CVMW and Commissioner of Taxation (Taxation)
[2023] AATA 4039
•30 November 2023
CVMW and Commissioner of Taxation (Taxation) [2023] AATA 4039 (30 November 2023)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2021/3124-3127
Re:Mr Chen (a pseudonym)
APPLICANT
File Number(s):2021/3129-3132
Re:Ms Li (a pseudonym)
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member G Lazanas
Date:30 November 2023
Place:Sydney
The decisions under review are affirmed.
..........................[Sgd]..............................................
Senior Member G Lazanas
Catchwords
TAXATION – income tax – where Commissioner of Taxation treated deposits into bank account of corporate trustee of a discretionary trust as assessable income – where applicants are beneficiaries of trust and taxed as presently entitled – where no independent evidence to support claims of applicants that deposits were loans and or equity contributions from parents of applicants – where evidence of applicants and tax agent contains inconsistencies – where evidence of applicants not sufficiently reliable – where financial records of trustee company not conclusive or determinative – administrative penalty – whether conduct involved failure to take reasonable care – whether conduct involved recklessness – whether safe harbour applies –– burden of proof not discharged – objection decisions affirmed
PRACTICE AND PROCEDURE – whether confidentiality order relating to name of tax agent necessary to protect identity of applicants – whether sufficient connection between applicants and tax agent – whether desirable to exercise discretion to anonymise name of tax agent – whether in public interest – application for confidentiality order regarding tax agent refused
Legislation
Administrative Appeals Tribunal Act 1975 (Cth) ss 35, 43
Corporations Act 2001(Cth) s 1305
Income Tax Assessment Act 1936 (Cth) ss 97, 166, 167, 175, 175A
Income Tax Assessment Act 1997 (Cth) s 6-5
Taxation Administration Act 1953 (Cth) ss 14ZZE, 14ZZJ, 14ZZK, Schedule 1 ss 285-75, 284-90, 284-220, 298-20
Cases
Bailey v Commissioner of Taxation (1977) 136 CLR 214
Briginshaw v Briginshaw (1938) 60 CLR 336
BQKD and Commissioner of Taxation [2023] AATA 2169
Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Elsey v Federal Commissioner of Taxation (1969) 121 CLR 99
Federal Commissioner of Taxation v Clark [2011] FCAFC 5
Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146
Imperial Bottleshops Pty Ltd v Commissioner of Taxation (Cth) (1991) 22 ATR 148
Galanos and Department of Immigration and Citizenship [2010] AATA 1004
Gauci v Federal Commissioner of Taxation (1975) 8 ALR 155
Hart v Commissioner of Taxation (2003) 131 FCR 203
Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455
Macmine Pty Ltd v Commissioner of Taxation (1979) 9 ATR 638
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
Rawson Finances Pty Ltd v Commissioner of Taxation [2013] FCAFC 26
Re DLMD and Federal Commissioner of Taxation [2017] AATA 739
Re Eastwin Trade Pty Ltd and Commissioner of Taxation [2017] AATA 140
Reliance Finance Corporation Pty Ltd v Federal Commissioner of Taxation (1987) 18 ATR 224
R.V. Investments (Aust) Pty Ltd as Trustee of the R.V. Unit Trust v Commissioner of Taxation [2014] FCA 1169
Trautwein v Federal Commissioner of Taxation (No 1) (1936) 56 CLR 63
Warner v Hung (No 2) [2011] FCA 1123
Secondary Materials
Miscellaneous Taxation Ruling MT2008/1: Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
REASONS FOR DECISION
Senior Member G Lazanas
30 November 2023
INTRODUCTION
The Applicants in these proceedings are referred to by the pseudonyms Mr Chen and Ms Li as they asked for a private hearing in relation to their proceedings with the Respondent, the Commissioner of Taxation, regarding their income tax disputes, and the reasons for decision following a private hearing should be written so as to protect the identity of the taxpayers. I have also used pseudonyms for their related entities to preserve the confidentiality of the Applicants.
Mr Chen and Ms Li are married and conduct restaurant and take-away businesses at different locations in Victoria through two discretionary trusts, referred to in these reasons by the pseudonyms Trading Trust 1 and Trading Trust 2. They also conduct property investment activities through another discretionary trust referred to by the pseudonym Property Trust. It was common ground that Mr Chen and Ms Li are the controlling minds and beneficiaries of the three trusts.
In the years of income ending 30 June 2017 and 30 June 2018, the Property Trust received into the bank accounts of its corporate trustee (Property Trustee Company) seven deposits of cash and or bank cheques totalling $735,825 (collectively the Deposits). The Property Trustee Company made a number of acquisitions of property in those income years.
The Commissioner assessed the Deposits as ordinary income of the Property Trust under s 6-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), with a consequential increase to the Property Trust’s net income under s 97 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The Commissioner then increased the assessable income of Mr Chen and Ms Li as presently entitled beneficiaries of the net income of the Property Trust. The amended assessments were issued to them pursuant to s 166 of the ITAA 1936 and related to the Deposits only. The Commissioner also imposed penalties on Mr Chen and Ms Li at the rate of 50% for recklessness as to the operation of the tax laws. Furthermore, the Commissioner did not exercise his discretion to remit the applicable penalties under the Taxation Administration Act 1953 (Cth) (TAA).
Mr Chen and Ms Li objected to the assessments with respect to income tax and penalties resulting from the variations to their assessable income from the Property Trust. In broad terms, they argued that the Deposits did not constitute income of the Property Trust but rather were a mix of debt and equity contributions to the Property Trust, all of which were provided by either Ms Li’s mother or Mr Chen’s father and mother. In addition to their evidence and the evidence of their tax agent, they also relied on the fact the Deposits were variously described as either a “Loan from related party” or a “Beneficiary contribution” in the general ledgers and financial statements of the Property Trustee Company.
For the reasons set out below, I was not persuaded that the Applicants discharged their burden of proving, on the balance of probabilities, that the assessments issued to them were excessive and what the assessments should be, as required under s 14ZZK of the TAA. I was also not persuaded that the administrative penalties imposed by the Commissioner at the rate of 50% of their income tax shortfalls for recklessness should be disturbed.
ISSUES TO BE DETERMINED
The ultimate issue for determination by the Tribunal is whether the Applicants discharged their onus of proof by demonstrating that the income tax assessments issued to them were excessive or otherwise incorrect and what the assessments should have been, for the purposes of s 14ZZK(b)(i) of the TAA. The standard of proof in taxation review proceedings is the balance of probabilities. This standard requires the allegation to be made out to the Tribunal’s reasonable satisfaction, with the degree of satisfaction varying based on matters such as the gravity of the fact to be proved or the inherent unlikelihood of the occurrence of a given description: Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362 (per Dixon J). The manner in which a taxpayer can discharge the burden of proof varies with the circumstances: Commissioner of Taxation v Dalco (1990) 168 CLR 614at 624 per Brennan J.
If the Applicants cannot satisfy the Tribunal that the assessments issued by the Commissioner to them were excessive, the Tribunal must dismiss the application for review “irrespective of the Tribunal being satisfied or not satisfied that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision”: Re Eastwin Trade Pty Ltd and Commissioner of Taxation [2017] AATA 140 at [79] (per SM Taylor SC) citing Rawson Finances Pty Ltd v Commissioner of Taxation [2013] FCAFC 26; at [111] (per Jagot J, as her Honour then was). This is because s 14ZZK(b)(i) gives rise to what has been described as “a rebuttable presumption of law that an assessment is not excessive”: McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 314 (per Jacobs J). That is, the assessments made by the Commissioner are “prima facie right” and “remain right” until the taxpayer shows they are “wrong”: Trautwein v Federal Commissioner of Taxation (No 1) (1936) 56 CLR 63 at 88 (per Latham CJ). The Commissioner is under no obligation to tender evidence in support of his assessments: Gauci v Federal Commissioner of Taxation (1975) 8 ALR 155 at 160 (per Mason J). In a nutshell, to persuade the Tribunal that the assessments are excessive or otherwise incorrect, the Applicants must identify a coherent factual and legal position and persuade the Tribunal that that position is correct (see Warner v Hung (No 2)[2011] FCA 1123).
Against that background, which is apposite to these proceedings which were heard together, I now outline the three key substantive issues for determination by the Tribunal with respect to the income tax disputes.
The first issue is whether the Applicants have discharged their onus of proving the income tax assessments for the 2017 and or 2018 income years are excessive or otherwise incorrect, and what the assessments should have been: s 14ZZK(b)(i) of the TAA. The Commissioner has confined the dispute in issuing the amended assessments under s 166 of the ITAA 1936 to the Deposits made into the bank accounts of the Property Trustee Company. That was a forensic decision made by the Commissioner. Therefore, Mr Chen and Ms Li have to prove that the Deposits made into the Property Trustee Company’s bank accounts in the 2017 and 2018 income years are not income within the meaning of s 6-5 of the ITAA 1997.
The second issue is whether the Applicants are liable for administrative penalties under Division 284 of Schedule 1 to the TAA for making false or misleading statements. Relevantly, Mr Chen and Ms Li engaged a tax agent and claim to have given the tax agent all information as required by the tax agent. Their claims entail examining whether they took reasonable care and or whether the safe harbour in s 284-75(6) of the TAA applies to them so that they are not liable to administrative penalties. As will be discussed below, a key issue is whether the Applicants gave the tax agent all relevant taxation information. The Applicants also assert that the false or misleading nature of their statements in their tax returns did not result from recklessness by them or their tax agent as to the operation of the taxation laws.
If Mr Chen and Ms Li are liable to administrative penalties, the third issue is whether the administrative penalties should be remitted by the Tribunal using the discretionary powers under s 298-20 of Schedule 1 to the TAA.
A procedural issue which I must additionally address is whether a confidentiality order should be made by the Tribunal with respect to the name of the tax agent acting on behalf of Mr Chen and Ms Li as they applied for this at the conclusion of the hearing.
I deal with the issue of the application for the confidentiality order regarding the tax agent first. I then recount the factual background and the evidence, followed by an analysis of the substantive income tax and penalties issues.
