Buzadzic and Commissioner of Taxation (Taxation)
[2021] AATA 4820
•24 December 2021
Buzadzic and Commissioner of Taxation (Taxation) [2021] AATA 4820 (24 December 2021)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2017/5901-7, 2017/5908-14
Re:Danny Buzadzic & Leisa Buzadzic
APPLICANTS
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President F D O'Loughlin QC and Senior Member L Hespe SC
Date:24/12/2021
Place:Melbourne
In relation to proceedings No 2017/5901-7, the Tribunal affirms the decisions under review.
In relation to proceedings No 2017/5908-14, the Tribunal sets aside the decisions under review and allows the objections.
...........................[sgd] ................................
Senior Member L Hespe SC
........................ ...[sgd]................................
Deputy President F D O'Loughlin QC
Catchwords
TAXATION – income tax — whether taxpayer discharged onus of proof – where taxpayer received unexplained deposits – unverifiable credit entries in loan accounts from associated entities –– where taxpayer intermingled personal and business moneys — alleged discrepancies between opening and closing balances in loan accounts — absence of records — finding that accounts in name of one spouse belonged to the other spouse —Division 7A applied to unpaid loan balances –– fraud or evasion –– administrative penalties
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Corporations Act 2001 (Cth) – s 1305
Income Tax Assessment Act 1936 (Cth) – Division 7A; s 170
Income Tax Assessment Act 1997 (Cth) – s 6-5
Taxation Administration Act 1953 (Cth) – Schedule 1 - ss 284-90(1); s 284-220(1)(c)
Cases
Binetter v F. C. of T. [2016] FCAFC 163; 249 FCR 534
Bosanac v F. C. of T. [2019] HCA 41; 374 ALR 425
Bosanac v F. C. of T. [2018] FCA 946
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) [1949] HCA 25; 79 CLR 296
Hines v F. C. of T. (1952) 5 AITR 305
Haritos v F. C. of T. [2015] FCAFC 92; 233 FCR 315
Nguyen v F. C. of T. [2018] FCA 1420; 265 FCR 355
Stone v F. C. of T. [1918] HCA 67; 25 CLR 389
Sabiel v F. C. of T. (1926) R& McG 87
Wilson v Chambers & Company Pty Ltd [1926] HCA 15; 38 CLR 131
REASONS FOR DECISION
Deputy President F D O'Loughlin QC and Senior Member L Hespe SC
24/12/2021
Reasons
This application is a burden of proof case that required the Applicants to demonstrate that the assessments they had received that were based upon Unexplained Deposits,[1] Unverified Credit Entries[2] and unexplained loan account balance mismatches, were excessive, or that fraud or evasion opinions should not have been formed, and/or that penalty decisions should have been made differently.
[1]Deposits or credits to bank accounts or credit card accounts in the names of one or both of the Applicants.
[2]Unexplained or unverified credit entries to loan accounts between the Applicants and their Associated Entities.
During the 2007 to 2013 Years,[3] the Applicants were associated with at least 16 companies and three trusts. Annexure A lists these Associated Entities. The Associated Entities carried on various business or investment holding activities. The Applicants lodged income tax returns for the 2007 to 2013 Years which included trust distributions and salaries paid by the Associated Entities. Table 1 shows the dividend income of the most significant of the trusts, the D & L Buzadzic Trust and the related party sourced income disclosed in the Applicant’s and the D & L Buzadzic Trust tax returns.
[3]A Year being a year of income ending on 30 June in the year indicated.
Table 1
Related party income flows to the Applicants disclosed in tax returns
Year Dividend income of D & L Buzadzic Trust Assessable income amounts Mr Buzadzic Mrs Buzadzic Trust amounts Salary Trust amounts Salary 2007 $276,921 $206,118 $52,997 $206,118 $33,101 2008 $66,975 $14,820 $69,229 $27,166 $56,834 2009 $345,086 $145,345 – $144,708 – 2010 $263,969 $141,499 – $148,571 – 2011 $350,000 $207,380 – $207,380 – 2012 $160,000 $125,470 – $125,473 – 2013 $618,000 $370,900 – $370,900 – Totals $2,080,951 $1,211,532 $122,226 $1,230,316 $89,935 $1,333,758 $1,320,251
Following an audit of their affairs, the Respondent identified amounts that he considered were evidence of, or represented, unreported income:
(a)for Mrs Buzadzic, amounts calculated by reference to Unexplained Deposits in excess of $1,000 of three types in her bank accounts which the Respondent says are either income as ordinarily understood and taxable as ordinary income, or for those from related parties, deemed dividends taxable pursuant to Division 7A of the 1936 Assessment Act;[4] and
(b)for Mr Buzadzic, amounts calculated by reference to:
(i)Unexplained Deposits in excess of $1,000 of three types in his bank accounts;
(ii)Unverified Credit Entries in excess of $1,000 of two types credited to his loan accounts as recorded in the books of entities associated with him;
(iii)an amount of interest on a term deposit which had been paid to him in the 2008 and 2009 Years;
(iv)a capital gain made by Mr Buzadzic on realization of a share investment in the 2010 Year; and
(v)what the Respondent says is a deemed dividend under Division 7A of the 1936 Assessment Act on account of balances owing to related companies that were not paid within the prescribed time.
[4]Income Tax Assessment Act 1936 (Cth).
The Respondent then formed the opinion that there had been fraud and/or evasion, considered that he had an unlimited period to amend the Applicants’ assessments, and then amended the Applicants’ 2007 to 2013 Year assessments and included in those amounts in their taxable income.
Mr Buzadzic conceded that the undeclared interest amounts and undeclared capital gain on the disposal of shares were assessable but that those amounts had been omitted from his tax return in error. Mr Buzadzic submitted that that error did not amount to a blameworthy act that could sustain an opinion that there had been fraud or evasion.
The Respondent has also imposed penalties:
(a)for Mr Buzadzic, calculated at the 75% rate in respect of the Unexplained Deposits, Unverified Credit Entries in loan accounts and the capital gain on disposal of shares, at the 50% rate in respect of the deemed dividends under Division 7A, and at the 25% rate in respect of the omitted interest income, with an uplift of 20% in second (2008) and subsequent Years; and
(b)for Mrs Buzadzic, calculated at the 50% rate with an uplift of 20% in second (2008) and subsequent Years,
and shortfall interest charge (SIC).
Table 2 sets out the adjustments made to Mrs Buzadzic’s taxable income and the penalties and SIC imposed.
Table 2
Mrs Buzadzic: adjustments
Year Additional amounts assessed Tax Shortfall Total Penalties SIC 2007 $136,665 $64,915.88 $32,457.90 $44,843.14 2008 $112,624 $49,996.40 $29,997.80 $28,120.29 2009 $382,832 $179,845.20 $107,907.10 $83,412.69 2010 $118,890 $53,993.65 $32,396.15 $19,728.55 2011 $136,416 $64,797.60 $38,878.55 $15,725.46 2012 $132,000 $59,659.85 $35,795.30 $9,773.03 2013 $23,671 $11,007 $6,604.20 $1,249.93 Totals $1,043,098 $484,215.58 $284,037 $203,853.09
The additional amounts assessed shown in Table 2 had three components as set out in Table 3.
Table 3
Mrs Buzadzic: particulars of the additional taxable income assessed
Year Unexplained Deposits from: Total additional amount assessed Associated Entities Third parties Unknown Sources 2007 $119,647 $17,018 $136,665 2008 $69,253 $1,170 $42,201 $112,624 2009 $27,000 $322,632 $33,200 $382,832 2010 $46,408 $27,911 $44,571 $118,890 2011 $74,067 $11,149 $51,200 $136,416 2012 $110,000 $22,000 $132,000 2013 $23,671 $23,671 Total $446,375 $362,862 $233,861 $1,043,098
Table 4 sets out the adjustments made to Mr Buzadzic’s taxable income and the penalties and SIC imposed.
