CONFIDENTIAL and COMMISSIONER OF TAXATION
[2013] AATA 112
•1 March 2013
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2010/4417-4420
TAXATION APPEALS DIVISION ) 2011/1983-1986Re:CONFIDENTIAL
Applicant
And:COMMISSIONER OF TAXATION
Respondent
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2010/4425-4428
TAXATION APPEALS DIVISION ) 2011/2000-2001Re:CONFIDENTIAL
Applicant
And:COMMISSIONER OF TAXATION
Respondent
CORRIGENDUM TO DECISIONS [2013] AATA 112
The Tribunal amends the details appearing at the end of its decisions of 1 March 2013 as follows:
1.by deleting the “s” that appears at the end of the applicant’s solicitor’s surname so that it is “Byrne”; and
2.by deleting the surname of “Alam” that appears for the respondent’s solicitor and replacing this with “Anwar.”
(sgd) S A Forgie
Deputy President
CATCHWORDS – TAXATION – whether undisclosed deposits correctly included in applicants’ respective assessable incomes as dividends under s 44(1) of ITAA36 or, alternatively, as deemed dividends under Division 7A of ITAA36 or, alternatively, as ordinary income under s 6-5 of ITAA97 – applicants did not discharge burden of proof – objection decisions affirmed subject to concessions made by respondent
CATCHWORDS – TAXATION – whether undisclosed deposits should be characterised as loans, fringe benefits or as a vehicle for protecting the assets of the corporate body of which the applicants were directors – no
CATCHWORDS – TAXATION – whether any undisclosed deposits treated as dividends should be treated as franked dividends - no
CATCHWORDS – PENALTIES – whether penalties correctly imposed – objection decisions affirmed
CATCHWORDS – PRACTICE AND PROCEDURE – whether respondent’s power to make amended assessments spent upon applicants’ lodging applications for review of objection decisions in the Tribunal – Commissioner retains power
CATCHWORDS – PRACTICE AND PROCEDURE – whether Tribunal may set assessments and amended assessments aside on the basis that they are void or invalid
CATCHWORDS – PRACTICE AND PROCEDURE – whether Commissioner should be required at the outset of the hearing to identify those of the documents lodged under s 37 of Administrative Appeals Tribunal Act 1975 (T documents) on which he relies and Tribunal admit only those in evidence – T documents admitted in their entirety
CATCHWORDS – PRACTICE AND PROCEDURE – whether Commissioner should produce the notices issued under s 264 of ITAA36 to the Australian Federal Police – not relevant in resolving issues
CATCHWORDS – PRACTICE AND PROCEDURE – a book “kept” under a requirement of Corporations Act 2001 is prima facie evidence of any matter stated or recorded in the book – meaning of “kept” dependent on particular requirement of Act – certain MYOB records not kept under such a requirement because of a type that should be kept contemporaneously – not compiled from copies of original invoices or contemporaneous documentation but from documents reconstructed by directors considerable time after transactions claimed to have occurred – limited or no means of tracing back to source - not “kept” as required under Corporations Act – not prima facie evidence
CATCHWORDS – PRACTICE AND PROCEDURE – expert witnesses – whether an accountant otherwise having relevant expertise must have previously worked in, or closely with, particular industry to qualify as an expert witness in this case – forensic accounting expertise is relevant expertise and experience in particular industry not relevant
CATCHWORDS – PRACTICE AND PROCEDURE – resolution of meeting of creditors to destroy company records – whether authorised – fact that desctruction authorised does not modify burden of proof carried by applicants
CATCHWORDS – PRACTICE AND PROCEDURE – whether probative value of evidence of ATO officer substantially outweighed by its prejudicial effect within meaning of s 135 of Evidence Act 1995 – whether principles underpinning provision relevant in Tribunal – whether evidence should be excluded as hearsay – whether applicants denied procedural fairness – evidence admitted
CATCHWORDS – PRACTICE AND PROCEDURE – rule in Jones v Dunkel not permit adverse inference to be drawn from applicants’ failure to call accountants as witnesses
CATCHWORDS – PRACTICE AND PROCEDURE – application for disqualification on basis of perceived bias – refused
CATCHWORDS – PRACTICE AND PROCEDURE – whether reasons should be given for decisions and rulings made on preliminary issues
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Darrell Lea Chocolate Shops Pty Ltd v Federal Commissioner of Taxation (1996)
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Director-General of Social Services v Chaney (1980) 31 ALR 571
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Driscoll v The Queen (1977) 137 CLR 517
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Federal Commissioner of Taxation v Blakeley (1951) 82 CLR 388
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42 FLR 403; 29 ALR 202; 80 ATC 4140
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Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd 97 ATC 4151
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Federal Commissioner of Taxation v Slater Holdings Ltd [1984] HCA 78; (1984) 156 CLR 447; 59 ALJR 89; 15 ATR 1299
Federal Commissioner of Taxation v Stokes [1996] FCA 1128; (1996) 72 FCR 160; 141 ALR 653; 34 ATR 478
Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) [2005] HCA 70; (2005) 225 CLR 488; 222 ALR 286; 2005 ATC 4,955;60 ATR 560; 80 ALJR 202
Federal Commissioner of Taxation v Tasman Group Services Pty Ltd [2009] FCAFC 148; (2009) 180 FCR 128; 74 ATR 739; 2009 ATC 20-138
Federal Commissioner of Taxation v Uther [1965] HCA 42; (1965) 112 CLR 630
Feltafield v Heidelberg Graphic Equipment (1995) 56 FCR 481
F J Bloemen Proprietary Limited v Federal Commissioner of Taxation [1987] 87 ATC 4,096
F J Bloemen Proprietary Limited v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360; 35 ALR 104; 55 ALJR 451; 11 ATR 914
Fleming v The Queen (1998) 197 CLR 250
Galea v Commissioner of Taxation [1990] FCA 456; (1990) 90 ATC 5060; 21 ATR 1108
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183
Goldsmith v Sandilands [2002] HCA 31; (2002) 190 ALR 370; 76 ALJR 1024
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25; (1990) 170 CLR 124; 93 ALR 193; 21 ATR 1; 64 ALJR 392; 90 ATC 4,413
Grant v Repatriation Commission [1999] FCA 1629; (1999) 57 ALD 1
Gray v National Crime Authority [2003] NSWSC 111
Grealy v Commissioner of Taxation [1989] FCA 28; (1989) 24 FCR 405; 20 ATR 403
Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; (1999) 151 FLR 191; 32 ACSR 124
Harlowe’s Nominees Pty Ltd v Woodside (Lake’s Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483
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Hart v Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203
Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47
HG v The Queen (1999) 197 CLR 414
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Henderson v Federal Commissioner of Taxation (1970) 70 ATC 4016
Hot Holdings Pty Ltd v Creasy [2002] HCA 51; (2002) 210 CLR 438; 193 ALR 90; 77 ALJR 70; 70 ALD 314
Hunt v Wark (1985) 40 SASR 489
Imperial Bottleshops and Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148; 91 ATC 4546
In re Harmony and Montague Tin and Copper Mining Co (Spargo’s Case) (1873) LR 8 Ch App 407
In re Hinchcliffe, a Person of Unsound Mind, Deceased [1894] 1 Ch 117
In the matter of Lawrence Waterhouse Pty Ltd (in liq) – Shaw v Minsden Pty Ltd [2011] NSWSC 964
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Ladic v Capital Territory Health Commission (1982) 5 ALN No 45
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Laws v Australian Broadcasting Tribunal [1990] HCA 31; (1990) 170 CLR 70; 93 ALR 435; 64 ALJR 412
Lever Bros Pty Ltd v Commissioner of Taxation [1948] HCA 25; (1948) 77 CLR 78
Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 1083
Livesey v New South Wales Bar Association [1983] HCA 17; (1983) 151 CLR 288; 47 ALR 45; 57 ALJR 420
Lombardo v Federal Commissioner of Taxation [1979] FCA 66; (1979) 28 ALR 574; 40 FLR 208; 10 ATR 310
Longhurst v Hunt [2004] NSWCA 91
Luxton v Vines (1952) 85 CLR 352
Ma v Commissioner of Taxation [1992] FCA 359; (1992) 37 FCR 225; 23 ATR 485; 27 ALD 601
MacFarlane v Commissioner of Taxation (1986) 13 FCR 356; 67 ALR 624; 17 ATR 808
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25 NSWCCR 218
Mandic v Phillis [2005] FCA 1279; 225 ALR 760
Marijancevic v Mann [2008] FCAFC 161; 73 ATR 709
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McKeown v Repatriation Commission (1995) 39 ALD 30; 22 AAR 229
McKinnon v Secretary, Department of Treasury [2006] HCA 45; (2006) 228 CLR 423
Michael Wilson & Partners Limited v Nicholls [2011] HCA 48; (2011) 244 CLR 427; 282 ALR 685; 86 ALJR 14
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Minister for Immigration and Multicultural Affairs v Eshutu (1999) 197 CLR 611;
162 ALR 577
Minister for Immigration and Multicultural Affairs v Jia Legeng [2001] HCA 17; (2001) 205 CLR 507; 178 ALR 421; 75 ALJR 679; 65 ALD 1
Minister of Immigration and Multicultural Affairs v Jia Le Geng [1996] FCA 1930
Minister for Immigration and Ethnic Affairs v Kurtovic [1990] FCA 22; (1990)
21 FCR 193; 92 ALR 93
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New York Property Pty Ltd v Commissioner of Taxation (1985) 7 FCR 401
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Oceanic Sun Line Special Shipping Co Inc v Fay [1988] HCA 32; (1988) 62 ALJR 389
O’Sullivan v Repatriation Commission [2003] FCA 387; (2003) 128 FCR 590; 74 ALD 407; 37 AAR 169
Ordukaya v Hicks [2000] NSWCA 180
Pearson v Deputy Commissioner of Taxation [2009] FCA 558; (2009) 74 ATR 437
Pham v Secretary, Department of Employment and Workplace Relations [2007] FCA 2049
Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia [2009] FCA 1203
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Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; (2004) 213 ALR 450; 58 ATR 210
Prudential Assurance Co v Fountain Page [1991] 3 All ER 878; 1 WLR 756
Public Service Board of New South Wales v Osmond [1986] HCA 7; (1986) 159 CLR 656; 63 ALR 559; 60 ALJR 209
Quick v Stoland Pty Ltd (1998) 87 FCR 371
R v Bartlett [1996] 2 VR 687
R v Bonython (1984) 38 SASR 45
R v Connell (1996) 14 ACLC 32
R v Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR 249;
72 ALR 365; 18 ATR 570
R v Essex Justices; Ex parte McCarthy [1924] 1 KB 256
R v JRL; Ex parte CJL (1986) 161 CLR 342
R v Lam (2001) 121 A Crim R 272
R v Swaffield (1998) 192 CLR 159
R v Turner (No 17) [2002] TASSC 18; (2002) 10 Tas R 388
R v Watson; Ex parte Armstrong (1976) 136 CLR 248; 50 ALJR 778; 9 ALR 551
