Dalby and Commissioner of Taxation (Taxation)
[2025] ARTA 1060
•21 July 2025
Dalby and Commissioner of Taxation (Taxation) [2025] ARTA 1060 (21 July 2025)
Applicant/s: Terrence Marcus Dalby
Respondent: Commissioner of Taxation
Tribunal Number: 2022/9851 - 9854
Tribunal:Deputy President Thompson SC
Place:Perth
Date:21 July 2025
Decision:The decision under review is affirmed.
Statement made on 21 July 2025 at 9:19am
CATCHWORDS
TAXATION – application for review of an objection decision – section 167 default assessment – onus of proof not discharged – Applicant was the director of multiple companies – Applicant assessed on funds withdrawn from Applicant’s company – evidence proving income do not exist – Applicant withdrew challenge to capital gains tax – penalty for recklessness
LEGISLATION
Income Tax Assessment Act 1936 (Cth) ss 166, 167
Income Tax Assessment Act 1997 (Cth) s 6-5
Taxation Administration Act 1953 (Cth) ss 14ZZK, Schedule 1, s 284-90
CASES
Buzadzic v Commissioner of Taxation [2024] FCAFC 50
Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614
Gashi v Federal Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301
Ma v Federal Commissioner of Taxation (1992) 37 FCR 225
McPartland v Commissioner of Taxation [2025] FCAFC 23
Commissioner of Taxation v Ross [2021] FCA 766; (2021) 174 ALD 77Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
SECONDARY MATERIALS
Australian Taxation Office, Making default assessments: section 167 of the Income Tax Assessment Act 1936 (PS LA 2007/24, 20 December 2007)
Statement of Reasons
INTRODUCTION
Mr Dalby is a businessman from the Townsville region of Queensland. His wide range of businesses included the construction and rental of student accommodation, delivery of workplace machinery training, and trading in scrap gold.
Mr Dalby returned no assessable income for the 2013 – 2016 income years, returning instead losses in each of those years; that is, his declared expenses were higher than his declared income in each year. The Commissioner commenced an audit into Mr Dalby’s taxation affairs for those years and ultimately assessed him for additional income tax and penalties totalling $3,085,830.90[1] for the income years 2014 – 2016. Interest accrues on this debt.
[1] Exhibit R2, T9.
His objection to the Commissioner’s assessments having been unsuccessful,[2] Mr Dalby sought review[3] of the Commissioner’s decision to disallow his objection to the Commissioner’s assessments of income tax for the 2014, 2015, and 2016 income years.
[2] Exhibit R2, T17.
[3] Exhibit R2, T1.
For the reasons which follow, Mr Dalby’s application for review must fail.
BACKGROUND
Income tax returned and amended returns post audit
Mr Dalby’s income tax returns for the 2014,[4] 2015,[5] and 2016[6] years disclosed the amounts set out in the table below.
[4] Exhibit R2, T3.
[5] Exhibit R2, T4.
[6] Exhibit R2, T5.
Year Employment income Business income[7] Business expenses[8] Capital gains Taxable income (loss) 2014 0 110,543 160,600 0 (49,100) 2015 0 66,098 106,612 34,000 (6,514) 2016 0 26,597 96,821 0 (70,224) [7] Non-primary production business income.
[8] Non-primary production business expenses, mainly comprising interest and depreciation.
The Commissioner undertook an audit of Mr Dalby’s taxation affairs in 2018.[9] As a result of the audit, amended assessments and penalty assessments were issued to Mr Dalby for the 2014, 2015, and 2016 income years.[10] The penalty assessments were issued on the basis that Mr Dalby was reckless in his income tax affairs and therefore penalty was assessed as 50% of the tax payable in each of the three income years.[11]
[9] Exhibit R2, T9; T18.
[10] Exhibit R2, T11; T12; T13; T14; Exhibit R3, ST61; ST62; ST63.
[11] Item 2 section 284-90 Schedule 1 of the Taxation Administration Act 1953 (Cth).
The adjustments made to Mr Dalby’s income tax assessments are summarised in the following table.
Year Returned taxable income Assessed net capital gain Assessed income incl capital gain Amended taxable income Shortfall penalties 2014 (49,100) 45,000 3,322,000 3,237,600 763,769 2015 (6,514) 150,500 1,097,661.60 1,047,264 249,379.15 2016 (70,224) 0 177,000 106,776 15,462.15 Total ($125,838.00) $195,500.00 $4,596,661.60 $4,391,640.00 $1,028,610.30 Additional income assessed
In making his assessment of additional income, two matters were of particular interest to the Commissioner.
