HFTS and Commissioner of Taxation (Taxation)
[2019] AATA 5164
•2 December 2019
HFTS and Commissioner of Taxation (Taxation) [2019] AATA 5164 (2 December 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s):2017/6337, 2017/6338, 2017/6339
Re:HFTS
APPLICANT
Commissioner of TaxationAnd
RESPONDENT
DECISION
Tribunal:Mr P W Taylor SC, Senior Member
N Gaudion, Member
Date:2 December 2019
Place:Sydney
The decision under review is:
(a)Affirmed in relation to the assessments for each of the 2014, 2015 and 2016 tax years.
(b)Set aside in relation to the penalty assessment for the 2015 tax year and in substitution the Tribunal decides that the administrative penalty for the 2015 tax year is 50% of the shortfall amount for that year.
(c)Set aside in relation to the refusal to remit any part of the administrative penalty for the 2014 tax year and in substitution the Tribunal decides that the administrative penalty for that year is remitted to the extent of 25% of the tax liability for that year.
...........................[sgd]…......................
Mr P W Taylor SC, Senior Member
CATCHWORDS
TAXATION – objection to income taxation assessment – objection to penalty assessment – nature of unexplained deposits – whether the deposits were loans – whether the Commissioner’s assessment was excessive – 14ZZK – whether the applicant could show his actual income – whether a penalty assessment was appropriate – whether the penalty should be remitted – income tax assessment decision affirmed – penalty remitted in part
LEGISLATION
Income Tax Assessment Act 1936 sections 161, 166, 167, 168 and 190
Income Tax Assessment Act 1997 section 8-1
Taxation Administration Act 1953 section 14ZZK, Schedule sections 284-75, 284-80, 284-85, 284-90 and 298-20
Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 Schedule 5, Division 3, Item 25
CASES
Agius v Commissioner of Taxation [2015] FCA 707
Bailey v FCT (1977) 136 CLR 214
Bosanac v Commissioner of Taxation [2019] FCAFC 116
Commissioner of Taxation v Firth (2002) 120 FCR 450; (2002) 192 ALR 542
Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300; (1997) 142 ALR 305
Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753; 89 ATR 357
Commissioner of Taxation v Rigoli [2013] FCA 784
Commissioner of Taxation v Tasman Group Services Pty Ltd [2009] FCAFC 148; (2009) 180 FCR 128
Confidential v Commissioner of Taxation [2013] AATA 112
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v R & D Holdings Pty Ltd [2007] FCAFC 107; (2007) 160 FCR 248
Gashi v Commissioner of Taxation [2013] FCAFC 30
George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183
Godecke v Kirwan (1973) 129 CLR 629
Gray v Gray [2004] NSWCA 408; (2004) 12 BPR 22,755
Guaci v Federal Commissioner of Taxation (1975) 135 CLR 81; (1975) 8 ALR 155
Hart v Federal Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203
LLUN and Commissioner of Taxation [2017] AATA 3058
Ma v Federal Commissioner of Taxation (1992) 37 FCR 225; (1992) 27 ALD 601
Macindoe v Parberry (1994) Aust Torts Reports 81-290
McCormack v FCT [1979] HCA 18; 143 CLR 284; (1979) 23 ALR 583
Meehan v Jones (1982) 149 CLR 571
Placer Development Limited v Commonwealth (1969) 121 CLR 353
QTWG and Commissioner of Taxation [2019] AATA 2428
Rawson Finances Pty Ltd v Commissioner of Taxation [2013] FCAFC 26; (2013) 296 ALR 307
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
Rigoli v Commissioner of Taxation (2014) 141 ALD 529; [2014] FCAFC 29
Schmierer v Tauok (2004) 207 ALR 301
Seldon v Davidson [1969] 1 WLR 1083
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Yung v Commissioner of Taxation [2012] AATA 872
Zappia v Commissioner of Taxation [2017] FCAFC 185
SECONDARY MATERIALS
C L Pannam, The Law of Money Lenders in Australia and New Zealand
Explanatory Memorandum
Miscellaneous Taxation Ruling MT 2008/1Practice Statement Law Administration PS LA 2014/4
REASONS FOR DECISION
Mr P W Taylor SC, Senior Member
Mr N Gaudion, Member
Following a period of incarceration in 2012, and because of reported threats to his life, HFTS left Australia with his family in late April 2013. He travelled first to Lebanon and then Dubai, where he lived for the next sixteen months (except for three short return visits to Australia). He says he had intended to establish himself in Dubai, but his endeavours there were not successful. That was why, in about August 2014, he came back to live in Australia. On his return he became a director of, and shareholder in, “BHGranpl”. The company was incorporated on 26 August 2014 and, at least during the 2015 and 2016 tax years, conducted quarrying activities at a site in South Australia. In almost the whole of that period, until just before the company’s August 2017 liquidation, HFTS was BHGranpl’s sole director and shareholder.
HFTS maintained at least one Australian bank account whilst he lived in Dubai. After his return he had several other Australian bank accounts. Following a “without notice” tax audit, in a 25 October 2016 decision the Commissioner characterised numerous deposits to some of HFTS’ various bank accounts as part of his assessable income for each of the 2014 to 2016 tax years. The amounts involved in each tax year, as summarised in the audit decision reasons, are set out in the following Table:-
Audit decision 25 October 2016 - deposits table 2014 2015 2016 Totals Cash and cheque deposits 211,800 193,736 134,000 539,536 Deposits from others STPM 12,250 12,250 FE 63,500 20,000 29,400 112,900 DS 56,000 56,000 Interest 2 4 2 8 Sub-Total - deposits & interest 287,550 213,736 219,400 720,686 Deposits from BHGranpl …. salary 10,906 23,100 34,006 …. Other 23,200 85,500 108,700 Sub-Total - BHGranpl 34,106 108,600 142,706 Sub-Totals 287,550 247,842 328,000 863,392 Total 863,392
The Commissioner’s audit conclusion was reflected in notices of assessment (or amended assessment) made in reliance on ss 167 and 168 of the Income Tax Assessment Act 1936 (“ITAA 36”). The Commissioner issued those assessments, and related shortfall penalty assessments, on 25 October 2016. Subsequently, the Commissioner’s 23 August 2017 objection decision partly allowed HFTS’ objection relating to the 2015 and 2016 tax years. (The adjustment allowed essentially credited some additional PAYG withholding payments that had been made by BHGranpl.) The Commissioner issued amended assessments, for those years, on 1 September 2017. On the same date the Commissioner also notified HFTS of a partial ($17,316) penalty remission, relating to the 2015 tax year.
The precise ultimate effect of the Commissioner’s various assessment decisions is not entirely clear (because of some difficult to reconcile details in the relevant notices). However, their approximate effect is summarised in the following Table.
Lodged Assessments - Default, Amended and Special Tax Year Income Income PAYG Tax S'fall Penalty credit . % Amount 2014 na 287,552 107,366 75 80,524 2015 11,752 247,846 23,932 67,975 75 50,659 2016 na 328,002 36,840 94,648 na na All audit years Totals 11,752 863,400 269,988 131,183 Total net shortfall and penalty 401,171 HFTS OBJECTION GROUNDS – LOAN FUNDS NOT INCOME
HFTS’s 22 December 2016 assessment objection identified four grounds and asserted the contentious deposits had various non-income sources. The first two grounds relate to the majority of the amounts assessed as income and involved the contention that the preponderance of the deposits had been made by, and were loans from, his long time friend, a Mr FE. A third ground was that other deposits were loans from, or mistaken deposits of moneys belonging to BHGranpl. Finally, one deposit, in September 2015, had been made by a Ms DS, but at Mr FE’s request, and was said to be part of the loan amount provided by Mr FE. The substance of the information in the objection letter is reflected in the following Table[1]:-
[1]The objection letter did not refer to the $12,500 deposit from “STPM” that had been identified in the audit decision reasons. Consistent with that omission, the $851,142 total of the “loan” and “other deposit” amounts in the Objection letter is $12,500 less than the $863,392 total of the deposits relied upon for the October 2016 assessments.
Objection letter - 22 December 2016 - deposit sources 2014 2015 2016 Loans from Mr FE Direct deposits 63,500 20,000 29,400 Cash and cheque deposits 211,800 193,736 134,000 Sub-total FE deposits (per year) 275,300 213,736 163,400 Sub-total FE deposits (all years) 652,436 Ms DS deposit - additional FE loan 56,000 Sub-total FE loans (per year) 275,300 213,736 219,400 Total FE loans (all years) 708,436 Amounts including mistaken deposits & loans from BHGranpl Other deposits 23,200 85,500 Salary deposits 10,906 23,100 Sub-total Disputed deposits (per year) 275,300 247,842 328,000 Total Disputed deposits (all years) 851,142
The Objection letter’s contention that all of the disputed deposits could be accounted for in the manner indicated in the preceding Table was not entirely consistent with either HFTS’ contemporaneous instructions to, or the views of Mr Assaf, an accountant he had first retained in about July 2016. Prior to the Objection letter being sent, and perhaps as far back as October 2016, HFTS and Mr Assaf had attended one or more meetings with HFTS’ solicitors. In that period HFTS had provided Mr Assaf with at least his 2014 bank statements. Mr Assaf had discussed the statements, and HFTS’ loan claims, at a meeting with both HFTS and Mr FE. He had also sought and obtained further information from HFTS and / or HFTS’s sister. (In about mid 2016 she had begun to work for HFTS as his personal assistant. In that role she handled most of his financial affairs, and was described by Mr Assaf as HFTS’ “internal controller”. After meeting with the solicitors HFTS had instructed her to deal with Mr Assaf in providing any required information.) Aided by that information, Mr Assaf had analysed the bank account deposits made during the 2014 tax year. His analysis resulted in being able to attribute only $208,000 of the deposits to Mr FE. Neither HFTS, his sister nor Mr FE had been able to explain the source of the $67,300 balance of the deposits. (In his oral evidence HFTS agreed that Mr Assaf must have drawn the difficulty to his attention at the time. Despite an initial assertion he had told the solicitors that the money had been provided by Mr HS (see paragraph 26 below) HFTS ultimately professed an absence of recollection. He agreed that he must not in fact have given Mr Assaf any explanation for those deposits.) In the absence of any explanation, Mr Assaf had sent a 21 December 2016 email to the solicitors. In that email he recorded his view that the $67,300 amount would have to be conceded as part of HFTS’ income.
THE SUPPLEMENTED OBJECTION CONTENTION
The 22 December 2016 objection letter contemplated the later provision of additional information correlating the deposit and withdrawal transactions in the respective FE, HFTS and BHGranpl bank accounts. The letter also sought to reserve a right to provide “further evidence and support material”. The Commissioner’s 27 February 2017 letter requested that the foreshadowed additional material be provided by 27 March 2017.
By some time in March 2017 Mr Assaf had obtained further information from HFTS and / or HFTS’ sister, and had completed his further analysis of the bank statements (those of HFTS, BHGranpl and at least some of Mr FE’s) for each of the three tax years. He sent the bank account analysis to HFTS’s solicitors. He also provided responses to the solicitors’ request for information about details of the asserted loans (from each of FE, HS and STPM). The contents of the analysis and the responses provided the basis for the more detailed information contained in a 27 March 2017 letter the solicitors wrote to the Commissioner. That letter made no positive assertion about the amount of HFTS’ taxable income, and implicitly assumed that the only matter in contest was the proper characterisation of the contentious deposits. The letter contained the following:-
(a)tables for each of the 2014 to 2016 tax years, particularising the deposits to HFTS’ bank accounts said to have been loans from Mr FE;
(b)tables particularising withdrawals from Mr FE’s various bank accounts in each of those tax year
(c)tables particularising the deposits to HFTS’ bank accounts, in each of the 2014 and 2015 tax years, that were asserted to have been loans from Mr HS
(d)a table particularising four deposits to HFTS’ bank accounts asserted to have been loans STPM made in the 2014 tax year
(e)an assertion that the previously asserted mistaken deposits from BHGranpl were payments to HFTS for directors fees or wages and a related contention that amounts paid by BHGranpl had been included in HFTS’ 2015 and tax returns and should not “double counted” by forming part of any amended assessment
(f)a further copy of an October 2016 statement from Ms DS acknowledging unsecured loans she had made to Mr FE in March 2014 ($250,000) and July 2015 ($130,000), and a claim that the $56,000 deposit to HFTS’ NAB bank account on 25 September 2015 by Ms DS was in fact a loan from Mr FE.
