Buzadzic v Commissioner of Taxation
[2023] FCA 954
•16 August 2023
FEDERAL COURT OF AUSTRALIA
Buzadzic v Commissioner of Taxation [2023] FCA 954
Appeal from: Buzadzic and Commissioner of Taxation (Taxation) [2021] AATA 4820 File number: VID 38 of 2022 Judgment of: MOSHINSKY J Date of judgment: 16 August 2023 Catchwords: TAXATION – appeal on question of law from the Administrative Appeals Tribunal – assessment under s 167 of the Income Tax Assessment Act 1936 (Cth) – whether the Tribunal applied the wrong test for burden of proof – whether the Tribunal made findings of fact or reached conclusions that were unreasonable – whether the Tribunal misconstrued or misapplied s 6-5 of the Income Tax Assessment Act 1997 (Cth) – whether the Tribunal misconstrued or misapplied the “fraud or evasion” provision – whether the Tribunal failed to afford the applicant procedural fairness Legislation: Administrative Appeals Tribunal Act 1975 (Cth), s 44
Corporations Act 2001 (Cth), s 1305
Evidence Act 1995 (Cth), s 164
Income Tax Assessment Act 1936 (Cth), ss 109RB, 167, 170, 262A
Income Tax Assessment Act 1997 (Cth), s 6-5
Tax Administration Act 1953 (Cth), s 14ZZK, Sch 1, ss 284-75, 284-90, 284-220
Cases cited: Binetter v Federal Commissioner of Taxation [2016] FCAFC 163; 249 FCR 534
Bosanac v Federal Commissioner of Taxation [2019] HCA 41; 374 ALR 425
Bosanac v Federal Commissioner of Taxation [2019] FCAFC 116; 267 FCR 169
Brown v Federal Commissioner of Taxation [2001] FCA 596; 47 ATR 178
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) [1949] HCA 25; 79 CLR 296
Evans v Federal Commissioner of Taxation (1988) 19 ATR 1784
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212; 266 FCR 385
Federal Commissioner of Taxation v McNeil [2007] HCA 5; 229 CLR 656
Federal Commissioner of Taxation v Montgomery [1999] HCA 34; 198 CLR 639
Federal Commissioner of Taxation v Ross [2021] FCA 766; 174 ALD 77
Federal Commissioner of Taxation v Stone [2005] HCA 21; 222 CLR 289
Haritos v Federal Commissioner of Taxation [2015] FCAFC 92; 233 FCR 315
Henderson v Queensland [2014] HCA 52; 255 CLR 1
Hines v Federal Commissioner of Taxation (1952) 5 AITR 305
Imperial Bottleshops Pty Ltd v Federal Commissioner of Taxation [1991] FCA 352; 22 ATR 148
Minister for Immigration and Border Protection v SZVFW [2018] HCA 30; 264 CLR 541
Minister for Immigration and Citizenship v Li [2013] HCA 18; 249 CLR 332
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; 67 ALJR 170
Nguyen v Federal Commissioner of Taxation [2018] FCA 1420; 265 FCR 355
Osland v Secretary to the Department of Justice [2010] HCA 24; 241 CLR 320
Plaintiff M1/2021 v Minister for Home Affairs [2022] HCA 17; 400 ALR 417
Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation [2007] FCA 345; 66 ATR 1
Repatriation Commission v O’Brien [1985] HCA 10; 155 CLR 422
Sharp Corporation of Australia Pty Ltd v Collector of Customs [1995] FCA 707; 59 FCR 6
Waterford v Commonwealth [1987] HCA 25; 163 CLR 54
Weyers v Federal Commissioner of Taxation [2006] FCA 818; 63 ATR 268
Division: General Division Registry: Victoria National Practice Area: Taxation Number of paragraphs: 170 Date of hearing: 21 and 22 December 2022 Counsel for the Applicant: Dr NF Orow Solicitor for the Applicant: MNG Lawyers Pty Ltd Counsel for the Respondent: Ms M Schilling with Ms FL Shand Solicitor for the Respondent: Australian Government Solicitor ORDERS
VID 38 of 2022 BETWEEN: DANNY BUZADZIC
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
MOSHINSKY J
DATE OF ORDER:
16 AUGUST 2023
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The applicant pay the respondent’s costs of the appeal, as agreed or taxed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
TABLE OF CONTENTS
Introduction
[1]
Background facts
[5]
The tax returns, the audit and the amended assessments
[40]
The Tribunal proceedings
[57]
The Tribunal’s reasons
[64]
The appeal
[77]
Applicable principles relating to “question of law”
[81]
Grounds 1 and 2 (burden of proof)
[88]
Ground 3 (income)
[112]
Ground 4 (whether objections should have been allowed in part)
[122]
Grounds 5, 6 and 7 (fraud or evasion)
[131]
Grounds 8, 9, 10, 11 and 12 (penalties)
[142]
Ground 13 (failure to consider)
[149]
Grounds 14 and 15 (unreasonable findings and conclusions)
[159]
Ground 16 (procedural fairness)
[165]
Conclusion
[170]
REASONS FOR JUDGMENT
MOSHINSKY J:
Introduction
The applicant, Mr Danny Buzadzic, appeals on a question of law pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) from a decision of the Administrative Appeals Tribunal (the Tribunal): Buzadzic and Commissioner of Taxation (Taxation) [2021] AATA 4820. The proceedings in the Tribunal related to assessments made by the respondent (the Commissioner) in respect of both Mr Buzadzic and his wife, Mrs Leisa Buzadzic, pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936). The assessments related to the years of income ended 30 June 2007 to 30 June 2013 (the 2007 to 2013 Years). In the proceedings relating to Mr Buzadzic, the Tribunal affirmed the decisions under review. In the proceedings relating to Mrs Buzadzic, the Tribunal set aside the decisions under review and allowed the objections. There is no appeal in relation to Mrs Buzadzic.
The questions of law and grounds of appeal on which Mr Buzadzic relies are set out in his amended notice of appeal dated 8 August 2022 (the notice of appeal). There is an issue whether all of the questions in the notice of appeal are, in truth, questions of law. That will be discussed later in these reasons. In any event, it is clear that the notice of appeal does raise at least some questions of law.
