Elvin and Commissioner of Taxation
[2004] AATA 852
•17 August 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 852
ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2003/202, VT2003/203,
Nº VT2003/204, VT2003/205
TAXATION APPEALS DIVISION
Re: MICHAEL ELVIN AND ANN ELVIN
Applicants
And: COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Mr B.H. Pascoe, Senior Member
Date: 17 August 2004
Place: Melbourne
Decision:The Tribunal varies the decisions under review by allowing the objection against the amended assessments based on income of the applicants for the years ended 30 June 1996 and 30 June 1997 to the extent of reducing the taxable income of each applicant by $18,123 for the year ended 30 June 1996 and $18,000 for the year ended 30 June 1997.
The Tribunal certifies that the proceedings have terminated in a manner favourable to the applicant.
(sgd) B. H. Pascoe
Senior Member
INCOME TAX – amended assessments – audit of taxpayer affairs – excess expenditure statements – excess of expenditure – claimed funds by way of gift from father – onus of proof
Income Tax Assessment Act 1997
Federal Commissioner of Taxation v Munro [1997] ATC 5041
McCormack v Federal Commissioner of Taxation [1979] ATC 4111
Gauci and Masi v Federal Commissioner of Taxation [1975] ATC 4257
McCauley v Federal Commissioner of Taxation [1988] ATC 4605
Federal Commissioner of Taxation v Dalco [1990] ATC 4088
Imperial Bottleshops Pty Ltd and Egerton v Federal Commissioner of Taxation [1991] ATC 4546
McIntosh v Federal Commissioner of Taxation [1979] ATC 4325
Seabright v Federal Commissioner of Taxation [1999] ATC 2011
REASONS FOR DECISION
17 August 2004 Mr B.H. Pascoe, Senior Member
These applications are for review of decisions of the Commissioner of Taxation (the respondent) dated 25 August 2003 to disallow objections lodged by Mr M. Elvin and Mrs A. Elvin (the applicants) against amended assessments of income tax for the years ended 30 June 1996 and 30 June 1997. The assessments had been amended as a result of an audit and an alleged understatement of income in each of the years.
At the hearing the applicants, were represented by Mr R. Harman an accountant. The respondent was represented by Mr C. Sievers of counsel. Evidence was given by Mr Elvin and Ms L. Siaw, an auditor with the respondent. In addition to the documents provided by the respondent pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, the applicant tendered a statement of Mrs A. Elvin, the mother of Mr Elvin, and a statement by Mr Harman. A statement of Ms Siaw was tendered by the respondent.
An audit of the applicants’ affairs was conducted between January and September 1999. The auditor prepared an excess expenditure statement based on bank records and other information obtained. This showed a total excess expenditure of $47,676 for the year ended 30 June 1996 and $54,012 for the year ended 30 June 1997. Amended assessments were issued in November 1999 to include 50 per cent of this excess expenditure in the assessable income of each of the applicants. It was not in dispute that this excess expenditure was attributable, primarily, to a total of $72,493 placed on term deposit in the names of the applicants’ two children and $27,500 in additional home loan repayments. Given the inexact nature of the excess expenditure statements which, of necessity, involve estimates of private living expenditure, it was clear that if the source of these two amounts totalling $99,993 could be demonstrated as not being income, the additional income of $101,690 should be excised.
The applicants lodged objections against amended assessments on 24 December 1999 on the grounds that the excess expenditure was funded by gifts from Mr P. Elvin, the father of Mr Elvin and was not income.
Mr Elvin said that his father retired from managing a power tool business in 1989 and that he acquired the business from his father at an agreed price of $300,000. He said that the amount was paid off in subsequent years by regular transfers from his bank account together with irregular payments of cash as it became available. Mr Elvin said that he had four sisters who became increasingly jealous of the fact that he had acquired the family business and appeared to be favoured by his father. He said that in 1996 his father spoke to him and said that he wished to provide money to be put away for the education of his two sons, then both at a local state primary school. He said that the father would call him to advise that he has some “cash for the boys” and each time would hand him $9,000 in cash. Mr Elvin said that he placed this cash on term deposit in equal amounts in the name of each son. He said that he had used some of the money in reduction of his home mortgage but had not told his father. Mr Elvin said that he had not discussed with his father the source of the cash funds so provided, but understood that the funds were provided in cash so as not to disclose the payments to his sisters.
