Confidential and Commissioner of Taxation - [2013] AATA 569

[2013] AATA 569

Division TAXATION APPEALS DIVISION

File Numbers

2011/2873 - 2011/2877

2011/2879 - 2011/2883

2011/2884 - 2011/2888

Re

Confidential

APPLICANTS

And

Commissioner of Taxation

RESPONDENT

DECISION

Tribunal
Egon Fice, Senior Member

Date 14 August 2013

Place Melbourne
The Tribunal affirms the three objection decisions made by the Commissioner of Taxation on 31 May 2011.
........[sgd Egon Fice]................................................................
Egon Fice, Senior Member
TAXATION – Income tax – GST shortfall – Income tax shortfall – Evasion – Penalty – Remission of Penalty – Burden of Proof – Discharging the Burden of Proof –Undisclosed income – T-Accounts – Asset Betterment Statements
PRACTICE & PROCEDURE – Credibility of witnesses – Expert Evidence
Legislation
Administrative Appeals Tribunal Act 1975 (Cth) s 33
Evidence Act 1995 (NSW)
Income Tax and Social Services Contribution Assessment Act 1936 – 1955 (Cth) s 170
Income Tax Assessment Act 1936 -1969 (Cth) s 190
Income Tax Assessment Act 1936 (Cth) ss 91, 166, 167, 170, 190, 226H
Income Tax Assessment Act 1997 (Cth) ss 8-1, 118-110, 995-1
Taxation Administration Act 1953 (Cth) ss 14ZZK, 284-75, 284-80, 284-85, 284-90, 284-220, 284-225, 298-20
Cases
Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588
Denver Chemical Manufacturing Company v The Commissioner of Taxation (New South Wales) (1949) 79 CLR 296
Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Hart v Commissioner of Taxation (2003) 131 FCR 203
Imperial Bottleshops Pty Ltd and Another v Federal Commissioner of Taxation (1991) 22 ATR 148
Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455
Kimche v Federal Commissioner of Taxation (2004) 57 ATR 28
Ma v Commissioner of Taxation (1992) 37 FCR 225
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Martin v Federal Commissioner of Taxation (1993) 27 ATR 282
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
Re Armirthalingam and Commissioner of Taxation [2012] AATA 449
Re Confidential and Commissioner of Taxation [2013] AATA 382
ReMynott and Commissioner of Taxation [2011] AATA 539
Tisdall v Webber (2011) 193 FCR 260
Vu v Commissioner of Taxation (2006) 63 ATR 341
W R Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198
Secondary Materials
Administrative Appeals Tribunal, Guidelines for Persons Giving Expert and Opinion Evidence (9 November 2011)
Miscellaneous Taxation Ruling MT 2008/1, Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
REASONS FOR DECISION
Egon Fice, Senior Member
14 August 2013

The husband (File no: 2011/2879-2883) and wife (File no: 2011/2873-2877), who are the applicants in this proceeding, conducted a business in partnership (File no: 2011/2884-2888). The Commissioner conducted a review of the taxation affairs of the partnership and the individual partners in September 2006. The Commissioner provided a final position paper for the partnership in respect of the review on 30 October 2009; and for the husband and wife, a revised position paper on 20 October 2009. The Commissioner issued a final audit report in respect of the partnership and the husband and wife on 11 December 2009 confirming additional tax liabilities for the income years 2002 – 2006 inclusive.
The Commissioner determined that:
(a)the partnership had a GST shortfall amount of $42,028 and imposed a penalty of $21,014 arising from the shortfalls;
(b)the husband had an income tax shortfall of $107,352 and imposed a penalty of $53,676; and
(c)the wife had an income tax shortfall of $104,552 and imposed a penalty of $52,276.
Notices of amended assessment issued to the partnership on 15 December 2009; to the wife on 17 December 2009; and to the husband on 22 December 2009.
The applicants lodged with the Commissioner objections to all of the assessments on 12 November 2010. On 31 May 2011 the Commissioner provided each of the applicants with a notice of objection decision (the objection decisions) and in each case, disallowed the objection in full. On 19 July 2011 the applicants lodged an application seeking review of the objection decisions by this Tribunal.
The questions which I am required to determine are:
(a)whether the husband and wife have discharged the onus of proving their true income in the 2002 – 2006 income years;
(b)if the answer to (a) is in the affirmative, whether the partnership GST assessment was correct;
(c)if the answer to (a) is in the negative, whether the Commissioner's penalty assessment was correct; and
(d)if the answer to (c) is in the affirmative, whether the penalty should be remitted.
ONUS OF PROOF
There was no dispute between the parties regarding the burden of proof imposed by s. 14ZZK of the Taxation Administration Act 1953 (the Administration Act). That section 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 that:
(i)if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive; or
(ii)if the taxation decision concerned is a franking assessment—the assessment is incorrect; or
(iii)in any other case—the taxation decision concerned should not have been made or should have been made differently.
While accepting that the applicant bears the onus of establishing that the assessments were excessive, Dr J Glover of counsel, who appeared on behalf of the applicants, referred to the decision of the High Court of Australia (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 631 where Toohey J said:
... A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment....
Dr Glover also referred to this passage by Brennan J at 621:
Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds had been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgement as to the amount of the assessment.
Brennan J referred to the manner in which a taxpayer can discharge the burden of proof. He said that it varies with the circumstances. His Honour said that if the Commissioner and taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it is sufficient for the taxpayer to show he is entitled to succeed on that point. However, in the absence of an agreement confining the issues for determination, his Honour said, at 624 – 625:
Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In Gauci v. Federal Commissioner of Taxation (44), Mason J. said:
“The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.”
That view, expressed in a dissenting judgment, now prevails: Macmine Pty. Ltd. v. Commissioner of Taxation (45); McCormack's Case (46).
Section 190(b) of the Income Tax Assessment Act 1936 -1969, to which Mason J referred in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, is similar to the burden of proof provisions now set out in s. 14ZZK of the Administration Act.
In Dalco’s case, Toohey J referred to the finding by Yeldham J at first instance where he referred to the taxpayer having had control and benefit of the monies included by the Commissioner in his assessable income. Toohey J said, at 633 – 634:
Although such "control and benefit" may not be conclusive proof of the taxpayer's liability, it does entail that the taxpayer do more than show that the Commissioner's assessment was made on a wrong basis.
That is not to say that, in such circumstances, the Commissioner's assessment is completely at large or that particulars of an assessment will not be ordered. If the Commissioner has simply plucked a figure "out of the air" (Reg. v. Deputy Commissioner of Taxation (W.A.); Ex parte Briggs (74)) or has proceeded "upon no intelligible basis" (Trautwein v. Federal Commissioner of Taxation (75)), the Commissioner may be in breach of his statutory duty to make an assessment from the information in his possession: see Bloemen (76). I express no view on that matter for this is not such a case; the assessments were reached after a long and detailed investigation into the taxpayer's affairs.
Like Dalco's case, the Commissioner in this matter issued default assessments to the applicants pursuant to s. 167 of the Income Tax Assessment Act 1936 (ITAA 1936). That section provides:
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 judgement income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.
Section 166 provides:
From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).
The Commissioner conducted an audit of the business carried on by the partnership after a preliminary examination indicated funds deposited into the family and business bank accounts significantly exceeded the income returned in the years in question. The auditor found source documents to be poorly maintained; sales invoice books had incomplete pages; pages were not completed sequentially; sales from different years were recorded in the same book; invoices were undated; there were large gaps between dates for consecutive invoices; and no reference was made to when amounts were banked. The auditor was unable to match deposits into the business account with the sales invoices provided. Because of the poor records, the auditor prepared T-Accounts for each of the years examined. The T-Accounts identified understated income in each year and that understatement was divided equally between husband and wife.
A T-Account is an indirect method of ascertaining the amount of taxable income earned during a period. According to the Commissioner, a T-Account allows the Commissioner to compare:
·the cash available at the beginning of a period plus cash received during the period; with
·cash expended during the period plus cash on hand at the end of that period.
According to the Commissioner, if the Australian Taxation Office (ATO) has been given full and accurate information, the two sides of the T-Account should balance. If the two sides do not balance, it is likely (subject to further enquiry) that there is undisclosed income.
The Commissioner also uses a technique referred to as an asset betterment statement to determine whether there has been undisclosed income. Under this technique the net worth of an entity or taxpayer at the end of each relevant year is compared with their net worth at the beginning of each of those years and an estimate of annual asset growth is obtained. Non-deductible expenditure (often in the form of estimates) is added to this estimate and the liabilities and exemptions are subtracted. A figure is then computed for total taxable income. The taxable income previously declared is then subtracted to leave a balance which is the outstanding taxable income.
Using the T-Account method, the auditor determined that both the husband and wife had understatements of taxable income for the income years 2002 - 2006. The Commissioner issued amended assessments to the wife on 17 December 2009 and to the husband on

