BXCD and Commissioner of Taxation (Taxation)
[2017] AATA 2826
•21 December 2017
BXCD and Commissioner of Taxation (Taxation) [2017] AATA 2826 (21 December 2017)
Division: TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/1597
Re:BXCD
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President B W Rayment
Date:21 December 2017
Place:Sydney
The decision under review is affirmed.
...........................[sgd].............................................
Deputy President B W Rayment
Catchwords
TAXATION – whether assessments are excessive – applicant bears onus of proof – cash purportedly paid to suppliers – demonstrated bogus transactions – significant cash amounts withdrawn – no evidence where cash applied – onus of proof not discharged – applicant’s role in management of companies – whether Commissioner has power to issue a notice of amended assessment – decision under review affirmed
Legislation
Income Tax Assessment Act 1936 (Cth) ss 170, 190C
Income Tax Assessment Act 1997 (Cth) s 6.5
Income Tax Regulations 1936 (Cth) regs 14, 20Taxation Administration Act 1953 (Cth) ss 14ZZE, 14ZZK
Cases
McAndrew v Federal Commissioner of Taxation [1956] HCA 62; (1957) 98 CLR 263; [1956] ALR 1008; 30 ALJR 464
Yazbek v Commissioner of Taxation [2013] FCA 39; (2013) 209 FCR 416
REASONS FOR DECISION
Deputy President B W Rayment
21 December 2017
BACKGROUND
The applicant is a married woman. She has two sons. I will refer to her husband by the pseudonym of ‘Pietro’ and to her two sons by the pseudonyms of ‘Daniele’ and ‘Aldo’. The pseudonyms are adopted because the applicant has applied, as is her right, for a private hearing, pursuant to s.14ZZE of the Taxation Administration Act 1953 (Cth) (the TAA).
The applicant was the director of two companies, which I will refer to as ‘Company 1’ and ‘Company 2’.
Company 1 was incorporated in New South Wales in 2005 and Company 2 was incorporated in New South Wales in 2012. The applicant was the sole director of Company 2 until it went into liquidation. The applicant was from 2009 until Company 1 went into liquidation, a director of Company 1 together with her son Aldo, and until 14 June 2012, her husband Pietro. The two companies went into liquidation in 2015. The applicant was the owner of all issued shares in Company 2 and, from 2009, of 45% of the share capital of Company 1, the remaining 55% of the capital being owned from 2009 by her son Aldo.
The financial records of Company 1 show trading income for the years from 2009 to 2013 as follows:
·2009: $184,826;
·2010: $4,110,698;
·2011: $6,964,788;
·2012: $53,312,951;
·2013: $57,047,539.
That income was shown as offset by purchases and trading profits were shown as follows:
·2009: $9,086;
·2010: $121,433;
·2011: $211,904;
·2012: $1,002,775;
·2013: $1,312,516.
The applicant’s oral evidence was to the effect that she progressively withdrew from the affairs of Company 1 from 2009 and that by 2011, her son Aldo had complete charge of Company 1. Her evidence was that at all times from its incorporation, her son Aldo was in sole charge of Company 2.
Companies 1 and 2 had a purported business of buying and selling gold, with GST paid on its purchases and sales. In fact, the Commissioner’s evidence shows that the purported suppliers of the gold were bogus, and the applicant has not required the Commissioner to produce the witnesses to those facts for cross-examination. If there were actual suppliers of gold to Companies 1 and 2, those persons may or may not have charged GST to Companies 1 and 2, and if no GST was charged and if Companies 1 and 2 had claimed input credits in their tax returns, those claims would have been false. Companies 1 and 2 would have derived hidden profits amounting to many millions of dollars if they had, for a time, successfully claimed GST input credits which were false. Where any such money may have gone does not appear from the evidence.