The notice of appeal contains 10 questions and 16 grounds. Further, attached to the notice of appeal is a schedule (Schedule A) comprising 18 pages of, essentially, submissions about the evidence before the Tribunal. Mr Buzadzic’s contentions can be summarised as follows:
(a)that the Tribunal applied the wrong test for burden of proof under s 14ZZK(b)(i) of the Tax Administration Act 1953 (Cth) (the Administration Act) and/or that the Tribunal’s decision that Mr Buzadzic had not discharged the burden of proof was unreasonable (Grounds 1 and 2);
(b)that the Tribunal misconstrued and/or misapplied s 6-5 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) (Ground 3);
(c)that the Tribunal erred by failing to exclude deposits, credit entries and other amounts that were explained or shown to be erroneous, from the assessments (Ground 4);
(d)that the Tribunal misconstrued and/or misapplied item 5 of s 170(1) of the ITAA 1936 (which relates to the amendment of an assessment if the Commissioner is of the opinion there has been fraud or evasion) and/or that the Tribunal applied the wrong test for burden of proof in connection with that provision and/or that the Tribunal made an unreasonable finding in relation to that provision (Grounds 5, 6 and 7);
(e)that the Tribunal misconstrued and/or misapplied the penalty provisions and/or that the Tribunal made unreasonable findings in relation to penalties (Grounds 8, 9, 10, 11 and 12);
(f)that the Tribunal failed to consider certain grounds of objection and submissions (Ground 13);
(g)that the Tribunal made certain unreasonable findings of fact and/or that there was no evidence or proper basis for certain findings (Grounds 14 and 15); and
(h)that the Tribunal failed to afford Mr Buzadzic procedural fairness in that it failed to properly consider the evidence tendered by Mr Buzadzic and/or to give it proper weight (Ground 16).
For the reasons that follow, I have concluded that none of these grounds is made out. The appeal is therefore to be dismissed.
Background facts
The following is a summary of the background facts and some of the evidence that was led during the Tribunal proceedings, based on the Tribunal’s reasons. In this section, I have not drawn on parts of the Tribunal’s reasons that are the subject of direct challenge in the notice of appeal.
During the 2007 to 2013 Years, Mr and Mrs Buzadzic were associated with at least 16 companies and three trusts (the Associated Entities). Details of the Associated Entities are set out in Annexure A to the Tribunal’s reasons. In these reasons, I will adopt the definitions used by the Tribunal as set out in Annexure A to its reasons. Accordingly, the Buzadzic Group refers to:
(a)three family trusts, being the D & L Buzadzic Trust, the Buzadzic Cubby Trust and the Buzadzic Family Trust; and
(b)the Western General Bodyworks group of companies (the WGBW Group).
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); and
(c)Delrich Arch Pty Ltd (trustee of the Buzadzic Family Trust).
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 WGBW Group. 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.
During the relevant Years, there were at least 26 bank and credit card accounts in the name of Mr Buzadzic and Mrs Buzadzic (including four in the name “D. Buzadzic Western General Body Works Pty Ltd”).
Private and business-sourced money was extensively intermingled over an extensive period: Tribunal’s reasons, [61].
Western General Bodyworks Pty Ltd (WGBW) generated significantly more revenues than the other entities.
Mr Buzadzic directed that cash be lent by WGBW to the other entities Mr Buzadzic 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 was extensive. 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 to the Tribunal of written agreements recording the terms on which these advances were made.
There was a ledger account in the accounting records of Logistic Car Rentals Pty Ltd entitled Loan Account – L Buzadzic. Increases and decreases in this ledger account reflected funds transferred at the direction of Mr Buzadzic. The Tribunal found that the balances 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.
Prior to 2013, Mr Buzadzic engaged bookkeepers to maintain the accounting records of the WGBW Group. Those bookkeepers were reliant upon the information provided to them by Mr Buzadzic.
Mr Buzadzic led very limited evidence in the Tribunal proceedings as to the bookkeeping 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 that 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 in the Tribunal proceedings.
Between 2008 and 2013, a 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 name of Mr Buzadzic. Accounts were not prepared for Mr Buzadzic in his personal capacity.
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 three trustee companies.
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 that 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). Mr Stirling relied upon the information provided to him by Mr Buzadzic or Mr Buzadzic’s personal assistants.
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 in the Tribunal proceedings 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.
Mr Stirling did not have access to or review the bank account statements for the personal bank accounts of Mr Buzadzic (including the home loan account). Although Mr Buzadzic testified in the Tribunal proceedings 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 Buzadzic, although on occasion he would see a copy of them when trying to see if a supplier invoice had been paid.
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 the 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’s 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 Buzadzic’s two personal assistants, neither of whom was called to give evidence in the Tribunal proceedings, also entered transaction data into the MYOB system.
At the end of each 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 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 Buzadzic and was unaware of the amounts deposited into those accounts. Mr Hadded’s evidence in the Tribunal proceedings 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 he did not recall whether that was sent to Mr Buzadzic.
Insofar as the Buzadzic Group entities were concerned, each Year Mr Hadded’s 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 of which the internal staff of the Buzadzic Group were unaware, 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).
Between 2 February 2012 and 19 July 2013, Mr Kane was an external accountant who provided accounting services to the Buzadzic Group. He prepared financial statements for the group entities and their tax returns, as well as Mr Buzadzic’s personal tax returns. Mr Kane never sought and was not provided with personal bank statements or personal credit card statements. Mr Kane posted year-end adjustments to the MYOB ledger accounts provided to him by Mr Stirling prior to preparing the finalised financial statements. Mr Kane did not have cause to examine the individual transactions posted to the director loans ledger accounts over the Year, except to the extent to which he posted year-end adjustments. It was not part of his engagement to verify or audit each record posted to the ledger. Mr Kane testified in the Tribunal proceedings that he prepared working papers as part of the end-of-year process. The Tribunal was not provided with copies of those working papers.
From January 2013, Mr Buzadzic engaged Mr Evans to act as the financial controller for the Buzadzic Group.
Mr Evans testified in the Tribunal proceedings that during the course of a financial year, entries were posted to the ledgers in the MYOB system maintained by the Buzadzic Group to record day-to-day transactions, although he did not himself post such entries.
