Graham Daniels and Commissioner of Taxation
[2012] AATA 792
•14 November 2012
[2012] AATA 792
Division TAXATION APPEALS DIVISION File Number
2011/5232
Re
Graham Daniels
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member R W Dunne
Date 14 November 2012 Place Adelaide The decision under review is affirmed.
..........................[Sgd]..............................................
Senior Member R W Dunne
CATCHWORDS
TAXATION – applicant failed to disclose overseas income – tax audit by respondent – capital gains tax – disposal of shares in company in Panama – assessment of net capital gain – administrative penalty – recklessness – applicant requested issue of summonses of respondent's officers to give evidence – issue of summonses refused – failure of applicant to attend hearing – review proceedings conducted in applicant’s absence – objection decision under review affirmed.
LEGISLATION
Income Tax Assessment Act 1936 (Cth) ss 166, 167
Income Tax Assessment Act 1997 (Cth) ss 100-20, 102-5, 104-10, 115-100
Taxation Administration Act 1953 (Cth) Schedule 1 ss 284-75, 284-80, 284-90, 298-20
CASES
Mika Engineering Holdings Pty Ltd and Commissioner of Taxation (2006) 92 ALD 688
FC of T v Dalco 90 ATC 4088
Eldridge v FC of T 90 ATC 4907
Gauci and Others v FC of T 75 ATC 4257
McCauley v FC of T 88 ATC 4605
Trautwein v FC of T (1936) 56 CLR 63
George v FCT (1952) 86 CLR 183, 5 AITR 360REASONS FOR DECISION
Senior Member R W Dunne
14 November 2012
INTRODUCTION
The applicant in this matter is Mr Graham Daniels. On 19 January 2009, Mr Daniels lodged his income tax return for the 2006/2007 tax year and an assessment issued on 4 February 2009. On 24 June 2008, he had been notified by the respondent of a tax audit of his tax affairs and associated entities. On 13 September 2010, he was notified of the outcome of the audit where the respondent had amended his assessable (taxable) income to include an amount of $129,131 representing the net capital gain made on the sale of shares held in a company incorporated in Panama called Anglo Far-East Bullion Corp (“AFEB”). A notice of amended assessment for the 2006/2007 tax year subsequently issued to include the net capital gain. A notice of assessment of shortfall penalty of 75% was also issued as the respondent had determined that the tax shortfall was caused by an intentional disregard of a taxation law by the applicant or his agent. On 26 November 2010, Mr Daniels objected against the amended assessment and the shortfall penalty. The respondent decided to allow the objection in part by reducing the shortfall penalty to 50 %, but disallowed the objection to the extent that it related to the inclusion of the net capital gain. Mr Daniels applied to this Tribunal for review of the respondent’s objection decision.
PRELIMINARY ISSUE
A preliminary issue had arisen in relation to the applicant’s application for review. Prior to the hearing, Mr Daniels had sought the issue of summonses requiring officers of the respondent to give evidence at the hearing. Having considered the question of the issue of the summonses, I was satisfied that the officers were undertaking the processes of the respondent, relevantly, the processes relating to the audit decision and the objection decision. The processes included the conduct of an examination of the applicant under s 264 of the Income Tax Assessment Act 1936 (“ITAA 1936”), and of documents that were authored by the officers who were involved in or were part of the administration of the processes. The reasons that Mr Daniels seemed to give for the issue of the summonses were not, in my view, for a legitimate forensic purpose. He was unable to demonstrate the relevance of the summonses to his case before the Tribunal. On the material before me, the issue of the summonses in these circumstances was inappropriate: see Re Mika Engineering Holdings Pty Ltd and Commissioner of Taxation (2006) 91 ALD 688. Mr Daniels then requested a directions hearing on the question of the issue of the summonses. As my view in relation to this question had not changed, I indicated that the holding of a directions hearing would not alter the position and I declined the applicant’s request.
The applicant then filed with the Tribunal a “Common Law Notice of Breach of Procedural Fairness”. I understand the Notice was also served on the respondent. Accompanying the Notice was a request that the hearing of the matter be vacated until the issue of the summonses had been determined. Mr Daniels was advised that the Tribunal was not prepared to vacate the hearing dates, but may be disposed to deal with the question of the refusal to issue the summonses as a preliminary matter on the first hearing day. If the Tribunal was to find in the applicant’s favour, it might be that the hearing could be adjourned or vacated to accommodate the calling of the respondent’s officers as witnesses. Subsequently, the applicant advised that it would be inappropriate for the Tribunal to consider the question of the summonses as a preliminary issue and that the hearing on 21‑23 August 2012 should be vacated. He was advised by the Tribunal’s Deputy District Registrar that the hearing would proceed as listed and the question of the refusal to issue the summonses would be considered as a preliminary matter on the first day.
In the end result, Mr Daniels did not attend the hearing listed for 21-23 August 2012. In these circumstances, there were three options available to the Tribunal, namely:
(a)To vacate the hearing to allow the applicant to put submissions in relation to the summons issue at a separate directions hearing, then proceed to another substantive hearing day.
