Elliott and Commissioner of Taxation

[2000] AATA 1057

DECISION AND REASONS FOR DECISION [2000] AATA 1057

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No ST1999/17

TAXATION APPEALS  DIVISION         )          
           Re      GARY ELLIOTT     
  Applicant
           And    COMMISSIONER OF TAXATION          
  Respondent

DECISION

Tribunal       Mr D.J. Trowse (Member)

Date30 November 2000

PlaceAdelaide

Decision      The Tribunal sets aside the decision under review and in substitution therefor decides that the applicant's objection should be allowed to the extent of a reduction in taxable income of $18,000 for the 1990 year.  The Tribunal, pursuant to Regulation 19(7) of the Administrative Appeals Tribunal Regulations, certifies that the proceedings have terminated in a manner favourable to the applicant.         
  (Signed)
  D.J. TROWSE
  (Member)
CATCHWORDS
INCOME TAX – T-account analysis – source of funds – loan repayments – sale of private asset – onus of proof – decision part set aside, and in part affirmed
Taxation Administration Act 1953 ss.14ZZK(b)
Briginshaw v Briginshaw (1938) 60 CLR 336
Krew v FC of T 71 ATC 4213

REASONS FOR DECISION

30 November  2000   Mr D.J. Trowse (Member)   

1. This dispute relates to adjustments made by the Commissioner of Taxation (the Commissioner) to the 1989 and 1990 tax returns of the applicant.  It appears that the applicant was selected for audit as part of a project into the illegal abalone industry and that the T-accounts prepared for the years 1989, 1990, 1992 and 1993 identified understatements of income.  It is the Commissioner's decision to disallow the objections lodged in connection with the 1989 and 1990 years that is the subject of the Tribunal's review.  Put briefly, the applicant contends that the Commissioner erred in his calculations in not bringing to account as sources of funds two receipts of a capital and private nature.

2. At the hearing, the applicant represented himself and gave evidence under oath. Also, he called as witnesses Mr N.A. Porter and Mr K.F. O'Bryan. The Commissioner was represented by one of his officers. The Tribunal had before it a copy of the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, together with 11 exhibits.

3. During the years in question, the applicant, who at that stage resided in Victoria, was engaged in the activity of fishing for abalone and crayfish.  He did not hold a licence for that activity and, as a consequence, was limited to a trip catch of 10 abalone and 4 crayfish which was sold to Chinese restaurants located in Melbourne.  Sales were settled in cash which was deposited into the applicant's bank account.  It is the applicant's assertion that all proceeds received from the activity had been included as assessable income in his 1989 and 1990 income tax returns.

4. To better understand submissions made by the applicant, either prior to or at the hearing, it is necessary to outline details of several events occurring before the period now under review.  The first relates to the applicant's involvement in a company incorporated for the purpose of conducting a business of selling earthmoving equipment and the servicing thereof.  It seems that a breakdown in the relationship between the applicant and his fellow directors and shareholders culminated in the applicant disposing of his shares in 1987 for a consideration of approximately $72,000.  Bank records reveal that the proceeds received from the disposition were deposited into the applicant's account in August and September 1987.  The next event concerns the matrimonial home previously owned by the applicant and his former spouse.  As part of the family settlement agreed upon, the former spouse took the home subject to the payment of $23,000 to the applicant.  That payment was effected in April 1987.  Finally, the applicant's acquisition of a home in February 1989 should be noted.

5. The Commissioner's audit, which commenced in August 1994 and concluded in January 1999, revealed understatements of taxable income of $18,148 and $22,983 for the 1989 and 1990 years respectively.  Included in the 1989 understatement was omitted interest income of $6,230 which, according to the applicant, was overlooked by his accountant in the compilation of the return.  The Tribunal observed that the liability for penalty tax imposed for incorrect returns had been waived by the Taxation Relief Board and thus the possible need to examine the reasonableness of the penalties does not arise.