During the time Mr Evans was employed by the Buzadzic Group:
(a)Mr Stirling was responsible for ensuring that during the Year all supplier invoices, all sales receipts and all cash movements in the entity bank accounts were posted into the MYOB accounting system;
(b)at the end of the Year, the internally maintained ledgers were provided to the external accountants to post year-end adjustments; the adjusted accounts were used to prepare the financial statements, and the tax returns, for each of the entities; and
(c)Mr Kane (and later Mr Hadded’s firm) was responsible for preparing Mr Buzadzic’s personal income tax return.
Mr Evans’s evidence in the Tribunal proceedings was that if any of the businesses had a cash shortfall, Mr Buzadzic drew on the home loan account and provided that cash to the business, whether by depositing that cash in the bank account of the entity requiring the funds or by paying the creditors of that entity directly. Mr Evans concluded, from his review of the ledger accounts, that cash transfers from the bank accounts of the Buzadzic Group entities to an account in the name of Mr or Mrs Buzadzic were recorded by posting a credit entry to the entity’s ledger account for cash at bank and debiting another account. If the cash transfer was a reimbursement for an expense paid for the business on a credit card issued in the name of Mr Buzadzic, the debit may have been either to the entity’s expense account (a profit and loss account) or to the entity’s director loan asset account which recorded the balance owed by Mr Buzadzic to the entity. The Tribunal stated in its reasons that it assumed that the difference in the debiting treatment would depend on whether the expense had previously been recognised with a corresponding debit to the director’s loan account. The amounts reimbursed were often rounded up or down, and in those cases the reimbursement would not match perfectly the amount shown on the personal credit card statement.
Mr Evans’s evidence was that when he was financial controller, he instructed, and it was his understanding, that at the end of each financial year the external accountants would arrange for the declaration and payment of dividends, at times through trusts, to Mr and Mrs Buzadzic in amounts equal to the loan balances recorded in each entity’s accounts as owing by them to the respective entity. Where the shareholder in these Associated Entities was a trustee of one of the Buzadzic trusts, the dividend was subsequently distributed as part of a trust distribution, ultimately to Mr and Mrs Buzadzic as beneficiaries. Beyond this instruction, Mr Evans was not directly involved in the process by which dividends and trust distributions were resolved and paid.
The tax returns, the audit and the amended assessments
Mr and Mrs Buzadzic lodged income tax returns for the 2007 to 2013 Years, which included trust distributions and salaries paid by the Associated Entities. Details of these amounts are set out in Table 1 of the Tribunal’s reasons.
The Australian Taxation Office (ATO) undertook an audit of the affairs of Mr and Mrs Buzadzic. During the course of the audit, Mr Evans provided information to the ATO. The Tribunal stated in its reasons that it was apparent that the audit process was not without difficulty, as perceived by at least Mr Evans, if not the auditors as well. The Tribunal stated that, in frustration, Mr Evans provided MYOB ledgers to the ATO that were incomplete. The records provided did not include, for example, non-trading transactions such as dividends paid to shareholders.
Following the audit, the Commissioner identified amounts that he considered were evidence of, or represented, unreported income. For Mr Buzadzic, the following categories were identified by the Commissioner:
(a)deposits or credits to bank accounts or credit card accounts in Mr Buzadzic’s name (Unexplained Deposits);
(b)unexplained or unverified credit entries to Mr Buzadzic’s loan accounts as recorded in the books of the Associated Entities (Unverified Credit Entries);
(c)interest on a term deposit that had been paid to him in the 2008 and 2009 Years;
(d)a capital gain made by Mr Buzadzic on realisation of a share investment in the 2010 Year; and
(e)what the Commissioner said was a deemed dividend under Div 7A of the ITAA 1936 on account of balances owing to related companies that were not paid in the prescribed time.
The Commissioner formed the opinion that there had been fraud and/or evasion. On this basis, he amended Mr and Mrs Buzadzic’s 2007 to 2013 Year assessments and included additional amounts in their taxable income.
Mr Buzadzic accepted that the undeclared interest amounts and the undeclared capital gain on the disposal of shares were assessable, but said 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 Commissioner imposed penalties in respect of Mr Buzadzic as follows:
(a)at the 75% rate in respect of the Unexplained Deposits, the Unverified Credit Entries and the capital gain;
(b)at the 50% rate in respect of the deemed dividends;
(c)at the 25% rate in respect of the interest income;
(d)the base penalty amounts in relation to the 2008 to 2013 Years were increased by 20% on the basis that there had already been a prior imposition of a penalty.
The Commissioner also imposed a shortfall interest charge (SIC).
The following table (which is Table 4 in the Tribunal’s reasons) 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 had five general categories, which are set out in the following table (reflecting Table 5 in the Tribunal reasons):
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 $264,071 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 Totals $1,272,315 $2,363,316 $291,450 $9,546 $1,768
The Unexplained Deposits had three general categories, as set out in the following table (which is Table 6 in the Tribunal’s reasons):
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 Totals $567,875 $396,225 $308,215
The Unverified Credit Entries comprised two categories: unverified credit entries and loan balance mismatches that were treated as unverified credits. The following table (which is Table 7 in the Tribunal’s reasons) identifies these amounts:
Table 7 Mr Buzadzic: totals of Unverified Credit 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 Totals $849,955 $1,513,361 $2,363,316
The following table (which is Table 8 in the Tribunal’s reasons) contains a breakdown of the “Unverified Credit Entries” column in Table 7:
Table 8 Mr Buzadzic: totals of related entity Unverified Credit 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 Totals $478,979 $83,896 $46,294 $81,000 $159,786
The Unexplained Deposit amounts (from Associated Entities) and the Unverified Credit Entries (to related-entity loan accounts) were those deposits and credits of $1,000 or more that: (a) were not reflected in increases to Mr Buzadzic’s loan account with the Associated Entity; (b) 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 (c) did not on their face appear to be reimbursements of business expenses that 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 $3.5 million of reimbursements were identified and accepted by the Commissioner. The credits for these reimbursements were not included in the totals assessed.