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Re An Application for Writs of Certiorari and Mandamus against Burton; Ex parte Burns [1998] WASC 98
Re Becker and Minister for Immigration and Ethnic Affairs (1977) 1 ALD 158; 15 ALR 696
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Ego Pharmaceuticals Pty Ltd and Minister for Health and Ageing [2012] AATA 113; (2012) 56 AAR 373; 125 ALD 588
Re Gee and Director-General of Social Services (1981) 3 ALD 132; 58 FLR 347
Re Gould and Companies Auditors and Liquidators Disciplinary Board and Anor [2007] AATA 1914; (2007) 98 ALD 662; 46 AAR 125
Re Hutson and Commissioner of Taxation [2009] AATA 574; [2009] ATC 10-099
Re Kocic & Anor and Federal Commissioner of Taxation [2011] AATA 47; 2011 ATC 10-174
Re Kowalski and Repatriation Commission [2011] AATA 634
Re Losberg and Australian Telecommunications Corporation [1992] AATA 652
Re Lowe and Secretary to the Department of Social Security [1986] AATA 309
Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Palme [2003] HCA 56; (2003) 216 CLR 212
Re Morris; Ex parte Donnelly (1997) 77 FCR 301
Re Phillips and Inspector-General in Bankruptcy [2012] AATA 788
Re Rana and Military Rehabilitation and Compensation Commission [2008] AATA 558; (2008) 104 ALD 595; 48 AAR 385
Re Robert George Quinn v Brian Alexander Given [1980] FCA 23; (1980) 41 FLR 416
Re Sinclair and Commissioner of Taxation [2010] AATA 902; (2010) 80 ATR 972
Re Sleiman and Companies and Liquidators Disciplinary Board [2007] AATA 1892; (2007) 46 AAR 374; 98 ALD 170
Re Waffles Pty Ltd and Commissioner of Taxation [2010] AATA 78; 2010 ATC 1-020; 75 ATR 376
Re Yip and Commissioner of Taxation [2011] AATA 785; 2011 ATC 10-214; (2011) 82 ATR 761
Repatriation Commission v O’Brien [1985] HCA 10; (1985) 155 CLR 422;58 ALR 119; 59 ALJR 363
Repatriation Commission v Warren [2008] FCAFC 64; (2008) 167 FCR 511; 246 ALR 279; 47 AAR 461; 101 ALD 222
Residues Treatment and Trading Company Ltd v Southern Resources Ltd (1989)
52 SASR 54; 7 ACLC 608
Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192
Richard Walter, Kennedy v Administrative Appeals Tribunal [2008] FCAFC 124; (2008) 168 FCR 566; 249 ALR 87; 103 ALD 238; [2008] ATC 20-037; 48 AAR 500; 73 ATR 276
Robbins v Harbord (1994) 62 SASR 229
Robert Bosch (Aust) Pty Ltd v Fice (Member of Administrative Appeals Tribunal) [2009] FCA 247; (2009) 175 FCR 258
Rose & Bloxham v AE Bridges (1997) 79 FCR 378
Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vic) [2001] HCA 49; (2001) 207 CLR 72; 181 ALR 307; 75 ALJR 1342; 47 ATR 541
RW Miller & Co Pty Ltd v Krupp (Australia) Pty Ltd (1991) 34 NSWLR 129
Saville v Health Care Complaints Commission & Anor [2006] NSWCA 298
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514
Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215
Shi v Migration Agents Registration Authority [2008] HCA 31; (2008) 235 CLR 286; 248 ALR 390; 103 ALD 467; 82 ALJR 1147; 48 AAR 345
Smorgon v Australia & New Zealand Banking Group Ltd [1976] HCA 53; (1976) 134 CLR 475
Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247
Stokes v Federal Commissioner of Taxation (1996) 136 ALR 632; 32 ATR 500
Summers v Repatriation Commission [2012] FCAFC 104
Summons v Federal Commissioner of Taxation (1986) 80 ALR 95
Sun v Minister for Immigration and Ethnic Affairs [1997] FCA 324
The Duke Group (In liq) v Pilmer (1994) 63 SASR 364; 123 FLR 210; 15 ACSR 255
The King v Deputy Federal Commissioner of Taxation for South Australia; Ex parte Hooper [1926] HCA 3; (1926) 37 CLR 368
The Ophelia [1916] 2 AC 206
The Queen v Duke (1979) 22 SASR 46
The Roads and Traffic Authority of New South Wales v Commissioner of Taxation [1993] FCA 314; (1993) 43 FCR 223; 116 ALR 482; 26 ATR 76
Tisdall v Webber [2011] FCAFC 76; (2011) 193 FCR 260
Transport Accident Commission v Bausch [1998] 4 VR 249; 13 VAR 61
Trade Practices Commission v Arnotts Ltd (No.2) (1989) 21 FCR 306; 88 ALR 90
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Tubby Trout Pty Ltd v Sailbay Pty Ltd (1992) 42 FCR 595; 113 ALR 748
TVW Enterprises Ltd v Australian Broadcasting Tribunal (1986) 11 FCR 293; 64 ALR 279
Van Reesema v Flavel (1992) 10 ACLC 291; 7 ACSR 225
Valoutin v Furst [1998] FCA 339; (1998) 154 ALR 119
VL Finance Pty Ltd v Francesco Legudi and Anthony Legudi [2003] VSC 57; (2003) 54 ATR 221
Vu v Commissioner of Taxation [2006] FCA 889; (2006) 63 ATR 341
Walstern Pty Ltd v Federal Commissioner of Taxation [2003] FCA 1428; (2003)
138 FCR 1; 54 ATR 423; 2003 ATC 5,076
Wang v Minister for Immigration and Multicultural Affairs [1997] FCA 70; (1997)
71 FCR 386; 151 ALR 717; 45 ALD 104
Weal v Bottom (1966) 40 ALJR 436
Webb v The Queen (1994) 181 CLR 41; 122 ALR 41; 73 A Crim R 258
Weyers & Anor v Federal Commissioner of Taxation [2006] FCA 818; (2006) 63 ATR 268
Wilson v Minister for Aboriginal and Torres Strait Islander Affairs [1996] HCA 18; (1996) 189 CLR 1
Witham v Holloway [1995] HCA 3; (1995) 183 CLR 525; 131 ALR 401; 69 ALJR 847
WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2008] HCA 33; (2008) 237 CLR 198; 248 ALR 256; 69 ATR 29; 82 ALJR 1211; [2008] ATC 20-040
Yolbir v Administrative Appeals Tribunal and Anor (1994) 48 FCR 246; 33 ALD 8;
19 AAR 15
Acts Interpretation Act 1901, ss 15AB, 25D
Administrative Appeals Tribunal Act 1975, ss 2A, 3, 6, 10B, 25, 26, 28, 33, 35, 36D, 37, 38, 39, 40, 41, 42A, 43, 44, 46, Sch 2
Administrative Decisions (Judicial Review) Act 1977, ss 3, 5, 13
Bankruptcy Act 1966, s 81
Broadcasting and Television Act 1942
Commonwealth of Australia Constitution Act, ss 75(v)
Companies (South Australia) Code, s 550
Corporations Act 2001, ss 9, 50, 50A, 286, 288, 292, 477, 506, 542, 601AD, 1305, 1306, 1307
Evidence Act 1898 (NSW)
Evidence Act 1958-1970, s 98B
Evidence Act 1905, s 7B
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Wigmore on Evidence (1978), Vol 7, par 1917
DECISIONS AND REASONS FOR DECISIONS [2013] AATA 112
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2010/4417-4420
TAXATION APPEALS DIVISION ) 2011/1983-1986
ReCONFIDENTIAL
Applicant
AndCOMMISSIONER OF TAXATION
Respondent
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2010/4425-4428
TAXATION APPEALS DIVISION ) 2011/2000-2001
ReCONFIDENTIAL
Applicant
AndCOMMISSIONER OF TAXATION
Respondent
DECISIONS
Tribunal: Deputy President S A Forgie
Date: 1 March 2013
Place: Melbourne
Decision:The Tribunal decides to:
(1)set aside those parts of the Commissioner’s objection decisions relating to assessments of the amount of tax and penalties payable by Bert and Fred in so far as they relate to:
(a) a donation of $25,000 to the Church;
(b)a payment of $86,500 made on 3 August 2006 to the State Revenue Office; and
(c)adjustments and concessions made by the Commissioner prior to the hearing and reflected in Amended Annexure to the Commissioner’s second Statement of Facts and Contentions and received by the Tribunal on 23 April 2012;
(2)remit the objection decisions to amend the assessments in light of those three matters; and
(3) otherwise affirm the Commissioner’s objection decisions.
S A Forgie
Deputy President
REASONS FOR DECISIONS
Between October 2004 and 30 June 2008, the applicants, to whom I will refer as Bert and Fred, were co-directors and employees of a company, to which I will refer as Freanert Enterprises (Australia) Pty Ltd (Freanert).[1] Bert and Fred have applied for review of decisions made by the Commissioner of Taxation (Commissioner) disallowing their objections against amended assessments and assessments of penalties issued in relation to the income years ending 30 June 2005, 2006, 2007 and 2008 (four income years) and the income year ending 30 June 2009.
[1] On 16 April 2012, the Tribunal made a record of the applicants’ request on 16 April 2012 that the hearing be held in private. The hearing was held in accordance with s 14ZZE of the Taxation Administration Act (TAA). These reasons have been written in accordance with the requirement imposed by s 43(2D)(b) of the AAT Act that I must ensure, as far as practicable, that they are framed so as not to be likely to enable the identification of Bert and Fred. That provision is inserted in the AAT Act by s 14ZZJ of the TAA for the review of reviewable objection decisions.
Through their counsel, Dr Orow, Bert and Fred have challenged the objection decisions and raised the following issues:
(1)whether the assessments are void;
(2)to the extent that the Commissioner has knowingly included in assessments issued to Fred amounts already assessed to Bert, whether the assessments are infected by bad faith and invalid;
(3)whether it is open to Bert and Fred to challenge the validity of those assessments in these proceedings;
(4)to the extent that the Freanert Westpac account was used to pay expenses and benefits on behalf of Bert and Fred and for the acquisition of property in their names or those of associated entities, does Bert and Fred’s assessable income include an amount in the nature of:
(a)a dividend under s 44(1) of Income Tax Assessment Act 1936 (ITAA36);
(b)ordinary income under s 6-5 of Income Tax Assessment Act 1997 (ITAA97); or
(c)a deemed dividend under Division 7A of Part III of ITAA36 (Division 7A)?
(5)whether Bert and Fred may properly be assessed in the 2009 year of income:
(a)on amounts purportedly declared as dividends by Freanert but not recognised as such by the Commissioner in settlement of its tax liability; and
(b)if so, whether the dividends should be treated as frankable distributions;
(6)to the extent that the Commissioner relies on Division 7A:
(a)whether he exercised his discretion under s 109Y of ITAA36 to substitute an alternative value for Freanert’s assets; and
(b)if so:
(i)whether it was open to him to do so given that Freanert’s accounting records did not significantly undervalue its records; and
(ii)whether the values adopted by the Commissioner were the appropriate values.
(7)whether the assessments were issued with the time limits prescribed by s 170 of ITAA36; and
(8)whether the penalties were properly assessed.
The Commissioner prepared a table specifying the amounts that remained in issue. I have omitted the references to those amounts in Bert’s statement at Exhibit A and item 6 as he conceded that item at the beginning of closing submissions.[2] I have also omitted item 9 because that is an amount that has been conceded by Bert and Fred:[3]
[2] The payment was a donation of $25,000 to a Church by cheque drawn on the Freanert Westpac account and noted as received from Bert and Fred by the Church at Exhibit D. The Commissioner accepted it as a personal donation by Bert and Fred and that each was entitled to a deduction of $12,500: transcript at 1048.