SHOULD A CONFIDENTIALITY ORDER BE MADE REGARDING THE TAX AGENT?
The Applicants submitted that the name of their tax agent should be anonymised in the published reasons because this is necessary to protect their identity in accordance with their entitlement to a private hearing pursuant to s 14ZZE of the TAA. In this regard, it is noted that s 14ZZJ(2) of the TAA modifies s 43 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act), which pertains to the Tribunal’s duty to give reasons for its decision, by providing that s 43 of the AAT Act should be read as if it included subsection (2D). Broadly, that subsection relevantly provides that if a hearing of a proceeding in the Tribunal is not conducted in public, the Tribunal must ensure, as far as practicable, that its reasons are framed so as to prevent the identification of the applicants. The Applicants also submitted that if the Tribunal considered that anonymisation of the tax agent is unnecessary, it was nevertheless desirable for the Tribunal to exercise its discretionary power to do so under s 35 of the AAT Act.
The relationship between s 14ZZE of the TAA and s 35 of the AAT Act was considered and explained in Re DLMD and Federal Commissioner of Taxation [2017] AATA 739 (DLMD) (at [11] per Deputy President Logan J):
Section 14ZZE of the TAA is expressed to apply, “Despite section 35 of the AAT Act”. I do not read that expression as excluding altogether s 35 of the AAT Act, as opposed to prevailing over s 35 of the AATAct to the extent of any inconsistency in the event that an applicant makes a request for a private hearing. Thus, s 14ZZE of the TAA leaves intact the discretionary powers vested in the Tribunal by ss 35(2)(b), 35(3) and 35(4) of the AAT Act. It is just that, upon an applicant requesting a private hearing, s 14ZZE requires that the hearing be so held, without any need for the making of a discretionary value judgement by the Tribunal as to whether a private hearing is warranted.
With respect to the issue of whether a confidentiality order is required for a witness, Deputy President Logan J stated in DLMD at [13] and [14], as follows:
To this extent, some of the concerns voiced by the applicant might well be met just by all that necessarily follows from the request that it made for a private review hearing.
However, neither the terms of s 14ZZE nor those of s 14ZZJ necessarily mean that the identity of a witness must be rendered anonymous in the Tribunal’s reasons for decision. Only if disclosure would reveal the identity of the applicant would these sections make it necessary to give anonymity to the identity of the witness in the published reasons.
Thus, I readily accept that there may well be scope for the making of particular orders under s 35 of the AAT Act, as well as, perhaps, under s 33 of that Act. Subject to the conditions mentioned in s 33(1), the procedure to be followed at all stages of the review is, by s 33(1) of the AATAct, “within the discretion of the Tribunal”. It is axiomatic that the directions given in the exercise of this broad discretionary power and in the exercise of powers conferred by s 35 of the AAT Act must be procedurally fair. And procedural fairness entails being fair both to the applicant and to the Commissioner.
(emphasis added in bold)
It follows that the need to anonymise the name of a witness may arise by implication where it is necessary to protect the identity of the taxpayers. Where this is not the case, it is then necessary to consider the appropriateness of a confidentiality order under s 35 of the AAT Act. In the present case, the Applicants submit that anonymisation is necessary to protect their identity so that the question of whether the discretion under s 35 should be exercised does not arise. Where the issue does arise, the Applicants argue the discretion should be exercised.
I disagree with both positions advanced by the Applicants. First, there is insufficient connection between the Applicants and their tax agent to enable the Applicants to be identified. The fact that Mr Chen and Ms Li have been clients of the tax agent for a considerable period of time, and that the tax agent assisted them with the establishment of the trusts as well as their income tax compliance obligations and the tax audit that led to these disputes, are not public matters which would allow Mr Chen and Ms Li to be identified. In this regard, there was no suggestion nor evidence to the effect that their tax agent works exclusively for them akin to a family office, such that there is a close and recognisable connection. Their tax agent is a director of Rucker Financial (RF), being an accounting firm that, amongst other things, provides tax return services and assists with preparation of financial statements for numerous clients. There is insufficient evidence to determine with any degree of certainty that even the Applicants’ circle of family, friends and associates may know that the Applicants utilise the services of the tax agent as they claimed.
Secondly, the tax agent’s business address (according to his witness statement) is Doncaster, Victoria, which does not of itself reveal the place where Mr Chen and Ms Li reside and operate their businesses in rural Victoria. Granted, Mr Chen and Ms Li are not individuals living and working in a capital city of Australia, but rural Victoria is a sizeable area and, as these reasons will reveal, it is unnecessary to risk the confidentiality of the taxpayers by referring to the bank branches where the Deposits were made, or the addresses of the properties acquired by the Property Trustee Company. Equally, the fact that the Applicants have provided testimonials about their tax agent in the past cannot be construed as concrete evidence of a solid public connection between the Applicants individually or collectively and their tax agent such that their confidentiality in these reasons is at risk. That connection is, at best, tenuous.
As to whether it would nevertheless be desirable to make a confidentiality order with respect to the tax agent’s details, s 35(3) of the AAT Act states:
Ordersfor non-publication or non-disclosure
(3) The Tribunal may, by order, give directions prohibiting or restricting the publication or other disclosure of:
(a)information tending to reveal the identity of:
(i) a party to or witness in a proceeding before the Tribunal; or
(ii) any person related to or otherwise associated with any party to or witness in a proceeding before the Tribunal; or
(b)information otherwise concerning a person referred to in paragraph (a).
Whether that power should be exercised is determined having regard to s 35(5) of the AAT Act which provides:
(5)In considering whether to give directions under subsection (2), (3) or (4), the Tribunal is to take as the basis of its consideration the principle that it is desirable:
(a)that hearings of proceedings before the Tribunal should be held in public; and
(b)that evidence given before the Tribunal and the contents of documents received in evidence by the Tribunal should be made available to the public and to all the parties; and
(c)that the contents of documents lodged with the Tribunal should be made available to all the parties.
However (and without being required to seek the views of the parties), the Tribunal is to pay due regard to any reasons in favour of giving such a direction, including, for the purposes of subsection (3) or (4), the confidential nature (if applicable) of the information.
The Applicants submitted that additional confidentiality orders are appropriate under s 35(5) of the AAT Act to anonymise the tax agent’s details in the published reasons to facilitate the interests of justice because not making such an order may affect the Tribunal’s ability to receive evidence in the future, as witnesses would be reluctant to come forward. The suggestion was that professionals may be especially reluctant to co-operate and furnish statements as it may be inferred they are concerned about their reputation and or their evidence being a matter of public knowledge. See also DLMD at [17]; and Galanos and Department of Immigration and Citizenship [2010] AATA 1004 at [36]. The witness here is a tax agent who has acted for the Applicants for approximately 20 years. There was no suggestion that he did not voluntarily assist his clients. It would be disappointing if a tax agent were to adopt a position of not assisting their clients in case their evidence became public knowledge. Besides, the Tribunal can summons witnesses to attend to give evidence in appropriate cases.
Additionally, with respect to tax agents, it was submitted their evidence may be of a ‘confidential nature’ generally as contemplated by s 35(5) of the AAT Act, including potentially subject to “the accountants’ concession”.[1] However, the Applicants did not submit that any of the evidence of the Applicants’ tax agent was confidential except that the advice is ordinarily subject to general confidentiality obligations.
[1] Communications between a tax agent or accountant and their client are ordinarily not subject to client legal privilege. However, a tax agent or accountant may apply to the Commissioner for an “accountant’s concession”, being an administrative concession such that certain classes of documents (such as advisory documents) prepared by the tax agent or accountant shall remain confidential to that tax agent or accountant and their client, and the Commissioner will in certain circumstances not seek access to these documents.
Finally, the Applicants added that no prejudice should arise for the Commissioner from anonymising the name of the tax agent. I acknowledge the possibility that the Commissioner may not be prejudiced, and that he also did not indicate his attitude to the Applicants’ request. However, this is because the application arose at the end of the hearing without notice. While the Applicants pressed their application and lodged submissions on 19 October 2023 (pursuant to directions made by the Tribunal), in any event it was not necessary for the Tribunal to seek the views of the Commissioner under s 35(5) of the AAT Act. For completeness, even if the Commissioner had not opposed the confidentiality order, I still would not have acceded to the Applicants’ request. The disclosure of the tax agent’s name and firm details does not jeopardise the confidentiality of the taxpayers nor is it inappropriate in all the circumstances. A cardinal principle under s 35(5)(b) of the AAT Act is that it is desirable that the evidence should be made available to the public, acknowledging, however, that there are nevertheless limitations on the public accessing the files of the Tribunal including the evidence of witnesses.(See BQKD and Commissioner of Taxation [2023] AATA 2169 at [9]–[10], per Deputy President McCabe)
THE FACTUAL AND PROCEDURAL BACKGROUND REGARDING THE TAX ISSUES
The following findings of fact are based on the T-Documents, the respective Statements of Facts, Issues and Contentions of the parties, and the written and oral evidence of Mr Chen and Ms Li and their tax agent, Mr Dong. As stated above, Mr Chen and Ms Li are pseudonyms. I also address the evidence of the three witnesses in further detail below, especially as regards the Deposits.
It was common ground that the Applicants are the controlling minds of the trustee companies of each of the three trusts, including the Property Trustee Company. As stated above, Trading Trust 1 and Trading Trust 2 operate restaurant and takeaway food businesses at different locations. The Commissioner asserted that the businesses operated using cash which was not disputed.
The Property Trust and the Deposits
The Property Trust is a discretionary trust established by a deed of settlement in January 2013. At all material times, Mr Chen and Ms Li were primary beneficiaries of the Property Trust. Ms Li’s mother and Mr Chen’s father are secondary beneficiaries of the Property Trust (Mr Chen’s mother was also a second beneficiary until she passed away in March 2016). Mr Chen’s father resides in Australia and has remained here since his arrival in October 2018 whereas Ms Li’s mother resides in Hong Kong and has visited Australia on several occasions.
