David Mack and and Commissioner of Taxation

[2014] AATA 367

[2014] AATA  367

Division	TAXATION APPEALS DIVISION
File Numbers	2012/5582; 2012/5583
Re	David Mack
APPLICANT
And	Commissioner of Taxation
RESPONDENT
File Number	2013/4934; 2013/4935
Re	Janice Mack
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Deputy President PE Hack SC
Date	11 June 2014
Place	Brisbane

In each application, the decision under review is affirmed.

...........................[Sgd].....................................

Deputy President PE Hack SC

CATCHWORDS

TAXATION – income tax – profit washing scheme – whether applicants participated – tax treatment of funds – accrued directors fees – deferral of profits – forced disposal of livestock – whether supported on the evidence – power of the Commissioner amend assessments.

LEGISLATION

Income Tax Assessment Act 1936 (Cth) Part IVA; s 170(2)(a)

Income Tax Assessment Act 1997 (Cth) Subdivision 385-E s 385-150

Taxation Administration Act 1953 (Cth) s 14ZZK Schedule 1 Division 284; s 298-20(1)

CASES

Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614

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

Dixon (as trustee) v Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287

Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63

REASONS FOR DECISION

Deputy President PE Hack SC

11 June 2014

Introduction

1. The applicants in these proceedings, Mr David Mack and Mrs Janice Mack, are husband and wife.  During the years in question in these proceedings Mr Mack practised as an accountant in Pittsworth, a small rural town in southern Queensland.  In that capacity he had a role in the promotion to some of his clients of what the respondent, the Commissioner of Taxation, calls a "profit washing scheme". The extent of that role is disputed; ultimately, it seems to me not to matter what role he played in promoting the arrangement to others.

2. The first issue in the proceedings is whether Mr and Mrs Mack, by means of related entities, participated in that scheme.  The Commissioner made amended assessments of the taxable income for each of the 2002 and 2003 income years on the footing that they did.  They say that they did not participate in the scheme.  In whatever way the question is answered, further questions arise about the tax treatment of the funds in issue as well as a question about the entitlement of the Commissioner to make amended assessments.

   Background

3. I start by recording some uncontroversial matters.  The Mack Family Trust was constituted by a deed dated 24 July 1994. It is a discretionary trust. Mr Mack was appointed trustee.  Mr Mack, Mrs Mack, various classes of the family members and any company in which a beneficiary held a share, and was or had been a director, and any related trust, were all beneficiaries of the Mack Family Trust.  By 2001, the start of the period in issue in the proceedings, the trustee of the Mack Family Trust was Baa Baa Mack Sheep Pty Ltd. Mr Mack became a director of that company in September 2000.  He was its only member at all material times.

4. It appears to be common ground that Baa Baa Mack Sheep Pty Ltd (which changed its name to Mack Accountancy Pty Ltd in July 2003) operated the accountancy practice in which Mr Mack was the principal.

5. In the early part of 2002 Mr Jeffrey Nirens was promoting the "Danbowl" scheme.  It was, as I have observed in other proceedings[1], crude.  The scheme involved the creation of a new hybrid trust in which an entity associated with the promoter would hold units which entitled it to the income of the trust.  The controllers of an underlying business would determine to conduct business through the newly created trust.  The trustee would determine to distribute the business income to the promoter entity although it would seem that, in reality, only 15% of the income, representing, I assume, the promoter's fee, was ever actually paid to the promoter entity.  The balance of the distribution would be notionally, at least, "washed" by the promoter through a loss trust and be available to the participants. 

   [1]See re Lack & Commissioner of Taxation [2012] AATA 823 at [6].

6. In the present case the Glenferry Downs Trust was constituted by a deed dated 27 June 2002. Drgee Pty Ltd was the trustee, and each of Mr Mack, Mrs Mack, Drgee Pty Ltd and Danbowl Pty Ltd were unit holders.  Mr Mack was issued 100 Ordinary Class A units which conferred on him, as the only holder of that class of units, the right to vote at general meetings of unit holders.  Mrs Mack was issued 100 Ordinary Class B units. Drgee Pty Ltd was issued 100 Special Class A units and Danbowl Pty Ltd, in its capacity as trustee of the Eleventh Hour Unit Trust, was issued 100 Special Class D units.  Those units conferred on the holder (and Danbowl was the only holder) the right to receive such proportion of the net income arising from the trust fund as the trustee might, in its absolute and uncontrolled discretion, appoint. Danbowl Pty Ltd was a company incorporated in July 1991.  Mr Nirens was its director between April 2000 and January 2004.