First, from its incorporation in September 2007 until its liquidation in November 2018, Mr Dalby was the sole director and shareholder of Mango Reef Pty Ltd[12] (Mango Reef), and so was the company’s controlling mind. During 2014 – 2016, funds were withdrawn from Mango Reef by way of cash cheques, signed by Mr Dalby. The amounts comprised:
(a)$3,277,000 in the 2014 income year;
(b)$947,661.60 in the 2015 income year; and
(c)$177,000 in the 2016 income year.
[12] Exhibit R3, ST65; Exhibit A1 at [12].
As can be seen from the table at paragraph [7] above, Mr Dalby was personally assessed on the basis that all of these funds were included in his ordinary income.
Secondly, Mr Dalby was the owner of various properties in the Townsville area. In the 2014 and 2015 income years he sold three properties, each at a profit. The properties were:[13]
[13] Amounts provided by State Revenue Office Data, Exhibit R2, T10.
Property Purchased Sold Purchase $ Sale $ Capital Gain Douglas 7/3/2007 24/7/2013 310,000 400,000 90,000 Hyde Park 14/7/2006 22/8/2014 85,000 270,000 185,000 Annadale 5/2/2007 27/10/2014 304,000 420,000 116,000 Total $391,000
The Douglas property capital gain was declared in the 2013 return.[14] In his 2015 income tax return, Mr Dalby declared a capital gain of $68,000 on the Annadale property.[15] The Commissioner assessed the gain on that property at $116,000 after deducting selling fees.[16] No capital gain was declared on the sale of the Hyde Park property, which Mr Dalby asserted was his main residence.
[14] Exhibit R2, T21.
[15] Exhibit R2, T5, 56.
[16] Exhibit R2, T2 at [76].
The amended assessments issued to Mr Dalby following the audit included tax on undeclared capital gains from two of these property sales.
THE ISSUES
The issues for determination in these proceedings are, broadly:
(a)Are the funds withdrawn from Mango Reef assessable as Mr Dalby’s ordinary income?
(b)Was the Hyde Park property Mr Dalby’s main residence and therefore exempt from capital gains tax?
(c)Is Mr Dalby liable for penalties as a result of having made false or misleading statements?
During the course of giving evidence Mr Dalby, in effect, withdrew the challenge to the assessment of capital gains tax on the Hyde Park property as he had, just prior to the hearing, been given some advice as to how capital gains tax operated, which he accepted. The fact that Mr Dalby failed to obtain that advice prior to filing his income tax return remains a live issue on the question of penalties.
Legal framework
Section 6-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) relevantly provides:
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.
(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Section 166 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) provides:
Assessment
From the returns, and from any other information in the Commissioner’s possession, or from any one or more of these sources, the Commissioner must make an assessment of:
(a) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and
(b) the amount of the tax payable thereon (or that no tax is payable); and
(c) the total of the taxpayer’s tax offset refunds (or that the taxpayer can get no such refunds).
Section 167 of the ITAA36 provides:
Default assessment
If:
(a)any person makes default in furnishing a return; or
(b)the Commissioner is not satisfied with the return furnished by any person; or
(c)the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.
Section 284-90 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA) provides relevantly:[17]
(1) The base penalty amount under this Subdivision is worked out using this table and Subsections (1A) to (2), and section 284-224 if relevant:
[17] Emphasis added.
Base penalty amount
Item
In this situation:
The base penalty amount is:
1
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a taxation law (other than the Excise Acts) by you or your agent
75% of your shortfall amount or part
2
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a * taxation law (other than the * Excise Acts )
50% of your shortfall amount or part
3
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a * taxation law (other than the * Excise Acts )
25% of your shortfall amount or part
Section 14ZZK of the TAA provides:[18]
Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and(b)the applicant has the burden of proving:
(i)if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii)in any other case—that the taxation decision concerned should not have been made or should have been made differently.
[18] Emphasis added.
Default assessments
In issuing the amended assessments, the Commissioner used his powers under section 167 of the ITAA36, which permits the Commissioner to make a default assessment if not satisfied with the return filed by the taxpayer (section 167 assessment). In doing so, the Commissioner uses his powers under section 166 of the ITAA36 to make an assessment of the amount of taxable income, and the tax payable on it.[19]
[19] See generally Australian Taxation Office, Making default assessments: section 167 of the Income Tax Assessment Act 1936 (PS LA 2007/24, 20 December 2007).
In making a section 167 assessment the Commissioner is obliged to make a genuine attempt to determine a taxpayer’s assessable income, and ensure the ascertainment of that income is based on reasonable and rational grounds. However, the Commissioner is not required to calculate assessable income and apply allowable deductions, and, importantly, errors made do not negate the assessment made. Hence the process of making a default assessment differs markedly from the usual methodology for making an assessment provided for in section 166 of the ITAA36.[20]
[20] Gashi v Federal Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301 at [52] – [56].