Unfortunately, Mr Elvin’s father is now deceased after a period of dementia. An undated, signed statement of Mrs A. Elvin, the mother of Mr Elvin was tendered. It was said that due to age and ill health, Mrs Elvin could not attend the hearing in person to affirm the statement and be subject to cross examination. In that statement it was said that Mr Elvin had paid cash funds as part consideration of the purchase of the business. It was usual for the late Mr Elvin Senior to retain cash in the house and that he had discussed a proposal to give money to his son for the future education of the grandchildren. She was unable to say that funds had been provided or, if so, the amount so provided.
Mr Harman provided a statement in which he said that Mr Elvin had advised him of his father’s decision to give funds to the children for their education and sought Mr Harman’s opinion of an appropriate investment. Mr Harman said that it was agreed to place the funds on term deposit in the names of the children. He was not aware of the amounts or frequency of the proposed gifts.
A statement was provided by Ms Siaw, the officer of the respondent who conducted the audit which gave rise to the amended assessments. One significant relevant matter from that evidence was that Mrs Elvin had stated that she had derived substantial winnings from betting on horse races in 1996 and that $10,000 had been withdrawn from her savings account and used as a mortgage repayment. Mrs Elvin did not give evidence at the hearing. Mr Elvin was unable to provide any detail of alleged betting wins and those alleged wins were not relied upon by Mr Harman in his submission.
Under s 14ZZK of the Taxation Administration Act 1953, the applicants bear the onus of proving that the assessments were excessive. It is clear from decisions of the courts in cases such as Federal Commissioner of Taxation v Munro [1997] ATC 5041; McCormack v Federal Commissioner of Taxation [1979] ATC 4111; Gauci and Masi v Federal Commissioner of Taxation [1975] ATC 4257; and McCauley v Federal Commissioner of Taxation [1988] ATC 4605 that, in the words of Lockhart J (at p 4613):
…It is for the taxpayer to prove that the assessment is excessive and the onus lies upon the taxpayer to prove that funds to acquire the assets in question were not derived from undisclosed income…
In Federal Commissioner of Taxation v Dalco [1990] ATC 4088, Brennan J said (at p 4093):
…the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment…
In this case we have the statement of Mr Elvin that the funds in question resulted from cash gifts from his father. This evidence was supported only by the untested statement from his mother that, at best, it was likely that such cash gifts had been made. Unfortunately, at the time of the audit the father was suffering from dementia. He has since died and no confirmation of that alleged source of funds can be provided. It was submitted by Mr Harman that it was not unusual for transactions between family members, particularly in cash, not to be documented. He said that Mr Elvin should not be penalised because the illness and death of his father meant that corroboration could not be obtained from the source of the funds. It was submitted that Mr Elvin had no other possible sources of income as his sole sources of revenue were from salary and a few investments.
The statement by Hill J in Imperial Bottleshops Pty Ltd and Egerton v Federal Commissioner of Taxation [1991] ATC 4546 is very relevant to this case where it was said (at p 4552):
…
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self‑serving statement. That does not necessarily mean that he is not believed. Such a statement, like statements of purpose, or object or state of mind must, however be “tested most closely, and received with greatest caution”. Pascoe v FC of T (1956) 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as “prima facie unacceptable”, cf McCormack v FC of T 79 ATC 4111 at 4121; (1978‑1979) 143 CLR 284 at 302 per Gibbs J.
In that case Hill J formed the view that Mr Egerton was “at least substantially, telling the truth.” There the taxpayer was seeking to have deductions allowed for cash purchases of stock. Here the taxpayer is seeking to have receipts excluded from income, but the principles referred to by Hill J are just as relevant.
While not made clear in the evidence, it is not necessarily true that the applicants had no other source of funds other than salaries and investment income. It is clear that Mr Elvin was accustomed to dealing in cash and it is possible that cash generated in the business operated by the company, of which they were the two directors, could have been a source of funds. Mr Elvin said that a substantial part of the purchase price for the business was paid to his father in cash.