7. Mr Mack was appointed the sole director of Drgee Pty Ltd on 27 June 2002, taking over that role from Mr Nirens.  On 7 November 2002 it changed its name to Grass Castle Beef Pty Ltd and then to Mack Grazing Pty Ltd on 14 July 2003.  In December 2007 it was wound up on a creditors' voluntary winding up.

8. On 17 November 2003 the Mack Family Trust lodged its 2002 and 2003 income tax returns.  The returns were lodged electronically through Mr Mack’s accounting firm, David Mack & Associates.  There is a dispute, dealt with below, whether Mr Mack authorised that lodgement. The 2002 return disclosed a net income of the Trust of $263,092 distributed as follows:

   ·Mr Mack  $17,512

   ·Mrs Mack  $20,000

   ·the local church  $14,300

   ·a child of Mr and Mrs Mack        $640

   ·another child   $640

   ·"Glenferry Trust"  $210,000.

   The pattern was similar in the 2003 return with net income of the Trust of $233,152 distributed to the same beneficiaries, including a distribution of $185,000 to the Glenferry Downs Trust.

9. On the same day the 2002 and 2003 income tax returns for the Glenferry Downs Trust were lodged.  They too were lodged electronically through Mr Mack’s accounting firm and again the authority to lodge is put in issue by Mr Mack.  The 2002 return disclosed net income of $210,000, said in the return to have been distributed to Danbowl Pty Ltd.  In 2003 the net income shown was $185,000, also said to have been distributed to Danbowl Pty Ltd.

10. Mr Mack lodged his personal tax return for the 2002 income year on 3 March 2003.  It disclosed gross income of $20,000 as a distribution from a trust and the taxable income of $16,175.  On the same day, Mrs Mack lodged her 2002 return disclosing a gross income of $20,000 as a distribution from a trust and taxable income of $16,175.  Each return was assessed as lodged and a notice of assessment issued, in Mr Mack's case, on 10 March 2003 and, in Mrs Mack's case, on 12 March 2003.  Mr Mack's 2003 income tax return was lodged on 18 May 2004.  It disclosed gross income of $20,000, described as net non-primary production income, and a taxable income of $16,600.  On the same day Mrs Mack lodged her 2003 return.  It also disclosed gross income of $20,000, similarly described, and a taxable income of $16,852.  Both returns were assessed as lodged and notices of assessment issued on 27 May 2004.

11. By early May 2005 the Commissioner had formed an adverse view of the Danbowl arrangement and had issued a Taxpayer Alert setting out that view.  Consistent with that view, in about October 2005, the Commissioner wrote to Mr Mack, as the tax agent for the Glenferry Downs Trust, noting that the Commissioner believed that the Trust may have participated in a profit washing arrangement and offering the Trust the opportunity to voluntarily self-amend its tax returns to reflect its correct tax position if it had participated in such an arrangement[2].

    [2]The Commissioner's letter is not in the material but the fact of the letter and its terms are set out in paragraph 29 of the respondent's Statement of Facts, Issues and Contentions (Exhibit 14) to which Mr Mack has responded in his Statement of Facts, Issues and Contentions (Exhibit 3) with "not disputed".

12. By letter of 14 November 2005[3], Worcester & Co, Solicitors, claiming to be writing on behalf of Mr Mack, Mrs Mack, Drgee Pty Ltd as trustee of the Glenferry Downs Trust, and Mack Accounting Pty Ltd as trustee of the Mack Family Trust, advised the Commissioner in these terms:

    I enclose a copy of the client's authorisation and would advise that the client has elected to review, revise, amend and refile all of the tax returns affected by their participation in the Danbowl Trust Scheme.  I anticipate that we will be amending all of the relevant tax returns prior to 31 January 2006 and will be in contact with you with respect to scheduling these particular clients in the near future.

    Despite the terms of the letter and the fact of an authority, executed by Mr Mack, authorising those solicitors to act on behalf of each of the persons or entities referred to (including the Glenferry Downs Trust), Mr Mack asserts that he did not participate in the Danbowl arrangement and did not authorise the solicitors to write to the Commissioner in those terms.

    [3]Exhibit 1, page 357.