The overall effect of the information and contentions provided in the 27 March 2017 letter (and its attachments) is summarised in the following table. (The table includes both the total of the deposits to HFTS bank accounts and the total of the identified withdrawals from the bank accounts of each of the asserted lenders.)
Further information letter - 27 March 2017 2014 2015 2016 bank a/c transactions HFTS "lender" HFTS "lender" HFTS "lender" Asserted deposit "lender" / source FE - loan 208,000 272,898 48,000 62,550 163,400 72,500 DS deposit (as an FE loan) na na 56,000 HS - loan 67,300 na 141,400 na STPM (STPM) - loan 12,250 na BHGranpl - directors fees & wages na not stated not stated Sub-Totals (per year) 287,550 272,898 189,400 62,550 219,400 72,500 Total FE loan (all years) 475,400 Total HS (all years) 208,700 Total 'asserted' loan deposits to HFTS 696,350 (plus the BHGranpl amounts) INCOME / DEPOSITS FROM BHGRANPL
The 27 March 2017 letter neither quantified the deposits said to have involved payments by BHGranpl, nor attempted to reconcile the totals of those payments with the details in the amounts taken into account in the audit decision reasons. The letter may be taken as assuming the accuracy of the contentious deposit totals in the audit reasons. On that basis, the reconciliation results in the “Unexplained deposit balance” in the Table set out in paragraph 14 below.
The reconciliation in the Table suggests that (if the specific loan contentions in the 27 March 2017 letter were to be accepted) then the “Unexplained deposit balance” could be taken as HFTS’ gross (and perhaps his taxable) income in each tax year. That suggestion is however contradicted (for the 2015 and 2016 tax years) by three personal tax returns HFTS lodged between October 2016 and April 2017. (There was one amended return for the 2015 tax year, and two versions of the return for the 2016 tax year.)
The amended return for the 2015 tax year indicated income of $90,000 (for director’s fees) in addition to the $11,750 salary disclosed in the original tax return, and related PAYG withholdings of $23,088. The first return relating to the 2016 tax year is noted as having been received on the same date as the Commissioner’s 25 October 2016 audit decision, but describes itself as having been “adjusted as a result of information supplied by your tax agent”.[2] It asserted that HFTS’ assessable income was $475,000 – a total apparently arrived at by accumulating (i) the total of the contentious bank deposits, (ii) directors fees from BHGranpl and, (iii) an additional salary payment stated in the return. The second return relating to the 2016 tax year asserted a (considerably lesser) taxable income of $147,000 (directors fee of $127,000 plus salary of $20,000) and related PAYG withholdings ($34,788).
[2]This wording suggests the return had in fact been generated, or at least modified, by the Commissioner as part of, or as a consequence of, the audit process and decision.
The Commissioner’s 23 August 2017 Objection decision reasons acknowledged that the director’s fee, salary and withheld PAYG amounts referred to in the preceding paragraph were consistent with the contents of BHGranpl’s company tax returns for the 2015 and 2016 tax years. That acknowledgement led to the PAYG credits (and the related penalty reduction) assessment amendments (or allowances) reflected in the summary Table set out earlier in these reasons:- see paragraph 4 above.
The BHGranpl directors fee and salary details included in the three amended personal tax returns show that (irrespective of whether or not HFTS’ “loan” contentions were accepted) the Objection decision involved an understatement of HFTS’s income in each of the 2015 and 2016 tax years. The extent of the understatement (“BHGranpl income not reflected in the assessments”) emerges from the comparison of the disputed deposits, and the income taken into account in the amended returns. That comparison is set out in the following Table:-
Deposit & income reconciliation 2014 2015 2016 Total income deposits (audit reasons) 287,550 247,842 328,000 Loans asserted by HFTS ( 27 March 2017 letter) 287,550 189,400 219,400 Unexplained deposit balance (inc BHGranpl deposits) 0 58,442 108,600 BHGranpl deposits (22 December 2016 letter) 0 34,106 108,600 BHGranpl - directors fees & wages 0 90,000 147,000 BHGranpl income not reflected in the assessments 0 31,558 38,400 THE SPECIFIC “LOAN” PARTICULARS.
Neither the December 2016 Objection letter nor the 27 March 2017 letter gave any specific details about the timing, purpose or terms of the loan agreements they asserted HFTS had made. That imprecision prompted the Commissioner’s 13 April 2017 letter. It contained an eight paragraph request for detailed information to substantiate the asserted loan arrangements.
HFTS’s solicitors’ further letter of 9 May 2017 recited their instructed response to the Commissioner’s request. The letter provided information about the nature and terms of each of the loans asserted in the 27 March 2017 letter. The information was to the following effect:-
(a)STPM loan (2014 tax year):- This was said to be a $12,500 loan, made by way of four direct credits to HFTS’ bank account between July and September 2013. The loan purpose was said to have been to assist HFTS in establishing a new business, and recover from his period of incarceration. Although the loan was undocumented, it was said to have been the subject of an oral agreement involving (i) a twelve month loan term, (ii) 10% interest, (iii) no security and, (iv) an (unfulfilled) contemplation that the loan would be the subject of a formal written agreement. The further assertion was that HFTS had used the money to fund the preliminary costs of incorporating BHGranpl (an event that happened in August 2014). The loan amount had not been repaid, and HFTS acknowledged his liability for both the principal and interest.
(b)HS loan (2014 and 2015 tax years):- This was said to be an undocumented, unsecured, interest free loan, that had been discussed over a period of months leading up to the first asserted loan deposit in September 2013. The agreement contemplated advances being made “as and when required” to assist HFTS with his family’s day to day personal expenses, given the “cash flow difficulties” HFTS had “as a result of his incarceration”. Consequently, there was no specific agreement about the total loan amount. The loan was to be repayable either when HFTS was financially stable “or as required” by Mr HS. The total amount of the loan (approximating $208,700 – see the Table in paragraph 9 above) remained outstanding.
(c)FE loan (2014 to 2016 tax years):- HFTS was said to have made an oral arrangement with Mr FE in June 2013. The arrangement was prompted by HFTS’s intention of buying an investment property, assertedly for the benefit of both himself and Mr FE. HFTS “did not have the funds to manage an investment property” and Mr FE agreed to lend him money for that purpose. The arrangement was said to relate to a business property in Adelaide. (In July 2016 HFTS did in fact contract to purchase such a property for $1.9m.) The arrangement was not documented but involved the following elements:- (i) Mr FE would advance the money when he could, and as HFTS required, (ii) interest was payable at an annual rate of 18%, (iii) the money was to be used to maintain the property, (iv) the loan was repayable on demand, but there was an understanding that HFTS would not be required to make any repayments until the property was providing a return to HFTS, (v) the loan was to be secured by mortgage and, (vi) the arrangement was to be reviewed after five years. As at May 2017, HFTS had not made any payments to FE, and acknowledged his indebtedness for the full loan amount “plus the return” originally contemplated in their arrangement.
The information in the 9 May 2017 letter substantially reflected the contents of three documents. They were:- (i) a 27 March 2017 email response from Mr Assaf to HFTS’ solicitors’ request for details of the asserted loans, (ii) an undated, handwritten solicitor’s file note and, (iii) a 4 May 2017 email exchange between Mr Assaf and HFTS’ solicitors. Mr Assaf’s 27 March 2017 response took the form of brief annotations to the solicitors email request. He said that HFTS had not made any repayments to either Mr FE or Mr HS, but had made some repayments to STPM. The latter payments were in the form of (unspecified) “reduced invoices”. In his oral evidence Mr Assaf said his responses were based on specific instructions he had been given about the various asserted loans.
The handwritten file note contained somewhat more detailed information about the loans, and appears to record responses to specific questions in the Commissioner’s 13 April 2017 request letter. Mr Assaf said HFTS’ sister had received the Commissioner’s letter, and sent him a copy. But he denied being the source of the loan information recorded in the file note. Mr Assaf’s evidence establishes that HFTS’ sister was certainly aware of the contents of the Commissioner’s letter. We pointed out earlier that (after about mid July 2016) she had a role as HFTS’ personal assistant:- see paragraph 6 above. Consistent with that role, her email address appears at the top of the first page of the file note. Those four considerations suggest that HFTS’ sister was the likely provider of the information recorded in the handwritten file note. The suggestion is enhanced by HFTS’ evidence that (i) he was aware of the Commissioner’s request for details of the loan transactions (although not the specific contents of the 13 April 2017 letter), (ii) he had deputed his sister to deal with Mr Assaf in providing the required information, (iii) his sister had sought information from him about them (she had not been involved in the making of the asserted loan arrangements) and, (iv) he had done his best to respond appropriately to any questions his sister had asked about those arrangements.
The 4 May 2017 email exchange between the solicitors and Mr Assaf referred to a previous meeting, and included a draft of the proposed further particulars letter. Parts of the draft had been highlighted as requiring further information. The substance of them was set out in the body of the solicitors’ email. Some of the requested information appears to have been added in a response by one of the other solicitors who had been present at the previous meeting. (It was presumably based on what had been discussed at the meeting.) Other details were the subject of specific requests to Mr Assaf. Mr Assaf denied that he was the direct source of any of the detailed information set out in the response about the asserted loans. He pointed out that the solicitors were in direct communication with HFTS sister. However, the email contents evidence the reality that the solicitors were looking to him for clarification about specific details of the asserted loan arrangements.
It is tolerably clear therefore, that the information contained in Mr Assaf’s 27 March 2017 email response, and the solicitors’ 9 May 201 letter, was the end result of collaboration between HFTS’ solicitors, Mr Assaf and (most likely) HFTS’ sister. That conclusion is one HFTS was reluctant to embrace. At one point HFTS professed to having “no idea” who provided the instructions reflected in either the handwritten file note or the 9 May 2017 letter. He speculated that part of the information contained in the 27 March 2017 email could have come from either his sister or his wife. But he acknowledged that his sister had asked for, and he had provided, information about the source of the contentious deposits. He implicitly agreed that his sister and Mr Assaf were the most likely source of the information in the email and the 9 May 2017 letter. He expressly acknowledged the unlikelihood that either of them had simply “made up” the information. Despite both that acknowledgement, and an absence of recollection, he denied that his sister’s questions of him had gone into the details of the asserted loan transactions. He denied having given any instructions to the effect set out in the solicitors’ letters. He asserted instead that the solicitors had just lied and “dressed up” the information, not just for taxation purposes but also because the “Crimes Commission and everyone else that was just looking at me”. He specifically asserted that the claimed loan from STPM was the result of his solicitors just wording things the way they wanted. Perhaps intending to support those criticisms of his solicitors’ conduct, HFTS claimed to have had a big argument with his sister about the instructions reflected in the solicitors’ letters, and asserted that she denied having provided them.
It is fair to acknowledge that the accuracy of parts of the information contained in the 9 May 2017 letter is doubtful. (The doubt attaches, for example, to (i) the claim that loan funds provided by STPM (prior to September 2013) were used to cover the preliminary costs of incorporating BHGranpl (in August 2014) and, (ii) the claim that the June 2013 arrangement with FE was for the purpose of funding an investment property that was not in fact purchased until July 2016:- see paragraphs 16(a) and 16(c) above.) But HFTS’s suggestion that his solicitors simply “dressed up” the information they provided, specifically in the 9 May 2017 letter, is inconsistent with the contents of Mr Assaf’s 27 March email, the existence of the undated file note, and with the email exchange of 4 May 2017. Those contemporaneous documents tend to demonstrate that the solicitors sought, and were provided with, the substance of the information they provided to the Commissioner in their 27 March 2017 and 9 May 2017 letters. Aspects of the accuracy of that information are questionable, but the more likely answer to those kinds of questions is that the letters reflect the content of the instructions that had been provided perhaps by HFTS directly and, more certainly, by Mr Assaf and by HFTS’ sister, on his instructions. The less likely answer is that the disputed details in the letters were the product of the dishonesty or incompetence of HFTS’ solicitors.
