Confidential and Commissioner of Taxation

[2008] AATA 1127

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 1127

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No      VT200300132 – 137,

TAXATION APPEALS DIVISION

)  VT 200400110, VT200400133-140

  2007/4364

Re

CONFIDENTIAL

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr John Handley, Senior Member

Date11 November 2008

PlaceMelbourne

Decision

Upon hearing Ms Harding for the Respondent and there being no appearance by or for the Applicant and for reasons given orally at the conclusion of the hearing IT IS DECIDED:

1.          The objection decision made by the Respondent on the Applicant's objection in respect of the assessment for the year ended 30 June 1991 is affirmed.

2.           The objection decision made by the Respondent on the Applicant's objections in respect of the assessments for the years ended 30 June 1992 and 30 June 1994 to 30 June 1997 (inclusive) are varied as follows:

2.1          The taxable income for the year ended 30 June 1992 is reduced to $40,449;

2.2          The additional tax for incorrect return for the year ended 30 June 1992 is remitted to nil;

2.3          The taxable income for the year ended 30 June 1994 is reduced to $19,022;

2.4          The additional tax for late return for the year ended 30 June 1994 is remitted to nil.

2.5 The taxable income for the year ended 30 June 1995 is reduced to nil and there be a carry forward loss under section 80 of the Income Tax Assessment Act 1936 of $460;

2.6          The additional tax for late return for the year ended 30 June 1995 is remitted to nil;

2.7 The taxable income for the year ended 30 June 1996 is reduced to nil and there be a carry forward loss under section 80 of the Income Tax Assessment Act 1936 of $40,168;

2.8          The additional tax for late return for the year ended 30 June 1996 is remitted to nil;

2.9          The taxable income for the year ended 30 June 1997 is reduced to $3,514; and

2.10        The additional tax for late return for the year ended 30 June 1997 is remitted to nil.

3.          The objection decision made by the Respondent on the Applicant's objection in respect of the assessment for the year ended 30 June 1993 is varied to the extent that the taxable income for the year ended 30 June 1993 is reduced to $138,027.

(Sgd)  John Handley
  Senior Member

INCOME TAX – applicant disputed he was a member of a partnership – alleged he was given pocket money, earned monies from vegetables grown and received a social security pension – conduct and role within the partnership examined – extensive documents obtained by Warrant including agreement to dissolve partnership – amended assessment issued by Commissioner – allegation of avoidance by evasion – applicant's objection confined to assessment – concessions by Commissioner – decision varied

Administrative Appeals Tribunal Act 1975 (Cth) s 42A(2)(a), s 43 and s 43(2A)
Income Tax Assessment Act 1936 (Cth) s 170(2) and s 170(2)(a)

Taxation Administration Act 1953 (Cth) s 14ZZK and s 14ZZK(a)

Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Denver Chemical Manufacturing Co v The Commissioner of Taxation(NSW) (1949) 79 CLR 296

Toll (FGCT) Pty Ltd and Alphapharm Pty Ltd and Others (2004) 219 CLR 165

REASONS FOR DECISION

17 December 2008   Mr John Handley, Senior Member

1.      At the conclusion of the hearing on 11 November 2008 in applications VT200300132 – 137, VT200400110, VT200400133 – 140 and 2007/4364, I delivered oral reasons for decision.  The decision then made reflected the decision proposed by the respondent.  The decision then made is as follows:

1.The objection decision made by the Respondent on the Applicant's objection in respect of the assessment for the year ended 30 June 1991 is affirmed.

2.The objection decision made by the Respondent on the Applicant's objections in respect of the assessments for the years ended 30 June 1992 and 30 June 1994 to 30 June 1997 (inclusive) are varied as follows:

2.1      The taxable income for the year ended 30 June 1992 is reduced to $40,449;

2.2The additional tax for incorrect return for the year ended 30 June 1992 is remitted to nil;

2.3      The taxable income for the year ended 30 June 1994 is reduced to $19,022;

2.4The additional tax for late return for the year ended 30 June 1994 is remitted to nil.