During the 2017 and 2018 income years, the following deposits were made into a Commonwealth Bank of Australia (CBA) bank account and into a Westpac bank account, each in the name of Property Trustee Company, as indicated below:
No. Date Amount Bank Account Description 1 22 Feb 2017 $113,350 CBA Cash Deposit
Victorian Rural Branch
2 29 Mar 2017 $100,000 CBA Cheque Deposit
Victorian Rural Branch
3 01 May 2017 $150,000 CBA Cash Deposit
Melbourne CBD Branch
4 02 May 2017 $95,000 Westpac Deposit
Victorian Rural Branch
5 14 May 2018 $50,000 CBA Cash Deposit
Victorian Rural Branch
6 07 Jun 2018 $7,475 CBA Cash Deposit
Victorian Rural Branch
7 27 Jun 2018 $220,000 CBA Cash Deposit
Victorian Rural Branch
Total $735,825
The above are collectively the Deposits. The evidence of the Applicants and Mr Dong in relation to each of the Deposits is set out further below, adopting the numbering in the above table. It is neither necessary nor appropriate to set out the names of the branches where the Deposits were made.
Property Trust distributions
In the 2017 and 2018 income years, the Property Trust distributed income to Mr Chen and Ms Li as to 50 per cent each. The Property Trust’s income was rent from various investment properties. During the hearing, the Commissioner also tendered the income tax returns of the Property Trust for the years ended 30 June 2019, 2020 and 2021.[2] The Property Trust also distributed income to Mr Chen and Ms Li as to 50 per cent each in those years.
[2] Exhibits R1 – R3.
Books and records of Property Trustee Company
The Deposits were recorded in the general ledgers of the Property Trustee Company for the 2017 and 2018 income years where they were described as either a “Loan from related party” or a “Beneficiary contribution.” The amounts described as “Loan from related party” were purportedly provided by Ms Li’s mother whereas the amounts described as “Beneficiary contribution” were purportedly provided by Mr Chen’s father and mother as set out below:
General ledger for the 2017 income year “Loan from related party” Date Details Amount 29 March 2017 Ms Li’s mother $100,000 1 May 2017 Ms Li’s mother $150,000 2 May 2017 Ms Li’s mother $95,000 “Beneficiary contribution” 22 February 2017 Mr Chen’s father and mother $113,350
General ledger for the 2018 income year “Beneficiary contribution” Date Details Amount 14 May 2018 Mr Chen’s father and mother $50,000 7 June 2018 Mr Chen’s father and mother $7,475 27 June 2018 Mr Chen’s father and mother $220,000 Property acquisitions by the Property Trustee Company
The Applicants stated that their parents loaned or provided equity contributions to the Property Trust to fund the acquisition of several properties by the Property Trustee Company in the 2017 and 2018 income years.
It was not in dispute that Property Trustee Company purchased a number of properties in around the 2017 and 2018 income years, the relevant details of which are, as follows:
(a)March 2017 – completion of purchase of a Melbourne residential unit for $628,000 (First Melbourne Unit);
(b)June 2017 – completion of purchase of a Melbourne residential unit for $658,000 (Second Melbourne Unit); and
(c)2 July 2018 – completion of purchase of two vacant rural lots in Victoria for $148,000 each (Two Vacant Lots).
Procedural Background to the Tax Disputes
On 31 October 2019, the Commissioner wrote to the Applicants confirming that the Australian Taxation Office (ATO) had chosen to audit:
(a)Trading Trust 1 in order to review a discrepancy between its business activity statements (BASs) and income tax returns (ITRs), entitlements to GST input tax credits and reported income and expenses claimed.
(b)Trading Trust 2 in order to review a discrepancy between BASs and ITRs, and reported income and expenses claimed.
(c)the Property Trust for the 2017 and 2018 income years in order “to verify sources of funding of your investment property acquisitions and repayments”.
On 15 November 2019, the ATO relevantly received from the Applicants’ tax agent, amongst other things, copies of the trust deed and resolutions, profit and loss statement, balance sheet, general ledgers and reconciliations for the Property Trust.
On 4 December 2019, a meeting was held between Ms Li, Mr Chen, their tax agents Messrs Nelson Wong and Ian Dong from RF and officers of the ATO. During this meeting, the Applicants’ tax agents made, on behalf of the Applicants, a voluntary disclosure of the under-reporting of GST on sales by the businesses conducted by the Trading Trust 1 and Trading Trust 2. In relation to matters with respect to the Property Trust, a file note of the meeting by the attending ATO officers records, as follows:
[Ms Li’s] mother would travel with cash from Hong Kong and give this to [Ms Li]. [Ms Li] said she would take a few days before depositing the funds into her bank account… During the 2015 year, [Ms Li] said there was one trip where her mother gave her $50,000 cash on one day and a few days later would give her $50,000 cash (total $100,000 cash). Cash was ultimately deposited into the [Property Trust] account when required for the purchase of investment properties…[3]
[Mr Chen] said he received $660,000 in cash as an inheritance from his parents. This is recorded in the [Property] Trust as a beneficiary contribution from [Mr Chen’s mother and father]… Cash was received over a period of 10 years and ultimately deposited into the [Property] Trust account when required for the purchase of investment properties.[4]
[3] ST34.
[4] ST35.
The Commissioner proceeded to ask for information from the Department of Home Affairs in relation to the travel movements for Ms Li’s mother and Mr Chen’s father and mother between the 2014 to 2018 income years. Significantly, none of the incoming passenger cards of Ms Li’s mother and Mr Chen’s father and mother declared any cross border movement of cash when they arrived in Australia. Consequently, on 16 January 2020, the Commissioner advised the Applicants’ tax agent that it would be requesting further explanations of the source of cash deposits contributed by family members during the 2017 and 2018 income years, to be provided at their next meeting.
The meeting in question was held on 4 February 2020 and was attended by ATO officers, Ms Li and Messrs Wong and Dong of RF. An ATO file note of the meeting records as follows:
… after [an ATO officer] noted to [Ms Li] that her mother last visited Australia between December 2014 and June 2015, [Ms Li] said when she needed money, she would discuss this with her mother and her mother would tell her there is cash in a drawer or wardrobe in her room. This was cash left from a previous visit by [Ms Li]’s mother, and was unknown to [Ms Li]. [Ms Li] said she would deposit these funds into the [Property] Trust bank account when they were required to be used.[5]
[5] T22.
On 14 February 2020, the ATO received an email from the Applicants’ tax agent stating “[Ms Li] cannot provide more evidence for the money [borrowed] from her mum and [Mr Chen]’s parents”.[6]
[6] T26.
On 18 February 2020, the Commissioner issued position papers to the Applicants. Broadly, the Commissioner increased the GST on sales and reduced the GST credits for Trading Trust 1 and Trading Trust 2, based on the amounts voluntarily disclosed by the Applicants, and also made consequential adjustments to the net incomes of those trusts. In relation to Trading Trust 2, the Commissioner disallowed deductions totalling $19,229 for international travel expenses, and a deduction totalling $1,377 for domestic travel expenses, both in the 2017 income year. The Commissioner included a trust distribution totalling $101,792 received from the Trading Trust 1 in the 2018 income year and made consequential adjustments to the net income of that trust. With reference to the Property Trust, the Commissioner concluded the Deposits totalling $735,825 reflected ordinary income of the Property Trust derived from a taxable source which had not been reported.
On 18 February 2020, the Commissioner also issued a beneficiary adjustment to each Applicant advising of the change in the net income for each of the three trusts under audit, and the resulting extra tax payable by each Applicant. The adjustments for each Applicant were identical and were as follows, noting that the largest adjustments related to the Property Trust:
Reported
net income
Revised
net income
Extra tax payable for the Applicant Reported
net income
Revised
net income
Extra tax payable for the Applicant Income year 2017 2018 Trading Trust 1 $14,464 $95,128 $38,329 $31,817 $110,560 $34,211 Trading Trust 2 $72,397 $92,833 $8,818 $26,954 $30,078 $1,263 Property Trust $0 $138,361 $108,163 $0 $223,183 $62,232
On 5 March 2020, the Applicants accepted the Commissioner’s position papers in relation to the two trading trusts and the Commissioner finalised his audit of those trusts. The adjustments made to the BASs and the net income of the Trading Trust 1 and the Trading Trust 2, for the 2017 and 2018 years were, as follows:
BAS adjustments Increased GST on sales Reduced GST credits Tax shortfall penalty Total Trading Trust 1 $8,199 $20,940 $2,913.90 $32,052.90 Trading Trust 2 $30,076 $15,879 $4,595.50 $50,550.50
Net income adjustments Financial year Reported amount Updated amount Difference Trading Trust 1 2017 $144,793 $185,667 $40,874 2018 $155,700 $175,899 $20,199 Trading Trust 2
2017 $28,928 $190,256 $161,328 2018 $63,634 $221,780 $158,146
On 12 March 2020, the Commissioner finalised his audit of the Property Trust maintaining the same position as earlier set out in his position paper, that is, the Deposits totalling $735,825 reflected ordinary income of the Property Trust.
On 25 March 2020, the Applicants sought “independent review” of the ATO’s audit position.[7] During the “independent review” process, the Applicants provided statutory declarations dated 28 May 2020. They also provided a statutory declaration signed by Ms Li’s mother dated 16 September 2020 and an undated statutory declaration from Mr Chen’s father. (The latter declarations were not relied on at the hearing nor was any evidence provided by Ms Li’s mother or Mr Chen’s father).
[7] An “independent review” is a process by which, upon the request of a taxpayer, an officer of the ATO with no history over the matter will review the audit case with an “independent fresh pair of eyes”. Their findings will be presented to the team conducting the audit as a recommendation with what the reviewer considers to be a view of the facts, and the application of the law to those facts.
On 16 December 2020, the “independent review” was finalised, and the Commissioner confirmed the ATO’s audit position.
On 13 January 2021, the Commissioner finished his audit of the Property Trust and issued a revised audit finalisation letter.
On 13 January 2021, the Commissioner issued notices of amended assessments of income tax to Mr Chen and Ms Li for the 2017 and 2018 income years.