[3] Transcript at 362 and 352. Item 9 concerned an alleged payment of $86,500 made to or on behalf of Freanert from Bert’s CBA account on 3 August 2006 (alleged State Revenue Office (SRO) payment). It was part of a larger amount comprised of alleged payments of $1,583,500 made from Bert’s CBA account. They are no longer in dispute. Amounts totalling $800,000 were allowed by the Commissioner during the audit and he conceded a further $697,000 prior to the hearing.
| Issue No | Issue | Amount |
| 1 | Direct payment Bert to subcontractors on behalf of Freanert between 2005-2008 | $979,953 |
| 2 | Further direct payments by Bert to Freanert for 2009 income year | $513,000 |
| 3 | Payments to subcontractors from Freanert Westpac account for 2005 to 2008 income years | $19,674,517 |
| 4 | $100,000 transfer from Freanert Westpac account to Freanert CBA account on 5 December 2005[4] | $100,000 |
| 5 | Payments of $1,014,500 from Freanert Westpac account to Freanert Assets | $1,014,500 |
| 6 | … | |
| 7 | Deposit of $50,000 to Freanert CBA account on 22 March 2007 from Bert and Nan’s Westpac loan account | $300,000 |
| 8 | Deposit of $50,000 to Freanert CBA account on 10 January 2005 from Bert and Nan’s Westpac loan account (alleged loan repayment by Jack, Managing Director of Galaxy Pty Ltd) | $50,000[5] |
| 9 | … | |
| 10 | Payment of $50,028 made by cash cheque on Bert’s CBA account on 17 February 2005 (alleged payment to Duchy Assets Pty Ltd | $50,028 |
| 11 | Payments made from the CBA account of Dinahjo Pty Ltd during the 2005 to 2008 income years | $430,000 |
| 12 | Payments made by Freanert Assets to Bert in 2005 | $519,469 |
[4] Original amount in dispute was $2,780,000 but $1,970,000 allowed during audit and Commissioner conceded a further $100,000 prior to the hearing.
[5] Issues 7 and 8 form part of a claim made for $540,000. Of this amount, the Commissioner conceded $190,000 before the hearing and a further $300,000 had been allowed during audit: Bert’s 2010 T documents; T11 at 127-137. A balance of $50,000 remains in dispute.
Except for concessions made by the Commissioner prior to or during the course of the hearing or before it, I have decided to affirm the Commissioner’s objection decisions relating to Bert and Fred. In essence, this means that I have not accepted Bert and Fred’s major contentions that they received loans or fringe benefits from Freanert rather than dividends or deemed dividends. Again in essence, I have not done so because they have not kept contemporaneous records in relation to an account from which they withdrew a considerable proportion of the moneys paid to them from Freanert. The records they have kept are reconstructed records unsupported by primary documentary material such as invoices. The inadequacies in their record keeping necessarily affect the weight I can give expert evidence based upon it.
During the course of the proceedings, Dr Orow also raised a considerable number of procedural and evidentiary points. He has requested written reasons for those to be given as part of these reasons. I have prepared them in a series of Attachments that form part of these reasons. The first attachment, Attachment A, contains an index to the remainder. Having been asked by Bert and Fred under s 14ZZE of the Taxation Administration Act 1953 (TAA) to hear the proceedings in private, I have adopted a number of pseudonyms for the purposes of writing these reasons. These are set out in Attachment P but, consistent with my obligations under s 43 of the Administrative Appeals Tribunal Act 1975 (AAT Act) as modified by s 14ZZJ of the TAA, that Attachment is available only to the parties.
| INDEX 6. | ||
| Attachment | Description | Paragraphs |
| Attachment A | Index | [6] |
| Attachment B | Background | [8]-[75] |
| Attachment C | Evidence on certain issues | [76]-[158] |
| Attachment D | Extent of obligation to give reasons for decisions or rulings on preliminary matters | [159]-[215] |
| Attachment E | Validity of assessments and amended assessments | [216]-[328] |
| Attachment F | Procedural and evidentiary matters | [329]-[559] |
| Attachment G | Request to issue summons to Commissioner | [560]-[572] |
| Attachment H | Production of documents | [573]-[575] |
| Attachment I | Application to disqualify myself | [576]-[601] |
| Attachment J | Did Bert and Fred derive dividends: 2005-2008? | [602]-[762] |
| Attachment K | Should dividends be treated as franked dividends? | [763]-[786] |
| Attachment L | Deemed dividends under Division 7A | [787]-[828] |
| Attachment M | Are the amounts assessable as ordinary income? | [829]-[838] |
| Attachment N | Fringe benefits | [839]-[875] |
| Attachment O | Penalties and Decision | [876]-[942] |
| Attachment P | Legend setting out pseudonyms (available only to the parties and their legal representatives) | [943] |
PSEUDONYMS (where used) FOR APPLICANTS AND OTHERS AND THEIR ROLES
7.
| Pseudonym | Brief summary of role |
| Individuals: family groups | |
| Bert | Director of Freanert Pty Ltd and other companies |
| Nan | Wife of Bert |
| Michelle | Bert and Nan’s daughter |
| Anthony | Bert and Nan’s son in law |
| Fred | Director of Freanert Pty Ltd and other companies |
| Flossie | Wife of Fred |
| Robert | Fred and Flossie’s son |
| Individuals: others | |
| Danny | Responsible for coordinating night sub-contractors working on Client A’s work |
| Jack | Director of Galaxy Pty Ltd |
| Mary | Personal Assistant to Bert and Fred |
| Richard | Director and shareholder of Samjohn Pty Ltd and engaged in its management |
| Relationship Executive | Relationship Manager, Commonwealth Bank of Australia |
| Risk Executive | Risk Executive Officer, Commonwealth Bank of Australia |
| Samantha | Personal Assistant to Bert and Fred |
| Companies: associated with family groups | |
| Freanert Assets Pty Ltd | Changed name to Lake Services Pty Ltd and then wound up |
| Freanert Pty Ltd | Bought business of Freanert Assets Pty Ltd |
| Samjohn Pty Ltd | Staff from Freanert Assets Pty Ltd transferred to it Subcontractor to Freanert Pty Ltd |
| Richboh Agents Pty Ltd | Directors: Bert and Nan; Fred and Flossie Shareholders: Bert and Nan; Fred and Flossie |
| Marilyn Pty Ltd | Director: Nan Shareholder: Nan |
| Lake Services Pty Ltd | Formerly Freanert Assets Pty Ltd |
| Snapsno Flat Pty Ltd | Directors: Bert and Fred Shareholder: Bert |
| Dinahjo Pty Ltd | Directors: Bert and Nan; Fred and Flossie Shareholders: Bert and Lake Services Pty Ltd |
| Fred Nominees Pty Ltd | Director: Flossie Shareholder: Flossie |
| Companies: other | |
| Duchy Assets Pty Ltd | Freanert Pty Ltd subcontractor |
| Galaxy Pty Ltd | Director: Jack Contracted to perform services for Client L and subcontracted work to Freanert |
| Bank | |
| Nemo Bank | Fred had an account at the Nemo Bank |
| Others | |
| Client A | Client of Freanert Pty Ltd |
| Client B | Client of Freanert Pty Ltd |
| Client L | Client of Galaxy Pty Ltd to whom Freanert Pty Ltd was a subcontractor |
| Houses | |
| House 1 | Owned: Fred Nominees Pty Ltd and Marilyn Pty Ltd |
| House 2 | Owned: Snapsno Flat Pty Ltd |
| House 3 | Owned: Snapsno Flat Pty Ltd |
| House 4 | Owned: Michelle and Anthony |
| House 5 | Owned: Nan |
| House 6 | Owned: Fred Nominees Pty Ltd |
| House 7 | Owned: Robert |
BACKGROUND
On the basis of Bert’s evidence, I find that he and Fred are brothers in law and have been in business together for some 28 years.[6] Of particular concern in this case are the businesses they have conducted through Freanert and related companies.
[6] Transcript at 35
Freanert Assets[7]
[7] Unless otherwise indicated, these findings are based on the relevant extracts from the records of the Australian Securities and Investments Commission: Exhibit A at Exhibits GH-5 and GH-10.
Freanert’s service industry business was previously operated by another company which I will refer to as Freanert Assets Pty Ltd (Freanert Assets). That other company provided those services to a number of clients in Melbourne. Those clients required the services to varying degrees and with varying requirements at varying times during the day and night.
Together with their wives, Nan and Flossie, Bert and Fred were directors of Freanert Assets. Freanert Assets sold its assets to Freanert. The copy of the contract of sale is undated and unsigned but I find that instructions were given for the preparation of the contract in mid November 2004.[8]
[8] FST documents; FST10 at 287
Some time after its assets were sold to Freanert, Freanert Assets ceased trading. I accept Bert’s evidence that it did so in order to reduce the payments it was making by way of Workcover premiums for its staff. Had it continued to operate, Bert believed that its premiums would have been in excess of $1 million each year.[9]
[9] Transcript at 39 and Exhibit A at [17] and Exhibit …-9
Freanert Assets changed its name to Lake Services Pty Ltd (Lake Services) on 22 September 2006 and, on 17 October 2006, a liquidator was appointed.[10] Fred certified a Report as to Affairs showing that Lake’s liabilities totalled $1,272,592.43 and included a debt of $507,478.43 owed to the Australian Taxation Office (ATO). Freanert Assets was wound up on 19 May 2008 under s 509 of the Corporations Act 2001 (Corporations Act).
[10] In the Commissioner’s Statement of Facts and Contentions at [10], the liquidator was said to have been appointed by resolution of the creditors. The minutes of the meeting of creditors also held on 17 October 2006 suggest, however, that the liquidator was appointed by a meeting of the members of Lake Services held just prior to the creditors’ meeting. The creditors’ meeting confirmed the appointment of the liquidator, Mr Samuel Richwol. See Further Supplementary T documents (FST documents), FST29 at 579-580
Freanert
A.Freanert and its business
Freanert was incorporated on 8 October 2004. Bert and Fred now each own 50 of Freanert’s issued capital comprising 100 ordinary class shares and Bert is its Company Secretary. At earlier times, two other persons had owned shares. I will refer only to one of them and will call him “Richard”. Reading ASIC’s Historical Company Extract with events relating to the CBA, it appears that Richard held 62 shares in Freanert until approximately 21 July 2006.[11]
[11] Exhibit A at Exhibit-5 at 5
Until it was placed in administration, Freanert conducted the business offering the same services as those previously offered by Freanert Assets. In the main, Bert managed the business relating to its largest two clients. I will call them Client A and Client Z.[12]
[12] Transcript at 159
Rather than engaging staff as Freanert Assets had done, Freanert largely operated through sub-contractors rather than through employees. It did have employees, though, but they were limited to two operations managers, nine contract managers and two secretaries. Bert had calculated that to engage sub-contractors to provide the services that were at the heart of Freanert’s business would save it a considerable amount of money. He worked with a former staff member whom I will call “Danny” and appointed him to a position responsible for the management of the sub-contractors providing the services rendered during the night. Services to be provided at night were managed through an office located in the Central Business District of Melbourne (Melbourne office). Freanert kept all of the documents relating to the services provided at night in its Melbourne office.