2.5The taxable income for the year ended 30 June 1995 is reduced to nil and there be a carry forward loss under section 80 of the Income Tax Assessment Act 1936 of $460;

2.6The additional tax for late return for the year ended 30 June 1995 is remitted to nil;

2.7The taxable income for the year ended 30 June 1996 is reduced to nil and there be a carry forward loss under section 80 of the Income Tax Assessment Act 1936 of $40,168;

2.8The additional tax for late return for the year ended 30 June 1996 is remitted to nil;

2.9The taxable income for the year ended 30 June 1997 is reduced to $3,514; and

2.10The additional tax for late return for the year ended 30 June 1997 is remitted to nil.

3.The objection decision made by the Respondent on the Applicant's objection in respect of the assessment for the year ended 30 June 1993 is varied to the extent that the taxable income for the year ended 30 June 1993 is reduced to $138,027.

2. On 2 December 2008 the solicitors for the respondent, despite the decision made, have requested written reasons for that decision. The reasons for the request are not known. I am obliged pursuant to s 43(2A) of the Administrative Appeals Tribunal Act 1975 (the Act) to provide a statement in writing of the reasons for the decision within 28 days of the request being made.  The reasons for the decision are recorded below.

3.      These applications have a long history with the Tribunal having commenced in 2003.  The quantity of documents generated throughout the pre hearing stages, which have comprised multiple conferences and direction hearings, occupy three archive boxes.  Five days were reserved for the hearing of these applications.  The applicant did not appear.

4.      On the first day, extensive enquiries were made to locate the applicant in the Tribunal precinct and by telephone.  Those attempts being unsuccessful, it was then decided to communicate with him by email.  He was then advised that the hearing would be reconvened on the following day, namely 11 November 2008.  He was also put on notice that failure then to appear may cause his application to be dismissed (refer s 42A(2)(a) of the Act).

5.      The applicant did not appear on 11 November however the respondent did not apply to have the application dismissed.  That submission was made because in the week prior to the first day of the hearing, the respondent indicated (in writing) to the applicant that it was prepared to make a number of concessions which it did not believe it could honour, as a matter of law, if the application was dismissed.  The respondent submitted that the respondent would be obliged to give effect to the amended assessments being the subject of these reviews (in the event of dismissal) but because it was contended that the concessions notified to the applicant should stand, a review should occur (although in the absence of the applicant) in order to give effect to a decision under s 43 of the Act.  (Put another way, a dismissal under s 42A(2)(a) would permit the respondent to recover the (greater) amounts originally assessed and it would therefore breach its prior undertakings to the applicant).  Accordingly at the conclusion of the review the respondent indicated that it would submit, as it did, that the concessions that it made to the applicant should be embodied in the decision that the Tribunal would be urged to make.

6.      As indicated above the decision that I made adopted the decision proposed by the respondent and was consistent with the concessions notified to the applicant by the respondent solicitors.  That letter and the schedule attached to it incorporating the amounts conceded by the respondent was received as exhibit R6.  The concessions comprised variations on the findings as to taxable income for a number of years (which were a reduction from the amounts decided when the assessments were made), remission to nil of additional tax for incorrect returns and late lodgement and allowing carry forward losses for two of the years in issue.

7.      As will be referred to later the principal year of income in issue was 1993 and a concession was made with respect to that year by varying the amount of taxable income by reducing it from the sum of $146,279 to the sum of $138,027.  For reasons which will also become apparent later it was over that year that the respondent sought a finding that there had been an avoidance of tax by evasion.

the review

8.      The principal contention of the respondent was that within the years ending 30 June 1991 to 30 June 1997 the applicant was a member of a partnership.  It was contended that the partnership earned income and the applicant's share of the net income of the partnership should be included in his assessable income.  Prior to 30 June 1993 there were three members of the partnership and the calculations made by the respondent have had regard to one‑third of the net income of the partnership.  From 1 July 1994 to 30 June 1997 there were four members of the partnership and the net income of the applicant has been assessed at 25 percent of the partnership income.  The calculations made by the respondent giving rise to the amounts that it conceded (refer above) arise out of a report completed by Mr George Kompos an Executive Director of Ferrier Hodson, Accountants, who forensically analysed an enormous collection of documents comprising bank statements, passbooks, invoices, receipts, cheques, correspondence, statements and miscellaneous other documents.  Distinctions were made by him with respect to payments which were of an income capital or private or domestic nature and enquiries and searches were made by him in order to seek the origin or destination of monies.  Mr Kompos completed an Affidavit and annexed to it a number of reports indicating the extent of his analysis and the methodologies adopted by him in reaching his conclusions.