The “Loan balance mismatches treated as unverified credits” column in Table 7 comprised 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 Commissioner. Details of these amounts were set out in Table 9 in the Tribunal’s reasons.
The outstanding loan balances at the relevant lodgement date which were assessed as deemed dividends under Div 7A of the ITAA 1936, and the applicable distributable surpluses, were as set out in Table 10 in the Tribunal’s reasons.
Through the objection and subsequent disputation processes, the Commissioner conceded that a small number of assessed amounts had been adequately explained. They were as set out in Table 11 in the Tribunal’s reasons.
The following table (which is Table 13 in the Tribunal’s reasons) provides details of the number of Unexplained Deposits and Unverified Credit Entries in relation to Mr Buzadzic:
Table 13
Mr Buzadzic: number of Unexplained Deposits or Unverified Credit EntriesYear 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
The Tribunal proceedings
The following witnesses gave evidence and were cross-examined during the hearing before the Tribunal: Mr Evans; Mr Stirling; Mr Kane; Mr Hadded; Mrs Buzadzic; Mr Buzadzic; and Mr Vasudevan, a partner of the firm Pitcher Partners, who was engaged to provide forensic accounting evidence.
During the Tribunal proceedings, the Commissioner conceded that certain specific amounts had been adequately explained. However, the Commissioner’s position was that Mr Buzadzic had nevertheless not discharged his onus, which required him to establish (on the balance of probabilities) the true amount of his taxable income, relying on Bosanac v Federal Commissioner of Taxation [2019] HCA 41; 374 ALR 425 (Bosanac) at [29]-[30] per Nettle J (set out below).
As noted in the Tribunal’s reasons at [32], through the course of Mr Evans’s and Mr Hadded’s evidence, it became apparent that Mr and Mrs Buzadzic’s representatives had provided incomplete accounting records to the ATO in the course of the audit. It also became apparent that:
(a)records that were supplied to the ATO during the course of the audit were supplied after there had been something of a breakdown in the relationship between Mr and Mrs Buzadzic’s representatives and the ATO’s audit team;
(b)the financial records provided to the audit team did not include all of the transactions entered into between Mr and Mrs Buzadzic and the various entities in the Buzadzic Group during the relevant years or the year-end adjusting entries that potentially affected directors’ loan account balances processed by the Buzadzic Group’s external accountants; and
(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.
When this situation became apparent in December 2018, the Tribunal indicated that it would be greatly assisted by a forensic accountant’s report. Mr and Mrs Buzadzic accepted this invitation, which was not opposed by the Commissioner. Mr and Mrs Buzadzic then engaged Mr Vasudevan as an independent expert. Issues were later raised by the Tribunal and the Commissioner as to the form of questions provided to Mr Vasudevan. However, the form of the questions remained unaltered. Mr and Mrs Buzadzic filed a report prepared by Mr Vasudevan that purported to address the questions framed by Mr and Mrs Buzadzic.
During a resumed hearing before the Tribunal in November 2019, Mr Vasudevan was extensively cross-examined. As the Tribunal stated at [40] of its reasons, the cross-examination revealed that the report filed could not be relied upon to provide substantive support for Mr and Mrs Buzadzic’s cases.
At the continuation of the hearing on 17 December 2019, counsel for Mr and Mrs Buzadzic re-examined Mr Vasudevan in a manner that took the form of a cross-examination. At the conclusion of this re-examination, counsel for Mr and Mrs Buzadzic 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 of the matter, the Tribunal refused this application.
As the Tribunal noted at [102] of its reasons, ultimately, Mr and Mrs Buzadzic did not seek to rely upon Mr Vasudevan’s report except to the extent that it confirmed that, in the finalised accounts, there was no discrepancy between the closing balance in the account as at the end of one Year and the opening balance in that account at the commencement of the following Year.
The Tribunal’s reasons
In the introductory section of its reasons, the Tribunal provided a summary of what it considered Mr and Mrs Buzadzic needed to show in order to succeed, and of its conclusions:
19.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.
20.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.
21. 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.
(Italics in original; bold emphasis added.)
After setting out the background facts and key details relating to the tax returns, the audit and the amended assessments, the Tribunal identified, at [103], six general considerations that were particularly relevant to the proceedings. These were:
(a)intermingling of money;
(b)the reasonableness of proof required;
(c)the assistance s 1305 of the Corporations Act 2001 (Cth) provides;
(d)the assistance a double-entry accounting system provides;
(e)the usefulness of estimates; and
(f)the relevant burden of proof.
In relation to “intermingling of money”, the Tribunal made the following observations at [104]:
The first general consideration concerns intermingling of various entities’ money. Using available funds and credit cards and intermingling of various entities’ money (including personal money) as has occurred in the present matter is not of itself improper. There may be various reasons for managing money this way. Using readily available cash to service the most pressing need, using private credit cards for business expenditures to secure airline loyalty points, and moving cash to and from home loan accounts so as to minimise interest accruals on a home loan might well be some of those reasons. However, if that type of activity is undertaken, the records kept of it need to allow the appropriate unmingling to be effected with a degree of confidence that the unmingling process is accurate, and the financial statements and balances produced are also accurate, and not merely a speculative end product of antecedent speculation.
(Emphasis added.)
In relation to “reasonableness of proof required/lack of documents”, the Tribunal stated at [109]:
… the obligation and expectation to retain a document does not exist in a vacuum. Much depends on the nature of the transaction and whether it is of a kind that would result in retention of documents in the circumstances. This is not a case where a taxpayer has been assessed because they have failed to produce a supporting record in respect of a single isolated deposit which might have been explained by private transactions some time ago for which records are inherently unlikely to have been retained, and are potentially unobtainable when the time comes to establish their character and provenance some years after the event. The evidence, or lack of it, in the present matter needs to be seen in the context of the pattern of conduct, the manner in which Mr Buzadzic conducted his affairs, the number of discrepancies, the size of the discrepancies (bearing in mind that the Commissioner did not seek explanations for and did not question transactions of less than $1,000) and the period over which the discrepancies were identified. The present circumstances include three trusts and 16 companies with which Mr Buzadzic was associated, repeated intermingling of [a] substantial volume and value of business transactions with private arrangements, repeated intermingling of funds of separate businesses and their owners and an apparent reluctance to do what the group’s external accountants usually ask of their clients. The deposits and credits to loan accounts that have been the subject of scrutiny were all in excess of $1,000 and were all unexplained. Most of the credits and deposits had their origins in entities that Mr Buzadzic controlled or was significantly associated with which carried on businesses. That of itself suggests that the transactions might not be explained away as private transactions for which records ought not be expected. To the contrary, those circumstances suggest that there might be expected to be a business record or trail that sets out the provenance of the deposits and credits and thus throw light on whether the deposits and credits reveal, or are the produce of, an undisclosed source of income.