Table 4
Mr Buzadzic: adjustments
Year Additional amounts assessed Tax Shortfall Total Penalties SIC 2007 $345,071 $163,908.70 $122,931.50 $116,193.55 2008 $786,251 $369,969.20 $332,216.95 $213,765.99 2009 $529,479 $249,502.50 $224,331.40 $110,954.84 2010 $488,853 $229,090.01 $187,974.20 $86,778.88 2011 $1,159,054 $550,550.63 $494,783.05 $140,330.70 2012 $354,935 $167,593.30 $129,080.10 $29,369.97 2013 $274,752 $127,759.70 $114,983.70 $15,905.87 Totals $3,938,395 $1,858,374.04 $1,606,300.95 $713,299.80
The additional amounts assessed to Mr Buzadzic as listed in Table 4 had five general categories as set out in Table 5.
Table 5
Mr Buzadzic: particulars of additional amounts assessed in Table 4
Year Unexplained Deposits Unverified Credit Entries Deemed Dividends Net Capital Gain (shares) Interest 2007 $264,071 $81,000 2008 $409,555 $372,333 $3,376 $987 2009 $191,255 $337,443 $781 2010 $106,584 $243,219 $129,504 $9,546 2011 $69,325 $1,084,729 $5,000 2012 $68,558 $132,807 $153,570 2013 $162,967 $111,785 Total $1,272,315 $2,363,316 $291,450 $9,546 $1,768
The Unexplained Deposits as listed in Table 5 had three general categories as set out in Table 6.
Table 6
Mr Buzadzic: categories of Unexplained Deposits
Year Unexplained Deposits from: Associated Entities Third parties Unknown Sources 2007 $133,294 $42,964 $87,813 2008 $283,996 $103,191 $22,368 2009 $58,051 $133,204 2010 $31,733 $4,142 $70,709 2011 $29,125 $40,200 2012 $19,676 $4,809 $44,073 2013 $12,000 $67,715 $83,252 TOTAL $567,875 $396,225 $308,215
The Unverified Credit Entries in loan accounts accounts as listed in Table 6 had two general categories as set out in Table 7.
Table 7
Mr Buzadzic: totals of Unverified Credits Entries
Year Unverified Credit Entries Loan balance mismatches treated as unverified credits Total 2007 $81,000 $81,000 2008 $61,800 $310,533 $372,333 2009 $293,381 $44,062 $337,443 2010 $34,954 $208,265 $243,219 2011 $134,228 $950,501 $1,084,729 2012 $132,807 $132,807 2013 $111,785 $111,785 Total $849,955 $1,513,361 $2,363,316
The Unverified Credit Entries component of Table 7 was made up of single entries to various loan accounts held by Mr Buzadzic with various entities he controlled or in which he had a material interest. The totals of these credits for each Year and relevant Associated Entity are as set out in Table 8.
Table 8
Mr Buzadzic: totals of related entity Unverified Credits Entries
Year Related entity Western General Bodyworks Pty Ltd Geelong Collision Centre Pty Ltd Geelong Towing Service Pty Ltd Western General Auto Pty Ltd Mynt Pty Ltd 2007 $81,000 2008 $61,800 2009 $185,000 $39,099 $69,282 2010 $6,250 $28,704 2011 $134,228 2012 $53,911 $78,896 2013 $99,590 $5,000 $7,195 Total $478,979 $83,896 $46,294 $81,000 $159,786
The Unexplained Deposit amounts from Associated Entities and Unverified Credit Entries to related entity loan accounts were those deposits and credits of $1,000 or more that were not reflected in increases to Mr Buzadzic’s loan account with the Associated Entity, were not reflected in the Associated Entity’s accounts as repayments of loans made to the Associated Entity or distributions of income by the Associated Entity already included in Mr Buzadzic’s assessable income, and did not on their face appear to be reimbursements of business expenses which the Commissioner was able to identify as having been paid by Mr Buzadzic on his personal credit cards or from his personal bank accounts. Approximately $3.5m of reimbursements were identified. The credits for these reimbursements were not included in the totals assessed.
The loan balance mismatches treated as unverified credits components of Table 7 were made up of those instances where the opening balance of Mr Buzadzic’s loan account with an Associated Entity for a Year recorded an amount less than the closing balance in that account for the preceding Year as disclosed in the financial records provided to the Respondent. The reduction in the recorded amount owed by Mr Buzadzic needed to be explained just like other unexplained credit postings to those accounts. The totals of these balance mismatches for each Year and relevant Associated Entity are as set out in Table 9.
Table 9
Mr Buzadzic: loan balance mismatches treated as unverified credits to related entity loan accounts
Related entity Year 2008 2009 2010 2011 Western General Bodyworks Pty Ltd $44,208 $742,955 Western General Bodyworks Pty Ltd (2) $72,325 Western General Bodyworks Pty Ltd (Rocket) $45,984 $60,500 Western General Towing Pty Ltd $14,631 $20,694 $34,281 Geelong Collision Centre Pty Ltd $28,275 $112,765 Geelong Collision Centre Pty Ltd (2) $96,000 Geelong Towing Service Pty Ltd $2,900 $15,312 Geelong Towing Service Pty Ltd (2) $194,000 Geelong Towing Service Pty Ltd (Rocket) $2,000 Logistic Car Rentals Pty Ltd $26,531 Total $310,533 $44,062 $208,265 $950,501 $1,513,361
The outstanding loan balances at the relevant lodgement date which have been assessed as deemed dividends under Division 7A and the applicable distributable surpluses were as set out in Table 10.
Table 10
Mr Buzadzic: outstanding loan account balances as at the relevant lodgement date and distributable surpluses
Year Entity name Outstanding balance Distributable surplus 2008 Western General Towing Pty Ltd $3,376 $55,553 2010 Geelong Collision Centre Pty Ltd $385 $412,158 2010 Western General Bodyworks Pty Ltd $129,119 $337,782 2011 Geelong Towing Service Pty Ltd $5,000 $271,258 2012 Western General Bodyworks Pty Ltd $153,167 $286,244 2012 Western General Towing Pty Ltd $403 $192,991 Total $291,450
Through the objection and subsequent disputation processes, the Respondent has conceded that a small number of assessed amounts have been adequately explained. They were as set out in Table 11. The Respondent otherwise did not narrow the issues in dispute and required the Applicants to prove the amount of their actual taxable income for each Year.
Table 11
Respondent’s conceded amounts
Year Description Amount Mr Buzadzic 2008 Deposits to bank accounts from Associated Entities $10,000 2013 Deposits to bank accounts from Associated Entities $7,000 2013 Deposits to bank accounts from unknown sources $10,000 Mrs Buzadzic 2010 Deposits to bank accounts from Associated Entities $13,900 2013 Deposits to bank accounts from unknown sources $3,000
The respective number of Unexplained Deposits, Unverified Credit Entries and loan account balances mismatches are as set out in Tables 12 and 13.
Table 12
Mrs Buzadzic: number of Unexplained Deposits or Unverified Credit Entries
Year Unexplained Deposits from: Associated Entities Third parties Unknown Sources 2007 20 - 5 2008 12 1 6 2009 5 3 5 2010 8 2 3 2011 7 1 3 2012 1 - 2 2013 - - 6 Total 53 7 30
Table 13
Mr Buzadzic: number of Unexplained Deposits or Unverified Credit Entries
Year Unexplained Deposits from: Unverified Credit Entries Associated Entities Third parties Unknown Sources Loan a/c credits Balance discrepancies 2007 15 1 15 5 2008 14 8 6 3 3 2009 8 2 6 3 2010 8 2 5 2 6 2011 5 3 4 5 4 2012 5 1 4 11 2013 4 4 12 9 Total 59 21 46 41 16
For the Applicants to succeed in relation to the disputed primary tax assessments, they need to demonstrate what their taxable incomes were for the 2007 to 2013 Years. To do this the Applicants must, as a minimum, demonstrate that the amounts that comprise the totals that remain disputed are not income or otherwise assessable or have already been included in their assessable income. The Applicants could also succeed by showing that there was no fraud or evasion or that the fraud or evasion opinion should not have been formed.