Bert told Danny that, if he were successful in reducing Freanert’s costs after it had moved to contract labour and if Freanert did not incur any penalties in respect of the contracts for Clients A and Z for which he was managing the labour, he would receive a commission. Any commission would be payable at the conclusion of the contract with Client A. The term of the contract was three years.[13]
[13] Transcript at 209
B.Freanert placed in administration on 6 December 2009
On 6 December 2009, Freanert’s directors passed a resolution to appoint three persons as joint and several administrators. The administrators are all partners of Pitcher Partners. On 9 July 2010, its creditors resolved that Freanert execute a deed of company arrangement under the Corporations Act. It did this on 28 July 2010. Under that deed, Freanert’s officers continued to manage the company and its business but the administrators established a Deed Administration Fund into which various amounts were paid. Among those amounts were amounts paid by Bert and Fred in the order of $3 million. Some $11 million has been paid from that fund to the Commissioner of Taxation as one of its creditors.[14]
[14] Exhibit A at [12] and Exhibit …-6
Other companies of which Bert and Fred are directors
18.
| Company pseudonym | Status | Directors | Shareholders |
| Samjohn Pty Ltd (Samjohn)[15] (Many of Freanert Asset’s staff transferred to it) (Engaged by Freanert as a subcontractor) | Dissolved 4/2/2010 (s 509, Corporations Act) | Bert and Fred (6/1/2007 – 31/7/2007) Richard (17/05/1999 – 04/02/2010) (All actively involved in its management until 31/07/2007)[16] | Richard and three other entities not involved with these proceedings. |
| Snapsno Flat Pty Ltd (Snapsno Flat) [17] | Registered | Fred (24/08/2006 – Bert (22/05/2008 - | Fred |
| Dinahjo Pty Ltd (Dinahjo)[18] | Registered | Bert and Nan and Fred and Flossie | Bert (1 share) Lake Services (4 shares) |
| Richboh Pty Ltd (Richboh)[19] | Registered | Bert, Nan, Fred and Flossie | Shares held equally among Bert, Nan, Fred and Flossie |
| Marilyn Pty Ltd | Registered | Nan | Nan |
[15] Exhibit A at Exhibit …-11
[16] Bert’s oral evidence: Transcript at 109 and 112
[17] Exhibit A at Exhibit …-36
[18] Exhibit A at Exhibit …-27
[19] Transcript at 150
| Company pseudonym | Status | Directors | Shareholders |
| Fred Nominees Pty Ltd | Registered | Flossie | Flossie |
Bank accounts operated by Freanert Assets
Until July 2006, Freanert Assets operated a Westpac Bank account (Freanert Assets account). It also banked with the Commonwealth Bank of Australia (CBA).[20]
[20] Bert’s evidence; Transcript at 124
Bank accounts operated by Freanert
In the four income years, Freanert operated a cheque account with overdraft facilities with the Commonwealth Bank (Freanert CBA account) and a Westpac Bank business cheque account in the names of Bert and Fred trading as Freanert Services (Freanert Westpac account).
Bank accounts operated by Bert and Fred
Throughout the four income years in question, Bert operated three Gold Mastercard accounts and one Platinum Visa account held with CBA (Bert’s credit card accounts). He also had a Streamline Account with CBA (Bert’s CBA account) and, together with his wife, whom I will call “Nan”, a Loan Account with Westpac (Bert and Nan’s Westpac loan account).
In the same period, Fred and his wife, whom I will call “Flossie”, jointly held a Streamline Account with CBA (Fred and Flossie’s Streamline Account). Fred also had a credit card with CBA (Fred’s credit card account) and an account with a third bank, which I will call the “Nemo Bank” (Fred’s Nemo account).
Freanert’s funding by CBA
CBA provided banking facilities to Freanert but on certain conditions. The facilities were a contingent liability bank guarantee in the sum of $500,000 and overdraft facilities of $1,000,000 and were set out in the letter of offer from the CBA to Bert and Fred on 15 March 2005.[21] One condition was that it hold securities. They were a registrable equitable mortgage by Freanert Assets over the whole of its assets, an unlimited guarantee by Dinahjo supported by a mortgage over a commercial property in Brunswick of which it was the registered owner and had been for a very long time,[22] a guarantee by Freanert supported by a registrable equitable mortgage over the whole of its assets, undertakings and uncalled for capital and personal guarantees limited to $49,540.00 from each of Bert and Fred.[23] Another of the CBA’s conditions Bert and Fred to give it written confirmation that all company and personal taxes of Freanert and its guarantors had been paid and that they do so each quarter. Another condition of the CBA’s extending banking facilities to Freanert was the, by 1 August 2005, all shares held by Richard in Freanert had been transferred to either Bert or Fred.[24]
[21] FST documents; FST19 at 474
[22] Bert’s evidence; Transcript at 124
[23] FST documents; FST19 at 511
[24] FST documents; FST19 at 477
Before it approved the banking facilities, the CBA required Freanert to provide financial statements for each of the four income years from 2005 to 2008. Each showed the total of share capital and reserves, current assets and non current assets, current and non current liabilities and net assets. Each disclosed share capital of $100 made up of 100 ordinary shares of $1 and no assets in the form of shareholder loans. Each showed shareholder entitlements. In 2005, the shareholder was not identified and only an amount of $201,770 was recorded.[25] In 2006, 2007 and 2008, an entry was made for “unsecured loans - …[Fred and Flossie]” for $625,649, $507,372 and $222,752 respectively.[26]
[25] FST documents; FST52 at 1196
[26] FST documents; FST52 at 1215,1237 and 1259
Property acquired for Bert and Fred and/or for associated entities
During the four income years, Bert and Fred purchased various properties. These properties were addressed in Ms Schilling’s cross-examination of Bert and in Mr Yeo’s investigation of the drawings by Freanert’s directors. On the basis of that evidence, I find that the following properties were purchased in the four
income years in the following names:
Family group
Registered proprietor
Purchase price
(GST)
Date of registration of transfer
Description of property
Bert and Fred’s
Fred Nominees Pty Ltd[27] and Marilyn Pty Ltd[28]
$3.92m
($215,000)
3 October 2006
House 1
Bert and Fred’s
Snapsno Flat
$675,000
($37,125)
16 May 2007
House 2
Bert and Fred’s
Snapsno Flat
$675,000
($37,125)
16 May 2007
House 3
Bert’s
Bert’s daughter and son in law
$1.7m
($93,500)
4 May 2006
House 4
Bert’s
Nan
$3.85m
($211,750)
30 December 2008
House 5
Fred’s
Fred Nominees Pty Ltd[29]
$690,000
($37,060)
30 June 2006
House 6
Fred’s
Fred and Flossie’s son
$1.17m
($64,350)
20 January 2009
House 7
TOTAL
$12.68m
[27] Fred Family Nominees Pty Ltd acted as the trustee for Fred’s Family Trust
[28] Nan is a director of the company I have called “Marilyn Pty Ltd”
[29] Flossie is a director of the company I have called “Fred Family Nominees Pty Ltd”
Freanert Assets’ income tax returns
For the 2004 and 2005 income years, Freanert Assets disclosed the following information:
| Description | 2004 | 2005 |
| Operating profit | $44,139 | $1,682,916 |
| Net assets | $732,002 | Not disclosed |
| Dividends | $60,000 | Not paid |
Freanert’s income tax returns
Freanert lodged income tax returns, and amended returns, in respect of the 2005, 2006 and 2007 income years in question. It lodged its return for the income year ending 30 June 2008 on 4 June 2009 and so after the due date for lodgement. The Commissioner did not process the tax return for, by that time, he had completed an audit and had prepared to issue a default assessment. The following table shows the amounts returned by Freanert for the first three income years and the amounts
determined by the Commissioner on the default assessment in respect of the fourth:
| Summary of Freanert’s income tax returns | |||||||
| Year | 2005 | 2005AMDT | 2006 | 2006AMDT | 2007 | 2007AMDT | 2008 Audit |
| Income | $5,209,107 | $5,209,107 | $12,250,385 | $12,250,385 | $13,205,044 | $13,205,044 | $7,972,802 |
| Expenses | $5,826,841 | $5,276,841 | $13,423,212 | $12,123,212 | $14,368,443 | $13,068,443 | $ 0 |
| Taxable income/ | $(614,569) | $(64,569) | $(1,158,503) | $72,018 | $(1,156,243) | $141,747 | $7,972,802 |
Bert and Fred’s income tax returns and assessments for the four income years
A. Bert
Bert lodged his income tax returns for the 2005, 2006 and 2007 income years on 1 November 2008 and, for the 2008 income year, on 25 May 2009. The income disclosed by Bert is summarised in the following table:
| Year | 2005[30] | 2006[31] | 2007[32] | 2008[33] |
| Income | ||||
| Income: employment by Freanert | $0 | $5,400 | $5,400 | $5,400 |
| Directors’ fees/allowance | $3,750 | $3,750 | $0 | $0 |
| Gross interest | $0 | $1,030 | $316 | $900 |
| Dividends – Franked amount | $15,000 | $15,000 | $0 | $0 |
| Dividends – Franking credit | $6,428 | $6,428 | $0 | $0 |
| Distribution from trusts (non pp) | $0 | $66,039 | $76,219 | $72,968 |
| Total income | $25,178 | $97,647 | $81,935 | $79,268 |
| Deductions | None | None | None | None |
| Taxable income/ | $25,128 | $97,647 | $81,935 | $79,268 |
[30] Documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 in No. 2010/4425-4428 (Bert’s T documents); T3 at 75-82
[31] Bert’s T documents; T4 at 83-90
[32] Bert’s T documents; T5 at 91-98
[33] Bert’s T documents; T6 at 99-106
The Commissioner issued notices of assessment to Bert on 6 November 2008 for the 2005, 2006 and 2007 years and on 29 May 2009 for the 2008 income year.[34]
[34] Bert’s T documents; T 7 to T10 at 107-111
B. Fred
Fred also lodged his income tax returns for the 2005, 2006 and 2007 income years on 1 November 2008 and, for the 2008 income year, on 25 May 2009. The income disclosed by Fred is summarised in the following table:
| Year | 2005[35] | 2006[36] | 2007[37] | 2008[38] |
| Income | ||||
| Income: employment by Freanert | $0 | $5,400 | $5,400 | $5,400 |
| Directors’ fees/allowance | $3,750 | $3,750 | $0 | $5,400 |
| Gross interest | $527 | $12,126 | $57,707 | $61,118 |
| Dividends – Franked amount | $15,000 | $15,000 | $0 | $0 |
| Dividends – Franking credit | $6,428 | $6,428 | $0 | $0 |
| Distribution from trusts (non pp) | $86 | $121 | $156 | $0 |
| Net CGT | $130 | $257 | $354 | $0 |
| Foreign source income | $2 | $22 | $3 | $0 |
| Total income | $25,923 | $43,104 | $74,420 | $71,918 |
| Deductions | None | None | None | None |
| Taxable income/ | $25,128 | $97,647 | $81,935 | $79,268 |
[35] Documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 in No. 2010/4417-4420 (Fred’s T documents); T 3 at 71-78
[36] Fred’s T documents; T4 at 79-86
[37] Fred’s T documents; T5 at 87-94
[38] Fred’s T documents; T6 at 95-102
The Commissioner issued notices of assessment to Fred on 6 November 2008 for the 2005, 2006 and 2007 years and on 29 May 2009 for the 2008 income year.[39]
[39] Fred’s T documents; T7 to T10 at 103-109
Commissioner’s audits taxation affairs of Freanert, Freanert Assets, Bert and Fred
The Commissioner commenced an audit of Freanert’s taxation affairs in December 2008 and followed it with audits of Bert and Fred’s taxation affairs beginning in February 2009. The audits were commenced without the taxpayers’ knowledge in order to maintain the integrity of an investigation being conducted by the Australian Federal Police (AFP). That investigation focused on whether Freanert had declared as part of its assessable income, amounts deposited in a particular bank account.[40]
[40] Bert’s T documents; T11 at 117-118; and Fred’s T documents; T11 at 117-121
As a result of the audits, which were completed on 1 June 2009,[41] the Commissioner concluded that Freanert had failed to include in its assessable income substantial deposits made under its service contracts in its Freanert Westpac account. These amounts were not returned as income in Freanert’s returns as sales for the purposes of income tax or as taxable supplies for the purposes of goods and services taxation (GST) for any of the four income years.