22 December 2009. The Commissioner also issued notices of assessment and liability to pay penalty to both the husband and wife. The auditor also determined that the partnership had a substantial GST shortfall amount for the period between 1 July 2001 and 30 June 2006. The Commissioner issued notices of assessment and liability to pay penalty to the partnership on 15 December 2009.
In his opening submissions, Dr Glover outlined the way in which the applicants' case would be presented. He said it would be argued that the amended assessments were excessive for two reasons: the first, because of the magnitude of the Commissioner's errors; and the second, because the applicants' rival T-Accounts were preferable and they indicated the true taxable incomes of the applicants were significantly less than that calculated by the Commissioner. Dr Glover said that the errors were identified and explained in the statements of the wife and Mr David Mond, a Certified Practising Accountant, who had prepared rival T-Accounts and also Asset Betterment Statements. According to Dr Glover, even if the wife's evidence was disbelieved, the amended assessments would nevertheless be excessive. That was because Mr Mond's calculations independently corroborated the overestimations of income.
Mr N Evans of counsel, who appeared on behalf of the Commissioner, submitted that the applicants' case proceeded on fundamental misconceptions. One of those misconceptions was the taxpayers' understanding of what was required to discharge their burden of proving that the assessments were excessive.
Mr Evans submitted that the problem with the approach suggested by Dr Glover was that the Tribunal did not rely on the Commissioner's assessment. The Tribunal, standing in the shoes of the Commissioner, makes its own assessment regarding whether a tax assessment is excessive. In other words, the application was about proving what the correct taxable income was, rather than demonstrating that the Commissioner got it wrong. Furthermore, Mr Evans submitted that it did not follow that the applicants would prove what the taxable income was by applying the Commissioner's methodology. Their task was to prove what their taxable income was in fact.
What I propose to do at the outset is to examine whether, having regard to the legal requirements for discharging the onus of proof, Dr Glover's methodology is capable of proving that the taxpayers' assessment in this case was excessive. That involves dealing with Dr Glover's submissions regarding the claimed magnitude of the Commissioner's errors. I then propose to examine relevant parts of the T-Accounts and the Asset Betterment Statements prepared by Mr Mond in order to determine whether Dr Glover's methodology satisfies the taxpayers' obligation to prove, on the balance of probabilities, that their assessments were excessive.
DISCHARGING THE BURDEN OF PROOF
Dr Glover referred extensively to Dalco's case in aid of his submissions regarding the methodology which he proposed would establish that the applicants in this case had discharged their burden of proof. In the course of the hearing, and in the interlocutory decision (Re Confidential and Commissioner of Taxation [2013] AATA 382) which I handed down on 6 June 2013 following a request by the applicants to reopen the substantive hearing, I made mention of the fact that it appeared Dr Glover had selectively quoted passages from Dalco's case without regard to their context. I remain of that view.
The first thing which needs to be stated is the basis upon which Dalco's case came to the High Court. Brennan J explained this in the following way, at 618 – 619:
In the proceedings before Yeldham J., the taxpayer was able to show that the bases on which the Commissioner had proceeded in making the assessments and he sought to demonstrate that those bases were erroneous. In brief, he sought to show that the Commissioner had wrongly treated the income of companies or trusts which the taxpayer or his family company acquired or controlled as assessable income of the taxpayer. Yeldham J. Found that the taxpayer "completely disregarded corporate structures and entitlements or used them purely for convenience in the lending of money and the claiming of expenses" (23) and his Honour considered that in each of the years of income there was a derivation of income by the taxpayer that was dealt with at his direction with a disregard of corporate rights. His Honour thought that much of the evidence of the taxpayer was unsatisfactory,…
The majority of the Full Court of the Federal Court noted that the "evidence before the Supreme Court disclosed the existence and some of the activities of numerous trusts and corporations which were associated with the taxpayer in either or both a legal and practical sense" (26), but their Honours held that the Commissioner had proceeded on a wrong basis in making the assessments.…
The divergence of views reveals the question for determination by this Court: In proceedings on appeal to a court pursuant to Div. 2 of Pt V of the Act against an assessment made under s. 167(b), does the taxpayer discharge the burden of proving that the assessment is excessive where (a) he does not prove that the amount assessed as his taxable income in fact exceeds his taxable income, but (b) he shows that the Commissioner formed a judgement as to the amount of his taxable income on a wrong basis?
The decision made by the Commissioner in Dalco's case was a default assessment made under s. 167 of ITAA 1936. Such a decision may be based on the Commissioner's judgement regarding the amount on which tax ought to be levied. The Commissioner may issue a default assessment whether or not the taxpayer has lodged income tax returns. It becomes the taxpayer's taxable income for the purpose of s. 166. That is despite the fact that, as Brennan J said at 619 – 620:
That amount may not be in truth the taxpayer's taxable income for a particular income year and it may not be so regarded by the Commissioner (as in Trautwein v Federal Commissioner of Taxation (29)) but, for the purpose of s. 166, that amount is the taxpayer's taxable income for the income year to which the assessment relates unless it is shown on appeal from, or on review of, the assessment that the amount of the assessment is wrong: Henderson v Federal Commissioner of Taxation (30).
Mr Evans objected to Mr Mond's witness statement and rival T-Accounts and Asset Betterment Statements being admitted into evidence. In the course of submissions made by Dr Glover regarding that objection, he referred to Dalco's case and said:
It's about the bottom line, it's – that's a way of proving it. Now if you look at Dalco's case and other cases they took (sic – talk) about the different options which are available to a taxpayer and how you prove an assessment is excessive; and one way you can prove an assessment is excessive is to prove that it’s made up of errors.

In his closing submissions, Dr Glover referred to what Brennan J said in Dalco's case which I have quoted above at [8]. He then said:
Which implicitly is saying, sir, that one of the ways is to show that the Commissioner has made an error.
Despite my suggestions to Dr Glover that his understanding of what Brennan J said at [8] was taken out of context, Dr Glover insisted that the use by Brennan J of the words not necessarily must mean that his Honour adverted to the possibility that a taxpayer could discharge the burden by showing an assessment to be excessive by pointing to errors of the Commissioner. The problem with Dr Glover's understanding of the expression used by Brennan J becomes immediately apparent when one reads on in that judgement where his Honour said, at 625:
The majority of the Full Federal Court in the present case treated the error which they held to infect the Commissioner's assessment of the amount of the taxpayer's taxable income as concluding the question whether that amount was excessive. It did not. If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessed taxable income an amount which, on those facts, ought not have to have been included. But where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed.… Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.
While Dr Glover was undoubtedly correct in suggesting that the use of the words not necessarily infers that an error by the Commissioner may result in his assessment being found to be excessive, his Honour plainly used those words in the context of a case where all the material facts were known and the only issue before the Court or Tribunal was the application of the law to those facts. That is plainly not the case in this matter. In this case, much of the factual material presented at the hearing was in dispute.
The Commissioner asserted that there was substantial income which had not been disclosed by the applicants in their income tax returns in the years in question. The applicants denied that was the case. Although the wife, in her evidence, accepted that she held approximately $120,000 in cash at home in about 2003, and that money was subsequently paid as a deposit on a house located in Ivanhoe which the applicant purchased, the only explanation for holding that money in cash was that's our tradition.
In cross-examination the wife was asked how the $120,000 amount said to have been used as a deposit on the Ivanhoe house purchased on 2 June 2003 in fact was paid. Her response was: I maybe took it to the bank or something. I can't remember. When further pressed about her answer, the wife said she could not remember whether it went into a bank account. In the course of further questioning, the wife gave some very confusing answers about how much money she in fact had at home in cash because she said she had received additional moneys from her brother, being a payment for the sale of the family home in Sydney. She said that at one stage there was $170,000 in cash at home. Despite that, she was unable to recall the precise amount which she took to pay as a deposit on the Ivanhoe house even though she suggested she took it with her in a bag.
The position paper prepared by the ATO auditor dated 29 October 2009 states that the taxpayers contended they had $120,000 accumulated over a number of years prior to the audit which was held as cash on hand at the beginning of the audit period, 1 July 2001. The report then stated: They had then deposited these funds into bank accounts in the 2003 income year. The auditor rejected this contention because:
(a)the husband and wife had previously advised that they had not retained large amounts of cash on hand during the audit period;
(b)funds were borrowed in order to purchase the investment property on 29 September 1998, indicating that at that time there was no surplus cash amounts;
(c)the tax agent (Mr Mond) argued in correspondence dated 18 September 2008 that the husband and wife distrusted the banking system but that statement was inconsistent with their dealings with the bank because as at 30 June 2002 they operated three separate bank accounts (business and private) with an aggregate balance of $271,627;
(d)the claim was inconsistent with an affidavit made by the husband which revealed an investment strategy which he had in order to earn good interest; and
(e)the reported taxable income of the husband and wife for the income years prior to the audit period did not support their ability to have accumulated $120,000 in that period.
In her written statement of evidence made on 24 April 2012 the wife attempted to explain that what she referred to as occasional cash contributions from external sources or cash previously saved, had been used in the partnership business but not recorded. She referred to the fact that in 1994 her husband's sister purchased his share of his father’s property in Lebanon which was left to him when his father died. She testified that the sale price was $50,000 and that her husband's sister gave him his first payment in 1994 and his final payment in 2004. The wife also testified that after her grandmother died in 1998, she was given an inheritance of $10,000 by her uncle in April 2005. In 2001 she said she sold her quarter share of the house left by her parents in New South Wales to her brother for $85,000. She said she was paid in five instalments, by a cheque for $30,000 in 2001; a cash payment of $9000 in 2001; a cash payment of $12,000 in 2002; a cash payment of $24,000 in 2003; and a cash payment of $10,000 in 2004.
I had in evidence attached to Mr Mond's statement made on 7 February 2013 the translation of a letter said to have been provided by the husband's sister. That letter purports to account for the $50,000 payment made in five instalments of $10,000 in 1995, 1997, 1999, 2001 and 2004.