(b)In view of the applicant’s failure to appear, to dismiss his application for review under s 42A(5) of the Administrative Appeals Tribunal Act 1975 (“AAT Act”). This could then give rise to a reinstatement application by the applicant under s 42A(8) of the AAT Act. Mr Cole indicated that the respondent would oppose any such application, which would give rise to further proceedings.
(c)To proceed with the hearing of the matter in the applicant’s absence on the first hearing day. Mr Cole submitted that the applicant had been given the opportunity to have the summons issue ventilated as a preliminary matter at the beginning of the hearing on 21 August 2012, but had chosen not to attend. If the Tribunal decided to have the respondent’s officers summonsed to give evidence, this could then be dealt with at a subsequent hearing.
Having considered the three options and having regard to submissions from Mr Cole for the respondent, I decided to adopt the third option to proceed to a hearing on 21 August 2012 in the applicant’s absence. This would take place on the information available in the T documents and the other documents (including the applicant’s statement of Facts, Issues and Contentions) in the Tribunal’s file.
THE HEARING
At the hearing, the respondent was represented by Mr S Cole (of counsel). I received into evidence the T documents lodged pursuant to section 37 of the AAT Act (Exhibit R2, Exhibit R3 and Exhibit R5), together with the following exhibits:
·the applicant’s Statement of Facts, Issues and Contentions and related documents (Exhibit R 1); and
·a compact disc containing audio of evidence given before the Australian Crime Commission (“Compact Disc”) (Exhibit R4). The respondent tendered the Compact Disc which was accepted into evidence on the basis that the audio of evidence was relevant to the hearing.
Pursuant to authorisation given by the Australian Crime Commission as to the publication of information under the Australian Crime Commission Act 2002, the Tribunal made a confidentiality order pursuant to s 35(2) of the AAT Act in relation to the audio contained in the Compact Disc. Having perused the transcript of evidence, the Tribunal made a further order pursuant to s 35(2) of the AAT Act to ensure compliance with the Australian Crime Commission authorisation.
ISSUES FOR THE TRIBUNAL
The following are the issues before me:
(a)Was the respondent correct in determining that the applicant was assessable on a net capital gain of $129,131 made on the disposal of shares held in AFEB during the 2006/2007 tax year?
(b)Was the amount of $129,131 included by the respondent in the assessable income of the applicant pursuant to s 167 of the ITAA 1936 in the 2006/2007 tax year excessive?
(c)Was the respondent correct in imposing an administrative penalty under s 284‑75 of Schedule 1 to the Taxation Administration Act 1953 (“TAA”) based on a base penalty amount of 50 per cent of the tax shortfall in the 2006/2007 tax year?
LEGISLATION
If a taxpayer fails to lodge a taxation return or the respondent is not satisfied with the return that has been lodged, the respondent can make an assessment (or make an amended assessment) of the taxable income on which he considers income tax ought to be levied: s 167 of the ITAA 1936. Such an assessment is called a “default assessment”. “Section 167 must be read with s 166 of the Act for the two sections together prescribe the scope of the duty of the Commissioner to make assessments and confer upon him the power to perform that duty”: FC of T v Dalco 90 ATC 4088 at 4089 per Brennan J.
A comprehensive capital gains tax (“CGT”) regime generally applies to CGT events that happen to CGT assets acquired by a taxpayer after 19 September 1985. A taxpayer will make a capital gain only if a CGT event happens. CGT event A1 occurs where the taxpayer owns shares and sells or disposes of them: see s 100-20(1) and (2) of the Income Tax Assessment Act 1997 (“ITAA 1997”). For most CGT events, a capital gain arises if a taxpayer receives amounts from the CGT event which exceed the taxpayer’s costs associated with that event. Section 102-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes any net capital gains made during the income year.
A person disposes of a CGT asset if a change of ownership occurs from the person to another entity, whether because of some act or event or by operation of law. Under s 104‑10(3)(a) of the ITAA 1997, the timing of the CGT event will be when the contract to dispose of the asset is entered into by the taxpayer. Under s 104-10(3)(b), if there is no contract, the time of disposal will be when the change of ownership occurs. A taxpayer is entitled to a discount on any capital gain made if the taxpayer satisfies the requirements outlined in s 115-5 of the ITAA 1997. Section 115-10 and s 115-100 provide that the discount percentage is 50 per cent if the capital gain is made by an individual.