For the Applicants to succeed in relation to penalty and SIC they need to show that there was not a tax shortfall, or, if there was a shortfall, the penalty and SIC have been inappropriately imposed or should be remitted.
As explained below:
(a)the uncontradicted evidence before the Tribunal was that Mrs Buzadzic was a stay-at-home mother whose involvement in the Buzadzic Group was limited to acting at the direction of Mr Buzadzic and his employees and that the amounts deposited in the accounts of Mrs Buzadzic belonged to Mr Buzadzic. As a result, the Tribunal has set aside the Commissioner’s objection decision in relation to Mrs Buzadzic; and
(b)except for a small minority of instances, Mr Buzadzic did not explain the sources of the moneys which resulted in the deposits in the bank accounts in his name or the credits to his director loan accounts. By moneys, the Tribunal refers not just to cash, but also to set-offs, payments by direction and other forms of fund transfers. The credit entries and deposits remained very substantially unexplained. As a consequence, Mr Buzadzic did not discharge his onus of proving what his correct taxable income was. The evidence of the distributions made to him and how funds flowed to him from his related entities that he provided was not sufficient to conclude that the amounts of money reflected in the entries the Respondent has identified were not income or otherwise assessable and that his taxable income was the amount he had returned. Having provided evidence that the amounts in the accounts of Mrs Buzadzic belonged to him, he provided no explanation for the deposits made into those accounts which could be accepted by the Tribunal as demonstrating that those amounts were not his income. It follows from this conclusion that the Tribunal does not have a sufficient foundation to conclude that the fraud or evasion opinion formed or held by the Commissioner ought not to have been formed or held, or to conclude that the penalty decision should have been made differently. As a result, notwithstanding that the Tribunal has found that the Commissioner had erroneously assessed some deposits and credits as unexplained, the objection decisions in relation to Mr Buzadzic have been affirmed.
Procedural Matters
There are six procedural matters that need to be noted, namely:
(a)the Evidence before the Tribunal;
(b)the Respondents’ concessions;
(c)the Forensic Accounting Evidence;
(d)the Submissions Process;
(e)the Tribunal’s questions concerning Mrs Buzadzic’s evidence;
(f)the Role of the Tribunal in dealing with financial record evidence.
Evidence before the Tribunal
Mr and Mrs Buzadzic’s applications for review were heard concurrently.
At the start of the hearing the Tribunal directed that evidence in one proceeding be evidence in the other. Consequently, the Commissioner’s submission that Mrs Buzadzic failed to lead evidence from various sources, including Mr Buzadzic, cannot be accepted.
The material presented to the Tribunal included:
(a)large volumes of documents filed with the Tribunal pursuant to section 37 of the AAT Act;[5]
[5]Administrative Appeals Tribunal Act 1975 (Cth).
(b)large volumes of accounting records, including electronic copies and print outs from the MYOB accounting package used to maintain records of business transactions and to assist in preparing the accounts for the entities controlled by Mr Buzadzic;
(c)written statements and oral testimony of the following witnesses who were extensively cross examined:
(i)Mr Evans – financial controller of the Buzadzic Group from 2013;
(ii)Mr Stirling – a bookkeeper for the Buzadzic Group;
(iii)Mr Kane – an external tax accountant to the Buzadzic Group between February 2012 and July 2013;
(iv)Mr Hadded – a principal of the firm providing tax accounting services to the Buzadzic Group from 2008 to 2013, excepting 2012;
(v)Mrs Buzadzic – who gave her testimony prior to Mr Buzadzic being called;
(vi)Mr Buzadzic; and
(vii)Mr Vasudevan, a partner of the firm Pitcher Partners, who was engaged to provide forensic accounting evidence.
Notably, Mrs Buzadzic gave evidence before Mr Buzadzic. Some of the questions put to Mrs Buzadzic involved expenditures using credit cards in her name to which she responded that she knew nothing of the expenditures and assumed that they were business expenses and that the money had been spent by Mr Buzadzic. While there were presumably forensic considerations for this, the same questions were not put to Mr Buzadzic. In these circumstances, which are expanded upon below, Mrs Buzadzic’s evidence that she knew nothing of the expenditure and that it had not been incurred by her was not contradicted. To the contrary, Mr Buzadzic’s responses to some of the cross examination questions put to him were entirely consistent with Mrs Buzadzic’s evidence. This has weighed significantly on some of the findings below.
The Respondents’ concessions
At the commencement of proceedings, it was made clear to the Tribunal and to the Applicants that the Commissioner was willing to make concessions in relation to specific identified deficiencies to the extent evidence was produced. Notwithstanding the Commissioner’s willingness to make concessions in relation to specific amounts, his position was that Mr Buzadzic was still required to prove what his taxable income was and what the assessment should have been. At the commencement of the hearing the following exchange took place:
DEPUTY PRESIDENT: ..If there are 20 items in the unexplained deposits, if 12 of them are adequately explained and eight aren't, is the Commissioner's position that the applicant taxpayers -they've proven that the assessment is excessive to the extent of those 12?
MS SHAND: To the extent that the applicants are able to substantiate certain deposits, then the Commissioner will, in order to narrow the issues in dispute, will concede any amounts where there is evidence to substantiate that, and in the absence of that, the Commissioner's position is that it's the applicant's onus to show what the income is as a whole, and by explaining one entry, that's not sufficient to knock off that entry. But the applicants need to show the entire income, what it is, in order to discharge their onus.
DEPUTY PRESIDENT: So if they explain 12 but not 20 deposits - - - ?
MS SHAND: Then the Commissioner will concede those, in order to narrow the issues, and then it won't be necessary for - - -
DEPUTY PRESIDENT: … if the applicant leads evidence in relation to 12 of the 20 that the tribunal might be inclined to accept … what's the Commissioner's position on the power of the tribunal to reduce the assessments on account of the 12 that are explained?
MS SHAND: The applicant's onus is to show what the income is, and I would say that by showing there's an error in relation to one component, that doesn't discharge the applicant's onus to show what their income is, and what the assessment should have been, which is what they're required to do.
DEPUTY PRESIDENT: So is the Commissioner's position in this case that the applicants need to demonstrate the entirety of the adjustment is wrong?
MS SHAND: That's correct, because their onus is to show that th[e] assessment is excessive and what it should have been, and by saying there's an error here, that doesn't say what the assessment should have been. It really shows, well, the Commissioner may have made an error at some point, and the cases are very clear that if the Commissioner has made an error in a default assessment, that doesn't discharge the applicant's onus. But obviously the Commissioner as a model litigant is not going to press any discrete items where there's evidence substantiating them. In our SFIC, we did - in the annexures - did strike out some line items we further review. It appeared that there may have been documents to substantiate a number of items, and there's also two more which I want to add to that as well.
DEPUTY PRESIDENT: So is the Commissioner saying that he's allowed to partially reduce the assessments, but not the tribunal?
SENIOR MEMBER: In the absence of the taxpayer leading evidence as to what their true taxable income is?
MS SHAND: Yes, that's right. If the applicants haven't discharged the onus of showing what the assessments should have otherwise been, or should be, then by showing there's an error with one line item, that's not sufficient.
Although the Commissioner conceded certain Unverified Credit Entries did not reflect the derivation of income, the Commissioner nonetheless contended that Mr Buzadzic had not discharged his onus. Based on statements made by Nettle J in Bosanac,[6] the Commissioner submitted that:
Notwithstanding the various discrete concessions made by the Commissioner in Annexures 3 and 4 to these submissions, the Tribunal should be satisfied that the Applicants did not discharge their onus in respect of the unexplained deposits. It is not enough for the Applicants to show that there was error in the Commissioner’s calculation of their assessable income.
