Commissioner of Taxation v Ross
[2021] FCA 766
•9 July 2021
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Ross [2021] FCA 766
Appeal from: Re MJPV and Commissioner of Taxation [2020] AATA 1527 File number: QUD 165 of 2020 Judgment of: DERRINGTON J Date of judgment: 9 July 2021 Catchwords: TAXATION – onus of proof – appeal from decisions of Administrative Appeals Tribunal setting aside objection decisions relating to assessments – default assessments pursuant to s 167 of Income Tax Assessment Act 1936 (Cth) – whether Tribunal failed to apply correct onus pursuant to s 14ZZK of Taxation Administration Act 1953 (Cth) – whether taxpayers could satisfy onus by establishing errors in asset betterment methodology adopted by Commissioner – whether taxpayers could satisfy onus by establishing amounts included in asset betterment statement were not assessable income – whether taxpayers could satisfy onus by otherwise conceding unexplained amounts represented assessable income – whether Commissioner had agreed to confine issues in dispute before Tribunal – effect of concessions by Commissioner to Tribunal that amounts included in asset betterment statements were not unexplained wealth or were overstated – whether properly instructed Tribunal could have been satisfied that taxpayers had established true taxable income on evidence adduced below – where taxpayers adduced document as aide-memoire purporting to summarise evidence – whether document could explain unexplained wealth – whether document could establish taxpayers’ true taxable income – appeal allowed
TAXATION – standard of proof – where Tribunal remitted objection decisions to Commissioner for reconsideration with direction to take account of “possibility” of double counting in asset betterment statements – whether Tribunal failed to apply correct standard of proof – appeal allowed
TAXATION – grounds of objection – whether Tribunal considered matters not raised in taxpayer’s grounds of objection – whether Tribunal impliedly granted leave to amend grounds – whether Commissioner joined issue on new matters in submissions – appeal allowed in part
TAXATION – administrative penalties – where taxpayer assessed for penalties for multiple income years – whether Tribunal erred in purporting to exercise discretion to set aside penalty uplift imposed by s 284-220(1)(c) of Sch 1 to Taxation Administration Act 1953 (Cth) – whether imposition of uplift depended on base penalty amount being worked out under relevant items in s 284-90(1) before conduct giving rise to further penalty – appeal allowed
TAXATION – remission of penalties – scope of considerations relevant to discretion to remit – whether scope of relevant considerations temporally limited – whether Tribunal erred in taking into account death of taxpayer after hearing concluded in remitting penalties imposed on him and his spouse – appeal allowed
ADMINISTRATIVE LAW – procedural fairness – whether Tribunal denied Commissioner procedural fairness by considering matter arising after hearing concluded – whether Tribunal failed to provide opportunity to make submissions on new matter – appeal allowed
ADMINISTRATIVE LAW – whether Tribunal denied taxpayers procedural fairness – where significant delay between hearing of evidence and delivery of decisions and reasons – whether delay gives rise to real and substantial risk that Tribunal’s capacity to assess matters was impaired – where Tribunal’s decisions failed to reflect its reasons in several respects – where Tribunal improperly used document tendered as aide-memoire as evidence – where reasons failed to specifically address matters raised before Tribunal – cross-appeal allowed
ADMINISTRATIVE LAW – appropriate order on setting aside decisions of Tribunal – where no properly instructed Tribunal could be satisfied as to requisite onus by evidence adduced by taxpayers – whether s 44 of Administrative Appeals Tribunal Act 1975 (Cth) permits order substituting only decision available on evidence before Tribunal – where only decision available on evidence was different to decision made by Tribunal – order remitting matters to Tribunal for re-hearing
ADMINISTRATIVE LAW – appropriate order on remission of matters to Tribunal for re-hearing – whether matters should be re-heard on same or further evidence – where taxpayers did not indicate nature or extent of further evidence to be adduced before Tribunal – where any further evidence could have been obtained for earlier hearing of evidence – significance of delay since earlier hearing – where taxpayers contended on appeal that evidence adduced below was adequate to satisfy onus – order that matters be re-heard without hearing further evidence
Legislation: Administrative Appeals Tribunal Act 1975 (Cth) ss 43, 44
Income Tax Assessment Act 1936 (Cth) s 167
Tax Administration Act 1953 (Cth) s 14ZZK, Sch 1, ss 284-220, 298-20, 340-5
Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 (Cth) Sch 5, s 27)
Cases cited: Arnott v Repatriation Commission (2001) 106 FCR 83
Australian Trade Commission v Richard Shrapnel Consulting Services Pty Ltd (1988) 85 ALR 287
Baig v Minister for Immigration and Multicultural Affairs [2002] FCA 380
Banque Commerciale SA v Akhil Holdings Ltd (1990) 169 CLR 279
Bosanac v Commissioner of Taxation (2019) 267 FCR 169
Bosanac v Commissioner of Taxation (2019) 93 ALJR 1327
Cajkusic v Commissioner of Taxation (2006) 155 FCR 430
Carter v Commissioner of Taxation [2020] FCAFC 150
Comcare v Etheridge (2006) 149 FCR 522
Comcare v Wuth (2018) 260 FCR 89
Commissioner of Taxation v Burness [2009] FCA 1021; (2009) 77 ATR 61
Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287
Dunn v Secretary, Department of Social Security (1990) 21 ALD 248
Expectation Pty Ltd v PRD Realty Pty Ltd (2004) 140 FCR 17
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Fletcher v Commissioner of Taxation (1988) 19 FCR 442
Fox v Percy (2003) 214 CLR 118
Frugtniet v Australian Securities and Investments Commission (2019) 266 CLR 250
Gashi v Commissioner of Taxation (2013) 209 FCR 301
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315
Harradine v Secretary, Department of Social Security (1989) 25 FCR 35
Holdway v Arcuri Lawyers [2009] 2 Qd R 18
Jolley v Federal Commissioner of Taxation (1989) 86 ALR 297
Kostas v HIA Insurance Services Pty Ltd (2010) 241 CLR 390
Krew v Commissioner of Taxation (1971) 45 ALJR 324
Le v Commissioner of Taxation [2021] FCA 303
Ma v Federal Commissioner of Taxation (1992) 37 FCR 225
Mathoura Property Pty Ltd v Federal Commissioner of Taxation [2013] AATA 922; (2013) 97 ATR 1059
McAuliffe v Secretary, Department of Social Security (1992) 28 ALD 609
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
Mingos v Commissioner of Taxation (2019) 274 FCR 148
Minister for Immigration and Ethnic Affairs v Gungor (1982) 63 FLR 441
Monie v Commonwealth (2005) 63 NSWLR 729
Morales v Minister for Immigration and Ethnic Affairs (1995) 60 FCR 550
Musgrave v Martin (2003) 130 FCR 546
MZAPC v Minister for Immigration and Border Protection [2012] HCA 17
NAIS v Minister for Immigration and Multicultural and Indigenous Affairs (2005) 228 CLR 470
Re Minister for Immigration and Multicultural Affairs; Ex parte Applicant S20/2002 (2003) 198 ALR 59
Rigoli v Commissioner of Taxation (2014) 141 ALD 529
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483
Szajntop v Commissioner of Taxation (1993) 42 FCR 318
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Truchlik v Repatriation Commission (1989) 25 FCR 414
Zappia v Commissioner of Taxation [2017] FCAFC 185
Woellner and Zetle, “Satisfying The Taxpayer’s Burden Of Proof In Challenging A Default Assessment – The Modern Labours Of Sisyphus?” [2014] JlALawTA 11
Division: General Division Registry: Queensland National Practice Area: Taxation Number of paragraphs: 351 Date of hearing: 1 – 3 March, 27 April 2021 Counsel for the Applicant/ Cross-Respondent: Ms A Wheatley QC with Ms JE Fitzgerald Solicitor for the Applicant/ Cross-Respondent: Craddock Murray Neumann Lawyers Counsel for the Respondents/ Cross-Appellants: Mr PE Hack QC with Mr PG Bickford Solicitor for the Respondents/Cross-Appellants: Small Myers Hughes Lawyers ORDERS
QUD 165 of 2020 BETWEEN: COMMISSIONER OF TAXATION
Applicant
AND: ALEXANDRA ROSS IN HER CAPACITY AS THE PERSONAL REPRESENTATIVE OF THE ESTATE OF SHANE ROSS
First Respondent
ALEXANDRA ROSS
Second Respondent
AND BETWEEN: ALEXANDRA ROSS IN HER CAPACITY AS THE PERSONAL REPRESENTATIVE OF THE ESTATE OF SHANE ROSS (and another named in the Schedule)
First Cross-Appellant
AND: COMMISSIONER OF TAXATION
Cross-Respondent
ORDER MADE BY:
DERRINGTON J
DATE OF ORDER:
9 JULY 2021
THE COURT ORDERS THAT:
1.The applicant’s appeal be allowed.
2.The respondents’ cross-appeal be allowed.
3.The decisions of the Administrative Appeals Tribunal dated 6 May 2020 be set aside.
4.Matters numbered 2016/4850 – 2016/4859 and 2016/4915 – 2016/4918 be remitted to the Administrative Appeals Tribunal for re-hearing according to law and in accordance with these reasons without the hearing of further evidence.
5.The parties file and serve written submissions on the question of costs limited to five pages within 14 days from the date of the delivery of these reasons.
6.The parties file and serve written submissions in reply on the question of costs limited to three pages within 21 days from the date of the delivery of these reasons.
7.Liberty to apply.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DERRINGTON J:
INTRODUCTION
On 6 May 2020, a Deputy President of the Administrative Appeals Tribunal (the Tribunal) handed down his decisions and reasons for decisions in the two matters now before this Court. Each involved an application pursuant to s 14ZZ of the Tax Administration Act 1953 (Cth) (the TAA) in relation to objection decisions made by the Commissioner of Taxation (the Commissioner) concerning the taxpayers’ objections to default and amended assessments made in respect of them on an “asset betterment” basis. In substance, the Tribunal partly allowed the applications and determined that alterations ought to be made to the assessments of the taxpayers’ taxable incomes for the several income years. It also concluded that the amounts of certain penalties for which the taxpayers had been assessed should be reduced and that the penalties should be either wholly or partly remitted.
In the first appeal, the Commissioner claims that the Tribunal ought not to have interfered with his objection decisions as, principally, the taxpayers failed to discharge the burden of proof imposed upon them in respect of the applications to the Tribunal. He also claims that the Tribunal erred in its decisions concerning the penalties and their remission. In the cross-appeal, Mrs Ross claims that the taxpayers were denied procedural fairness consequent upon a significant delay between the hearing of the evidence in the matter and the delivery of the Tribunal’s decisions and reasons for decisions. While to a limited extent the issues in the separate appeals overlap, the issues in each require separate consideration.
SUMMARY
Given the unfortunate length of these reasons, it is appropriate to provide a brief summary of the conclusions reached in relation to the appeals and the individual grounds of appeal.