[41] Bert’s T documents; T11 at 112-155; and Fred’s T documents; T11 at 110-146
The Commissioner also concluded that the amounts deposited in the Freanert Westpac account had been paid either to the personal bank accounts of Bert and Fred or to the bank accounts of those associated with them. Neither Bert nor Fred, the Commissioner concluded, had returned those amounts as income in the four income years.
The Commissioner made his amended assessments as default amended assessments under s 167(b) of ITAA36 after deciding that the deposits made by Freanert and Freanert Assets to Bert and Fred’s personal bank and credit card accounts be assessed to them on one or other of the following three bases i.e. that in the four income years in issue they were:
(1)dividends under s 44(1) of Division 2 of Part III of ITAA 36;
(2)deemed dividends under Division 7A of Part III of ITAA36; or
(3)ordinary income under s 6-5 of ITAA97.[42]
[42] Bert’s T documents; T11 at 150 and 153; Fred’s T documents; T11 at 142 and 144
A.Freanert
I have taken the following table from [28] of the Commissioner’s Statement of Facts and Contentions (CSFC). Having checked the figures set out in that document in relation to Bert and Fred against the figures in the Final Audit Report for each, I accept the accuracy of the summary. The Final Audit for Bert is dated 1 June 2009 and that for Fred is dated 1 June 2009:
| TABLE 4: Comparison of [Freanert] deposits into [Freanert]Accounts and assessable income as per [Freanert] Tax Returns | ||||||
| A | B | C | D | E | F | G |
| FY | Assessable income (Exc GST) as Per ITR lodged | Assessable Income (CBA) | Assessable Income (Westpac) | Less GST | Total Assessable Income (Col C +D - E) | Understated Assessable Income (Col F – B) |
| 2005 | $5,209,107 | $4,934,174 | $3,474,084 | $764,387 | $7,643,871 | $2,434,764 |
| 2006 | $12,250,385 | $14,237,372 | $10,889,069 | $2,284,222 | $22,842,219 | $10,591,834 |
| 2007 | $13,205,044 | $14,635,729 | $8,952,939 | $2,144,424 | $21,444,244 | $8,239,200 |
| 2008 | Not Applicable | $15,968,874 | $11,043,680 | $2,455,687 | $24,556,867 | $24,556,867 |
On the basis of his audits of Bert and Fred, to which I refer below, as well as his audit of Freanert itself, the Commissioner calculated its distributable surplus to be:[43]
[43] Bert’s T documents; T11 at 133-134 and Fred’s T documents; T11 at 129. These figures were revised at the hearing: see [72] below.
| 2005 | 2006 | 2007 | 2008 | |
| SHAREHOLDER EQUITY | ||||
| PAID UP SHARE CAPITAL | $100 | $100 | $100 | $100 |
| RETAINED EARNINGS | ||||
| Balance at beginning of retained earnings | $0 | $2,178,286 | $11,142,199 | $17,780,405 |
| Add: Revised operating costs as per audit | $2,178,286 | $8,963,913 | $6,638,206 | $7,972,802 |
| Less: Franked dividends paid to Shareholders | $0 | $0 | $0 | $0 |
| Retained earnings at year end | $2,178,286 | $11,142,199 | $17,780,405 | $25,753,207 |
| SUBSTITUTED VALUE OF SHAREHOLDERS’ EQUITY | $2,178,386 | $11,142,299 | $17,780,505 | $25,753,307 |
| Less: Non-commercial loans | $0 | $0 | $0 | $0 |
| Less: Paid up share capital as at year end | $100 | $100 | $100 | $100 |
| Less: Repayments of Non-commercial Loans | $0 | $0 | $0 | $0 |
| DISTRIBUTABLE SURPLUS | $2,178,286 | $11,142,199 | $17,780,405 | $25,753,207 |
| PAYMENTS TAKEN TO BE DEEMED DIVIDENDS [TOTAL] | [Bert $743,620] [Fred $81,522] [$825,142.00] | [Bert $2,021,863] [Fred $153,911] [$2,175,774.00] | [Bert $3,225,985] [Fred $69,650] [$3,295,635.00] | [Bert $1,741,920] [Fred $38,908] [$1,780,828.00] |
B.Freanert Assets
Freanert Assets’ income tax returns for the 2004 income year disclosed an operating profit of $44,139, net assets of $732,002 and dividends paid to the shareholders amounting to $60,000. In 2005, its operating loss was $1,682,916, and dividends were not paid to the shareholders. As its assets, liabilities and shareholder funds were not disclosed in the income tax return for the 2005 income year, its net assets for that year were not known. Having regard to its net assets in the 2004 income year, the dividends paid to directors in that year and the Commissioner’s view that Freanert had significantly undervalued its assets, the Commissioner considered that Freanert Assets would have done the same and that it held retained profits at the end of the 2005 income year. Those profits he estimated to amount to $672,002 being the net assets of $732,002 in 2004 minus the $60,000 dividends paid to directors. He supported his conclusion by reference to payments of $519,469 made to personal accounts held by Bert and Fred during the 2005 income year.[44]
[44] Bert’s T documents; T11 at 135
C.Bert
The Final Audit Report completed on 1 June 2009 in respect of Bert included an analysis of the bank statements relating to the various accounts he, or he and his wife, held. They showed the following credits and repayments to accounts held by him or by him and his wife:
Repayments on Bert and Nan’s Westpac loan account[45]
[45] Bert’s T documents; T11 at 120
| Source | 2005 | 2006 | 2007 | [2008] | Total |
| Freanert | $4,500 | $160,500 | $2,516,000 | [0] | $2,681,000.00 |
| Unidentified | $15,342 | $103,500 | $342,850.90 | [0] | $ 461,992.90 |
| Total | $19,842 | $264,000 | $2,858,850.90 | [0] | $3,142,692.90 |
| Folio | … | … | … |
Credits to Bert’s CBA account[46]
[46] Bert’s T documents; T11 at 121
| Source | 2005 | 2006 | 2007 | 2008 | Total |
| Interest | $362.85 | $1,030.38 | $314.92 | $859.21 | $2,567.36 |
| Rent | $156,868.54 | $119,028.06 | $183,038.60 | $121,150.00 | $580,085.20 |
| Freanert | $259,500.00 | $1,352,000.00 | $504,154.00 | $1,401,060.70 | $3,516,714.70 |
| Freanert Assets | $411,000.00 | Nil | Nil | Nil | $411,000.00 |
| Unidentified | $224,913.16 | $589,874.31 | $332,797.24 | $293,888.34 | $1,441,173.05 |
| Total Credits | $1,052,644.55 | $2,061,932.75 | $1,020,304.76 | $1,816,958.25 | $5,951,840.31 |
| Folio | … | … | … | … | . |
Payments made to Bert’s credit card accounts[47]
[47] Bert’s T documents; T11 at 121
| Source | 2005 | 2006 | 2007 | 2008 | Total |
| Freanert | $38,645.00 | $136,177.75 | $181,802.07 | $125,338.54 | $481,963.36 |
| Freanert Assets | $108,469.55 | Nil | Nil | Nil | $108,469.55 |
| Folio | … | … | … | … |
Gambling funds sourced from Bert’s credit card accounts
| 2005 | 2006 | 2007 | 2008 | Total |
| $104,308 | $100,605 | $119,367 | $15,721 | $340,001 |
| Folio … | … | … | … |
Summary of total credits to bank accounts of Bert or of Bert and Nan[48]
[48] Bert’s T documents; T11 at 122
| 2005 | 2006 | 2007 | 2008 | Total |
| $1,219,601.10 | $2,462,110.40 | $4,060,957.73 | $1,942,296.79 | $9,684,966.12 |
| Folio … | … | … | … | … |
Having regard to the amounts credited [….(1)-(3) and (5)], the Commissioner concluded that the total credits made to Bert’s various bank accounts had been:[49]
[49] Bert’s T documents; T11 at 122
| 2005 | 2006 | 2007 | 2008 | Total |
| $1,219,601.10 | $2,462,110.40 | $4,060,957.73 | $1,942,296.79 | $9,684,966.12 |
| Folio … | … | … | … |
The Commissioner conceded the gambling deposits listed at [37(4)] prior to the hearing.
The amounts shown in these figures included amounts that the Commissioner acknowledged had been deposited or transferred to Freanert in the four years of income. They were $300,000 (2005), $230,000 (2006) and $570,000 (2007).[50] Also included were income returned by Bert in his income tax returns lodged in respect of the four years. After deducting those amounts, the Commissioner calculated Bert’s assessable income deposits to be $743,620 (2005), $2,021,863 (2006), $3,225,985 (2007) and $1,741,920 (2008).[51]
[50] Bert’s T documents; T11 at 122
[51] Bert’s T documents; T11 at 123
D.Fred
The Final Audit Report completed on 1 June 2009 in respect of Fred included an analysis of the bank statements relating to the various accounts he, or he and his wife, held. They showed the following credits and repayments to accounts held by him or by him and his wife:
Credits to Fred and Flossie’s Streamline Account[52]
[52] Fred’s T documents; T11 at 118
| Source | 2005 | 2006 | 2007 | 2008 | Total |
| Interest | $17.20 | $78.77 | $0.06 | Nil | $96.03 |
| Freanert | $50,000.00 | $100,000.00 | Nil | Nil | $150,000.00 |
| Other – Salary | Nil | $2,990.00 | Nil | $1,900.00 | $4,890.00 |
| Unidentified | $48,326.37 | $53,705.00 | $32.07 | $1,000.00 | $103,063.44 |
| Total Credits | $98,343.57 | $156,773.77 | $32.13 | $2,900.00 | $258,049.47 |
| Folio | … | … | … | … | . |
Payments made to Fred’s credit card account[53]
[53] Fred’s T documents; T11 at 118
| Source | 2005 | 2006 | 2007 | 2008 | Total |
| Freanert | Nil | $7,881.75 | $12,796.05 | $5,000.00 | $25,677.80 |
| Unidentified | $43,914.00 | $35,624.64 | $56,821.86 | $32,907.73 | $169,266.23 |
| Total Payments | $43,914.00 | $43,506.39 | $69,617.91 | $37,907.73 | $194,946.03 |
| Folio | … | … | … | … |
Summary of total credits to bank accounts of Fred or of Fred and Flossie[54]
[54] Fred’s T documents; T11 at 118
| 2005 | 2006 | 2007 | 2008 | Total |
| $142,257.57 | $200,280.16 | $69,650.04 | $40,807.73 | $452,995.50 |
| Folio … | … | … | … | … |
The amounts shown in these figures included amounts that the Commissioner acknowledged had been returned by Bert and Flossie in their income tax returns lodged in respect of the four years. They were:[55]
[55] Fred’s T documents; T11 at 118
| 2005 | 2006 | |
| Fred | $18,968.00 | $24,550.00 |
| Flossie | $41,750.00 | $18,750.00 |
| Total | $60,718.00 | $43,300.00 |
| Folio … | … |
After deducting those amounts, the Commissioner calculated Fred’s assessable income deposits to be $81,522 (2005), $153,911 (2006), $69,650 (2007) and $38,908 (2008).[56]
9 and 10 June 2009: amended assessments for four income years
[56] Bert’s T documents; T11 at 119
A.Freanert
On 10 June 2009, the Commissioner issued amended assessments for income tax for the income years 2005, 2006 and 2007 and a default assessment for the 2008 year. He also issued an amended assessment of GST for the period 1 July 2005 to 30 June 2008 under s 105-25 of the TAA. The position following those amended assessments and the default assessment is summarised in the following table:
| Income year | 2005 | 2006 | 2007 | 2008 | Total |
| Income Tax | |||||
| Understated income tax liability | $653,485.80 | $2,677,568.50 | $1,948,937.70 | $2,391.840.60 | $7,661.832.60 |
| Penalties | $490,114.35 | $2,400,811.65 | $1,754,043.93 | $1,793,880.45 | $6,438,850.34 |
| Interest to 10 June 2009 | $228,537.98 | $623,496.05 | $307,783.00 | $3,330.77 | $1,163,147.80 |
| Sub-total (income tax) | $15,263,830.78 | ||||
| GST | |||||
| Understated GST liability | $901,972 | $644,301 | $840,398 | $2,386,671 | |
| Penalties | $809,822 | $583,332 | $756,358 | $2,149,512 | |
| Interest | $509,257.12 | $240,527.80 | $169,553.82 | $5,445,853.74 | |
| Sub-total GST | $5,445,853.74 | ||||
| TOTAL | $20,709,684.52 |
B.Bert
On 9 June 2009, the Commissioner issued notices of amended assessments. The Commissioner assessed those distributions as unfranked dividends under s 44(1) of ITAA36 or, alternatively, as deemed dividends under Division 7A of Part IIIA of ITAA36 or, alternatively, as ordinary income under s 6-5 of ITAA97. As Bert and Fred had not returned those amounts, the Commissioner determined their taxable incomes under s 167 of ITAA36.[57]
[57] Bert’s T documents; T17 at 170-176. Section 167 of ITAA36 provides that, in any one of three circumstances, “… the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be taxable income of that person for the purpose of section 166” (and so the basis on which he makes his assessment under that section). The three circumstances occur if a person makes default in furnishing a return, the Commissioner is not satisfied with a return that has been furnished and if the Commissioner has reason to believe that a person who has not furnished a return has derived taxable income.