I also had in evidence a letter dated 7 April 2005 addressed to: To whom it may concern. The letter purports to be written by one of the wife's brothers (Michel) stating that he owed the wife the sum of $85,000 in 2001 being her share of the New South Wales property. The wife's brother also purported to have paid the wife those monies in the five instalments which I have referred to above. However, in her witness statement, the wife said that she sold her quarter share in that property to her brother Tony. When asked about this in cross-examination the wife's responses were very confusing. She said: Michel and Tony were always partners in business and my – like, they both – my brother had a house. He bought another house next door and, like, it was a share between him and Tony. And then the house – my family's home where my mum lives was shared by me, two sisters and Michel. So they decided that Tony would buy the share of the family home, our shares, and Michel to keep the one next to him or something. So they would pay us, each sister, her share, and then Tony to keep the house and Michel to keep whatever house he bought after and stuff. I did not have in evidence a contract of sale for this property or any other document evidencing transfer of ownership.
In cross-examination the wife was also asked about the $10,000 inheritance. The wife said that this money was held by her uncle because he needed the money. He gave it to her after a few years, in 2005. The wife said she did not see a Will nor was one produced the purposes of this hearing.
The controversial cash receipts to which I have referred above are only a part of the dispute between the applicants and the Commissioner. The auditor found that deposits to bank accounts grossly exceeded business income returned in both the partnership activity statements and the partnership tax return.
In my opinion, it is plain from the factual matters remaining in dispute between the parties that all of the material facts in this matter are not known. That is why both parties utilised the T-Accounts methodology in order to estimate the income of the applicants. Therefore, as Brennan J said in Dalco's case, where the taxpayer has not proved that his actual taxable income was less than the amount assessed, I cannot find that the amount assessed is wrong simply on the basis of pointing to errors made by the Commissioner.
In Dalco's case, Brennan J also referred to an observation made by Barwick CJ in Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214 which he said may have supported a contrary view. Brennan J said, at 626:
It may be that his Honour had in mind a case where all the material facts were known and the only question was the legal complexion to be attributed to them: cf. his observations in Henderson v Federal Commissioner of Taxation (50). But if his Honour did not intend the cited passage to be so understood, I must respectfully disagree with it. Since McAndrew's Case (51) it has been generally accepted that "excessive" refers to the amount of the assessment, not to any kind authorized step in the process of its calculation.
In this case, as the taxpayer failed to discharge the burden of proving that his taxable income was in truth less than the amount assessed, his appeals were rightly dismissed by Yeldham J.
In his closing submissions Dr Glover also referred to the statement made by Toohey J in Dalco's case where he said, at 631:
I agree with Wilcox J. in the Federal Court that "the task for the taxpayer, upon an appeal or a review under Pt V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer". As his Honour a points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. He or she may do so by pointing to some error of computation, as suggested by McAndrew, by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.
Dr Glover once again referred to the words not necessarily and submitted that use of that expression was significant. However, and with respect to Dr Glover, one needs to look at the context in which the above statement was made by Toohey J. In the preceding paragraph, he referred to McAndrew's case in which Dixon CJ and McTiernan and Webb JJ… had no doubt that "'excessive' relates to the amount of the substantive liability". Toohey J then said, regarding the power to amend an assessment referred to in s. 170 (2), which was the subject of McAndrew's case:
It held that, once a regular notice of assessment was produced, the burden was on the taxpayer to show that he had made a full and true disclosure of all the material facts necessary for his assessment or that there had not been an avoidance of tax (64).
What his Honour was saying was no different to that which Brennan J said when using the expression not necessarily. In other words, showing non-compliance with statutory conditions precedent to the imposition of a liability may be sufficient. However, his Honour noted that the taxpayer's case was not that in raising the assessments, the Commissioner failed to comply with any relevant statutory condition precedent. His complaint was simply that the amounts of taxable income in the assessments were excessive. His Honour then concluded, at page 633 – 634:
The same may be said of the present case, concerning as it does assessments under s. 167 of the Act. But more significant is the finding by Yeldham J. (73) that the taxpayer "[a]t the very least" had control and benefit of the moneys included by the Commissioner in his assessable income. Although such "control and benefit" may not be conclusive proof of the taxpayer's liability, it does entail that the taxpayer do more than show that the Commissioner's assessment was made on a wrong basis.…
For this taxpayer to demonstrate that in some respects, indeed it may be in a number of respects, the Commissioner erred in the way in which he attributed income to the taxpayer or otherwise dealt with the material available to him does not prove that an assessment was excessive. It does not prove that the taxable income of the taxpayer was less than the amount of taxable income shown in any of the assessments. It was necessary for the taxpayer to make good the proposition that his income was less; this he failed to do in respect of any of the assessments.
In his written submissions Dr Glover said that a taxpayer disputing T-Accounts or a Betterment Statement will usually be taken at his or her word as long as the explanation is reasonable and not otherwise undermined. Furthermore, corroboration was not absolutely essential. He then submitted that an evidentiary or tactical burden arises and is placed on the Commissioner to show that the taxpayers' account of their financial affairs is wrong. He said that unless the Commissioner goes into evidence and successfully challenges and discredits the taxpayers' account, the Commissioner will lose the issue to which the reasonable explanation relates and the overall burden of proof which the taxpayers bear will be, to that degree, discharged. With respect to Dr Glover, I cannot agree with that submission.
It appears that Dr Glover's submission relies on what was said by Burchett J in Ma v Commissioner of Taxation (1992) 37 FCR 225. The Commissioner’s assessment in that case was made using a Betterment Statement because Mr Ma, who apparently gambled heavily on racehorses, disclosed that more money had been paid into his bank accounts then was shown in his income tax returns. Mr Ma gave evidence that he would withdraw money to place cash bets at the racecourse and subsequently redeposit the sum resulting from his gains and losses. His Honour said, at 230:
The decision must take account of the onus under s 190(b). But if a taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spends his time, and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved. Any other view would introduce a degree of arbitrariness into liability for tax.
Deputy President S A Forgie in Armirthalingam and Commissioner of Taxation [2012] AATA 449 referred to Burchett J's decision in Ma and said, at [117]:
After considering the authorities such as McCormack and Gauci, his Honour's statement might give rise to a suggestion that the burden of proof shifts from the taxpayer to the Commissioner once that taxpayer has made an assertion and given an explanation of the sources of income. To do so would be contrary to s 14ZZK of the TA Act. Justice Burchett cannot have intended himself to be understood in that way. Instead, I respectfully suggest that he intended that a decision-maker should have regard to all of the evidentiary material, including the taxpayer's evidence, before deciding whether the burden of proof has been discharged. That evidence is to be assessed and findings of fact made.
Respectfully, I agree with what Deputy President Forgie said in Armirthalingam.
There are two further decisions which I should briefly mention in respect of discharging the onus of proof. The first is the decision made by Davies J in Martin v Federal Commissioner of Taxation (1993) 27 ATR 282 where his Honour said, after reviewing the decision in Dalco and some earlier decisions, at 285:
It follows that the task of the court on an appeal from a decision on an objection is to determine whether the taxpayer has satisfied the burden of proof of showing that the amount of taxable income assessed is excessive, a burden which the taxpayer cannot dispel merely by showing that there was an error in the assessment. The taxpayer must go on to establish what is the amount which should be substituted therefore.
Ryan J, in Kimche v Federal Commissioner of Taxation (2004) 57 ATR 28 referred to Ma and Martin when setting out the principles applicable to discharging the onus of proof. His Honour said, at 37:
If it is established that a payment was received in a particular year of income, the onus is on the taxpayer to establish, on the balance of probabilities, circumstances which deprive that receipt of the character of income, for example, because it was a repayment of a loan or other capital advance or by way of gift. If the taxpayer fails in respect of a particular receipt to discharge that onus which is imposed by s 14ZZO(5) of the TAA set out at [26] above, then the amount of that receipt remains assessable to tax.
In my opinion, Dr Glover's submission that the applicants could prove that the assessment was excessive by pointing to the magnitude of the errors made by the Commissioner in his T-Accounts is misconceived. This is essentially because he relied on the statements made by Brennan and Toohey JJ in Dalco's case that the burden which rests on the taxpayer to prove an assessment is excessive is not necessarily discharged by showing an error by the Commissioner informing a judgement as to the amount of the assessment. Dr Glover submitted that the use of the expression not necessarily indicated that it may be possible to discharge the burden of proof by simply showing an error by the Commissioner. However, the context in which this expression appears in that case is that the Full Court of the Federal Court held that the Commissioner had proceeded on a wrong basis (ie the taxpayer having had control and benefit of monies) in making the assessments. In other words, the assessment was not permitted by law.
In fact, it was not Mr Dalco's case before the High Court that he had demonstrated to the judge at first instance (Yeldham J) that his taxable income for the relevant years was less than the assessments made by the Commissioner. That is the reason why Toohey J said that even if Mr Dalco was able to demonstrate the errors he claimed were made by the Commissioner, that alone did not prove that the assessment was excessive. It was necessary for him to prove that his income was less than that claimed by the Commissioner. Brennan J explained that where all the material facts were known and the only issue was the legal complexion of those facts, the taxpayer would succeed if he or she were able to establish that the Commissioner incorrectly included in the taxpayer's assessable income an amount which should not have been included. However, the amount of the assessment might not be excessive in fact, even though the reasons which led to the assessment were erroneous.
Clearly, all the material facts in this case are not known. Accordingly, I find that simply demonstrating by evidence that the Commissioner has made significant errors in his T-Accounts does not, by itself, prove on the balance of probabilities that the amount assessed by the Commissioner is wrong. The applicants in this case must go further and prove that the amount of the assessment is greater than the taxable income on which tax ought to have been levied. In fact, as Hill J pointed out in Imperial Bottleshops Pty Ltd and Another v Federal Commissioner of Taxation (1991) 22 ATR 148 at 155:
A taxpayer challenging an assessment made under s 167 of the Act (sometimes referred to as a default assessment) bears the onus of proof (s 190 of the Act) to show not only that the assessment is wrong but also what the true taxable income is. It is not sufficient to merely show that the assessment is in error, thereby leaving a "blank": Trautwein v FCT (No 1) (1936) 56 CLR 63; FCT v Dalco (1990) 20 ATR 1370; 90 ALR 341; 64 ALJR 166.