[6]Bosanac v F. C. of T. [2019] HCA 41; 374 ALR 425.
The Commissioner’s concession might be taken to be that for the entries which he now accepts as having been explained, the Tribunal need not trouble itself with making more than a finding that they have been explained and need only focus on whether or not the non-conceded entries and deposits are explained, but unless all of the non-conceded deposits and entries are explained the assessments, including the conceded entries, stand. The concession appears to be merely a concession that the Tribunal need not trouble itself with analysis of the conceded items.
However, in the same submissions, the decision sought by the Commissioner in respect of Mr Buzadzic was that:
the objection decision relating to the amended assessment issued to Mr Buzadzic in respect of the year ended 30 June 2013 to take into account the Commissioner’s concessions [relating to two deposits into Mr Buzadzic’s accounts]; and
remit the objection decisions to the Commissioner to recalculate the penalties and amend the amended assessments and the penalty assessments as is necessary to give effect to the decisions in (a) and (b) above;
It is difficult to reconcile precisely what the Respondent is really asking for. In the circumstances set out more fully below, this difficulty does not need to be addressed or resolved.
Forensic Accounting Evidence
As indicated above, forensic accounting evidence from Mr Vasudevan was led on behalf of the Applicants. This evidence was compiled after the hearing had begun and ultimately led to a substantial gap in proceedings. Through the course of hearing Mr Evans’ and Mr Hadded’s evidence, it became apparent that during the course of the Respondent’s audit the Applicants’ representative had provided incomplete accounting records of the various Buzadzic Group entities to the Respondent. It was also quite apparent that:
(a)records that were supplied to the ATO[7] during the course of the audit were supplied after there had been something of a breakdown in the relationship between the Applicants’ representatives and the Respondent’s audit personnel;
(b)the financial records provided to the audit team did not include all of the transactions entered into between the Applicants and the various entities in the Buzadzic Group during the relevant years or the year end adjusting entries which potentially affected directors loan account balances processed by the Buzadzic Group’s external accountants;
(c)working papers (and/or records) asserted to have been maintained by the Buzadzic Group’s external accountants would probably be available and would probably contain information that would explain year end adjusting entries and other entries posted and included in the year end finalised accounts.
[7]Australian Taxation Office.
When this situation became apparent in December 2018, the Tribunal indicated that it… would be greatly assisted by … a forensic account’s report that pieces the picture together. The Applicants accepted this invitation which was not opposed by the Respondent.
The Applicants subsequently proposed the following questions for the independent expert:
(a)What is the provenance and character of credit entries to loan accounts with various companies as particularised in paragraph 54(a) of the decision on objection?
(b)What is the provenance and character of discrepancies between closing and opening balances of loan accounts between successive years particularised at paragraph 54(b) of the decision on objection?
The references to character of entries to loan accounts and discrepancies in the proposed questions tend to reveal a misunderstanding of the real issues that needed to be addressed, which concerned the provenance of the funds that the entries or mismatches represented and whether those funds were sources of income that had not been brought to account. The Tribunal can readily accept that a repayment of a loan is not a transaction that produces an assessable or income amount for the person making the repayment or the recipient. However, the money used or applied to make the repayment may have been income, or the source of that money may have been a source of income, and that income may not have been brought to account.
The Tribunal and the Respondent expressed concerns about the form of the questions, in particular about the character of the entries. In his letter of 7 February 2019 the Respondent said of the proposed questions to the expert:
…
3 As currently drafted, we do not understand how the expert's opinion of the 'character' of the relevant transactions is relevant to the issues in dispute, or will otherwise assist the Tribunal. In this regard, we note that on the final day of the hearing, at pages 351−2 of the transcript, there was the following exchange with the Tribunal which highlighted that the central issue for the transactions was provenance and not character:
DEPUTY PRESIDENT: Dr Orow, far be it for us to tell you how to run your case. There are significant mismatches of information which, on the vive voce evidence of the accountants, is explained or explainable.
DR OROW: Yes.
DEPUTY PRESIDENT: And it's explainable by reference to supporting working papers and documents that can be retrieved from various places and the like. This kind of case calls for proof of provenance and appropriateness of adjustments that are made to ledger accounts that square them off or balance them out, and provenance of amounts that are being credited to various accounts. And the last lot of credits to Mr Buzadzic's loan account with Mint reveals the complete mismatch of communication that has been going on with this matter. There is someone sitting in the witness box saying they're not income, and you've got someone sitting on the other side of the ledger saying, "Prove the provenance of the amounts", that an amount credited to a loan account, the crediting process itself reveals an investment in, to Mint.
DR °OROW: Yes.
DEPUTY PRESIDENT: What the Commissioner has been asking for is what is the provenance, where did the money come from. How do we know it's not income, because where that money came from is not explained. And that's the constant – the two people going down opposite paths in this case. I don't want you to − to dictate to you what you do and don't want to do, or you should and shouldn't do. The choice is open to you about what you're proposing to lead.
DR OROW: Thank you.
…
Our further comments in relation to proposed question 1:
What is the provenance and character of credit entries to loan accounts with various companies as particularised at paragraph 54(a) of the decision on objection?
5. As well as referring the expert to the summary of the credit entries referred to at 54(a) of the decision on objection dated …., we consider it may assist the expert to have their attention drawn to the more detailed and particularised references to the credit entries in:
…
[three documents where the Respondent identified the entries that needed to be explained]
6. In our view, in light of our comment at paragraph 3 above, the proposed question should be drafted so as to focus on, for each of the relevant transactions and on the basis of the briefed documents: (a) whether the expert is able, based on their training, study or experience, to identify the provenance or source of any funds which are recorded as having been credited to the director's loan account, and if so, (b) specifying the relevant source (or sources) of those funds.
Our comments in relation to proposed question 2:
What is the provenance and character of discrepancies between closing and opening balances of loan accounts between successive years as particularised at paragraph 54(b) of the decision on objection?
7 As well as referring the expert to the summary of the unexplained discrepancies referred to at 54(b) of the decision on objection …, we consider it may be helpful to draw the expert's attention to the more detailed explanation of the discrepancies in the Commissioner's reasons for decision on audit dated 28 April 2016 at paragraphs …...
8. In our view, in light of our comment at paragraph 3 above, the proposed question should be drafted so as to focus on, for each of the unexplained discrepancies: (a) whether the expert can provide an explanation for the discrepancies based on their training, study or experience, and if so, (b) identifying the explanation, including if relevant, by identifying the relevant opening and closing balance of the relevant loan accounts for each of the relevant years, and the appropriateness of any end−of−year adjustments made to those relevant loan accounts in the relevant years.
And in the directions hearing on 1 March 2019 the following exchanges transpired:
MS SHAND:….The other concern I just want to note is you would have seen the Commissioner’s correspondence about the questions. Now, obviously it is the applicant’s case, and the applicant can ask whatever questions the applicants think are necessary, but in the context here where the expert now says they need three months to prepare a report it concerns me if they are going to be answering questions which the Commissioner thinks have no utility, and in particular the question about the character of these transactions where it was made very clear on the last day of the hearing that the issues in dispute really go to the provenance of these funds, which have been credited to the loan accounts, and not to the character of the evidence. So if this expert is going to engage in a long exercise going through each transaction and giving evidence about the character and drawing out this whole exercise more than is necessary, we would resist that.
…
Now we’ve been told that he’s going to take three months to undertake this exercise which includes talking about the character of various transactions, which we say is clearly …[irrelevant].
