Freris, N. v Commissioner of Taxation Freris, D. v Commissioner of Taxation

[1989] FCA 371

LIMITED DISTRIBUTION

CATCHWORDS

INCOME TAX -Whether deductions claimed by company adequately substantiated - whether such sums constituted distributlons by company to taxpayer - S. 108 Income Tax Assessment Act 1936 - onus on taxpayer to show amended assessments to be incorrect.

Income Tax Assessment Act 1936: ss. 6, 44, 108.

NICK FRERIS v COMMISSIONER OF TAXATION

G797-9 of 1988

DORIS FRERIS v -	COMMISSIONER OF TAXATION
G800-2 of 1988
LOCKHART J. SYDNEY 7 JUNE 1989

LIMITED DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA	)
1
NEW SOUTH WALES DISTRICT REGISTRY )	NO. G797 of 1988

) G798 of 1988

GENERAL DIVISION ) G799 of 1988

BETWEEN :  NICK FRERIS

Applicant

AND :  COMMISSIONER OF TAXATION

Respondent

IN THE FEDERAL COURT OF AUSTRALIA	) )
NEW SOUTH WALES DISTRICT REGISTRY	NO. G800 of 1988

1          G801 of 1988

GENERAL DIVISION G802 of 1988

BETWEEN:  DORIS FRERIS

Applicant

AND :  COMMISSIONER OF TAXATION

Respondent

7 JUNE 1989	REASONS FOR JUDGMENT
LOCKHART J.

These are slx appeals being heard together today by consent against assessments to income tax. The two appellants are Nick Freris and Doris Freris and they are husband and wife. They were the sole shareholders and directors of Zophim Pty. Ltd. ("Zophlm") during the relevant years of income. Zophlm 1s now in liquidation. There are three relevant years of income, namely, the years ended 30 June 1980, 1981, 1982.

Zophlm carrled on a plasterlng business through a trade name, F & N Plasterers. Zophim submitted returns of Income for the three years in questlon and the Commissloner issued assessments based on the returns. He subsequently issued amended assessments which were the sublect of other appeals that were disposed of yesterday.

The Commissioner also issued assessments followed by amended assessments with respect to Mr. and Mrs. Frerls. The amended assessments followed extensive investigation into the affairs of zophlm and Mr. and Mrs. Freris by the Commissioner and, the adjustments to their respective taxable incomes were made on the basis that certain deductions claimed on its behalf were not in fact Incurred by it in the course of