On 1 February 2021, the Commissioner issued notices of assessment of administrative penalties to Mr Chen and Ms Li for the 2017 and 2018 income years. Each notice reflected a base penalty amount of 50% of the tax shortfall amount, based on recklessness as to the operation of a taxation law: see Item 2 of the table to s 284-90(1) of Schedule 1 to the TAA. To the extent the base penalty related to the income tax shortfalls related to the Trading Trust 1 and the Trading Trust 2, it was remitted by 80%. To the extent there was any percentage increase under s 284-220 of Schedule 1 to the TAA, it was also remitted.
A summary of the total adjustments to the Property Trust and to each of the Applicants in respect of the 2017 and 2018 income years is set out in the tables below:
The Property Trust Income year Reported net income Amended net income Variation Distribution to beneficiaries (50%) Income tax 2017 -$11,983 $446,367 $458,350 $223,183 $0 2018 -$752 $276,723 $277,475 $138,361 $0
Ms Li Income year Reported taxable income Amended taxable income Variation Income tax Administrative penalties 2017 $165,281 $489,565 $324,284[8] $190,447.85[9] $59,081.35 2018 $145,256 $365,814 $220,558[10] $124,715.5[11] $35,267.25 Total $310,537 $855,379 $544,842 $315,163.40 $94,348.60 Mr Chen Income year Reported taxable income Amended taxable income Variation Income tax Administrative penalties 2017 $168,040 $492,324 $324,284 $174,880.7[12] $59,184.90 2018 $149,782 $370,340 $220,558 $91,567.80[13] $35,396.30 Total $317,822 $862,664 $544,842 $266,448.55 $94,581.20 [8] The variation referable to the Property Trust is $233,183.
[9] The additional tax payable referable to the Property Trust is $107,887.
[10] The variation referable to the Property Trust is $138,361.
[11] The additional tax payable referable to the Property Trust is $61,864.
[12] The additional tax payable referable to the Property Trust is $108,163.
[13] The additional tax payable referable to the Property Trust is $62,232
On 4 March 2021, Mr Chen and Ms Li each objected to the notices of amended assessments of income tax and penalty assessments.
On 25 March 2021, the Commissioner disallowed the objections in full.
On 28 April 2021, Mr Chen and Ms Li applied to the Tribunal for review of the objection decisions being the decisions under review in these proceedings.
THE EVIDENCE
Ms Li and Mr Chen each provided signed statements dated 28 May 2020, 31 January 2022 and 3 May 2022.[14] At the hearing, which was conducted by Teams, Ms Li and Mr Chen also gave oral evidence with the assistance of an interpreter and were cross-examined. Mr Ian Dong, the Applicant’s registered tax agent and accountant, signed a statement dated 3 May 2022 in support of them. Mr Dong also gave oral evidence and was cross-examined.[15] As stated above, Mr Chen’s father and Ms Li’s mother did not give evidence.
[14] Statutory declaration of Ms Li dated 28 May 2020 (Exhibit A1); Witness statement of Ms Li dated 31 January 2022 (Exhibit A2); Witness Statement of Ms Li dated 3 May 2022 (Exhibit A3); Statutory declaration of Mr Chen dated 28 May 2020 (Exhibit A4); Witness statement of Mr Chen dated 31 January 2022 (Exhibit A5); Witness Statement of Mr Chen dated 3 May 2022 (Exhibit A6).
[15] Witness Statement of Mr Ian Dong dated 3 May 2022 (Exhibit A7).
Much of the evidence given by Ms Li and Mr Chen in their written statements was relevantly similar, if not identical in relation to, for example, the establishment of the Property Trust, its property investment activities and their asset positions. I have summarised it immediately below and then dealt separately with their evidence regarding the Deposits which was the focus of cross-examination.
Ms Li and Mr Chen both stated in their statements that since the Property Trust was established in 2013, it has only ever been used as a private investment vehicle and does not carry on any commercial or business activities apart from property investment.[16] Ms Li and Mr Chen stated as follows in relation to the sources of funds for the property acquisitions:
(a)In relation to the First Melbourne Unit (see [34] above), the Property Trustee Company paid the balance of the purchase price in late March 2017 using funds from the Property Trust and a loan obtained from the CBA. The Property Trustee Company had earlier paid the 10 per cent deposit in February 2017 for exchange of contracts in two instalments, $5,000 and $57,800.[17] In other words, none of the Deposits contributed to the purchase price of the First Melbourne Unit.
(b)In relation to the Second Melbourne Unit (see [34] above), the Property Trustee Company paid the balance of the purchase price in late June 2017 using part of a loan obtained from Ms Li’s mother and a beneficiary contribution provided by Mr Chen’s father.[18] The Property Trustee Company had earlier paid the 10 per cent deposit for exchange of contracts in two instalments of $5,000 in March 2017 and $60,800 in April 2017. In other words, one or more of the Deposits directly contributed to the purchase price of the Second Melbourne Unit.
(c)In relation to the Two Vacant Lots (see [34] above), the Property Trustee Company paid the sum of the balance of the purchase price on or about 2 July 2018 using the proceeds of a beneficiary loan obtained from Mr Chen’s father. As with the Second Melbourne Unit, one or more of the Deposits contributed to the purchase price of the Two Vacant Lots.[19]
[16] Exhibit A1, [6]; Exhibit A4, [6].
[17] Exhibit A1, [8]-[9]; Exhibit A4, [8]-[9].
[18] Exhibit A1, [14].
[19] Exhibit A1, [17]; Exhibit A4, [17].
Both Ms Li and Mr Chen referred to Mr Chen’s father having provided a beneficiary contribution of $113,350 to the Property Trust on or around 22 February 2017 to facilitate its purchase of the Second Melbourne Unit,[20] as well as a further sum of $131,002.43 as a beneficiary contribution on 30 June 2017 to facilitate payment of outstanding owners’ corporation fees owing on that unit.[21] Ms Li and Mr Chen stated they did not make enquiries regarding the source of the funds. They both stated that Mr Chen’s father provided beneficiary contributions to the Property Trust in mid-2018 to facilitate its investment in the Two Vacant Lots. These beneficiary contributions were said to have been made as follows: $50,000 provided on or about 14 May 2018; $7,475 provided on or about 7 June 2018; and $200,000 provided on or about 27 June 2018.[22]
[20] Exhibit A1, [28][ Exhibit A4, [28].
[21] Exhibit A1, [30]; Exhibit A4, [30].
[22] Exhibit A1, [31]-[32]; Exhibit A4, [31]-[32].
Ms Li and Mr Chen also stated in their respective witness statements dated 31 January 2022 that they have never owned any material assets or investments outside Australia, nor earned any income other than that disclosed by them in their income tax returns for the 2017 and 2018 income years and as disclosed to the Commissioner during the tax audit for those years.[23] They both also stated that, to the best of their knowledge and belief, the Property Trust did not earn any other income, apart from that disclosed in its income tax returns for the 2017 and 2018 income years and as disclosed to the Commissioner during the audit with respect to those income years.[24]
[23] Exhibit A2, [6] and [8]; Exhibit A5, [5] and [6].
[24] Exhibit A2, [7]; Exhibit A5, [4].
Ms Li (a pseudonym)
In her statement dated 28 May 2020, Ms Li stated her mother is a resident of Hong Kong and occasionally travels to Australia to visit family.[25] Ms Li’s mother stays with Ms Li and her family and sleeps in a spare bedroom in their home.[26] Ms Li stated that she has a close relationship with her mother who had always offered to financially assist her when she needed help.[27] Ms Li indicated that her mother had travelled to Australia in late 2014 to visit and assist the Property Trust in identifying suitable investment property and, in early 2015, Ms Li’s mother had advanced a loan to the Property Trust to facilitate the purchase of a property in rural Victoria (that loan is not the subject of these proceedings).[28]
[25] Exhibit A1, [35].
[26] Exhibit A1, [37].
[27] Exhibit A1, [38].
[28] Exhibit A1, [40]-[42].
With respect to the properties purchased by the Property Trust in the 2017 and 2018 income years, Ms Li stated that she contacted her mother in late March 2017 to inform her that the Property Trust had identified the Second Melbourne Unit as a potential investment opportunity and that she wanted to request a loan. Ms Li stated that her mother agreed to advance a loan to assist the Property Trust with making the investment.[29] Ms Li stated that in or around May 2017, she contacted her mother to request that she provide further financial assistance, specifically, to allow the payment of the balance of the purchase price on the Second Melbourne Unit. Ms Li’s mother agreed to do so.[30] Ms Li stated that it was her “understanding that [her mother] provided [redacted] genuine interest-free loans that the Trust will be required to repay.”[31] (Mr Chen separately referenced the putative loans from Ms Li’s mother in his statement dated 28 May 2020.)[32]
[29] Exhibit A1, [45].
[30] Exhibit A1, [48].
[31] Exhibit A1, [55].
[32] Exhibit A4, [38]-[41].
In her third statement dated 3 May 2022, Ms Li provided information as to her interactions with the tax agent and the preparation of the income tax returns. Relevantly, Ms Li stated that the firm RF has been assisting with the preparation of tax returns since about 2005 and that she was primarily responsible for assisting RF as her husband was busy with the businesses. She stated that RF would send an email to her asking for information they needed and she would provide this and any additional information to them for RF to prepare the returns and financial statements. Ms Li stated she never prepared the returns, does not have an accounting degree and entirely relied on RF for her and Mr Chen’s tax affairs. Specifically, she stated “I relied on Rucker Financial for assistance and advice” and “[w]ith respect to preparing the tax returns… I believe that I exercised reasonable care. I provided all the information that the accountant (Rucker Financial) asked for. I tried to follow all the instructions that the accountant advised and provide all the information that the accountants needed.”[33] Ms Li added: “I did not think I would need to document the contributions/ loans to the Trust, because this involved my family. When we lent money to the family, we never asked the other party to have a contract or document about the loan.”[34]
[33] Exhibit A3, [8] and [10].
[34] Exhibit A3, [9].
Ms Li further explained her “cultural experiences” in her third statement, as follows:
Cultural experience with savings
14. My experience and understanding is that my mum and [Mr Chen’s] parents would keep their savings in cash. They did not tell me everything. My mum would never tell me how much cash she had. She would only tell me what she wanted me to know. This is very normal in my culture, which is Chinese. My understanding is that the same is for [Mr Chen]. My understanding is that in my culture sometimes parents try not to create too much conflict between kids, therefore they do not share information about their wealth.