HFTS’ evidence establishes that (i) neither Mr Assaf nor his sister had direct personal knowledge of the transactions underlying the contentious deposits, (ii) each of them had asked him for information about them, (iii) they were the most likely source of any instructions given to the solicitors and, (iv) they were unlikely to have made up the information they provided to the solicitors. All of those considerations tend against acceptance of HFTS’ repeated assertions that he was not the relevant originator of the instructions set out in the solicitors’ letters.
THE STPM DEPOSITS - 2014 TAX YEAR
We pointed out earlier that the December 2016 Objection letter did not assert that the four “direct credit” deposits (totalling $12,500) made by Mr STPM/STPM between July and September 2013 were loans:- see paragraph 5 above. Conversely, that assertion was made in the 27 March 2017 supplementary information provided by HFTS’ solicitors:- see paragraph 8(b) above. Furthermore the solicitors’ 9 May 2017 letter contained specific details about the timing, purpose and terms of the asserted loan agreement:- see paragraph 16(a) above.
In his 15 March 2018 statement in the review proceedings HFTS resiled from the loan assertions made in the solicitors’ correspondence of March and May 2017, and denied ever having given instructions to the effect reflected in those letters. He said that the four credits to his account were neither loans nor income. Rather, they were payments Mr STPM had made, by way of gifts, to assist HFTS in setting up business in Dubai. In a further statement, dated 5 October 2018, HFTS gave a more specific, and somewhat different, explanation. He said that he had travelled to Dubai with Mr STPM, with a view to HFTS being engaged as an “overseer” for the business Mr STPM had attempted to establish, and wanted to pursue, in Dubai. The payments Mr STPM subsequently made were in recognition of the efforts HFTS was to make on Mr STPM’s behalf, and were (according to HFTS’s statement) “to cover some of my living costs”. However, in a later part of the 5 October statement, HFTS returned to describe the payments Mr STPM had made as loans.
In the course of his evidence in the review proceedings HFTS gave a more complete explanation of his relationship with Mr STPM, and the circumstances in which the contentious direct credit payments had been made. He expressly disavowed any assertion that Mr STPM lent him money. He explained that, prior to going to Dubai, he had been working as a subcontractor for Mr STPM. The idea was that they would “keep it going” while HFTS was in Dubai. Mr STPM had already made some contacts in Dubai, and invested money there, trying to establish his business. HFTS explained that the original intention was that he would work for (or with) Mr STPM in developing Mr STPM’s business in Dubai and take over on the ground control of the business. Consistent with those explanations, HFTS’ bank account records deposits totalling $11,550 from Mr STPM’s business in the month before HFTS went to Dubai. In June 2013 there were two further such deposits (totalling $7,700). One of those deposits was apparently recorded as a payment relating to “Invoice 2104, 2105”. HFTS specifically denied that any of the payments Mr STPM made to him while he was in Dubai related to work that he had done for Mr STPM in Australia. Indeed, HFTS ultimately acknowledged that the contentious deposit payments Mr STPM made were (or could reasonably be classified as) income, having regard to the work Mr STPM expected him to undertake in Dubai. In the light of what HFTS said in his oral evidence about the nature of his dealings with Mr STPM, that acknowledgement was an appropriate recognition of the real character of the payments. Accordingly, we find that the “STPM” deposits in the 2014 tax year were income and not loans.
THE HS DEPOSITS - 2014 & 2015 TAX YEARS
As we noted earlier, the 22 December 2016 Objection letter claimed that borrowings from Mr FE were the only loan funds HFTS had received in the 2014 tax year. Similarly, the contentious deposits in the 2015 tax year, were said to have been either further loans by Mr FE, or deposits from BHGranpl (either by way of loan or mistaken deposit):- see the Table in paragraph 5 above.
We also noted that the 2014 tax year HS loans (totalling $67,300) asserted in the 27 March 2017 letter, were the same deposits that Mr Assaf (HFTS’ recently appointed accountant) had listed in December 2016 as amounts that had not been identified as loans:- see paragraphs 6 and 8(c) above. In relation to the 2015 tax year, the total of the HS loan deposits ($141,000) asserted in the 27 March 2017 letter must have included a substantial number of deposits HFTS (or at least those acting on his instructions) had previously asserted were loans made by Mr FE.[3]
[3]This is because there was a simultaneous reduction of $165,736 (from $213,736 to $48,000) in the deposit amounts that were asserted to have been by way of loans from Mr FE. As to the basis for determining HFTS’ previous instructions – see paragraphs 5 and 6 above.
In his 15 March 2018 statutory declaration, and in his oral evidence HFTS insisted that the $67,300 amount identified in the 27 March 2017 letter was the total of the deposit loans Mr HS made in the 2014 tax year. In his statement he said he had made the loan arrangement in a telephone call from Dubai. The conversation was to the effect that he needed funds for his living expenses, and would repay Mr HS when he was “back on my feet”. In part of his oral evidence HFTS said that he had actually wanted money for “investments” (although he agreed that was not what he told Mr HS). He also said that he would repay the money when he was “doing good”, but there was never any more specific discussion about either repayment or interest.
Those general assertions about the nature of the arrangement with Mr HS applied to all of the asserted loans (in both the 27 March 2017 letter and HFTS’ 15 March 2018 statutory declaration) and covered deposits in both the 2014 and 2015 tax years. The following Table provides an overview of the number, timing and monthly amounts of the deposits involved.
Asserted HS Loan deposits YE June 2014 YE June 2015 HFTS bank a/c transactions "n" $ "n" $ July 1 6,000 August September 2 12,500 1 3,000 October 3 6,800 November 1 12,000 December January 1 7,000 February 1 5,000 5 22,200 March 3 17,500 6 37,500 April 1 1,000 2 33,000 May 2 12,500 1 30,000 June 0 1 2,700 Total deposits - per year 13 67,300 18 141,400 Sub-total - post August 2014 deposits na na 17 135,400 Total all deposits - number 31 - (28 "cash dep" and 3 "card”) Total all deposits - value 208,700
As the preceding Table indicates, almost all of the deposits were made by cash. None of those deposits, nor any of the three “card” deposits, was accompanied by any description in HFTS’ bank a/c records that either (i) indicated the person who had made the deposit or, (ii) suggested the transaction was by way of loan. Notwithstanding both those matters, and the obviously wide variation in the frequency and amount of the contentious deposits, HFTS initially asserted that each deposit would have been preceded by a specific request he made to Mr HS (although not necessarily for the precise amount of the individual deposits that were in fact made). However the accuracy of that assertion, and indeed, the reliability of the whole of HFTS’ assertions about the loans made by Mr HS, were subsequently undermined by HFTS’ own evidence. It included the following propositions:-
(a)Even though the December 2016 Objection letter made no mention of the HS loans, HFTS was sure he had told at least his solicitors that he had borrowed money from Mr HS. He had met with his solicitors once or twice before the Objection letter was sent, and Mr Assaf had been present at his meetings with the solicitors. He was also sure that by then he had sat down with Mr Assaf and discussed the source of the deposits that had been included in the October 2016 assessments.
(b)(Contrary to the preceding propositions) prior to the December 2016 Objection letter HFTS had probably not told Mr Assaf about the HS loans. That was the case even though he knew Mr Assaf had not been able to reconcile the deposit amounts, and had likely specifically asked HFTS about the source of the deposit amounts he had not been able to reconcile.
(c)HFTS could not be sure which of the deposits in the 2014 tax year had been made by Mr HS.
(d)HFTS really did not know who had made any of the deposits in the 2015 tax year. The fact that many of them had been made at a “Greenacres” branch was the only thing that suggested to him the deposits had been made by Mr HS.
(e)Some of the deposits in the 2015 tax year had been made at bank branches in South Australia. Those deposits had definitely not been made by Mr HS. They had been made by Mr FE.
(f)HFTS was sure he had asked Mr HS to make the three “card entry” deposits (totalling $72,000) made to his bank account in March, April and May 2015. He remembered that one of the three deposits (in an amount of $30,000) had come from Mr HS.
(g)(Contrary to the preceding proposition) the two “card entry” deposits (each for $30,000) made to his account in April and May 2015 had been made at bank branches in Western Australian. They were definitely not deposits made by Mr HS. They were loans Mr FE made.
(h)HFTS could not tell where the $12,000 March 2015 “card entry” deposit had been made, and did not know whether it was a deposit by Mr HS.
(i)HFTS could not actually say which (if any) deposits had been made by Mr HS.
(j)He probably did not really understand the contents of his 15 March 2018 statutory declaration (in so far as it contained specific assertions about the deposits that were “loans” by Mr HS).
It is perfectly clear, therefore, that the HS loan assertions made in the 27 March 2017 letter, and in HFTS’s own statutory declaration of March 2018 were unreliable. In the case of some deposits HFTS expressly disavowed that they were loans by Mr HS. In the case of others, he conceded his lack of actual knowledge of the source of the deposits. His claim that (at the time of his discussions with Mr Assaf and his solicitors prior to the December 2016 Objection letter being sent) he had forgotten the source of the $67,300 2014 tax year deposits that Mr Assaf could not identify as loans, and had likely asked HFTS about, is not credible. His failure to advance the loan assertion at that time, undermines confidence in the reliability of his loan claim. Further undermining that claim is the difficulty of reconciling the timing, and the amount, of the contentious deposits (particularly those made after his return to Australia – see the Table in paragraph 29 above) with HFTS’ principal assertion that he had asked Mr HS to assist him with funds to meet his living expenses in Dubai.
There is not a single contemporaneous document characterising the asserted HS deposits as loans. Nor is there anything, beyond HFTS’ own assertion, to identify Mr HS as the source of the deposits. That assertion was inconsistent with HFTS’ first explanation (in the December 2016 Objection letter) for the various deposits, concededly untrue in relation to many of the them, and concededly doubtful in relation to the others. In those circumstances, HFTS has failed to discharge his onus of establishing that any of the contentious deposits were provided by Mr HS.
THE FE DEPOSITS – THE 2014, 2015 & 2016 TAX YEARS
The Commissioner’s audit decision included deposits totalling $112,900 that had been attributed to Mr FE in HFTS’ bank account records:- see the Table in paragraph 2 above. On the other hand, HFTS’ December 2016 Objection letter asserted that most of the contentious deposits (totalling $652,436) were loans from Mr FE:- see the Table in paragraph 5 above. Then the 27 March 2017 letter asserted that many of the deposits previously attributed to Mr FE, were loans provided by Mr HS:- see paragraphs 8, 9 and 27 above. More specifically HFTS’s solicitors’ 27 March 2017 letter identified 45 deposits to HFTS’ bank account in the period from July 2013 to September 2015 as loans (totalling $475,400 – see paragraph 9 above) made by Mr FE.
Comparison of the information contained in the December 2016 and March 2017 letters reveals the large reduction in each of the 2014 tax year ($67,300:- from $275,300 to $208,000) and the 2015 tax year ($165,736 - from $213,736 to $48,000) in the deposit amounts said to represent loans from Mr FE. In his 15 March 2018 statement HFTS listed the specific deposits he asserted were loans from Mr FE. In so doing he reproduced the substance of the details in the 27 March 2017 letter. Neither that letter nor his statement included any of the deposits :-
(a) HFTS had attributed to Mr HS (in the 27 March 2017 letter and in his own statement)
(b) to Westpac Banking Corporation accounts that HFTS operated in the 2016 calendar year
(c) made to HFTS’ CBA bank account before 1 July 2013
The deposits attributed to Mr HS:- In the preceding section of these reasons we addressed HFTS’ oral evidence about these deposits. HFTS confidently stated that some of the asserted HS deposits (those recorded as having been made at bank branches in South Australia and Western Australia during the 2015 tax year) had not been made by Mr HS. They had definitely (or most likely) been made by Mr FE:- see paragraphs 30 and 31 above.
Deposits made by Mr FE to HFTS Westpac bank accounts in 2016:- The October 2016 audit decision only took into account deposits to HFTS’ accounts at three banks - CBA, NAB and ANZ. However, at least during the 2016 calendar year, HFTS also operated accounts with Westpac Banking Corporation. Between January and May 2016 there were nine deposits to those accounts at various locations in Western Australia and South Australia. In the course of his evidence HFTS was taken to each of the former deposits and said that they had been made by Mr FE. In relation to the deposits made in South Australia, Mr FE agreed that he had been in Adelaide at the time of, and said he may have in fact made, each of those deposits. He similarly agreed with the likelihood that he made at least some of the deposits at the Western Australian locations. However, the nature of those deposits was left obscure. They had not been included in the loan amounts asserted by either HFTS or Mr FE, in their respective statutory declarations. He in fact said, although before his attention had been specifically drawn to the additional deposits, that he had not made any further loan to HFTS after September 2015. The reason for not doing so was that once HFTS got the quarry started he was on his feet and had not needed any further assistance.