The inaccuracy of a section 167 assessment is largely irrelevant to the task of the Tribunal on review.
Onus
In challenging a section 167 assessment, the taxpayer bears a heavy burden. He or she must discharge the dual onus of showing that the Commissioner’s assessment is excessive and what the assessment should have been.[21] In doing so, a taxpayer is best served by proving, on the balance of probabilities to the civil standard, what his or her total income from all sources was in the relevant year. Next, a taxpayer should show what deductions they are entitled to make for the year, to arrive at the true amount of assessable income, thereby demonstrating the section 167 assessment is excessive. By proving their assessable income, they discharge the second part of the onus, i.e. proving what the assessment should have been.
[21] Buzadzic v Commissioner of Taxation [2024] FCAFC 50; Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63; Commissioner of Taxation v Ross [2021] FCA 766; (2021) 174 ALD 77; Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614; Ma v Federal Commissioner of Taxation (1992) 37 FCR 225.
In the recent decision of McPartland v Commissioner of Taxation,[22] the Full Court explained the requirement in the following terms:
A taxpayer’s burden in challenging an assessment made pursuant to s 167 is to establish on the balance of probabilities their “actual taxable income” and, in so doing, show that the amount of money for which tax was levied exceeded their actual substantive liability: Gashi at [63], citing Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621, 623-625 (Dalco).
The taxpayer cannot discharge their burden only by showing that the Commissioner erred in the formation of his assessment for the purposes of s 167 of the ITAA: Dalco at 621; Gashi at [62]; Bosanac at [35], [47]-[48].
The taxpayer bears the onus on all issues, save where the Commissioner and taxpayer agree to confine the issues to a particular point of law or fact, in which case the taxpayer bears the onus in respect of those: Dalco at 624. No particular method by which the taxpayer must discharge their burden is defined or specified. The method will vary according to the circumstances of the case: Gashi at [63], citing Dalco at 624.
[22] [2025] FCAFC 23.
Focusing on seeking to disprove the basis of the Commissioner’s assessment is an all too common error that taxpayers make in seeking to challenge a section 167 assessment. A more productive course is to ignore the detail of how the Commissioner arrived at the section 167 assessment, and prove their actual taxable income for the year or years in issue.
THE EVIDENCE
The hearing took place on 1 April and 28 May 2025 via video link. Mr Dalby had been represented in these proceedings until March 2025. His legal representatives had filed a Statement of Facts, Issues and Contentions (ASFIC) in December 2023 and witness statements in August 2023. Mr Dalby appeared at the hearing without a lawyer.
I took into evidence the following:
(a)Exhibit A1 – Witness statement of Terrence Dalby, dated 8 December 2023;
(b)Exhibit A2 – USB stick of Mr Dalby’s additional evidence, comprising a bundle of documents belonging to the business 888;
(c)Exhibit A3 – Terrence Dalby’s Australian passport, valid from 30 September 2009 to 30 September 2019;
(d)Exhibit A4 – Witness statement of Roimata Mahuta dated 8 December 2023, including attachments;
(e)Exhibit A5 – Witness statements of Jeffery Leahy dated 8 December 2023, including attachments;
(f)Exhibit R1 – Hearing Book Part A, consisting of:
(i)The Commissioner’s SFIC, dated 10 May 2023 (Exhibit R1.1);
(ii)The ASFIC, dated 8 December 2023 (Exhibit R1.2); and
(iii)The Commissioner’s Statement of Facts, Issues and Contentions in reply, dated 17 May 2024 (Exhibit R1.3);
(g)Exhibit R2 – Hearing Book Part B, consisting of the section 23 T-Documents, labelled T1 – T54, filed 28 March 2025; and
(h)Exhibit R3 – Hearing Book Part C, consisting of section 23 supplementary documents and further supplementary documents, labelled ST55 – ST77, filed 28 March 2025.
CONSIDERATION
Mr Dalby focused his attention and his evidence solely on the findings made by the Commissioner during the audit. Those findings resulted in Mr Dalby being assessed on the withdrawals of funds from an account held in the name of Mango Reef, for which Mr Dalby was the sole account signatory. The funds were withdrawn using cheques made out to cash, all of which he had signed.