Subdivision 284-B of Schedule 1 to the TAA deals with the imposition of administrative penalties. Under subdivision 284-B, a taxpayer is liable to an administrative penalty if the taxpayer makes a false or misleading statement about a tax-related matter. Base penalty amounts are imposed and are generally calculated at rates commensurate with the taxpayer’s behaviour resulting in the tax shortfall or “shortfall amount”. The shortfall amount is the difference between the amount of tax calculated on the basis of the taxpayer’s statement and the amount of tax according to law. The amount of the administrative penalty is determined by reference to a “base penalty amount”. Base penalty amounts apply at the following rates:
(a)25 per cent of the tax shortfall where it was a result of a failure by a taxpayer or their agent to take reasonable care to comply with a taxation law;
(b)50 per cent of the tax shortfall where it was a result of recklessness by a taxpayer or their agent as to the operation of a taxation law; and
(c)75 per cent of the tax shortfall where it was the result of intentional disregard of a taxation law by the taxpayer or their agent.
BACKGROUND FACTS
In this section of my reasons, I will set out the facts that I have found, based upon the material I have before me, but in the absence of Mr Daniels’ presence at the hearing.
The applicant’s amended assessment for the 2006/2007 tax year included a net capital gain resulting from the tax audit initiated by the respondent. In the respondent’s reasons for decision relating to the 2006/2007 amended assessment, the respondent determined that the applicant was assessable on the net capital gain made on the sale of shares held in AFEB. The amount of the capital gain was based on evidence obtained by the respondent which indicated that the applicant had received USD$200,000 from the disposal of shares in AFEB. The net capital gain was calculated, based on the following:
USD$ Conversion AUD$ Capital Proceeds 200,000 0.7552[1] 264,831 Cost Base 5,000 0.7614[2] 6,567 Capital Gain 195,000 258,263 Application of 50% Discount (129,131) Net Capital Gain 129,131 [1] Applicable exchange rate for February 2004.
[2] Applicable exchange rate for July 2006.
In his Affidavit dated 14 January 2011, the applicant makes the following statements:
“…
3.It has always been my view that I was not certain if I actually held any shares in AFBC [‘Anglo Far East Bullion Corp.’], which is consistent with my testimony under 264 examination at page 85, line 1 and line 14.
4.If I was ever the owner of the said shares in AFBC then I must surely still be the owner of such shares as I have no recollection of ever signing the blank share transfer dated 22nd April 2008, which did not seem to cause concern to Mr. Judge (copy provided by ATO in RFDP at 1:54) (document 5) even though such was requested by Mr. Philip Judge, Director of AFBC (copy provided by ATO in RFDP at 1:54) (document 6).
…
6.I can recall refusing to sign minutes purporting to relate to my relinquishing all involvement in AFBC, as the said minutes (copy provided by ATO in RFDP at 1:32) (document 7) were dated January 12th 2007 and I had officially relinquished all involvement in AFBC 5 months earlier on 7th July 2006 (document 8)
…
11.In December 2010 in order to add clarity to my position in relation to my 2007 Amended Assessments, I engaged lawyers in Panama to assist in the disclosure and translation into English of legal documents in relation to AFBC, and was to discover that the share holding to the said company was by what is called “Bearer Shares” (document 9)
…
13.The translated Minutes of Meeting of AFBC dated 1st November 2006 (document 10), confirm that ALL shares of AFBC were held by Mr. Philip Judge, and Miss Marquelda Teresa Isaza Ortega.
…
15.Additionally I have never sold any AFBC shares and it would now appear in the light of this new evidence that I could not have sold AFBC shares even if I wanted to, as not being the bearer of the said shares, I had nothing to sell.
…
19.It has always been my declared position that the approximate USD100,000 value I received from AFBC, and the approximate USD100,000 value my father Peter Daniels received from AFBC, had nothing to do with any share sale but was a result of a settlement for damages between AFBC and Graham Daniels, and AFBC and my father Peter Daniels, which is consistent with my testimony in the 264 interview at page 90.
20.I have further testified under 264 examination (at page 149 line 16 to page 152 line 46), that Peter Daniels and myself had received approximately USD100,000 value each as settlement from AFBC and that the payment was compensation for damages, to the professional reputation and occupation of Peter Daniels and Graham Daniels.”
In his affidavit dated 14 January 2011, the applicant’s father (Mr Peter J Daniels) makes the following statements:
“…
11.In 1998, my son Graham began a gold and silver business called Australia Fair.
12.Graham asked if I would be interested in getting involved as Chairman of the Board of Elders, which served as an over-site to the Directors offering moral guidance to the venture.
…
15.In time, my son invited a friend, Mr. Philip Judge, to the Board of Australia Fair, and he accepted.
16.Within a couple of years, Australia Fair went international and eventually changed name to The Anglo Far East Bullion Company (AFBC) with office in Panama City which was the address of choice of Philip and Naomi Judge who live there.
…
19.Mr. Philip Judge and his family live in Panama due to his wife’s health and run the operation from there.
…
21.After some time it became evident that AFBC was making decisions without the knowledge or consent of my son Graham who I understand was a director of AFBC.
…
23.I also informed Graham that I felt I should publicly distance myself from any involvement in AFBC as there was an implied contract that Graham (who I understood to be a Director and shareholder) and to a lesser degree I, (not being a Director or shareholder) would be kept informed in the decision making of AFBC as it had a direct relationship to our reputation (both private and professional), which in turn had a direct relationship to our occupation and income earning potential both current and future.