In relation to the Commissioner’s appeal, it is accepted that the Tribunal failed to correctly apply the statutory onus carried by the taxpayers in this matter. The taxpayers sought to justify the Tribunal’s approach by submitting that the parties had agreed to contest the appeals on a different basis. No such agreement existed. As it emerged from the consideration of the many issues in dispute, it appears that the taxpayers had commenced and substantially prosecuted their appeals before the Tribunal under a misapprehension as to what they were required to establish. Although this was recognised shortly prior to the Tribunal’s hearings by the then recently engaged Counsel, he lacked sufficient time and evidence to construct a case which satisfied the onus. It was no doubt due to these circumstances that the Commissioner advanced the rather bold submission on appeal that the Court should conclude that, on the basis of the material before the Tribunal, the taxpayers could never have succeeded in satisfying their onus and, in particular, that part which required them to show what were their actual incomes in the relevant years. Although the Commissioner was able to sustain that submission, its value in the disposition of the appeals was ultimately limited in the present circumstances.
The Commissioner is also entitled to succeed, in part, on the second ground of appeal. The Tribunal did purport to decide the applications to it based on matters which were not raised in the taxpayers’ grounds of objection. However, to the extent to which that involved the “double counting issue” that was ultimately acquiesced in by the Commissioner. The other issue, being that of the characterisation of amounts received by Mr Ross as “refunds” had not properly been raised, but it was relatively minor in the scheme of the appeal.
The Commission is also entitled to succeed the remaining grounds of appeal: that the Tribunal erred by purporting to set aside the imposition of penalty uplift pursuant to s 284-220 of Sch 1 to the TAA (Ground 3); that the Tribunal erred in the manner in which it considered whether administrative penalties should be remitted and by how much (Ground 4); and that the Tribunal denied him procedural fairness by failing to provide him with an opportunity to make submissions as to the impact of Mr Ross’s death of on the issue of remission (Ground 5).
Necessarily, the Commissioner is entitled to succeed on his appeal.
Mrs Ross is also entitled to succeed on her cross-appeal. It was established, by reference to the numerous errors in the Tribunal’s reasons, that the delay of approximately two years and two months gave rise to a real and substantial risk that its ability to assess the issues in the applications to it was impaired.
Despite the Commissioner’s submission that this Court should substitute for the Tribunal’s decision with respect to the taxpayers’ applications a decision that the applications be dismissed and his objection decisions be affirmed, I am not satisfied that the Court has the power to do so in the circumstances of this case. The appeals should therefore be remitted to the Tribunal for re-hearing but, by reason of the matters discussed at the conclusion of these reasons, that hearing should occur without the hearing of further evidence.
BACKGROUND
In October 2015, the Commissioner concluded a covert audit of the affairs of Mr Shane Ross and Mrs Alexandra Ross. It was covert in the sense that it was undertaken without notice to either taxpayer. The audit of Mr Ross’s affairs concluded that he had failed to disclose assessable income over the subject income years in an amount totalling approximately $843,989, resulting in a tax shortfall amount of $353,042. In respect of Mrs Ross, the audit concluded she had failed to disclose assessable income in an amount totalling approximately $466,080, resulting in a tax shortfall of $192,420.
In consequence upon the conclusions reached in the audit, the Commissioner made default and amended assessments for Mr and Mrs Ross. In relation to Mr Ross, amended assessments were made on 27 October 2015 for the 2009, 2010, 2012, 2013 and 2014 income years. For each of those income years, the assessments were made pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) (the ITAA36). In the case of Mrs Ross, a default assessment was made for the 2013 income year and an amended assessment was made for the 2014 income year, each on 28 October 2015. These assessments were also made pursuant to s 167 of the ITAA36.
In addition, the Commissioner assessed each of Mr and Mrs Ross for administrative penalties. In respect of Mr Ross, the Commissioner assessed administrative penalties at a rate of 75% of the shortfall amounts for relevant income years, with an uplift of 20% for the income years after the 2009 income year. Similarly, Mrs Ross was assessed for administrative penalties at a rate of 75% of the shortfall amounts for the 2013 and 2014 income years.
The results of the audit were disclosed to Mr and Mrs Ross in letters dated 27 October 2015 which explained the basis on which the Commissioner had made the amended and default assessments and assessed the taxpayers for penalties, and included the “Asset Betterment Statement” prepared in respect of each of them on which the assessments were based.
On 4 March 2016, objections were lodged on behalf of Mr and Mrs Ross’s in respect of the assessments and penalty assessments. On 15 July 2016, the Commissioner gave Mr Ross a notice of objection decision disallowing his objections in full. On 18 July 2016, the Commissioner gave Mrs Ross a notice of objection decision disallowing her objections in full.
Proceedings in the Tribunal
On 13 September 2016, Mr Ross commenced proceedings in the Tribunal seeking a review of the Commissioner’s objection decision. On 15 September 2016, Mrs Ross commenced similar proceedings in which she sought review of the Commissioner’s objection decision in relation to her. These proceedings were heard together in the Tribunal and it is appropriate to adopt the nomenclature used by the Commissioner in his written submissions in describing the combined proceedings as “the Tribunal proceedings”.
Mr Ross and Mrs Ross each lodged amended grounds of objection on 19 October 2017 which altered the issues which were to be the subject of review in the Tribunal proceedings.
Evidence was received by the Tribunal at a hearing which was initially conducted over four days from 6 to 9 November 2017. The proceedings were then adjourned to 1 February 2018 when further evidence was received.
On 26 March 2018, Mr and Mrs Ross filed extensive written submissions with the Tribunal, and, on 27 April 2018, the Commissioner responded with written submissions. Mr and Mrs Ross filed written submissions in reply on 25 May 2018.
On 29 October 2019, an email was sent by the legal representatives for the taxpayers to the Tribunal advising that Mr Ross had died. They also enquiring as to the progress of the Tribunal’s decision.
On 5 November 2019, the Tribunal responded to the email from the taxpayers’ legal representatives proposing that the matter be listed for a case management telephone directions hearing and stating that it would provide the parties with an opportunity to make any submissions (although in respect of what those submissions were to be made was in dispute).
The directions hearing apparently occurred on 13 and 14 November 2019. Subsequently, an application was sent to the Tribunal seeking to join Mrs Ross, in her capacity as the personal representative of Mr Ross’s estate, as a party to his proceedings. The Commissioner did not oppose the application for joinder, although it does not appear that any formal order or direction was made to that effect by the Tribunal.
Following the directions hearing, no further hearing was held, no further evidence was led, and no submissions were made by any party regarding the implications of Mr Ross’s death.
The Tribunal’s decisions on the applications for review were made on 6 May 2020 and reasons for decisions were given. As identified by Counsel for Mrs Ross, this was more than two and a quarter years from the last receipt of evidence on 1 February 2018 and just short of two and a half years since the hearing of the oral evidence of Mr and Mrs Ross.
Tribunal’s decision
At this point, there is no need to set out the Tribunal’s reasons in great detail. Where appropriate, relevant parts will be analysed in the reasons which follow. For present purposes, only a brief synopsis is required.
First, the Tribunal noted in relation to Mr Ross that, for income years 2009, 2010, 2012 and 2013, the Commissioner relied upon the “fraud or evasion” exception in s 170 of the ITAA36 to the statutory time limit on the making of an amended assessment. It also observed that the taxpayer bore the onus of establishing that the Commissioner could not validly have formed the opinion that fraud or evasion had occurred. In relation to the 2014 income year, the amended assessment was made within the statutory time limit so the Commissioner had not needed to rely on the fraud or evasion exception.
The Tribunal further noted that taxpayers claimed that they had done nothing wrong and alleged that the specific amounts which the Commissioner had assumed to be representative of assessable income should properly have been regarded as loans, gifts, the proceeds of recreational gambling, and the proceeds of sales of motor vehicles and components. It then briefly set out a consideration of the taxpayer’s obligation in s 14ZZK(b)(i) of the TAA to discharge the burden of establishing that an assessment was excessive. It also identified that the taxpayer must persuade the Tribunal what the correct assessment should be. After referring to the process of assessing evidence, the Tribunal acknowledged that there had been a “lengthy and regrettable delay in producing [its] reasons for decision”, but indicated that the Tribunal member was confident that he would be able to deal with the challenges posed by the delay by reference to his detailed notes, the transcript and the audio recordings of the hearing.
The Tribunal then identified the possibility that the Commissioner’s calculations in the Asset Betterment Statement had involved some double counting of amounts based on Mr Ross’s transfer of funds between his several accounts. It noted that Mr Ross had provided a detailed analysis which “strongly suggest[ed]” that inter-account transfers were mistakenly taken into account in making the amended assessments, and indicated that the Commissioner would need to reconsider all of the assessments with a direction to exclude such transfers.
Thereafter, it considered each of the income years in relation to Mr Ross and whether certain amounts should not have been included in his assessable income for the relevant income years. In summary, the findings of the Tribunal were as follows:
(1)In relation to the 2009 income year, it was not persuaded that Mr Ross had discharged the onus of establishing that the sum of $93,000, which the Commissioner had included in the Asset Betterment Statement in making the amended assessment for that year, was a loan from an acquaintance. Further, having concluded that it was not a loan, as Mr Ross had claimed, the Tribunal determined he had not discharged the onus of showing that the Commissioner’s view that there was fraud or evasion should be overturned.
(2)In relation to the 2010 income year, it determined that Mr Ross had discharged the onus of showing that the sum of approximately $8,000, of an amount of $63,473 which the Commissioner had identified as unexplained income, was a gain derived from gambling such that it ought not to have been included in the amended assessment. It also observed that Mr Ross did not dispute the balance of the amount included in his assessable income by the Commissioner or that the Commissioner had erred in determining that there was fraud or evasion in relation to that balance.
(3)In relation to the 2012 income year, it concluded that Mr Ross had discharged the onus of establishing that certain payments which had been received by him from his mother were not income. However, he had not discharged that onus in relation to other payments, nor in establishing that the Commissioner should not have formed the opinion that there was fraud or evasion.
(4)In relation to the 2013 income year, it determined that Mr Ross had not discharged the onus of establishing that the sum of $75,000, which the Commissioner included in the Asset Betterment Statement relating to Mr Ross, was a loan from an associate. Neither did it accept that the sum of $44,000 was the total of the funds received by Mr Ross as cash gifts in connection with his engagement to Mrs Ross. Similarly, it concluded that Mr Ross had not discharged the onus of showing that the totality of the sum of approximately $74,000 received by him in that year could be accounted for as the proceeds of gambling, nor that the Commissioner had erred in determining that there was fraud or evasion. However, it did accept that certain amounts claimed as being the proceeds of gambling (totalling $16,010.40) should be excluded from Mr Ross’s assessable income for that year.
(5)In relation to the 2014 income year, the Commissioner had increased Mr Ross’s taxable income by $425,256 and the Tribunal concluded that Mr Ross had not discharged the onus of showing that the separate sums of $45,000, $50,000 or $140,000 which formed part of that increase were gifts or loans. It also concluded that Mr Ross had not discharged the onus of establishing that the sum of $132,500 received by him in that income year represented the proceeds of the sale of motor vehicles and an engine. It did, however, accept that he had discharged the onus in relation to the sum of $35,000 which he had claimed was a loan.
The Tribunal’s conclusions in relation to Mrs Ross were as follows:
(1)In relation to the 2013 income year, it found that the Commissioner had erred in attributing to Mrs Ross’s assessable income the sum of $171,500 representing the value of a 2009 Mercedes Benz ML63 motor vehicle. It concluded that its value was only $32,500 and that it was this amount which should be included in her assessable income.