13. In January 2006 Mack Accounting wrote[4] to the Commissioner requesting amendments to the 2002 and 2003 returns of the Glenferry Downs Trust to remove the distributions to Danbowl Pty Ltd. In March 2006 the Commissioner received a schedule[5], apparently sent on behalf of the Glenferry Downs Trust, asserting, in terms, that in the 2002 income year the Trust incurred expenditure of $210,000 described as "Accrued Director Fees" and that the 2003 income be adjusted for "STS Cash Adjustment - $48,000" and "Deferred Livestock Sales – $137,000".  Ultimately, these amendments were not pressed although Mr Mack asserts that the Trust was entitled to deductions in that order and answering, in part, those descriptions.

    [4]For reasons not explained, the letter is not in the material; what is, is an extract from the Commissioner's records noting the receipt of the letter and its terms (exhibit 1, pages 378-379).

    [5]Exhibit 1, pages 381-382.

14. Eventually, in July 2007, the Commissioner made assessments of the tax payable by Mack Grazing Pty Ltd, as trustee of the Glenferry Downs Trust, for the 2002 and 2003 years.  The assessments treated the distributions from the Mack Family trust ($210,000 in 2002 and $185,000 in 2003) as income of the Glenferry Downs Trust.  The assessments were evidenced by notices dated 20 July 2007.  As noted above, Mack Grazing Pty Ltd was put into a creditors’ voluntary winding up in December 2007.  It has since been deregistered.

15. The Commissioner revisited the matter in 2008.  First, on 30 April 2008, a determination was made that there had been an avoidance of tax due to fraud or evasion by the participants in the Danbowl scheme.  In August 2009 the Commissioner made determinations under Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), the anti-avoidance provisions of that Act, in relation to Mr Mack and Mrs Mack in the 2003 income year. For reasons not explained on the material (I infer through oversight) no similar determinations were made in relation to the 2002 year until August 2012. Then, on 28 September 2009, the Commissioner made amended assessments of Mr Mack’s taxable income for the 2002 income year, increasing it by $105,000 (i.e. half of the purported distribution by the Mack Family Trust) and for the 2003 income year, increasing it by $92,500 (on the same basis). Penalty tax was imposed in each year on the basis that the shortfall had resulted from recklessness thus warranting a penalty of 50%. Similar amended assessments were made in respect of Mrs Mack for each of the 2002 and 2003 income years evidenced by notices of amended assessment dated 26 October 2009. She too was assessed for penalty on the footing of recklessness.

16. On 30 March 2012 each of Mr Mack and Mrs Mack lodged a request for an extension of time to lodge objections to the amended assessments for the 2002 and 2003 income years.  On 28 September 2012 the Commissioner disallowed those objections.  Mr Mack sought a review of the Commissioner's objection decisions on 26 November 2012.  Those decisions are the subject of applications 2012/5582 and 2012/5583.  Mrs Mack lodged her application to review the Commissioner’s objection decisions on 27 September 2013.  Applications 2013/4934 and 2013/4935 concern the Commissioner’s objection decisions in relation to her objections.

    The parties’ contentions

17. Whilst, by virtue of s 14ZZK of the Taxation Administration Act 1953 (Cth), Mr and Mrs Mack have the task of showing that the assessments are excessive, it is convenient to consider first the way in which the Commissioner puts his case. First, it is said, that I ought to be satisfied, despite the evidence of Mr Mack, that he and Mrs Mack did participate in the Danbowl arrangement. If that would be accepted, the Commissioner submits that I should conclude that the scheme was a sham and, on that basis, hold that the amounts purportedly distributed from the Mack Family Trust to the Glenferry Downs Trust were shared equally between Mr and Mrs Mack in each of the two income years. The Commissioner has alternative contentions that I do not, in the result, need to consider. In the alternative to the argument concerning sham, the Commissioner submits that Part IVA of the ITAA 1936, the general anti-avoidance provisions, operates to cancel the tax benefit with the result that the amounts of the distributions ought be regarded as income shared equally between Mr and Mrs Mack.

18. If I were to accept that Mr and Mrs Mack did not participate in the Danbowl arrangement the Commissioner accepts that the sham and Part IVA arguments fall away and it becomes necessary to consider Mr Mack's contention that the Glenferry Downs Trust was entitled to claim the deduction of $210,000 (in the 2002 income year) and $115,000 (in the 2003 income year) and to reduce its income by $70,000 in the 2003 income year in reliance upon the provisions in Subdivision 385-E of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for dealing with forced disposal of livestock.