…
28.Knowing that the ‘Daniels’ started AFBC (known originally as Australia Fair), and that many had got involved due to our presence, I was aware that our ‘resignations’ could create uncertainty in the minds of those involved in AFBC and would further damage our reputations and effect future occupation and earning capacity, as many would think twice before getting involved with us again in any future venture.
29.I did relinquish all involvement in 2005, and Graham likewise the following year.
30.Graham had negotiated a modest settlement for damages in relation to breach of contract and damage to our reputation and future earning capacity due to the potential negative view of those who knew (or know of) us within the Christian Church.
…
32.I was surprised that Graham had reached agreement with Mr. Judge for a settlement of USD100,000 each, but was not optimistic that it would be forthcoming.
…
36.Graham explained that there was some gold and silver still in Australia from when the Australia Fair Depository Trust (AFDT) operated in Australia through Brinks Security Storage, as when AFBC ceased using the Brinks vault in Australia, the remaining gold and silver taken from the Brinks storage was kept in a steel box. (Australia Fair was a previous name used by AFBC bullion storage)
37.In due course when Philip visited Australia, settlement was finalized and both Graham and I separately took gold and silver to the approximate value of our outstanding damages/compensation payments.
… ”
In relation to the shares in AFEB, which the respondent contends were sold by the applicant, a “Certificate of Shares” on page 30 of Exhibit R5 relevantly reads as follows:
“This is the [sic] Certify that GRAHAM K DANIELS of STRATHALBYN, AUSTRALIA is the proprietor of Shares, numbered ONE to FIFTY inclusive, subject to the rules and regulations of the said Corporation, and further, the said Corporation has issued the said Shares according to the charter and regulations of the Corporation.
…
Dated this the 2ND day of FEBRUARY 2004 AD”
On page 31 of Exhibit R5, the following unsigned share transfer form relevantly appears:
“SHARE TRANSFER
I, Graham Daniels, of Strathalbyn, South Australia, hereby fully relinquish all my beneficial ownership and interest in the shares in The Anglo-Far-East Bullion Corp. Limited, incorporated in the Republic of Panama;
Whereas, the said shares numbered one (1) to fifty (50) as assigned to me on 2nd Day of February 2004 on The Anglo Far-East Bullion Corp issued share certificate 000001 (see attached) and transfer beneficial ownership and interest of the said shares to;
Signed : ______________ (transferee)
Name : _______________ of Address : ___________________________________
Date : ________________
Signed : ______________ (transferor)
Name : Graham Daniels of Address : Strathalbyn, South Australia
Date : ________________
Company Secretary
Signed : ______________
Name : Maria Lurdes Moncada of Address : Panama City, Panama
Date : April 22nd, AD2008”
In his statement of facts, issues and contentions, the applicant refers to the purported AFEB share sale. In relation to the share sale, he makes the following comments:
“25.It was always the Applicants view that he was never certain he ever had shares in Anglo Far East Bullion Corp. (AFBC). This is consistent with the evidence of the Applicants 264 examination, which was the first time this issue was raised by the Respondent. Subsequently a search of the companies office in Panama by the Applicant, confirmed that the shareholding of AFBC was by ‘bearer shares’ which the Applicant was never in possession of.
26.The first the Applicant knew that he had supposedly received $200,000 from the sale of shares in AFBC was when the proposition was put to the Applicant in the ATO Position Paper of 13/09/2010. This proposition is simply a fanciful invention by the ATO and has no basis in truth. It would appear that the Respondent came to this position based on an internal, unofficial memo apparently from the AFBC office, that included financial details of AFBC combined with financial details of the Anglo Energy Fund, which is a gas and oil project run by a company other than AFBC. It is the Applicants view that the data the Respondent has based their argument on is unreliable. It would be considered negligent accounting practice to base calculations of a net capital gain on such data.
27.The Applicant did receive a settlement payment from AFBC and/or its officer of approx. $100,000 as did his father Peter Daniels. This is supported by affidavit which is before the Respondent and the AAT. The share sale theory of the Respondent does not fit nor explain why Peter Daniels also received approx. $100,000 as a settlement from AFBC.
28.It should be noted that the Respondent had no idea that the Applicant had ever received the said payment from AFBC let alone what it was for, until the Applicant voluntarily disclosed this information at his 264 examination on November 26th 2009, at page 90 line 20: ‘That was $200,000 damages to my father and my reputation.’ This was the first time the matter was raised.”
On page 150 of Exhibit R2, the following minutes of meeting of directors of AFEB appear:
“WHERE AS: A MEETING of directors of The Anglo Far-East Bullion Company Limited (“the company”) was held this day, 20 June 2006 January 12th 2007, at level 23, Monticello, Marbella, Panama City, Panama
PRESENT GRAHAM K DANIELS: President/Director
(by phone)
PHILIP JUDGE: Director
APOLOGIES ROBB THOMPSON: Director
BRYCE ANDERSON: Director
CHANGE OF DIRECTORS:
Graham Daniels tabled that he would resign from Anglo Far-East Bullion company effective from 7 July 2006, and would send a letter confirming this.