The issue which then remains is whether the taxpayers in this case are able to do that through rival T-Accounts and Asset Betterment Statements.
PROOF OF THE TRUE TAXABLE INCOME OF THE TAXPAYERS
The taxpayers in this application relied essentially on the T-Accounts prepared by Mr Mond in order to establish the true taxable income for the years in question. Mr Mond was put forward as an expert witness. In his statement of evidence dated 7 February 2013 Mr Mond explained his qualifications which included a Bachelor of Economics degree with majors in accounting and taxation. He is a Fellow Certified Practising Accountant with tax specialist membership as well as a Fellow of the Taxation Institute of Australia. He was employed by the ATO for some 10 years between 1974 and 1984 and his role included preparing T-Accounts and Asset Betterment Statements. After leaving the ATO he established a public accountancy practice.
Given Mr Mond's academic qualifications and specialised practice in taxation matters, I have no difficulty in accepting him as an expert in this field. While Mr Evans did not disagree with Mr Mond's expertise, he nevertheless objected to his evidence being admitted. That objection was based essentially on the grounds of relevancy. In essence, as I understood Mr Evans, the T-Accounts and Asset Betterment Statements prepared by Mr Mond represent his opinion about the way in which those documents should have been prepared. That opinion was based on assumptions which he has made about affairs of the applicants where there was no evidence supporting those assumptions or they had not been proven.
I also identified another possible problem with Mr Mond purporting to give expert opinion evidence when he informed me that his firm prepared the 2005 and 2006 income tax returns and that he had been retained by the applicants to assist them in relation to the audit being performed by the ATO. In the course of assisting the applicants, Mr Mond said he had meetings with the number of auditors and an Assistant Commissioner at the ATO. He had lodged a complaint about what had occurred in this matter with the ATO. He also acted for the applicants in drafting the objection to the assessments in question. When Mr Evans asked Mr Mond in cross-examination whether one of the purposes of his evidence was to give his opinion as to what the taxable income of the applicants ought to be for the periods 2002 – 2006, Mr Mond responded: I’m not seeking to give my opinion about it. I'm seeking to establish the true taxable income based on all the information available to me. In my opinion, the evidence clearly establishes that Mr Mond was not an independent expert, but rather an advocate for the applicants.
Although Dr Glover indicated that he did not believe this should cause concern, respectfully, I disagree. The independence or rather the lack of it, of witnesses purporting to give opinion evidence as experts has long been the subject of concern by the courts. Heydon J in Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 described the problem in this way, at 609 – 611:
First, for generations judges have complained about partiality of expert opinion witnesses. In 1843 Lord Campbell (62), in 1873 Sir George Jessel MR (63), and in 1963 Walsh J (64) lamented their "bias". Indeed many litigation lawyers can doubtless recall instances of experts who say one thing in one case and a contradictory thing in another, each time to the supposed advantage of the party paying them.… In 1935 Lord Tomlin complained of the propensity of experts to offer opinions on matters which are questions for the court (67) – or, as Lord Justice Auld said more recently, to give opinion evidence "masquerading as expert evidence on or very close to the factual decision that it is for the court to make" (68). In 1986 Judge Posner complained of expert opinion which (69):
"was the testimony either of a crank or, what is more likely, of a man who was making a career out of testifying for plaintiffs in automobile accident cases in which a door may have opened; at the time of the trial he was involved in 10 such cases. His testimony illustrates the age-old problem of expert witnesses who are 'often the mere paid advocates or partisans of those who employ and pay them, as much so as the attorneys who conduct the suit. There is hardly anything, not palpably absurd on its face, that cannot now be proved by some so-called "experts"."'
In 1994 he said (70):
"Many experts are willing for a generous (and sometimes for a modest) fee to bend their science in the direction from which their fee is coming. The constraints that the market in consultant services for lawyers places on this sort of behaviour are weak… The judicial constraints on tendentious expert testimony are inherently weak because judges (and even more so juries…) lack training or experience in the relevant fields of expert knowledge."…
The tendency of experts to dominate proceedings creates numerous other perils for the integrity of the trial process. One is that experts, who ex hypothesi know much more about their fields of expertise than judges and juries do, and who know of that vast disparity, will take over the conduct of cases and exert excessive influence over their outcomes. Another is that experts, no doubt contemptuous, often justifiably, of the ignorance of the lawyers, will appoint themselves as advocates for the party calling them. Another is the tendency of experts to render their evidence less than useful by giving it in a form conventional in their discipline but not conforming to the rules of evidence (72). Another is the tendency of experts to drift into giving the courts reasons why they should accept or reject the evidence of lay witnesses on matters of primary fact (73).
I should also refer to what Heydon JA, as he then was, said in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705. In dealing with assumed facts which an expert is ordinarily required to state in his opinion, his Honour said, at 731 – 732:
The basal principle is that what an expert gives is an opinion based on facts. Because of that, the expert must either prove by admissible means the facts on which the opinion is based, or state explicitly the assumptions as to fact on which the opinion is based. If other admissible evidence establishes that the matters assumed are "sufficiently like" the matters established "to render the opinion of the expert of any value", even though they may not correspond "with complete precision", the opinion will be admissible and material: see generally Paric v John Holland Constructions Pty Ltd [1984] 2 NSWLR 505 at 509 – 510; Paric v John Holland (Constructions) Pty Ltd (at 846; 87). One of the reasons why the facts proved must correlate to some degree with those assumed is that the expert's conclusion must have some rational relationship with the facts proved.
In Dasreef, Heydon J explained the function of the proof of assumption rule. He said, at 622:
The function of the proof of assumption rule is to highlight the irrelevance of expert opinion evidence resting on assumptions not backed by primary evidence. It is irrelevant because it stands in a void, unconnected with the issues thrown up by the evidence and the reasoning processes which the trier of fact may employ to resolve them (134). If the expert's conclusion does not have some rational relationship with the facts proved, it is irrelevant. That is because in not tending to establish the conclusion asserted, it lacks probative capacity. Opinion evidence is a bridge between data in the form of primary evidence and a conclusion which cannot be reached without the application of expertise. The bridge cannot stand if the primary evidence end of it does not exist. The expert opinion is then only a misleading jumble, uselessly cluttering up the evidentiary scene.
While of course the Tribunal is not bound by the rules of evidence (s. 33(1)(c) of the Administrative Appeals Tribunal Act 1975), and the cases to which I have referred above dealing with evidence were concerned with the Evidence Act 1995 (NSW), that is not to say I should disregard them. In fact, like many rules of evidence, they impact on the fairness of the proceeding before the Tribunal. For that reason, the Tribunal has established Guidelines for persons giving expert and opinion evidence. Those guidelines broadly follow the common law and statutory provisions dealing with expert or opinion evidence. The duty of an expert giving evidence before the Tribunal is set out in paragraph 9 which provides:
A person giving evidence based on his or her special knowledge or experience in an area:
(a)has an overriding duty to provide impartial assistance to the AAT on matters relevant to the person's area of knowledge or experience;
(b)is not an advocate for a party to a proceeding.
The Guidelines, in dealing with reports, provides the following at paragraph 10:
A written report prepared for the purpose of proceedings in the AAT must include the following information either in the body of the report or as an annexure:
(a)details of the person's area of knowledge and his or her qualifications and/or experience;
(b)the letter of instruction or details of the questions or issues that person was asked to address in the report as well as a reference to any documents or other materials the person was given to consider;
(c)details of any facts and assumptions that inform the report and the sources for the factual information in the report;
(d)reasons for any opinion that is expressed.
Returning to the matter before me, it is abundantly clear from Mr Mond's own evidence that he has acted as an advocate for the applicants since 2007. He did not bring independent assistance to the Tribunal by way of objective, unbiased opinion. Were this matter before a court, I have little doubt that his evidence would not have been admitted. However, given the greater flexibility which should be accorded to parties before the Tribunal, I have admitted that evidence subject to giving it appropriate weight. In doing so, I have been mindful to allow Mr Evans as much leeway as he required in the course of his cross-examination.
I should also express some concern about the fact that Mr Mond purported to seek to establish the true taxable income of the applicant's based on information available to him. As will become apparent presently, that information was obtained from the husband and wife and was not corroborated. It was plainly hearsay. I have treated that information as assumptions of fact upon which Mr Mond drew up his T-Accounts and the Asset Betterment Statements. This issue is further compounded by the fact that T-Accounts and Asset Betterment Statements are usually constructed from identifiable facts. Those facts are entered as if the T-Accounts were constructed in the same form as a ledger, but rather than having debits on one side and credits on the other side, what is entered in that document is cash available plus cash received during the period on one side, and cash expended plus cash on hand at the end of that period on the other side. If the resultant on each side of the T-Accounts does not balance, it may be that cash received during that period has not been disclosed. It may or it may not be taxable income. It could also be the result of expenditure not having been recorded.
It is the missing cash or expenditure which is the subject of the enquiry. Evidence about the missing cash or expenditure can only be provided by the taxpayers and, normally, corroborated by documentary evidence and cross-examination of third parties where that might be required. It cannot be the subject of an opinion given by an expert.
It should also be obvious that one does not need to have an expert opinion about a missing receipt or an unrecorded expenditure in order to balance the T-Accounts. If an accountant such as Mr Mond draws up his own T-Accounts and informs his client of a discrepancy, his client will undoubtedly provide an explanation which will result in a figure being entered into one or other side of the ledger. It may then balance. However, that process by itself does not prove anything.
It is also clear from Mr Mond's witness statement that he takes issue with the way in which the ATO auditor has compiled the T-Accounts. In fact, he points to errors both in the methodology and in some of the figures used by the auditor. In respect of that, Mr Evans made it clear in the course of making his objection to the admission of Mr Mond's statement that he did not intend to go through every matter with which Mr Mond took issue although, in not doing so, he did not wish to be taken to have accepted that there were errors. As I understood his submission, Mr Evans relied on the taxpayers in this case to discharge their onus of proof. Given what was said by Mason J in Gauci, I accept that the Commissioner is entitled to take that approach.
I should also refer to what was said by Hill J in Imperial Bottleshops about taxpayers who do not keep records. His Honour said, at 155:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be "tested most closely, and received with the greatest caution": Pascoe v FCT (1956) 6 AITR 315; 11 ATD 108 at 111. It would, of necessity, be a rare case indeed were a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as "prima facie unacceptable", cf McCormack v FCT (1979) 143 CLR 284 at 302 per Gibbs J; 9 ATR 610; 23 ALR 583.
Undoubtedly, what his Honour said about deductible outgoings applies equally to income.
The first significant complaint made by Mr Mond is the fact that the ATO auditor dealt with the three entities as though they were a single entity. In other words, he did not take into consideration that the husband and wife would have deductions individually to which they were entitled after distribution from the partnership. Mr Mond therefore referred to those T-Accounts as flawed.
With respect to Mr Mond, that is overstating the position and it stems from the fact that he has set out, according to his own evidence, to establish the true tax liability of the husband and wife. Respectfully, this cannot be done through T-Accounts or Asset Betterment Statements alone. It is not what the Commissioner attempts to do by using the T-Accounts method. The T-Account methodology, at best, allows the Commissioner to make a reasonable estimate of undisclosed income. It assumes that all deductible expenditure has been recorded. Logically, without further explanation, the Commissioner is entitled to treat that undisclosed income as taxable. The use of T-Accounts or Asset Betterment Statements does not necessarily result in the true tax liability of the taxpayer. An assessment which results from the application of these methodologies, commonly referred to as a default assessment, becomes the Commissioner's assessment by reason of the application s. 167 of ITAA 1936. Section 177 then deems the amount and all the particulars of the assessment to be correct except in proceedings under Part IVC of the Administration Act.
By way of contrast, as I understand what the ATO auditor has done in preparing T-Accounts, given that the husband and wife each have a 50% interest in the profits and losses of the partnership, and that there may be some intermingling of private funds and expenditures with those of the partnership, is to examine all of the funds which have come in against all expenditures by the three entities. That seems to satisfy the purpose established by the Commissioner in the utilisation of T-Accounts. Their purpose is not to establish the true taxable income of each entity as described by Mr Mond. Their purpose is to identify missing income. The Commissioner is then entitled, by law, to treat the missing income as taxable in the absence of a proper explanation from the taxpayer.
Furthermore, the partnership of course is not a taxpayer despite the fact that it is required to furnish a return (s. 91 ITAA 1936). As I have already said, not all of the missing income will necessarily be assessable income nor will all of the missing expenditure, if that is claimed, necessarily be deductible. Once the missing items have been identified and the Commissioner has issued an assessment, the burden shifts to the taxpayers, the husband and wife in this case, to prove on the balance of probabilities that their assessments are excessive. While the husband and wife may give evidence regarding the nature of any unidentified income amounts or unclaimed expenditures, that evidence will necessarily be in the form of a self-serving statement. As Hill J said in Imperial Bottleshops, some other corroborative evidence would normally be required to establish the true nature of that income and expenditure.
I also note that Mr Mond completed Asset Betterment Statements in addition to the T-Accounts. The Commissioner of course only prepared T-Accounts. It became apparent in the course of Mr Mond's cross-examination that he had, in some circumstances, incorporated matters in the T-Accounts which were taken from his Asset Betterment Statements. An example of this is the addition of the item stock on hand in Mr Mond's T-Accounts. That item is clearly not cash. The T-Accounts deal solely with the movement of cash. When I asked Mr Mond in the course of his cross-examination why that item had been entered in the T-Accounts, he said: Big question. We've put it in there first of all because we wanted to put it in the area where all of the tax return items are shown, and that stock on hand figure is actually in the tax return. That's the first point. So it's something to be placed there. The main thing is just as long as it appears on the right side of the ledger, funds available versus funds expended, it doesn't matter I suppose you categorise it in terms of the heading, but let me – we put it there for that reason.
The problem with this approach is, at least to me, reasonably apparent. The stock on hand figure in Mr Mond's T-Accounts under the Funds Available column is not the equivalent of cash which is available for expenditure in the period in question. In fact that item is usually carried forward from the prior accounting period and expenditure on that item occurred in a prior period. Under the Funds Expended column in Mr Mond's T-Accounts are items described as purchases of stock and stock on hand. While the figure included for purchases of stock plainly satisfies the funds expended categorisation, the stock on hand item does not. In fact, the stock on hand item, depending on the accounting method employed, may well have a component of stock in that item on which funds were expended many periods prior to the one in question. It does not necessarily indicate that any expenditure of funds took place on that particular item of stock in the period being examined. Because the period in which that expenditure was incurred cannot be identified, it is entirely possible that the figure simply duplicates an element of the item purchases of stock. It appears to me that the reason Mr Mond has included these items in his T-Accounts is because he was attempting, by this method, to establish the true tax liability of the husband and wife. As I have already said, the T-Accounts alone are not a suitable method for achieving this purpose.