Apparent discrepancies relating to the asserted loan amounts:- We noted earlier that HFTS’s solicitors’ 27 March 2017 letter included tables particularising the withdrawals Mr FE had made from his various bank accounts during each of the relevant tax years:- see paragraph 8(b) above. The asserted reason for including this information was to demonstrate Mr FE’s capacity to have made the contentious deposits to HFTS’ account. However the letter made no attempt to correlate the deposits in either of the 2015 and 2016 tax years.[4] In relation to the 2014 tax year, the letter did identify four April 2014 withdrawals from Mr FE’s bank account, and asserted that they matched, and were the source of, approximately contemporaneous deposits to HFTS’ CBA account. However, that correlation provided no evidence of Mr FE’s financial capacity. This was because the evidence established that all of those deposits were made by either online banking transfers, or bank cheque deposits, and had been funded from a $250,000 amount that Mr FE received from Ms DS on 7 April 2014. (We refer to that matter later in these reasons:- see paragraph 59 below.)
[4]Nevertheless, there was one $10,000 deposit in May 2015 that did correlate with an FE account withdrawal.
In the following Table we set out a monthly summary of the “FE related” bank account transactions as asserted in the 27 March 2017 letter.[5] In each month we have recorded the number of the assertedly relevant transactions, and their corresponding total, in each of the HFTS and FE bank accounts identified in the 27 March 2017 letter. We have then added additional rows (indicated as “month +”) to capture similar monthly details for (i) the asserted HS deposits that HFTS said in his oral evidence had been made by Mr FE:- see paragraphs 35 and 36 above; and, (ii) the deposits to HFTS’ Westpac account in 2016.
[5]We have omitted from the Table the $56,000 DS deposition on 22 September 2015 because, even though it was identified as an FE loan in the 27 March 2017 letter, it was also said that Mrs DS (not Mr FE) had actually made the deposit.
In the rows at the bottom of the Table we have included the following details:-
(a)The “loan” total for each tax year – as asserted in the 27 March 2017 letter:- see the Table in paragraph 9 above
(b)The “loan” total for each tax year – taking into account HFTS’ oral evidence (specifically in relation to the asserted HS deposits: see paragraph 30 above)
(c)The total amount of the withdrawals from Mr FE’s bank account in each tax year – as asserted in the 27 March 2017 letter:- see the Table in paragraph 9 above.
(d)An indication of the number and value of the “cash” deposit (or withdrawal) transactions in each tax year.
(e)An indication of the number and value of the transactions where either HFTS or Mr FE’s bank accounts identified the transaction as relating to HFTS and, more specifically, as a loan.
FE deposits / withdrawals - 27 March 2017 letter - plus conceded "non-HS" deposits YE June 2014 YE June 2015 YE June 2016 banka/c transactions HFTS FE HFTS FE HFTS FE "n" $ "n" $ "n" $ "n" $ "n" $ "n" $ July 7 30,000 0 2 15,000 1 2,500 1 120,000 1 3,500 August 1 9,000 1 3,000 3 38,400 1 1,000 September 4 16,000 1 6,000 1 5,000 September + 1 3,000 October 3 12,000 3 3,000 November 0 0 6 6,000 December 4 22,000 3 3,000 January 3 7,000 2 2,000 January + 1 7,000 3 13,900 February 4 29,000 2 2,000 1 7,000 February + 1 9,800 1 1,000 March 2 4,000 2 2,000 2 6,000 9 51,000 March + 1 5,800 3 8,000 April 5 75,000 19 253,898 7 26,250 1 5000 April + 1 30,000 1 3,000 May 1 4,000 4 13,000 2 20,000 9 21,800 May + 1 30,000 1 2,000 June 0 3 3,000 Total loan asserted 34 208,000 6 48,000 5 163,400 Total deposits asserted 34 208,000 12 133,600 14 191,300 Total FE withdrawals 29 272,898 23 62,550 24 72,500 Total cash transactions 19 74,500 23 98,000 6 38,000 22 50,050 3 38,400 24 72,500 FE / HFTS ref (only) 6 31,000 0 0 0 0 1 10,000 0 0 0 0 FE / HFTS loan ref 8 31,500 0 0 1 10,000 1 2,000 2 29,400 0 0
The propositions that can be derived from the information summarised in the preceding Table are as follows:-
(a)In none of the contentious tax years is there a readily discernible consistent correlation between the amounts withdrawn from the FE bank accounts and the deposits to the HFTS bank accounts.
(b)The apparent differences in both the timing and the amount of the bank account transactions in the 2014 tax year tends to contradict the likelihood that (apart from the four transactions in April 2014 – see paragraph 37 above) Mr FE’s bank account withdrawals were the source of the deposits to HFTS’ bank account.
(c)Similar differences suggest the same unlikelihood in relation to the 2015 tax year.
(d)The unlikelihood of Mr FE’s bank account being the source of the deposits to HFTS’ bank accounts appear quite stark in relation to the 2016 tax year. (This puts aside the $120,000 “Westcorp” deposit in July 2015 – see paragraph 61 below.)
(e)Even though some deposits made in the 2014 tax year were specifically described in HFTS' bank account entries as loans from Mr FE, in the 2015 and 2016 tax years there is a marked absence of contemporaneous indications in the bank account descriptions to indicate that any particular transaction was in the nature of a loan.
(f)In the 2015 and 2016 tax years, there is a large difference between the FE deposit loan amounts asserted by HFTS (in the 27 March 2017 letter and his 15 March 2018 statement) and the total of the FE deposit loans HFTS acknowledged in his oral evidence.
Deposits made by Mr FE before July 2013:- According to the 27 March 2017 letter, the first of the contentious deposits Mr FE made to HFTS bank account was a $1,000 cash deposit at the Mandurah branch of the Commonwealth Bank. But this was neither the first of the deposits made at that branch, nor the first of the deposits attributed to Mr FE in HFTS bank account records. There had been approximately twelve similar “cash deposits” (totalling $49,700) to HFTS’ bank account that were made at the Mandurah CBA branch in the months between August 2012 and June 2013. They included a $9,000 cash deposit by “Frank” on 31 May 2013, again at the Mandurah CBA branch. HFTS said that this was definitely a deposit made by Mr FE. (We address the significance of these deposits later in these reasons:- see paragraphs 49 & 54 below.)
HFTS VERSION OF THE ASSERTED FE LOAN ARRANGEMENT AND DEPOSITS
The 27 March 2017 letter cryptically stated that the purpose of Mr FE’s deposits was to provide “monetary assistance”. It necessarily implied that the arrangement had been made before the first deposit (on 1 July 2013) in the 2014 tax year. But neither that letter, nor the December 2016 Objection letter, gave any specific details about the timing, purpose or terms of the asserted loan arrangement between HFTS and Mr FE. Information addressing those matters was not provided until the solicitors letter of 9 May 2017:- see paragraph 16 above.
Both the 9 May 2017 letter and HFTS’s 15 March 2018 statutory declaration asserted that the loan arrangement had been made in a telephone conversation in June 2013, a few months after HFTS’ arrival in Dubai. But only in the 15 March statutory declaration did HFTS relate the arrangement to his asserted financial difficulties in Dubai. According to his statutory declaration version of the phone call, he complained about having to pay accommodation rental a year in advance, and explained that he was having difficulty trying to promote STPM’s business in Dubai. In response to these complaints, and assertedly consistent with other telephone conversations in the preceding months, Mr FE volunteered to lend HFTS money. HFTS’ denial of the loan details asserted in the 9 May 2017 letter (see paragraph 18 above) suggests, and his oral evidence confirmed, that he had no recollection of any discussion about either the time for repayment or the payment of interest.
HFTS acknowledged he operated at least one bank account when he was in Dubai and, at one point, asserted that the only credits to that account had come from his Australian bank accounts. But he did not provide those bank account records and, in his oral evidence, professed an absence of confidence and recollection about the source of credits to that account. Neither was there any other objective evidence of his financial situation in Dubai. Consequently, the proposition that HFTS was struggling financially in Dubai rests entirely on HFTS’ own assertion. As to that, one of the specific points of concern HFTS claimed to have made to Mr FE in June 2013 was the necessity to pay rent 12 months in advance for residential accommodation in Dubai. However, HFTS was apparently living rent free in May and June 2013 and did not thereafter incur any rental obligation until early August 2013. He was, in fact, unable to explain how that rent had been paid. He acknowledged he had not paid the rental amount from the CBA bank account to which the contentious FE deposits had been made. Furthermore, in parts of his oral evidence HFTS baulked at the idea that he was financially struggling in Dubai. He said that “maybe” he had been “bullshitting” to Mr FE. HFTS resisted the notion that the pattern of expenditure suggested by the various debits in his CBA bank account could properly be described as “lavish”, but conceded not only that he had “a problem when it comes to money” but also that his problems included gambling. It is readily apparent from descriptions of the withdrawals from that account during HFTS’ stay in Dubai, that some of them relate to items or activities consistent with a lifestyle marked by significant discretionary expenditure, and are difficult to reconcile with any reasonable concept of financial struggle. (Examples include numerous air fares, hotels, fashion label items, the purchase of a Harley Davidson motor cycle and numerous sizeable cash withdrawals.)
The matters referred to in the preceding paragraph, together with our general impression of HFTS’ unreliability as an accurate historian (see paragraphs 22 & 30 above and 47 & 70 below) disincline us from accepting his uncorroborated subjective assertions of financial struggle in Dubai. In any event, HFTS’ “financial struggle” assertion as the reason for the arrangement he claims to have made with Mr FE hardly explains why (although the Table in paragraph 39 above clearly shows) substantial amounts (specifically, more than half of the “Total deposits asserted”) were deposited after September 2014. By that time HFTS had returned to Australia and established BHGranpl’s operations. Shortly thereafter he was apparently deriving a not insubstantial income from that business, and during 2015 assertedly accumulated cash funds approximating $100,000:- see paragraph 73(b) below. We also note that, at another point in his March 2018 statutory declaration HFTS gave another explanation for some of the asserted FE loan balance. He claimed that he had borrowed funds from Mr FE to set up BHGranpl and purchase necessary equipment for the quarry. However, he gave no specific details, and it is a claim hard to reconcile with either (i) his evidence that the quarry was already an operating business, (ii) the bank account transactions summarised in the Table of deposits (see paragraph 39 above – with particular regard to the 2015 tax year) or, (iii) BHGranpl’s financial statements.
Returning to the “financial struggle” assertion, we observe that it differs from the explanation that had been given in the 9 May 2017 letter:- see paragraph 16(c) above. Earlier in these reasons we noted HFTS’ denial of the accuracy of much of the information in the 9 May 2017 letter. We particularly noted the objectively doubtful accuracy of the claim that the asserted FE loan arrangement related to a property purchase that had not been made until July 2016:- see paragraph 21 above. However, the denial contained in HFTS’ statutory declaration was quite specific, and related to the terms of the arrangement. It did not expressly dispute the proposition that the purpose of the asserted loan was to assist HFTS in purchasing an investment property. Furthermore, another denial HFTS made in his statutory declaration was that he had asked Mr HS for money because he was having cash flow difficulties because of his incarceration. As we also noted earlier, in his oral evidence HFTS said the real reason he had asked HS for money for investment purposes:- see paragraph 28 above.
Next we note that when HFTS was taken to the list of deposits attributed to Mr FE in the 2014 tax year he expressly denied having asserted that Mr FE made all of the contentious deposits. He said he would never say that. He accepted that other people may have made some of the deposits and he claimed he had conveyed that acknowledgement to every solicitor who had represented him in relation to the contentious assessments. Later (and despite the evidence Mr Assaf gave about the extent of his dealings with HFTS, Mr FE, and his analysis of the bank statements) HFTS said he had no idea where the information for the list of FE loan deposits had come from. He ultimately said that the only reason he knew they were loan deposits from Mr FE was because they had been made in Perth.