It was further tabled that it was likely that Robb Thompson and Bryce Anderson may also resign
RESOLVED THAT: The resignation of Graham Daniels, Robb Thompson and Bryce Anderson be accepted. resign as directors of the company.
and further;
RESOLVED THAT: the outgoing directors should be replaced immediately and Philip Judge should nominate new directors to the board of the company.
Being no further business, the meeting was called to a close.
Signed _________________ Signed ________________
Graham Daniels Philip Judge
President/Director Director”
On page 309 of Exhibit R2 is an extract from the transcript of the s 264 examination of the applicant by the respondent’s officers on 26 November 2009. Present at the examination apart from the applicant were officers of the respondent (including Mr Barrington) and Mr J Cummins (representing the applicant). The extract reads as follows:
“MR BARRINGTON: Can we get to the 200,000.
MR DANIELS: I’m coming to that. And this is how you’ll see it. I’m not evading that. So at that point – I mean, we had an agreement. An agreement that, as directors, we would be fully informed of what was going on. We had an agreement that my reputation and dad [sic] reputation would be protected. That was falling apart big time. I came back from that Panama meeting and, within a couple of weeks, I rang Phil and said, ‘Mate, the time has come. I’ve got to part the ball table.’ I said, ‘My reputation is hurt. Dad [sic] reputation is hurt. We need some compensation for the damages you’ve caused to our reputation.’ And he blew bubbles and ummed and ahhed for a while. And he said, ‘Well, what do you want?’ I said, ‘Phil, we are going to need at least 100,000 each as compensation for the damages to our reputation and the breach of contract.’ He agreed.
MR BARRINGTON: Okay.
MR DANIELS: Now, I think he agreed because if he didn’t agree, the ramifications of that echoing may have affected his business. So I think to some degree, he was trapped, but nonetheless he agreed. And that is how the 200,000 was determined.
MR BARRINGTON: And what did you think was the appropriate tax treatment of that payment?
MR DANIELS: I’d spoken to John beforehand. We’d had lunch at Siam, and it was a tax-free damages claim.”
In a letter sent by the applicant to one of the respondent’s officers dated 7 November 2011 (Exhibit R3, T46 at page 550) and relating to the purported AFEB share sale, the applicant made the following comments:
“The history of the 200k in this dispute is relevant, and I thought I had thoroughly explained that history to you, and that you had understood it. In short the (approx.) USD100,000 my father and I each received was compensation for damage to our respective reputation upon departure from the Anglo business in 2006, which I (with Dads help) founded in 1998. This fact is consistent with my 264 examination of 26/11/09 at page 151, line 13 through to page 152 line 26. This point was well understood by Mr. Barrington of the ATO who interviewed me at my 264 examination, where at line 43 of page 151 in referring to the ‘payment’ I received from Anglo said: ‘okay, so damage to reputation”.
…
I should point out that the ‘payment’ received from Anglo for damage to my reputation, was not monetary even though when it was originally discussed with Anglo, I had assumed it would have been. The agreed payment from Anglo was not forthcoming, and I had considered that I might not get paid at all. Fortunately, there was in my shed some gold and silver, which was left there, along with other stored items belonging to Anglo. What was in precious metal was roughly the amount agreed in compensation, so I took it. Although not very commercial, I concluded that was the best I could expect and considered the deal done.
…”
On page 558 of Exhibit R2 is an extract from the website of “Dan El Private Estates”. It appears that Dan El Private Estates was established by the applicant’s parents in 1959. The website contains information relating to “The Team” at Dan El Private Estates, including information relating to the applicant, which relevantly reads:
“Mr Daniels is a citizen and resident of Australia. His background in precious metals, international business, law, Real Estate, and Biblical studies, provide a unique blend that has placed him in demand for private counsel and as a convention speaker. In 1981 Mr Daniels was invited to the position of manager of CCI (Corporate Consultants International) a practice specialising in Australian tax incentive programs, and by the mid 80’s was running his own tax, finance and investment firm.
In 1998, under the name “Australia Fair”, Graham produced and released the first of a series of privately issued gold and silver coins, minted by Perth Mint Australia. This project went global in 1999 under the name the Anglo Far-East Bullion Company, where Graham served as chairman for five years.
Today Mr Daniels consults on international estate planning, lectures on lifestyle and economics, and is an advocate of the ‘Open Market Gold Standard’.”