In his witness statement Mr Mond said that the advantage of the Asset Betterment Statement over the T-Account method was that it permitted an observation of the change in circumstances over a number of years as opposed to the annualised T-Account method. While I accept, to a certain extent, that may be correct, the T-Accounts method when used over a number of income periods has the same effect. If a taxpayer is operating in the cash economy it is possible that incoming cash is accumulated and not expended in a particular income year. However, when a portion of that incoming cash is expended, it should show up in the year of income in which it is expended. While that of course may not satisfy an accountant who is concerned with matching expenditure against income in a particular financial year, it will nevertheless result in the identification of undeclared income even though it may not be matched to the correct financial year. I would expect that the Asset Betterment Statement model suffers from the same problem.
In his witness statement Mr Mond pointed to a number of significant revisions made by the Commissioner to his T-Accounts as result of his investigations. According to Mr Mond, that simply demonstrated significant errors made by the Commissioner or, more accurately, the auditor in the construction of the T-Accounts. In the objection decision, the Commissioner makes it clear that in the course of reviewing the accounts of the taxpayers, representations were made on nine occasions regarding proposed adjustments to the T-Accounts. In other words, the Commissioner took into account evidence subsequently provided to enable identification of assessable income and unclaimed deductions. The Commissioner issued a final audit report on 11 December 2009.
In his opening submission Dr Glover said that in this matter, unexplained deposits were not the central issue. He said the applicants contested the private consumption underlying the withdrawals stated to be for personal living expenses. He pointed out that in 2002 the T-Accounts private living expenses were estimated to be $103,000; in 2003 they were $30,000; in 2004 they were $89,000; in 2005 they were $132,000; and in 2006 they were $86,000. Dr Glover explained that in October 2006 the auditor had questioned those figures and made an attempt to ascertain their private living expenses. He said that the figures in the T-Accounts bear no relation to the estimation given to the auditor.
Mr Evans took Mr Mond through the entries on the funds expended side made in his T-Accounts compared with the entries made by the auditor in the ATO T-Accounts. Save for some differences in the treatment of GST on claimed expenses, one significant difference pointed out by Mr Evans was the entries referred to as Personal Living Expenses (costs). Mr Evans put to Mr Mond that the withdrawals listed in the ATO T-Accounts were actual withdrawals from identified CBA accounts where the expenditure was not able to be otherwise accounted for under the funds expended column. Mr Mond agreed with that stating: As determined by the ATO, yes. Mr Evans then asked Mr Mond:… – the taxpayer tells us that they've spent X amount on business items, okay, and then what we do is we go through all the withdrawals in the bank accounts and we say, well, we can take off what has been paid for business items and that leaves these withdrawals; the ones that are listed? Mr Mond responded: Well, that's a long bow. You say that's what has occurred; that's not what has occurred. I think they've just picked up the figures as they've done some sort of reconciliation to say that these amounts were withdrawn, but we say they can't determine how they should get (indistinct). When it was put to Mr Mond that the withdrawals on the ATO T-Accounts were actual amounts withdrawn, Mr Mond said he did not dispute that.
Mr Evans then took Mr Mond to his alternative T-Accounts and to the personal living costs amount which he entered which was $43,050. When Mr Evans suggested to Mr Mond that the figure he put in for personal living costs was an estimate of the applicants' living costs, Mr Mond said it was based on interviews he conducted to determine what he described was the veracity of that figure. He agreed that it was necessarily an estimate. Mr Evans then put to Mr Mond that as the total withdrawals from the CBA accounts amounted to approximately $100,000 and that he estimated personal living expenses to be some $43,000, what should happen to the remaining $55,000 withdrawn? Mr Mond responded: Well, part of that money went to cash on hand. You see, the cash on hand, Senior Member, was shown as 120… And then it went up to 170. When Mr Evans put to Mr Mond that his T-Accounts were based on the assumption that there was $170,000 cash on hand on 30 June 2002 Mr Mond said: Yes. They saved an extra 50,000 that year, yes. Mr Mond then went on attempting to explain that the ATO T-Accounts also suffered from double accounting of the BAS payments because that was included in the withdrawals given that the taxpayers had to be able to use the money in the CBA accounts to pay their BAS obligations.
There are a number of problems with Mr Mond's responses. The first is that Mr Mond simply accepted what was said by either the wife or the husband about the cash on hand on 1 July 2001 and the cash on hand at 30 June 2002. That is plainly hearsay. However Mr Mond did attach to his witness statement documents supporting what the wife claimed in her witness statement and oral evidence regarding the sources of savings. The sale of the property in Lebanon for $50,000 was said to have been paid in five instalments of $10,000 each, the first being made in 1995; the second in 1997; the third in 1999; the fourth in 2001; and the final payment in 2004. Although $120,000 is the amount recorded by Mr Mond on the funds available side of his T-Accounts for the year ended 1 July 2001, the maximum amount available in cash from these payments would be $40,000. In fact, that assumes that none of those moneys were expended in the meantime and that possibility remains at large given that a period of some seven years elapsed from the first payment to the date the funds were said to be available.
The second payment of some $85,000 was said to have been made in five tranches, the first being $30,000 in 2001; the second being $9000 in late 2001; the third being $12,000 in 2002, although it is not stated whether that was prior to 30 June or after; the fourth payment of $24,000 was said to have been made in 2003; and the final payment of $10,000 was said to have been made in 2004. In fact the first payment of $30,000 was said to have been by cheque and therefore it is highly likely that these monies would have been paid into a bank account rather than the cheque being simply cashed. Therefore, as at 1 July 2001, even giving the wife the best possible outcome, that would add a further $30,000. The wife also claimed she had received an inheritance of $10,000 in April 2005. That of course is after that period with which we are concerned.
Therefore, the best that can be said for the wife is that she had some $70,000 in cash as at 1 July 2001. However, even the evidence about that amount would not pass the test on the balance of probabilities. The information has come from family members and was not tested. The wife's evidence is clearly self-serving. In fact, it was also contradictory having told the ATO that she sold her share of the house in Sydney to her brother Michel but in her witness statement having said she sold it to Tony. There was no evidence from Tony and the statement setting out the instalment payments said to have been made to her was made by Michel. There was no objective evidence produced corroborating the sale of her interest in the Sydney house even though it seems to me that it would have been possible to produce such evidence. Furthermore, although in her oral evidence the wife mentioned having about $170,000 in cash at home at some point in time, that evidence was vague and unsubstantiated. It certainly did not meet the standard of proof required.
Accordingly, I find that the underlying assumptions made by Mr Mond have not been proved by evidence to the requisite standard. On that basis alone, I cannot give Mr Mond's T-Account evidence much weight. Further, the answers given by Mr Mond in cross-examination make it clear that he was determined to act as an advocate rather than an impartial expert. He maintained that the excess payments withdrawn from the CBA accounts in the 2002 income year were expended in the business and therefore deductible. That is despite the fact that there was no objective evidence of such expenditure. It appears that Mr Mond's answers to questions in cross-examination were simply an attempt to support what was said in his written statement about CBA account number 876 being used almost entirely for tax deductible business dealings. That account appears for the first time in the ATO T-Accounts in the 2004 income year. Also, that account, which is described as a Streamline Account, is a cheque account with the CBA. Logically, if that account were used to meet business expenses, payments would be made by cheque. I had in evidence bank statements relating to that account between 7 July 2003 and 30 June 2006. There appeared to be numerous cash withdrawals, however I am unable to locate one single cheque withdrawal transaction. The cash withdrawals also appear to be almost entirely in round figure sums which suggest that the amounts withdrawn were not for the purpose of paying any specific business expense. It also suggests, if this account was used for business purposes, those payments were in cash. That may account for the fact that the transactions were not recorded.