19. Next, the Commissioner submits that s 170(2)(a) of ITAA 1936 authorised amendment of the original assessments because there was an avoidance of tax due to fraud or evasion. Finally, the Commissioner submits that the shortfall penalties were correctly imposed and that no remission of them is warranted.

20. For his part, Mr Mack, who appeared on both his own behalf and on behalf of Mrs Mack, argued that I ought be satisfied that they did not participate in the Danbowl arrangement, that the income of the Glenferry Downs Trust was reduced to nil in 2002 by reason of accrued directors fees of $150,000 (in respect of the accounting practice) and accrued management fees of $60,000 (in respect of farming activities), that the income of the Trust was reduced to nil in the 2003 income year by reason of  $115,000 of accrued directors fees in respect of the accounting practice and the deferral of $70,000 of livestock profits and that, in any event, the Commissioner was not entitled to amend the assessments.

21. In explanation of these arguments Mr Mack denies that he authorised the lodgement of the 2002 and 2003 income tax returns for the Mack Family Trust and the Glenferry Downs Trust in November 2003.  He says that the returns for the two Trusts lodged for those years were lodged in late 2005 after he had received a letter from the Commissioner requiring them to be lodged[6].  Those returns, he says, showed the deduction for accrued directors/management fees and the deferral of livestock profits which are said to have reduced the taxable income of the Glenferry Downs Trust to nil in each of the 2002 and 2003 income years.

    [6]Transcript page 21, lines 9 – 13.

    Consideration

22. It is necessary to start with a consideration of the reliability of Mr Mack’s evidence. I have reached the conclusion that I am unable to rely on that evidence.  I have come to that conclusion because his evidence on critical matters is so at odds with contemporaneous documents and with matters that are incontrovertible as to render reliance on that evidence impossible.  It may be that Mr Mack has been able to persuade himself of the accuracy of his account by a process of after-the-fact reasoning; he has not been able to persuade me.

23. I should say that, in coming to that conclusion, I have declined the invitation from the Commissioner[7] to judge Mr Mack’s evidence by reference to evidence given in other proceedings concerning the Danbowl arrangement.  I regard it as impermissible to do so given that Mr Mack was not in a position to test that other evidence.  It is, though, permissible to have regard to that evidence where it was put to Mr Mack and he agreed to it.

    [7]Exhibit 16, paragraph 7 & exhibit 17, paragraph 1.

24. There is much about Mr Mack's evidence that is troubling.  He denies participating in the Danbowl arrangement yet on 27 June 2002, just prior to the end of that financial year, he arranged, through Mr Nirens, for the creation of the Glenferry Downs Trust, a trust adapted for use by participants in the Danbowl arrangement and a Trust in which  Danbowl Pty Ltd, an entity unrelated to Mr Mac, held the only units entitled to receive the income of the Trust.  He explained the matter in this way[8]:

    It should be noted that Danbowl is a listed beneficiary of the Glenferry Downs Trust… I needed to restructure my business in 2002.  As I was aware Mr Jeff Nirens of Danbowl set up trusts I asked his firm to set one up for me as a matter of convenience for me.  I also requested not to have Danbowl included.  When it arrived in the post to me I noticed Danbowl was included.  He said it was just standard in all of their trust setups that Danbowls [sic] was included in the list of beneficiaries as their business was obviously based around Danbowl.  He advised me that Danbowl did not have any voting rights and it was at the Trustees discretion whether it received income.  I also had early advice from another law firm – Cleary Hoare in relation to this matter.

    That explanation is illogical and unconvincing.  The "advice from another law firm" was advice in relation to a different trust deed.  Absent some suggestion that Mr Mack satisfied himself that the structures of that trust and the Glenferry Downs Trust were the same, and he did not suggest that he had, the advice cannot have been of any comfort for him.  Clause 7 (2) of the Glenferry Downs Trust gives to the trustee a discretion to accumulate income or to distribute it.  But, if the discretion to distribute was exercised, Danbowl Pty Ltd was the holder of the only class of unit entitled to a distribution of income.

    [8]Exhibit 3, response to paragraph 11 – 19.