The alleged suppliers having been shown to be bogus, the Commissioner made default assessments against the applicant and her son Aldo on a somewhat different basis. The Commissioner ascertained the amounts of cash withdrawn by Companies 1 and 2 from its bank accounts, being money falsely said in the general ledgers of Companies 1 and 2, to have been paid to the bogus suppliers, and assessed the applicant and her son Aldo to 45% and 55% of those amounts respectively, in the case of Company 1, and assessed the applicant to 100% of amounts withdrawn in the case of Company 2. As a result the applicant was assessed to tax amounting to an increase of $6,560,211 for the 2012 tax year and penalties of $2,324,470 for that year, and an increase of $2,367,404 for the 2013 year with a penalty of $972,309. Unexplained cash withdrawals totalling approximately $16 million were withdrawn in cash from the bank accounts of Companies 1 and 2 during the 2012 and 2013 financial years and the applicant was assessed to income tax for a total of 45% of that amount. The amounts were assessed on a default basis, and as ordinary income derived by the applicant under s.6-5 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997), or, in the alternative, as dividends or deemed dividends paid to the applicant.
The effect of s.14ZZK of the TAA is that the applicant has the onus of proof of all facts upon which the applicant relies to show that the assessments the subject of these proceedings are excessive. No case has been made by the applicant to suggest that some lesser amount was the proper amount of the assessments, or that she received the monies as a gift. Rather, she has suggested that the assessments were wholly wrong. The case is therefore an all or nothing case. If the applicant has not discharged her onus of proof, then the assessments are otherwise unchallenged. If the applicant has satisfied her onus of proof, then the assessments will be discharged.
No attempt has been made by the applicant to prove what happened to the amounts of cash said to have been paid to suppliers, but proved not to have been paid to them. According to the applicant, only her son Aldo would be able to say what happened to the money in question. She said that she knows only one thing: that she did not receive the money in question or any of it. The question is whether she has discharged her onus of proof of that fact, and whether in the circumstances of the case, I should find as she has suggested because she was, as the applicant’s counsel submitted, a “generally credible witness”. Demeanour is not a reliable guide to decision-making in many cases and this is not a case in which I am prepared to find that, based on demeanour, I should accept the applicant’s evidence as a satisfaction of her onus of proof. As indicated later in these reasons, I have been much more prepared to act on what is probable, having regard to what one does know in this case, and bearing in mind how the applicant has conducted this proceeding.
The applicant was injured in a motor car accident in 2003. After some nine years she needed a left hip replacement and a year later she needed a right hip replacement. From her perspective, the first operation gave her more pain relief than the second. She said that her family is a close one, and that her relationship with both her sons is such that she places trust in them both. Her nephew became the accountant for both Companies 1 and 2.
When Company 1 started trading, she conducted its business with a friend from Italy, who was her fellow director. The business involved the purchase and sale of jewellery. The business did not prosper in those years and she found it necessary to introduce capital into the business with borrowed funds. The friend had trouble with his visa and could not return to Australia from Italy and she was left to run the business alone for a time.
THE EVIDENCE
The applicant was cross-examined over about two days before me. The cross-examination did not involve any affirmative suggestion that funds had been applied by her in any particular way, or that she had acquired identifiable assets, or that funds had been banked by her in any bank account which was identified in the evidence. She repeatedly professed puzzlement about the funds apparently earned by Companies 1 and 2, and said that she was unaware of receipt of funds of the order shown by the accounts.
The business premises of Companies 1 and 2 were in a building at the rear of the applicant’s residence in Sydney. Her sons Aldo and Daniele worked there. Proceedings are pending before this Tribunal for review of the assessments also levied on Daniele, which relate to other companies of which he was a director. No objection was made by Aldo to the amended assessments notified to him. Neither Aldo nor Daniele were called before me. I declined to receive as evidence of the facts, statements made by them in interviews conducted by the ATO. Certain statements were made by Aldo at a meeting in 2013, and the applicant was cross-examined about those statements. I refer to the evidence she then gave in paragraph 16 below. I received into evidence the note of that meeting on which the applicant was cross-examined.
In the case of Aldo, at the commencement of day two of the hearing, I invited the applicant to call him to give evidence in the Tribunal, indicating that it may be difficult for the applicant to satisfy me about what happened to any money that came into the companies without hearing his evidence. At the beginning of the third day of the hearing I was told by the applicant’s counsel that the applicant’s instructions were that Aldo would not be summonsed to appear.