(Emphasis added.)
In relation to s 1305 of the Corporations Act, the Tribunal stated at [116]-[117]:
116.Section 1305 of the Corporations Act provides very limited assistance to the Applicants. The section provides that such books are prima facie, but not conclusive evidence of the matters recorded in them. The Commissioner was entitled to interrogate the accounts. He has interrogated the accounts and, after accepting that there had been reimbursements of business expenditure in excess of $3.5 million, asked questions of particular items. In the scheme of the business operations of the group of Associated Entities comprising three trusts and 16 companies over a period of 7 years, the number of items that remain unexplained, was not an overwhelming number.
117.It was clear from the evidence led that the basis for the entries made in the accounts that are under review were not all explained, and that the Tribunal could not be satisfied that all of the entries made were an accurate reflection of the underlying transactions. The accuracy of the records depended on the accuracy and completeness of the information provided to the bookkeeper. The Tribunal is not satisfied that all information relating to Mr Buzadzic’s dealings with the WGBW Group was accurately provided to the bookkeepers.
(Emphasis added.)
The Tribunal gave detailed consideration to the issue of the burden of proof at [122]-[158]. At [122], the Tribunal stated that it is for the applicant to establish that the amount assessed exceeds their actual liability, and this requires the applicant to demonstrate what their actual taxable income is. The Tribunal, at [123], set out an extract from the judgment of Nettle J in Bosanac at [29]-[30] in support of those propositions (set out later in these reasons). The Tribunal then reasoned as follows:
125.In this matter, there were clear deficiencies in the records provided to the Tribunal. The basis for accounting entries remained unexplained. The manner in which funds flowed between the entities was not explained except in the form of generalisations. The distributions included in Mr Buzadzic’s income tax returns were not reconciled to either the bank account statements (which was not unexpected given that the evidence was that the distributions were not paid in cash) or to the amounts recorded as owed to the various entities by Mr Buzadzic. It was not at all clear how trust distributions returned as being made to Mrs Buzadzic could be used to reduce amounts owed to the Associated Entities by Mr Buzadzic. The source and provenance of identified deposits and credit entries (and in particular the transactions which had given rise to the deposits or credit entries) remained unexplained.
126.The burden of proving a negative is not easily discharged. In the present case it requires the Tribunal to be satisfied that not only have all the sources of the taxpayer’s income been disclosed but also that the earnings from those sources have been correctly returned. The Tribunal is unable to determine whether all of the deposits and credit entries were the product of transactions that had given rise to the derivation of assessable income by Mr Buzadzic or whether all sources of income have been brought to account.
127.Aside from the amounts which the Commissioner concedes as explained (including the deposits which the Commissioner conceded were debited to the director’s loan ledger accounts) and the money received on the sale of heritage number plates, the Tribunal is not satisfied that Mr Buzadzic has shown what the source or sources of money reflected in the disputed deposits and credits (including credits to eliminate apparent opening and closing loan account balance mismatches) was or were, and as a consequence has not shown that:
(a)the deposits from the Associated Entities and the unexplained credits were not attributable to amounts of undeclared income derived by Mr Buzadzic; and
(b)the deposits from the non-associated entities and unknown persons were not attributable to amounts of undeclared income derived by Mr Buzadzic from an unidentified source.
128.In a case such as the present where the Commissioner has assessed a taxpayer on the basis of unexplained deposits and unexplained sources for reductions in their liabilities, to the extent that the taxpayer contends that their income is sourced from distributions and dividends, it is incumbent on the taxpayer to lead evidence that explains how those distributions and dividends were paid (whether in cash or book entry), how the distributions had been reflected in their taxable income as returned and how those dividends and distributions explain decreases in personal liabilities.
129.Mr Buzadzic appeared to assert that the deposits to his bank accounts from his Associated Entities were to be explained on the basis that they were:
(a)reimbursements to him of outgoings he incurred on behalf of those entities (as a result of his decision to use his personal credit cards or home mortgage offset account to pay outgoings for his Associated Entities);
(b)the proceeds of loans made to him by the Associated Entity; and
(c)the proceeds of distributions made to him and which had been included in his assessable income.
130.Mr Buzadzic did not lead sufficient evidence to detail the structure of the various trusts, how the relevant companies declared divided income to those trusts, and how the income from those trusts was distributed each Year.
131.The Tribunal is unable to be satisfied that the amounts deposited into Mr Buzadzic’s bank accounts and credit card accounts from the Associated Entities were not assessable, for example by being the proceeds of distributions made to him and which had already been included in his assessable income.
132.The Tribunal is similarly unable to be satisfied that any of the reductions recorded in Mr Buzadzic’s loan accounts with the Associated Entities were referable to distributions made to him and which had already been included in his assessable income. Although Mr Buzadzic’s income tax returns disclosed some amounts of assessable income referable to trust distributions, the evidence led did not explain how the distributions were made or applied, or the manner in which dividend payments were made by other Buzadzic Group companies to those trusts. The evidence led did not show how the dividends and distributions flowed from the entities in the Buzadzic Group to the accounts of each of Mr and Mrs Buzadzic and how those dividends and distributions were to be reconciled to the deposits in the bank accounts and the Buzadzic loan account reductions recorded in each entity’s accounts. The forensic accountants report that had been suggested might have addressed these matters but failed to do so.
133.In the absence of any contemporaneous evidence (whether in the form of bank records, invoices or receipts) and a forensic analysis of the ledger accounts of the Associated Entities, the Tribunal is not satisfied that the identified deposits into Mr Buzadzic’s accounts from the Associated Entities can be explained as reimbursements of expenses incurred by Mr Buzadzic for the business operations where no corresponding expense can be identified from the credit card statements for Mr Buzadzic’s credit card accounts. Nor can the deposits be readily explained as the proceeds of loans made to Mr Buzadzic where there is no corresponding debit entry to Mr Buzadzic’s loan account with the Associated Entities.