…
17. Now things are different. Now people have a safe in a bank. But the old generation did not do this. My grandpa came from China and lived in Hong Kong, during the regime change in China. During that time, people wanted to keep their wealth close to them, in case they had to run for their lives.
Cultural experience with loans
18. In the past I have borrowed money from family, and they never asked me to sign anything. For family, people who are close, it is not a good thing to sign something, because it is embarrassing, because it shows that you do not trust them. If you lend money to people, sometimes you feel embarrassed to chase people for payment. If I ever needed to borrow money from Mum, it was always given in cash.[35]
[35] Exhibit A3.
Mr Chen (a pseudonym)
In his third statement dated 3 May 2022, Mr Chen provided an explanation of his involvement with and reliance on RF and Ms Li in relation to the preparation of income tax returns.[36] Mr Chen stated, as follows:
I think it was reasonable for me to rely on [Ms Li] and Rucker Financial to prepare the tax returns … [Ms Li] is my wife, she is also my business partner. With respect to Rucker Financial, I have used them since 2005. Rucker Financial are professional accountants.[37]
[36] Exhibit A6.
[37] Exhibit A6, [6].
Additionally, Mr Chen provided the following further explanations regarding his family’s dealings in money and property acquisitions in his third statement:
Money
18. In my experience, older people keep their wealth in cash.
19. My mum and dad did not understand the system outside of China, so they were nervous.
20. When I was young my mum always said never to spend all your money and keep it in a safe place.
21. My experience growing up is that people hid money everywhere. Because houses were old, some stones could be removed so that money could be hidden there.
22. I am not sure where my parents got their money.
23. In our family, we never talked about how much money my parents had, or where this was. As long as everyone was ok we never talked about money.
24. I started the first business in Chinatown in 2011 in partnership. This was sold in 2003/2004. I worked very hard, but my partner was not really working, so we sold out the partner and took a break for a while. After a few months, we looked for a new business and bought in [business managed under the Trustee company for Trading Trust 2]. When things were not working out with the first business, my dad offered to give me money to buy out my former business partner, but I didn’t take it.
25. Over the years, dad has offered to contribute for things, such as for a car or for kids. He gave some small amounts in the past – a few thousand or hundred dollars. He always gave money in cash. He never asked me to repay the money.
26. My dad also gave me money as he stayed with us, to help with living expenses.
27. I never borrowed money from my dad. We are doing ok and growing the business step by step, so that we don’t require money from someone else.
28. In the past, mum offered to send money to cover the $60,000 to $65,000 immigration fee for her permanent residency application. However, I didn’t accept this as me and my brother had money and covered the fee.
Money for property acquisitions
29. When mum passed away, dad started to give some money to me – bigger amounts. He had not done this before, apart from situations I mentioned previously.
30. In our culture, when parents pass away, they give money to their children.
31. After my mum passed away, dad went back to China to deal with his antiques and paintings. He kept some items and sold them in China. He did not bring some items to Australia as he was not allowed to.
32. When mum passed away, dad felt lonely. He has some friends in Melbourne and wanted to buy something close to Chinatown so he could see his friends, a place to stay. He was also looking for an investment.
33. When the [Property Trust] bought [the First Melbourne Unit], my dad liked this property. After the [Property Trust] bought this, another apartment came up on [level] in the same building, which my father also liked. This was [the Second Melbourne Unit]. The [Property Trust] bought that also. My dad provided the funds to invest in [the Second Melbourne Unit].
34. [The Second Melbourne Unit] is not rented out and is used by family members, including my dad when they come to Melbourne, to stay.
35. There was nothing in writing about the investment and money my father provided, because this was from my father. We don’t do things that way. He trusts me and never wanted to put anything in writing. He trusts me because he lived with us for many years.[38]
[38] Exhibit A6.
Mr Ian Dong
Mr Dong is an accountant and tax agent who has worked with RF since 2011. He was a certified practising accountant, registered tax agent and director at RF at the time the tax returns for the Property Trust were prepared in respect of the 2017 and 2018 income years. He continues to be a registered tax agent and a director at RF and is now also a chartered accountant. As stated above (see [19] above), RF is an accounting practice which provides tax return services to numerous clients. RF also assists with the preparation of financial statements and investment structures such as discretionary trusts like the Property Trust.
Mr Dong stated that RF use Xero accounting software to prepare the relevant tax returns and financial statements for the Property Trust.[39] Mr Dong stated that he would mostly deal with Ms Li when asking for information in relation to the Property Trust’s tax returns.[40] Mr Dong explained that he would delegate the majority of the work in respect to the Property Trust’s tax returns to a colleague at RF who, to the best of his knowledge, had completed an accounting degree and was a qualified chartered accountant and tax agent.[41] The process for preparing the tax returns and financial statements for the Property Trust was “initially based on bank statements, information from the real estate agent and other documents, such as settlement statements for properties”.[42] “With respect to information from bank statements, we would ask [Ms Li] to provide an explanation for certain bank transactions.”[43] Mr Dong also attached various examples of emails to Ms Li together with attachments from Ms Li responding to questions and providing additional information dated 23 August 2017, 12 and 22 January 2018.[44] Mr Dong stated that “[w]ith respect to follow-up questions and clarifications… we would have either sent an email or had a follow up call where some queries were discussed. We would treat deposits by [Ms Li] as contributions to the trust, on the basis that the only income in the Trust was rent.”[45] Mr Dong also stated “[w]ith respect to the deposits, we accepted the explanations provided by [Ms Li]. There was nothing out of the ordinary with respect to these. We have other clients with family or private loans and contributions to trusts.”[46]
[39] Exhibit A7, [6].
[40] Exhibit A7, [10].
[41] Exhibit A7, [12]-[14].
[42] Exhibit A7, [17].
[43] Exhibit A7, [18].
[44] Exhibit A7, [19]
[45] Exhibit A7, [20].
[46] Exhibit A7, [22].
Mr Dong further stated the following in relation to his interactions with Ms Li:
23. We may have requested a loan agreement, but [Ms Li] didn’t have this, so we left it at that. In my experience, it was pretty common for private loans between family members to be undocumented. It was not something that we would go further and inquire about, as these are private arrangements.
24. I cannot recall a time where I asked [Ms Li] for information, and she did not provide this, except maybe where this related to immaterial items. Sometimes [Ms Li] was slow as she was busy and would need to be followed up, but she would provide the information. We would not finalise the work without relevant information being provided by [Ms Li].
25. We would use the information by [Ms Li] to prepare tax returns and financial statements for the [Property Trust] for FY17 and FY18. This was recorded in our accounting software, Xero.[47]
[47] Exhibit A7.
I turn now to address the oral evidence of Ms Li, Mr Chen and Mr Dong noting that they were extensively cross-examined by counsel for the Commissioner. First, it is convenient to set out their respective evidence by reference to the Deposits referred to in the table at [29] above, followed by a summary of the nature of their evidence.
Deposit No. 1
This was a cash deposit in the amount of $113, 350 made by Ms Li at the CBA in a Victorian rural branch on 22 February 2017 (see table at [29] above for this and each of the Deposits). It transpired from the oral evidence of both Ms Li and Mr Chen that Ms Li undertook all the banking transactions regarding the Deposits. Ms Li stated that this cash deposit came from her father-in-law “because we are going to purchase an investment property”. There were no conditions attached to him giving that money.[48] Ms Li said that her husband gave her the cash, at their home. She had no contemporaneous evidence of this cash being given to her. Only her and her husband were present when he gave her this cash.[49]
[48] Transcript of hearing on day 1, 9 October 2023 (Transcript 1), page 46 lines 20-40 (recorded as 46:20-40).
[49] Transcript 1, 47.
Mr Chen testified this cash was given to him by his father over two to three occasions, including two lots of $50,000.[50] He did not recall the dates on which it was given[51] but recalled that the third lot was given “before his departure” [52], and that “[t]wo lots were given to me in his bedroom, and one lot was given to me in, sort of, loose notes and, yes, I can’t remember exactly the location for that one.”[53] Mr Chen also stated there was no mention of any conditions attached to the money[54] nor did he have any contemporaneous notes, documents or other records of any of these lots of cash.[55]
[50] Transcript of hearing on day 2, 10 October 2023 (Transcript 2), 112.
[51] Transcript 2, 112:25; Transcript 2, 113:25-30.
[52] Transcript 2, 114:25-30.
[53] Transcript of hearing on day 3, 11 October 2023 (Transcript 3), 135:35-40.
[54] Transcript 2, 115:40-45.
[55] Transcript 2, 115:5-15.
Mr Dong stated in oral evidence that Ms Li informed him in a phone call that this was a loan from Mr Chen’s parents.[56] However, when shown a copy of the general ledger prepared by RF recording the amount as “9400- Beneficiary Contribution – [Mr Chen’s parents]”[57], Mr Dong said that this was a mistake on the part of RF and it should read “loan from related party – Mr Chen’s parents.”[58] He later explained, that he thought this and other deposits were incorrectly characterised as contributions to the Property Trust, because Mr Chen’s parents were beneficiaries. There was no written loan agreement[59] and Mr Dong made no enquiries of the purported lenders.[60] Nor were there any repayments of principal or interest payments made for this loan.[61]
[56] Transcript 3, 155:1-20; Transcript 3, 158:30-45.
[57] Exhibit A1, 16.
[58] Transcript 3, 160:40-45.
[59] Transcript 3, 153:35-40.
[60] Transcript 3, 154:10.
[61] Transcript 3, 161:45; 162:5.