(2)In relation to the 2014 year of income, the Commissioner’s assessment had attributed an additional $271,003 to Mrs Ross’s taxable income. Before the Tribunal, the Commissioner had accepted that the additional amount assessed should be decreased by the amount of $21,491 which was accepted as representing the proceeds of gambling as well as an amount attributed to Mrs Ross as representing her share of an interest in land. However, the Tribunal held that Mrs Ross had not discharged the onus of establishing that the deposit of the sum of $75,000 in May 2014 represented the proceeds of the sale of the Mercedes Benz motor vehicle such that it was not properly included in her assessable income. Nor was it satisfied that the sum of $60,000 received by Mrs Ross was a loan from her father and should not also be included.
The Tribunal then turned its attention to the penalties which had been imposed on Mr Ross, concluding that:
(a)there was no basis on which it could conclude that the Commissioner erred in applying an administrative penalty equal to 75% of the shortfall amount for each income year on the basis that Mr Ross had made statements that were false or misleading in a material particular which resulted in the shortfall and that such shortfalls resulted from an intentional disregard of a taxation law;
(b)no additional 20% uplift should have been imposed for the income years after the 2009 income year pursuant to s 284-220(1)(c) of Sch 1 of the TAA as all of the amended assessments were made at the same time such that Mr Ross was not able to modify his behaviour in response to an earlier imposition of a penalty;
(c)the penalties imposed upon Mr Ross should be remitted in their entirety in the unusual circumstance of his death on the basis that it was difficult to see what purpose the imposition of the penalties would now serve now given he had died and the penalties would simply be paid out of his estate; and
(d)there was, however, no basis on which to waive the shortfall interest charges.
In relation to the penalties imposed upon Mrs Ross, the Tribunal determined that:
(a)as she failed to file a tax return for financial year ending 30 June 2013 and a shortfall had been assessed, the conditions were satisfied for the imposition of a penalty at the rate of 75% pursuant to ss 284-75(3) and 284-90(1) of Sch 1 of the TAA, but in relation to a smaller shortfall than the Commissioner had identified;
(b)as to the 2014 income year, Mrs Ross had been guilty of an intentional disregard of taxation laws in relation to the claim that she had received an amount from her father by way of a loan and, accordingly, she did not establish that the base penalty amount was incorrectly assessed at a rate of 75% of the shortfall amount;
(c)no uplift should apply in relation to the penalty for the 2014 income year because Mrs Ross was not in the position of a taxpayer who had been caught out previously and, therefore, there was no opportunity for her to have learned anything from the default assessment for the 2013 income year; and
(d)in the circumstances, in particular the death of Mr Ross, most of the penalty imposed for the 2013 income year and half of the penalty imposed for the 2014 income year should be remitted.
Grounds of appeal and cross-appeal
The Commissioner’s appeal is founded upon a number of questions of law concerning what he contended to be errors in the manner in which the Tribunal:
(a)interpreted and applied the onus of proof under s 14ZZK(b)(i) of the TAA;
(b)interpreted and applied s 14ZZK(a) in allowing the taxpayers to raise grounds which were not included in their objections;
(c)interpreted and applied s 284-220(1)(c) of Sch 1 to the TAA by applying the wrong test when setting aside the uplift penalties imposed upon the taxpayers;
(d)interpreted and applied s 298-20 of Sch 1 to the TAA when remitting penalties imposed upon the taxpayers; and
(e)interpreted and applied ss 33 and 43 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) by purporting to exercise powers which were not vested in it.
The grounds on which such errors were said to arise were detailed and are considered more fully in the consideration below.
By an amended notice of cross-appeal, Mrs Ross, on her own behalf and as the personal representative of the estate of Mr Ross, raised only one question of law. This concerned whether she and her husband were denied a fair hearing of their applications to the Tribunal for review of the Commissioner’s objection decisions, in particular having regard to the delay between the giving of the evidence and the giving of the Tribunal’s decision. The particulars in support of that ground identified a number of alleged errors in the Tribunal’s decisions and reasons for decisions. Those errors were not advanced as grounds which, of themselves, justified overturning the Tribunal’s decisions, but were advanced as evidencing that the lengthy delay had resulted in demonstrable unfairness to Mr and Mrs Ross.
THE COMMISSIONER’S APPEAL
Ground 1: Did the Tribunal err in relation to the taxpayers’ onus under s 14ZZK(b)(i)?
The central issue in the Commissioner’s appeal concerned the interpretation and application of s 14ZZK(b)(i) of the TAA. In particular, he submitted that the Tribunal erred by misapplying this section, which imposes a particular onus of proof on a taxpayer when seeking review of an objection decision, and, so the submission went, that error of law vitiated the Tribunal’s decisions warranting their being set aside. He further submitted that the matters should not be returned to the Tribunal for reconsideration because, on the material and evidence before it, had the Tribunal applied the correct onus it could not have done other than affirm the objection decisions. In effect, he submitted that, on the material before it, no properly instructed Tribunal would have set aside the objection decisions. The Commissioner’s submissions concerning the alleged futility of remitting the matter consumed a significant portion of the appeal as it necessitated a close traversing of the material which had been before the Tribunal.
Mrs Ross submitted the two matters should instead be returned to the Tribunal for reconsideration. In general terms, she submitted that, before the Tribunal, the taxpayers had discharged the relevant onus but that, if they did not, it was merely because the Commissioner had implicitly agreed to contest the applications on specific issues such that the usual onus did not apply. She submitted the establishment of either of those matters justified the applications being remitted to the Tribunal for a reconsideration according to law.
The relevant legislation and principles on onus
Relevant statutory provisions
In part, this matter necessitates a consideration of the distinction between an assessment under s 166 of the ITAA36 and an assessment made pursuant to the power in s 167.
Section 166 concerns assessments made by the Commissioner in the ordinary course and provides:
166 Assessment
From the returns, and from any other information in the Commissioner’s possession, or from any one or more of these sources, the Commissioner must make an assessment of:
(a) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and
(b) the amount of the tax payable thereon (or that no tax is payable); and
(c)the total of the taxpayer’s tax offset refunds (or that the taxpayer can get no such refunds).
On the other hand, s 167 empowers the Commissioner to make default assessments in certain circumstances. That section provides:
167 Default assessment
If:
(a) any person makes default in furnishing a return; or
(b) the Commissioner is not satisfied with the return furnished by any person; or
(c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.
The distinction between the two forms of assessment are obvious. Section 166 requires, unequivocally, an evidence-based calculation of a person’s taxable income, tax payable thereon, and tax offset refunds. By contrast, s 167 authorises the Commission to form a judgment as to the amount on which tax ought to be levied, once one of the matters in sub-paragraphs (a), (b) or (c), on which the power is conditioned, is satisfied. Broadly speaking, the substance of those matters is that, in the circumstances, the Commissioner is unable to make an accurate assessment in accordance with s 166.
If dissatisfied with an assessment, a taxpayer may object to it in accordance with Pt IVC of the TAA: ITAA36, s 175A. If the taxpayer is dissatisfied with the Commissioner’s decision in relation to their objection, they may apply to the Tribunal for review of that decision (or appeal against the decision to this Court): TAA, s 14ZZ. The onus which must be satisfied by a taxpayer on an application for review is provided by s 14ZZK of the TAA.
The current iteration of s 14ZZK provides:
14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving:
(i)if the taxation decision concerned is an assessment — that the assessment is excessive or otherwise incorrect and what the assessment should have been;
That form of s 14ZZK was introduced by amendments to the TAA made in 2013: see Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 (Cth). Section 27 of Sch 5 to the amending act governs the application of the relevant amendments, and provides:
27 Application of amendments
The amendments made by this Division apply to an assessment if:
(a) the assessment is made on or after 1 July 2013; and
(b)in the case of an assessment that relates to an income year or other accounting period:
(i)the income year is the 2013‑14 income year or a later income year; or
(ii)the other accounting period commences on or after 1 July 2013.
In this case, while all of the assessments were made in October 2015, most related to income years before the 2014 income year. Necessarily, the current iteration of s 14ZZK only applies in relation to the assessments relating to the 2014 income year, while the unamended version of s 14ZZK applies in respect of the other assessments.
Prior to the amendments, s 14ZZK provided that an applicant had the burden of proving that an assessment was “excessive” and did not expressly require, as it now does, proof of “what the assessment should have been”. While this might be taken to suggest that some lower burden of proof applied previously, that is not the case and the latter requirement has always formed part of the taxpayer’s burden of proof in challenging an assessment. See also the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013 [7.36] – [7.38]. Accordingly, as Counsel for each of the parties accepted at the hearing, which version of s 14ZZK is inconsequential in terms of the burden of proof that applies.
The nature of the onus of proof
The parties generally agreed that the effect of s 14ZZK(b)(i) is that the taxpayers bear the burden of proving, on the balance of probabilities, both that the assessment is “excessive” and, also, what the assessment should have been to make the assessment right, or “more nearly right”: Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 (Trautwein) at 88 per Latham CJ; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 (Dalco) at 623 – 625 per Brennan J and at 632 – 634 per Toohey J; Gashi v Commissioner of Taxation (2013) 209 FCR 301 (Gashi) [61] – [67]. It was also not in dispute that the onus is to the civil standard, being the balance of probabilities. It should always be kept steadily in mind that the rationale for the onus imposed by s 14ZZK(b)(i) is that the facts relating to a taxpayer’s taxable income are peculiarly within their knowledge and they must be taken to know what their income is and how it was derived: Trautwein at 87. It follow that there is no undue harshness in requiring a taxpayer, who has failed to lodge a return or whose return is not compliant with the taxation legislation, to bear the onus of establishing their true taxable income for the relevant income year.
Whilst the overarching principles surrounding the onus might be succinctly stated as they are above, a question arose in the present matter as to the application of the onus in the context of a challenge to a default assessment founded upon the “asset betterment method”. In particular, the parties differed as to the manner in which the onus might be discharged in that context.
Some guidance as to that question can be gleaned from a more granular analysis of the principles concerning the onus as they have been synthesised in the authorities. In general terms, the relevant authorities establish as follows:
(1)An assessment under s 166 is fundamentally different to an assessment under s 167 and, necessarily, the manner in which they can be challenged are also fundamentally different: Gashi [61] – [67]; Rigoli v Commissioner of Taxation (2014) 141 ALD 529 (Rigoli) [12].
(2)The assessment by the “asset betterment method” is a legitimate form of assessment: Trautwein at 86 – 87, 99 – 100 and 105; even though it necessarily involves an amount of guesswork and, whilst almost certainly inaccurate to some extent, it is no part of the Commissioner’s duty to establish what judgment he has formed in making a s 167 assessment: Gashi [55]; George v Federal Commissioner of Taxation (1952) 86 CLR 183 (George) at 204. Clearly enough, any inaccuracy follows from the circumstances which impel the Commissioner to make a default assessment, being that a process of calculating assessable income less deductions is not possible: Rigoli [12].
(3)It is not part of a review of an objection decision concerning an assessment under s 167 to seek to identify the facts the Commissioner adopted for the purpose of making the assessment and whether those facts disclose a taxable income: Gashi [55]; George at 204. The principal fact which the Commissioner is required to determine in making an assessment pursuant to s 167 is “the amount of income upon which … income tax ought to be levied”: Gashi [56].
(4)It is insufficient to discharge the burden under s 14ZZK(b)(i) in relation to an assessment under s 167, whether based on the asset betterment method or otherwise, to merely demonstrate that the Commissioner formed a judgment about the taxpayer’s taxable income on a wrong basis and that the amount assessed far exceeded the taxpayer’s taxable income: Gashi [62]; Rigoli [12].