The note of the meeting in 2013 attributed to Aldo a statement that of five family-owned companies (two of which were Companies 1 and 2) all were utilized by the family as a means of increasing their market share and allowing the distribution of profits between individual family members. After giving a number of other answers, the applicant said:
That’s what was always said, but I know we did work for many builders who used to have two and three companies, and it was always the same builder. So I thought nothing of it. That I was a company director of all these companies, to me didn’t mean nothing, as it wasn’t running the business, and I wasn’t making the money or taking the money. So therefore – but as I said, my husband had many builders who used to have two and three companies, and it was always the same principal person. To me, I didn’t think it was odd.
The answer I have quoted begins with the words “[t]hat’s was always said” and I take that to be the applicant’s recognition of Aldo’s remark as a statement which he made on several occasions in her presence. The statement recognising that the company structures served as a way of allocating the profits among individual family members suggests that profits would be divided among family members, including the applicant herself, and presumably in accordance with the shareholdings. Now, if monies were siphoned off from the companies, or profits were hidden somewhere, it seems likely that the respective family members would benefit from those monies in proportion to their shareholdings, that is, in the case of the applicant, her entitlement would be to 45% of Company 1, and 100% of Company 2.
One could arrive at the same impression by considering the shareholding alone. The differences between the shareholdings in those companies suggest entitlements to profits in different proportions as between the family members of the applicant and her two sons.
The applicant’s family appears to be a close one. The applicant stated her trust in Aldo consistently. As a grandmother she looked after his children. Both Aldo and Daniele worked at the back of her residence. The businesses engaged her nephew as their accountant and other relatives worked as couriers or in other capacities. The closeness of the family is also consistent with the notion of distribution of gains to family members, including the applicant. The main alternative, that Aldo took all the money and kept it for himself, is not supported by any reliable evidence. The applicant’s counsel submitted that the Tribunal should make a finding that Aldo received and kept the money, but I am not satisfied that such a finding should be made.
Taking a hypothetical, assume Company 1 earns a hidden $100,000 on which tax is unpaid. It would be open to be inferred from the statement attributed to Aldo and noted in paragraph 16 above that the applicant would be given $45,000 and Aldo $55,000. If the money were put in a safe, as may have happened in this case, it would not appear in any bank account and would remain hidden. The applicant’s counsel submitted that I should find that the applicant did not receive money from Companies 1 and 2 because no such money is seen in her bank accounts, but the bank is not necessarily where such money was put, especially when one bears in mind that sham suppliers were involved in the method of trading of the companies. That is consistent only with deception and fraud. The natural corollary is hiding the gains.
The applicant had divided profits in accordance with shareholdings with her husband Pietro in a company through which her husband’s bricklaying business traded, and that also is consistent with shareholdings reflecting real entitlements, as one would expect.
The parts of the answer of the applicant which I have quoted in paragraph 16 above, but not yet commented upon refer to the fact that the applicant’s husband Pietro was a bricklayer and the applicant was a director of his company. I took the applicant to be referring to the fact that contractors or sub-contractors of her husband’s company might make use of more than one company in their dealings with his company.
The applicant had more than the connection with Companies 1 and 2 of being a director of each company. She was a signatory on their bank accounts, together with other family members. Some of the cash withdrawals made by Company 1 from its bank account were made by means of cheques signed by the applicant and taken to the bank by her to be cashed. She said that she gave the money withdrawn to her son Aldo, but no record of that fact occurred. Giving the cash to Aldo would not mean that Aldo did not put the money away for her. The cash cheques signed by the applicant totalled some hundreds of thousands of dollars. The signatories for the bank account of Company 1 were the applicant, Aldo and Pietro. For Company 2, the authorised signatories were the applicant, Aldo and Daniele. The total cash withdrawals in 2012 were $14,631,967 from Company 1, and in 2013 the total cash withdrawals were $2,854,255 for Company 1 and $1,120,000 for Company 2.