Mr Dalby led detailed evidence as to how the Mango Reef funds were used, being to fund the day-to-day activities of a scrap gold trading business called 888 Refining Australasia Pty Ltd, which is now in liquidation. I do not necessarily disbelieve all of what Mr Dalby told me regarding how scrap gold trading operated, although Mr Dalby’s story of travelling once or twice a week to Hong Kong, with a carry on bag full of gold bullion, and returning on the same day, having had payment for the gold transferred to the Mango Reef bank account, does have the aura of a movie script about it. Interesting as it was, the operations of 888 are largely irrelevant to my decision as it does not assist Mr Dalby in discharging the onus the law places on him.
The Commissioner’s SFIC, Reply SFIC, and submissions were clear on the onus obligation.[23] The legal requirement was explained by me to Mr Dalby during the course of the hearing, on several occasions.[24] On each occasion Mr Dalby informed me he understood the problem he faced, but then proceeded to deal with the 888 business evidence. Whilst he said, numerous times, that the funds used by 888 were all for its business purposes, and were not part of his income, that assertion alone is not sufficient to discharge the onus. Whilst he filed a substantial bundle of evidence of various transactions undertaken by 888, as well as witness statements from two people who worked at 888, giving evidence of how the business operated, this did not prove, and could not prove, that all of the Mango Reef funds were used by 888 in its business.
[23] Exhibit R1.1 at [33]; Exhibit R1.2 at [12], [22]; Commissioner’s submissions dated 15 May 2025 at [251].
[24] Ts 1 April 2025, 14, 23 – 24, 27; Ts 28 May 2025, 80 – 82.
Mr Dalby’s success in this review requires him to positively prove what his income was in each of the years under consideration; he was both unprepared, and unable, to do so. When questioned during his evidence, he could not tell me what his income in any of the three years under consideration was. He frankly admitted that for the 2014 year he had ‘no idea’ what his income was, for the 2015 and 2016 income years he told me that he ‘believed’ that the returns he filed were correct, but in closing submissions he walked that back to a position of considerable less certainty. The difficulty this leads to is that even if I were to conclude that all the Mango Reef money was used in the 888 business, which I do not, that of itself is insufficient to prove the correctness of the returns filed by Mr Dalby as his assessable income in the three years remains a mystery.
During his submissions on penalty, specifically in response to my asking why he might say he was not reckless so as to attract a 50% penalty, he informed me:[25]
My accountant, I believe I’m the biggest nightmare for my accountant. She now is not practicing and I have a new accountant, and I’m still the biggest nightmare because my records are very, very – not so much questionable but very, very poor. It’s always a challenge. My accountant said to me unless I have documentation, we can’t move forward. Yes, my bookkeeping skills are very, very basic, very minimal. I don’t do invoices. I just – there’s so much I don’t do. Personally, I do have trouble keeping up to date and stuff.
We were – my house was robbed a few years ago. I lost a lot of information that was compiled by other people on my computer. I lost my hard drive as well as computer. And since then, it’s been a little bit of a struggle to try and get information for my accountant to cover the gaps, so to speak. What I can’t cover, I can’t cover, but I don’t consider myself reckless at all. I consider myself just a hard-working Aussie that’s happy to give it a go. And give me a shovel, I’ll dig a hole. Give me a 10 and expect me to be an academic and it’s just not going to work. We all have our own roles, and I’m more outdoor – hands-on and happy to get sunburnt. Happy to work hard outside, sweat blood, tears. And not an office person at all. Unfortunately, that’s something that, you know, I lack in my life but that’s why I do employ people that can do that.
[25] Ts 28 May 2025, 86 Ln 10.
During the course of his closing submissions Mr Dalby had sought the opportunity to file supplementary evidence to attempt to prove his income for the three years in issue. The following exchange took place:[26]
DEPUTY PRESIDENT: Okay. So just going back so I understand what you’ve just told me. You’ve told me that you’re not an indoor person, not a paperwork person, not a detail, keep-the-records type person. You don’t issue invoices and you’re the outdoor worker.
MR DALBY: Yes.
DEPUTY PRESIDENT: Can I take from that, that if you had the opportunity to prove what your income in 2014 was, you probably wouldn’t be able to do it anyway because you’re not going to have the records.
MR DALBY: Yes. I definitely wouldn’t have the records. Unless Austax still retains those records, I don’t personal have the records.
DEPUTY PRESIDENT: Okay. And what about 2015?
MR DALBY: For 2015 and – yes, same, 2016 – I don’t have records. I don’t have anything that my accountants produced apart from the tax return. But I certainly could go to them. They did give me a big box of paperwork when they disengaged me. I still have that box of paperwork but it is a big box of paperwork.
[26] Ts 28 May 2025, 87.