Although Mr Evans took Mr Mond through most of the differences which are recorded in the ATO T-Accounts and his own T-Accounts, there is little purpose in going through each of those in detail. That is because on each occasion, Mr Mond has made assumptions which differ to those made by the ATO. For example, in the 2003 income year, Mr Mond has recorded cash on hand as at 30 June 2003 to be $30,700. I had no evidence from the wife that she had that sum of cash at the end of that financial year. In fact the husband and wife purchased a property in Ivanhoe for $1,166,748 in that financial year. In her witness statement the wife said that all of the cash savings that were held (approximately $120,000) were applied to the purchase of that property. If that is correct, then the husband and wife did not have any cash savings on hand at the end of that financial year. On the expenditure side of the ledger, while Mr Mond had entered differences to which I have already referred to above relating to personal living costs, there were also differences in relation to GST on expenses claimed; some differences in the BAS payment amounts; expenses in relation to the granny flat for the wife's mother in the 2006 income year; and a $3000 payment to the husband's brother in Lebanon in that income year. There was no evidence of these payments.
The difference in the BAS statement amounts seems to be attributed to the fact that Mr Mond obtained the running account of the partnership which, for example, in the 2002 income year, disclosed total payments to the ATO of $21,804. Mr Mond has assumed these were all BAS payments. However the nature of the payment and its purpose is not stated on the running account. It is simply a payment received by the ATO. In order to examine the precise figure for each period one needs to examine each BAS statement. There is also likely to be a timing issue in respect of those payments.
At the hearing of this matter, as I understood it, an issue remained regarding a capital gain assessed to the husband and wife following the sale of a property in Doncaster in 2001. The property was purchased in 1998 for $160,000 and it was sold for $350,000. The wife gave evidence about this property and, although the husband sat in the hearing room for the three days of hearing this matter, the applicants chose not to have him give evidence. I have dealt with this in detail in the interlocutory decision (Re Confidential and Commissioner of Taxation [2013] AATA 382) following an application to reopen the substantive hearing.
In her witness statement the wife initially testified that the Doncaster property was purchased as an investment property in 1998. However, at the commencement of the hearing, she amended that statement by deleting the word investment from her statement. The wife explained it this way: It says "investment property" but it was – I think it was like misprint or someone misunderstood what I said, or something. But it wasn't meant as investment at all.
In her evidence in chief the wife explained that she never lived at the Doncaster property but that the husband did. She said that her husband lived there with his mother for about 14 months. She also explained that there was a bungalow at the back of the house and it was rented out.
In cross-examination the wife explained that she and her husband were having some difficulties and that her husband moved to the Doncaster house in 1998 but that they retained the Preston property, which was then the family home, until 2003. The wife said that her husband came back on occasions between 1998 and 1999. In light of this evidence, it was essential that I had evidence from the husband in order to determine whether the Doncaster house was his main residence. It was not clear from the evidence whether that dwelling was the applicants' main residence throughout the ownership period thereby allowing it to be disregarded for the purposes of capital gains tax (s. 118-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). Unfortunately, the applicants chose not to adduce evidence from the husband. The wife agreed that her husband had moved back to the Preston house in October 1999. She also agreed that there was a tenant living in the Doncaster house. Apparently the tenant first rented bungalow at the rear of the house and when the husband moved out of the house, the house was given to a real estate agent for the purposes of renting. The wife's evidence was unclear regarding the period of time that the husband in fact lived at the Doncaster house. When the wife was asked who the tenant was in Doncaster and where they lived she answered: We rented the – I think [the husband] rented the bungalow when he was living in the house. She said the Doncaster house was sold in August 2001.
Mr Evans submitted that the wife's initial reference to investment could not have been an inadvertent slip because it was difficult to imagine how that could have been done accidentally if the house were not an investment. In fact the ATO in its audit recorded rental returns for the three years between 1999 and 2001. There was also an interest deduction and other rental deductions claimed in each of those years.
The problem with the evidence given by the wife is that it was in the nature of a self-serving statement and there was no corroborative or objective evidence to support that statement. In fact although the wife made her witness statement referring to the purchase of an investment property on 24 April 2012, it was not until the first day of the hearing on 4 March 2013 that she sought to amend the statement that she and her husband purchased an investment property in Doncaster. In those circumstances, I find that the applicants have not discharged the onus of proving, on the balance of probabilities, that they should not have been assessed for capital gains tax.
In his opening submissions Dr Glover referred to an amount of $134,000 in legal fees paid to lawyers in respect of the husband's criminal case where he was charged with theft. Dr Glover submitted that those legal fees were deductible under s. 8-1 (1) of ITAA 1997. However, Mr Evans submitted that it was not necessary for me to determine the question because the applicants had failed to substantiate that legal expenses were incurred. I should also add that I am unable to locate any such expenditure in Mr Mond's T-Accounts.
I did have a letter dated 11 March 2008 from lawyers who confirmed that they acted for the husband in respect of the criminal charge. The lawyers said that they estimated the husband's legal fees for a two - three week jury trial would be in the order of $100,000-$150,000. However, the letter also makes it clear that the husband pleaded guilty to the charges. Therefore no trial took place. Furthermore, I had no other evidence supporting the applicants claim that $134,000 was paid to the lawyers. Although I was provided with a subsequent letter from the lawyers dated 1 March 2013 in which the lawyers said: [the husband] paid our firm somewhere in the order of $100,000-$150,000 over the course of criminal proceedings; the lawyers were unable to provide copies of tax invoices or any other documents because they said their hard files had been destroyed and that they were no longer operating the accounting system which they operated at that time. Therefore, as Mr Evans submitted, I need not determine whether in fact the legal expenses, if they were incurred, were deductible. I find that the applicants have not discharged onus of proving, on the balance of probabilities, that this expenditure was incurred.
In summary, I find that the applicants' attempt to prove their true taxable income through the T-Accounts and Asset Betterment Statements prepared by Mr Mond does not succeed. That is because the factual assumptions underlying Mr Mond's accounts have not been proved on the balance of probabilities by the applicants or by Mr Mond.
In the High Court of Australia case, George v Federal Commissioner of Taxation (1952) 86 CLR 183, the Court (Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ) referred to s. 190 of the Income Tax Assessment Act 1936. That section provided that upon every appeal to the Court the burden of proving that the assessment is excessive shall lie on the taxpayer. The Court said at 204:
The fact is that unless the taxpayer discharges the burden laid upon him by s. 190 (b) of proving that this ascertainment or judgment is excessive, he cannot succeed and it can be no part of the duty of the commissioner to establish affirmatively what judgment he formed, much less the grounds of it, and even less still the truth of the facts affording the grounds.
The term excessive, as it is used in s. 14ZZK(b)(i) relates to the substantive amount of the assessment. This was explained by the High Court in W R Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 at 203:
The selection of the term “excessive” in a provision which preceded the enactment of s 14ZZO (namely s 190(b) of the Act in its original form) was said by Dixon CJ, McTiernan and Webb JJ in McAndrew v Federal Commissioner of Taxation (19) to be “perhaps not a good choice”, but their Honours emphasised that “excessive’ relates to the amount of the substantive liability”.
Where the evidence is equivocal and where a proper inference cannot be drawn to support an applicant’s claim, the applicant will fail to discharge the onus. This was clearly explained by Gibbs J in McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 where he said, at 303:
The taxpayer bears the burden of proving that the assessment was excessive. To discharge that burden in a case such as the present he must prove affirmatively, on the balance of probabilities, that the property was not acquired for the purpose of profit-making by sale. The burden may be discharged by drawing inferences from the evidence. In some cases in which all the relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose. But it is not enough, even when all the facts are known, that there is no material upon which it may be concluded that the property was acquired for the purpose mentioned in s. 26 (a). If a taxpayer can succeed, simply because there is no evidence from which it can be concluded that the relevant purpose existed, that must mean that the burden of proving the existence of that purpose lies on the Commissioner. That in my respectful opinion would be to invert the onus of proof. The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail.