6. It is fair to say that the submissions made throughout the audit period as to the incorrectness of the Commissioner's calculations were many and varied and that those inconsistencies were of concern to the Commissioner and also to this Tribunal.  Of particular interest are the varying explanations provided with regard to a bank deposit of $16,000 appearing on 19 April 1989.  Initially, it was stated that the source of the $16,000 was from the sale of the applicant's equity in the earthmoving business.  Next, came the statement that it represented the proceeds from the sale of a business to a Donald Cavelero.  This was followed by a declaration that the deposit was proceeds from the sale of poached abalone costing $14,600, as evidenced by a bank withdrawal of that amount on 22 February 1989, and for which no deduction had been allowed.  In the course of time, it was established that the sale of shares was transacted in August 1987, that the withdrawal of $14,600 was the deposit paid on the home property purchased by the applicant at that time and that the proposition involving Mr Cavelero was taken no further once the Commissioner requested documentary evidence of the alleged transaction.

7. Before the Tribunal, the applicant relied upon two submissions, one of which relates to the previously mentioned deposit of $16,000 made on 19 April 1989.  On this occasion, it was claimed that the deposit represented  the repayment of a loan made to a Mr N. Porter during the 1986 and 1987 calendar years.  The other submission was that the calculations for the 1990 year should be adjusted to allow for the sale of a boat purchased by the applicant in about 1982.  The acceptance of those submissions will increase funds available to the applicant and reduce the understatements calculated by the Commissioner.
   applicant's evidence

8. The applicant informed the Tribunal that Porter, a friend of some years, was a member of a band operating in the Geelong area and that the band, of which he was the "backup manager" was in need of financial support for the purchase of instruments and sound equipment.  It seems the applicant believed that the band had the potential to succeed in the business of recording and, on the basis of sharing in any profits so derived, he advanced by way of instalments during the 1986 and 1987 years a total of $16,000.  Originally, the evidence was that the loan had been funded from the sale of the shares in the earthmoving business.  However, when confronted with bank records indicating that all of those funds had been expended on the purchase of his home in 1989, the applicant changed the source to include the monies received from his former spouse and also those received from the sale of motor vehicles, plant and equipment.

9. After a request for repayment, Porter paid to the applicant a cash amount of $16,000.  The applicant advised the Tribunal that the repayment took place in April 1989 and was reflected in the bank deposit appearing on 19 April 1989.  Although the time of repayment was confirmed by the evidence of Porter, it is worthwhile to observe from a letter written by Porter and tendered at the hearing that the year of repayment was stated as being 1988 and that superimposed over the last 8 is the number 7.

10. The boat, a Haines 19 foot Runabout, was acquired as a wreck in 1982 with the intention of renewing and using for recreational fishing and water skiing.  While it appears that the repair work, including the fitting of a new outboard motor, was undertaken, the craft remained in the applicant's workshop/garage at his suburban home in Melbourne until its disposal in the latter part of the 1990 financial year.  The testimony was that the boat was advertised for sale in the Melbourne Trading Post and that, soon after, the applicant was visited by a Mr K. O'Bryan who was a prospective buyer.  After inspecting the boat and leaving a cash deposit, Mr O'Bryan returned on the same day and after agreeing to purchase the boat for a consideration of $18,000, paid the balance outstanding in cash.  It was stated that $14,000 of the cash received was used by the applicant in the purchase of a Falcon car which, incidentally, is recorded as an application of funds in the 1990 calculations.

11. One of the documents tendered was an invoice raised by Burwood Boating Centre against the applicant.  The issue date was November 1986 and the service rendered was the supply of a 140 horsepower motor for a Haines.

12. The applicant, when questioned as to the changing nature of the explanations provided as to the source of funds, replied that his approach to queries raised in the course of the audit was less than diligent and, it was only after becoming aware of the seriousness of the consequences, that he applied himself to the task of researching earlier transactions in greater detail.
    evidence of porter

13. Mr Porter told the Tribunal that he and the applicant had been friends for some 15 years and that the applicant, being aware of his financial circumstances, offered to lend monies for the purchase of musical instruments and sound equipment.  He stated that the monies were advanced on a needs basis during the 1988 and 1987 years and that the total cash received was $16,000.  Also, he confirmed that, for a time, the applicant had been the manager of the band.