carrying on its buslness. The Commrssloner took the vlew	that the claims for deductlons were not substantiated.
The items in controversy relate malnly to claims by Zophim for deductlons in respect of moneys alleged to have been paid by it for materials and to sub-rontractors in the course of its carrylng on its plasterlng buslness.
The disallowance by the Commissioner of the deductions claimed was the subject of appeals by Zophlm but the liquidator did not seek to prosecute those appeals and they were dismissed yesterday.
So far as Mr. and Mrs. Freris are concerned, the Commissioner raised hls amended assessments in respect of them on the basls that the deductions disallowed by the commlssloner in zophimwere represented by distributions made by way of advances, loans or payments to Mr. and Mrs. Freris or for therr individual benefrt. The Commlssloner relled upon S. 108 in the form in which it then stood of the Income Tax Assessment Act 1936 ("the Act"). The Commissioner took the view that the value of those advances, loans or payments represented distrrbutions of income and were accordingly deemed to be dlvldends paid by Zophim to Mr. and Mrs. FreriS in the relevant years of Income pursuant to S. 108.
The amended assessments relied upon ss. 6, 44 and 108 of the Act wlth each of Mr. and Mrs. Frerls being assessed one half of the amount of the distributions or payments.
It is necessary to say something about the history of the appeals in thls Court. In February this year these appeals were specially flxed for hearlng to commence yesterday. Prlor to the flxlng of a hearlng date there had been a rather long hlstory of directions hearings. Dlrectlons had not been complled wlth especially for the filing of statements of witnesses by Mr. and Mrs. Freris to whom I shall sometimes refer to as the applicants.
When the matter was called on for hearlng yesterday, Mr. Freris was in court with his accountant, Mr. Comino, who has been his accountant at all tlmes relevant to thls case and he has also been the accountant for Zophim and Mrs. Frerls. Mr. Comino sought leave to, in effect, represent Mr. and Mrs. Freris and I allowed this course to be adopted especially since two sollcltors who had, according to what I was told by Mr. Comlno, been retalned in the matter previously subsequently declined to act further.
Mr. Comino inltlally sought an adjournment of the hearlng for about one month which I declined for a number of reasons including the curlal history of the matter especially the long history of dlrectlons and non-compliance therewith and because I held the view, in the llght of what was told to me yesterday by Mr. Comino, that no good purpose would be served in anyone's interests including those of Mr. and Mrs. Freris if the matter were to be adjourned for any lengthy period such as a month.
I then stood the matter down until 2.15 yesterday so that Mr. Comlno and Mr. Freris could dlscuss the matter and look at any necessary documents. When the matter resumed at
2.15 Mr. Comino proceeded to ably present the applicant's
cases.
In my vlew, no preludlce was sustained by the applicants by the matter proceeding as it did yesterday and today. The relevant documents of Zophlm were in Court at all materlal times, because they had been subpoenaed by the respondent from the liquidator. Mr. Frerls has had access to them himself and through Mr. Comlno rn addition, of course, to their being intrally in the possession of Mr. Freris or Mr. Comino as the accountant of Mr. and Mrs. Freris and Zophim prior to the llquldatlon of Zophlm.
Mr. Freris gave evidence, as dld Mr. Comino. Mrs. Freris did not glve evidence but thls is explained to my satisfaction by the evldence of Mr. Freris that she is unwell and unable to attend the Court, whlch I accept.
The applicants' case is essentially that Zophim carrled on the business of plasterers through its trade name of F & N
Plasterers. Sometimes its plastering work appears to have been done by itself as a sub-contractor and other times being farmed out to others who became sub-contractors from Zophim. Zophim purchased materials in the maln from CSR Limited or its relevant subsidiaries who are not clearly defined in the
evidence but nothing turns on thls.
The picture I have formed of the buslness conducted by Zophim is that Mr. Frerls was the person in control of its affairs. It seems that Mrs. Frerls dld play some though not a major role in its buslness. Mr. Frecls drew llttle, if any, dlstlnctlon between himself and hls company, Zophim. zophim had its own banking account as dld Mr. Freris but busrness expenses of Zophim and prlvate expenses of Mr. and Mrs. Freris were paid by cheque or cash from whichever account was conveniently available.
The company's account was used for business and prlvate purposes as was Mr. Frerls's own account. The two were inextricably intermingled. As Mr. Frerls frankly put it in evidence, the papers and records of the company were "in a mess".
In the result, however, a most imprecise picture emerges. Very few buslness records were tendered in evidence. The tendered records consisted of a limited number of cheque butts, one lnvoice tendered by the respondent, a green book kept by Mr. Freris recording, amongst other things, details of payments alleged to have been made by Zophim for materials and to sub-contractors and employees of Zophim in relation to Zophlm's business during the period 10 August 1981 to 29 November 1983 though there are some entrles which appear to relate to a later time. Also in evidence is a book to which llttle attention has been paid in the evidence, and upon which no reliance has been expressly placed by Mr. Frerls, containing details of Zophlm's expense
of payments before 10 August 1981.
There IS, in short, a paucity of records upon whlch the applicants can rely to establish thelr case. The case made by the applicants with the assistance of Mr. Comlno is in brlef that for the year of income ended 30 June 1982 the green book speaks for ltself and that for the two preceding years of lncome wlth whlch these appeals are concerned, one can take the flgures included in the lncome tax returns of
Zophim Including the amended returns and the balance sheets and proflt and loss accounts included in them, relate them to the flgures for later years of income, 1982, lncluded in the green book and by a process of extrapolatlon arrlve at the actual expendlture of Zophim for materials and payments to sub-contractors.
For the years ended 30 June 1980 and 1981 to the extent that there may be an overstatement of the cost of materials there has been, so it was submitted by M r . Comino, an under statement of payments to sub-contractors by approxlmately the same amount so that by averaging, the total of the relevant deductions 1s much the same.
There are substantial difficulties in the path of the applicants succeeding in the appeals. I have already said the documentary evidence in support of their case is very slight. Also to the extent that attempt was made in the evidence to relate the entries in the green book to cheque
bank statements or invoices or cheque butts, other than for a butts it tended to establish inconsistency between them. No limited period, or any other probative documents were
tendered In support of the case for the applicants though this 1s explained partly by the passage of time slnce the conclusion of the years of income and partly because, as is apparent from letters whlch are in evidence from the CSR group of companies, documents whlch may have been televant have since been destroyed due to the passage of time and the policy of the CSR group not to keep documents beyond that particular time.
Mr. Frerls dld not give evldence about any particular payments in support of his case though thls is not surprlslng In view of the passage of years and the ordinary frailty of human recollection.
Mr. Comlno gave evidence as to the role played by hlm and his firm of chartered accountants in preparing Income tax returns for Zophim and Mr. and Mrs. Freris but it can be summed up by saying that he relied basically on documents given to him by Mr. Frerls and information given to hlm verbally by Mr. and Mrs. Frerls. He made it clear that he did not audit the books or records of Zophim. Hence there is an absence of oral and documentary evidence to support in any precise manner the case of the applicants.
The evldence is of the most general klnd on whlch, in my vlew, no safe reliance can be placed. I really have very little ldea of what went on in the affairs of Zophim durlng
about rt except that I am satlsfled there is no cogent the years of income in question and prefer to say nothing
evidence before the Court upon which rellance could safely be placed to conclude the amounts clalmed by Zophlm as
deductions in respect of payments for materials or
sub-contractors have been substantiated.
There are too many other possibilities about what occurred or what could have occurred, whlch are equally open on the evidence and inconsistent with the case for the applicants. I should add, in this connection, that the respondent led certain evidence both oral and documentary which I accept and which establishes to my satisfaction that amongst other things, the green book and the other exercise book to which I have referred cannot safely be relied on.
The oral evidence was that of Mr. Leon volovelsky, who had previously done some platering work for zophim, and Hrs. Cathy Novakovic, investigating officer of the respondent. I accept their evidence.

