Eao and Commissioner of Taxation

[2008] AATA 804

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 804

ADMINISTRATIVE APPEALS TRIBUNAL      )          No VT200600205

)          No VT200600206

TAXATION       APPEALS        DIVISION      )          No VT200600207

Re SHU UAN EAO

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B.H. Pascoe, Senior Member

Date10 September 2008

PlaceMelbourne

Decision The decisions under review are affirmed.

(sgd) B.H. Pascoe

Senior Member

INCOME TAX ‑ derivation of rent income ‑ property said to be held in trust for mother ‑ whether income derived by applicant ‑ majority of funds for purchases provided by mother ‑ presumption of advancement.  

Income Tax Assessment Act 1997

REASONS FOR DECISION

10 September 2008 Mr B.H. Pascoe, Senior Member

1.      These are applications to review decisions of the respondent to disallow objections lodged against amended assessments of income tax for the years ended 30 June 2000, 2001 and 2002.  The amended assessments were issued to include as assessable income of the applicant rental income derived from a commercial property.  The additional income included and objected to was $66,867 in the 2000 year, $49,600 in the 2001 year and $15,850 in the 2002 year.

2.      At the hearing the applicant, Ms Shu Uan Eao (Ms Eao), was represented by Mr A Athanasiou, a solicitor.  The respondent, the Commissioner of Taxation, was represented by Mr M Moshinsky QC assisted by Ms J Forsyth of counsel.  Evidence was given by Ms Eao, her mother, Ms Pao Yu Yu-Lin, her brother Mr Wenjai Yu, a retired book keeper, Mr N Lucas, two accountants, Ms J Walker and Mr M Karafili and two directors of the company which occupied the commercial property, Mr N Doolan and Mr M Hughes.

3.      During the three years in dispute Ms Eao was the registered owner of a commercial property known as 13 Raymond Road, North Laverton (the property). The property had been purchased on or about 6 June 1996 under a contract of sale with the vendors Mark Francis Hughes (Mr Hughes) and James Francis Doolan (Mr Doolan) for the sum of $535,000.  On or about the same date an option agreement was entered into, granting an option to Mr Hughes and Mr Doolan to purchase the property from Ms Eao on or before 7 June 1998 for $675,000.  The option was not exercised and lapsed.  At all times during the relevant years the property was leased to and occupied by Superior Hide & Skin Exports Pty Ltd (Superior Hide).  The rental income included by the amended assessments for the three years ended 30 June 2002 was the rental shown as an expense in the accounts of Superior Hide.

4.      Ms Eao gave evidence that she has been in a long term de facto relationship with Mr Hughes.  While she accepted that she had purchased the property in June 1996, she maintained that it was purchased in trust for her mother from funds provided by her mother.  She said that the property had been occupied by Superior Hide which conducted a hide and skin processing business and was owned and controlled by Mr Hughes and Mr Doolan.  The premises were purpose built for the business and required specific permits to allow the business to be carried on. She said that, in May 1994, Mr Hughes and Mr Doolan entered into a contract of sale with the then owner, Topper Nominees Pty Ltd to purchase the property for $540,000.  The settlement date under that contract was 31 May 1996.  Ms Eao said that Mr Hughes and Mr Doolan were unable to obtain finance to complete settlement and were concerned that the property would be acquired by a competitor and it would be difficult for Superior Hide to obtain alternative acceptable premises.  She said that she approached her Taiwan-resident parents to lend the required funds to complete the purchase.  They refused the loan but were prepared to purchase the property as an investment in Australia.  She said that the decision was that the property would be purchased by her mother who was further prepared to enter into an option agreement for Mr Hughes and Mr Doolan to repurchase the property for an additional $135,000 to cover costs.