9.      The reasons for the decision made by me are found at pages 37 – 41 inclusive of the Transcript.  I do not intend to depart from any matter then decided.  However, the provision of written reasons gives the opportunity to reflect on the matters then decided and have regard in a more orderly and thorough manner to the submissions that I heard and to the documents that I read which in combination gave rise to the decision ultimately made.

10.     The respondent knew that the applicant contended (refer paragraph 18 of his Statement of Facts and Contentions) that he resigned from the partnership in December 1990.  The applicant in that document also referred to other events and documents which he said supported his contention of resignation at December 1990.  The document also records that the only income received until November 1997 was in the form of small amounts of occasional pocket money, social security pension, $40,705 in the year ending 30 June 1993 from the sale of vegetables and a resettlement grant in July 1995 of $45,000 (refer Statement of Facts and Contentions at paragraph 40).

11.     The respondent was adamant that at all relevant times the applicant was a partner initially with his parents and later with his parents and with his brother and in that partnership earned substantial sums of income which were not declared.

12.     Reference was made to a resumé completed by the applicant found at T158 (exhibit R3) where he recorded under the subheading Work History that he was self employed between 1989 and 1998.  In another document also found at T158 entitled History Of Events the applicant recorded that at 4 March 1998 an agreement signed dissolving partnership.  Later in the document the applicant recorded that he had been led to believe by his previous partners that he would be paid out.  However, he and his wife were suffering from severe depression and anxiety as we could see the wealth I had created over the years put in jeopardy and our future.

13.     Of significance however is an agreement entered into by the applicant with his parents and brother on 4 March 1998 (T4, p43A).  The agreement is the recorded basis on which the applicant retired from the partnership.  Ms Harding who appeared on behalf of the respondent submitted, and I agree, that the agreement is contemporaneous proof that during the years in issue the applicant regarded himself as a partner with his parents and with his brother.

14.     The document records that the business constituting the partnership would continue by the applicant's parents and his brothers.  They are described as the continuing partners.  The applicant, who was retiring from the partnership, is described as the retiring partner.  In the document which comprises three and a half typed A4 pages the word partnership appears on two occasions, the words continuing partner appear on 20 occasions and the words retiring partner appear on 25 occasions.  The agreement contains the usual and anticipated clauses with respect to liabilities, indemnities, restraint of trade, confidentiality and retention of profits.  It is of interest that the applicant is recorded by another name to which he became known following an application by him to register a change of name (refer later).

15.     The document was completed by a solicitor who witnessed the signature of all four persons.  The document is recorded in clear and unambiguous terms and the intention of all four persons is obvious.  The authorities advanced by Ms Harding to support the manner in which the document should be interpreted were sound (refer Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352; Toll (FGCT) Pty Ltd and Alphapharm Pty Ltd and Others (2004) 219 CLR 165 at 177 commencing at [35]).

16.     The agreement provided for a payment to the applicant by his parents and his brothers, the continuing partners, in the sum of $125,000.  It would appear from a number of other documents to which I was taken that only $25,000 was paid under the agreement.  The balance was the subject of proceedings issued out of the County Court in Victoria for which the applicant later received judgement.

17.     The business in which the applicant held an interest as a partner was the manufacture, initially, of polystyrene boxes used by fruit and vegetable growers.  Later the business manufactured corrugated cardboard boxes.  The applicant and his family had previously been orchardists in rural Victoria.  Ms Harding submitted that a number of activities undertaken by members of the partnership were intended to confuse others especially creditors.  Her submissions with references to documents on this issue is found at pages 14 – 26 inclusive of the Transcript.

18.     Those activities may be summarised as follows:

·Multiple dealings over two properties involving transfer, registration of caveats, transfer by gift to and from members of the partnership.  On one occasion one of the properties was transferred to an aunt and on another occasion a transfer was effected in the maiden name of the applicant's mother.

·The business traded from time to time under a number of different business names some of which were registered and some which had lapsed.