DR OROW: I’m grateful for the comments that were made but there are a couple of very important matters to bear in mind. The expert is being retained by the applicants. We phrased the questions, if they have issues with them we were content to take note of the points that were made and the Commissioner indicated in his letter that there are a number of documents that he wishes and issues he wishes to be put to the expert, and we considered those. But the phrasing of the questions as far as we’re concerned is correct. The expert has expertise in the field to be able to look at the movement of funds and decide what the character of that movement is not only the source of it, and I think with respect that would be of benefit to the tribunal
…
DEPUTY PRESIDENT: In relation to the questions and in relation to this whole exercise, the tribunal has taken the course that it has so as to facilitate to the applicant a path that in the tribunal’s view will throw light on what the relevant facts are. And with that light hopefully leading to a proper resolution of the dispute. That’s where we’re coming from as the tribunal. We see some difficulties in those questions that have been put to the expert, and we fear that either the answers to those questions might not be the proper subject matter of a forensic accountant support, and might not be of any assistance in resolving this matter.
The questions don’t really reflect the concerns that we expressed …. (indistinct), and those concerns have been identified in the … relevant bits of the transcript identified in the Commissioner’s correspondence on 7 February, and again today. We can’t dictate to you what evidence you should lead, but we do see considerable merit in the commentary made by the respondent in his letter of 7 February. We also note that the applicant hasn’t altered the questions but has indicated that it is proposed to provide the expert with those comments.
We repeat the concerns that were expressed about the gaps in the evidence and the provenance of amounts and entries made to journals which affect loan account balances and the like, and we have concerns about the gaps in the evidence that go to that provenance which leads to a concern that we’re unable to form a view on the appropriateness of those alignment adjustments that have been made.
…
Notwithstanding these concerns, the proposed questions in unaltered form together with transcript of the earlier discussions in the Tribunal were part of the material provided to the chosen expert, Mr Vasudevan.
The Applicant filed a report on 18 September 2019 from Mr Vasudevan which purported to address the questions framed by the Applicant.
Mr Vasudevan was extensively, and very effectively, cross examined in a hearing in November 2019. There was nothing inappropriate in the cross examination. This was called for in the circumstances and revealed that the report filed could not be relied upon to provide substantive support to the Applicant’s cases.
At the continuation of the hearing on 17 December 2019, Counsel for the Applicants re-examined Mr Vasudevan in a manner which took the form of a cross-examination. At the conclusion of this re-examination, Counsel for the Applicants submitted that Mr Vasudevan had failed to do what he was asked to do when he was engaged as an expert and requested leave to obtain and file a report from another expert. Given the history to the production of the forensic accounting report, the Tribunal denied this application.
Submissions process
The Applicants filed their closing submissions on 20 February 2020 before the Covid-19 pandemic impacted Tribunal hearings. Those submissions were prepared on the basis that they would be developed further in an oral hearing.
On 20 March 2020, as the impact of the pandemic on Tribunal hearings became more apparent, the parties were advised that the Tribunal intended to minimise the need for oral submissions and that the Tribunal expected that it would rely upon the written submissions of the parties. The parties were granted further time to ensure those submissions included everything they wanted to say.
The Respondent filed his written closing submissions on 21 April 2020. The Respondent’s filed amended written closing submissions on 13 May 2020 and further submissions on 28 August 2020.
In March 2020 the Applicants lost the representation of Counsel and an extension of time for the filing of their further submissions was granted on 29 April 2020. In June 2020 a further extension was granted to accommodate the personal circumstances of those involved in assisting the Applicants in preparing their response to the Respondent’s submissions in the absence of Counsel. The Applicants re-engaged their Counsel in July 2020 and lodged both reply and further reply submissions on 9 September 2020.
Tribunal’s questions concerning Mrs Buzadzic’s evidence
On 31 July 2020 the Tribunal asked the parties to advise the Tribunal as to the outcome that should follow if, notwithstanding the Commissioner’s submissions to the contrary, Mrs Buzadzic’s evidence were to be believed and that she had given an accurate account of her knowledge and or memory of the events about which she was asked. The Respondent did not address this request and, rather, maintained the earlier submissions that she should not be believed.
In so far as her evidence that the moneys in those accounts belonged to Mr Buzadzic was concerned, the Commissioner submitted that:
she chose not to call any evidence from Mr Buzadzic to explain the sources of the various deposits made into her personal accounts.
Each of the transactions in Table 4.1 of RS Annexure 4 (Deposits from Associated entities which have not been identified in loan accounts), required an explanation from the managing director of those Associated Entities, that is, Mr Buzadzic. Neither Mr Buzadzic, or anyone else in the business, was called to give evidence in chief on this topic. The Tribunal should infer Mr Buzadzic’s evidence would not have assisted Mrs Buzadzic…
Some of the deposits summarised at Table 4.2 of RS Annexure 4 were received from third parties which were business associates or presumed business associates of Mr Buzadzic. Mrs Buzadzic nevertheless did not lead evidence from Mr Buzadzic or those business associates to explain these deposits
Furthermore, …. in providing the explanations in her witness statement, Mrs Buzadzic in cross-examination stated that she had relied on information provided by Mr Evans. In many or most cases, it was evident she did not have first-hand knowledge of the matters that were referred to in her witness statement. Mr Evans was not called by Mrs Buzadzic to give evidence on these matters, and therefore the basis for her conclusionary, hearsay evidence could not be tested by the Tribunal. Importantly, Mr Evans did not join the business until 2013, so it was unclear how he was able to assist Mrs Buzadzic in providing these explanations. To the extent that he may have reviewed business records or other documents in order to investigate the unexplained deposits, those records and documents were not put before the Tribunal. So while Mrs Buzadzic may have honestly believed Mr Evans’ explanations, those explanations could not be satisfactorily tested.
Role of Tribunal in dealing with financial record evidence
The Tribunal cannot and has not sought to undertake a forensic examination and interpretation of the accounting records (which were included MYOB files) laid before it.
The Tribunal is not in a position, unassisted, to embark on an examination of records of varying degrees of completion without being party to or involved in the transactions they are said to record, in an endeavour to work out what the Applicants’ taxable income was and whether any or all of the amounts the Respondent has included in the amended assessments totals that he has assessed were truly assessable. Where the respective amounts are not obvious, for the Tribunal to undertake that task without proper assistance and explanatory evidence would be engaging in speculation and guesswork which is not the proper foundation for concluding whether an applicant has demonstrated what the relevant taxable income is.
The Applicant has relied on the assistance of externally engaged accountants and lawyers to attempt to do this.
The Tribunal has relied upon the parties and the evidence led by them, including evidence of an expert forensic accountant. Both parties were represented by experienced counsel. In these circumstances the Tribunal can expect to have explained to it the competing conclusions that should be reached based on the evidence led and to have its attention directed to the specific material relied upon by the parties in support of their respective cases.
Facts
The Applicants, Mr and Mrs Buzadzic, are husband and wife.
The Applicants’ tax returns disclosed assessable income from their Associated Entities as set out in Table 1 above.
Mrs Buzadzic
Mrs Buzadzic was principally engaged in domestic and family activities. In 2007 and 2008 Mrs Buzadzic received a salary from WGBW,[8] although she did not provide services to the company and had limited understanding of its affairs. The salary was included in her assessable income as disclosed in her tax returns for those Years.
[8]Western General Body Works Pty Ltd.
Mrs Buzadzic’s involvement in the affairs of the Associated Entities was very limited. While there were bank accounts and credit cards in her name and she was a named signatory to some of the bank accounts, and from time to time she filled in and signed deposit slips in relation to bank accounts held in her name when directed to do so by her husband or his personal assistants, Mrs Buzadzic was not involved in transferring funds from the accounts in her name to other entities in the Buzadzic Group.
Mr Buzadzic had access to the bank accounts and credit cards in her name and he used those bank accounts and credit cards as he wished. Mrs Buzadzic also used the credit cards in her name to pay for household expenses.
Mrs Buzadzic relied upon Mr Buzadzic to pay the credit card bills and provide information to the accountants who prepared her income tax returns. She did not review the credit card statements for the credit cards issued in her name.