5.      Ms Eao said that, because of time constraints and difficulties with non‑residents purchasing real estate, she was advised by her solicitor, Mr H Turner, that it would be advisable to purchase the property in her own name, on behalf of her mother.  While her formal written statement stated that she would hold the property in trust for my mother, Ms Eao accepted in her oral evidence that she was not sure of the legal meaning of the word trust and would not have used those words with her mother.  She said that it was agreed with her mother that Superior Hide would pay the same amount of rent as paid to the previous owner and that such rent would be deposited in a Citibank account in the name of the mother, of which Ms Eao was a signatory.  It is not clear from the evidence when such an account was first opened. Ms Eao said that her mother had the account since at least 1997 and the earliest copy of a bank statement produced was from 24 June 1997 showing a balance of $10,713.43.  Ms Eao said that the total expenditure on the purchase of the property was $596,373.06 including stamp duty on the two contracts.  This was said to have been funded from a transfer of $505,000 from Ms Eao’s mother’s account with the National Australia Bank in Taipei, Taiwan and a drawdown facility for $100,000 with the National Australia Bank secured against Ms Eao’s residential property.  Ms Eao said that she had agreed with her mother that the $100,000 would be regarded as an interest free loan to her mother to be repaid from future rentals of the property.

6.      Ms Eao said that, on advice, she registered for GST purposes and paid the GST on the rent paid by Superior Hide.  She also opened a bank account with National Australia Bank, obtained an ABN number and deposited the rental receipts in this account.  Some of those deposits were used to repay the National Australia Bank loan facility.  Some of the funds were said to have been used to pay for the mother’s travel costs.  Ms Eao acknowledged that Superior Hide had cash flow problems from 2002 and, with her consent, did not pay the full amount of rent due.  She maintained that her mother had agreed that Superior Hide need not pay rent when in financial difficulties.

7.      On 25 November 2006 an enduring power of attorney was executed by the mother of Ms Eao, Ms Pao Yu Yu-Lin (Ms Yu-Lin), appointing Ms Eao as her attorney.  On 15 March 2007 Ms Eao executed a Deed of Acknowledgment of Trust both as trustee and as attorney for the beneficiary, Ms Yu-Lin, reciting that the property had been purchased on 6 June 1996 as trustee for the beneficiary.  On 5 April 2007, the property was transferred into the name of Ms Yu-Lin alleging her entitlements pursuant to that trust.  The transfer of land was executed by Ms Eao as attorney for Ms Yu-Lin.  Ms Eao acknowledged that, prior to March 2007, no document existed which recorded her as holding the property in trust, whereas a document such as the option agreement warranted that she was the sole owner with no other person having any interest or rights in the property.  She said that she had relied on professional advice from those who were aware that the legal owner was her mother.

8.      Ms Eao acknowledged that, in September 2001, she had guaranteed a borrowing of $450,000 by another company in which Mr Hughes had an interest, Aussie Game Meats Pty Ltd.  The guarantee was secured by a mortgage over the property.  In July 2006 she guaranteed a borrowing of $450,000 by Razorback Australia Pty Ltd, another company in which Mr Hughes had an interest, again secured by mortgage over the property.  She maintains that her mother had accepted her decision to mortgage the property.  Ms Eao said that she had no direct knowledge of the two companies or their financial position but was aware that there was some risk involved.  She said that it was necessary to take some risk to earn money but was unable to provide any detail of any consideration received for the provision of the guarantees and security.

9.      Ms Yu-Lin provided evidence confirming her daughter’s evidence that the property had been purchased in the daughter’s name but that she was the true owner.  Ms Yu-Lin said that the $505,000 was not a loan but funds for the purchase of the property.  She maintained that she was happy to invest in Australia but would not want to benefit one daughter to the detriment of her two other children.  She said that she trusted her daughter and was aware of the mortgage as security for loans to other companies, the failure to pay full rent as a result of financial difficulties and the option to sell to Messrs Hughes and Doolan.  She said that she had borrowed a part of the $505,000 remitted to Australia.

10.     Mr Wenjai You (Mr You), the brother of Ms Eao, admitted that he has had little contact with his parents for many years.  Nevertheless, he maintained that he was aware in 1996 that his mother had decided to invest in Australia at the request of his sister.  He said that his parents were wealthy, had investments in various areas and his mother was good at money management.  He conceded that he had no direct involvement in the decision to purchase the property in Australia and his knowledge of it came from his mother and sister.