A generous interpretation of the evidence referred to in the preceding paragraph would attribute to HFTS a distinction between Mr FE, as the operative provider of the funds, and the person or persons who physically attended at the various bank branches and made the cash deposits. But it is difficult to embrace that interpretation as a correct understanding of HFTS’ evidence. The questioning that prompted HFTS’ acknowledged agnosticism about who had made the deposits could not reasonably have been regarded as alluding to any such distinction. It was directed at whether or not Mr FE was the person causally responsible for having provided the funds. That direction is reasonably apparent from the transcript context. Furthermore, HFTS’ disavowal of confidence about the actual source of deposits was consistent with (a) the variation in his previous claim about the amount Mr FE had provided (see paragraphs 5 and 9 above) (b) his disavowal of many of the asserted HS deposits and, (c) his acknowledged uncertainty about other HS deposits:- see paragraph 31 above.
The inconsistency of HFTS’ various explanations of the asserted arrangement with Mr FE, the difficulty of reconciling his “financial difficulties” explanation with the continuation of deposits after August 2014 and HFTS’ diffidence as to whether or not Mr FE had made particular deposits, are three considerations that undermine confidence in the reliability of the loan arrangement he claims to have made in June 2013. Furthermore, the fact that there were many previous deposits, apparently attributable to Mr FE, suggests that whatever were the arrangements between HFTS and Mr FE, at least some aspect of them long preceded the asserted telephone arrangement of June 2013. These combined considerations significantly detract from confidence that the June 2013 loan arrangement asserted by HFTS was in fact made, and that it suffices to permit characterisation of all the deposit transactions in the contentious tax years as loans made pursuant to any such arrangement.
MR FE’S VERSION OF THE ARRANGEMENT WITH HFTS
In his 15 March statutory declaration Mr FE asserted he had lent HFTS the individual deposit amounts (totalling $419,000) particularised in the 27 March 2017 letter. He adhered to that assertion in his oral evidence and explained that, although (like HFTS) he had not kept any record of the asserted loan balance, he had obtained all his bank statements and given them to his accountant, to determine the exact amount involved.
Mr FE substantially agreed with HFTS’ evidence that the loan arrangement had been made in a telephone conversation in June 2013, after HFTS had gone to Dubai. The version of events he gave in his statutory declaration was that he offered to lend HFTS money, because he understood him to have been struggling financially in Dubai. Mr FE said he assured HFTS that he did not need to stress either about the loan or when it was to be repaid. He claims to have added “if you find that big business opportunity, count me in, but if it does not work out for you, it does not work out for me”. The latter statement suggests his indifference to repayment. Complementing that suggestion, Mr FE said in his oral evidence that there was no discussion about the money being repaid or about interest or security.
Mr FE said, at least at one stage in his oral evidence that the individual deposits he made were typically preceded by a phone call request from HFTS either for a specific amount or for any “spare money”. (At other points in his evidence Mr FE asserted a lack of recollection about the reason for particular deposits.) In explaining why his deposits to HFTS bank account were typically made in cash, Mr FE asserted that cash deposits reflected immediately in the bank account balance, without the several day delay that usually accompanied other means of payment.
As we have already said (see paragraph 49 above) there are good reasons to doubt the reality of the asserted June 2013 loan arrangement. In addition to those matters, it is not at all clear that there was any reason why HFTS would have looked to Mr FE for financial assistance in mid 2013. HFTS said that, despite their close personal relationship over many years, he had neither known, nor asked, whether Mr FE had any available funds. Mr FE was himself trying to “start a new life” in a new State, and was unemployed at the time. He remained unemployed during 2014. His income tax returns for those years reported no significant assessable income. At the time of the hearing he had not lodged an income tax return for any subsequent tax year. It is correspondingly unclear what income he had in the 2015 and 2016 tax years, despite some evidence that he worked as a subcontractor to BHGranpl. That limited current employment and income history calls into question the likelihood that Mr FE had, or was thought by HFTS to be likely to have, any “spare money” (to adopt the expression Mr FE used to recall HFTS’ asserted loan request). Despite the assertions made in the 27 March 2017 letter (see paragraph 37 above) Mr FE had no demonstrated means of providing – at least from his own resources - the kind of financial contributions HFTS is asserted to have requested of him in mid 2013. Indeed the objective circumstances point to the contrary.
We noted earlier that Mr FE had apparently provided HFTS with substantial funds well before the asserted telephone call arrangement of June 2013:- see paragraph 41 above. More specifically, notwithstanding both his apparent lack of personal resources and HFTS’ contemporary work for STPM, in the four months before December 2012, Mr FE appears to have made six cash deposits (totalling $18,700) to HFTS’ CBA bank account. In the period from January to June 2013, there were six more deposits (totalling $31,000). In the period from 1 July 2013 to the end of March 2014 Mr FE had made 28 deposits (totalling $129,000) to HFTS account:- see the Table in paragraph 39 above. (We note that all of these deposits occurred before 7 April 2014 when Mr FE received a $250,000 loan from Ms DS:- see paragraph 59 below.) Mr FE said these funds (which reflect a combined total of $178,700) had been made available to him from three sources. They were (i) Ms DS’s son (who had died in July 2013), (ii) Ms DS and, (iii) family and friends.
Ms DS’s son had assertedly provided a total of $130,000 to Mr FE, in three transactions in January and April 2013. After her son’s death, Ms DS had provided Mr FE with two significant payments in December 2013 ($37,000) and February 2014 ($45,000). According to Mr FE’s oral evidence none of these deposits (which total $212,000) was a loan to him. Rather, they were all payments the two DSs made because of apprehensions about their potential liability to a finance company (that Mr FE identified as “Liberty”) and with a view to avoiding Liberty being able to resort to the money. Mr FE asserted that Ms DS’s son told him that he would rather Mr FE have the money than it be recovered by Liberty. Mr FE attributed similar reasoning to Ms DS in relation to her two payments. He noted that Ms DS had not included those two amounts in her loan statements (see paragraph 59 below) and, somewhat ambiguously, suggested that she had regarded them as gifts to him.
In addition to the funds Mr FE obtained from the DSs between January 2013 and April 2014 (ie., $212,000 + $250,000 = $462,000), he also received a substantial number of cash deposits into his various bank accounts. In the period from 1 July 2013 to 30 June 2014, these cash deposits totalled approximately $143,000. He claimed these amounts had all been provided by either his ex partner, other family members, or by members of the Lebanese community to which he belonged. He did not expressly say that any of these receipts was a loan, and he conceded that, five years later, he had neither repaid, nor had he ever been asked to repay, any of these amounts.
We remarked earlier on the fact that the only clearly demonstrable correlation between the transactions on the bank accounts of HFTS and Mr FE involved four deposits (totalling $70,000) that were made by cheque or direct credit in early April 2014, and immediately after Mr FE received the $250,000 amount from Ms DS:- see paragraph 37 above. That receipt seems itself to have been promptly followed by various other transactions that resulted in the entirety of the money being paid out to a number of different payees. It follows that the preponderance of the deposits Mr FE made to HFTS bank account cannot readily be linked to the DS funds. Furthermore, as the Table of deposits set out earlier (see paragraph 39 above) tends to show, many of those deposits were made in cash, and rarely characterised as loan payments.
The frequent appearance of cash deposits in HFTS bank accounts, particularly in the absence of demonstrable correlation between the FE and HFTS account entries, cannot be regarded as sufficiently explained by Mr FE’s evidence about the typical delay in having other forms of payment promptly reflected in the payee’s bank account:- see paragraph 52 above. That evidence has a merely superficial plausibility. Its acceptability depends on the justification for attaching any significance to the need for prompt payment. Neither Mr FE nor HFTS suggested (nor was there objective evidence to indicate) there was any urgency in any of his requests. Indeed, there were many occasions when the deposits to the account were made either by cheque or by on line transfers (inevitably involving some delay in funds becoming available). On other occasions Mr FE made cash deposits either on the same day, or on successive days – conduct that is not obviously consistent only with a primary of objective of providing HFTS with promptly available funds.
THE DS LOANS – DISSONANT EVIDENCE
In her 31 October 2016 handwritten loan statement, that had been provided with the 27 March 2017 letter, Ms DS recorded having made two separate unsecured personal loans to Mr FE, on 31 March 2014 (as to $250,000) and on 1 July 2015 (as to $130,000). In the review proceedings HFTS provided another handwritten statement (dated 20 June 2019) from Ms DS. In that statement Ms DS recorded having lent HFTS $56,000 (on 22 September 2015) “to finish off his swimming pool”.
The 31 March 2014 loan referred to in Ms DS’s October 2016 statement relates to a $250,000 amount paid into Mr FE’s bank account on 7 April 2014. In his oral evidence Mr FE described this as essentially another arrangement of convenience whereby Ms DS sought to put more money out of the reach of “Liberty”, the finance company with which she had some kind of dispute. The payment to Mr FE was, he said, intended to help Ms DS and throw the finance company off the scent. For his part, he appears to have regarded himself as free to use the money as he pleased. (It was almost immediately paid out, in various transactions (including four deposits to HFTS’ bank account), the details and purpose of which Mr FE was unable to recall.) It was not until some time later (in October 2016) after (as he professed to understand) Ms DS had paid out Liberty, that her handwritten statement had been prepared, and the payment was characterised as a loan.
Ms DS’s July 2015 $130,000 loan amount was provided to a company (Westcorp Pty Ltd) that Mr FE controlled. A few days later he drew a $120,000 cheque on the company’s account, and deposited it into HFTS’s CBA bank account. Mr FE said he set Westcorp up as a result of an agreement with Ms DS. The agreement related to the intended purchase of a truck which he hoped to use, as a subcontractor to BHGranpl, hauling granite blocks from the quarry site. The loan arrangement with Ms DS was (according to Mr FE) one in which she would derive some kind of return on her funds. But the arrangement was never documented, and the nature of her return never discussed.
Mr FE’s version of events would tend to suggest that Westcorp had borrowed the $130,000 from Ms DS, and that it was the intended purchaser of the truck. Indeed, both he and HFTS said that the reason for the $120,000 on payment to HFTS, was only for him to source the truck and purchase it for Mr FE and Ms DS (perhaps treating them as synonymous with Westcorp). It was only later, after Westcorp had been de-registered, that Mr FE indicated to Ms DS he would assume personal responsibility for the $130,000 loan.
The truck purchase proposal never proceeded. According to Mr FE’s oral evidence, apart from the truck, there would have been a need to get a licence, a trailer for the truck, and obtain insurance. As well the actual driving task involved was not something he really felt comfortable undertaking. Mr FE said that after considering all those matters he decided the proposal was neither cost effective nor realistic.
That explanation for the lapse of the truck proposal betrays such a rudimentary consideration of what it was likely to involve that we are not satisfied that, as between Mr FE and HFTS, it was ever a genuine proposal. That doubt is consistent with the absence of any detailing of the arrangement with Ms DS:- see paragraph 61 above. Also consistent with our doubts about the genuineness of the truck purchase proposal, its asserted abandonment did not result in the return of any funds to either Westcorp or to Ms DS. According to HFTS, Mr FE told him that there was no hurry to return the $120,000 and he could use the money for whatever he had to do to make the quarry work. (However, he conceded there was no specific discussion about interest or repayment, and speculated that he “would have” said he would repay “when the business kicks off”.) Based on that authorisation, HFTS said he spent the money on various things related to BHGranpl’s business, including the purchase of a loader.
HFTS’ evidence necessarily implies that the quarry business was in some difficulty around the time of the $120,000 deposit, in early July 2015. That claim is difficult to reconcile with BHGranpl’s financial statements. They indicate that it had a turnover of $576,000, and a profit of almost $100,000, during its first months of operation in the 2015 tax year. In the 2016 tax year, BHGranpl almost doubled its turnover. In appears to have done so without either acquiring any significant additional plant and equipment, or incurring any significantly increased expenses for plant hire or repairs and maintenance. (It did, however, enter into a hire purchase arrangement to acquire a BMW motor vehicle, whose acquisition cost was recorded in the 2016 financial statements at about $197,000.) Finally, BHGranpl’s 2016 financial statements do not disclose a liability that can be attributed to any such $120,000 loan amount.)