On page 446 of Exhibit R3, is the respondent’s chronology of material facts relating to the net capital gain made on disposal by the applicant of the AFEB shares in the 2006/2007 tax year. The chronology of material facts reads:
Date Facts 20 November 2003 AFEB Panama was incorporated and registered in the republic of Panama. 2 February 2004 A share certificate issued by AFEB Panama identified that the corporation’s authorised share capital was US$10,000 divided into 100 shares of US$100.00 each. 2 February 2004 You acquired a 50% shareholding in AFEB Panama having a value of US$5,000. 6 – 7 July 2006 You resigned as director of AFEB Panama. A letter and minutes of meeting recorded your resignation. You maintained a 12-month consultancy agreement from that time. Your letter stated that you and Mr Judge remain good friends. 23 April 2008 Mr Judge asked you to sign the transfer forms to dispose of your AFEB Panama shareholdings. 19 January 2009 You lodged your 2007 income tax return and stated that you did not make any capital gains for the 2007 income tax year.
During 2007, you also received US$200,000 payment from Mr Judge.
On page 34 of Exhibit R5 are minutes of a meeting of AFEB dated 27 February 2007, which reads:
“WHERE AS: A MEETING of directors of The Anglo Far-East Bullion Company Limited (‘the company’) was held this day, January 12th 2007, at level 23, Monticello, Marbella, Panama City, Panama
PRESENT GRAHAM K DANIELS: President/Director
(by phone)
PHILIP JUDGE: Director
APOLOGIES ROBB THOMPSON: Director
BRYCE ANDERSON: Director
CHANGE OF DIRECTORS:
RESOLVED THAT: Graham Daniels, Robb Thompson and Bryce Anderson would resign as directors of the company.
and further;
RESOLVED THAT: outgoing directors should be replaced immediately and Philip Judge should nominate new directors to the board of the company.
Being no further business, the meeting was called to a close.
Signed _________________ Signed ________________
Graham Daniels Philip Judge
President/Director Director”
On page 35 of Exhibit R5 is a letter dated 6 July 2006 to AFEB which appears to be from the applicant. It reads as follows:
“To the Board of:
The Anglo Far-East Bullion Company
Level 23, Monticello Building, Marbella,
Panama City, Panama
Further to previous communications, I now write to provide record that I shall have officially resigned from The Anglo Far-East Bullion Company (AFBC), and all of its associated entities effective from the close of business on Friday 7th July AD 2006.
Further I relinquish all shareholding, authority and benefits in AFBC and all related structures, to which I have had an attachment and/or capacity to represent, transferring such to Mr Philip Judge (of the above address) and/or his nominee, and request that any outstanding documents requiring my signature to effect the transition stated in this correspondence, be produced and executed expediently.
I take this opportunity to sincerely wish the very best to all those involved with Anglo Far-East projects’ around the world.
I trust that the collective experience of both client and Corporate Team, will continue to produce for all involved, progressive life changing and prosperous futures for generations to come.
Yours Faithfully,
Graham Daniels”
In the applicant’s notice of objection dated 26 November 2010 (Exhibit R2, T14) the following background to AFEB appears (at pages 94-95):
“1.3 By way of background to AFEB Panama:
1.3.1 The Taxpayer and his father, Peter Daniels, were the original promoters of AFEB Panama and its business.
1.3.2 The third party, Philip Judge, was introduced to AFEB Panama on an equity basis and to provide accounting, financial and general administrative support.
1.3.3 The Taxpayer and his father introduced business and clients to AFEB Panama.
1.3.4 The Taxpayer took an official office holder position with AFEB Panama, whilst his father acted on a consultancy basis.
1.3.5 Mr Judge was incompetent in performing the tasks he was responsible for.
1.3.6 The Taxpayer and his father issued an ultimatum to Mr Judge, along the lines of ‘you go or we go’.
1.3.7 On the basis that the Taxpayer and his father were agreeable to separation from Mr Judge/AFEB Panama, they each sought compensation on account of damage incurred by them in their occupation/profession on account of grievances against them due to Mr Judge’s behaviour. Mr Judge was agreeable to provide such compensation in the sum of US$200,000 – US$100,000 for each of the Taxpayer and his father.
1.3.8 This agreement between the Taxpayer, his father and Mr Judge was never documented and would not even be a transaction that the ATO would be aware of but for the Taxpayer’s voluntary disclosure in the course of interrogation. The ATO have chosen to assess the amount as consideration for shares of the Taxpayer notwithstanding that the Taxpayer has voluntarily disclosed the payment, but has never suggested this payment was consideration for his shares. The Taxpayer’s father was never a shareholder and hence receipt of half the consideration by the Taxpayer’s father evidences that the payment was not for the transfer of shares. No share transfer was ever executed and therefore the Taxpayer believes he remains a shareholder to this day. There is a document (dated 6 July 2006 which the ATO has a copy of) under which the Taxpayer relinquished involvement with AFEB Panama, but that document does not evidence any consideration being payable.
1.3.9 The Taxpayer only derived US$100,000 of consideration, not US$200,000. The payment was for damage to the Taxpayer in his occupation and therefore we say that amount is CGT exempt under section 118-37. This is the position now and it is exactly the position contended for under examination when the Taxpayer voluntarily disclosed this to ATO.