On balance and after observing Mr Elvin in the witness box, I am prepared to accept his evidence as to the source of funds placed on term deposit in the names of his two children. There were some concerns in relation to his evidence. He said initially, that he placed half of each amount given to him by his father on term deposit in the names of each of his two sons. The amounts received from his father were always $9,000. However, the records of the deposits show that on each of the four dates between 6 May 1996 and 4 February 1997, a sum of $9,000 was deposited in each name. This implies that, at least within a short time of each deposit, there must have been two gifts of $9,000. Mr Elvin maintained that he often held the cash until a convenient time for him to arrange the term deposit. Nevertheless, I am prepared to accept the evidence that the funds were provided by his father. To a degree this evidence was supported by the statement of Mr Harman and, although of limited evidentiary value, the statement of Mr Elvin’s mother. While I have referred to deposits of $9,000, the two amounts shown at 6 May 1996 were $9,246.42 each. Given the proximity of that date to the date of the next two deposits on 14 May 1996 it appears more probable than not, that the 6 May 1996 date was the date of a reinvestment of the principal and interest of an earlier deposit.
The question of the source of funds for three amounts totalling $27,500 in reduction of the home loan is more difficult. The three amounts were:
21 February 1996 $9,000
3 April 1996 $9,5006 May 1996 $9,000
In his evidence Mr Elvin said that he had used some of the $9,000 cash gifts from his father to reduce the mortgage. Given the amounts and the dates, this could be plausible. However, during the audit, the only source of funds put forward by the applicants for these repayments was betting wins, particularly in relation to a horse owned by friends. In a statutory declaration of 6 July 1999, Mrs A. Elvin said that she had taken $10,000 from her savings account and deposited it to the credit of the home loan. However, while there was a withdrawal of $9,000 from her savings account, this was on 27 May 1996, some 21 days after the third additional payment into the home loan account. It was only in the objection lodged against the amended assessments on 24 December 1999 that the repayments of the home loan were attributed solely to the gifts from Mr Elvin’s father. At the hearing, the earlier alleged source of funds from betting wins was not pursued. Given the evidence of the funds from Mr Elvin’s father being specifically provided for the education of his grandchildren, it is not easy to accept that Mr Elvin diverted some 27.5 per cent of the total amount in a reduction of the home loan without reference to his father. When this is coupled with the initial failure to attribute the home loan repayments to the parental gifts and the reference to betting wins as the source, it cannot be said that the applicants have discharged the required onus of proof in relation to these funds.
It may well be that the home loan repayments did come from gifts, perhaps supplemented by some savings. It may be also, that there was no income omitted from the applicants’ income tax returns. Certainly, an audit of their trading company at the same time showed no understatements of income or a likely source of personal income. However, it is no part of the respondent’s responsibility to positively identify an undisclosed source of income. It is sufficient to show that funds were available and the taxpayers cannot satisfy, on the balance of probabilities, the onus of proving that the source of the funds was not income.
It follows from the foregoing that the amounts of $36,246 for the year ended 30 June 1996 and $36,000 for the year ended 30 June 1997 are not the applicants’ assessable income. While it was noted earlier that a total amount over the two years of $99,993 was argued as being from a non income source and this total differs by only $1,697 from the total alleged shortfall, the allocation of the sum of the alleged gifts over the two years does not reconcile with the alleged shortfall in each year. Notwithstanding that it might be said that $27,500 in the figure which should remain in assessable income, it is not possible to deal with this on the basis of including all or part of it in either year of income. The amended assessments included additional tax by way of penalty for understating taxable income equal to 25 per cent of the tax shortfall. There was no objection to this penalty or any submission made in relation to it. Consequently, it is appropriate that this level of penalty remains on the reduced shortfall. The objection decision should be varied by allowing the objections to the extent of reducing each applicant’s taxable income by $18,123 in the year ended 30 June 1996 and $18,000 in the year ended 30 June 1997.
I certify that the sixteen [16] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member
(sgd) Olympia Sarrinikolaou
Clerk
Date of Hearing: 28 July 2004
Date of Decision: 17 August 2004
Advocate for the applicant: Mr R. Harmon
Solicitor for the applicant: Nil — R. Harmon and Associates, AccountantsCounsel for the respondent: Mr C. Sievers
Solicitor for the respondent: Australian Taxation Office Legal Practice
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