Mr FE’s evidence was somewhat different. According to him, when the truck purchase did not go ahead the alternative proposal was for him to operate a loader at the BHGranpl quarry. The money that had been provided for the truck was, he said, used instead to purchase a loader, although he was unsure by whom. In any event, that proposal also came to nothing because, according to Mr FE the loader purchased was found to have a broken gearbox and was never in fact used at the quarry.
Mr FE’s evidence about the circumstances of Ms DS’s $250,000 payment in March / April 2014, and about the proposal to purchase a loader for the BHGranpl quarry were flatly contradicted by Ms DS. She also denied any knowledge of the $120,000 payment to HFTS from the Westcorp account. So far as the $250,000 payment was concerned, Ms DS said she drew that money from her superannuation fund, for the purpose of a short term (12 month) business loan that Mr FE requested. She said it was money she had intended to use to build a house, and had constantly been asking for it to be repaid. She completely rejected the idea that the payment had anything to do with a desire to conceal funds from “Liberty”, as Mr FE had claimed. In relation to the $120,000 amount she said she had never got to the bottom of what went on in relation to the truck proposal, and she had fruitlessly asked for the money to be returned after it was not carried through. She completely rejected (with the expostulation “God no, no, no.”) the suggestion that, after the truck purchase proposal did not proceed, she had contemplated purchasing a loader for the quarry.
The conflicting evidence of Mr FE and Ms DS about the circumstances of the original $250,000 payment, the extent of her knowledge about the $120,000 payment to HFTS, and the purchase of the quarry loader, raises serious questions about the reliability of their respective versions of events. Those questions have to be answered adversely to Mr FE’s version of events. Acceptance of the idea that Ms DS made the $250,000 payment because of her concerns about “Liberty” depends solely on his vague evidence. Such a proposition is inconsistent with her evidence about the nature of the loan arrangement. It is not reflected in Ms DS’s handwritten loan statement of October 2016. It is also inconsistent with her evidence that she had effectively resolved her dispute with Liberty. The idea is made even harder to accept when Mr FE is apparently unable to explain what he did with the balance of the $250,000 (after the $70,000 paid into HFTS’ account). Furthermore, despite acknowledging that Ms DS had indeed (at least subsequently) resolved her dispute with Liberty, Mr FE has made no attempt to repay her.
In relation to the loader purchase proposal, we have already expressed our doubts about the genuineness of the truck purchase proposal that preceded it. There is no significant evidence to demonstrate that there was ever any need for such an item of equipment. (BHGranpl’s financial statements for the 2015 and 2016 years reveal significant and profitable activity, and tend to suggest the contrary.) Nor is there any objective or documentary evidence to substantiate the fact of the loader’s purchase, let alone its supposed cost. In that regard, it is arguably significant to note that although, HFTS’s bank account records the receipt of the $120,000 payment from Westcorp on 3 July 2015, there is no corresponding subsequent payment out of the account, nor one that apparently relates to the purchase of a loader.
CONCLUSION ON THE FE DEPOSITS AND LOAN CONTENTION
As we have previously indicated (see paragraph 45 above) HFTS is not a reliable historian. In his oral evidence he said repeatedly that he could not remember the details of conversations relating to the instructions he gave to his solicitors, to his sister or to Mr Assaf, and conversations relating to the asserted loan requests. He acknowledged having an inability to provide specific evidence about important details, including even as to whether material conversations had occurred. That was in the context of his memory being adversely affected by a past history of having been both a boxer and an enthusiastic drug taker.
HFTS’ unreliability on matters of detail is readily apparent from his varying assertions about both the HS and the STPM deposits, and his ultimate substantial disavowal of the loan assertions relating to those deposits. There is a similar unreliability about his assertions of “financial struggle” in Dubai. To those matters may be added the inconsistency between the categorical statement, specifically in the 9 May 2017 letter, that he had not made any repayments to Mr FE, and the unsubstantiated assertions he made in his oral evidence that he had repaid Mr FE something between $150,000 and $200,000.
Apart from those aspects of the unreliability of HFTS’s evidence, there are the additional difficulties in accepting his evidence about the amount and character of the arrangement he asserts he made with Mr FE. Those difficulties start with his various assertions about both the amounts that have been provided by Mr FE, and also the content of his asserted arrangement with Mr FE. The difficulties are added to by the absence of any evidence that HFTS kept a contemporaneous record of, or ever contemporaneously acknowledged, the asserted loan amount. They continue with the paucity of the evidence establishing that Mr FE actually provided the asserted loan funds. (Here we refer to (a) Mr FE’s evident lack of means:- see paragraph 53 above; (b) the repeated “cash” character of the predominance of the deposits and, (c) the poor correlation between the transactions recorded on their respective bank accounts:- see paragraphs 37 and 40 above. We also refer to HFTS’ diffidence about the deposits he attributed to Mr FE: see paragraphs 47 and 48 above.) To those matters we add the failure of HFTS to include in his identification of the FE loan amount any of either the pre July 2013 payments, or any of the payments made after September 2015.
The final significant matter is the absence of any evidence of repayment. The whole thrust of HFTS’ evidence about his asserted arrangement with Mr FE was that he was expected to repay him as and when he was able. His asserted (but unsubstantiated) repayment claims suggest that he had sufficient financial means to make at least some repayments. That suggestion is corroborated by (or at least apparently consistent with) a number of considerations. They include:-
(a)BHGranpl’s apparently significant and successful operation in each of the 2015 and 2016 tax years – as asserted by HFTS in explaining his ability to undertake a two week European holiday in April 2015, and as apparently corroborated by BHGranpl’s financial statements.
(b)Between May and November 2015 made numerous cash withdrawals from his bank account and, by some time in early 2016 he had accumulated (assertedly from those withdrawals) an amount of $100,000 which he then provided to his brother, as an unsolicited loan. An affidavit HFTS swore in June 2016 indicates that (by some time around May 2016) he had also paid a deposit (of an unspecified amount) on the proposed purchase by his brother of a residential property in Western Sydney.
(c)BHGranpl’s financial statements for each of the years ended June 2015 and 2016 reported profitable trading performance. That result (particularly in the 2016 tax year) occurred despite the fact that the company’s operating costs apparently included rental payments (significantly greater in the 2016 tax year) for office accommodation at the Adelaide residence HFTS occupied with his family. The practical effect of those rental payments appears to have been to fund the mortgage costs for the family residence, and to understate the actual profitability of the BHGranpl business.
(d)In May 2016 HFTS received $1.1m, as a result of a property settlement with his wife, following the $3.45m sale of, and the discharge of the mortgage over, a property in Western Sydney, that HFTS had previously transferred into his wife’s name. In his oral evidence HFTS conceded that after receiving this money he had the means to, but did not, repay at least some of the asserted loan amounts.
(e)In July 2016, HFTS contracted to purchase a substantial commercial property in suburban Adelaide. The property had been promoted as having four main tenants, with a total net income of $270,000. The contract was conditional upon the complementary purchase (by HFTS or someone approved by him) of the gym business operated by one of the existing tenants. The purchase price for the property itself was $1.9m. The actual settlement amount (of about $2.026m) was funded by the $1.1m HFTS had obtained from his wife, and as to $997,000, from drawing on a $1m finance facility provided by Westpac Banking Corporation. HFTS caused a newly incorporated company, as the trustee of a unit trust (of which he was initially the sole unit holder), to effect the purchase of the property. Before the company completed the purchase the unit holder became the corporate trustee of a discretionary trust, of which HFTS and Mr FE were beneficiaries.)
It is necessary to say something more about HFTS’s repayment assertions, particularly in relation to the July 2016 property and business purchase. Previously (in the 9 May 2017 letter) HFTS had asserted that the reason for the asserted loan from Mr FE was to assist in the purchase or management of an investment property (ultimately the Adelaide property purchased in July 2016). In both his 15 March 2018 and 15 October 2018 statements HFTS said he had used some of the funds assertedly provided by Mr FE to assist in the property purchase. Mr FE said much the same thing, in his 15 March 2018 statutory declaration.
In contrast with the claim that Mr FE contributed to the property purchase is what happened in relation to the contemporaneous business purchase. HFTS caused F & E Australia Pty Ltd (a company incorporated on 21 July 2016 and of which Mr FE was the sole director and shareholder) to contract to purchase the gym business. The gym business contract price was $65,000, but various adjustments reduced the actual settlement payment to only about $14,000. HFTS said he (rather than Mr FE) provided that amount.
In his October 2018 statutory declaration HFTS said that the purchase of the business in the name of F & E Australia Pty Ltd was itself a partial repayment of Mr FE’s loan. For his part, Mr FE, in his March 2018 statement, suggested that the gym business purchase in F & E Australia’s name was to “start the return” of money he had provided. But he did not say that he had actually received any money. He suggested that he proposed to take $50,000 from F & E Australia’s bank account, and would recognise that as part of the loan repayment. But in his oral evidence he accepted that the money belonged to the company, as the owner of the gym business.
Neither of the possibilities recognised in the preceding paragraph will apply, in a challenge to an objection decision involving a “default” assessment under ITAA 36 s 167, where the “step” seeks to rely on either (i) a demonstrable error in the reasons on calculations underlying the assessment or, (ii) the absence of evidence to warrant an affirmative conclusion that the contentious amount is income:- Gashi v Commissioner of Taxation [2013] FCAFC 30 at [35]-[36], [59]-[67]. The reason underlying both of those propositions is the onus placed on the taxpayer by TAA s 14ZZK. In order to establish that the assessment is excessive, the taxpayer will have to establish the factual and legal basis for the assessment outcome for which they contend. That basis is not found (at least not in the absence of agreement) in the Commissioner’s reasons and findings of fact. Nor can it be established by a mere absence of evidence about the proper character and purpose of receipts and payments:- see Zappia v Commissioner of Taxation [2017] FCAFC 185 at [3]. The point is made abundantly clear in the following passage from the reasons for judgment of Jagot J in Rawson Finances Pty Ltd v Commissioner of Taxation [2013] FCAFC 26 at [111] & [112]:-
[111] …. The review process in a case to which s 14ZZK(b)(i) applies does not necessarily include the tribunal in reaching any state of satisfaction that there is a proper basis for deciding that the facts as found by the tribunal give rise to the amount of the liability in the impugned decision. The only state of satisfaction that the tribunal is required to reach in a review subject to s 14ZZK(b)(i) is whether on the facts as found the applicant has proved that the assessment is excessive. If that state of satisfaction cannot be reached, the application for review must be dismissed irrespective of the tribunal being satisfied or not satisfied that the facts as found by the tribunal give rise to the amount of the liability in the impugned decision.
[112] The two tasks (on the one hand, being satisfied on the facts as found that the applicant has proved that the assessment is excessive and, on the other hand, being satisfied on the facts as found as to the amount of the liability in the impugned decision) are conceptually different. The statute consigns the first task only to the tribunal. It may be accepted that, in performing the first task, the tribunal may consider and/or resolve the second task. No doubt in a case where the tribunal can satisfy itself, in accordance with the second task, that the facts as found by the tribunal give rise to the amount of the liability in the impugned decision the tribunal can also discharge the first task with a high degree of confidence and conclude that the applicant has not proved that the assessment was excessive. Provided the tribunal’s consideration of the second task does not distract it from the task which the statute requires to be performed there will be no question of law capable of vitiating the tribunal’s decision. But the second task cannot be substituted for the first task. There may well be cases where the tribunal cannot satisfy itself on the facts as found that the amount of the liability is the amount in the impugned decision and yet the applicant also cannot satisfy the tribunal that the amount is excessive. In such a case, the application must be dismissed by reason of s 14ZZK(b)(i) of the TA Act.
The practical consequence is that (in the absence of a consensual limitation of issues) a taxpayer will fail in their objection decision review where they either (i) purport merely to “concede” the accuracy of the Commissioner’s “default” assessment of their assessable income (see Rigoli), (ii) merely establish (or accept the Commissioner’s concession about) an inaccuracy in the components the amount assessed (see Bosanac at [64]-[69]), (iii) fail to provide reliable evidence of the amount of their income or, (iv) despite providing generally reliable of evidence of the income they assert, fail satisfactorily to exclude the likelihood or possibility of other income:- see Gashi at [75] to [78]; Bosanac at [77]-[84][10]. In each of those cases the taxpayer will not have discharged the statutory onus and will have failed to provide a basis for a favourable alteration of the Commissioner’s assessment:- Agius v Commissioner of Taxation [2015] FCA 707 at [55] to [62].[11]
[10]Bosanac (in the paragraphs referenced) illustrates a situation where unexplained deposits to a taxpayer’s bank account may result in the taxpayer’s failure to discharge the onus, even where the taxpayer has otherwise attempted to account for their income sources. A later passage in Bosanac (at [98]) explains that even demonstration that particular deposits were not income receipts would not discharge the objection review onus if the taxpayer had not otherwise adequately established the amount of his taxable income.