11.     Mr Lucas was a former bookkeeper employed by Walker & Company, accountants for Superior Hide until the 2003 financial year.  He had faxed a letter to the ATO auditor on 13 July 2004 which stated that the amounts shown as rent in the accounts of Superior Hide were incorrectly described and should have been classified as interest paid to Ms Yu-Lin, not Ms Eao, on a loan account.  A file note by the auditor noted having doubts regarding this statement as, in an interview with Mr Walker and Mr Hughes on 7 October 2003, he had been told that the rent shown was paid to Ms Eao as owner of the property.  The variations in amounts were explained as being payment to Mr Hughes’ de facto wife when the company could afford it.  Mr Lucas had responded that Ms Eao was to travel to Taiwan to obtain the documentation regarding the loan.  Mr Lucas had no memory of the letter and the background to it but insisted that it would have been sent by him with the authority of Mr Walker.

12.     Mr Walker had retired from practice in 2005 after contracting motor neurone disease.  He confirmed that Superior Hide had been a client of his from approximately 1996 to 2004.  He had not been responsible for entries in the general ledger which was in the hands of Ms Eao until the 2003 year.  He was unable to explain several entries in the accounts.  He accepted that the letter of 13 July 2004 would have been sent on his instructions but now believes that it should not have left his office until further enquiries had been made.

13.     Mr Karafili gave evidence that he was approached by Mr Hughes in 2004 who expressed concern at the financial statements prepared by Mr Walker and the information contained therein.  After a review of the statements and the general ledger for the year ended 30 June 2003, Mr Karafili formed the view that:

The financial statements prepared by Walker for that particular income year, and therefore, most likely for every income year before and after that have been prepared by Walker are inaccurate and cannot be relied upon.

The major criticisms involved the accounts shown as loan accounts and the failure to accrue as an expense the rent due but not paid.

14.     Mr Doolan and Mr Hughes gave evidence confirming the circumstances of the initial contract for purchase of the property by them, the subsequent inability to finance settlement and the subsequent contract for purchase in the name of Ms Eao. Both stated that the final purchase was financed primarily from funds provided by Ms Yu-Lin; but the solicitor, Mr Turner, advised that, as a foreign national, she could not own land in Australia without approval so the purchase was in the name of Ms Eao.  Both confirmed, also, that Superior Hide encountered financial difficulties and Ms Eao had agreed to delays in paying the rent.  Neither Mr Doolan nor Mr Hughes had any direct dealings with Ms Yu-Lin but both understood that the true owner of the property was Ms Yu-Lin and the bulk of the rent was paid into the bank account in her name.

15.     It was submitted for Ms Eao that the evidence of all witnesses who were involved at the time of the purchase of the property was clear and consistent that Ms Eao was acting as trustee for her mother in the purchase and the true beneficial owner was Ms Yu-Lin.  It was argued that any presumption of advancement by a mother for the benefit of a daughter had been successfully rebutted by the evidence. It was said that once Mr Karafili became involved, the correct position was recognised and the subsequent transfer of the property in the name of Ms Yu-Lin and the lodgement of income tax returns on her behalf occurred.  It was submitted that, of actual rent paid by Superior Hide from 1 July 1998 to 5 June 2003, Mr Karafili had physically traced $231,500 to the Citibank account of Ms Yu-Lin and $33,000 to the National Australia Bank account of Ms Eao.  The latter amount consisted of four payments between 30 November 1999 and 14 March 2000.

16.     It was submitted for the respondent that, prior to the review of the relevant amended assessments, all information from Superior Hide was that the owner of the property was Ms Eao and rental had been paid to her.  It was argued that all of the witnesses who attested that the true beneficial owner of the property was Ms Yu-Lin had an interest in the outcome and the Tribunal should treat such evidence with reservation.  It was said that there was a marked lack of clarity in relation to the conversations and arrangements between mother and daughter.  Mr Moshinsky submitted that the presumption of advancement had not been rebutted by simply saying Ms Yu-Lin had expressed an interest in investing in Australia. Notwithstanding that the documentation was prepared on legal advice by a solicitor who was alleged to be aware that the beneficial owner was to be Ms Yu-Lin, no contemporaneous documents exist which refer to the alleged trust.  It was argued that it was an offence under the Foreign Acquisitions and Takeovers Act 1975 at that time for a foreign nation to enter into an agreement to purchase land without 40 days prior notice to the Federal Treasurer.  As such, the alleged arrangement was an illegal agreement and could not be relied upon to rebut the presumption of advancement.