(5)In order to establish that an assessment under s 167 is excessive, a taxpayer must positively prove their “actual taxable income” and, in doing so, must demonstrate that the amount of tax levied by the assessment exceeds their actual substantive liability: Gashi [63]; Dalco at 623 – 625; Trautwein at 88; Ma v Federal Commissioner of Taxation (1992) 37 FCR 225 (Ma) at 230; by, in effect, furnishing a return of actual income which involves establishing both sides of the equation: Bosanac v Commissioner of Taxation (2019) 267 FCR 169 (Bosanac (FC)) [57].
(6)In the context of a s 167 assessment based on the asset betterment method, the taxpayer must demonstrate that the identified unexplained accumulated wealth was derived from non-income sources and that may be achieved by an accepted denial of any undisclosed source of income, providing acceptable evidence of how the taxpayer spends their time, and demonstrating a reasonable explanation for any appearance of the possession of assets: Ma at 230; Gashi [64] – [65]. The taxpayer must account for the unexplained increase in assets by explaining the source of those assets and identifying that those sources are not taxable. “[I]f the disclosed “actual” taxable income does not explain the increase in assets, then the taxpayer is unlikely to have discharged the burden of establishing the assessment is excessive”: Gashi [65].
(7)The converse is that it is insufficient for a taxpayer to prove that an item in their asset betterment statement was wrong or should not have been included: Gashi [63] – [67]; Rigoli [12]. If they do not also satisfactorily explain the source or sources for the other unexplained wealth, that is that they were derived from non-income sources, the onus under s 14ZZK(b)(i) will remain unsatisfied: Gashi [66]. A deficiency in proof of the excessiveness of the assessment results in the challenge failing: Dalco at 624 – 626. Necessarily, this prevents a successful challenge to an assessment being made by a process of “picking and choosing” part or parts of the increased wealth relied upon by the Commissioner and attacking them as being improperly included as part of the taxpayer’s taxable income: Gashi [66]; Rigoli [25]. A process which involves attacking elements of the Commissioner’s calculation and facts in respect of which the taxpayer chooses to lead evidence is not sufficient. The same is true for a default assessment not based on the asset betterment method: Rigoli [12].
(8)These principles can result in a situation where the default assessment can be assumed to be inaccurate in some respects but, in the absence of the taxpayer establishing what their actual taxable income was, it must nevertheless stand: Gashi [77] – [79]; Woellner and Zetle, “Satisfying The Taxpayer’s Burden Of Proof In Challenging A Default Assessment – The Modern Labours Of Sisyphus?” [2014] JlALawTA 11.
(9)The ultimate question in Part IVC proceedings relating to an assessment made under s 167 is whether the amount of the assessment is excessive. That places no burden on the Commissioner to show that the assessments were correctly made: Dalco at 623 – 624. The manner in which the taxpayer can discharge the burden may vary with the circumstances but “absent agreement with the Commissioner to confine the issues for determination in a Pt IVC proceeding, the Commissioner is entitled to rely upon any deficiency in the taxpayer’s proof of the excessiveness of the amount assessed in seeking to uphold the assessment”: Gashi [61]. See also Dalco at 624.
(10)There may be cases where the amount of taxable income depends upon the legal complexion of known facts or upon specific factual questions. In such a case, a taxpayer may successfully discharge the onus by establishing that the Commissioner included in their taxable income amounts which ought not to have been included: Dalco at 624. However, such a situation would only arise where the Commissioner agrees to a process which is different to that described above by confining the scope of the dispute between him and the taxpayer to certain enumerated amounts. One might expect some clear expression of that agreement, involving as it does an abandonment of the advantages accorded to the Commissioner in s 167 in respect of defaulting taxpayers.
Central to the dispute between the parties in relation to this issue were three matters. First, the actual nature of the obligation of the taxpayer to prove their taxable income. Second, the manner in which such proof may occur. Third, whether the taxpayers had discharged the onus in the present case and, in particular, whether the handing to the Tribunal of a document which is referred to as “MFI-1” had achieved that objective.
In relation to the first two matters, the issue between the parties was whether the taxpayers were able to discharge their onus by giving explanations for some of the transactions and assets identified in the Asset Betterment Statements and otherwise giving an account of the transactions in their bank accounts (which they claimed to have done by MFI-1). The Commissioner submitted that such an approach tacitly assumes that a s 167 assessment identifies the taxpayers’ actual taxable income, such that the attack on the correctness of the assumption that the identified assets were the product of unexplained income would, by a process of calculation, result in the identification of their taxable income. This, he submitted, is an ineffective process for the purposes of the onus in s 14ZZK(b)(i) as it does not go to establish what were the taxpayers’ actual taxable incomes.
Mr Hack QC for Mrs Ross submitted that the manner in which a taxpayer discharges the burden of proof varies with the circumstances of the case and that, in the present case, the approach adopted would, if accepted, have satisfied that obligation. In this regard, he relied heavily on the decision in Ma as referred to above and submitted that the decisions in Rigoli and Gashi were mere applications of the principle there stated.
The decisions in Le and Haritos
After the initial three days of hearing of the appeal, the parties requested leave to make further submissions in relation to a number of matters including the recent decision of Logan J in Le v Commissioner of Taxation [2021] FCA 303 (Le) as well as the decision of the Full Court in Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315 (Haritos). Leave was given and another half day was allocated to receive further submissions.
Mr Hack QC submitted that the decision in Le applied statements of principle from Haritos as to the manner in which a taxpayer might be able to discharge their onus of proof. In particular, it was submitted that the Full Court in Haritos (at [233] – [237]) rejected the “all or nothing” approach to the discharge of the onus of proof by a taxpayer faced with a default assessment founded on the asset betterment methodology and that Logan J had adopted that in Le (at [54]). It was submitted that the result of this was:
Where, by concession or by the Tribunal’s finding, it is concluded that an amount included in an applicant’s assessable income by the Commissioner is not, in truth, assessable income of the applicant the applicant has shown that the assessment is excessive to the extent of that concession or finding.
It is appropriate to first consider the Full Court’s decision in Haritos as it was subsequently relied upon by Logan J in Le. There, the Commissioner had undertaken a wide ranging audit of the taxpayers’ affairs over a number of years and issued assessments substantially increasing the amount of their assessable income for each income year. By the time the matter had reached the Tribunal, the issues between the parties had reduced to a consideration of a number of issues relating to certain payments and expenses. In relation to the latter, the most significant issue was the payment by a company of approximately $20 million to the taxpayers which, so they alleged, was used to pay the company’s subcontractors. So much is apparent from the reasons of the AAT: Re Applicant v Federal Commissioner of Taxation [2013] AATA 112 [3] – [4] and the decision of Pagone J at first instance in Haritos v Commissioner of Taxation (2014) 141 ALD 369 [4]. One issue which arose in that context was whether the Tribunal had erred by making an illogical or irrational finding as to the acceptability of evidence said to be corroborative of the evidence of one of the taxpayers as to the nature and extent of the payments claimed to have been made to the subcontractors. The Tribunal had determined that the corroborating evidence should be given no weight because it was, to some extent, based on the taxpayer’s evidence of which it was suspicious. However, the Full Court found that there was nothing which would support the finding that the corroborative evidence was so based and, as such, that finding was without any foundation whatsoever. The consequence of this conclusion was, so the Full Court found (at [219]), that the Tribunal had not completed its review function insofar as it required a proper evaluation of the taxpayer’s evidence, and that an element of the taxpayer’s attempt to demonstrate the excessiveness of the assessment had not been considered. In the course of a discussion as to whether the evidence of the corroborating witness had established the amount of costs which might have been properly paid to subcontractors, the Full Court observed that the Tribunal had concluded that the evidence was insufficient to establish the extent to which the Commissioner’s assessments were excessive. The Court identified that the taxpayers were required to show, not only that the assessments were excessive, but also the extent to which they were excessive, and that the import of the evidence of the corroborating witness was to support that of the taxpayer who was able to provide some precision as to the quantum of the costs in question: at [223]. Thereafter the Court said (at [224]):
In his outline of submissions filed before the hearing, the respondent sought to meet the appellants’ argument by reference to the principle that, in this case, the appellants were required to prove not only that the assessments were excessive, but also the extent to which they were excessive. We reject that argument for the reasons given in the previous paragraph. As it happened, during the course of the hearing of the application for leave to appeal, counsel for the respondent conceded (correctly in our view) that it was “not wrong” to say the Tribunal’s reasoning was illogical to the extent that it said that Mr Dalla Costa relied on Mr Haritos’ evidence.
However, the Full Court was not there rejecting the established principles in relation to the application of s 14ZZK(b)(i) or, indeed, its clearly expressed elements, but merely rejecting that the submission had any relevance in the case before it. In the previous paragraph, it had identified how the taxpayer had sought to establish with precision the amount of his income (by establishing that money paid to him was for the purposes of paying his company’s subcontractors), such that the Commissioner’s submission did not meet the argument which the taxpayer was seeking to advance.
After considering a number of arguments as to the manner in which the burden of proof applied in the case before them, the Court addressed one further argument as follows:
235.The third way in which the appellants put their argument that the Tribunal had misused the burden of proof section is related to the second. The appellants submitted that even if Mr Haritos’ evidence was correctly rejected, they had nevertheless established subcontractor expenses of at least a certain amount. The Tribunal was not entitled to adopt what the appellants described as an “all or nothing” approach. If an “at least” figure was established on the evidence, then the Tribunal should have made a finding in accordance with that evidence.
236.We think that proposition is correct. If a taxpayer claims his or her expenses were $10, but fails to prove that fact because their evidence is rejected, this does not prevent the Tribunal from finding that the expenses were $5 where there is other satisfactory evidence establishing expenses of at least that amount. In our opinion, the burden of proof section does not dictate a different conclusion.
Mrs Ross submitted that this latter discussion by the Full Court in Haritos had the consequence that, in attempting to discharge the burden imposed by s 14ZZK(b)(i) in relation to an assessment made pursuant to s 167, it was sufficient to identify that elements of the Commissioner’s assessment were incorrect or partially incorrect and, to the extent error is shown, the taxpayer’s taxable income is revealed by the remaining amount. With respect, although the Full Court in Haritos may have intended to overturn the earlier decisions of the Full Court in Gashi, Rigoli and Bosanac (FC) by a side-wind, it is probably unlikely. As the Commissioner submitted, Haritos concerned circumstances where the taxpayers and the Commissioner had reduced the scope of the hearing to a number of particular disputed amounts which, depending upon the manner in which they were resolved, would increase or decrease the amount which the parties had otherwise agreed represented the taxpayers’ taxable income. In other words, the underlying circumstances in relation to the taxpayers’ taxable income were generally agreed with the remaining disputed items to be determined by the Tribunal, with the results of those determinations altering the otherwise accepted amount of taxable income. Haritos was not a case where, before the Tribunal, the taxpayers’ were still required to fully and completely establish the actual amount of their taxable income. Given the context in which the Court was discussing the effect of the taxpayer establishing some portion of its expenses, there is nothing exceptional about its comments at [235] to [236] and no reason to think the Court was departing from the orthodox principles described earlier.