The applicant was named as an addressee on invoices sent to Company 1 and Company 2 for purchases of gold bullion by those companies from Australian Bullion Company Pty Limited. It appears that the applicant first dealt with that company on behalf of Company 1 when it began operations shortly after 2005, and that may explain why the bullion company continued to name her on invoices. Invoices addressed to Company 1 were sent to a post office box which the applicant accepts was hers but which she asserted she had not used since some time in 2011. Invoices for Company 2 went, in the case of the first two invoices, to the applicant’s home address and thereafter to a post office box which the applicant said she did not recognise.
The applicant signed purported trading agreements between Companies 1 and 2 and bogus suppliers. She professed ignorance of the other parties to those invoices, and ignorance of the circumstances, saying simply that she signed at the request of Aldo.
She signed some Recipient Created Tax Invoices purporting to record sales by bogus suppliers, again she said, because Aldo asked her to do so.
The applicant signed appointment documents for the liquidator of Companies 1 and 2.
The applicant offered the explanation that her signatures were placed on the documents at the request of Aldo and that she did not read the documents (other than the cash cheques signed by her).
Generally, she asserted that she had no knowledge of the business of Company 1 after Aldo took over in 2011, and no knowledge at all of the business of Company 2.
A portion of the applicant’s solicitor’s notes tendered before me suggested that instructions were given on her behalf by her son Aldo, or by telephone by her nephew, the accountant for Companies 1 and 2, and in each case without the applicant being present. That is consistent with Aldo and the accountant playing a leading role in the way the applicant’s case has been framed. More recently, the applicant herself attended conferences with counsel.
The applicant lent $710,035 to Company 1, and says she sold that debt to Aldo for less than $90,000 and did so at a time when the company’s turnover was increasing substantially. There is proof that monies amounting to $88,912 were paid into a self-managed superannuation fund, but the rationale for the alleged sale is not apparent. The transaction was unable to be explained even by the applicant herself. She also could not explain how amendments to her statements made shortly before the hearing came to be made, or why it was that her earlier statements needed correction.
I am unable to accept that the applicant was without an understanding of the volume or nature of the business of Companies 1 and 2 from 2011. She remained a director of the companies, which owed her money, and from which she and her son Aldo expected to benefit. The business was conducted from a building at the rear of her property. Her two sons worked there full-time. She personally knew of large sums of cash (some hundreds of thousands of dollars) being taken to the property by her and withdrawn from the bank accounts by means of cheques signed by her. There was no apparent continuation of the smaller scale business she had conducted on behalf of Company 1. Her curiosity is likely to have been engaged about the nature of the business, which now involved much larger sums of money than had ever been associated with the business when she was in charge of it without Aldo’s involvement. There is no reason to think that her son Aldo would not have answered such questions, and no reason was led in evidence why he would not have confided the truthful position in his answers. The applicant was at pains to emphasise that she trusted Aldo.
When funds were required to be spent on the legal costs of challenging assessments, the applicant and Daniele borrowed funds from a company I will call ‘Company 3’. The funds emerged within seven days of the applicant being handed assessments in her name. Company 3 was shown to have numerous family connections with the applicant, such as one of her nephews being associated with the business address at the applicant’s home and another nephew being its sole director. Precisely where that money came from was not established before me.
I am not satisfied that the applicant did not benefit from the activities of the companies. While parts of her evidence were satisfactory (such as the matters of fact which I have found at paragraphs 11 and 12 above) I was not able to satisfy myself, having heard the evidence of the applicant alone, that the assessments were excessive. If, as seems inevitable, some family members must have benefited from the carrying on the businesses of Companies 1 and 2, there seems to be no reason why the applicant was not one of them.
It was not put to the applicant that, using funds of Companies 1 or 2, she herself has acquired any particular unexplained asset. But if, for example, cash was put in a safe and left there, its existence would not be discoverable and it would still be available to her today.
For all of those reasons I conclude that the applicant has not discharged her onus of proof.
WAS THERE POWER TO ISSUE THE AMENDED ASSESSMENTS?
A further question was argued by the applicant in these proceedings. That relates to the power of the respondent to have issued amended assessments. The power of the Commissioner to issue an amended assessment goes to the excessiveness of the assessment, as the High Court held in McAndrew v Federal Commissioner of Taxation [1956] HCA 62; (1957) 98 CLR 263; [1956] ALR 1008; 30 ALJR 464, overruling earlier High Court authority to the contrary. Since McAndrew, it has been the law that the taxpayer has the onus of proof that he or she made full and true disclosure of all the material facts necessary for the assessment and that there had not been an avoidance of tax.