Deposit No. 2
This was a bank cheque deposit made on 29 March 2017 in the amount of $100,000 at the CBA. Ms Li’s oral evidence was that this was a loan from her mother but she could not remember the date on which the cash was given.[62] Asked whether it was a loan by her mother to Ms Li or to the Property Trust, Ms Li stated that she did not go into that detail with her mother. Ms Li further testified that it was deposited as a bank cheque that she arranged at a Westpac rural branch by exchanging cash she retrieved from a plastic box in a spare room of her house where her mother stayed when she visited from overseas.[63] The reason Ms Li went to the Westpac bank to arrange a bank cheque is because all the business accounts of the trading trusts are with Westpac and it had a private room so she did not have to deposit cash in public view.[64] Ms Li stated she then deposited that bank cheque with the CBA at a Victorian rural branch. Ms Li stated she was not surprised her mother had hidden money in her spare room. Ms Li also stated she did not ask her mother if there was more cash, and was not concerned about the security of that amount of cash being stored in her house.[65] There was no written loan agreement and Ms Li did not record repayments of the loan made “here and there”.[66] When taken to the Property Trust’s general ledgers exhibited to her first statement[67], Ms Li could not identify any repayments of principal or payments of interest made to her mother in the relevant income years.[68] Ms Li had no contemporaneous records of her communicating with her mother and or finding the cash.[69] No one else was with her when she found the cash and no one else saw the cash in the spare room.[70]
[62] Transcript 1, 50:15.
[63] Transcript 1, 53; 50:45
[64] Transcript 1, 54:10; 54:24.
[65] Transcript 1, 52-53.
[66] Transcript 1, 53:25-30.
[67] Exhibit A1, [22]-[29].
[68] Transcript 2, 88:25-35 (for 2017 income year); Transcript 2, 92:1-25 (for 2018 income year).
[69] Transcript 1, 51:24-40.
[70] Transcript 1, 51:30-35.
Mr Chen stated in oral evidence that he did not deposit the cheque and did not know the source of this cash.[71] Mr Dong’s oral evidence was that Ms Li informed him in a phone call that this was a loan from her mother.[72] There was no written loan agreement[73] and Mr Dong made no enquiries of the purported lender.[74] There were no repayments of principal or interest payments made for this loan.[75]
[71] Transcript 2, 116:1-10.
[72] Transcript 3,155:1-5; Transcript 3, 159:1-5.
[73] Transcript 3, 153:35-40.
[74] Transcript 3, 154:10.
[75] Transcript 3, 161:45; Transcript 3, 162:5-10.
Deposit No. 3
Ms Li deposited the cash in the amount of $150,000 on 1 May 2017 at the CBA, at a Melbourne CBD branch. Ms Li stated she would have taken the cash with her to deposit when she had to go to the Melbourne CBD to do other errands. On the first hearing day, Ms Li stated this money was physically given to her by her father-in-law,[76] not in a lump sum but in “two or three goes”[77] and that her husband was there “on one occasion”.[78] On the second hearing day, Ms Li changed her evidence after refreshing her memory overnight. Ms Li stated this cash was from her mother which she took from the plastic box in a drawer in the spare room.[79] When asked how her mother obtained the cash, Ms Li claimed privilege[80] and refused to answer any more questions in relation to Deposit 3.[81] On the second day of the hearing, Mr Chen said in relation to Deposit 3, “I think it’s from my father… it was always, you know, after like a meal when we’re chatting together and then the property – when the property was mentioned that the money was given to us”.[82] On the third day of the hearing, Mr Chen changed his evidence and said “I’m actually not aware; not aware of the existence of this sum”.[83] Mr Dong’s oral evidence was that Ms Li informed him in a phone call that this was a loan from her mother.[84] As with the other alleged loans, there was no written loan agreement[85] and Mr Dong made no enquiries of the purported lender.[86] According to Mr Dong, there were no repayments of principal or interest payments made for this loan.[87]
[76] Transcript 1, 56:5-20.
[77] Transcript 1, 58:15.
[78] Transcript 1, 58:35-40.
[79] Transcript 2, 66:20-30.
[80] Transcript 2, 67:35.
[81] Transcript 2, 70:1-5; Transcript 2, 69:5.
[82] Transcript 2, 116:20-35.
[83] Transcript 3, 124:15.
[84] Transcript 3,155:20; Transcript 3, 159:5-10.
[85] Transcript 3, 153:35-40.
[86] Transcript 3, 154:10.
[87] Transcript 3, 161:45; Transcript 3, 162:5-10.
Deposit No. 4
Under cross-examination, Ms Li could not remember whether she made this deposit in the amount of $95,000, which was made on 2 May 2017 or why it was deposited.[88] She said she made the transfer to the account of the Property Trustee Company but cannot remember why.[89] Mr Chen stated he did not deposit this cash, did not know what the source of the cash was and did not transfer the amount into the CBA account.[90] Mr Dong stated that he was informed by Ms Li in a phone call that this was a loan from her mother and Mr Chen’s parents.[91] Based on his review of the accounts attached to Exhibit A1, Mr Dong stated there were no repayments of principal[92] or interest payments made.[93]
[88] Transcript 1, 60:20-25.
[89] Transcript 1, 60:45; Transcript 1, 61:1-5.
[90] Transcript 2, 118:25-35.
[91] Transcript 3, 155:15; Transcript 3, 159:20-25.
[92] Transcript 3, 159:35-40.
[93] Transcript 3, 161:45; 162:5-10.
Deposit No. 5
Ms Li deposited the cash in the amount of $50,000 on 14 May 2018, which she said came from her father-in-law, and was given to her at home for “the [Two Vacant Lots] properties”.[94] She could not recall when it was given. She did not know and did not ask where he got the cash from. It was given just in “a pile of cash”.[95] There were no conditions or terms attached to him giving that money. Her husband was present when the cash was given by her father-in-law,[96] and Ms Li had no contemporaneous records or documents of him giving her that cash .[97] Mr Chen said this cash was given to him by his father “for property purchase”, after a meal at the meal table, when Ms Li was also present.[98] His father gave the cash to him in a bag.[99] Mr Chen saw his father get the physical cash from the bedroom.[100] Mr Chen stated that he did not know what his father’s source for this cash was and did not ask.[101] Mr Chen had no contemporaneous documents or records of his father giving him this cash.[102] Mr Dong stated that Ms Li informed him in a phone call that this was a loan from Mr Chen’s parents.[103] When shown a copy of the general ledger prepared by RF recording the amount as “9400- Beneficiary Contribution – [Mr Chen’s parents]”,[104] Mr Dong said that this was a mistake on the part of RF and it should read “loan from related party – [Mr Chen’s parents]”.[105] Mr Dong confirmed there was no written loan agreement[106] and he did not make enquiries of the purported lenders.[107] Nor were there were any repayments of principal or interest payments made for this loan.[108]
[94] Transcript 2, 70:40.
[95] Transcript 2, 70:35.
[96] Transcript 2, 70:30.
[97] Transcript 2, 70:10.
[98] Transcript 2, 119:5; Transcript 3, 131:30-35.
[99] Transcript 3, 131:40.
[100] Transcript 3, 131:40.
[101] Transcript 3, 131:5-20.
[102] Transcript 3, 132:5-10.
[103] Transcript 3, 155:1-5; Transcript 3, 164:35-45, referring to Exhibit A1, 27.
[104] Exhibit A1, 26.
[105] Transcript 3, 165:35-40.
[106] Transcript 3, 153:35-40.
[107] Transcript 3, 154:10.
[108] Transcript 3, 166:5-20.
Deposit No. 6
The cash deposited in the amount of $7,475 on 7 June 2018, according to Ms Li, came from her father-in-law. She did not know and did not ask where he got the cash from.[109] She could not recall when it was given but it was given to her at home in a pile of cash, for the [Two Vacant Lots] property purchase.[110] She did not know why he gave her the cash for these properties in separate lots.[111] Ms Li had no contemporaneous records or documents of him giving her the cash.[112] No one else was present when her father-in-law gave her the cash.[113] Mr Chen stated that he did not deposit the cash and did not know where it came from.[114] Mr Dong stated that Ms Li informed him in a phone call that this was a loan from Mr Chen’s parents.[115] When shown a copy of the general ledger prepared by RF recording the amount as “9400- Beneficiary Contribution – [Mr Chen’s parents]”[116], Mr Dong said that this was a mistake on the part of RF and it should read “loan from related party – [Mr Chen’s parents]”.[117] Mr Dong confirmed that there was no written loan agreement[118] and he made no enquiries of the purported lenders.[119] Nor were there were any repayments of principal or interest payments made for this loan.[120]
[109] Transcript 2, 71:30-45.
[110] Transcript 2, 72:10-20.
[111] Transcript 2, 72:10-15.
[112] Transcript 2, 73:15-20.
[113] Transcript 2, 73:15.
[114] Transcript 3, 132:45; Transcript 3, 133:1-5.
[115] Transcript 3, 155:1-5; Transcript 3, 165:1-5, referring to Exhibit A1, 27.
[116] Exhibit A1, 26.
[117] Transcript 3, 165:30-40; Transcript 3, 166:1.
[118] Transcript 3, 153:35-40.
[119] Transcript 3, 154:10.
[120] Transcript 3, 166:5-20.
Deposit No. 7
Ms Li deposited the cash in the amount of $220,000 on 27 June 2018 which she stated came from her father-in-law, also for the purchase of the Two Vacant Lots. She did not know and did not ask where he got the cash from. She could not recall when it was given but she did recall that it was given to her at home in a bag. She could not recall if anyone else was there when her father-in-law gave her the bag of cash.[121] Ms Li had no contemporaneous records or documents of him giving her that cash.[122] Mr Chen said this cash was given to him by his father “a few days before settlement” of the Two Vacant Lots. It was given to him “at the meal table” when Ms Li was also present in a bag, or one or two bags.[123] Mr Chen saw his dad get the cash physically from his bedroom.[124] He did not know what his father’s source of funding for the cash was and did not ask[125] Mr Chen had no contemporaneous documents or records of his dad giving him this cash.[126] Mr Dong stated that he was informed by Ms Li in a phone call that this was a loan from Mr Chen’s parents.[127] When shown a copy of the general ledger prepared by RF recording the amount as “9400- Beneficiary Contribution – Mr Chen’s parents”,[128] Mr Dong said that this was a mistake on the part of RF and it should read “loan from related party – Mr Chen’s parents”.[129] Mr Dong confirmed that there was no written loan agreement[130] and that he made no enquiries of the purported lender.[131] Additionally, there were no repayments of principal or interest payments made for this loan.[132]
[121] Transcript 2, 74.