134.Aside from the generalised assertion that the deposits from the Associated Entities were reimbursements of unidentified expenses, no specific explanation was proffered by Mr Buzadzic for most of the deposits.
…
150.The Tribunal does not accept the unsupported explanations for the deposits proffered by Mr Buzadzic. The Tribunal considers Mr Buzadzic’s oral evidence concerning the deposits to be speculative and unreliable.
151.Only one of the explanations, concerning the sale of heritage number plates, could be accepted.
(Footnote omitted; emphasis added.)
The balance of the Tribunal’s reasons is structured under the following headings:
(a)Unverified Credit Entries – Mr Buzadzic;
(b)Discrepancies between opening and closing balances;
(c)Unexplained Deposits and Unverified Credit Entries purporting to be in Mrs Buzadzic’s favour;
(d)Division 7A;
(e)Fraud or Evasion;
(f)Penalties.
In relation to “Unverified Credit Entries – Mr Buzadzic”, the Tribunal stated:
159.The Unverified Credit Entries remain substantially unverified and unexplained. The evidence provided to the Tribunal did not adequately explain the reasons for these credit entries to show that they were not income, or amounts representing income, or whether these amounts had otherwise already been included in the taxable income returned by Mr Buzadzic.
160.In this regard, the Tribunal cannot determine whether the amounts credited to Mr Buzadzic’s director’s loan account reflected the repayment of loans made by Mr Buzadzic to the Mynt or Cubby House businesses (whether such loans were made and if so how they were made, whether directly out of a bank account controlled by Mr Buzadzic or indirectly by Mr Buzadzic drawing down on his loan account with WGBW and directing WGBW to transfer funds to Mynt or Buz Cubby) or whether the credit entries reflected distributions made to Mr Buzadzic at the direction of the Trustee of the Buz Cubby Trust and if so, whether such a distribution had already been included in the assessable income returned by Mr Buzadzic or whether the credit entries reflected funds otherwise applied for Mr Buzadzic’s benefit.
161.On the evidence provided, and absent the assistance of a forensic examination of the journals and ledgers for each entity tracing the provenance and origin of the credits, the Tribunal is not satisfied that the decreasing movements in Mr Buzadzic’s loan accounts with each entity or the identified deposits are to be explained by the distributions made to him by the WGBW Group which were otherwise included in the taxable income he returned. This inability to be so satisfied is not assisted by the fact that the sum of the decreases in the balances owed by Mr Buzadzic exceeded the sum of the distributions he received. The Tribunal is not satisfied that Mr Buzadzic has discharged his onus of demonstrating that these amounts did not represent amounts of his assessable income.
(Emphasis added.)
In relation to “Discrepancies between opening and closing balances”, the Tribunal stated in part:
165.The Tribunal concludes that there was no discrepancy between the opening balance of the director’s loan account as properly recorded in each entity’s accounts as at the beginning of the Year and the closing balance as at the end of the previous Year (based on the finalised complete books of account maintained by the external accountants). The Commissioner was in error in assuming such a discrepancy existed. However, to show error in the Commissioner’s process of assessment is not sufficient to discharge the Applicant’s burden of showing the amended assessments to him were excessive. Even if these balances in the finalised accounts are accepted, the entries made that led to those balances need to be explained if they are challenged, as is the case presently.
166The evidence led suggests that to align the external accountants’ records with Buzadzic Group records year-end adjustments had been made to reflect at least three matters:
(a)Distributions declared and paid at year end. The distributions involved dividend declarations by the companies to their shareholders and trust distributions by the trustees of the family trusts. Mr Evans did not prepare the documents to effect the distributions. Year-end distributions were not paid in cash but effected by book entries. Where the distributions were applied on behalf of Mr Buzadzic to reduce his liability to WGBW, the effect of the distribution was to reduce the balance of Mr Buzadzic’s director loan account in WGBW’s ledger.
(b)Entries made to reflect transactions at year end to consolidate the director loan account balances into one entity – [WGBW]. Because the other entities in the group tended to suffer cash shortfalls, during the Year, from time to time, Mr Buzadzic advanced moneys to those other entities by drawing on his home loan. In the accounts of these entities, the director loan account was a liability. At the same time, [WGBW] did generate surplus cash and Mr Buzadzic drew on those surplus cash funds from time to time to fund his family’s living expenses or direct WGBW to repay his home loan. In WGBW, the director loan account was an asset. Having many inter-entity loans made, in the words of Mr Kane, it is difficult to ascertain the amount of money that was owed between entities because this one owed this one so much, and this one owed this one so much. It was very difficult to control and understand which entities were supporting the other entity with regard to its own cash flows. As part of tidying up the accounts, the external accountants processed entries which had the result of transferring from Mr Buzadzic to [WGBW] the liability owed by the other group entities (and instead of those entities owing moneys to Mr Buzadzic, those entities owed moneys to WGBW, thereby creating an asset in the accounts of WGBW and WGBW recording a decrease in the amount owed to it by Mr Buzadzic).
(c)Missed prior year adjustments. If these adjustments had not been properly made to the ledgers maintained by the client as at the end of the prior year, the prior year adjustments would also need to be processed.
167.To the extent that the adjustments related to the second and third of the above matters, the adjustments would not necessarily relate to, be sourced in or be explained by Mr Buzadzic contributing funds to the entities from undeclared sources of income. In particular, the missed prior year adjustments would not be referable to undeclared sources of income in the year of income in which the adjustments were in fact processed. Whether adjustments made to loan account balances as a result of Mr Buzadzic advancing funds to entities suffering a cash shortfall were referable to undeclared sources of income of Mr Buzadzic would depend on identifying Mr Buzadzic’s source for those funds. If those funds were sourced by Mr Buzadzic borrowing from another party (for example, by drawing down on his home loan) those funds would not be sourced by Mr Buzadzic from any undeclared income. If however those funds were sourced by Mr Buzadzic as a result of other transactions, those funds might have been sourced by Mr Buzadzic from undeclared income.
