Hourigan and Commissioner of Taxation (Taxation)
[2018] AATA 3369
•10 September 2018
Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369 (10 September 2018)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2016/6335, 2016/6336, 2016/6337, 2016/6338, 2016/6339
Re:Joshua Hourigan
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President R I Hanger QC
Date:10 September 2018
Place:Brisbane
The Tribunal:
a)Sets aside the decisions under review to the extent that they deal with the assessment of the taxpayer’s income for the subject years, and remits the decisions to the Respondent in accordance with these reasons; and
b)To the extent that the decisions deal with the imposition of penalties and shortfall interest charges, allows the Applicant and Respondent to reconsider and make further submissions within 14 days of the date of this decision regarding their respective positions.
...........................[sgd]......................................
Deputy President R I Hanger QC
CATCHWORDS
TAXATION – whether fraud or evasion – whether applicant discharged onus to show whether amended assessment excessive – whether liable for penalty uplift – unexplained deposits – whether shortfall interest charge should be remitted – decision under review regarding assessment set aside and remitted – administrative penalty and shortfall interest charges – further submissions
LEGISLATION
Taxation Administration Act 1953 (Cth)
Income Tax Assessment Act 1936 (Cth)CASES
Bai v Commissioner of Taxation [2015] FCA 97
Binetter v Commissioner of Taxation (2016) 346 ALR 357 at 374
Dalco v Commissioner of Taxation (1990) 168 CLR 614 at 626, 631
Denver Chemical Manufacturing v Commissioner of Taxation (1949) 79 CLR 296 at 313
Gashi v Commissioner of Taxation [2013] FCA FC 30
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148
Jones v Dunkel (1959) 101 CLR 298
Kuhl v Zurich Financial Services (2011) 243 CLR 361
Reeders v Federal Commissioner of Taxation [2001] AATA 933SECONDARY MATERIALS
Practice Statement Law Administration Act 2008/6
Miscellaneous Taxation Ruling 2008/1
REASONS FOR DECISION
Deputy President R I Hanger QC
10 September 2018
BACKGROUND
In April 2016, the Respondent conducted an audit of Mr Hourigan’s taxation affairs and issued amended income tax assessments for the income years ending 30 June 2010, 2011, 2012, 2013 and 2014 (‘the subject years’).[1] The Applicant objected to those amended assessments and that objection was, to some extent, allowed.[2] The Applicant has sought a review of the decisions to the extent that the objections were disallowed in respect of each year pursuant to section 14ZZ(1)(a)(i) of the Taxation Administration Act1953 (‘TAA’).
[1] Exhibit 1, T-documents, Volume 1, T2 at pages 32-52, Reasons for Decision dated 28 September 2016.
[2] Exhibit 1, T-documents, Volume 1, T2 at page 32, Reasons for Decision dated 26 September 2016.
The Respondent contends that there has been an avoidance of tax for each of the subject years due to fraud or evasion by the Applicant.[3] In forming this opinion, the Respondent relied on the fact that the private expenditure established by the Applicant’s bank accounts far exceeded, and could not possibly be supported by, his reported income.[4] The Respondent accordingly concluded that the Applicant falsely reported income, thereby avoiding his true tax liability which resulted in a shortfall amount.
[3] Exhibit 5, Respondent’s Statements of Facts, Issues and Contentions dated 20 June 2017, para 11.1.
[4] Exhibit 1, T-documents, Volume 1, T2 at page 34, Reasons for Decision dated 26 September 2016.
It therefore contends that pursuant to sections 167 and 170 of the Income Tax Assessment Act1936 (‘ITAA’), it has power to amend the Applicant’s income tax assessments for the financial years of 2010, 2011, 2012, 2013; and it has power to amend the assessment for the financial year ending 30 June 2014 within the timeframe pursuant to section 170(1).
LEGISLATIVE FRAMEWORK
Section 167 of the ITAA allows the Commissioner to make an assessment of the amount of income tax which, in their judgement, ought to be levied against a person, which is taken to be taxable income for the purpose of section 166 of the ITAA, if:
· That person makes default in furnishing a return; or
· The Commissioner is not satisfied with the return furnished by that person; or
· The Commissioner has reason to believe that the person, who has not furnished a return, has derived taxable income.