The relevant principles of law are clear. It is for the

applicants as taxpayers to show what is wrong wlth the amended assessments and what correction should be made to the amended assessments. See Trautwein v Federal Commissloner of Taxation (1936) 56 CLR 63 per Latham CJ at 87-89.

As Mr. Freris is in Court I should make clear to him

something which lawyers, of course, would understand that

oblections lodged by the applicants. The Court's task is not	these are appeals from the respondent's disallowance of
to look at the whole matter afresh as if it had the same powers of the Commissioner and the same discretions to be exercised as he has. It is a court of law which is bound by established rules and practices.
It has not been established that the Commissioner took into account irrelevant considerations or failed to take into account relevant consideratlons or otherwise failed to properly discharge his statutory function: Avon Downs Pty. Limited v Federal Commissioner of Taxatlon (1949) 78 CLR 353 at 360-361; Commissioner of Taxation v Brlan Hatch Timber Co. (Sales) Pty. Limited (1972) 128 CLR 28 at 45, 51. There was ample material on which the respondent could properly rely and did rely to form the opinion that the amounts in questlon here were withln S. 108 in the form in whrch it then stood in the Act. Sectlon 108 must, of course, be read together with S. 44 of the Act in order to operate and I am satisfied on the evidence that the distributions that have been deemed to be made had as their source the proflts of Zophlm. See in thls regard MacFarlane v Commissioner of Taxation 13 FCR 356.
In all the circumstances I would dismiss the appeals and order the applicants to pay the costs of the respondent. The exhibits may be handed out unless appeals are lodged withln 21 days of today.

nlne ( 9 ) pages are a true copy of the	I certify that thls and the preceding
reasons for judgment herein of the Honourable Mr. Justice Lockhart.
~ssociate Date: 7 June 1989

Mr. N.G. Freris in person asslsted

by Mr. S. Comino (Accountant)

Counsel for Respondent:	Mr. S. McMillan
Solicitors for Respondent:	Australian Government
Solicitor
Date of Hearing:	7 June 1989
Date of Judgment:	7 June 1989