…”
RESPONDENT’S SUBMISSIONS
Mr Cole indicated that the respondent did not wish to make any submissions on the alternative that the amount of US$200,000 was assessable as a compensation payment to the applicant and/or the applicant’s father or for breach of contract.
The following submissions, in brief terms, were made by Mr Cole for the respondent:
(a)The payment of US$200,000 was made to the applicant for the disposal of his shares in AFEB. The net capital gain of AU$129,131 determined under s 102‑5(1) of the ITAA 1997 and s 167 of the ITAA 1936, based on the figures referred to in paragraph 13 above, was correct and was not excessive.
(b)The taxpayer bears the burden of proving that the amended assessment is excessive. By failing to present and give his evidence, the applicant cannot discharge the burden of proof.
(c)As to the issue of penalty, the material put before the respondent by the applicant in his 2006/2007 taxation return and his failure to disclose the net capital gain from the disposal of the shares in AFEB was misleading. The penalty of 50 per cent of the shortfall amount applied to the applicant because he was reckless in not including the net capital gain from the disposal of the shares in AFEB.
CONSIDERATION
Was the respondent correct in determining that the applicant was assessable on a net capital gain of $129,131 made on the disposal of shares held in AFEB during the 2006/2007 tax year?
In my view, on the information and material available, the respondent was correct in determining that the applicant was assessable on a net capital gain of $129,131 made on the disposal of shares held in AFEB during the 2006/2007 tax year. There are inconsistencies in the statements that the applicant has made in the T documents. For example, he said in his statement of facts, issues and contentions that he was never certain he ever held shares in AFEB. However, in the examination on 26 November 2009 when asked whether he was a shareholder, he said “I’m not sure about that”. He said he had an agreement with Mr Judge, as the other director of AFEB, that he and his father would each receive US$100,000 for damages to their reputation. There is no independent evidence, on the terms the applicant has suggested, to support this statement. In particular, there is nothing in writing from Mr Judge. Moreover, the T documents (Exhibit R5, page 30) include a share certificate for 50 shares held in the applicants name, and also include a blank share transfer (Exhibit R5, page 31) in which the applicant is shown as the transferor of the 50 shares referred to in the share certificate. This evidence, without any contrary oral evidence from the applicant, supports the respondent’s assertion that the US$200,000 was received from the sale of the shares in AFEB. The applicant suggested that he had an issue with Mr Judge and it was as a result of this that the payment of US$200,000 was to be made. However, this statement is inconsistent with the extract from the website of AFEB (Exhibit R3, page 554), which suggests an ongoing friendship between the applicant and Mr Judge. It reads:
“Graham Daniels
Graham was an original founding director of AFE and served the company for 9 years. He retired as Chairman/Director in 2006 but remained with the company for a further 12 months providing independent consulting in the areas of international trust and company law. Graham has researched and lectured on geo-political shifts and global economics from a biblical perspective for over 15 years. (website: founding directors Philip Judge and Graham Daniels remain firm friends to this day, sharing simular philosophies and business ideals.
AFE also acknowledges the contribution and thanks other retired directors that served the company in past years including Mr. Robb Thompson (USA) and Mr. Bryce Anderson (UK).” [emphasis added]
Apart from these matters which support the respondent’s actions, the applicant has failed to discharge the burden of proving, under s 14ZZK of the TAA, that the amended assessment for the 2006/2007 tax year is excessive.
In proceedings before the Tribunal, neither party carries the burden of proof. However, under s 14ZZK(b)(i) of the TAA, when the Tribunal reviews an objection decision, the taxpayer applying for review has the burden of proving, where an assessment is involved, that the assessment is excessive. In seeking to show that the assessment is excessive, the taxpayer must put his or her case before the Tribunal and produce records and other evidence in support of the case. In considering the predecessor to s 14ZZK(b)(i), Foster J observed in Eldridge v FC of T 90 ATC 4907 at 4921:
"This, it must not be lost sight of, was the main and substantial case put to the Tribunal by and on behalf of the applicant. It was through this case, mainly if not solely, that the applicant sought to demonstrate, the onus being on him, that the assessments were 'excessive' within the meaning of s. 190(b). The Tribunal rejected this case. Quite clearly, it was not rejected on the basis of some 'rubber-stamping' of the Commissioner's previous views. It was rejected fairly and squarely upon evidence given before the Tribunal itself through documentary exhibits and through witnesses who were examined, cross-examined and re-examined in the ordinary way.
It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the Court than of the office desk.
It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer's objections. Although it is not bound by the rules of evidence (s 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it. …"
The Tribunal's role was explained more fully in the decision of the Full High Court in Dalco (supra). There, speaking of the ITAA 1936 (but the principles apply equally to the TAA) and also in speaking of an appeal (but the same principles apply to a review in this Tribunal), Brennan J observed (at 4091):
"… It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.