[122] Transcript 2, 74:25.
[123] Transcript 3, 134:25-45.
[124] Transcript 3, 135:5.
[125] Transcript 3, 133:40.
[126] Transcript 3, 135:10-15.
[127] Transcript 3, 155:1-5; Transcript 3, 165:5-10, referring to Exhibit A1, 27.
[128] Exhibit A1, 26.
[129] Transcript 3, 165; 166:1.
[130] Transcript 3, 153:35-40.
[131] Transcript 3, 154:10.
[132] Transcript 3, 166:5-20.
Mr Chen agreed that when the two lots of $50,000 ($100,000) forming part of Deposit 1 ($113,500) were added to Deposits 5 and 7, his father had given him $370,000 in cash “taken from the bedroom” over approximately two years.[133] Mr Chen maintained that he did not know there was cash in his house despite his father giving him cash in February 2017, May 2018 and June 2018 as “it’s not my business”.[134] When asked: “is it your evidence, Mr Chen, that it’s not your business that there are these large amounts of cash in your house?”, Mr Chen said: “I am not going to answer this question”.[135] Mr Chen agreed that the total of Deposits 1, 5 and 7 was $383,350. (It will be recalled from the table at [29] above that Deposits 1, 5 and 7 were made on 22 February 2017, 14 May 2018 and 27 June 2018.) Mr Chen stated he never asked his father where he got $383,350 worth of cash from and could not produce any contemporaneous documents or evidence that his father gave him any cash.[136]
[133] Transcript 3, 136:35-40.
[134] Transcript 3, 137:30-45.
[135] Transcript 3, 138:1-5.
[136] Transcript 3, 138:30-45; Transcript 3, 139:1.
Summary re Evidence
There were numerous shortcomings in the written and oral evidence of the three witnesses regarding the Deposits. First, despite the numerous affidavits put forward by Ms Li and Mr Chen, their written and oral evidence were at a very high level of abstraction. They provided very few details about the circumstances in which the cash totalling $735,825 was allegedly given to them for the Property Trust. This was despite the amounts in cash being significant. According to Ms Li, the cash that was loaned by her mother was found in a plastic box in a drawer in the spare room in their home after Ms Li’s mother had directed her to take the cash from that box. At least in respect of the cash which was Deposit 2, Ms Li was unclear as to whether her mother loaned the money to her or the Property Trust. Ms Li stated they did not go into that level of detail. Nor were there any details as to the terms of any loans in the evidence of Ms Li or Mr Chen. Similarly, the circumstances in which the cash claimed to have been provided as equity contributions by Mr Chen’s parents to the Property Trust were also ambiguous and vague. No further details were provided by their evidence, including any dialogue that one might expect, for example if the cash were given in the form of loans, when repayments were to occur.
Secondly, Mr Dong’s oral evidence was that all Deposits represented loans from either Ms Li’s mother or Mr Chen’s parents. This contradicted both Mr Chen and Ms Li’s evidence, who stated that the cash given by Mr Chen’s parents were for equity contributions to the Property Trust, albeit with no discernible terms. Significantly, Mr Dong’s evidence was also in conflict with the general ledgers and financial statements that were prepared for the Property Trustee Company and Property Trust by RF based on instructions from Ms Li. Thirdly, it transpired that Ms Li and Mr Chen were also confused about the details regarding Deposit 3 where they both subsequently changed their oral evidence after refreshing their memory (see [74] above). This was despite the fact that Ms Li had instructed RF to prepare the general ledgers and financial statements from time to time, ostensibly on the basis that amounts from her mother represented loans and amounts from Mr Chen’s father represented equity contributions. Fourthly, Ms Li’s written and oral evidence was inconsistent with her prior statements given to officers of the ATO during the course of the audit. She had stated in earlier meetings with ATO officers that all the Deposits were referable to amounts borrowed from her mother and her father-in-law (see [40] above).
Fifthly, I do not find Ms Li’s evidence that she went back to the same plastic box and drawer in the spare room in her home to access further monies when the Property Trust wished to borrow subsequent amounts (after asking her mother for further advances) to be credible. Deposit 2 was in the amount of $100,000 made on 29 March 2017, and Deposit 3 was in the sum of $150,000 made on 1 May 2017, both of which, at a minimum, were said to have been loans from Ms Li’s mother where the cash was apparently retrieved from the same plastic box (see [72] and [74]). Furthermore, Deposit 4 in the amount of $95,000 made on 2 May 2017 (the next day after Deposit 3) is also recorded in the general ledgers of Property Trustee Company as a loan from Ms Li’s mother (see [32] above), and it is perplexing that neither Ms Li nor Mr Chen could recall anything about this Deposit despite it being made only a day after Deposit 3 (see [75] above).Sixthly, when it came to questions regarding the fact that Ms Li’s mother and Mr Chen’s parents had not declared any monies on their incoming passenger cards when arriving in Australia from overseas, Ms Li refused to answer any further questions (see [74] above). Mr Chen also declined to answer questions when counsel for the Commissioner probed whether he knew that his father kept large amounts of cash in their home (see [79] above).
While it may be generally accepted that there is no issue with taxpayers engaging in cash transactions (cash is after all a legal form of tender), it is also the case that undocumented transactions involving large amounts of cash would naturally attract the Commissioner’s interest in tax audits. The predicament for taxpayers is that, absent any independent corroboration of the alleged sources of the cash, the reliability of the evidence of the taxpayers becomes critical. The manner in which such evidence is to be approached by the Tribunal is in accordance with the well-established principles in the case of Imperial Bottleshops Pty Ltd v Commissioner of Taxation (Cth) (1991) 22 ATR 148 (Imperial Bottleshops) at 155 per Hill J.
Having regard to the above, it is appropriate to summarise the position with respect to the evidence in these proceedings. The vagueness and the numerous inconsistencies of the evidence of Mr Chen and Ms Li lead the Tribunal to the position that it cannot accept their evidence as being sufficiently reliable. This is despite the fact that the evidence of Ms Li and Mr Chen was sometimes virtually identical. This is because their interests in the disputes were aligned and their statements consequently self-serving (see Imperial Bottleshops). Their evidence, in the absence of any independent contemporaneous documentation or records, was not credible in all the circumstances. Even if their evidence regarding the different cultural attitudes to cash were accepted (see [62] and [64] above), it would carry little weight. This is because the evidence was similarly high-level and anecdotal in nature. Significantly, that evidence failed to support the position of Mr Chen and Ms Li as it did not relevantly address how and where Ms Li’s mother and/or Mr Chen’s parents obtained the cash and brought it to Australia. It may be that some matters advanced by one or both of Ms Li and Mr Chen were truthful, but in the absence of sufficiently reliable evidence, the Tribunal was not satisfied to the requisite degree. It follows that the Tribunal cannot be satisfied, on the balance of probabilities, that the Deposits were cash provided by Ms Li’s mother and or Mr Chen’s parents.
HAVE THE APPLICANTS DISCHARGED THEIR BURDEN OF PROVING THE ASSESSMENTS OF INCOME TAX ARE EXCESSIVE?
In circumstances where the Tribunal rejected the evidence of the Applicants, as explained above, it is difficult to see how they can discharge their burden of proving the assessments are excessive. The Applicants nevertheless submitted there is no evidence to support the finding that the Deposits constituted ordinary income of the Property Trust. According to the Applicants, the assessments are excessive as they are not supported by the law as applied to the facts in reliance on Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 (Futuris).
The Applicants argued that there is a difference between them and the Commissioner as to how the burden of proof can be discharged in this case. The Applicants pointed out that the relevant assessments were issued under s 166, and not s 167 of the ITAA 1936, but that the Commissioner was relying on the principles relevant in the context of a s 167 assessment. Under s. 166 of ITAA 1936, the Commissioner must relevantly make an assessment of the amount of taxable income of a taxpayer, and the amount of tax payable thereon from the returns, and from any other information in the Commissioner’s possession. Under s 167 of ITAA 1936, if any person makes default in furnishing a return or if the Commissioner is not satisfied with the return furnished, the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied. The Applicants further argued that the main difference between the two provisions is that the burden can be discharged by showing an error in the process of assessment by the Commissioner, namely, that on the basis of the material before the Tribunal, it cannot support the Commissioner’s assessment.
The Applicants argued that the Commissioner has to find and adopt a view of relevant facts which disclose taxable income, to identify ‘taxable facts’: see Bailey v Commissioner of Taxation (1977) 136 CLR 214 (Bailey) at 217-218, per Barwick J. The Applicants further argued that the taxpayers are entitled to know the basis on which the assessments have been made and should be told the taxable facts. These facts can then form the basis for a challenge to an assessment: Bailey at 231-232 (per Aikin J). It follows, according to the Applicants that in the case of a s 166 assessment, the taxpayers can discharge their onus by disproving the basis for the Commissioner's assessment, for example, by identifying an error in the process of assessment: see Bailey at 216 per Barwick CJ and Macmine Pty Ltd v Commissioner of Taxation (1979) 9 ATR 638 at 652 (per Stephen J).
The Applicants advanced the proposition that it follows that “it is for the taxpayer to show that the basis for the Commissioner’s assessment is incorrect, based on the relevant facts. That is, in contrast to an assessment under s 167, the burden can be discharged by showing that the Commissioner formed a judgment about the taxpayer’s assessable income on a wrong basis…In other words, in the present case, the burden can be discharged by the Applicants by showing that the circumstances for liability under s 6-5 do not exist. In this regard, the taxpayer may rely on the fact that the Commissioner has conducted a full investigation and inquiry and the outcome of the same (e.g., that this has failed to reveal anything worthy of being adduced in evidence).”[137]
[137] Applicant’s Amended Opening Submissions, [46]-[47].
The Applicants also submitted the following:
(a)During the 2017 and 2018 income years, the Property Trust carried on a business of property investment. The properties acquired by it were funded by a mix of debt and equity. In particular, the Deposits constituted a mix of loans and beneficiary contributions from the Applicants’ parents, who are beneficiaries of the Property Trust.