25. Mr Mack denied that he had authorised the lodgement of the Mack Family Trust and Glenferry Downs Trust returns for the 2002 and 2003 income years in November 2003.  He claimed that he lodged the Glenferry Downs Trust return in late 2005 in response to a letter from the Commissioner requiring him to do so.  He did not produce that letter (and it was not in the voluminous material produced by the Commissioner) and the Commissioner has no record of receiving returns from that Trust in 2005.  The Commissioner's records show only the lodgement in November 2003.  Moreover, the uncontradicted and unchallenged evidence[9] is that the Commissioner's records system would disclose any attempt to lodge a subsequent return.  No such attempt is recorded in 2005, 2006 or at any other time.

    [9]Exhibit 13.

1. It does not assist Mr Mack's credibility that the first record of him alleging to the Commissioner that he had lodged a different form of return for the Glenferry Downs Trust came on 30 March 2012 when he sought an extension of time to lodge objections to the amended assessments.  With his objection he enclosed[10] what was described in the objection as,

   Copies of the trust distribution of Glenferry Downs Trust as lodged with the ATO for years ended 30 June 2002 & 2003 showing no distribution to Danbowl Pty Ltd.

   The documents enclosed were the front pages of the Trust's 2002 and 2003 income year returns together with statements of distribution for each of those years. No detail was given when the returns had been lodged.  It was not until 24 June 2012 that what purported to be full copies of returns, now claimed to have been lodged in 2005, were provided to the Commissioner[11] and, even then, were absent any assertion about the date of the claimed lodgement. From January 2006[12] Mr Mack was asserting an entitlement to reduce the net income of the Glenferry Downs Trust to nil in each of the 2002 and 2003 income years by means of accrued director’s fees and referral of profit on livestock sales.  On his case he had, a matter of months earlier, lodged returns for the Trust reflecting that position. Yet the request in January 2006 was to amend a return; it did not assert that a return in these terms had already been lodged. I do not overlook the fact that the letter with the request is not in the material and that its contents must be deduced from the Commissioner’s record of its contents but Mr Mack did not suggest that the record did not accurately reflect the terms of his request.

   [10]Exhibit 1, pages 206, 214-217.

   [11]         Exhibit 1, page 225 and following.

   [12]See paragraph [13] above.

2. If the position had been as Mr Mack claimed, and returns lodged in late 2005, it may be wondered why it took him so long to raise that issue with the Commissioner.

3. Equally, it does not aid Mr Mack's credibility that he sought to add weight to his case by producing to the Commissioner documents obviously back dated but asserting that his lawyers had produced them and he had signed them at their request[13].  One of those documents[14] purports to be a record of a meeting of members of Mack Accounting Pty Ltd on 30 June 1993 resolving to remunerate directors on an annual basis.  On its face it lends support to Mr Mack's claim to deduct accrued director’s fees.  Yet in June 1993 the company whose ACN is recorded in the minutes was known as J & J Landscaping & Maintenance Pty Ltd; it changed its name to Mack Accounting Pty Ltd in September 2004.  Mr Mack's first involvement as a member or officer of the company did not occur until he was appointed director in September 2000.  The same is true of a similar minute for Mack Grazing Pty Ltd dated 17 April 2001[15].  At the time of that claimed meeting Mack Grazing Pty Ltd was known as Drgee Pty Ltd and Mr Mack had nothing to do with it.  He became a director of the company on 27 June 2002 as one of the steps in the Danbowl arrangement, that company playing the role of trustee of the Glenferry Downs Trust.

   [13]Transcript page 52, line 37 and following.

   [14]Exhibit 1, page 254.

   [15]Exhibit 1, page 278.

4. These matters, in and of themselves, are of no particular moment but they demonstrate Mr Mack's willingness to manufacture evidence to support his case.  When coupled with the illogicality and inherent implausibility of his evidence, and its inconsistency with contemporaneous documents or demonstrated events, I conclude that I cannot rely on Mr Mack’s evidence.

5. The first question presented by the arguments of the parties is whether Mr Mack and Mrs Mack participated in the Danbowl arrangement.  On the basis of the tax returns lodged in November 2003 they did.  According to those returns in 2002 the Mack Family Trust distributed $210,000 to the Glenferry Downs Trust which then distributed it to Danbowl Pty Ltd as trustee of the Eleventh Hour Unit Trust.  In 2003 the distribution was $185,000.

6. Ultimately, I need not decide whether they participated in the arrangement or not.  Either way the conclusion reached is the same.