[11]In Ma Burchett J contemplated that the taxpayer’s success in demonstrating that the assessment amount was likely to be excessive, could permit setting aside the decision, and remitting the assessment to the Commissioner for reconsideration to establish the taxable income amount. It is unnecessary to express a view as to whether the possibility of remittal, merely for the purpose of establishing the taxable income amount, has survived the 2013 amendment of TAA s 14ZZK(b), and the addition of the words “and what the assessment should have been” as part of the taxpayer’s onus.
A taxpayer who is able to provide a factual basis for a satisfactory estimate, rather than certainty, of the amount of any contentious receipts, and the taxable income they involve, may discharge their onus:- see Ma v Federal Commissioner of Taxation (1992) 37 FCR 225; (1992) 27 ALD 601. But a taxpayer who does not present an adequately documented record, of their receipts, expenses and activities is likely to be found to have no reliable evidence of their income, and correspondingly unlikely to be able to provide the basis for such an estimate:- QTWG and Commissioner of Taxation [2019] AATA 2428 at [48] & [49]; Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 per Latham CJ at 87; Bosanac v Commissioner of Taxation [2018] FCA 946 at [15] & [52]-[56] per Steward J. The reason for that unlikelihood is twofold. First, oral recollection and quantification of the value of activities and transactions spanning a many months or years is ordinarily unlikely to provide a sufficient basis for confidence in the reliability of the details necessary to arrive at a satisfactory accurate quantification of the contentious income:- Yung v Commissioner of Taxation [2012] AATA 872 at [13]-[17]. Second, oral evidence of that kind is inherently self serving. Whilst that characterisation does not dictate a conclusion that the taxpayer’s evidence is unreliable, or suggest that it should be treated otherwise than on its merits, it does invite (and indeed require) careful scrutiny, in arriving at satisfaction that the evidence is indeed reliably probative:- see Guaci v Federal Commissioner of Taxation (1975) 135 CLR 81; (1975) 8 ALR 155 per Barwick CJ at 157; McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284; (1979) 23 ALR 583 per Gibbs J at 596.
LIMITATION TO THE OBJECTION GROUNDS
The statutory provision in TAA s 14ZZK(b)(i) conditionally limits HFTS to the grounds raised in his December 2016 Objection. The Commissioner relied on that limitation in the present case to preclude a conclusion that, if HFTS failed to establish that the contentious deposits were loans, there were, nevertheless other reasons why they did not bear an income character. This was in response to a suggestion from the Tribunal, that one possible characterisation of the contentious deposits, is that they were gifts.
We consider that HFTS should be held to the loan contention identified in the grounds for the December 2016 Objection decision, notwithstanding the objective possibility that some of the contentious deposits might be characterised as gifts. The first reason for that view is that, although HFTS appeared for himself at the review hearing, he had previously retained both solicitors and counsel in relation to his Objection and his review application. At one point (in HFTS’s 15 March 2018 statutory declaration, and in counsel’s written submissions of 6 September 2018) a “gift” argument was raised, but only in relation to the funds involved in the payments attributed to STPM. Second, the asserted “loan” characterisation of the FE and HS deposits raised a ground of objection that was fundamentally inconsistent with the contentious deposits being characterised as “gifts”. Third, as the Commissioner’s final oral submissions indicated, the potential description of any contentious deposits as “gifts” would not necessarily exclude their characterisation as “income”. Such a conclusion would require consideration of the total circumstances in which the asserted “gifts” were made, and would likely include exploration of the nature of the relationship between HFTS and the asserted donor. In the case of Mr FE, in particular, the requisite examination would involve the reasons why a person in Mr FE’s apparent circumstances would undertake to make “gifts” in the amount indicated by the contentious deposits. That kind of examination was not necessary, given the Objection grounds relied upon. It is an examination now too late to be undertaken in these proceedings.
CONCLUSIONS IN RELATION TO THE TAXATION ASSESSMENTS IN EACH TAX YEAR
The consequence of our findings in relation to the contentious deposits attributed to each of FE, HS and STPM, is that HFTS has failed to satisfy us he has discharged his onus of establishing the “loan” objection ground on which he relied. Having failed in that contention the character of the asserted FE and HS deposits is unexplained, and consequently HFTS has failed to show that the Commissioner’s assessment for the 2014 tax year was excessive. For that reason the Objection decision relating to the 2014 tax year will be affirmed.
Our findings in relation to the asserted FE and HS loans mean that HFTS has also failed to show that the Commissioner’s assessment for the 2015 tax year was excessive. However, the amended income tax return HFTS lodged in January 2017 shows that the return he lodged in July 2015 significantly understated the income he had derived from BHGranpl:- see paragraphs 4 and 12 above. In addition, reconciliation of the contentious deposits with HFTS’ income from BHGranpl, shows that a significant proportion of that income was not accounted for in the contentious deposits and had not been taken into account in the Objection decision (and the consequential amended assessments):- see the Table in paragraph 14 above.
A similar position applies in relation to the 2016 tax year. HFTS has failed to make out his “loan” contention in relation to the contentious FE deposits, and the Objection decision does not take into account the full amount of the income he derived from BHGranpl:- see the Table in paragraph 14 above. Neither did the Objection decision take into account the additional deposits, apparently made by Mr FE, to HFTS’ Westpac bank accounts between January and May 2016:- see the Table in paragraph 39 above. Conversely, the Objection decision did include the $56,000 DS deposit which, for the reasons we earlier indicated, was subject to a repayment obligation and should be characterised as a loan:- see paragraphs 87 to 91 above.
Although the Commissioner’s April 2018 contention document formally relied on the onus provisions in TAA s 14ZZK, it formulated the issues for determination slightly differently in relation to the 2014 tax year, on the one hand, and the 2015 and 2016 tax years on the other. The statement relating to the 2014 tax year explicitly required HFTS to establish his actual taxable income. The statement relating to the 2015 and 2016 tax years merely enquired whether HFTS had established that the assessments were excessive. In his final written submissions, the Commissioner also contended that HFTS had to establish his actual tax liability in relation to “the default assessment” (expressly a reference to the assessment for the 2014 tax year), but separately addressed the “loan” argument relating to the contentious deposits and did not make the same “actual tax liability” submission in relation to either of the 2015 or 2016 tax years.
As a matter of strict interpretation, the TAA s 14ZZK onus applies indifferently to all reviewable objection decisions relating to assessments, irrespective of the assessment has been based on ITAA 36 ss 166, 167 or 168:- see Bosanac v Commissioner of Taxation [2019] FCAFC 116 at [56]. Applying that onus, there are a number of reasons to doubt whether or not HFTS could have discharged his onus of proof, irrespective of his “loan” argument. These include (i) the unexplained arrangements relating to his salary and directors fee entitlement from BHGranpl, (ii) the appearance that he had conflated his personal affairs and those of the company, (iii) the apparent absence of contemporaneous accounting records, (iv) the absence of any objective evidence of his activities in Dubai (which appear to have extended into part of the 2015 tax year) and, (iv) the apparently questionable reliability (and inadequately explained significance of) the unaudited BHGranpl financial statements Mr Assaf prepared.
Nevertheless, the Commissioner’s final submissions appeared to accept that, as a result of the concession relating to the $56,000 DS loan amount (see paragraph 91 above) HFTS would have discharged his onus, but for the Westpac account deposits in 2016. This was a consequence of the fact that offsetting the DS loan amount against the BHGranpl income not reflected in the assessments resulted in a net income reduction of $17,600. However, that net reduction would disappear, and indeed be replaced by a small increase (of about $10,000), if the 2016 Westpac deposits were to be taken into account as part of HFTS’ assessable income. The Commissioner contended that the Tribunal could and should increase the assessment amount, to take into account the 2016 Westpac deposits.
We are disinclined to accede to the Commissioner’s submission. The Commissioner’s assessment in relation to the 2016 tax year was a special assessment under ITAA 36 s 168. The special assessment power authorises the Commissioner to make an assessment of a taxpayer’s “assessable income”. That authority is different from the kind of assessment, and “judgement”, authorised by the statutory assessment process conditionally permitted by ITAA 36 s 167. The special assessment authority requires a considered characterisation of the contentious receipts as assessable income. Where nothing is known about the receipts than that they were apparently made by Mr FE, but in circumstances that were not raised in the assessment decision, and not really addressed in the review proceedings, there is no real factual basis for characterising them as income. Where, as we consider here, the evidence is ambivalent about the character of the Westpac receipts, HFTS has the difficulty that he cannot show the assessment is “excessive” (even after the Commissioner’s concession in relation to the $56,000 DS loan). But an evidentiary inability to discharge that onus does not justify an affirmative conclusion that the special assessment amount should be increased.
THE PENALTY ASSESSMENTS
The requirement to lodge an income tax return derives from the combined effect of ITAA 36 s 161, and the content of the Commissioner’s notice, contemplated by ITAA 36 s 161. Failure to give a return within the required time gives rise to an administrative penalty liability. If the Commissioner makes an assessment in the absence of a timely return, the administrative penalty liability is 75% of the assessed tax liability:- see TAA Schedule ss 284-75(3), 284-85 & 284-90 Table Item 7.
A taxpayer who makes a false or misleading statement to the Commissioner is conditionally liable to an administrative penalty:- TAA Schedule ss 284-75(1). No penalty liability arises in either of the following situations:- (i) where the taxpayer took reasonable care in connection with making the statement:- TAA Schedule ss 284-75(1); (ii) where the taxpayer engaged a registered tax agent, provided them with “all relevant taxation information”, and the statement was neither reckless, nor made in intentional disregard of a taxation law:- TAA Schedule ss 284-75(5)&(6).
Where an administrative penalty liability arises, the penalty amount depends on (i) whether reliance on the statement gave rise to a lesser tax liability than would otherwise have been assessed (ie., a “shortfall amount”) and, (ii) whether the statement giving rise to the shortfall was the result of a failure to take reasonable care, or was made recklessly or intentionally in disregard of a taxation law. Depending on which of those latter characterisations apply to the statement, the administrative penalty liability is either 25%, 50% or 75% of the resultant shortfall amount:- TAA Schedule ss 284-75(1), 284-80 Table Item 1, 284-85(1) & 284-90 Table Items 1, 2 & 3.
The Commissioner’s 75% shortfall penalty assessment for the 2014 tax year was imposed because of HFTS’ undisputed failure to have lodged an income tax return for that year. The Commissioner’s 25 October 2016 objection decision imposed a 75% penalty for the 2015 tax year on the basis of HFTS intentional disregard of a taxation law. That conclusion was derived from inferences the Commissioner had drawn in the 25 October 2016 audit decision reasons. There the Commissioner had taken into account the (i) the magnitude of the shortfall amount in the 2015 tax year, (ii) HFTS’ awareness of the contentious receipts, evidenced by the bank account deposit records and, (iii) HFTS’ frequent resort to the deposited funds for apparently non-business purposes, potentially consistent with awareness of their character as income.
The 2016 audit had been conducted without notice to HFTS, and characterised the contentious deposits as “unexplained income”. The audit decision reasons did not consider (and the Commissioner was apparently then unaware of) the “loan” assertion HFTS relied on in the December 2016 Objection. The Commissioner’s 23 August 2017 Objection decision reasons did address the “loan” contention. In the absence of any repayment or documentary support for the loan contention, the reasons concluded that HFTS had not established that the asserted “loans” were genuine. The Commissioner also considered that HFTS had “changed his position” between the December 2016 Objection, and the March 2017 particulars, and had conceded that the previously asserted “mistaken deposits” from BHGranpl were in fact income payments. The Commissioner then had regard to the policy guidelines in Miscellaneous Taxation Ruling MT 2008/1 (Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard). Paragraphs [111] & [112] of that ruling characterised the test for intentional disregard of a taxation law as subjective, and required satisfaction that the taxpayer both understood the substance of the relevant taxation obligation and had made a deliberate choice to disregard it. Despite that high standard thus suggested, the Commissioner’s Objection decision proceeded on the basis that HFTS’ intentional disregard could be inferred, essentially from the apparent lack of substance in the asserted “loan” explanation for the contentious deposits.