In Le, the Commissioner had made default assessments after conducting an audit and, in part, those assessments were based on the asset betterment method. The Tribunal rejected the taxpayers’ application for review concerning some of the income years under review, but made alterations to the Commissioner’s objection decisions relating to other income years. Logan J critiqued the Commissioner’s approach to undertaking the assessments but observed that the discharge of the statutory onus “entails rather more than just a critique of that approach”: at [31]. His Honour also referred to the observations of Burchett J in Ma which have been mentioned above and identified that they were directed to circumstances where the occurrence of the underlying taxable events is controversial, of which undisclosed income cases offer a paradigm case. The appellants in Le had submitted that, given what the decision in Ma permitted, the Tribunal had failed to address key elements of the explanation which they had provided for their assets. They submitted that, similar to the circumstances in the present case, the Commissioner had erred by double counting amounts which had been transferred between their several accounts and that the Tribunal had erred by not dealing with that contention which was advanced as demonstrating that the assessments were excessive. This, it was submitted, amounted to an error of law. Logan J referred to the decision in Haritos and the passages to which reference has been made above, and observed that the understanding in Ma of the statutory onus of proof as explained in Dalco and Trautwein has not be gainsaid. His Honour recognised that it coincided with the observations of Walsh J in Krew v Commissioner of Taxation (1971) 45 ALJR 324, where it was said (at 327):
He gave evidence of his ordinary business activities and of his gambling activities and of the way in which these were interrelated. If his account of the matter had been accepted in full, it would have been shown that the disputed accruals to his wealth were not assessable income and that the assessments were wrong… But the explanations of the appellant were not accepted and that meant that he had not discharged the onus of showing that the assessments were wrong.
Logan J then identified why it was important for the Tribunal to consider the arguments advanced as to why the amount of declared income was excessive. His Honour said (at [52]):
This statement also underscores the importance of engaging with the explanation proffered by a taxpayer to explain, in each income year, why there is no unexplained wealth such that the taxable income as declared (or additionally conceded) is indeed the true taxable income with the consequence that the contested assessment for that year is excessive.
He then considered the taxpayers’ submissions as to the consequences of the Tribunal’s alleged failure to consider the nature and extent of the evidence on which the taxpayers had relied as demonstrating that the credits in their bank accounts were transfers from other accounts and not income (as the Commissioner had assumed for the purpose of the taxpayer’s asset betterment statement), stating (at [53]):
Against this background, particularly the emphasised parts of the observations in Haritos, the applicants’ allegation that the Tribunal failed to advert to one of their central arguments as to why in each year the amount of the assessment was excessive does not just have force, it should be accepted. The flow of funds into and out of bank accounts was in evidence, as was an explanation as to why outgoings from accounts were not income. The applicants gave precision in their tabulations as to the resultant excess in the amount of each assessment. A failure to consider that explanation is, truly, a failure to undertake the statutory review function. Further, the impact of that failure is not explicable by findings as to credit, because those findings themselves were made without considering the explanation.
His Honour then held (at [54]), in relation to the Full Courts’ observations in paragraphs [233] to [236] in Haritos, that a taxpayer is entitled to succeed in having shown that an assessment is excessive even if they have not succeeded to the fullest extent:
The observations made by the Full Court in Haritos offer, with respect, elucidation about the operation of the statutory onus of proof in practice. If the material before, and accepted by, the Tribunal shows that the assessment is excessive in a particular amount, it is nothing to the point that an applicant contends that it is excessive to an even greater extent. Section 14ZZK does not have the effect that, because that contention fails, the applicant has not shown the assessment to be excessive or, related to that, that the Tribunal is thereby relieved from concluding, based on the material it has accepted, that the assessment is excessive to the extent revealed by that material.
There is little doubt that, in relation to the circumstances considered in Haritos, those comments are correct. The parties before the Full Court in that case had effectively accepted that the taxpayers’ taxable income in particular years was a certain amount, save that it might be increased or decreased depending upon the manner in which a number of disputed items were resolved. Even if the taxpayers’ contentions in relation to those matters were only partially accepted, the amount of taxable income was to be decreased to that extent, but that was only because of the paradigm in which the parties accepted the dispute was to occur.
However, his Honour’s observations should not be accepted in relation to circumstances where the Commissioner has made a default assessment based on the asset betterment method and the taxpayer is faced with having to establish what their actual income is and that it is less than that assessed by the Commissioner. As the authorities previously referred to clearly establish, in such cases the methodology adopted by the Commissioner by which he reached a judgment about the amount of taxable income for the default assessment is not in issue. What is in issue is whether the taxpayer is able to establish both what their actual taxable income was and that it was less than the Commissioner’s assessment (which gives rise to the conclusion that the latter is excessive).
The taxpayers seemed to rely upon later discussion of Logan J as suggesting that somehow the decision of the Full Court in Gashi was to the effect that a taxpayer might succeed in an objection by attacking the Commissioner’s default assessment methodology rather than by establishing what their actual income is and, having done so, thereby show the Commissioner’s assessment to be excessive. His Honour said (at [59] – [60]):
59.None of this is to gainsay what was stated by the Full Court in Gashi v Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301 (Gashi), a case emphasised by the Commissioner, along with Trautwein and Dalco, in his submissions. In Gashi, at [63], the Full Court stated, with reference to Dalco and Trautwein:
A taxpayer who seeks to establish that a s 167 assessment based on the asset betterment method of calculation is excessive must positively prove his or her “actual taxable income” and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer: Dalco at 623 – 625 and Trautwein at 88. The taxpayer must show that the unexplained accumulated wealth was from the non-income sources. The manner in which a taxpayer discharges that burden is not defined or specified — it varies with circumstances: Dalco at 624.
[Emphasis added]
60.The whole point of the applicants’ explanation, offered but not considered by the Tribunal, was, as the emphasised passage from Gashi highlights, to show that what to the Commissioner was unexplained accumulated wealth was from the non-income sources.
The subject of his Honour’s comments in paragraph [60] was the attempt by the appellants to dispute the Commissioner’s assessment by producing tables (similar to MFI-1) to establish that the total sum of the debits from their bank accounts as assessed by the Commissioner involved a double counting of amounts which were transferred between accounts. In so doing, they sought to undermine the methodology by which the default assessment was reached rather than establish what their taxable income was: at [36].
Mr Hack QC for Mrs Ross submitted that the approach adopted by Logan J in Le has the consequence that, where the Commissioner has made a default assessment using the asset betterment method, a taxpayer can succeed in establishing that the assessment is excessive by merely identifying errors in the Commissioner’s methodology which inflated the amount of the default assessment. With respect, that cannot be so. Most obviously it would be directly inconsistent with the Full Court decisions in Gashi and Rigoli and the earlier High Court authorities in Dalco and Trautwein. It is an approach which would assume, wrongly, that the Commissioner’s default assessment was a calculation of actual taxable income from which items might be challenged leaving the remainder as the taxpayer’s actual taxable income. The authorities establish that not to be the case. It is a judgment of what the taxpayer’s taxable income should be and it establishes the taxpayer’s liability to the Commonwealth save and unless they can successfully challenge it by demonstrating the amount of their actual taxable income and that it is less than the amount of the default assessment. Whilst Logan J may have considered some observations in Haritos to suggest to the contrary, those statements were directed to the particular circumstances before the Full Court where the parties had agreed as to the manner in which the remaining issues in dispute were to affect the taxpayers’ taxable income. That situation did not apparently exist in Le and, for the reasons explained below, did not exist in the present case.
It follows that there is nothing in the decisions in either Haritos or Le which alters the statement of the relevant principles concerning the operation of s 14ZZK(b)(i) set out above. To the extent to which the decision in Le requires a different approach, it is not consistent with the established Full Court authorities which I am bound to apply: see also Farah Constructions Pty Ltd v Say-DeePty Ltd (2007) 230 CLR 89 at 151 – 152 [135].
The established position remains that a taxpayer’s obligation under s 14ZZK(b)(i) is to show that the Commissioner’s assessment of their taxable income is excessive relative to their actual taxable income. It is not merely to show that his judgment as to taxable income, as identified in the default assessment, is greater than it might otherwise have been because it is based on his limited knowledge of the taxpayer’s affairs.
Furthermore, Mrs Ross submissions to this Court misapplied the statement in Gashi that the taxpayer must show that their unexplained wealth was from non-income sources: at [63]. She wrongly assumed that the statement opens the way for a taxpayer to discharge the onus, at least partially, by merely explaining away some of the assets on which the Commissioner adjudged an amount of assessable income using the asset betterment test and accepting that the unexplained balance formed part of their assessable income. In context, all the Full Court was saying was that the effect of discharging the onus is that the taxpayer proves what their actual assessable income was and that explains their accumulated wealth and, to the extent that it does not, that their wealth was acquired from non-assessable sources. In other words, if the taxpayer’s asserted actual assessable income cannot explain their wealth and they also have no or insufficient non-assessable income to explain it, they will have failed to prove the true amount of their assessable income. In that process, they might also prove their actual wealth, including by establishing certain assets which the Commissioner had assumed belonged to the taxpayer for the purposes of the asset betterment method did not so belong to them or that their value was less than the Commissioner assumed. However, it must be kept steadily in mind that the object of doing so is to discharge the burden of having the arbiter of fact accept that they have established the true amount of their taxable income. Merely demonstrating that some of the assets on which the Commissioner relied in estimating the taxpayer’s wealth were not owned by them, not as valuable as thought, or were obtained from non-assessable income does not assist the taxpayer in the absence of proof of their actual taxable income.
Did the Tribunal apply the incorrect onus?
The gravamen of the Commissioner’s complaint is that the Tribunal erred by misapplying the principles relating to the taxpayer’s burden of proof. It can be accepted that, at paragraphs [11] to [12] of its reasons, the Tribunal, to some extent, correctly articulated the principles relating to the application of the onus under s 14ZZK(b)(i) in an appeal to it. That is not unimportant as it identifies the Tribunal was aware that the issues in the matter included whether the taxpayer has discharged the onus under s 14ZZK(b)(i) as it usually applies. However, as Ms Wheatley QC for the Commissioner submitted, those paragraphs stand in stark contrast to the Tribunal’s earlier statement at paragraphs [7] to [8] of its reasons where it articulated its approach in the following way:
7.The financial affairs of Mr and Mrs Taxpayer were – unsurprisingly – intermingled to some extent. I will deal with each taxpayer separately, starting with Mr Taxpayer, but their argument is essentially the same. They insist they did nothing wrong but say a number of specific amounts the Commissioner assumes to be assessable income are properly regarded as:
•loans, gifts or the proceeds of recreational gambling, or
•the proceeds of sales of motor vehicles and components.
8.If the taxpayers are right in relation to the characterisation of (any or all of) those amounts, the amounts in question should not be included in assessable income for the relevant year of income. The amount of the assessment for that year of income should be adjusted accordingly.
The parties’ submissions
The Commissioner submitted that these paragraphs, and the Tribunal’s reasons generally, demonstrate that it pursued the erroneous approach of only considering those several items in the Asset Betterment Statements which the taxpayers had selected for contention. Some were found in favour of the taxpayers, others were not, and the matter was remitted to the Commissioner with a direction to undertake the assessment by taking into account the items which the Tribunal had accepted had been explained. In effect, so the Commissioner submitted, the Tribunal merely assumed that those items which were not contested by the taxpayers or which they had failed to demonstrate were acquired from non-income sources were assessable income. He also submitted that neither Mr Ross nor Mrs Ross positively proved what their actual taxable income was and, therefore, what the assessment should have been, with the consequence they had failed to discharge the applicable onus of proof under s 14ZZK(b)(i).