7. If it be assumed that Mr and Mrs Mack did participate in the Danbowl arrangement, that arrangement was plainly a sham.  I did not understand Mr Mack to argue to the contrary.  It was a device to avoid tax on the earnings of Mr Mack's accountancy practice.  None of the parties could have intended the documents to take effect according to their tenor.  In that regard, it was no coincidence that the documents evidencing the arrangement were created in the last days of the financial year.  There is no evidence that any sum was paid to Danbowl Pty Ltd, indeed Mr Mack was insistent that none was.

8. On that assumption the claimed distributions of $210,000 in 2002 and $185,000 in 2003 by the Mack Family Trust were ineffective.  On that basis, at least in theory, the amounts of the two distributions remained in the Mack Family Trust.  If that be the case it is unnecessary to consider Mr Mack's argument about accrued director's fees and deferred profit because that argument, which I reject in any event, is premised upon the receipt by the Glenferry Downs Trust of the distributions from the Mack Family Trust.  I will defer consideration of the tax consequences of this conclusion.

9. If, on the other hand, I were to accept that Mr and Mrs Mack did not participate in the Danbowl arrangement, it becomes necessary to consider Mr Mack's evidence about accrued director's fees and deferred profit.  I have already indicated my unfavourable view of the evidence of Mr Mack generally.  The documents that purport to record the agreement to pay director's fees were created after the fact.  There is no evidence of any contemporaneous agreement to pay director's fees or management fees, no evidence of how the amounts in question were calculated, no evidence whether they were ever paid, no satisfactory evidence that any thought was ever given to them until it became necessary, in late 2005, to respond to the Commission's audit of participants in the Danbowl arrangement.  There is, as well, an element of farce when it is remembered that the director's fees and management fees for 2002 were, on Mr Mack's case, payable by Drgee Pty Ltd as trustee of the Glenferry Downs trust when Mr Mack had been a director of, or involved in the management of, that company for only three days in the financial year in which fees of $210,000 were supposedly incurred.

10. The same is true of the claim regarding the deferral of profit on the sale of livestock.  To succeed, Mr Mack needed to provide evidence that satisfied the various elements of subdivision 385-E of the ITAA 1997 including, relevantly, that there was a forced disposal or death of livestock, there was a resulting profit and that an election had been made before a return was lodged as was required by s 385-150 of the ITAA 1997.  Mr Mack’s evidence does not satisfy me of any of those matters.

11. In the result I reject claims that the Glenferry Downs Trust incurred director’s fees or deferred profits on the fourth disposal of livestock.

12. The Commissioner’s Statement of Facts and Contentions[16] appeared to accept, subject to the Commission's usual "without admission" qualification, that distributions were made in each year from the Mack Family Trust to the Glenferry Downs Trust.  In his closing submissions[17] the Commissioner invited me to conclude that those distributions were part of the "sham" and ought be disregarded.  Mr Mack does not suggest that he had been prejudiced by that change in argument nor that he could call any further evidence to deal with it.  It is difficult to see any justification for the interposition of the Glenferry Downs Trust, absent involvement in the Danbowl arrangement.  No trust distribution minutes have been produced and claimed distributions from the Mack Family Trust to the Glenferry Downs Trust are evidenced only by the latter Trust's tax returns which Mr Mack denies were authorised by him.  Unsurprisingly, in these circumstances and, in particular, my view of the reliability of Mr Mack’s evidence, I am not satisfied that the distributions of $210,000 in the 2002 income year and $185,000 in the 2003 income year were made by the Mack Family Trust to the Glenferry Downs Trust.

    [16]Exhibit 11, paragraph 9.

    [17]Exhibit 16, paragraph 13 – 14.

13. Thus, whether the matter be viewed on the basis of a lack of satisfaction that the distributions were made, or on the basis of the distributions, if made, were part of a sham and ineffective, the position is that the amounts of $210,000 and $185,000 remained in the Mack Family Trust.

14. The Commissioner's amended assessments proceeded on the premise that Part IVA of ITAA 1936 operated to deny the tax benefit and that, but for the scheme, the claimed distributions would have been available for the use and benefit of Mr and Mrs Mack equally. Mr Mack has made no attempt to demonstrate what actually happened to the funds beyond the claim to have accrued (but not paid) director's fees, a claim I have rejected. Although it has not been necessary to consider the path by which the Commissioner came to the conclusion that Mr and Mrs Mack shared equally in the amounts of the distribution, that conclusion provides an "intelligible basis"[18] for the assessments.  Mr and Mrs Mack are obliged to show that the assessments were excessive.  In Commissioner of Taxation v Dalco[19] Brennan J observed:

    [18]See Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63, 88.