Section 170 of the ITAA relevantly allows the Commissioner to amend an individual’s tax assessment for a year of income, within 2 years after the day on which the Commissioner gives notice of the assessment to the individual,[5] or at any time if they are of the opinion that there has been fraud or evasion.[6]
[5] Income Tax Assessment Act 1936 (Cth), s 170(1), Item 1.
[6] Income Tax Assessment Act 1936 (Cth), s 170(1), Item 5.
The concepts of fraud and evasion in relation to tax law are delineated in Practice Statement Law Administration 2008/6 (‘PS’). There, the PS provides that fraud involves the making of a false statement knowingly or recklessly, without care as to whether the statement is true.[7] The PS indicates that the threshold for an opinion of ‘evasion’ is lower than the threshold to establish fraud. The PS adopts Dixon J’s judgment in Denver Chemical Manufacturing v Commissioner of Taxation when defining evasion.
[7] Practice Statement Law Administration 2008/6.
Dixon J held that for the Commissioner to form the opinion that there has been evasion, it must be established that there has been both an avoidance of tax, resulting in a shortfall amount, and a blameworthy act or omission on behalf of the taxpayer or their agent.[8]
[8] Denver Chemical Manufacturing v Commissioner of Taxation (1949) 79 CLR 296 at 313.
Under Schedule 1 of the TAA, a person is liable for an administrative penalty if they make a statement to the Commissioner and the statement is false or misleading in a material particular.[9] The base penalty liability is calculated as follows:[10]
·25% of the shortfall amount if the shortfall arose due to a failure to comply with a taxation law;
·50% of the shortfall amount where the shortfall arose due to recklessness as to the operation of a taxation law; or
·75% of the shortfall amount where the shortfall arose due to an intentional disregard of the taxation law.
[9] Taxation Administration Act 1953, Schedule 1, Section 284-75.
[10] Taxation Administration Act 1953, Schedule 1, Section 284-90.
The base penalty may also be increased by 20% if, relevantly, the taxpayer made an effort to prevent or obstruct the Commissioner from finding out about a shortfall amount, or the false or misleading nature of the statement, or was previously liable for a penalty under subsection 284-75 or 284-90 of Schedule 1 of the TAA.[11]
[11] Taxation Administration Act 1953, Schedule 1, Section 284-220.
The burden of proof pertaining to tax evasion or fraud is summarised by the full Federal Court in Binetter v Commissioner of Taxation (2016) 346 ALR 357 at [93], as follows:
“Although the Tribunal re-examines whether, on the evidence before it there was an avoidance of tax due to fraud or evasion, and is able to substitute its opinion for that of the Commissioner, the issue for the Tribunal is whether the taxpayer has discharged the onus of showing that the opinion that there was fraud or evasion should not have been formed, and therefore, that the statutory condition for the power to amend is not satisfied. Unless the taxpayer discharges that onus, the assessments are not shown to be excessive and the effect of section 14ZZK is that the Tribunal must affirm the amended assessments, such assessments having been made by the Commissioner in compliance with the statutory requirements. (McCormack v Commissioner of Taxation (1979)143 CLR 284 at 303; Millar v Commissioner of Taxation [2015] FCA 1104. In Millar, Griffiths J correctly held that on a merits review before the tribunal, the onus of proof imposed by section 14ZZK places on the taxpayer the burden of disproving fraud or evasion”.
The taxpayer bears the civil onus of proof, and therefore needs to show that, on the balance of probabilities, there was no fraud or evasion.[12] The onus is not discharged by identifying a mere error by the Commissioner, by ‘chipping away’ at an asset betterment assessment or by showing only that some moneys treated as income are not in fact income.[13]
[12] Bai v Commissioner of Taxation (2015) 67 AAR 197 at [25].
[13] Dalco v Commissioner of Taxation (1990) 168 CLR 614.
Even when the Applicant cannot discharge the onus to disprove the existence of tax fraud or evasion, the Tribunal will still consider whether the assessment made is excessive: Bai v Commissioner of Taxation [2015] FCA 973 at [34] and [35]. I do not understand the decision in Binetter or Dalco to be at odds with this proposition. The Applicant has not proven, on the balance of probabilities, his actual income in any of the subject years to my satisfaction but the Respondent has identified specific deposits which make up the great bulk of the asset betterment statements. I proceed on the basis that the asset betterment statements are correct and the Applicant has the onus of establishing they are wrong. To do that, he must at least deal with the items identified by the Respondent.