On the other hand, the Commissioner accepted that he made certain concessions at the hearing in relation to a few matters which were accepted by the Tribunal. These related to specific amounts which had been included in the Asset Betterment Statements and were to the effect that either those amounts did not represent unexplained wealth or were overstated. However, he submitted that such concessions did not alter the taxpayers’ onus and it is only where the Commissioner and a taxpayer have agreed the underlying facts upon which the assessment was made and/or the issues for determination have been confined, that an approach such as that adopted by Mr and Mrs Ross, and accepted by the Tribunal, could be appropriate: Bosanac v Commissioner of Taxation (2019) 93 ALJR 1327 (Bosanac (HCA)) [24] – [30]; Zappia v Commissioner of Taxation [2017] FCAFC 185 (Zappia) [3]; Rigoli [25] – [26]. Here, at best, the Commissioner’s concessions were that two particular items should not have formed the basis of the amount of taxable income in the default judgment. However, that did not permit the Tribunal to proceed on the basis that the taxpayers might succeed merely by contesting the inclusion of other amounts in the Asset Betterment Statements. Such concessions did not even permit the Tribunal to conclude that the default assessments were excessive to that limited extent: Bosanac (HCA) [24]. Rather, they merely relieved the taxpayers from proof of the facts which the Commissioner had conceded.
As mentioned, the taxpayers did not cavil with the statements of principle relied upon by the Commissioner either before this Court or before the Tribunal. Specifically, they accepted that the onus could not be discharged in the case of the default assessment pursuant to s 167 of the ITAA36 unless they were able to positively prove their “actual taxable income”. However, Mrs Ross submitted to this Court that, before the Tribunal, both she and her former husband sought to demonstrate what their true taxable incomes were, but that the Tribunal lost sight of or overlooked their efforts. Alternatively, she submitted that the Commissioner had agreed to confine the issues in relation to the taxpayers’ applications for review of his objection decisions in such a manner that they were entitled to use the Asset Betterment Statements as identifying the amount of their taxable income, save to the extent to which they were able to show that certain amounts were incorrectly included.
The submission that the Tribunal had overlooked the taxpayers’ attempts to establish their actual taxable income, through the document identified as MFI-1, was an implicit acknowledgement that the Tribunal did not apply the onus under s 14ZZK(b)(i) in its usual form. If, as Mrs Ross submitted, it did not consider the taxpayers’ attempts to establish their actual taxable income, it must have proceeded on an erroneous assumption that all that they were required to do was to undermine selected items included by the Commissioner in the Asset Betterment Statements. On the other hand, Mrs Ross did not expressly acknowledge the Tribunal’s incorrect application of the onus, but somewhat inconsistently asserted the existence of an agreement by the parties to confine the issues of fact and law to the validity of the inclusion of certain items in the Asset Betterment Statements.
Prima facie the Tribunal adopted the incorrect approach to the onus under s 14ZZK(b)(i)
It can be immediately observed that, absent an agreement between the parties to confine the issues in dispute, the process described in paragraph [8] of the Tribunal’s reasons involved an erroneous application of the onus under s 14ZZK(b)(i) in relation to a default assessment pursuant to s 167. The amount of taxable income in an assessment under that section is not the starting point for the taxpayers in advancing their objections or applications for review and nor do the items specified in an asset betterment statement (which, in a general sense, support the Commissioner’s judgment of their taxable income) prima facie identify the issues which are in dispute between the parties. As the authorities make clear, a taxpayer must positively prove what their taxable income actually is and that onus is not satisfied by merely showing that some element in the Commissioner’s assessment is wrong. A process of picking and choosing between the several elements on which the Commissioner relied in making the default assessment does not suffice because it proceeds on the misapprehension that an assessment made pursuant to s 167 is a proxy for a calculation of a taxpayer’s actual taxable income.
It is abundantly clear from its decisions and reasons for decisions that the Tribunal applied the erroneous approach foreshadowed in paragraph [8] of those reasons. It made no attempt to ascertain whether the taxpayers had established what their actual taxable income was, but merely assumed that the default assessments identified the amounts which constituted the taxpayers’ taxable income, save to the extent to which they were successfully challenged. In the absence of an agreement between the parties to confine the issues in dispute, that constituted an error of law which justifies setting aside the Tribunal’s decisions.
As a matter of substance, Mr Hack QC for Mrs Ross did not seek to sustain the Tribunal’s approach in relation to the taxpayers’ challenge to the objection decisions. He acknowledged that the Tribunal was required to ascertain whether the taxpayers had demonstrated what the actual income was and, so he submitted, although the taxpayers had attempted to do so, the Tribunal overlooked their efforts. He said that, despite the taxpayers advancing evidence of what their actual income was, the Tribunal “got the impression that all it had to decide were the big ticket items”. In relation to the taxpayers’ alleged attempt to prove their actual income, he sought to rely upon the document which became MFI-1 before the Tribunal (which is considered in detail below) which, it was said, disclosed the taxpayers’ activity on their several bank accounts and, derivatively, disclosed their assessable incomes.
Did the Commissioner agree to confine the issues on the application to particular points of law or fact?
Mrs Ross’s alternative, and somewhat inconsistent, argument was that the parties had agreed to confine the issues in dispute before the Tribunal to certain matters of law and fact such that the taxpayers would succeed to the extent to which they could establish that certain amounts in the Asset Betterment Statements were wrongly included or were overstated. In Mrs Ross’s written submissions to this Court, the following was advanced:
… That the Commissioner agreed to approach the matter on the basis that Mr and Mrs Ross were entitled to a reduction of their taxable income to the extent they demonstrated the correctness of their particular claims is evident, not merely because an experienced Tribunal member proceeded that way; it is evident from the submissions made below on behalf of the Commissioner.
With respect, the mere fact that an experienced Tribunal member adopted an erroneous approach to the onus issue is no indication of an antecedent agreement between the parties that such an approach should be taken. It evidences only the Tribunal’s error and, in the circumstances of this case, one which may have occurred as a result of the extensive delay in making a decision on the review applications. Parenthetically, this submission was seemingly at odds with Mrs Ross’s cross-appeal. That aside, in support of the above submission, Mr Hack QC also referred to paragraph [8] of the Tribunal’s decision. However, it is by no means clear how anything in that paragraph indicates the Commissioner had agreed to confine the application for review to particular points of law or fact. It merely demonstrates that the Tribunal adopted the incorrect approach.
Although not articulated with any great clarity, the essence of the alleged agreement by the Commissioner to limit the issues before the Tribunal appears to be derived from implications arising from the submissions which were advanced to the Tribunal.
Mrs Ross’s submissions in this respect commenced with the proposition that they are not confined as to the manner in which, in circumstances such as the present, they establish their actual taxable income and that the Commissioner’s assessment was excessive. Put another way, it was said that the taxpayer can discharge the onus by establishing that any unexplained wealth had not been acquired through non-income sources: Gashi [63]. At paragraph 11 of her written submissions to this Court, Mrs Ross submitted that a major part of establishing the amount of her actual taxable income and that the Commissioner’s assessments were excessive was undermining the accuracy of the assumptions and calculations performed by the Commissioner in relation to the default assessments and, in particular, as they appeared in the Asset Betterment Statement. She sought to establish that the amounts of unexplained wealth attributed to her were from non-assessable sources, excessive in value, or not hers at all. She claimed to have done so by challenging the value attributed to a motor vehicle included in her Asset Betterment Statement and eschewing any interest in certain land which was registered in her name. Mrs Ross further claimed that the Commissioner had erred by taking into account amounts paid into her bank accounts (which were adjusted to take into account transfers between accounts). A complaint was then made as to the manner in which the Asset Betterment Statement reconciled the amounts identified to arrive at the figure relied upon by the Commissioner as being her taxable income. The underlying difficulty with this approach has been discussed above.
The crux of Mrs Ross’s allegation that there was an agreement to confine the issues appears from paragraph 16 of their written submissions to this Court. There, it was said that, in response to her submissions that the value of the Mercedes Benz motor vehicle which had been attributed to her should be reduced, the Commissioner did not submit that such a conclusion would have no effect on Mrs Ross’s taxable income or that the Tribunal was not authorised to proceed in that way. It was said that, instead, the Commissioner accepted that the value of the motor vehicle, as identified by the Tribunal, would be assessable income to Mr Ross (at paragraph 89 of the Commissioner’s closing written submissions to the Tribunal) and thus indicated his consent to confining the issues in this manner.
Mrs Ross also relied upon the position adopted by the Commissioner before the Tribunal in relation to the land known as the “Maudsland land”. Before the Tribunal, the Commissioner apparently accepted (at paragraph 132 of his written submissions) that Mrs Ross provided no funds towards its acquisition of the land, that there was an insufficiency of evidence as to the source of the funds used to purchase the land, and that “[a]ny amounts paid in connection with the purchase of the Maudsland property which are held not to be assessable to Alexandra Ross should be included in Shane Ross’ assessable income.”
From this, Mrs Ross submitted that the Commissioner must be taken to have conducted the hearing before the Tribunal on the basis that all the taxpayers were required to do was to provide a sufficient explanation for their increased wealth and that, to the extent to which they were able to do so, such amounts would be deducted from the amounts assessed by the Commissioner which were assumed to be their assessable income. They submitted this is particularly clear from the Commissioner’s concession that amounts which the Tribunal finds were not attributable to Mrs Ross’s income should be added to Mr Ross’s. In addition, they relied upon the Commissioner’s positive assertion (at paragraph 40 of his written submissions to the Tribunal) that Mr and Mrs Ross had the onus “of proving that the amounts in question were in fact loans, gifts, or the proceeds of recreational gambling or the sale of motor vehicles and other chattels”, which was said to be a plain acknowledgement that the Commissioner was not approaching the matter on the basis that the taxpayers carried the onus as identified in Dalco, Gashi and Rigoli.
The existence of any agreement that the usual onus rules did not apply
Mrs Ross necessarily asserted that there was an implicit or tacit agreement by the Commissioner to forego his right to require the taxpayers to satisfy the onus in s 14ZZK(b)(i), such that the dispute between the parties before the Tribunal was merely one in which the s 167 assessments were the starting point and that the taxpayers’ only task was to establish where they were excessive. Necessarily, whether an implicit or tacit agreement can be established or not arises as a matter of inference. Mrs Ross’s submissions in this regard were not wholly without merit as there are indicators both for and against the proposition. Somewhat curiously, the manner in which she ran her case on appeal provides the strongest evidence against the conclusion that any such agreement existed before the Tribunal.
Nevertheless, given the manner in which the argument was advanced to this Court, it was, perhaps, an unusual submission that the Commissioner must be taken as having agreed that the hearing before the Tribunal should proceed in such a limited or confined manner on the basis of his written submissions given some months after the hearing had been completed. Indeed, as the Commissioner’s submissions were delivered subsequent to the adducing of evidence, the completion of the hearings, and the taxpayers’ closing written submissions, it cannot be said that the latter tailored the presentation of their case according to an agreement said to implicitly arise from the content of the Commissioner’s submissions. Mrs Ross did not explain how that alleged agreement as to the manner in which the hearing was to be conducted could arise after its completion.
In response to this, Mr Hack QC submitted that the Commissioner’s written submissions following the conclusion of the hearing reflected the existence of an antecedent agreement as to the manner in which the hearing was to occur.