On 10 June 2009, the Commissioner also assessed the outstanding tax and shortfall interest charges payable for all four income years. Taking them into account, the net amount of income tax and charges payable by Bert in respect of the four income years totalled $4,226,851.68.
On the same day, the Commissioner also issued a notice of assessment of penalties he had imposed in respect of each of the four income years. It was dated 10 June 2009 and, for all four income years, totalled $3,221,291.40. The reason for imposing the penalty was described as “intentional disregard” in respect of each of the four income years i.e. of a taxation law under Item 1 of s 284-90(1) of Schedule 1 of the TAA.[58] That meant that the base penalty amount in respect of each of the four income years was 75% of the shortfall amount. In respect of the 2008 income year, the Commissioner increased the base penalty amount by 20% and that resulted in a penalty of 90% of the shortfall amount in respect of that income year. It was increased under
s 284-220 of the TAA on the basis that Bert was liable for a penalty for intentional disregard under Item 1 of s 284-90(1) of Schedule 1 of the TAA in respect of the 2007 income year.[59][58] Bert’s T documents; T16 at 168-169
[59] Bert’s T documents; T20 at 395 and see TAA, Schedule 1, s 284-220(1)(c).
The information in the notices of assessments is summarised in the following table:
| Year | 2005[60] | 2006[61] | 2007[62] | 2008[63] |
| Notices of amended assessment | ||||
| Amended taxable income | $768,798.00 | $2,115,910.00 | $3,307,920.00 | $1,821,188.00 |
| (including income assessed on default) | $743,620.00 | $2,021,863.00 | $3,225,985.00 | $1,741,920.00 |
| Tax on taxable income | $347,047.06 | $979,719.70 | $1,468,914.00 | $799,134.60 |
| Medicare levy | $11,531.97 | $31,792.65 | $49,618.80 | $27,317.82 |
| Credit for PAYG instalments | $332.00 | |||
| Tax offsets and other credits | $6,428.00 | $6,428.00 | ||
| Balance of this assessment | $351,819.03 | $1,005,084.35 | $1,518,532.80 | $826,452.42 |
| Balance of previous assessment for year | $2,748.81 | $2,4480.79 | $21,853.02 | $19,996.22 |
| Difference between two assessments | $354,567.84 | $980,603.56 | $1,496,679.78 | $806,456.20 |
| Interest charges and outstanding amounts from previous assessments | ||||
| Shortfall interest charge | $110,356.61 | $218,994.41 | $236,360.84 | $2,726.24 |
| Other amounts payable | $20,106.20 | $485,030.65 | $1,684,628.62 | $3,417,669.24 |
| Net amount payable | $485,030.65 | $1,684,628.62 | $3,417,669.24 | $4,226,851.68 |
| Penalty amounts payable assessed on basis of intentional disregard | $265,925.85 | $882,543.20 | $1,347,011.80 | $725,810.55 |
[60] Bert’s T documents; T12 at 156-157
[61] Bert’s T documents; T13 at 159-160
[62] Bert’s T documents; T14 at 162-163
[63] Bert’s T documents; T15 at 165-166
C.Fred
On 10 June 2009, the Commissioner issued amended assessments to Fred in respect of the four income years and a notice of assessment and liability to pay penalty under Item 1 of s 284-90(1) of Schedule 1 of the TAA. They were issued on the basis that Fred had failed to return amounts paid to him by Freanert in those years. Those amounts were $81,522 (2005), $153,911 (2006), $69,650 (2007) and $38,908 (2008).[64] The Commissioner did so on the basis that they were dividends under s 44(1) of ITAA36 or, alternatively, either deemed dividends under Division 7A of Part III of that legislation or ordinary income under s 6-5 of ITAA97. Including shortfall interest charges, the net amount of tax payable for the four income years was $188,546.80.[65] Penalties totalled $128,075.20.[66]
[64] Fred’s T documents; T17 at 161-167
[65] Fred’s T documents; T13-T16 at 149-160
[66] Fred’s T documents; T12 at 147
21 August 2009: objections to 2009 assessments and amended assessments
Under cover of letters dated 21 August 2009, each of the taxpayers objected to the amended assessments and default assessments.
Bert made objections to the notices of amended assessments issued in respect of the four income years and to the notice of assessment and liability to penalty in respect of the 2009 income year. He also requested remission of the shortfall penalties and shortfall interest charges imposed by the Commissioner.[67]
[67] Bert’s T documents; T18 at 177-251
Fred also objected to the notices of amended assessments issued in respect of the four income years and to the notice of assessment and liability to penalty in respect of the 2009 income year. He did so on 21 August 2009 and, like Bert, also requested remission of the shortfall penalties and shortfall interest charges imposed by the Commissioner.[68]
[68] Fred’s T documents; T18 at 168-242
November to December 2009: section 14ZYA notices and Commissioner’s responses
On 6 November 2009, Freanert, Bert and Fred gave the Commissioner written notices requiring him to make an objection decision. The notices were given under s 14ZYA(2) of the TAA. The effect of the notices was to require the Commissioner to make objection decisions within 60 days. If he did not, the Commissioner was taken to have made those decisions under s 14ZY(1) to disallow the taxation objections.
The Commissioner responded on 27 November 2000 questioning whether the objections stated the grounds of objection on which they relied fully and in detail as required by s 14ZU(c) of the TAA and so whether they had been validly made. He also responded to the assertion that the amended assessments and default assessments had not contained sufficient particulars as to the basis on which they were made. The taxpayers had not been advised of the audit before they were issued, he wrote, because there was concern that Bert and Fred had already diverted Freanert’s funds and assets to themselves or to those associated with them. Had they been told of the audit and investigation, the ATO had been concerned that outstanding amounts of income tax and GST would not be able to be recovered. Arrangements were now being made to send copies of the audits to the taxpayers. The Commissioner offered the taxpayers an opportunity to supplement their grounds of objection after they had received them.[69]
[69] Bert’s T documents; T19 at 252-253; Fred’s T documents; T19 at 243-244
On 22 December 2009, Freanert, Bert and Fred withdrew the s 14ZYA notices. The Commissioner extended the time within which they might supplement their grounds and provide further evidence to 1 March 2010. They did not provide any additional material in response.
13 August 2010: objection decisions on objections made on 21 August 2009
A. Bert
On 13 August 2010, the Commissioner made an objection decision disallowing Bert’s objections and disallowing his requests for remission.[70]
[70] Bert’s T documents; T20 at 254-290
B. Fred
The Commissioner made objection decisions on 13 August 2010 disallowing Fred’s objections and disallowing his requests for remission.[71]
July and September 2010: final audits for Bert and Fred in the 2008 and 2009 income years
[71] Fred’s T documents; T20 at 245-278
A.Bert
On 17 September 2010, the Commissioner issued a “Final Audit Report” to Bert. The audit was undertaken for the 2008 to 2009 income years and was undertaken as a result of the identification of further bank accounts in respect of those two income years and income not returned for the 2009 income year.[72]
[72] Documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 in No. 2011/2000-2001 (Bert’s 2011 T documents); T 19 at 322-371 and see particularly at 333.
B.Fred
On 29 July 2010, the Commissioner issued a “Final Audit Report” to Fred. The audit was undertaken for the 2006 to 2009 income years and focused upon income diverted from Freanert to Fred’s personal bank accounts.[73]
30 September 2010: further assessments and amended assessments for 2008 and 2009 income years
[73] Documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 in No. 2011/1983 (Fred’s 2011 T documents); T 28 at 317-372 and see particularly at 326.
A.Bert
On 30 September 2010, the Commissioner issued a further amended notice of assessment in relation to the 2008 income year and an assessment of shortfall penalty he had assessed in respect of the shortfall amount identified in that amended notice of assessment.[74]
[74] Bert’s T documents; T 23 at 415-416 and T 24 at 417-418
The Commissioner also issued another notice of assessment of penalty on the same day. On this occasion, it was a penalty for failing to provide a document as required in relation to the 2009 year of income.[75] He issued a notice of assessment for the 2009 year of income and did so under s 167 of ITAA36.[76]
[75] Bert’s T documents; T 25 at 419-420
[76] Bert’s T documents; T26 at 421-424
The following table summarises the additional tax and penalties payable as a result of the two assessments issued to Bert on 30 September 2010 and the third on 1 October 2010:
| Year | 2008 | 2009 |
| Taxable income | ||
| Previous taxable income | $1,821,188 | |
| Amended taxable income | $2,150,449 | $2,752,004 |
| Tax payable on taxable income | ||
| Amended tax payable | $947,302.05 | $1,215,401.80 |
| Less refundable tax offsets | $108,565.00 | |
| Less PAYG credits and other entitlements | $16,494.00 | |
| Plus other liabilities: Medicare levy | $32,256.73 | $41,280.06 |
| Total tax payable on taxable income | $979,558.75 | $1,131,622.85 |
| Less tax payable on 9 June 2009 amended assessment | $826,452.42 | |
| Difference and additional tax owing | $153,106.33[77] | |
| Penalties | $137,795.70 | $848,717.15 |
| Total additional tax and penalties | $290,902.03 | $1,980,340.00 |
[77] On occasion, and presumably due to rounding down and rounding up, there are variations of some cents in the figures shown in the Commissioner’s Statements of Facts and Contentions and those on the assessments. This is an example when there is a three cent difference in the figure shown for the additional tax shown in the amended assessment at page 415 of T24 of Bert’s T documents and [23] of the Commissioner’s Statement of Facts and Contentions lodged in Bert’s application under cover of a letter dated 4 August 2011. I have taken the figure shown on the assessments where this is a difference but that difference is, on each occasion, inconsequential.