Mr Buzadzic
During the relevant Years, through various group entities he controls, Mr Buzadzic operated panel beating workshops and other related businesses (including towing and car rental businesses) owned by the Western General Group of Companies. For part of the relevant period, through entities he controlled, Mr Buzadzic was also involved in two nightclub businesses and a tattoo business.
Mr Buzadzic and/or his assistants employed in the Buzadzic Group directed all financial matters for his family. He controlled all bank accounts that were in his name or in Mrs Buzadzic’s name and directed the deposits to be made into those accounts and the funds to be transferred from those accounts to other entities in the Buzadzic Group.
Intermingling of business and personal finances and accounting
During the relevant Years, there were at least 26 bank and credit card accounts in the name of Mr Buzadzic (four in the name D. Buzadzic Western General Body Works Pty Ltd) and Mrs Buzadzic.
Private and business sourced money has been extensively intermingled over an extensive period.
WGBW generated significantly more revenues than the other entities.
Mr Buzadzic directed that cash be loaned from WGBW to the other entities he controlled as needed. Mr Buzadzic also directed that cash that was not required for immediate use in the business operations of each entity be transferred to a home loan account to reduce the interest being incurred on that account.
Mr Buzadzic used personal credit cards (some issued in his name and some in Mrs Buzadzic’s name but in respect of which he exercised control) to pay personal and business expenses in order to accrue maximum credit card reward points. Use of credit cards for this purpose can be assumed to be extensive given the quantum (in excess of $3.5m) of reimbursements of business expenses paid for by the Applicants that the Respondent has accepted. From time to time, Mr Buzadzic also drew down on his home loan account to provide funds to the businesses in which he or the Buzadzic Group held an interest.
Transactions between Mr Buzadzic and the Associated Entities were generally recorded in ledger asset and liability accounts generally titled loan account in the accounting records of the Associated Entities. Advances from the Associated Entities to Mr Buzadzic resulted in increases in those account balances owed and the transfer of funds from Mr Buzadzic, or at the direction of Mr Buzadzic, to those accounts, resulted in decreases in the account balances owed as shown in those accounts. No evidence was provided of written agreements recording the terms on which these advances were made. A significant element of the present dispute relates in part to the accuracy and completeness of the manner in which those accounts were maintained.
There was a ledger account in the accounting records of Logistic Car Rentals Pty entitled Loan Account –L Buzadzic. Increases and decreases in this ledger account reflected funds transferred at the direction of Mr Buzadzic. For the reasons set out below, the Tribunal finds that the balance recorded in this account were amounts advanced to Mr Buzadzic, irrespective of whether amounts were deposited in bank accounts or credit card accounts in his name or in Mrs Buzadzic’s name.
As discussed further below, prior to 2013, Mr Buzadzic engaged bookkeepers to maintain the accounting records of the WGBW Group.[9] Those bookkeepers were reliant upon the information provided to them by Mr Buzadzic.
[9]The Western General Body Works Group, the composition of which is set out in Annexure A.
The Applicants led very limited evidence as to the book-keeping practices or arrangements employed by the Buzadzic Group in 2007. Mr Buzadzic’s evidence was that bookkeeping responsibilities in that Year were performed by his personal assistant, Ms Suzana Jankovic. Ms Jankovic was not called as a witness. Mr Buzadzic led no evidence otherwise explaining the basis on which credits were made to his loan accounts or explaining the deposits in his bank accounts (including the bank accounts in Mrs Buzadzic’s name which he directed and controlled). External accounting services were provided to the Buzadzic Group by Mr Bozyk of Douglas Clark Associates. Mr Bozyk did not give evidence.
Between 2008 and 2013, MYOB business accounting system was used to maintain the accounting records of the entities in the Buzadzic Group. The MYOB system was not used to record the transactions in the personal bank accounts or personal credit card accounts in the names of Mr and Mrs Buzadzic. Accounts were not prepared for either Mr Buzadzic or Mrs Buzadzic in their personal capacities.
Five witnesses, Messrs Stirling, Kane, Hadded, Evans and Vasudevan gave evidence as to financial matters.
Mr Stirling
Mr Stirling provided bookkeeping services to the Buzadzic Group from about March 2008. Mr Stirling generally worked from home and attended the WGBW Group premises in Maribyrnong and Geelong two to three days each week to record transactions in the MYOB system. Mr Stirling did not provide bookkeeping services to the trustee companies Buz Cubby Pty Ltd, Buzadzic Pty Ltd or Delarch Pty Ltd.
Mr Stirling posted entries in the MYOB system to reflect transactions made by the WGBW Group during the Year based on source documents provided to him, generally in the form of invoices and sales receipts.
Mr Stirling did not perform banking duties which involved attending a bank branch such as depositing funds into the bank accounts of Mr or Mrs Buzadzic. However, Mr Stirling did perform internet banking activities at the direction of Mr Buzadzic such as transferring funds into the credit card accounts or home loan accounts of Mr or Mrs Buzadzic. It was not part of Mr Stirling’s role to deposit moneys into the personal bank accounts of Mr and Mrs Buzadzic except on the instructions of Mr Buzadzic. He transferred funds from the WGBW Group entities to credit card accounts or home loan accounts in their names when he was instructed to do so by Mr Buzadzic. When he transferred funds to these personal accounts, he posted increases (debits) to the director’s loan account with the WGBW Group entity.
Mr Stirling posted decreases (credits) to the director’s loan account if he was informed that Mr Buzadzic had paid an expense on behalf of that entity out of personal funds (whether that be on a personal credit card in Mr or Mrs Buzadzic’s name or from his home loan account). Although Mr Stirling often sighted copies of invoices before making credit entries, he did not always do so. Mr Stirling relied upon the information provided to him by Mr Buzadzic or Mr Buzadzic’s personal assistants. If he sighted an invoice for the business that had been paid on a credit card in Mr or Mrs Buzadzic’s name, he generally posted a decrease (credit) to the director’s loan account and a corresponding debit to the entity’s expense account. If he was not provided with source documents or was not told by Mr Buzadzic or his personal assistants when Mr Buzadzic had paid an invoice for one of the WGBW Group entities he would not make entries in the accounting system.
Mr Stirling ’s evidence was that he became more aware of the need to personally sight invoices or source documents after he completed his Certificate IV in bookkeeping in about 2012 or 2013.
Nothing in this process required Mr Stirling to identify from where Mr Buzadzic had obtained the funds to pay invoices or expenses for the WGBW Group entities.
Mr Stirling admitted under cross examination that there were instances where amounts were transferred from the WGBW Group entity bank accounts to Mr Buzadzic’s personal bank or credit card account without any entry appearing in Mr Buzadzic’s loan account. Whether the transfers were otherwise accounted for as reimbursements of expenses incurred by the relevant WGBW entity is a possibility. However given the approach to identifying transactions and entries that formed the basis of the amended assessments, for the disputed entries in the present matter to be explained on the basis of them being a reimbursement it is necessary to point to some evidence that indicates that that would be so.
Mr Stirling did not have access to or review the bank account statements for the personal bank accounts of Mr and Mrs Buzadzic (including the home loan account). Although Mr Buzadzic testified that his bookkeeper had full access to his personal credit card statements, Mr Stirling’s evidence was that he did not have a practice of reviewing the credit card statements issued to Mr or Mrs Buzadzic, though on occasion he would see a copy of them when trying to see if a supplier invoice had been paid. What Mr Stirling said is not inconsistent with Mr Buzadzic’s evidence and the Tribunal accepts Mr Stirling’s evidence.