In ascertaining whether there existed some implicit agreement as Mrs Ross submitted, it is essential to consider the context in which the hearing occurred. The starting point is necessarily the taxpayers’ objections to the s 167 assessments and the grounds which they sought to raise. Although those objections each attached a sheet purporting to explain the increase in wealth by referring to alleged sources of income and listing each person’s respective income, they were very light on detail or supporting evidence. Similarly, the amended grounds of objection did not contain specific assertions concerning the sources of income. Rather, the suggestion was that the receipts of substantial sums by the taxpayers were loans, gambling winnings, gifts, or the proceeds of sale of assets.
This complaint related to the sum of $60,000 deposited by Mrs Ross’s father, Mr Karl Petith. It was claimed that this amount was loaned to Mrs Ross on or about 14 November 2013. The Tribunal observed the loan was undocumented, Mr Petith did not charge interest on it, and no repayments were made. Mrs Ross claimed that she spent the money on her wedding which took place about 10 months after the receipt of those funds. Although the Tribunal ultimately accepted that the money was transferred from Mr Petith to his daughter, it remained unconvinced about the purpose of the loan. It said (at [129] – [130]):
129.It is not difficult to believe KP would loan money to his daughter, nor is it surprising that a loan would be undocumented. But the evidence Mrs Taxpayer and KP gave about the purpose of the loan is unconvincing given the money was provided in a lump sum so far in advance of the wedding and there was no evidence of significant expense being incurred at that point. KP did not clearly explain why he chose to go to the bank to access his savings account when he already had cash on hand; his suggestion that it was more convenient to transfer the money was not born out by the bank statement which suggests the money was withdrawn from the account rather than transferred.
130.I am ultimately unsure what was going on with the deposits and withdrawals in KP’s account. I accept he had a financial interaction with his daughter but the evidence does not clearly establish any of the monies in Mrs Taxpayer’s account were referable to a loan provided by KP. In those circumstances, the $60,000 amount in dispute must be included in Mrs Taxpayer’s taxable income.
It is apparent that the Tribunal’s conclusion that Mr Petith transferred the money to his daughter, Mrs Ross, by withdrawing cash from his account and giving it to her added weight to its concerns in relation to the evidence of Mrs Ross and Mr Petith on this issue. Unfortunately, its conclusion as to the manner in which the funds were transferred was in error. They were, in fact, transferred from Mr Petith’s account to his daughter’s. It appears that the Commissioner’s written submissions to the Tribunal contained the erroneous statement that the funds were handed over in cash rather than being remitted by an inter-account transfer and that was accepted by the Tribunal.
The Commissioner’s submissions on this point do not squarely confront the issue of what is an apparent factual error in the Tribunal’s reasoning which originated in his submissions. Whilst it is obvious that the particular manner in which the money was transferred and Mr Petith’s evidence about it had some relevance to the conclusion reached, it was not great. Nevertheless, it is apparent that there was a misunderstanding of the evidence. On the other hand, the Tribunal’s error does not necessarily bespeak of, nor is it necessarily reflective of, delay impacting adversely on the decisional process. Most likely it arose as a consequence of the Tribunal relying upon the Commissioner’s inaccurate submissions. It is not of such a nature as would give rise to an appeal on a question of law and nor was the erroneous fact finding so significant as to amount to a jurisdictional error. However, it is an error of fact which, when taken with the other difficulties with the Tribunal’s reasons tends to suggest that the lapse of time had an adverse impact on its ability to marshal the evidence on each topic.
A further complaint by the taxpayers relates to the Tribunal’s reasoning in concluding that it was not satisfied that the amount of $60,000 Mrs Ross received from her father, Mr Petith, was not assessable income. The complaint is that although it concluded that the amount was not a loan it did not go on and explain why it did regarded it as assessable income. However, that submission fails to appreciate the effect of the onus and that the taxpayers were required to identify the actual amount of their assessable income. Even in the context in which the Tribunal dealt with the applications, it was for the taxpayers to demonstrate that the funds coming into their hands were not assessable income.
Conclusion as to Mrs Ross’s cross-appeal
From the foregoing discussion, there were several issues with the Tribunal’s decisions and reasons for decisions which, collectively, could support a finding that there is a real and substantial risk that the Tribunal’s capacity to assess the matters before it was impaired by the substantial delay between the hearing of the taxpayers’ applications and the delivery of its decisions and reasons for decisions.
It is convenient to summarise them here, again adopting the categorisation in the Commissioner’s written submissions. First, there were various respects in which the Tribunal’s decisions did not reflect the findings it reached in its reasons:
(a)(Grounds 1(b)(ii) and (f)) the failure to direct the Commissioner to take into account the payments to Mr Ross which were accepted as being from his mother prior to 18 May 2012 in the 2012 income year;
(b)(Ground 1(b)(iii)) the failure to direct the Commissioner to take into account Mrs Ross’s gambling winnings of $21,491.40 in the 2014 income year;
(c)(Ground 1(b)(iv)) the failure to direct the Commissioner to take into account the error in attributing half of the value of the Maudsland land, being the amount of $184,500, to Mrs Ross in the 2014 income year; and
(d)(Ground 1(e)) the failure to direct the Commissioner to take into account the suspected double counting in relation to the 2013 income year.
Although not relied upon in the notice of cross-appeal, to that list might also be added the error in the Tribunal’s decision in remitting in full the penalties imposed upon Mrs Ross in respect of the 2014 income year where its reasons contemplated only partial remission.
Second, there were various other aspects of the Tribunal’s reasons which it was accepted were at least concerning, even when viewed in isolation, or which did tend to demonstrate errors in the Tribunal’s deliberative process with respect to these matters:
(a)(Grounds 1(b)(i) and (c)(i)) the nature and treatment of MFI-1 by the Tribunal was problematic. In part, it did not fully appreciate its purpose in attempting to establish the taxpayers’ actual incomes in the relevant years. More relevantly, however, it is apparent that it failed to keep in mind that the document did not have evidential status with the consequence that it relied upon the commentary in it which was not supported by the evidence;
(b)(Grounds 1(b)(ii) and (f)) the Tribunal used MFI-1 as being evidence of the matters contained in it when that was clearly not the case. It is likely that the passage of time had caused it lose appreciation of the limited nature of the document in that respect;
(c)(Ground 1(c)(ii)) the failure to specifically address with the amount of $27,226.90 received by Mr Ross in the 2014 income and claimed to be gambling winnings; and
(d)(Ground 1(l)) the acceptance of the Commissioner’s erroneous submission that the transfer from Mr Petith to Mrs Ross did not occur by bank transfer.
The errors of which the taxpayers complain were not individually sufficient to raise any error on which an appeal might be sustained and nor were they advanced as such. They were, however, significant in numerical terms. The delay in delivering the reasons of the Tribunal was prolonged and the number of errors identified supports the conclusion that the length of time between the hearings and the delivery of the decision gave rise to a real and substantial risk that the Tribunal’s capacity to assess the merits of the claim was impaired. Whilst a few errors of a more technical nature may be acceptable as part of the administrative process, here the nature and number of the errors on which the taxpayers relied were sufficient to support the above conclusion with the result that the taxpayers were denied procedural fairness.
Although it was not necessary to decide, the above conclusion is strengthened when the fundamental error relied on by the Commissioner in Ground 1 of his appeal is taken into account. It would appear that the long delay caused the Tribunal to lose sight of the case which the Commissioner had been advancing based on the onus under s 14ZZK(b)(i) and the taxpayers’ failure to establish the actual amounts of their taxable incomes in the several income years. Had the Tribunal been able to attend to the matter sooner, it may not have been misled by the erroneous manner in which the taxpayers’ case was, in part, advanced to it.
It follows that the taxpayers have established that they were denied procedural fairness as a consequence of the prolonged delay. For the reasons which are discussed below, they are entitled to an order that the Tribunal’s decisions be set aside.
CONCLUSION
The conclusion reached above in relation to the cross-appeal is not the end of the matter. As the Commissioner submitted, even if a denial of procedural fairness was established, it is necessary to consider whether the appropriate consequential orders should be that the matters be remitted to the Tribunal for re-hearing. In particular, he submitted that such relief ought to be refused because the taxpayers could never have succeeded on their appeals as no properly instructed Tribunal could have been satisfied that they had discharged the onus under s 14ZZK(b)(i) of the TAA. On this basis, it was submitted that regardless of the outcome of the taxpayers’ appeal, the matters should only be remitted to the Tribunal for further hearing on the question of the exercise of the power to remit penalties. However, the Commissioner is not satisfied with the Tribunal’s decisions as they presently stand and he asks that the Court substitute for them decisions dismissing the taxpayers’ appeals. Conversely, Mrs Ross submitted that the taxpayers’ appeals should be allowed and the matter remitted to the Tribunal and that the Tribunal be at liberty to determine whether the parties should be able to adduce further evidence on the re-hearing.
The applicable principles
The issues which arise on the question of the appropriate orders are difficult and somewhat complex. Unfortunately, the parties provided only meagre submissions in relation to them.
The appropriate place to start is the statutory powers vested in the Court to make orders on appeal from the decisions of the Tribunal, being found in ss 44(4) and (5) of the AAT Act. Those sections provide:
(4)The Federal Court of Australia shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision.
(5)Without limiting by implication the generality of subsection (4), the orders that may be made by the Federal Court of Australia on an appeal include an order affirming or setting aside the decision of the Tribunal and an order remitting the case to be heard and decided again, either with or without the hearing of further evidence, by the Tribunal in accordance with the directions of the Court.
Those provisions are unaffected by the alterations to the application of the AAT Act in matters under Pt IVC of the TAA: TAA, s 14ZZA.
Despite the apparent width of sub-sections (4) and (5), they must be exercised with caution. This was made clear by Sackville J in his reasons in Morales v Minister for Immigration and Ethnic Affairs (1995) 60 FCR 550, where his Honour observed (at 560 – 561):
In certain circumstances, however, the Court may exercise the power in s 44(4) of the AAT Act and make orders finally resolving the matter. In Harradine v Secretary, DSS, for example, the only question was the construction of a particular section of an Act. The parties agreed that whoever succeeded on that issue was entitled, as a matter of law, to succeed in the AAT. Accordingly, the Court made orders finally disposing of the case without remitting the matter to the AAT (at 36, 43, 49). Similarly, if the Court hearing an appeal from the AAT finds an error of law in its reasons, but nonetheless considers that the decision was clearly correct on the material before the AAT it is open to the Court to dismiss the appeal: Austin v Deputy Secretary, Attorney-General’s Department (1986) 12 FCR 22 (FCA/FC), 316 at 26-27; McAuliffe v Secretary, Department of Social Security [1992] FCA 483; (1991) 23 ALD 284 (FCA/von Doussa J), at 295-296, aff’d at (1992) 28 ALD 609 (FCA/FC), at 618-619; State Rail Authority of New South Wales v Collector of Customs [1991] FCA 610; (1991) 33 FCR 211 (FCA/FC), at 217.