In the statute as it stands today, that is because of s.14ZZK of the TAA. The Commissioner puts his power to issue an amended assessment on any of four grounds, each of which is mentioned in s.170 of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), or relies upon regulations prescribed for the purposes of that section.
The applicant denied that any such ground was available, accepting only that if I upheld the fourth ground as a matter of fact, the amended assessments were within time. Each amended assessment was issued after more than two years.
The first ground is that the applicant is “a beneficiary of a trust estate” within the meaning of item 1, paragraph (d) of s.170 of the ITAA 1936.
The second ground is based on item 1 of r.14 of the Income Tax Regulations 1936 (the ITR 1936), to the effect that there were transactions between the applicant and Companies 1 and 2 which were not at arm’s length.
The third is based upon item 2 of r.20 of the ITR 1936. Finally it is alleged by the respondent that there has been fraud or evasion by the applicant in the preparation of her income tax returns, and here the Commissioner relies on item 5 of r.20 of the ITR 1936, which permits amendment by the Commissioner at any time.
In accordance with McAndrew, it will be for the taxpayer to negative each of those three grounds. I will take them in turn.
The first ground
Paragraph (d) of the qualifications to the provision as to timing of assessments provided by item 1 s.170 of the ITAA 1936 permits later assessment if:
(d)if the individual is a beneficiary of a trust estate at any time in that year unless the trust is a small business entity for that year or the trustee of the trust (in that capacity) is a full self-assessment taxpayer for that year.
That qualification does not restrict the power of amendment to returns based on distributions of a trust estate. The applicant did not receive any such distribution in the relevant years of income. However the Commissioner’s point is that she was, in each of the relevant years, a beneficiary of a trust estate, in that, as a parent, she was in the class of potential income and capital beneficiaries of a certain discretionary trust. That trust includes her among the class of beneficiaries to whom a distribution may be made and the qualification in s.170 is literally satisfied. In this respect onus of proof may not matter.
In Yazbek v Commissioner of Taxation [2013] FCA 39; (2013) 209 FCR 416, a decision of Bennett J, her Honour dismissed an appeal on a question of law from this Tribunal, which had construed paragraph (d) of the qualifications to the timing provision of item 1 so as to include the case of a beneficiary who had received no income in the year in question. I am bound by Yazbek and that concludes the question before me.
The second and third grounds
The second and third grounds build upon my finding that the applicant has not discharged her onus of proof that funds were not received by her as income or dividends from Companies 1 and 2. The respondent submits that because she has not proved those facts, equally she has not proved that funds received by her were received at arm’s length. I accept that submission.
The third ground assumes that I find that what the applicant received is a deemed dividend under s.190C of the ITAA 1936. The respondent puts the matter in the alternative, submitting that the money was income or dividends. I am satisfied that what was received by the applicant was either income or a dividend, albeit that the money in question was derived by means of the illegality which affected the method of carrying on the business of Companies 1 and 2. My preferred characterisation of the receipts is as dividends or deemed dividends, because income would suggest that work was done to earn it, and especially during a period when the applicant was hospitalised or recuperating, that is unlikely. Since I have not found it necessary definitively to choose between the alternative characterisations, I do not act on the third ground.
The fourth ground
Because I have reached a conclusion adverse to the applicant on both the first and second grounds, and since each such finding is fatal to a suggestion that the amended assessments are too late, it is unnecessary to deal with the fourth ground and I do not do so.
DECISION
Accordingly the reviewable decision will be affirmed.
I certify that the preceding 50 (fifty) paragraphs are a true copy of the reasons for the decision herein of Deputy President B W Rayment
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Associate
Dated: 21 December 2017
Date(s) of hearing: 20, 21, 22 & 24 November 2017 Counsel for the Applicant: Mr R Clark Solicitors for the Applicant: MDW Law Counsel for the Respondent: Mr A Stewart SC & Mr A O'Brien Solicitors for the Respondent: Australian Government Solicitor
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