Some of the entities in the WGBW Group had their own bank accounts. Mr Stirling performed a weekly bank reconciliation for these entities’ bank accounts whereby he checked that the balance of each WGBW Group entity’s bank account as recorded by the bank reconciled to the balance recorded in the relevant MYOB ledger account. As part of this process, Mr Stirling was able to identify transactions in the WGBW Group entity’s bank account which had not been recorded in MYOB ledger. If a deposit into those accounts was identified as having come from Mr Buzadzic, a decrease (credit) was recorded in the MYOB system against Mr Buzadzic loan account balance (recording a reduction in the amount owed by Mr Buzadzic to the entity). Mr Stirling did not know from where Mr Buzadzic had sourced the funds for these deposits and loan account reductions.
Mr Stirling’s evidence was that Mr Buzadzic’s two personal assistants, neither of whom was called to give evidence, also entered transaction data into the MYOB systems.
At the end of each of financial year, Mr Stirling sent a copy of the MYOB system files to the external accountant who then had responsibility for preparing the end of year financial statements and tax returns. Mr Stirling had no involvement in the process or recording of dividend declaration or trust distributions made by the entities in the Buzadzic Group.
Mr Stirling could not shed any light on the Unverified Credit Entries identified by the Respondent.
Mr Hadded
Mr Hadded is a principal of a firm called The Practice which acted as external accountants and tax agents for Mr and Mrs Buzadzic and for the Buzadzic Group between 2008 and 2011 and from July 2013.
Mr Hadded’s firm never asked for and was not provided with the personal bank statements or credit card statements for Mr and Mrs Buzadzic and was unaware of the amounts deposited into those accounts. Mr Hadded’s evidence was that his firm generally had a practice of sending a checklist to its clients of information that if relevant the firm would require. He testified that I don’t recall that we would have sent that to Danny because I don’t know whether he would have acted on it.
In so far as the Buzadzic Group entities were concerned, each Year his firm was provided with the MYOB ledger accounts maintained by the Buzadzic Group bookkeeper recording the day to day transactions. Mr Hadded’s firm used this information together with information retained in their records to produce finalised accounts. This process entailed:
(a)starting with the relevant entity’s finalised accounts from the previous Year as recorded in the external accountant’s system;
(b)using the closing balances as recorded in those accounts as the opening balances for the current Year;
(c)transferring the entries for the daily transactions entered into during the Year as recorded by the Buzadzic Group bookkeeper in the MYOB records provided to Mr Hadded’s firm;
(d)posting year-end adjustments to reflect transactions the internal staff of the Buzadzic Group were unaware of, for example dividends paid and trust distributions and entries to consolidate the intragroup loans in WGBW;
(e)calculating the closing balances for each ledger account and using those closing balances to prepare the finalised financial statements for the relevant entity; and
(f)advising the Buzadzic Group of the entries to be posted to the Buzadzic Group accounting system so as to align the accounting records maintained by the Buzadzic Group with those maintained by the external accountants (alignment entries). As explained further below (at [166]), the amounts posted in the alignment entries were a product of a number of integers.
Mr Hadded himself was not involved in the preparation of the work papers supporting the adjustment amounts. Mr Hadded did not know if the alignment entries were in fact posted by the Buzadzic Group to their accounting system records. If the aligning entries were not posted in the Buzadzic Group accounting system, the opening and closing balances of the financial records maintained by the Buzadzic Group would not be the same as those maintained by the Buzadzic Group’s external accountants and which were reflected in the finalised accounts.
Mr Hadded’s firm had no reason to question the daily transaction entries made by the client in the MYOB ledger. It was not the role of his firm to audit the records maintained by the Buzadzic Group bookkeeper. Mr Hadded asserted that in so far as the director loan account was concerned:
I have no reason to believe that those transactions were not accurately recorded in our in-house general ledger and to the extent the entries represented amounts drawn down by Danny Buzadzic then they were offset by:
-Dividends declared each year as resolved with our clients during the tax planning sessions conducted between April and June each year …
-Amounts introduced into the companies and sourced by Buzadzic from increased in his personal home loan (rocket) account
-Other intra group credit loan balances that existed from time to time but which were not income in nature and which were credit balances referable to dividends booked by the respective companies in the group.
In this particular case, to discharge the onus regarding fraud and evasion, Mr Buzadzic needed to provide evidence as to the sources of the amounts deposited into the bank accounts. Based on the evidence before it, the Tribunal does not accept the explanations proffered by Mr Buzadzic for the deposits. The character of the amounts deposited remain unexplained and he has not proven the amounts to be non-assessable. In the absence of an accepted explanation for the amounts, Mr Buzadzic has failed to demonstrate the omission of these amounts from his assessable income were not attributable to a blameworthy act. Approached differently, the Tribunal has nothing on which it can evaluate the seriousness of any shortcoming, there is nothing on which the Tribunal can rest a conclusion that there was not such a blameworthy act.
Mr Buzadzic contended that there was no basis on which the Tribunal could be satisfied that he had engaged in fraud or evasion because he was a panel beater with limited education who relied upon his employees and external accountants in order to comply with his taxation obligations. He had no knowledge of the provisions of the Income Tax Assessment Act 1936 and could not have understood that unverified credit entries comprising discrepancies in loan accounts with various companies and discrepancies between closing and opening balances of some loan accounts were assessable income.
There are a number of difficulties with this submission. First, it does not lay a foundation to come to a conclusion that there was not a blameworthy act. Second, a taxpayer is responsible for the acts of his employees and agents. The blameworthy act may be that of the taxpayer personally or of those he is responsible for. Third, a taxpayer does not discharge their onus of showing an absence of evasion based on a contention about their subjective level of understanding of the operation of the income tax legislation. To allow otherwise would be to reward fiscal naivety. Fourth, the submission reflects confusion about the reason why the unverified credit entries and discrepancies between closing and opening balances result in amounts being included in Mr Buzadzic’s assessable income. The Unverified Credit Entries comprise instances where the source of and reason for the reduction in Mr Buzadzic’s loan account could not be explained. In the absence of an explanation of the source of the moneys (whether by way of a cash receipt, set-off, payment by direction or otherwise) which gave rise to the reductions, Mr Buzadzic has not discharged his onus of demonstrating that the moneys which funded those reductions were not amounts of his assessable income. Similarly by not providing evidence of the basis of the adjustments made to the loan accounts as part of the year end process, Mr Buzadzic has not discharged his onus of demonstrating that the source of those adjustments was not to be found in amounts that were his assessable income (for example, in the form of dividends).
For the reasons set out above, the Tribunal concludes that Mr Buzadzic received amounts (in the form of the deposits to the bank accounts in his name and in the name of Mrs Buzadzic) and received the benefit of amounts which were credited to his loan accounts. These amounts were not included in his returns, and aside from some isolated exceptions, were omitted without explanation. Having been assessed and having failed to demonstrate that he should not have been, the Tribunal has no basis on which it can be satisfied that the shortfall in his taxable income was not attributable to a blameworthy act. Accordingly the Tribunal is not satisfied that the Applicant has demonstrated that the Commissioner should not have formed the view that there had been fraud or evasion.
On the basis of the authority in Denver Chemicals[23], once fraud or evasion opinion is formed, the entire assessment is open for amendment and not just a single particular. As a result, Mr Buzadzic’s assessments could be amended for the inclusion of the amounts of interest and capital gains which he conceded were omitted by error.
[23]at 315
The findings made in relation to Mrs Buzadzic also have a bearing on the case of Mr Buzadzic.[24] The Unexplained Deposits in the accounts of Mrs Buzadzic are found to be belong to Mr Buzadzic but the reasons for and the underlying transactions giving rise to those deposits remain unexplained. The existence of the Unexplained Deposits in the accounts (whether in his name or in his wife’s name) and credit entries leaves open the possibility that not all of Mr Buzadzic’s earnings have been correctly disclosed in his tax returns which he bears the onus of establishing is not so.
[24]An example where the findings in relation to one taxpayer can bear on another where the matters are heard concurrently and rely upon the same substratum of facts can be found in Hines v F. C. of T. (1952) 5 AITR 305 at 317.