17.     The primary issue before the Tribunal is whether the rental income derived from the property in the three years ended 30 June 2002 represented assessable income of Ms Eao or Ms Yu-Lin.  The only evidence of the property being beneficially owned during this period was the oral evidence of the mother, the daughter, the son, the daughter’s de facto partner and his business partner.  The only documentary contemporaneous evidence was a telegraphic transfer order, transferring $505,000 from Ms Yu-Lin to the account of Ms Eao.  The evidence pointing to beneficial ownership by Ms Eao or evidence indicating concern of acceptance of the above oral evidence included:

(a)Notwithstanding that the ownership arrangements were made with legal advice, no documentary evidence existed prior to 2007 of any trust relationship.  All prior documentation was to the contrary.

(b)$96,373 of the purchase costs was borrowed directly in Australia by Ms Eao for no apparent consideration by Ms Yu-Lin.

(c)Ms Yu-Lin was prevented from acquiring land in Australia in 1996.

(d)An apparent informal acceptance of non-payment of rent.

(e)The use of the property to provide security for borrowings of two other companies associated with Mr Hughes for no apparent consideration.

(f)Payment of, at least, some rent into the same bank account of Ms Eao.  While the majority of the rent was paid into an account in the name of Ms Yu-Lin, Ms Eao was the signatory on this account and there is no evidence of the subsequent disposition of the funds credited to that account.

(g)Ms Eao was employed by Superior Hide and was the person primarily responsible for recording payments and receipts of that business.

(h)The statement attributed to Mr Hughes at the interview with the ATO auditor in October 2003 that the property was owned by Ms Eao.

(i)The evidence of Ms Yu-Lin that:

I would never want to benefit my daughter at the expense of my other two children. I would only ever invest any money if it would be for the benefit of my children jointly and then only after my passing.

This is at odds with the acceptance of non-payment of rent and allowing the property to be used as security for personal guarantees.

(j)The letter from Walker & Company in July 2004 indicating the rent payments were interest on a loan from Ms Yu-Lin.

18.     On balance, I am satisfied that the applicant has not discharged the required onus of proof that she was not the beneficial owner of the property during the relevant period and that the amended assessments were excessive.  It is unnecessary for the Tribunal to make a finding as to whether the $505,000 was a loan or gift to Ms Eao.  It is appropriate to note that the actual source of the funds was not clearly demonstrated.  It is accepted that it is possible the funds were by way of loan with the rental payments in lieu of interest and the subsequent transfer of the property to Ms Yu-Lin in 2007 being consideration for repayment of the principal. However, the full circumstances are something known only to the family.

19.     While not clear from the evidence and submissions at the hearing, it would appear that the applicant disputes the actual amounts of rental derived in the relevant years.  The amounts assessed were the amounts shown as rental expense in the accounts of Superior Hide.  Mr Karafili traced lesser amounts into the bank accounts of Ms Yu-Lin and Ms Eao.  However he found that the profit and loss statement was erroneously prepared on a cash basis.  There was no evidence to demonstrate that these accounts overstated the rent actually paid.  It is clearly possible that rental payments were made by Superior Hide to accounts other than the two examined by Mr Karafili.  Again, I cannot be satisfied that the income included in the amended assessments was excessive.

20.     No objection was made to the additional tax by way of penalty in the amended assessment for the year ended 30 June 2000 nor any submissions made in relation to such additional tax at the hearing.  Consequently, that issue is not before the Tribunal.

21.     As a result of the foregoing, the objection decisions under review should be affirmed.

I certify that the twenty‑one [21] preceding paragraphs are a true copy of the reasons for the decision herein of

B.H. Pascoe, Senior Member

Signed:          Olympia Sarrinikolaou

Clerk

Dates of Hearing  18 February 2008 and 14‑15 April 2008
Date of Decision  10 September 2008
Counsel for the Applicant            Mr A Athanasiou
Solicitor for the Applicant             Rigby Cook Lawyers
Counsel for the Respondent:        Mr M Moshinsky (SC) and Ms J Forsyth
Solicitor for the Respondent        Ms E Saltnes, ATO Legal Services