The scope of the power conferred by s 44(4) of the AAT Act is, however, subject to limitations. These flow from both the fact that an appeal from the AAT is on a question of law only and from the language of s 44(4) and (5). The limitations were explained by Sheppard J in Minister for Immigration and Ethnic Affairs v Gungor [1982] FCA 99; (1982) 63 FLR 441 (FCA/FC), at 454-455:
It is in my opinion not correct to say that this Court is by these provisions given wide powers to make such orders as it thinks fit. Implicit in its powers are a number of restrictions. The appeal is expressly limited to error of law, which alleged error is the sole matter before this Court and is the only subject matter of any order made consequent on the appeal. The order which this Court can make after hearing the appeal is also similarly restricted to an order which is appropriate by reason of its decision. It follows that the only order which can be properly made is one the propriety of which is circumscribed by and necessary to reflect this Court’s view on the alleged or found error of law. To go further I would see as amounting to exceeding the jurisdiction of this Court under this section. A power to make “such order as it thinks appropriate by reason of its decision” is much more restrictive than a power “to make such order as it sees fit” or a power “to make a decision in substitution for the decision” the subject of the appeal. S 44(5) confirms, though it states that it does not purport to limit, this as an appropriate reading of the power in s 44(4) when it limits its statement to the express power of the Court when setting aside a decision to the making of an order remitting the case to be heard again. Having set aside a decision, it has no express power to substitute what it sees as the correct decision unless such is the appropriate order by reason of its decision on the point of law in the context of the particular proceedings.
It is recognised that there are cases where it has been held that it would be futile to remit the matters for re-hearing because they admit of only one possible outcome: Musgrave v Martin (2003) 130 FCR 546 at 567 [121]; Arnott v Repatriation Commission (2001) 106 FCR 83 at 93 [36] – [37]; McAuliffe v Secretary, Department of Social Security (1992) 28 ALD 609. However, they are almost invariably occasions where the Tribunal has committed an error of law but the conclusion reached was the only correct one available with the consequence that no order for remittal should be made. For example, in Dunn v Secretary, Department of Social Security (1990) 21 ALD 248, O’Laughlin J concluded that the Tribunal had erred in its construction of the relevant statute under consideration, but nevertheless dismissed the appeal on the basis that, even if the Tribunal correctly applied the law, it could have come to no other conclusion. It is to be emphasised that these are cases where the effect of refusing to remit would be to leave the decision of the Tribunal below in place.
The decision in Harradine v Secretary, Department of Social Security (1989) 25 FCR 35 is closer to the circumstances of this case. In that case, the appellant had been denied unemployment benefits on the grounds that he was engaged in a course of education on a full time basis. On appeal to the Full Court of this Court, it was held that the relevant section of the legislation required a consideration of whether the objectively ascertainable activity of the student might be described as a full time engagement in a course of education. The Court concluded that, as on the facts as found and on the proper construction of the statutory provision in issue, the matter admitted of only one answer the appropriate order was to allow the appeal, set aside the Tribunal’s decision, and order that the application to it be allowed. However, in that case, as the parties had agreed that the Court’s determination should resolve the issue which had been before the Tribunal, the Court did not have to definitively reach a conclusion on the existence of its power to make the orders. A not dissimilar outcome occurred in Truchlik v Repatriation Commission (1989) 25 FCR 414, where Sheppard and Foster JJ held (at 424) that, as the facts were fully found and not in dispute and the question of law could only lead to one conclusion, it was appropriate to set aside the Tribunals decision and order that the application to it be allowed. There was no discussion in that case of how the Court might validly exercise the power of the Tribunal and it did not appear that the point was in issue.
Relevant to the exercise of the Court’s power to dispose of the appeals is that the taxpayers’ success was founded upon a denial of procedural fairness and the substance of that ground did not alter even though it was advanced as an issue of an error of law for the purposes of s 44 of the AAT Act. Were the matter one of judicial review, the court would retain a discretion to not set aside an order of the Tribunal despite it being established that a denial of procedural fairness had occurred where it has been shown that the denial did not deprive the applicant of the chance of a successful outcome: see the cases collected in Baig v Minister for Immigration and Multicultural Affairs [2002] FCA 380 [34] and more recently the development of materiality as a necessary element of jurisdictional error in the decision of the High Court in MZAPC v Minister for Immigration and Border Protection [2012] HCA 17. Similar considerations would necessarily apply in relation to the nature of the relief which might be granted on an appeal on a question of law under s 44 of the AAT Act. Other cases tend to limit the power of the Court to deciding the matter only where the facts are beyond dispute and the matter turns on a question of law: Jolley v Federal Commissioner of Taxation (1989) 86 ALR 297 at 309; Australian Trade Commission v Richard Shrapnel Consulting Services Pty Ltd (1988) 85 ALR 287 at 290.
What ought to happen in the present case?
The essential difficulty in this case is that neither party was satisfied with the Tribunal’s decision which only partially allowed the appeals from the objection decisions. Although each opposed the other’s appeal, neither is satisfied with the Tribunal’s decisions in remaining intact. This case is, therefore, unlike those discussed above where one option was dismiss the appeal and allow the Tribunal’s decision to stand.
The Commissioner’s preferred outcome
Here, it has been concluded that the Commissioner should succeed on, inter alia, Ground 1 of his appeal in relation to the onus question. It has also been concluded that no Tribunal, properly applying the correct onus, could have reached a conclusion favourable to the taxpayers on the material before it. The Commissioner submitted that if that position were reached it would be futile to remit the matters for re-hearing because the Tribunal could only ever determine to affirm the Commissioner’s assessments. As identified above, his preferred outcome is that this Court should order that the appeals be allowed, the Tribunal’s decisions be set aside and, in lieu thereof, an order be made affirming the Commissioner’s objection decisions. An exception to this was said to be in relation to the question of the remission of penalties as that had to be exercised afresh by the Tribunal according to law.
The taxpayers’ preferred outcome
Mrs Ross, in each of her capacities, submitted that if her cross-appeal succeeds the matters should be returned to the Tribunal for re-hearing and on the basis of fresh evidence. It is undoubtedly the case that in less complicated circumstances, if the Court concludes that there was a denial of procedural fairness and the possibility of a different outcome was denied, then the ordinary course would be to remit the matters to the Tribunal for some form of reconsideration. Mr Hack QC for Mrs Ross went further and submitted that, if the taxpayers succeeded in respect of the cross-appeal, then the issues raised by the appeal fell away entirely. The logic of this submission was not entirely clear and no authorities were identified which supported such a proposition.
The appropriate orders
On the basis of the Commissioner’s appeal and the conclusion that no properly instructed Tribunal would allow the appeals from the objection decisions, there is an element of futility in requiring a re-hearing in the Tribunal. Conversely, the Tribunal’s error in delaying the delivery of judgment had the consequence that the taxpayers were denied procedural fairness in the determination of their appeals and that ought to usually result in the matters being remitted. There is no clear path to the resolution of this conundrum. Ultimately, however, the course urged by the Commissioner to vary the Tribunal’s decision or make one in substitution for it requires the Court to exercise the Tribunal’s power under s 43 of the AAT Act for the purpose of disposing of the appeal. In the absence of any clear authority which would justify taking such a step and, keeping in mind the Constitutional imperatives of not trespassing into the field of executive power, I am declined to do so. More particularly, the authorities to which I have referred above suggest that the power of the Court to effectively decide the matter itself is limited to those cases where the facts are found and beyond dispute, and the matter turns on a question of law. That is not the position here where the conclusion that the taxpayers could not succeed before a properly instructed Tribunal is, essentially, a factual determination rather than one of law.
Further, in line with the decision in Minister for Immigration and Ethnic Affairs v Gungor (1982) 63 FLR 441, an order setting aside the Tribunal’s determinations on the Commissioner’s appeal is one which conforms to and reflects the error of law on which the appeal succeeded. The same cannot be said of the relief sought by the Commissioner that the Court make orders that the appeals to the Tribunal be dismissed. That would necessarily be reflective of the factual determination that the evidence before the Tribunal could not satisfy the onus under s 14ZZK(b)(i).
Should a remitted hearing be on the hearing of further evidence?
The next question is whether, if the matter were remitted to the Tribunal, it should be on the basis that it be reheard on a hearing of the same or further evidence. Although the parties had different positions on this, neither made any substantial submission as to how the issue ought to be decided. The taxpayers’ seek an order that they be entitled to adduce further evidence on the re-hearing and that apparently underpins a desire to advance a new case based on additional material. It is not immediately clear why they should be given that second chance, merely due to the Tribunal’s delay in delivering its decisions.
In this context, it is relevant that the taxpayers did not indicate the nature or extent of the further evidence which they wished to adduce before the Tribunal. All that was said that they should be at liberty to do so. With respect, that is inadequate given they were aware of the Commissioner’s submission that it would be futile to remit the matter for re-hearing. A further difficulty is that by the evidence adduced at the original hearing they have already purported to assert the sources of their income and how it came to be transferred to and from their bank accounts. That evidence was, in part, shown to be erroneous and, otherwise, not believed. Necessarily, in order to secure a different outcome it is likely that they will be required to adduce evidence which contradicts that which they adduced at the first hearing. This case is not similar to many before the Tribunal where the facts might be constantly evolving, such as claims by persons who have suffered illness or injury, where new evidence might throw light on a developing situation. Here, any new evidence which might be advanced must necessarily be evidence which could have been obtained for the earlier hearing. That being so, the absence of any explanation as to why it was not then made available militates strongly against exercising a discretion to allow additional material on any remitted hearing.
A reason for remitting the matter for hearing on new evidence would exist had it been demonstrated that the passage of time had adversely impacted upon the Tribunal’s credit findings. That was not the case here. Although the Tribunal’s findings in relation to the specific transactions involved a rejection of the evidence of the taxpayers and their witnesses, that was the result of the objective, inherent implausibility of what they said rather than the manner in which they said it or their dispositions when giving evidence.
It should be also recognised that the taxpayers’ position, which was strenuously advocated with respect to the Commissioner’s appeal, was that the evidence before the Tribunal was more than adequate to satisfy the onus under s 14ZZK(b)(i). If that be so, they can agitate that argument before the Tribunal on any re-hearing. No submission was made to the effect that the evidence which was originally advanced to the Tribunal did not remain available for its reconsideration and no submission was made that, in order to properly understand the case, a reconstituted Tribunal would need to see and hear the witnesses again.
In these circumstances, if the appeals from the Commissioner’s objection decisions are to be remitted to the Tribunal for re-hearing, they should be heard without the hearing of further evidence. There is no warrant for effectively starting the proceedings from the beginning.
I recognise the relevance to this issue of the conclusion in these reasons that the evidence adduced by the taxpayers before the Tribunal was insufficient to satisfy the onus under s 14ZZK(b)(i) of the TAA. However, that was made in the context of the Commissioner’s submissions that the appeals should not be remitted to the Tribunal for further hearing and, as that submission failed and the relief sought by the Commissioner in that respect has been rejected, any Tribunal re-hearing the appeals will make of those conclusions what it will.
Whilst it is appreciated that the conclusion that the matters be remitted for a re-hearing may seem somewhat impractical and unproductive, that is unavoidable in the context of the unusual circumstances of this case. In any event, given that the appeals to the Tribunal are to be reheard without the hearing of further evidence, any reconsideration before the Tribunal should not be prolonged.
Costs
The parties asked to be heard on the question of costs once they have had an opportunity to consider these reasons. In those circumstances, they should be allowed a period of time to make submissions as to the appropriate orders in relation to costs and, thereafter, an appropriate time to make submissions in reply to their opponent’s submissions.
I certify that the preceding three hundred and fifty-one (351) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington. Associate:
Dated: 9 July 2021
SCHEDULE OF PARTIES
QUD 165 of 2020 Cross-Appellants
Second Cross-Appellant:
ALEXANDRA ROSS
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