In these circumstances, notwithstanding there have been accepted errors in determining Mr Buzadzic’s assessable income, the Tribunal finds that on the balance of probabilities, Mr Buzadzic has not shown that the amended assessments issued to him are otherwise excessive in the required way. He has not shown what his assessment should have been.
Penalties
Mrs Buzadzic was assessed to penalties at a rate of 50% of the tax shortfall amounts on the basis that the shortfalls in the relevant Years were caused by recklessness of Mrs Buzadzic, or by her tax agents, pursuant to s 284-90(1) of Schedule 1 to the Administration Act.[25] The base penalty amount in relation to the tax Years ended 30 June 2008 to 30 June 2013 was to be increased by 20% under s 284-220(1)(c) of Schedule 1 to the TAA as there had already been a prior imposition of a penalty.
[25]The Taxation Administration Act 1953 (Cth).
For the reasons set out above, the Tribunal has concluded that the Unexplained Deposits in the accounts in Mrs Buzadzic’s name did not belong to her. Accordingly there was no shortfall in tax in respect of Mrs Buzadzic, and no penalty can arise.
Mr Buzadzic was assessed to penalties on the following basis:
(a)in relation to the Unexplained Deposits, the Unverified Credit Entries, and the capital gain for the sale of the KAR shares, the base penalty amount was set at a rate of 75% of the relevant tax shortfall amounts on the basis that those shortfalls were caused by an intentional disregard of the law by Mr Buzadzic or his tax agents, pursuant to s 284-90(1) of Schedule 1 to the TAA;
(b)in relation to the deemed dividends, the base penalty amount was set at a rate of 50% of the relevant tax shortfall amounts on the basis that those shortfalls were caused by recklessness by Mr Buzadzic or his tax agents, pursuant to s 284- 90(1) of Schedule 1 to the TAA;
(c)in relation to the undeclared interest received from the NAB term deposit, the base penalty amount was set at a rate of 25% of the relevant tax shortfall amounts on the basis that those shortfalls were caused by a lack of reasonable care by Mr Buzadzic or his tax agents, pursuant to s 284-90(1) of Schedule 1 to the TAA; and
(d)the base penalty amounts in relation to the each of the tax Years ended 30 June 2008 to 30 June 2013 was to be increased by 20% under s 284-220(1)(c) of the Schedule 1 to the TAA as there had already been a prior imposition of a penalty.
The Tribunal does not propose to increase the penalty imposed in respect of the undisclosed interest. The failure to provide the accountants with the bank statements for the term deposit for two Years was careless and the amount was small in nature.
In so far as the balance of the amounts assessed to Mr Buzadzic are concerned, Mr Buzadzic’s predicament resulted from the complex manner in which he conducted his and his entities’ affairs – mixing business expenditure and personal expenditure on credit cards, moving moneys between his personal accounts and around the accounts of the Buzadzic Group entities and not always telling his bookkeeper and accountant of all amounts deposited into his personal accounts. He accessed moneys as he chose and appears to have assumed that service providers would clean up after him based on the information he gave to them. Mr Buzadzic’s most significant service provider, Mr Hadded/The Practice, failed to make inquiries that they knew they should have: Mr Hadded admitted his firm had a practice of sending out a questionnaire to its clients to complete but did not send one to Mr Buzadzic because they were of the view that Mr Buzadzic would not respond. Mr Buzadzic provided no explanation for his conduct. The Tribunal is not satisfied that he has discharged his onus of proving on the balance of probabilities that his conduct in respect of the balance of the shortfall assessed to him was not attributable to an intentional disregard of the law. Because the taxpayer has provided no explanation for the amounts assessed to him that has been accepted by the Tribunal, and has provided no reason for excluding those amounts from his assessable income, the Tribunal is unable to be satisfied that the Commissioner’s assessment of the taxpayer’s conduct has resulted in a penalty assessment that is excessive. In these circumstances the Tribunal can be left with no option but leave the pre-existing basis on which penalty has been imposed undisturbed.
Because it is not satisfied that the shortfall was not attributable to repeated culpable conduct the Tribunal does not consider it appropriate to remit the 20% uplift imposed under under s 284-220(1)(c) of Schedule 1 of the Administration Act.
The Tribunal is not satisfied that the penalty assessments issued to Mr Buzadzic are excessive.
Decision
In relation to proceedings No 2017/5901-7, the Tribunal affirms the decisions under review.
In relation to proceedings No 2017/5908-14, the Tribunal sets aside the decisions under review and allows the objections.
I certify that the preceding 217 (two hundred and seventeen) paragraphs are a true copy of the reasons for the decision herein of Deputy President F D O’Loughlin QC and Senior Member L A Hespe SC
…………[sgd]……………..
AssociateDated: 24/12/2021
Dates of hearing: 12,13,14,17 December 2018, 7,8,11,12,13 November 2019, 17 December 2019
Date final submissions received: 9 September 2019
Counsel for the Applicant: Dr Bill Orow
Solicitors for the Applicant: MNG Lawyers
Counsel for the Respondent: Ms Fleur Shand
Solicitors for the Respondent: Australian Government Solicitor
Annexure A
Buzadzic Group
The Buzadzic Group consisted of:
(a)Three family trusts being the D & L Buzadzic Trust, the Buzadzic Cubby Trust and the Buzadzic Family Trust
(b)The Western General Bodyworks Group (or WGBW Group) of companies
The trustees of the three family trusts were:
(a)Buzadzic Pty Ltd (Trustee of the D & L Buzadzic Trust)
(b)Buz Cubby Pty Ltd (Trustee of the Buzadzic Cubby Trust)
(c)Delrich Arch Pty Ltd (Trustee of the Buzadzic Family Trust and an object of the D & L Buzadzic Trust)
The Western General Bodyworks Group of companies comprised:
(a)Footscray Towing Services Pty Ltd, the shares in which were held by Buzadzic Pty Ltd
(b)Geelong Collision Centre Pty Ltd, the shares in which were held by Buzadzic Pty Ltd, as trustee for the D & L Buzadzic Trust
(c)Gordon Avenue Accident Repair Centre Pty Ltd, the shares in which were held by Buzadzic Pty Ltd, as trustee for the D & L Buzadzic Trust
(d)Geelong Towing Service Pty Ltd, the shares in which were held by Buzadzic Pty Ltd, as trustee for the D & L Buzadzic Trust
(e)Logistic Car Rentals Pty Ltd, the shares in which were held by Mrs Buzadzic
(f)Total Sports Network Pty Ltd, the shares in which were held by Mr Buzadzic and which was deregistered on 16 February 2012
(g)Western General Auto Pty Ltd the shares in which were held by Mr Buzadzic and which was deregistered on 19 December 2010
(h)Western General Bodyworks Pty Ltd, the shares in which were held by Buzadzic Pty Ltd
(i)Western General Bodyworks Mentone Pty Ltd, the shares in which were held by Mr Buzadzic
(j)Western General Bodyworks Sunshine Pty Ltd, the shares in which were held by Buzadzic Pty Ltd, as trustee for the D & L Buzadzic Trust
(k)Western General Towing Pty Ltd, the shares in which were held by Buzadzic Pty Ltd
In addition to the above:
(a)During some of the relevant Years, Mr Buzadzic owned a significant proportion of the issued ordinary shares in Mynt Pty Ltd, which operated a nightclub known as the Mynt Lounge;
(b)up until about 2011, Buz Cubby Pty Ltd (Trustee of the Buzadzic Cubby Trust) owned an interest in a nightclub called Cubby House; and
(c)up until about 2014, Mr Buzadzic was associated with St Kilda Ink Pty Ltd which operated a tattoo parlour in St Kilda. It is unclear whether Mr Buzadzic or one of his Associated Entities owned shares in that company.
In these reasons, together with the Buzadzic Group, the additional entities in [4] above are referred to as the Associated Entities.
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