Having heard the submissions on penalty in response to my questions regarding his records, I concluded that a further opportunity to file evidence to attempt to prove his income for the three years in issue would have no utility as the evidence to meet the onus is unlikely to exist. Furthermore, Mr Dalby had ample opportunity to put on evidence proving his income, having commenced the review application in 2022, and having been legally represented until March 2025.
What Mr Dalby told me in the passages I have referred to above, serves to completely undermine any confidence I might otherwise have had in Mr Dalby’s assertions that all of the Mango Reef withdrawals were used by 888 in its business. That is, given what he said regarding the state of his own record keeping, I cannot be satisfied that the assertions in his witness statement, and orally, that all the cash withdrawals were used solely for 888 purposes, are accurate statements. I do not accept that they were.
I am not persuaded that the figures he returned in any of the years in question[27] were more accurate than mere guesstimates.
[27] Exhibit R2, T3, T5, T6.
In his written closing submissions, Mr Dalby said:[28]
The cash withdrawals . . . were not used by the Applicant to supplement for wages, given the Applicant survived from income generated from other business activities, lived frugally and had otherwise generated an income of approximately $900,000 in the 2013 financial year which he continued to life off . . .
[28] At [3(e)].
There are several issues with this submission, including the fact this was the first time that Mr Dalby claimed that he had an income of $900,000 from the 2013 year which sustained him in the three years of 2014, 2015 and 2016. When this was challenged by the Commissioner who drew attention to Mr Dalby’s 2013 income tax return, which also disclosed a loss,[29] Mr Dalby said the $900,000 was income of the family trust.[30] He went on to explain the written submissions were drafted by a friend and not properly checked by him.[31] This frank admission does not serve to assist his case.
[29] Ts 28 May 2025, 54 Ln 43; Exhibit R3, ST59, 88.
[30] Ts 28 May 2025, 78.
[31] Ts 28 May 2025, 83.
A further difficulty with the submission is that it relies on his disclosed income, apparently from his rental properties and the machinery training business, as a foundation for suggesting that he had no need to take funds from Mango Reef. Even if I were to draw an inference that the income disclosed in his returns was solely from the rental accommodation and machinery training businesses, it cannot be accepted as being sufficient to have sustained him given the tax returns he filed[32] and the objective evidence of his lifestyle. That evidence comprised his passport,[33] which discloses considerable overseas travel in the three years, in addition to the travel to Hong Kong which I assume for this purpose was paid for by 888.[34] Mr Dalby’s level of international travel is wholly inconsistent with his assertion that he lived frugally,[35] and cannot have been supported by the income that he disclosed.
[32] See paragraph [5] above.
[33] Exhibit A3; including multiple trips to the United States, Cambodia, China, Fiji and Thailand during the three years.
[34] Albeit, there is no actual evidence that the Hong Kong travel was paid for by 888.
[35] Witness statement at [62].
Ultimately, I have concluded that Mr Dalby has exhibited an entirely cavalier attitude to his taxation affairs. The failure to keep proper business records, issue tax invoices for work he has done, keep receipts for the expenses he has incurred in earning his income, or provide any analysis of his income and expenses in any of the income years, and his failure to obtain advice on capital gains tax prior to filing his income tax returns, along with his failure to check the documents which he filed with the Tribunal, suggest he does not regard that the taxation laws apply to him, and that he need not take his taxation obligations seriously.
Mr Dalby seeks to present himself as a ‘loveable rouge’, perhaps a latter day Arthur Daley;[36] however in my view Mr Dalby is utterly reckless in his taxation affairs.
[36] “Minder,” British TV show staring Denis Waterman and George Cole from 1980-1994.
His attitude to compliance with his obligations has particular resonance in my decision on penalty. Mr Dalby was assessed by the Commissioner as being reckless under section 284-90 (1) of Schedule 1 of the TAA.[37] He made no real attempt to persuade me that his failures were as a result of a failure to take reasonable care, so as to give a basis for reducing the penalty from a base amount of 50% to 25%. Indeed, Mr Dalby’s failures might arguably be seen as demonstrative of intentional disregard of the law, but as no submission was made to me regarding that, I will not make that finding.
[37] Exhibit R2, T2, 13 at [78(c)].
I have no basis at all to reduce the penalty imposed on Mr Dalby.
DECISION
I affirm the applications for review.
I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for the decision herein of Deputy President Clare Thompson SC
..........................[sgd]..............................................
Associate
Dated: 21 July 2025
Date of hearing: 1 April and 28 May 2025 Counsel for the Applicant: Self-represented Counsel for the Respondent: Mr B McEniery Solicitors for the Respondent: McInnes Wilson
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Appeal
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Limitation Periods
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Compensatory Damages
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Breach of Contract
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Contract Formation
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