·The applicant represented himself throughout the relevant years by three different names.  He used his birth name, the name which was registered on 20 February 1991 (T29, p105) and by another name, the nomenclature consistent with monarchy after his family and their properties purported to secede from Australia and exist under another name.

·The successful applications for multiple bank loans and for finance from rural incentive schemes sponsored by government by the applicant using a different name on each application.  On one occasion a bank account was opened in the name of the State which purported to have seceded.  That application was signed by the applicant using the name of the monarch which he had adopted.

·In January 1994 the applicant's father approached an accountant with instructions to complete income tax returns on behalf of the applicant and the applicant's brother for the 1993 year.  The accountant was instructed to record that the applicant and his brothers were fruit and vegetable growers and the income declared was from the sale of that produce.  The applicant was recorded as residing in a caravan park.

·In or about 1995 the applicant applied to the Department of Social Security for payment to him of carer pension with respect to his father.  The applicant represented that he was the carer of his father.  He also represented that his father lived in rented accommodation by reason of a bank previously taking possession of a family farm.  The applicant married in July 1997 and left the family property.  Carer pension was paid to him until February 1998.

19.     The above events satisfied me that the applicant either alone or in concert with his partners engaged in a pattern of conduct during the relevant years not only to confuse or hide assets from creditors but to avoid or attempt to shield enquiry from the income earned by the partnership.  A number of the bank loans were taken out by the applicant in order to undertake capital expenditure over the business.  He also leased two semi‑trailers in or about 1996 for use in the business, which satisfied me that he was a member of a partnership.  Throughout the years in issue the applicant signed cheques on behalf of the partnership and did so as a partner.  He was also engaged intimately in the construction and expansion of the business from time to time and liaised with contractors and tradesmen.  He travelled interstate and overseas to observe the operation of machinery which was ultimately acquired.  His conduct in my view throughout the years in issue is not consistent with a person who was paid small amounts of occasional pocket money but was at all relevant times a partner in the business which, on the Affidavit of Mr Kompos, earned considerable amounts of money.  I am also satisfied on the documents made available by the Department of Social Security that the applicant received payments of social security benefits.  These findings are consistent with the findings also made and delivered orally at the hearing (refer transcript p39).

20.     At paragraph 26 of his Statement of Facts and Contentions the applicant acknowledged that he signed cheques and deposited monies but at the request of his father and in his capacity as an employee.  I am satisfied, on the material read and the submissions made that this explanation is consistent with the applicant, in fact, being a member of the partnership.

assessment

21.     The 1993 year of income has excited the greatest degree of interest in this review because in that year the respondent asserted that there had been an avoidance of tax due to fraud or evasion which would permit it to impose a penalty.

22. It was submitted that s 170(2) of the Income Tax Assessment Act 1936 permits the Commissioner, if he is satisfied that there has been an avoidance of tax to amend the assessment, at any time, if the avoidance is due to fraud or evasion. The remaining part of s 170(2) permits an amended assessment within four years of the making of the original assessment. It may therefore be seen by this section that if there has been an avoidance of tax due to fraud or evasion, the Commissioner may amend the assessment at any time, that is, without any limitation period.

23. Accordingly, the amended assessment in issue for the 1993 year having been made on 25 August 2006 was not subject to any limitation of time and pursuant to s 170(2)(a) it is a valid assessment if fraud or evasion can be established in the 1993 year of income.

24. Section 14ZZK of the Taxation Administration Act 1953 provides that upon review of a reviewable objection decision, an applicant is limited to the grounds stated in his objection (unless the AAT otherwise orders) and the applicant has the burden of proving that the taxation decision, being the assessment in issue is excessive or should not have been made or should have been made differently.

25.     The applicant failed to appear at the hearing of this review.  I am satisfied that he was aware of the days upon which the matter was listed and no explanation has been given by him subsequently for his failure to attend.  The applicant has been served with a copy of the decision made by me on 11 November 2008 and no application has been made by him either here or elsewhere to disturb that decision.

26.     In the absence therefore of the applicant's evidence and being satisfied particularly with the contents of the Affidavit of Mr Kompos, two conclusions are permitted namely:

(i)The applicant has not satisfied the burden, which he had, to prove that the assessment was excessive; and

(ii)       The assessment in my view was not excessive. 