168.The difficulty is that based on the evidence before it, the Tribunal cannot ascertain the extent to which the entries made to the director’s loan accounts related to any of the three matters. The Tribunal was provided with alignment journal entries which listed the total debits and credits the external accountants instructed be made to the Buzadzic Group’s internally maintained ledgers at the end of each Year. However the Tribunal was not provided with an explanation for the basis on which those debit and credit amounts had been determined and in particular how the debit adjustments to the director loan accounts had been calculated or evidence of the transactions which they were intending to reflect.
…
170.No attempt had been made to demonstrate how any of the year-end adjustments were reflected in or reconciled with the amounts included in Mr Buzadzic’s tax returns. Although it is likely that at least some of the year-end adjustments (and thus some of the differences between the closing balances recorded in the accounting files provided to the Commissioner and the opening balances recorded in the following year’s financial statements) may be explained by the distributions of income that were included in Mr Buzadzic’s income tax return, the Tribunal does not have a sufficiently reliable basis on which to quantify or ascertain the connection, if any, between the reductions in the loan account balances and the distributions made to Mr Buzadzic that may have been satisfied by an entry reducing his loan account balance. It may be accepted that the balance shown in the accounts of the entities properly disclose the balance owed by Mr Buzadzic and disclose the extent of that entity’s claim against Mr Buzadzic. However, the year-end accounts do not of themselves explain the reasons for or the sources of the reductions recorded against Mr Buzadzic’s loan account. The balance in the ledger account does not identify whether the source of the reduction recorded in that ledger account is to be found in a non-assessable receipt or entitlement or an assessable entitlement or receipt that has already been brought to account.
171.Having provided incomplete information to the ATO during the course of the audit, to discharge his onus, it was incumbent on Mr Buzadzic to provide the Tribunal with evidence of the transactions which supported the adjusting entries made to his loan account and to demonstrate why those transactions did not involve or reflect amounts that were assessable to him, or if they were, that those amounts had been included in the taxable income he had returned. In this case the Tribunal was not provided with an adequate explanation of the manner in which the quantum of the adjustments had been determined. The Tribunal considers it possible, potentially even likely, that there exists an explanation for some if not all of the discrepancies identified by the Commissioner between opening and closing balances and it is possible that such an explanation might demonstrate that the adjustment made to align those balances reflected transactions that were not attributable to undeclared income. However, on the evidence before it, the Tribunal does not have a sufficient basis on which it might estimate the extent to which the adjustments made to align the opening and closing balances reflected or were sourced in such transactions.
…
173.The Tribunal accepts that the finalised financial statements for each entity do not disclose a difference between the closing balance of one Year and the opening balance of the next Year. But whilst the Tribunal accepts that the final accounts of the entities show that the closing balances match the opening balances of the following Year, the evidence led does not demonstrate that the entries giving rise to the closing balances were properly made or, identify the nature of the transactions that those entries were intended to record, or to the extent they were, demonstrate that those entries were referable to dividends declared or distributions of net income of trust made to or on behalf of Mr Buzadzic, that had been included in the assessable income returned by Mr Buzadzic.
(Italics in original; footnote omitted; bold emphasis added.)
The questions of law in the notice of appeal potentially relevant to these grounds are:
8.Whether the Tribunal (i) failed to make findings of material fact that it was required to make (ii) failed to make inferences of fact it ought to have made or [made inferences] which were not permissible (iii) made findings of fact that were not supported by admissible, relevant or probative evidence or were contrary to the evidence (iv) made findings of fact that were manifestly unreasonable?
9.Whether the Tribunal’s decision was so unreasonable that no reasonable decision maker could have made [it]?
As noted above, it is not clear that all aspects of question 8 raise questions of law for the purposes of s 44 of the AAT Act. However, I accept that at least sub-paragraphs (i) and (iv) of question 8 raise questions of law. Further, I accept that question 9 raises a question of law for the purposes of s 44.
Ground 14 challenges a long list of factual findings and other conclusions of the Tribunal. The difficulty with many aspects of ground 14 is that they amount to no more than taking issue with the Tribunal’s findings or conclusions by pointing to evidence that Mr Buzadzic contends supports a contrary finding or conclusion. This does not appear to raise a question of law and is therefore outside the scope of an appeal on a question of law. Further, insofar as Mr Buzadzic relies on Schedule A to the notice of appeal, which sets out a summary of evidence led in the Tribunal proceeding, the Commissioner responded to that document in Annexure 2 to his outline of submissions (a replacement version of Annexure 2 was handed up during the hearing). By that document, the Commissioner submits that, in respect of many paragraphs of Schedule A, there are inconsistent and/or relevant findings of the Tribunal. Mr Buzadzic’s submissions do not grapple with these matters.
Insofar as Mr Buzadzic contends that the relevant findings/conclusions are unreasonable in the sense that they lack an evident and intelligible justification (see SZVFW at [10]-[11]), including because they are so unreasonable that no reasonable decision-maker could have made them, having reviewed each of the findings/conclusions referred to in ground 14, I am not satisfied that any of them is unreasonable. I note in particular:
(a)Paragraph 21(b) of the Tribunal’s reasons contains an overall summary of its conclusions in relation to Mr Buzadzic’s case. The Tribunal explained why it concluded that Mr Buzadzic had not discharged his burden of proof. It was open to the Tribunal to reach that conclusion on the material before the Tribunal.
(b)Paragraph 86 of the Tribunal’s reasons contains findings about Mr Hadded’s role. The second sentence (“Mr Hadded did not know if the alignment entries were in fact posted by the Buzadzic Group to their accounting system records”) was challenged during Mr Buzadzic’s oral submissions during the appeal hearing. It was said that it did not make sense. However, all the Tribunal is saying is that Mr Hadded did not himself know if the alignment entries were posted in the accounting system maintained by the Buzadzic Group. This finding does not appear to be surprising or contrary to the evidence. In any event, it does not appear to be material.
(c)Paragraph 88 of the Tribunal’s reasons includes a statement that the Tribunal attaches no weight to Mr Hadded’s assertion of belief in certain matters. It was open to the Tribunal to attach no weight to that belief, for the reasons it gave.