B. Fred
On 30 July 2010, the Commissioner issued notices of amended assessments in respect of the 2006, 2007 and 2008 income years as well as a notice of assessment and liability to pay penalties in respect of those years and the 2009 income year. They included amounts of unfranked dividends. Penalties were assessed at 75% of the shortfall amount on the basis of intentional disregard of a law in respect of the 2006, 2007 and 2008 income years. That was imposed under Item 1 of s 284-90(1) of Schedule 1 of the TAA. The Commissioner increased the base penalty amount by 20% and that resulted in a penalty of 90% of the shortfall amount in respect of those three income years. He also imposed a penalty at 75% of the shortfall amount on the basis Fred’s failing to provide a document as required in respect of the 2009 income year. He imposed that under s 284-75(3) of the TAA.
Relying on s 167 of ITAA36, the Commissioner then issued a notice of assessment and a further notice of assessment and liability to pay penalty in respect of the 2009 income year. That was on 4 August 2010.
Bert’s evidence has to be considered in light of his background. I have the impression from hearing him give evidence that personal contacts are a very important part of his way of doing business. There can be no doubt about that but personal contact is not enough in the modern world. Bert had a small taste of that in relation to the negotiations with the CBA over the facilities. What might possibly have satisfied the Relationship Executive, and I do not find whether it did or not because I have insufficient evidence, was certainly not to the Risk Executive’s satisfaction. He required Bert and Fred to comply with the bank’s conditions and those conditions required them to verify that neither they nor Freanert, Freanert Assets or Dinahjo had outstanding taxation liabilities. They gave the verifications even though they knew that they had not disclosed the income in the Freanert Westpac account to Gillards so that neither Freanert nor they could be compliant with their taxation obligations.
Another relevant part of their backgrounds was that both Bert and Fred had been company directors for over 20 years if not substantially longer. Company directors do not have to pass an exam in order to be permitted to act as such but their actions are examined nonetheless. They are judged in the market place and in their success in generating income and profits. As the High Court has said in the past in stating the position at common law:
“… Directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. …”[1074]
[1074] Harlowe’s Nominees Pty Ltd v Woodside (Lake's Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483 at 493 per Barwick CJ, McTiernan and Kitto
That is an area in which Bert and Fred seemingly excel but it is an area that is now regulated under statute to some extent and that leads to an examination of a director’s actions and inactions in certain areas. I refer to the duties specified in Part 2D.1 of the Corporations Act 2001 (Corporations Act) but will refer to only three of them.
The first is set out in s 180, which begins with the general proposition in s 180(1):
“A director … of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a)were a director or officer of a corporation in the corporation’s circumstances; and
(b)occupied the office held by, and had the same responsibilities within the corporation as, the director …”
In assessing whether a director has behaved in accordance with this duty, regard must be had to the business judgment rule. The expression:
“business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.”[1075]
It has been held that matters “relevant to the business operations of the corporation” are broad enough to encompass “… matters of planning, budgeting and forecasting … because they provide a financial framework within which business operations are conducted. …”.[1076] I would think that compliance with the company’s taxation obligations are also characterised in the same way. They are the obligations that a company must meet and so a part of the framework within which it operates.
[1075] Corporations Act; s 180(3)
[1076] Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1; 75 ACSR 1 at [7424]; 150; 674
The business judgment rule is a rule that can be called upon by a director to say, “Yes, I have acted with the care and diligence required of me under
s 180(1)” but only if that director first satisfies the preliminary conditions set out in
s 180(2). That subsection provides:
“A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a)make the judgment in good faith and for a proper purpose; and
(b)do not have a material personal interest in the subject matter of the judgment; and
(c)inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d)rationally believe that the judgment is in the best interests of the corporation.
The director’s … belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.”
My reason for setting out this provision is not to assess whether Bert and Fred have acted in breach of it in lodging Freanert’s taxation returns without referring to the income in the Freanert Westpac account but to illustrate what was expected of them as directors. Repeatedly, Bert has said that he has left decisions about the accounting matters to Gillards or to Mary and/or Samantha. Fred has left the part of the business whose income was banked in the Freanert Westpac account to Bert. Both Bert and Fred are attempting to shift their responsibilities to another or to others. That is not what is expected of them as directors for, if they were ever called upon to answer for their actions under s 180(1) of the Corporations Act, they would have to establish that they had informed themselves about Freanert’s taxation obligations at least to some extent. On the evidence that I have, I am not satisfied that they turned their minds to it. I will come back to that aspect shortly for there can be inadvertent failure to turn their minds or deliberate failure or wilful blindness.
I will consider together the second and third duties that are specified in Division 1 of Chapter 2D.1 and that have some relevance in this matter. The second is that in s 181. Section 181(1) provides:
“A director … of a corporation must exercise their powers and discharge their duties:
(a)in good faith in the best interests of the corporation; and
(b)for a proper purpose.”
The third is set out in s 182. Section 182(1) provides:
“A director … of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.”
In view of the findings that I have made regarding the purchase of the properties and in view of my not accepting that they were purchased for the purpose of protecting Freanert’s assets, I find that Bert and Fred diverted funds from the Freanert Westpac account to purposes other than those that were in the best interests of the company. They were, instead, in the best interests of Bert and Fred and members of their families.
As company directors of long-standing, Bert and Fred must be taken to know these duties. They were duties reinforced by the CBA’s requirement to give it the verification letters. In the circumstances I have outlined, I am not satisfied that they acted with reasonable care in making their statements regarding their income.
Not only am I not satisfied that they acted with reasonable care, I am not satisfied that their actions could be described as reckless. They did not sign the taxation returns prepared by Gillards knowing that there was a real risk that the statement of their income might be incorrect or grossly indifferent to whether it was or not. If they had, they would have been reckless. I am satisfied that they knew that it was incorrect and they knew that because they had not revealed to Gillards any of the information relating to the Freanert Westpac account. I am satisfied that their use of the funds for the purchase of the Houses shows that they did not intend to disclose it. So too does the fact that what I have called the Freanert Westpac account to distinguish it from their personal bank accounts was held not in the name of Freanert but in the names of Bert and Fred. To suggest that they had to wait until the end of the whole period of the contract in order to know of any penalties to which they would be subject and so to know their income is disingenuous. For the reasons I have given at [618] earlier, complaints about the services rendered by Freanert were resolved within the month.
Therefore, I am satisfied that Bert and Fred come within item 1 of
s 284-90(1) of the TAA.
Increase in base penalty amount
Section 284-220(1)(c) is the relevant provision. It provides for an increase in the base penalty amount if a base penalty amount was worked out using item 1, 2 or 3 of the table in s 284-90(1) and a base penalty amount was worked out under one or other of those items in respect of a previous accounting period. Dr Orow submitted that it does not apply but, other than to state that submission, did not appear to develop it.[1077]
[1077] Applicants’ Submissions dated 13 March 2012 at [105(e)]
On its face, I do not see any reason why s 284-220(1)(e) would not apply. The base penalty amounts for both Bert and Fred have been worked out under item 1 of s 284-90(1). In the orderly course of events of a taxpayer’s lodging a return each year and the Commissioner’s making an assessment each year, it might be expected that a taxpayer who has received a penalty in the first year might reconsider his or her actions in lodging the return for the next year. He or she might have some months in which to undertake that reconsideration. That is not the case here for Bert and Fred. They have not had the opportunity to see the consequences of keeping income from the Commissioner but it is an opportunity that they have denied themselves by engaging in a course of conduct that involved their keeping income from the Commissioner.
There is nothing in s 284-220(1)(c) that requires there to be any notice given to a taxpayer. It takes a very clinical approach to the imposition of the 20% increase in the base penalty. If the condition is met in relation to a previous accounting period, the base penalty is increased. The condition has been met in this case because Bert and Fred have had a base penalty amount previously worked out under item 1 but it would not have mattered whether it was item 1, 2 or 3 of the table in s 284-90(1).
Remission
A.The authorities
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 ITAA36, ITAA97 and the TA Act in supporting that purpose. As Collier J said in FederalCommissioner of Taxationv Dixon (Trustee):[1078]
“... while the purpose of a penaltyregime is obviously to deter infringement of the law, particularly in an environment of self-assessment, the importance of conduct of taxpayers in attempting to comply with the legislation and their taxation obligations is clear from the legislation itself and ... Explanatory Memorandum 2000. ...”[1079]
[1078] [2007] FCA 1079; (2007) ATC 4748 and see also Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission and Others [2000] HCA 47; (2000) 203 CLR 194; 174 ALR 585 at 205; 591 and see also Drake v Minister for Immigration and Ethnic Affairs [1979] AATA 179; (1979) 24 ALR 577; 2 ALD 60 at 590; 70 per Bowen CJ and Deane J and 602; 80 per Smithers J
[1079] (2007) ATC 4748; [2007] FCA 1079 at 4,762; [47]
No criteria are set out in s 298-20(1) to guide the Commissioner in the exercise of his discretion but its predecessor in ITAA36, s 227(3), has been considered by the Federal Court. It seems to me that the authorities establish the following more particular principles:
(1)The existence of special circumstances is not a prerequisite to any exercise of the Commissioner’s power to remit a penalty under s 298-20 of Schedule 1 to the TA Act.[1080]
(2)Whether or not a taxpayer has the benefit of a shortfall amount or the Commissioner is deprived of that amount, the fact that there is, or is not, a shortfall amount has nothing to do with the remission of administrative penalties:
(a)If there is, the Commissioner is compensated for any harm he might suffer as a result by the taxpayer’s obligation to pay interest by way of a General Interest Charge;[1081] and
(b)It is not permissible to have regard to the fact that the Commissioner became aware of the false statement before any harm was done.[1082]
(3)“Broadly speaking, the main consideration relevant to the discretion … was whether any part of the penalty should be remitted on the basis that the outcome is so harsh so as to provide an unjust result, having regard to the particular circumstances of the taxpayer …”.[1083]
(4)“… As the payment of the penalty requires some kind of failure on the part of the taxpayer to do something, there would naturally be reasons particular to the taxpayer for this failure. By implication, then, s 227(3) is limited by considerations particular, or personal, to the taxpayer. …”[1084]
[1080] Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287 at [21]; 291-292 per Spender, Ryan and Emmett JJ
[1081] Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287 at [23]; 292
[1082] Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287 at [21]-[25]; 292
[1083] Commissioner of Taxation v Traviati [2012] FCA 546 at [78] per Middleton J
[1084] Commissioner of Taxation v Traviati [2012] FCA 546 at [90] per Middleton J
B.Consideration
I accept that Fred was in poor health at the time of the hearing. The medical certificate admitted in evidence[1085] referred to his suffering from symptoms for the previous two or three years. While I am concerned that his health is suffering, I do not consider that I can take this into account in deciding whether to remit the penalties he has incurred.
[1085] Exhibit K
In the case of Commissioner of Taxation v Traviati, Middleton J said that the fact that the penalty regime is predicated on a taxpayer’s failure to do something means that the reasons for remission must be reasons that are particular to the taxpayer and that relate to that taxpayer’s failure. The medical condition descrbed in the medical certificate does not link Fred’s failure in his health with his behaviour. It was dated 24 April 2012. That would mean that Fred first suffered symptoms no earlier than the first half of 2010 or 2009. This is a time well past the time during which the events that led to the Commissioner’s amended assessments took place. It is well past the time of the purchase of House 7 for Fred and Flossie’s son on 28 October 2010. It is well past the time that money from the Freanert Westpac account was first transferred to Bert and Nan’s Westpac loan account and then to Fred and Flossie’s son.