The principal contention in the December 2016 Objection letter was that the asserted loan receipts should not be characterised as income and consequently, the penalty assessment should be either reduced or “remitted, at the least, to the extent there is no shortfall”. The alternative, but logically prior, contention was that HFTS was exempt from any penalty liability because his 2015 tax return had been lodged by a registered tax agent, to whom HFTS had provided “all relevant taxation information”.
The 14 March 2018 contention document lodged by HFTS’ then solicitor disputed the penalty assessments, but primarily on the ground that there had not been any tax shortfall in either the 2014 or 2015 tax years. The briefly stated additional contention was that, rather than intentionally disregarding a taxation law, HFTS’ culpability was merely a failure to take reasonable care. Subsequently the 6 September 2018 outline submissions provided by HFTS’ former counsel contained essentially the same points, and supplemented them with the proposition that it was “not unreasonable” for HFTS to have excluded the asserted loan amounts from his assessable income.
HFTS did not address the penalty issue in any of the three statutory declarations on which he relied in the review proceedings. At a general level he said that he was not familiar with accounting and taxation laws and relied on professional advice. Beyond the generality of that assertion, he did not explain the circumstances in which he had come to lodge his 2015 tax return (on 27 July 2015. At the outset of the review hearing, counsel for the Commissioner noted the latter omission and invited HFTS to provide further information to support his formal objection to the penalty assessments, particularly in relation to his failure to lodge an income tax return for the 2014 tax year. That invitation having been issued, the Tribunal indicated to HFTS that he could either accept it or alternatively, proceed on the basis that the Commissioner’s counsel would be encouraged, in the course of his cross examination, to ask him to explain the reasons for his objection to the two penalty assessments. HFTS took the latter course and, at the end of his evidence was asked a number of questions.
Most of those questions were about his failure to lodge an income tax return for the 2014 tax year, and are addressed later in these reasons:- see paragraph 149 below. In relation to the 2015 tax year, counsel for the Commissioner specifically put to HFTS that he knew the contentious deposits were income. The suggestion met with a vigorous, indeed indignant and combative denial.
Earlier in these reasons we have unambiguously expressed our view that HFTS is not a reliable historian:- see paragraph 70 above. For that reason, although we do not disregard his emphatic denial, we do not consider it would be appropriate to regard such an assertion, made in the course of the review hearing and four years after the event, as determinative. However, it was a denial similar in effect to many instances throughout the course of the hearing when HFTS contended that neither the undocumented nature of the arrangements, his inability to recall relevant details, or the absence of repayment justified characterisation of the contentious receipts as income. Furthermore, although we have not been prepared to accept that HFTS made the asserted arrangement with Mr FE (or Mr HS) it is not without significance that (a) most of the contentious deposits (particularly in the 2015 tax year) were attributed to Mr FE, (b) that appears to have been HFTS’ understanding at the time of the December 2016 Objection (see the Table in paragraph 5), (c) there does seems to have been some understanding of friendship or cultural related reciprocity in the relationship between HFTS and Mr FE concerning the payments, (d) HFTS’ inability (as we have determined) to affirmatively establish the “loan” character of the contentious deposits is not inconsistent with either the fact, or HFTS’ contemporaneous belief, that they were not in truth assessable income and, (e) there is no affirmative evidence to establish that the contentious deposits attributable to FE and HS were in fact income receipts.
We acknowledge that the 2015 tax year return lodged in July 2015 understated HFTS’s income from BHGranpl. We would infer that (a) the return was prepared by a registered tax agent (as asserted in the December 2016 Objection, noted in the amended assessment lodged for the 2015 tax year, and consistent with HFTS general assertion of reliance on professional advisers), (b) the return was prepared on the basis of the existing available accounting records, (c) the available according records did not include financial statements for BHGranpl (Mr Assaf’s evidence indicates he prepared them sometime after mid 2016), (d) the available records did not include any explicit statement about HFTS’ income entitlement from BHGranpl and, (e) HFTS had conflated his own affairs with the activities of BHGranpl to some significant extent (as suggested by the “mistaken deposits” argument advanced in the December 2016 Objection).
Although the evidence as a whole is not entirely satisfactory, we are inclined to the view that HFTS’ disavowal of intentional disregard in relation to the contents of the 2015 tax return lodged in July 2015 is credible, and should be accepted. This is essentially because of (i) the vigour and apparent genuineness of HFTS’ denial, (ii) the inherent difficulty of the exercise involved in the impressionistic characterisation of a contentious “loan” (see paragraphs 92 to 110 above) and, (c) the fact that rejection of the “loan” contention does not dictate characterisation of the contentious receipt as income:- see paragraphs 111 to 120 above.
On the other hand, the same factors that indicate the unsatisfactory nature of the available accounting information, and HFTS’ apparent conflation of his own activities and those of BHGranpl, contribute to comfortable satisfaction that HFTS was reckless in relation to compliance with taxation laws in connection with the submission of the July 2015 tax return.
The “recklessness” criterion referred to in TAA Schedule s 284-90(1) has been regarded as involving “gross carelessness” to the extent of indifference to, or actual disregard, of a risk that would be foreseeable to a reasonable person. This is the view that has been consistently taken of the concept in the taxation context:- see Federal Commissioner of Taxation v R & D Holdings Pty Ltd [2007] FCAFC 107; (2007) 160 FCR 248 at [70]. In Hart v FC of T [2003] FCAFC 105; (2003) 131 FCR 203 Hill and Hely JJ said this about the concept:-
[43] Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) ATC 4111 at 4129 Cooper J made the following observations in relation to recklessness in the context of s226H;
'Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.'
Even though we have inferred that HFTS’ likely retained a registered tax agent in connection with the lodgement of his original return for the 2015 tax year, there is certainly no affirmative evidence to establish that he provided “all relevant taxation information” for the purpose of preparing the return. On the contrary, the matters we have referred to above indicate there is no real possibility he could have satisfied that requirement. Accordingly, there is no basis for concluding that HFTS’ has made out the administrative penalty exemption in TAA Schedule s 284-75(6). More significantly, for the purpose of the recklessness characterisation of HFTS’ conduct, we consider that characterisation is appropriate in relation to HFTS’ conduct in authorising the submission of the 2015 tax return when the true position of his income receipts from the company could not have been known with any confidence (given the apparent conflation of the two entities financial affairs).
THE PENALTY REMISSION DISCRETION – THE 2014 TAX YEAR
The Commissioner has a general discretion to remit part or all of any penalty liability. A refusal to remit decision must be the subject of written reasons, and is itself a reviewable decision:- TAA Schedule s 298-20.
The December 2016 Objection letter included a request for penalty remission at least “to the extent that there is no shortfall”. Neither the terms of that request, nor the other contents of the Objection letter, specifically addressed the administrative penalty for the failure to lodge a return for the 2014 tax year. Nor were any other submissions or explanations subsequently provided. That absence of any explanatory information was at the heart of the remission refusal in the Objection decision.
Notwithstanding the absence of any previously articulated basis for the exercise of the remission discretion in relation to the 2014 tax year. As we indicated earlier, at an early stage of the review hearing the Commissioner’s counsel invited HFTS to provide an explanation for that failure:- see paragraph 138 above. Given that invitation, and the matters referred to in the succeeding paragraph, we do not consider that HFTS should be limited to the abbreviated content of the Objection in relation to the penalty for the 2014 tax year.
The invited explanation for non-lodgement of the return for the 2014 tax year came in response to questions posed, first by the Commissioner’s counsel, and subsequently by the Tribunal, towards the end of HFTS’s cross examination. His response to counsel’s questions was that he really did not remember. The questions from the Tribunal drew HFTS’ attention to the apparent regularity of his tax return lodgement prior to 2014, and his prompt lodgement of the 2015 tax return. Notwithstanding those circumstances, which tend to indicate the aberrant nature of the non-lodgement for the 2014 tax year, HFTS again said he did not know. When pressed as to whether he had sought any advice in relation to the 2014 tax year, HFTS said that although he had previously retained an accountant, he did not think he had an accountant at the time of his return from Dubai. After he returned to Australia he said he did not have any discussion with anyone about lodging a tax return for the 2014 year. He could not even recall who had acted for him in lodging his tax return for the 2015 tax year. He said that he did not really understand his lodgement obligation. Because he had been out of the country, he did not think he had to lodge a return.
This evidence is not entirely satisfactory, but it is clearly established that HFTS was living in Dubai throughout the 2014 tax year. It is also clear that the non-lodgement of a return for that year was a significant departure from what appears to be his usual conduct.
Exercise of the remission discretion is addressed in Practice Statement Law Administration PS LA 2014/4. An important consideration is that the lodgement requirement, and the related statutory penalty, should be administered both consistently and in a fair and reasonable manner. Consistent with that view, whilst the statutory penalty rates are inherently designed to promote consistent treatment for non-compliance, regard may properly be had to (a) the taxpayer’s compliance history, (b) whether the lodgement failure was the result of a genuine misunderstanding of the lodgement requirement, (c) the circumstances that contributed to that understanding, including reliance on, or failure to seek, relevant advice and, (d) the amount of the penalty resulting from the application of the statutory rate. An additional proposition is that remission is “generally not appropriate” where the taxpayer either understood or “should have understood” their lodgement obligation:- see PA LA 2014 / 4 paragraphs [27] to [32]. Finally, subsequent compliance or co-operation may contribute to the favourable exercise of the remission discretion:- (see the PA LA 2014 / 4 paragraph [59] example)
Not without some hesitation, we are inclined to accept HFTS’ assertion that he genuinely did not consider that he had to lodge a tax return for the period when he was living in Dubai. That would not be a determinative consideration if we were satisfied that he “should have understood” his lodgement obligation. But it is very clear from the totality of the evidence that HFTS has only a general understanding of taxation law requirements, and is heavily reliant on the advice and assistance of others. That, of course, creates the difficulty that he offered no real explanation (other than misplaced confidence in his own understanding) for not having sought specific and appropriate advice in relation to his lodgement obligations for the 2014 tax year. However, we consider that, against the background of his own record of previous compliance with lodgement requirements, and the reality of his presence in Dubai throughout the 2014 tax year, his lodgement failure in 2014 should be viewed as more akin to recklessness than intentional non-compliance. Viewed in that way, we consider it appropriate to approach the penalty remission discretion on the basis that HFTS was reckless in his failure to lodge a return, rather than that his failure was knowing and intentional. In those circumstances it appropriate to impose a substantive administrative penalty of 50% of his tax related liability for the 2014 tax year, and to remit the balance of the penalty assessment. Despite that remission, the administrative penalty will still approximate $80,000 and will constitute a substantial sanction for his non-compliance.
PENALTY REMISSION – THE 2015 TAX YEAR
Having regard to our previous conclusion that HFTS was reckless about compliance with taxation laws in relation to the contents of his July 2015 tax return, and after having regard to the guidance provided in MT 2008/1, we do not consider that there is any proper basis for remission of any part of the administrative penalty in relation to the 2015 tax year penalty assessment
CONCLUSION
The decision under review is
(a)Affirmed in relation to the assessments for each of the 2014, 2015 and 2016 tax years
(b)Set aside in relation to the penalty assessment for the 2015 tax year and in substitution the Tribunal decides that the administrative penalty for the 2015 tax year is 50% of the shortfall amount for that year.
(c)Set aside in relation to the refusal to remit any part of the administrative penalty for the 2014 tax year and in substitution the Tribunal decides that the administrative penalty for that year is remitted to the extent of 25% of the tax liability for that year.
I certify that the preceding 154 (one-hundred and fifty four) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member and N Gaudion, Member
......................................[sgd]..................................
Associate
Dated: 2 December 2019
Date(s) of hearing: 8 to 10 July and 29 August 2019 Date final submissions received: 28 August 2019 Applicant: In person Counsel for the Respondent: Mr B Kasep Solicitors for the Respondent: Australian Taxation Office
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