    [19][1990] HCA 3; (1990) 168 CLR 614 at 624.

    The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection.

    There was no agreement to confine the issues in any way in these proceedings hence the Commissioner is entitled to, and did, submit that Mr and Mrs Mack had not discharged the onus to demonstrate that the assessments were excessive. In the same case Toohey J said[20]:

    I agree with Wilcox J. in the Federal Court that "the task for the taxpayer, upon an appeal or a review under Pt.V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer". As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. He or she may also do so by pointing to some error of computation or, as suggested by McAndrew, by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.

    In George the Court said at p 201:

    .. the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income.

    There can be no quarrel with that statement.

    [20]168 CLR at 631.

15. In my judgement Mr and Mrs Mack have not established affirmatively that the amount of taxable income for which they have been assessed exceeds the actual taxable income.  That is because they have not demonstrated what their actual taxable income was.

16. It is then necessary to consider whether the Commissioner was authorised, in September and October 2009, to amend assessments made in March 2003 (in respect of the 2002 income year) and May 2004 (in respect of the 2003 income year).  He was authorised if there had been an avoidance of tax and if that avoidance had been due to fraud or evasion[21].  There is no doubt there was an avoidance of tax.  On the basis of the individual returns the applicants have lodged, less tax was payable than ought to have been.  And, in my view it resulted from evasion.  Whether the matter is viewed as one in which they were parties to a sham or one in which there were no effective distributions of income from the Mack Family Trust, I infer that the amounts of the distributions were available to them for their use and benefit. The case is plainly one where there was "blameworthy" conduct[22] on Mr Mack’s part and, in the case of Mrs Mack, on the part of Mr Mack as her agent. The true position was, in my view, consciously withheld from the Commissioner. The case is a plain case of evasion. The Commissioner was entitled to amend the assessments.

    [21]See s 170(2)(a) of ITAA 1936 which continued to apply, despite subsequent amendments, to assessments earlier than the 2005 income year.

    [22]See Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at 313.

17. Finally, it becomes necessary to consider whether administrative penalties were correctly imposed and whether remission of them was warranted.  These matters were not the subject of any separate submission on the part of Mr Mack nonetheless they need to be considered.

18. Division 284 of Schedule 1 to the Taxation Administration Act 1953 (Cth) sets out the circumstances in which administrative penalties apply for, amongst other things, making false or misleading statements. It is enough to say that penalties are imposed by reference to a characterisation of conduct bringing about the shortfall. In the present case the Commissioner concluded that there had been recklessness warranting the imposition of a penalty of 50% of the shortfall. That amount was not increased by any aggravating conduct or decreased because of any mitigating conduct. I have already concluded that there was evasion on the part of Mr and Mrs Mack. In those circumstances it seems difficult to conclude other than that their conduct, either directly or, in the case of Mrs Mack by her agent, Mr Mack, was reckless. There was, in my judgement, a deliberate failure to tell the Commissioner of the true position in relation to the funds that I have had held remained in the Mack Family Trust. The penalties were correctly imposed.

19. The power to remit penalties is set out in s 298-20(1) of Schedule 1 to the Taxation Administration Act in these terms:

    The Commissioner may remit all part of the penalty.

20. In Dixon (as trustee) v Commissioner of Taxation[23] the Full Court, remitting a decision on the remission of penalty to Tribunal, described the Tribunal's task in this way:

    The matter should have been remitted to the Tribunal for consideration of the question of whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer.

    As I have said, no separate submissions were directed to the question of remission of penalty and it was not suggested that the outcome was harsh in Mr and Mrs Mack’s particular circumstances or that there were any other matters that would warrant the remission of penalties.  There is nothing about the present case which suggests to me that the discretion to remit should be exercised favourably to Mr and Mrs Mack.

    [23][2008] FCAFC 54; (2008) 167 FCR 287 at [26].

21. It follows that in each application, the decision under review ought be affirmed.

I certify that the preceding 46 (forty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC

.............................[Sgd]....................................

Associate

Dated 11 June 2014

Dates of hearing	26 February 2014; 9 April 2014
Applicants	In person
Counsel for the Respondent	Miss E Ford
Solicitors for the Respondent	Australian Taxation Office Legal Practice