(b)Apart from property investment, the Property Trust did not carry on any other income earning activities, which could be said to constitute assessable income. The focus of the inquiry should be on the Property Trust being the entity said to have derived the Deposits.
(c)The Commissioner carried out an audit of the Applicants and their associated entities for the 2017 and 2018 income years and did not nominate any activities or sources of income, which could be said to give rise to the Deposits even though in the revised audit finalisation letter for the Property Trust, he suggested that the two trading trusts may have been the source of the funds but then did not refute the Applicants’ assertion that it was impossible for the Deposits to have been generated by the businesses carried on the trading trusts, having regard to industry benchmarking for restaurant businesses.
(d)Even if the evidence supporting the Applicants’ positions are disregarded, there is nothing to positively indicate that the Deposits were anything but loans and/or equity contributions to the Property Trust. A finding that the Deposits were income of the Property Trust is inconsistent with the conduct and outcome of the tax audit.
(e)There is no presumption that all moneys which a taxpayer receives from any source forms part of his or her assessable income: see, for example, Elsey v Federal Commissioner of Taxation (1969) 121 CLR 99 at 108 per Windeyer J. That is, a deposit in a bank account is not prima facie income, unless proved otherwise.
The Applicants’ arguments are misconceived as the case is about the burden of proof which a taxpayer has to discharge under s 14ZZK(b) of the TAA and not about the basis upon which the assessments were issued (see [7]–[8] above). Although the Applicants emphasised that there are “fundamental differences” between an assessment under s 166 of the ITAA 1936 and a default assessment under s 167 of the ITAA 1936, they did not identify how these differences meaningfully affect the manner in which the Applicants may demonstrate that the assessments are excessive in these proceedings. Significantly, this is not a case in which differences in the way s 166 and s 167 assessments are made has any practical significance for the Applicants as to their burden of proof. This is because the fact of the matter is the Commissioner made a forensic decision to only put the Applicants to proof in relation to the Deposits. That is, the scope of the dispute has been narrowed to only concern the assessability of discrete amounts deposited into the bank accounts of the Property Trustee Company. The Commissioner can choose to put an applicant to proof of every fact relevant to establishing that an assessment is excessive, but he did not do so in the present cases (cf Bosanac v Commissioner of Taxation (2019) 374 ALR 425 at [28] per Nettle J).
There is also a flaw in the Applicants’ arguments about the “absence of evidence” to support a finding that relevant “income-generating activities” existed. The Commissioner does not bear the responsibility of sustaining the assessments issued by him. It follows that is also not for the Commissioner to advance a positive case as to the likely source (and therefore character) of the Deposits: see Vu v Federal Commissioner of Taxation (2006) 63 ATR 341; Galea v Federal Commissioner of Taxation (1990) 21 ATR 1108 at 1116 per Hill J; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623-624 per Brennan J; Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301 at [61].
The Applicants’ reference to Futuris is not of any assistance to the Applicants in the present proceedings because as was made clear by the High Court in Futuris at [24], s 175 of the ITAA 1936 concerning the validity of assessments must be read with, relevantly, s 175A of the ITAA 1936, which provides that a taxpayer dissatisfied with an assessment may object against it in the manner set out in Part IVC of the TAA. The High Court reasoned at [24]:
“…in review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but with the burden of proof provided in s. 14ZZK and s 14ZZO of the [TAA]. Where s 175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or under s 39B of the Judiciary Act.”
Clearly, the income tax disputes in the present proceedings do not involve tentative or provisional assessments nor was there any suggestion of conscious maladministration in the assessment process (cf Futuris at [25]). The Applicants’ reference to Bailey also does not assist, as while that case stands for the proposition that taxpayers are entitled to know the basis on which the assessments were made and for particulars to be given by the Commissioner, they were already informed as to how their assessments were arrived at, namely, by reference to the Deposits. As to the other grounds advanced by the Applicants, including reliance on the ATO’s industry benchmarking for restaurant businesses, in light of the deficiencies of the Applicants’ evidence with respect to the Deposits they are of no merit.
Finally, the Applicants submitted that the books and records comprising the general ledgers, balance sheets and profit and loss statements of the Property Trustee Company were prima facie evidence of the matters they record as a consequence of the operation of s 1305 of the Corporations Act 2001 (Cth) (Corporations Act), in reliance on Commissioner of Taxation v Cassaniti [2018] FCAFC 212 at [88] (per Steward J) and, as such, s 1305 is applicable to the Property Trustee Company, which is required to retain books in its capacity as trustee. The Applicants stated such evidence should be accepted as the effect of s 1305 is that books kept by a company are prima facie evidence of the information they record: see Federal Commissioner of Taxation v Clark [2011] FCAFC 5 at [68] (per Edmonds and Gordon JJ). The difficulty here, however, is that the reliability of the financial records are suspect. The financial records were prepared by the tax agent based on instructions from Ms Li and her evidence was, as explained above, found to be problematic because of numerous inconsistencies and ambiguities. Therefore, the presumption about the records being prima facie evidence is displaced (see also R.V. Investments (Aust) Pty Ltd as Trustee of the R.V. Unit Trust v Commissioner of Taxation [2014] FCA 1169 at [32]-[35] per Gordon J).
WERE THE ADMINISTRATIVE PENALTIES PROPERLY IMPOSED? IF SO, SHOULD ALL OR PART OF THE PENALTIES BE REMITTED?
Division 284 of Schedule 1 of the TAA sets out the administrative penalty regime relevant to the present applications. Section 284-75(1) of Schedule 1 of the TAA relevantly provides that a taxpayer will be liable to an administrative penalty if that taxpayer makes a statement to the Commissioner that is false or misleading in a material particular, whether because of things in it or omitted from it. Here, the false or misleading statements are the understatements of assessable income by each of the Applicants with respect to their tax returns for the 2017 and 2018 income years. In this context, the word “false” means “wrong”. the Tribunal does not need to consider whether the Applicants made the statements knowing them to be false or misleading, only that they have been made: see Reliance Finance Corporation Pty Ltd v Federal Commissioner of Taxation (1987) 18 ATR 224 at 228 per Yeldham J; Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455.
The Commissioner imposed administrative penalties at 50% of the tax shortfall for recklessness as to the operation of a taxation law: ss 284-80 and 284-90 of Schedule 1 to the TAA. This is where recklessness is considered to involve “gross carelessness” or behaviour that “falls significantly short of the standard of care expected of a reasonable person in the same circumstances”: Miscellaneous Taxation Ruling MT2008/1: Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard at [101]. It is for the Applicants to prove that the penalty assessments are excessive or otherwise incorrect and what the assessments should have been: s 14ZZK(b)(i) of the TAA.
The Applicants argued that they are not liable to administrative penalties on a number of bases. First, they argued that as they and their agent took reasonable care in connection with the making of the statements, no penalties are applicable: s 284-75(5) of Schedule 1 to the TAA. Judging whether there has been a failure to take reasonable care turns on an evaluation of all the circumstances surrounding the making of the false or misleading statement to determine whether a reasonable person of ordinary prudence in the same circumstances would have exercised greater care. Secondly, the Applicants argued that the ‘safe harbour’ exception in s 284-75(6) of Schedule 1 to the TAA applies as the Applicants provided all relevant taxation information to their tax agent and their tax agent did not act recklessly.
I was not persuaded that the Applicants discharged their burden of proving that they and their agent took reasonable care. The reasonable care test calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer fulfilling their tax obligations. In my view, the behaviour of the Applicants was reckless as they showed disregard or indifference to a risk that is foreseeable by a reasonable person by not treating the Deposits as constituting income: see Hart v Commissioner of Taxation (2003) 131 FCR 203 at [43] per Hill and Hely JJ.
Regarding the safe harbour exception, the Applicants did not prove that they provided their tax agent with all relevant taxation information. Their evidence was to the effect that Mr Dong requested information from Ms Li and that Ms Li was compliant. However, at no stage, did the evidence establish the information she provided was all relevant taxation information. The information that was how Ms Li wanted the Deposits to be presented in the books and records of the Property Trustee Company. For completeness, it is unnecessary to come to a conclusion as to whether the tax agent was reckless.
The final issue is that the Tribunal standing in the shoes of the Commissioner may, in exercising the discretion allowed, remit the whole or any part of the administrative penalties: s 298-20 of Schedule 1 to the TAA. The relevant question is whether remission is appropriate in the particular circumstances of the Applicants. The Commissioner contended there is nothing in the evidence before the Tribunal that points to remission being appropriate.
While it is acknowledged that the Applicants co-operated with the Commissioner with respect to the tax audit and made a number of voluntary disclosures in relation to Trading Trust 1 and Trading Trust 2, I agree with the Commissioner’s position. I was not persuaded that remission was appropriate in all the circumstances and that the Commissioner’s decision with respect to non-remission of penalties should have been made differently: s 14ZZK(b)(ii) of the TAA. The Applicants’ arguments that they are not “wealthy individuals” but restaurateurs operating small local food businesses is of itself not sufficient to warrant remission. The Commissioner had already appropriately remitted administrative penalties by 80% with respect to the Applicants’ voluntary disclosures but no such disclosures were made regarding the Deposits and the Property Trust. Accordingly, the penalties imposed are not disturbed.
CONCLUSION
Mr Chen and Ms Li has failed to discharge the burden of proving that the assessments issued to them by the Commissioner in respect of income tax and penalties for the 2017 and 2018 income years were excessive.
DECISION
The decisions under review are affirmed.
I certify that the preceding 103 (one hundred and three) paragraphs are a true copy of the reasons for the decision herein of Senior Member G Lazanas
...............................[Sgd].........................................
Associate
Dated: 30 November 2023
Date(s) of hearing: | 9 – 12 October 2023 |
Date of last submissions: | 19 October 2023 |
Counsel for the Applicant: | Mr P Klank |
Solicitors for the Applicant: | Mr R Verma, Velocity Legal |
Counsel for the Respondent: | Ms A Lee and Ms K Chan |
Solicitors for the Respondent: | Mr W Stewart, Australian Taxation Office |
0
26
0