(d)Paragraph 92 of the Tribunal’s reasons contains a statement that it was “not impossible” for Associated Entities’ cash amounts to be deposited directly in Mr Buzadzic’s accounts without having been first deposited in an entity’s bank account or otherwise recorded. The assessment of the possibility of this occurring was a matter for the Tribunal to determine. I am not satisfied that any error is shown.
(e)Paragraph 109 of the Tribunal’s reasons (see [67] above) contains a number of statements by the Tribunal about the context and facts and circumstances that were relevant to its consideration of the sufficiency of the proof provided by Mr Buzadzic. I see no error in the Tribunal’s approach. It was open to the Tribunal to regard these matters in the way that it did.
(f)Paragraph 115 of the Tribunal’s reasons includes a statement that the alignment journal entries that needed to be posted were not always made. In oral submissions during the appeal hearing, Mr Buzadzic contended that this was incorrect. However, the Tribunal’s statement is consistent with the fact that the MYOB ledgers initially provided to the ATO contained discrepancies between opening and closing balances (see the Tribunal’s reasons at [163]). In any event, the statement made by the Tribunal does not appear to be material in the context of the Tribunal’s reasons as a whole, given that the Tribunal considered the issue of discrepancies between opening and closing balances in detail elsewhere in its reasons (see [163]-[173]).
(g)Paragraphs 117, 125, 130, 132 and 133 of the Tribunal’s reasons contain conclusions that the basis for entries in the accounts was not explained, the Tribunal could not be satisfied that all of the entries were an accurate reflection of the underlying transactions, and there were clear deficiencies in the records provided to the Tribunal (and other similar conclusions). It was open to the Tribunal to reach these conclusions, for the reasons it gave.
(h)Paragraphs 160 and 161 of the Tribunal’s reasons contain a conclusion that the Tribunal could not determine whether the amounts credited to Mr Buzadzic’s loan account reflected the repayment of loans made by Mr Buzadzic or whether the credit entries reflected distributions made to Mr Buzadzic at the direction of the trustee of one of the trusts (and, if so, whether or not the distribution had already been included in the assessable income returned by Mr Buzadzic). It was open to the Tribunal to reach this conclusion, having regard to the state of the evidence.
(i)Paragraph 168 of the Tribunal’s reasons contains a conclusion that, on the evidence before it, the Tribunal could not ascertain the extent to which the entries made to the director’s loan accounts (namely, the entries referred to in [165]) related to any of the three matters relied on by Mr Buzadzic set out in [166]. The Tribunal provided, in [168]-[173], a clear and evident justification for this conclusion.
(j)Paragraph 170 of the Tribunal’s reasons contains a conclusion that no attempt had been made to demonstrate how any of the year-end adjustments were reflected in or reconciled with the amounts included in Mr Buzadzic’s tax returns. The Tribunal accepted that “it is likely that at least some of the year-end adjustments … may be explained by the distributions of income that were included in Mr Buzadzic’s income tax return”, but said that “the Tribunal does not have a sufficiently reliable basis on which to quantify or ascertain the connection, if any, between the reductions in the loan account balances and the distributions made to Mr Buzadzic that may have been satisfied by an entry reducing his loan account balance”. It was open to the Tribunal to evaluate the evidence in this way.
(k)Paragraph 173 of the Tribunal’s reasons contains a conclusion that “the evidence led does not demonstrate that the entries giving rise to the closing balances were properly made or, identify the nature of the transactions that those entries were intended to record, or to the extent they were, demonstrate that those entries were referable to dividends declared or distributions of net income of trust made to or on behalf of Mr Buzadzic, that had been included in the assessable income returned by Mr Buzadzic”. It was open to the Tribunal to reach this conclusion, given the state of the evidence.
(l)Paragraphs 202 and 205 of the Tribunal’s reasons relate to the fraud or evasion issue. In summary, the Tribunal concluded that Mr Buzadzic had failed to demonstrate that the omission of amounts from his assessable income was not attributable to a blameworthy act. It was open to the Tribunal to reach this conclusion, for the reasons it gave.
(m)Paragraph 213 of the Tribunal’s reasons relates to penalties. The Tribunal concluded that it was not satisfied that Mr Buzadzic had discharged the onus of proving that his conduct in respect of the balance of the shortfall assessed to him was not attributable to an intentional disregard of the law. It was open to the Tribunal to reach this conclusion, for the reasons it gave.
Insofar as Mr Buzadzic contends that there was no evidence to support, or no proper basis for, the above findings, I consider that the evidence before the Tribunal did provide a proper basis for the findings.
For these reasons, grounds 14 and 15 are not made out.
Ground 16 (procedural fairness)
Ground 16 is as follows:
16.The Tribunal failed to afford the Applicant procedural fairness in failing to properly consider or at all the evidence tendered by the Applicant (including but not limited to the facts and findings in schedule A [to the notice of appeal] but save and except facts challenged in this notice of appeal) and/or in failing to give such evidence proper weight.
The question of law in the notice of appeal relevant to this ground is:
10. Whether the Tribunal denied the Applicant procedural fairness?
As indicated above, I accept that this is a question of law for the purposes of s 44 of the AAT Act.
I am not satisfied that the Tribunal failed to consider relevant evidence. The Tribunal’s reasons demonstrate that it had regard to the evidence before it, and carefully considered whether the evidence was sufficient to discharge Mr Buzadzic’s burden of proof. It was open to the Tribunal to conclude that Mr Buzadzic had not discharged his burden of proof (both in relation to primary tax and in relation to the fraud/evasion and penalties issues).
Insofar as ground 16 includes a contention that the Tribunal failed to give evidence “proper weight”, the weight to be given to evidence is a matter for the Tribunal. This contention seeks to have the Court engage in merits review, and is beyond the scope of an appeal on a question of law.
For these reasons, ground 16 is not made out.
Conclusion
It follows that the appeal is to be dismissed. There is no apparent reason why costs should not follow the event. Accordingly, I will also make an order that Mr Buzadzic pay the Commissioner’s costs of the appeal.
I certify that the preceding one hundred and seventy (170) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky. Associate:
Dated: 16 August 2023
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