I find that Fred has, for the most part, not been involved in that part of Freanert’s business that used the Freanert Westpac account. He did not write cash cheques and he did not deal with the subcontractors. The part of the business in which he was involved operated through the Freanert CBA account and MYOB records and Financial Statements were based on that as were the taxation returns. What he did in relation to the other side of the business was to allow Bert to run it as he wished. There is no evidence on which I am satisfied that he questioned him about either the services that were provided by that part of the business or what happened to the income. Rather, he went along with whatever Bert did and did so without question.
One example illustrates Fred’s approach to both matters related to the business. It arises in cross-examination in relation to the value of property in which he had previously had an interest through Lake Services and which a company of which he is a director, Dinahjo, does have an interest. It also arises in relation to his objections to the Commissioner’s assessments. Fred’s attention was drawn to a particular objection that had been prepared for him by Richard and the following exchange occurred:
“And did you tell … [Richard] – did you ask … [Richard] do [sic] prepare that objection for you?--- Well, I didn’t ask him, but it would have come from … [Bert] as well, because he did it for both.
Did you ask … [Bert] to ask … [Richard] to prepare that objection for you?--- They were prepared together, so I didn’t – there was no need for me to ask. They were prepared together, so
Well, you were aware that … [Richard] was preparing objections, weren’t you?---Yes.
Okay. And if you note - over at page 415 – have a look at the paragraph under Financial Hardship. And it refers to the property at … [northern suburb property]. And it says in that paragraph that the actual value of the real estate of … [northern suburb property] is 3 million. And that was based on a valuation by … [valuers]. Do you recall that?---I do recall having valuations done.
So you knew that the property – well, to your mind, you agree that the property was worth 3 million, was it?---To my mind?
Yes. Well, based on that valuation, you formed the view that the property was worth 3 million. That’s what … [Richard] put in this letter on your behalf. Is that right?--- I think he would have gone through a valuation that was done. So – I mean, I don’t know what the place is worth – the property is worth. He simply would have gone by the valuers.
Did you see this before it was lodged, … [Fred]?--- No, I don’t – I haven’t seen it.
You never saw it. So … [Richard] lodged this document on your behalf without any instructions from you to do so. Is that right?---Well, he would have done it with instructions with … [Bert].
So, … [Fred], I’m trying to understand this. You were aware that you had significant assessments that had been issued to you, weren’t you?--- Yes.
And this was an objection filed on your behalf and are you telling the tribunal you didn’t take any involvement in that process? You just left it all to … [Bert]?---Yes.
And is it your evidence that you didn’t know what the value of that property is – the 3 million?--- I would have thought it was worth more than that, but – if that’s what the valuers come up with.”[1086]
[1086] Transcript at 593-594
A person in Fred’s position cannot walk away from his responsibilities because he chooses to rely on another. He has made that choice in a context in which, under the Corporations Act, he has statutory duties imposed upon him and in a context in which he is liable under the taxation law to pay taxation just as other people are. He has linked his choices to those made by Bert and Bert has acted in a way that I find does not attract a remission. He is an obviously intelligent man with a lot of business savvy but he has acted in a way that has ignored his obligation to disclose income to the Commissioner. I am not satisfied that there is any basis on which I should remit the penalties.
DECISION
For the reasons I have given, I:
(1) set aside those parts of the Commissioner’s objection decisions relating to assessments of the amount of tax and penalties payable by Bert and Fred in so far as they relate to:
(a) a donation of $25,000 to the Church;
(b)a payment of $86,500 made on 3 August 2006 to the State Revenue Office; and
(c)adjustments and concessions made by the Commissioner prior to the hearing and reflected in Amended Annexure to the Commissioner’s second Statement of Facts and Contentions and received by the Tribunal on 23 April 2012;
(2)remit the objection decisions to amend the assessments in light of those three matters; and
(3) otherwise affirm the Commissioner’s objection decisions.
LEGEND
943.
Legend deleted in accordance with s 14ZZJ of the Taxation Administration Act 1953.
I certify that the preceding 943 paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: ....................................................................
Leah Berardi Associate
Dates of Hearing 16-20, 23-24 and 26 April 2012; 3-4, 21-23 and 29 May 2012; and 18 June 2012
Date of Decision 1 March 2013
Counsel for the Applicant Dr B Orow
Solicitor for the Applicant Mr S P Byrnes
Stephen Peter Byrne Lawyer
Counsel for the Respondent Ms M Schilling
Solicitor for the Respondent Ms F Alam and Mr D Slater
Maddocks Lawyers
207 CLR 72; 181 ALR 307; 75 ALJR 1342; 47 ATR 541 at [26]; 84; 314; 1348; 549 per Gaudron, Gummow, Hayne and Callinan JJ
Bienstein v Bienstein
[2003] HCA 7; (2003) 195 ALR 225; McHugh, Kirby and Callinan JJ
“… It is a necessary inference from the Administrative Appeals Tribunal Act that the function of the Tribunal is to review on the merits decisions which affect a person’s interest. See per Bowen CJ and Deane J in Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 68, and Smithers J in Collector of Customs (New South Wales) v Brian Lawlor Automotive Pty Ltd (1979) 2 ALD 1 at 23. It is inconsistent with the tenor of the Act that the Tribunal should concern itself not with an operative decision which affects a person’s rights but merely with a decision which has simply affirmed or varied the operative decision. Moreover,… the Tribunal would not be able effectively to use the power conferred by s 43 of the Act to set aside the decision under review and to remit the matter for reconsideration in accordance with any directions or recommendations of the Tribunal. …”: (1981)
3 ALD 132; 58 FLR 347 at 141; 357 cited with approval in Yolbir v Administrative Appeals Tribunal and Anor (1994) 48 FCR 246; 33 ALD 8; 19 AAR 15 at 248-249; 10; 17-18; Davies, Burchett and O’Connor JJ
The question for the determination of the Tribunal is not whether the decision which the decision-maker made was the correct or preferable one on the material before him. The question for the determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal. ...”: Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; 24 ALR 577; 46 FLR 409 at 68; 589; per Bowen CJ and Deane J.
In that context, I regard as compelling a construction of s 37(1)(b) and s 37(2) which treats the latter subsection alone as providing a facility for the Tribunal to require a decision-maker to lodge with the Tribunal copies of the relevant, or possibly relevant, documents in addition to those lodged in discharge of the obligation imposed by s 37(1)(b) as amended. …”.
His Honour’s attention would seem not to have been drawn to the more general power given to the Tribunal under s 33(1) and expanded in s 33(2A) but that power does not detract from his statement that s 37(2) is the only power given to the Tribunal to direct the decision-maker to lodge documents that “may be” relevant as opposed to relevant, or at least, appearing to be so.
[1990] FCA 456; (1990) 90 ATC 5060; 21 ATR 1108 at [34]; 5,067; 1116 See also
[2006] FCA 889; (2006) 63 ATR 341 at [9]; 344 per Finn J
Vu v Commissioner of Taxation
“… The first ruling allowed hearsay from Mrs McLean about events witnessed by the plaintiff as proof those events had occurred. The weight to be given to such evidence depends on the honesty and reliability of the person who made the representation, and the person giving the evidence.
A party against whom such evidence is tendered must be free to challenge any link in the chain, or the chain as a whole. It would be unfairly prejudicial within s 135(a) for evidence to be tendered against a party who could not contest it.”: (1996) 41 NSWLR 389 at 401
“... a reference to the authorities makes it tolerably plain that the court will exercise its undoubted jurisdiction to set aside a subpoena in a variety of cases, as, for example:
1.unless the subpoena was issued for the purpose of a pending trial, hearing or application ...
2.where to require the attendance of a witness would be oppressive ...
3.where the subpoena had not been issued bona fide for the purpose of obtaining relevant evidence and the witness to whom the subpoena had been addressed was unable to give relevant evidence ...
4.where the subpoena has been used for the purpose of obtaining discovery or further discovery against a party ...
5.where the subpoena has been used for the purpose of obtaining discovery against a third party...
6.where to require a party to comply with a subpoena to produce documents would be oppressive ...
7.where the subpoena has been issued for a purpose which is impermissible, as, for example, ‘fishing’ ...”: [1984] 3 NSWLR 98 at 100-101; citations omitted.
This summary was accepted by Beaumont J in Trade Practices Commission v Arnotts Limited (No 2) (1989) 21 FCR 306; 88 ALR 90 at 102 (part of passage noted as omitted from authorised report: (1989) 21 FCR 306 at 315), Conti J in Mandic v Phillis [2005] FCA 1279; 225 ALR 760 at [33]; 771 to 772
and Flick J in Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia [2009] FCA 1203 at [20]. A “fishing expedition” has been described by Owen J in Associated Dominions Assurance Society Pty Ltd v John Fairfax & Sons Pty Ltd (1952) 72 WN(NSW) 250 at 254 in this way:
“A ‘fishing expedition’, in the sense in which the phrase has been used in the law, means, as I understand it, that a person who has no evidence that fish of a particular kind are in a pool desires to be at liberty to drag it for the purpose of finding out whether there are any there or not.”
As King CJ, with whom both White and Millhouse JJ concurred, said in Hunt v Wark (1985) 40 SASR 489 at 493: “... There must be some reason to suppose that the documents sought will be capable of being used ....”.
59 ALJR 89; 15 ATR 1299 at [16]; 460; 93-94; 1306-1307 and see also Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (In Liq) [2005] HCA 70; (2005) 225 CLR 488; 222 ALR 286; 2005 ATC 4,955; 60 ATR 560; 80 ALJR 202 at [71]; 512; 302-303; 4,968; 578; 216
59 ALJR 89; 15 ATR 1299 at [8]; 454; 91; 1303 and adopted in Summons v Federal Commissioner of Taxation (1986) 80 ALR 95 at 132 per Ormiston J
If one were so to vary the facts of the present case that the tickets with which the taxpayers were provided could be surrendered by them for cash, the benefit which, on that hypothesis, the taxpayers would have received would have been converted into money, and would have constituted income if the origins of the receipt gave that character to it. Indeed, as the authorities show, it is not necessary that the pecuniary alternative be available by way of direct conversion of the benefit received …” [1980] FCA 37; (1980) 42 FLR 403; 29 ALR 202; 80 ATC 4140 at 414; 212; 4,148;
Mrs McNeil was a shareholder in St George Bank Ltd (SGL), which adopted a scheme to buy back issued shares in order to reduce its capital. For every 20 of its ordinary shares, St George issued one put option (sell back right) obliging it to buy back one share for $16.50. At all times, Mrs McNeil’s shareholding remained precisely as it had been before the introduction of the scheme. The put options did not represent any portion of her rights as a shareholder under SGL’s constitution. Instead, they were generated by the execution and subsequent performance of covenants in the deeds poll. Under that deeds poll, each shareholder could acquire put options according to their shareholding. If they did not choose to acquire them within a certain period, the put options were traded by a merchant bank appointed for the purpose. That merchant bank accounted for the proceeds of the trades to a trustee who held the proceeds for those particular shareholders. The put options were issued and listed at a market value of $1.89. Mrs McNeil was paid $576.64 being $514 as the total of the proceeds of the sale of the put options that she did not take up and a sum of $62.64 being the increase in realisable value of the put options since they were issued. The smaller sum was assessable as a capital gain.
The majority held that the derivation of $514 was a gain derived from property and so a derivation of income and assessable as such. It was not receipt of a distribution in any form of SGL’s assets. It was not an amount provided “in satisfaction” of the rights of shareholders under SGL’s constitution. The scheme took its life from the deeds poll alone. Consequently, no proper analogy could be drawn between dividend cases and the sum paid under the deeds poll or between bonus shares and that sum.
Downes; Edmonds and Greenwood JJ
12
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