14. The evidence was that the band ceased normal operations in about January 1988 and that its final performance was a benefit concert held in March 1988 to raise funds to assist in the repayment of the $16,000 loan.  The witness stated that the instruments and sound equipment purchased with the borrowings were sold soon after disbandment and that, when those proceeds were added to the profit derived from the benefit concert, there remained a shortfall of $3,000.  It was said that the cash then on hand, that is $13,000, was held by one of the former band members until sometime in 1989 when, having collected the shortfall from the former members, the full amount of $16,000 was handed over to the applicant in a single lump sum payment.  Mr Porter advised the Tribunal  that the applicant had supplied a receipt for the payment which, unfortunately, had been misplaced.
    evidence of o'bryan

15. The witness was able to recall the purchase of a Haines 19 foot Runabout from the applicant sometime around 1990 for a consideration of $18,000.  Mr O'Bryan, who then resided at Sandford in Victoria, was in Melbourne for the express purpose of buying a boat for pleasure when he sighted the applicant's boat for sale notice in the press.  After inspecting the boat at the applicant's home and leaving a cash deposit, Mr O'Bryan visited boat centres to compare quality and price.  Having decided to take the applicant's boat, he returned to the home of the applicant and paid the balance of the asking price in cash.

16. In reply to questions put to him regarding the means of settlement, Mr O'Bryan stated that a dislike of banks had resulted in him adopting a cash payment system.

17. The provisions of sub-section 14ZZK(b) of the Taxation Administration Act 1953 clearly establish that the applicant has the burden of proving that the assessments issued by the Commissioner are excessive. It is the Tribunal's view that the applicant will discharge that burden if, and here the opinion expressed by Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at p361 is paraphrased, the Tribunal feels an actual persuasion of the occurrence or existence of the facts before it.

18. The credibility of the three witnesses is now considered.  Notwithstanding what appeared to be an honest presentation by the applicant, there remains the constant variation of events.  The attempt to explain the changes inasmuch that he did not appreciate the seriousness of the consequences is fatuous and is rejected.  The more likely scenario is that the applicant was prepared to offer whatever explanation that was needed to placate the Commissioner.  Mr Porter was unimpressive.  In the giving of his evidence he lacked conviction.  In cross-examination, he was evasive.  His recital as to the retention of the $13,000 for a period of one year borders on being fanciful and is viewed with considerable doubt.  The Tribunal regards the applicant and Porter as being unreliable witnesses.  The reverse can be said of O'Bryan.  He gave his evidence in a direct and steadfast manner and the Tribunal sees no reason to question the truthfulness of his testimony.

19. The Tribunal turns to consider the two matters in contention – one being the alleged loan repayment by Porter and the other being the purported sale of a boat.  It is appropriate that the Tribunal here acknowledge that a witness whose word cannot be relied upon may yet give evidence which is true in part – see the decision of Walsh J in Krew v FC of T 71 ATC 4213 at p4219. The task of the Tribunal is to decide, on the balance of probabilities, as to what is false and what is not.

20. The Tribunal has considered all of the circumstances of the alleged Porter repayment and is not persuaded that the facts as outlined occurred or existed.  On this issue, the applicant has failed to discharge the burden of proof.

21. With regards to the boat and its sale, the Tribunal commences with a finding that the Haines 19 foot Runabout was in the applicant's possession in November 1986.  Such an outcome is based on the information contained in the invoice rendered to the applicant by the Burwood Boating Centre.  Furthermore, and in reliance of the evidence attested to by O'Bryan, the Tribunal is persuaded, on the balance of probabilities, that the facts pertaining to the sale of the boat did occur and did exist.  Additionally, the Tribunal is satisfied that a portion of the proceeds were used in the purchase of a Ford motor vehicle and that the acquisition was transacted in the 1990 financial year.  For these reasons, the $18,000 was a source of funds in the 1990 year and thus the understatement of $22,983 calculated by the Commissioner should be reduced accordingly.

1. For the reasons set out above, the Tribunal sets aside the decision under review and in substitution therefor decides that the applicant's objection should be allowed to the extent of a reduction in taxable income of $18,000 for the 1990 year. The Tribunal, pursuant to Regulation 19(7) of the Administrative Appeals Tribunal Regulations, certifies that the proceedings have terminated in a manner favourable to the applicant.

   I certify that the 22 preceding paragraphs are a true copy of the reasons for the decision herein of Mr D.J. Trowse (Member)

   Signed:         .....................................................................................
     Personal Assistant

   Date/s of Hearing  15 & 20 September 2000
   Date of Decision  30 November 2000
   Counsel for the Applicant        In person
   Solicitor for the Applicant         -
   Counsel for the Respondent    An officer
   Solicitor for the Respondent    ATO