In the Tribunal review of an assessment, it is not necessary for the Commissioner to seek to establish that the applicant’s assessable income was, or was at least, a particular figure. In Vu v Commissioner of Taxation (2006) 63 ATR 341, Finn J said, at 344:
The only additional matter of principle to which I need refer concerning the onus of proof is that in the tribunal review of an assessment it is not necessary for the Commissioner to seek to establish that the applicant's assessable income was or was at least a particular figure. As Hill J commented in Galea v FCT (1990) 21 ATR 1108 at 1116; 90 ATC 5060 at 5067:
The fact that the Commissioner sought so to do and failed has no bearing, at the end of the day, on the question whether the applicant has discharged the onus of showing, as he is required by s 190 (b) of ITAA 1936 to show, that the assessment is excessive. The Commissioner's failure to establish a positive case, if that is what he sought to do, leaves the Tribunal in no different position than it would have been in if the Commissioner had not sought at all to advance a positive case.
There are several ways in which a taxpayer can discharge the burden of proof placed on him by s. 14ZZK of the Administration Act. When referring to the predecessor s. 190(b) of the ITAA 1936, Murphy J said in McCormack’s case, at 323:
A taxpayer might discharge the burden of proof placed on him by s. 190 (b) in any of several ways. He may prove all relevant circumstances and from these establish that an inference should be drawn that the property (from the sale of which by the taxpayer a profit arose) was not acquired by him for the purpose of profit-making by sale. Or he may prove by direct evidence that such a purpose did not exist. The burden might also be discharged by a combination of direct evidence and inference from other circumstances. He may, of course, rely upon any evidence or any inference from evidence adduced by the Commissioner.
Murphy J also dealt with credibility issues relating to witnesses. He said, at 323‑324:
I would not single this case out for remission for another hearing, especially if the purpose contemplated is that the court to which it is remitted should find whether the taxpayer or a witness is "honest" or "dishonest". In some cases a tribunal may conclude that a witness is, or is not, an honest witness. It is not required to do so. In civil cases such as this, it is generally undesirable to express such a finding in a proceeding which after all is to be decided on the balance of probabilities. Tribunals should not be encouraged to make findings that witnesses are honest or dishonest. In some cases, the evidence may point to such a conclusion. Even in these cases, assessment is often based on the demeanour of the witness and intuitive perception. The supposed special capacity of judges to decide the honesty of witnesses from demeanour and intuitive perception has never been established, and is, I suspect, grossly overrated. Even where witnesses contradict one another, it is not necessary to find that one is honest and the other dishonest. Both may be honest or both dishonest. It is enough for the tribunal to state that it does, or does not, accept certain evidence, or that it is, or is not, satisfied to the requisite standard.
I respectfully adopt what his Honour said regarding the credibility of witnesses.
It seems to me that the Tribunal was being asked to infer, from Mr Mond's evidence, that his estimate of the true taxable income of the applicants should be preferred to that of the Commissioner. I am unable to draw such an inference. My reasons follow those stated by the Full Court of the Federal Court (Greenwood, Tracey and Buchanan JJ), in Tisdall v Webber (2011) 193 FCR 260 where his Honour, Buchanan J said at 297:
It is important to bear in mind also that the inferential process is not one where speculation, guesswork or mere assumption is accommodated. So far as the work of courts is concerned, where the application of a judicial method is expected, the process of drawing an inference from available facts is not to be equated with conjecture, surmise or guesswork. The arbitrary selection of one possibility over others from an available number of possibilities by such a method is not merely lacking in logic; it fails to conform to the necessity that inferences be drawn as matters of legitimate deduction, based on probative values.
In Bell IXL Investments Ltd v Life Therapeutics Ltd (2008) 68 ACSR 154; [2008] FCA 1457 Middleton J said (at [14]):
In considering the material before the Court, the trier of fact must be careful to distinguish between inference and conjecture. A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding. Whilst sometimes it may be difficult to distinguish between conjecture and inference, nevertheless the distinction is an important one.
His Honour's observations, with respect, state a fundamental principle which is authoritatively established but which is not always observed (see also Luxton v Vines (1952) 85 CLR 352 at 358, quoting Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1).
Given that the assumptions of fact upon which Mr Mond's assessment is based have not been proved to the required level of satisfaction, I find that it is not open to me to infer that Mr Mond's assessment of taxable income should be preferred to that of the Commissioner. To do so would require me to arbitrarily select one possibility from a number of others. It would not be an inference drawn from legitimate deduction based on probative evidence.
Although I accept that precision in the calculation of the true taxable income of the taxpayer may not be required, there nevertheless needs to be sufficient evidence to support an estimate if that is what is relied upon. This was explained by Davies J in Martin's case where he said, at 291:
In all the circumstances, although Mr Martin's evidence as to his costs is unreliable, I have formed the view, as a matter of probability, that Mr Martin did have substantial costs, particularly expenditure in the purchase of stock. To put a figure on that cost is, of course, a matter of guesswork. But if a taxpayer has no records and his evidence is thought not to be reliable, then it is impossible to determine the facts of each dealing. Indeed even the invoices and the other records from which the Commissioner based his assessments are not before the court. Yet, as Burchett J said in Ma v FCT (1992) 23 ATR 485; 92 ATC 4373 at ATR 492; ATC 4379:
… the making of estimates upon inexact evidence, which is so much a feature of both judicial and administrative decision-making, cannot be uniquely excluded from appeals against betterment assessments.
Ryan J in Kimche’s case followed what Davies J said in Martin's case. In fact, in addition to the quote to which I have referred above from Ma's case, his Honour referred to this passage, at page 37 – 38:
To refuse to consider the credit, not only of the applicant, but also of his independent and unchallenged witnesses, simply because the effect of the evidence was to support his accountant's generalisations about double-counting rather than to hit upon a precise figure, was to fall into an error of law. If authority be needed for this proposition, it may be found in the decision of Walsh J in Krew v FCT (1971) 2 ATR 230; 45 ALJR 324; 71 ATC 4213, to which Mr Gibb, with his usual frankness, referred me. That was a betterment case, bearing some similarity to the present, in which Walsh J, in various parts of his judgement, acted on evidence that was "substantial" portions of sums of money represented the proceeds of gambling; expressly eschewed (at ATR 245; ATC 4223) any attempt to reach a "precise result"; and acknowledged (at ATR 247; ATC 4224) that his decision as to certain "large payments" lacked "satisfactory evidence of a specific kind", concluding nevertheless that it was probable that a large part of the money was derived from gambling", with the result that "a somewhat arbitrary decision" was required, to some extent in favour of the taxpayer.
Ryan J then said, at 38:
It follows, I consider, that if, in a case like the present, the taxpayer is able to establish facts tending to show that some part of a particular receipt did not bear the character of income but is unable to quantify with precision the amount of that part then the assessment will be excessive only in respect of the minimum amount which could have borne a different character.
In my opinion, the evidence in the case before me does not permit the estimates of the true taxable income made by Mr Mond to be relied upon. The factual basis which underpins his estimates has not been established on the balance of probabilities. The evidence was insufficient to draw any safe conclusions about the estimated true taxable income of the applicants in this matter. That, in my opinion, distinguishes this matter from the cases to which I have referred regarding a reasonable estimate of the true taxable income of taxpayers.
PENALTIES
The issue of penalties in this matter has added importance because, unless there is a finding of fraud or evasion, the Commissioner was limited to issuing amended assessments to either two years or four years after the day on which those assessments were given in accordance with s. 170 (1) of ITAA 1936. However, in accordance with Item 5 of s. 170 (1), if the Commissioner is of the opinion that there has been fraud or evasion, he may amend an assessment at any time. The Commissioner has relied on the fraud or evasion claim for the purpose of validly issuing assessments for the 2002 - 2004 income years. In fact, at the hearing of this matter, Mr Evans made it clear that the Commissioner was only pursuing the question whether there had been evasion within the meaning of s. 170 (1) Item 5 of ITAA 1936. If I were to find there was no evasion, those amended assessments cannot stand.
In his opening submissions Dr Glover acknowledged that there had been some non-declaration of income on the part of the applicants. He said that for the 2002 income year, Mr Mond estimated the applicants’ understatement of income to be $977. In 2003 the understatement was $161,000 and in 2004, the understatement was $89,000. Dr Glover submitted that in the 2005 and 2006 income years there was no understatement. However, he also submitted that the applicants denied any intent to withhold information from the Commissioner for the purpose of avoiding tax. He said the applicants contended that if there was non-reporting of sales, it resulted from their accountant's failure to advise them of their liabilities and to ask for and obtain full details of business performance for the purpose of statements made to the Commissioner.
The High Court of Australia in Denver Chemical Manufacturing Company v The Commissioner of Taxation (New South Wales) (1949) 79 CLR 296 was required to deal with whether there had been avoidance of tax by evasion. Dixon J said, at 313:
To apply these principles it is necessary to consider what relevant conduct amounts to evasion and whether the Board correctly applied their minds to the question of evasion. I think it is unwise to attempt to define the word "evasion." The context of s. 210 (2) shows that it means more than avoid and also more than a mere withholding of information or the 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.
In that case, Dixon J said that the Board concluded that the appellant intentionally omitted the income from the return and there was no credible explanation for why he did so. The Board held that the conduct of the taxpayer warranted the description of an avoidance of tax by evasion. He held that it was not an error of law for the Board to make that finding.
As Mr Evans correctly submitted, the onus is on the applicants to prove there has been no evasion. The High Court of Australia dealt with this conclusively in McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263. Dixon CJ, McTiernan and Webb JJ, when dealing with s. 170 (2) of the Income Tax and Social Services Contribution Assessment Act 1936 – 1955 which permitted the Commissioner to amend an assessment where the taxpayer had not made a full and true disclosure of all the material facts necessary for his assessment and that there had been an avoidance of tax said, at 269:
But after full consideration we are constrained to the conclusion that when upon any appeal to the Court under ss. 187 (b), 197 and 199, there is an issue as to whether these conditions are fulfilled and a regular notice of assessment is produced, or a copy under a proper hand, then the burden rests upon the taxpayer of proving to the reasonable satisfaction of the Court the particular fact or facts which take the case outside s. 170 (2). This means that the onus probandi lies on the taxpayer if his objection is that he did make a full and true disclosure of all the material facts necessary for his assessment or that there had not been an avoidance of tax.
As Mr Evans submitted, the applicants' contention is that there was a division of labour between the husband and wife in the business. The husband was in charge of production and sales while the wife answered the telephone and tended to the paperwork. It should also be added that the wife's evidence was that the applicants' accountant installed a software program, called Cash Flow Manager, for use by the wife. She then provided the entered data on the programme to the accountant every three months to enable him to calculate the GST payable. The wife said in her written statement that all she did was follow the accountant’s instructions recording invoices and expenses. She also said that she spoke with the accountant by telephone quite often asking if she should include certain expenses because she was not sure that they were deductible. The wife said that the accountant phoned her from time to time clarifying queries which arose in preparing the accounts and the GST returns. However, she said that the accountant never wanted to see details of bank accounts. I should point out that the accountant was not called to give evidence and therefore these statements by the wife could not be verified. Regardless, in my view, they would not impact on this decision.
In my opinion, whether or not the wife’s statement regarding the accountant's role in this matter was correct, it seems reasonably clear that the accountant only acted on the information regarding sales and invoices provided to him by the wife. If there were sales transactions which were not recorded for the reason that they were either overlooked or that they involved cash transactions, that was squarely within the knowledge of the husband and wife. Access to bank accounts and bank reconciliations would not have disclosed any of this information. Where there were bank deposits which were not recorded as income, it is reasonable to infer that the explanation which would have been given by the applicants to their accountant would be no different to the explanations given by the wife in this proceeding. Therefore, the wife's attempt to shift the blame for undisclosed income or unclaimed business expenditure onto the accountant is misconceived. In fact, I am not convinced that her evidence regarding what was given to the accountant was accurate. In cross-examination the wife was taken to a trial balance as at 30 June 2003. On the trial balance is recorded an item for bank charges and FID in the amount of $184.19. That information could only have come from a bank statement. The wife did not know what that document was and it is quite plain that it must have been prepared by the accountant. Therefore, as Mr Evans submitted, there was no evidence before me which indicated that anything done by the accountant caused the claimed evasion.
In any event, regardless of the role of the accountant, as Mr Evans correctly submitted, the Commissioner's powers under s. 170(1) are not restricted to circumstances where the avoidance of tax by reason of evasion is due solely to the action or inaction of the taxpayer. This was made clear by Drummond J in Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455 where his Honour was dealing with s. 170 (2)(a) of ITAA 1936 which at that time provided:
… where there has been an avoidance of tax, the Commissioner may:
(a)if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion – at any time; and
…
amend the assessment…
His Honour said, at 483:
There will be "an avoidance of tax" within this provision where, without any active or passive fault on the part of the taxpayer, less tax has been paid then ought to have been paid.
And further, at 484 – 485:
There is no justification for implying a limitation on these clear words to restrict the Commissioner's power under the provision to amend an assessment only where the avoidance of tax is due to fraud or evasion by the taxpayer personally. The wording of s 170(2)(a) is apt to empower the Commissioner to issue an amended assessment where an avoidance of tax is due to the fraud or evasion of the taxpayer's agent engaged to prepare returns signed by the taxpayer and to lodge those returns on the taxpayer's behalf,… Tax agents whose registration as such is controlled by Pt VIIA of the ITAA 1936 are recognised by the Act as entitled to perform a range of functions on behalf of their taxpayer principals in respect of their tax affairs, including the preparation and lodging of taxpayers' returns. For example, by s 251L, a registered tax agent is entitled to charge fees for a wide range of services rendered to taxpayers in connection with their tax affairs. This legislative recognition of the role of tax agents is an additional reason for giving the words of s 170(2)(a) their ordinary meaning. Nor can it be said there is any absurdity involved in so construing the sub-section. The notion that a principal may be held responsible for the fraudulent conduct of an agent, even though ignorant of the agent's fraudulent behaviour is not a novel one: it is well established at common law. It is not necessary that the principal shall authorise or even know of the fraudulent act of the agent to be liable for it.
Dr Glover also referred to the Tribunal case Mynott and Commissioner of Taxation [2011] AATA 539 which he submitted disclosed that where there was an honest and reasonable reliance on the tax agent, it could not be established that there was an intention to evade tax. However the circumstances in Mynott's case were significantly different to those before me in this matter. Mr Mynott apparently worked overseas for a number of years and he was unaware whether he owed tax to any country on his earnings. He relied on his Australian accountant to advise him about that. Apparently he was told by his account that as a non-resident of Australia at the time he was working overseas, he was not required to pay Australian income tax. That is very different to the circumstances in this matter where the accountant relied on the taxpayers to give him the information to prepare BAS's and to prepare the partnership accounts. It does not assist the applicants in this matter.
I am also not persuaded by Dr Glover’s submission that the taxpayers in this case were persons with limited comprehension of tax law requirements and therefore relied on their accountant. The taxpayers were sufficiently conversant with the fact that they were required to declare all business income to the Commissioner and that they were able to deduct business expenditure in earning that income. They had operated the partnership business since 1990. Furthermore, their accountant provided them with the means of keeping proper records of those transactions. The evidence indicates that they operated, at least to some extent, in the cash economy. In other words, they were not averse to conducting business transactions in cash which was not banked and which were not recorded. I find that they were solely responsible for their actions.