…"
As Brennan J also said in Dalco (supra at page 4093), the manner in which a taxpayer can discharge the burden of proof varies with the circumstances. In some cases, the burden may be discharged by pointing to some error of computation. The burden can also be discharged by the taxpayer proving that the Commissioner erroneously included in the assessment an amount that should not have been included. On the other hand, as Mason J pointed out in Gauci and Others v FC of T 75 ATC 4257 at 4261 (when considering the application of the predecessor to s 14ZZK(b)):
"Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. The appellants relied on their evidence and that of Graham in order to show that the assessments were excessive. Once that evidence was rejected, the appellants' case necessarily failed."
Section 14ZZK(b) effectively creates a rebuttable presumption that an assessment is not excessive. As was further said by Mason J in Gauci (supra at page 4261):
"The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail."
Finally, in commenting on the taxpayer's absence of records, Lockhart J in McCauley v FC of T 88 ATC 4605 at 4612 referred to the judgment of Latham CJ in Trautwein v FC of T (1936) 56 CLR 63 and said:
"I have already made some observations about the effect of the absence of records on the taxpayer's case and it is pertinent to recite the observation on this matter by Latham CJ in Trautwein's case (supra) at p 87:
'In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.'
… ”
The applicant failed to appear before the Tribunal to be able to discharge the burden of proof that was imposed upon him. He was given the opportunity to appear before the Tribunal at the hearing to seek to discharge the burden of proof and for the Tribunal to consider the question of the summonses as a preliminary matter. He was not willing to proceed in this way.
For the reasons outlined above, I am of the view that the respondent was correct in determining that the applicant was assessable on a net capital gain of $129,131 made on the disposal of the shares held in AFEB during the 2006/2007 tax year.
Was the amount of $129,131 included by the respondent in the assessable income of the applicant pursuant to section 167 of the ITAA 1936 in the 2006/2007 tax year excessive?
Section 167 of the ITAA 1936 is the source of the respondents’ authority to make a default assessment and provides that, if any person makes default in furnishing a return or including an amount of income (or net capital gain) that is properly included, the respondent may make an assessment of the amount upon which, in his judgement, income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of s 166. Section 166 provides that, from the returns and any other information in his possession or from any one or more of these sources, the respondent shall make an assessment of the amount of taxable income of any taxpayer and the tax payable thereon.
Section 167 is not an independent power but is in aid of section 166 in the duty or function of making assessments, so that the formation of a judgment as to the amount of taxable income is part of the very process of assessment itself and is not a condition precedent to the power to assess. That is, there is no requirement on the respondent to prove that he formed a judgment of the amount of income upon which the taxpayer should be taxed. Rather, the burden lies upon the taxpayer of establishing that the amount of his taxable income is excessive. This means that there is no duty on the Commissioner to allege or prove the source of the taxable income imputed to the taxpayer: George v FCT (1952) 86 CLR 183 at 204.
It follows that, based upon the documents and other evidence available, the amount included by the respondent in the assessable income of the applicant pursuant to s 167 of the ITAA 1936 in the 2006/2007 tax year was not excessive.
Was the respondent correct in imposing an administrative penalty under section 284-75 of Schedule 1 to the TAA based on a base penalty amount of 50 per cent of the tax shortfall in the 2006/2007 tax year?
The administrative penalty regime is contained in Schedule 1 of Part 4-25 of the TAA. Amongst other things, the regime provides for the imposition of penalties for failure to lodge taxation returns and other documents on time and for failure to include income that is properly assessable to income tax. In the applicant’s case, the 2006/2007 amended assessment has been issued because of his failure to include the amount of the net capital gain arising on the disposal of the shares in AFEB in his 2006/2007 taxation return. In these circumstances, s 284-75(1) of the TAA applies, and a shortfall amount arises under Item 1 of the table in s 284-80(1) of the TAA. A base penalty amount has been determined by the respondent under Item 2 of the table in s 284-90(1) of the TAA. The respondent considered that, based upon the applicant’s level of knowledge, education, experience and skill and knowledge of the tax laws, his behaviour fell significantly short of the standard of care expected of a reasonable person in his circumstances, and constituted recklessness. I agree with this assessment. I believe the respondent was correct in imposing a base penalty amount of 50 per cent of the tax shortfall in the 2006/2007 tax year.
Having made the finding in paragraph 42, I note that the respondent (and upon review, the Tribunal), under s 298-20 of the TAA, has discretion to remit all or part of the penalty imposed. The respondent contends that it is not appropriate to exercise this discretion. I agree with this contention. I do not believe any remission of the 50 per cent penalty is warranted.
DECISION
For the reasons set out above, the objection decision under review is affirmed.
I certify that the preceding 43 (forty -three) paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne .....................[Sgd]...................................................
Administrative Assistant
Dated 14 November 2012
Date(s) of hearing 21 August 2012 Applicant In person Advocate for the Applicant No appearance by or for the applicant Counsel for the Respondent Mr S Cole Advocate for the Respondent Ms S Loveband Solicitors for the Respondent ATO Legal Branch
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