27. Additionally I should add to complete this part that I did not make any Order that the applicant was not limited to the grounds of his objection (refer s14ZZK(a). It therefore follows that the applicant is confined to the grounds of his objection. The amended assessment over which he objected included references to the quantum of the taxable income, the tax payable, the medicare levy and significantly a payment of penalty and interest (T4). The objection by the applicant was to the assessment of the taxable income only in the 1993 year (T5 p2). There is accordingly no review with respect to the amount calculated as penalty.

28.     Accordingly the review with respect to the 1993 year concerns the assessment of taxable income.  The quantum of penalty and interest as raised by the respondent is not under review in these proceedings.

29.     Because more than four years has elapsed between the 1993 year and the objection assessment in 2006 the respondent can only be permitted to pursue the amended assessment if he can establish fraud or evasion.  The respondent chose the latter and relied on the decision of the Commissioner of Taxation for the Commonwealth of Australiav Dalco (1990) 168 CLR 614. At page 621 Brennan J gave support to the submissions of the respondent in the present application. His Honour indicated that the burden to prove that an assessment is excessive rests with the taxpayer, indeed His Honour decided that that burden would not necessarily be discharged even if it were shown that there was an error by the Commissioner in the decision made concerning the quantum of the assessment. At page 624 His Honour referred to the assessment made by the Commissioner (in that case) as being the bona fide judgement as to the taxable income of the taxpayer.

30.     As a fact I am satisfied that the amount assessed in the present case, it being consistent with the findings made by Mr Kompos, represent the bona fide judgement of the Commissioner and should be preferred.

31.     With respect to the issue of evasion the respondent relied on a judgement of Dixon J in Denver Chemical Manufacturing Co v The Commissioner of Taxation(NSW) (1949) 79 CLR 296. At 313 His Honour examined the meaning of the word evasion as it appeared in preceding legislation.  I am not satisfied that there is any material distinction between the previous Act and the current legislation.  His Honour concluded:

The context of s 210(2) shows that it means more than avoid and also means more than a mere withholding of information or the mere furnishing of misleading information.  It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated.  An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede is conduct which if the result is to avoid tax would justify finding evasion.

32.     Having regard to s 170, and to the above decision, and being satisfied that at all relevant times the applicant was in partnership with his parents and in latter years with his brother, and especially in relation to the 1993 year by reason of the failure to declare income other than from the sales of fruit and vegetables, the conduct of the applicant has been blameworthy, he intended to withhold information (being the true state of his financial affairs) and he intended by that omission to avoid the payment of income tax.  Accordingly I am satisfied that there has been an avoidance of tax due to evasion.  This finding is consistent with the finding that was also made at the hearing (refer Transcript p40).

33.     I should add at this stage that subsequent to the delivery of Transcript it was drawn to my attention that an obvious error appears at line 30 on page 40 of the Transcript.  The word wasn't, is incorrectly recorded.  The word that should not have been recorded.  The word actually spoken by me, was the word was.  I have subsequently heard an audio recording of that part of the proceedings and I am satisfied that the word that I then uttered was the word was.  I have recently written to the Manager of Auscript Transcription Services and asked that the Transcript be amended.

34.     The Transcript at that part incorrectly records the decision that I then made and is indeed inconsistent with the decision that I made.  That is to say, the finding that I made of evasion was by reason of me being satisfied that there was an avoidance on the part of the applicant to meet his taxation liabilities.  I am reassured that I did not utter the word wasn't because if I did I am sure that Ms Harding would have (and should have) corrected me but rather her response to the finding that I made is found at line 37 on page 40.

conclusion

35. In all of the circumstances I am satisfied that the concessions made by the respondent have been properly made and the decision that I made at the conclusion of the hearing is a reflection of the concessions. The above statement of the reasons for the decision made on 11 November is delivered to meet the request by the respondent pursuant to s 43(2A) of the Administrative Appeals Tribunal Act 1975.

I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of:
Mr John Handley, Senior Member

Signed:         Grace Carney Personal Assistant

Date of Hearing  11 November 2008
Date of Oral Decision                11 November 2008
Date of Written Reasons          17 December 2008
Applicant  No Appearance
Counsel for the Respondent     Ms D Harding
Solicitor for the Respondent     Mr S Linden, Australian Government Solicitor