In my opinion, the applicants have failed to discharge the onus of proving that there was no tax evasion. Their failure to disclose income to the Commissioner is properly described as blameworthy and the evidence disclosed an intention to withhold information regarding net income which would have resulted in a greater liability for tax. It necessarily follows that the Commissioner's actions in issuing amended assessments in December 2009 were lawful.
Liability to an administrative penalty is provided for in s. 284-75, Schedule 1, of the Administration Act which, during the relevant income years in question, stated:
(1) You are liable to an administrative penalty if:
(a)you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law; and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c)you have a * shortfall amount as result of the statement.
The expression shortfall amount is defined in s. 995-1 (1) of ITAA 1997 as the meaning given by s. 284-80 in Schedule 1 to the Administration Act. In so far as it is relevant to this matter, s. 284-80 (1), Item 1 is relevant and it provides:
A * tax-related liability of yours for an accounting period, or for a * taxable importation, worked out on the basis of the statement is less than it would be if the statement were not false or misleading.
As Mr Evans submitted, the husband and wife filed returns which failed to disclose taxable income in the income years 2002 to 2006. In addition, the partnership filed business activity statements for the period from 1 July 2001 to 30 June 2006 which failed to disclose taxable supplies.
The amount of penalty is dealt with under s. 284-85 of the Administration Act. The amount is worked out from the base penalty amount set out in s. 284-90 which may be increased under s. 284-220 or reduced under s. 284-225. If an increase or reduction is not applied, the penalty amount is the base penalty amount. In this case, the Commissioner has applied a shortfall penalty of 50%. That is the base penalty amount where the shortfall amount or part of it resulted from recklessness by the taxpayer or their agent as to the operation of a taxation law (s. 284-90, Item 2 of the Administration Act).
Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347 explained the operation of s. 226H of ITAA 1936 which was the predecessor of s. 284-90 which commenced on 1 July 2000. Section 226H provided:
226H Subject to this Part, if:
(a)a taxpayer has a tax shortfall for a year; and
(b)the shortfall of part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.
His Honour said this about the meaning of the word recklessness at 364:
Recklessness in this context means to include in a tax statement material upon which the ITAA 1936 or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
The Full Court of the Federal Court of Australia (Hill and Hely JJ; Spender J dissenting on the question of penalty) in Hart v Commissioner of Taxation (2003) 131 FCR 203 cited with the approval what was said by Cooper J in BRK regarding the operation of s. 226H. Their Honours said, at 214:
Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective.
…
There is a line between recklessness and dishonesty, and as the Explanatory Memorandum for the Taxation Laws Amendment (Self Assessment) Bill 1992 (Cth) (at p 89) confirms, a finding of dishonesty is not necessary for a tax paid to be subject to s 226H penalty. Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self assessment. But, in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established although there are some sections (e.g. s 226K) which impose a liability in particular circumstances even if the taxpayer has not been negligent. The context makes it clear that recklessness means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J).
Mr Evans in his submissions also referred to Miscellaneous Taxation Ruling MT 2008/1 which deals with penalties relating to statements and includes the meaning of the expression recklessness. MT 2008/1, states, at paragraphs 100 and 101:
100. Like the test for determining whether reasonable care has been shown, a finding of recklessness depends on the application of an essentially objective test. There must be the presence of conduct that falls short of the standard of a reasonable person in the position of the entity. Similar to the position with a failure to take reasonable care, dishonesty is not an element of establishing recklessness. The actual intention of the entity is of no relevance.
101. Behaviour will indicate recklessness where it falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity. Although the test for determining whether recklessness is shown is the same as that applied for testing a want of reasonable care, it is the extent or degree to which the conduct of the entity falls below that required of a reasonable person that underscores a finding of reckless.
In my opinion, the cases I have referred to above and the Miscellaneous Taxation Ruling make it reasonably clear that while the test may be described as objective, it should take into account whether the conduct of the taxpayers meets the standard of a reasonable person in their position or circumstances. I accept that involves an element of subjectivity even though the test is described as being essentially objective.
Dr Glover submitted that at the relevant time, the husband and wife were recent migrants, with limited education and commercial experience. Accordingly, in determining whether the applicants were reckless, I should take into account whether they acted unreasonably in relation to their record-keeping procedures and other business systems taking into account the standard of reasonable persons with limited endowments.
While I agree with the process Dr Glover submitted should be adopted in determining whether a taxpayer has been reckless, given my findings of fact in this case and having heard the evidence of the wife, I am unable to conclude that either the husband or the wife acted reasonably in the circumstances in which the partnership business operated.
While I accept Dr Glover's submission that the wife did not have accounting experience and that the Commissioner had overstated her level of the work experience at the firm of chartered accountants, I am also of the view that Dr Glover understated her commercial abilities and work experience. Attached to the wife's witness statement was a letter from her former employer dated 25 January 1990. That letter states: [the wife] was responsible for the collation and coding of office disbursements in relation to photocopies and filing of computer output sheets relating to clients' time cost. [The wife] was responsible for lodging returns at the Australian Taxation Office, carrying out searches at Corporate Affairs Commission, attending to banking and other general duties, as required.
The wife's evidence was that the business partnership commenced on 1 July 1990. The partnership used the services of an accountant however, in 1992, the wife explained that she was unhappy with the accountant because he came across as being unorganised and unprofessional. She then acquired the services of Mr Klinkatsis. The taking of those steps indicates that the wife had some knowledge of what was required in respect of keeping business accounts otherwise she would not have been aware that the first accountant was performing unsatisfactorily. Also, having heard the wife give evidence, I am satisfied that she has significant skills with the English language. I have no idea as to the command of the English language held by the husband as he did not give evidence. However, there was nothing in the evidence which would suggest that the wife could not convey, accurately, any requirements regarding the recording of business transactions suggested or demanded by Mr Klinkatsis. The requirements are, relatively speaking, simple. The husband and wife only needed to record, in invoice books, all sales made by the business. They need to keep all invoices which were paid indicating business expenses. The wife was given a computer program in which to record income and expenses and was shown how to operate it. Had all of those transactions been faithfully recorded, the accountant would have had no difficulty at all in preparing accurate financial statements for the partnership or any documents required by the ATO.
Although Dr Glover submitted that the applicant banked trading receipts and did not conduct a cash business, the evidence was to the contrary. The wife made it clear that at one point in 2001 or 2002, she held at least $120,000 in cash at home. She even suggested that at one stage it might have been as high as $170,000. A careful examination of the evidence given by the wife regarding the source of those moneys disclosed that the stated sources could not possibly have resulted in an accretion of that much cash at that time. That finding supports the Commissioner's finding using the T-Accounts method that there was substantial unexplained income, some deposited in bank accounts and some undoubtedly kept in cash. Given that the evidence did not disclose any other possible sources of those moneys, the reasonable inference which must be drawn is that the husband and wife did not disclose all of their business transactions, some of them being conducted in cash. There was no evidence of gambling.
Dr Glover attempted to make much of Mr Klinkatsis' conduct in failing to reconcile bank statements. However, had all business outgoings and incomings been faithfully recorded, the applicants would not be in the position they now find themselves in. In fact, given that bank charges are recorded in the financial statements of the partnership, I am not convinced that bank statements were not provided to Mr Klinkatsis. There was no problem with the accounts or statements prepared by Mr Klinkatsis but rather, the problem was essentially with the lack of faithful recording of income and possibly expenditure.
Given the state of the evidence, I find that the applicants acted recklessly in providing information to Mr Klinkatsis who then lodged various documents with the ATO. Their actions disclosed disregard of or indifference to consequences foreseeable by a reasonable person. Those consequences were that there was a real risk that they had not complied with taxation laws. I have no doubt they were aware of that risk.
REMISSION OF PENALTY
Section 298-20 (1) of the Administration Act provides that the Commissioner may remit all or part of the penalty. The Act does not set out the basis upon which that discretion should be exercised.
The Full Court of the Federal Court (Spender, Ryan and Emmett JJ) in Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287 examined the basis upon which the discretion to remit penalties might be exercised. The Court set out in summary form the conclusions of the judge at first instance including:
·the circumstances relevant to the exercise of the discretion to remit are restricted to those relating to the conduct of the taxpayer and the taxpayer's circumstances;
·the amount of the shortfall amount is a relevant consideration in exercising the discretion to remit as it is directly referable to the particular circumstances of the taxpayer;
·the failure of the taxpayer to consult is relevant to the issue of recklessness but is also relevant to whether the taxpayer has made genuine attempts to comply with his obligations; and
·the rate of penalty is relevant because it determines the amount of penalty to be paid by a particular taxpayer in the relevant circumstances; the fact that the shortfall amount resulted from recklessness as to the operation of a taxation law is a relevant factor to weigh in conjunction with other factors arising from the particular circumstances of the taxpayer in reaching a decision as to whether the discretion to remit should be exercised.
The Court disagreed with the primary judge where she stated that it was necessary that there be special circumstances before the discretion to remit is exercised. However, it agreed that it was permissible for the Tribunal to exercise its discretion to remit by having regard to the fact that there was a harsh outcome. It did not disagree with the points I have referred to above.
In Re Hobart Central Childcare Pty Ltd and Federal Commissioner of Taxation (2005) 60 ATR 1314, Deputy President Forgie said, at 1357:
Section 298-20 of Sch 1 to the TAA provides that the Commissioner may remit all or part of a penalty. It does not set out any guidelines as governing the exercise of the discretion. Given the provisions relating to the imposition of penalties, there would clearly need to be circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of the ITAA 1936 and the TAA in supporting that purpose.
I respectfully adopt what Deputy President Forgie said in that case.
Given the nature of the conduct impugned by the Commissioner and the fact that I have found that the conduct of the applicants in this case did amount to recklessness, it is difficult to find any basis upon which remission would be justified. There was nothing in the behaviour of the applicants which could be regarded as mitigating in any way. They were aware of the risks in conducting the business affairs of the partnership in the way that they did. I do not accept Dr Glover's submissions that the applicants made a serious effort to comply with the taxation laws. There has been more than a minor divergence from proper procedures. Accordingly, I find that the penalties assessed by the Commissioner in this case should not be remitted.
CONCLUSION
Following an audit of the taxpayers’ affairs for the 2002 – 2006 income years, the Commissioner issued default assessments to the husband and wife regarding income tax and the amounts of taxable income on taxable supplies for GST purposes for the quarters 1 July 2001 – 30 June 2006. The Commissioner also issued penalty assessments to all entities.
The applicants sought to discharge the onus of proving that the Commissioner's assessments were excessive by the unorthodox method of preparing rival T-Accounts and Assets Betterment Statements for the years in question. The applicants contended that the Commissioner's assessments were excessive because of the magnitude of the Commissioner's errors and because the applicants' rival T-Accounts indicated the true taxable incomes of the applicants were significantly less than that calculated by the Commissioner.
I have found that because all the material facts in this case were not known, simply demonstrating that the Commissioner had made significant errors in his T-Accounts did not prove, on the balance of probabilities, that the amount assessed by the Commissioner was wrong. The applicants were required to go further and prove that the amount of the assessment was greater than their true taxable income.
I have also found that the applicants have not satisfied the onus of proving, on the balance of probabilities, that the Commissioner's assessments were excessive. The rival T-Accounts prepared by Mr Mond do not permit reasonable estimates of the true taxable income to be made. That is because the factual assumptions underpinning Mr Mond's accounts were not proved, on the balance of probabilities, either by the applicants or by Mr Mond.
The amended assessments issued by the Commissioner were issued outside the ordinary period of either two or four years within which the Commissioner is required to amend assessments. The only basis upon which those amended assessments can stand is if there was a finding of fraud or evasion. Although the Commissioner initially contended that the applicants had committed a fraud, on the hearing of this matter, that contention was discarded and the Commissioner relied solely on evasion. I have found that the Commissioner has made out a case of evasion and therefore the amended assessments are valid.
The Commissioner also contended that the applicants should be subjected to a 50% of the shortfall penalty because their conduct amounted to recklessness. Although the applicants attempted to shift blame to their accountant, I have found that they were solely responsible for the errors and omissions made when disclosing their business income from the partnership and, possibly, some business deductions. Accordingly, I have found that the applicants acted recklessly in the conduct of their taxation affairs.
Finally, I have not found any sound basis upon which the discretion to remit penalties could be exercised. I have declined to do so.
It is my opinion that the amended assessments issued to the partnership on 15 December 2009; to the wife on 17 December 2009; and to the husband on 22 December 2009 were correct. I am also of the opinion that the notices of assessment and liability to pay penalty for all three entities were also correct.
The Commissioner issued the partnership, the wife and the husband with objection decisions made on 31 May 2011. I affirm those decisions.

I certify that the preceding 148 (one hundred and forty-eight) paragraphs are a true copy of the reasons for the decision herein of Senior Member Egon Fice

....[sgd]....................................................................
Associate
Dated 14 August 2013

Dates of hearing 4-6 March 2013

Date final submissions received 8 May 2013

Counsel for the Applicants Dr J Glover

Representative for the Applicants David Mond & Associates

Counsel for the Respondent Mr N Evans

Solicitors for the Respondent Australian Taxation Office

Division	TAXATION APPEALS DIVISION
File Numbers	2011/2873 - 2011/2877 2011/2879 - 2011/2883 2011/2884 - 2011/2888
Re	Confidential
APPLICANTS
And	Commissioner of Taxation
RESPONDENT

Tribunal	Egon Fice, Senior Member
Date	14 August 2013
Place	Melbourne

Dates of hearing	4-6 March 2013
Date final submissions received	8 May 2013
Counsel for the Applicants	Dr J Glover
Representative for the Applicants	David Mond & Associates
Counsel for the Respondent	Mr N Evans
Solicitors for the Respondent	Australian Taxation Office