Where, as in this case, an assessment has been made on the basis of an asset betterment method of calculation, and the Commissioner has identified specific deposits into a taxpayers account which it has treated as income, the taxpayer must prove, on the balance of probabilities, that it is not income and that can best be achieved by demonstrating its source. Such an exercise will ordinarily entail the “identification of sources of income, explanation of a taxpayer’s activities and an explanation of the source or sources of a taxpayer’s assets.”[14]
[14] Gashi v Commissioner of Taxation [2013] FCAFC 30 per Bennet, Edmonds and Gordon JJ at [65].
In relation to the burden of proof, the Tribunal must also approach self-serving evidence given by witnesses or parties to an application with ‘the greatest caution’. The statements must necessarily be tested, and normally corroborative evidence is required to establish that the testimony is to be believed on the balance of probabilities.[15] This is not to say however, that self-serving evidence be necessarily disbelieved.
[15] Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148 per Hill J at [155].
ISSUES FOR DETERMINATION
The question of tax fraud or evasion is one of objective fact.[16] The Applicant must establish the following on the balance of probabilities:
(a)that the opinion that there has been an avoidance of tax due to fraud or evasion for the subject years was wrong; and
(b)that the assessments with respect to the subject years are excessive.
[16] Bai v Commissioner of Taxation (2015) 67 AAR 197 at [23].
The Tribunal will also consider:
(a)Whether the administrative penalties imposed pursuant to section 284-75(1) of Schedule 1 to the TAA for the subject years are excessive; and
(b)Whether the discretion to remit the shortfall interest charge imposed with respect to the financial years ended 30 June 2010 and 30 June 2011 ought to be exercised.
The Applicant provided an affidavit and gave oral evidence at the hearing. His father, Mr Hourigan Senior, provided a statutory declaration but was not called as a witness at the hearing.
Following the conclusion of the hearing, I invited the parties to make further submissions on the following matters:
· The effect of the Applicant not calling his father or ex-partner as witnesses at the hearing;
· The overall effect of the Applicant’s evidence concerning the funds transferred to him by, or at the behest of, his father;
· Whether the liability for an administrative penalty imposed by section 284-75 of Schedule 1 of the TAA is automatically set as 75% pursuant to section 284-90 of Schedule 1 of the TAA following a finding of fraud or evasion; and
· What facts were identified by the Commissioner to support a 20% uplift under section 284-220 of Schedule 1 of the TAA.
In response, I received further submissions from both parties, including an additional statement from the Applicant with some attachments evidencing what he asserts were loans and repayments thereof for relatively minor amounts of money. As no objection was raised by the Respondent as to the receipt of those documents I will admit them and take them into account as unsworn statements.
Did the Applicant discharge the onus of showing that the opinion that there was fraud or evasion should not have been formed?
In the financial years ended 30 June 2010 and 2011, the Applicant reported receiving income for providing labouring and construction services.[17]
[17] Respondent’s Post-Hearing submissions dated 21 February 2018, para 22.
For the income years ended 30 June 2012 to 30 June 2014, he reported receiving income for providing services as a door attendant.[18]
[18] Respondent’s Post-Hearing submissions dated 21 February 2018, para 22.
The Applicant’s income, as reported in his various tax returns, is as follows:[19]
[19] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017 at para 10.
Year Ended 30 June Gross Salary and Wage ($) Gross Interest ($) Net Business Income ($) Gross Rent ($) Reported Taxable Income ($) 2010 1,080 209 79,025 80,314 2011 3,318 18,268 21,586 2012 6,132 24,463 30,595 2013 7,528 2,002 -1,254 3,960 10,573 2014 39 3,841 22,414 22,237 TOTAL 8,608 11,700 125,597 26,374 165,305
Essentially, the Applicant’s case is that the unexplained deposits into his account constitute loans from his father, or repayments of loans from various other third parties, and therefore are not assessable income. The Applicant contends that he truthfully and accurately reported his Income Tax Return as he was not required to report the various loans to the Commissioner, and accordingly there was no fraud or evasion.
The assessment for the income year ended 30 June 2010
Following the determination of the Applicant’s objection, the adjusted taxable income for the income year ended 30 June 2010 imputed to the applicant was as follows:
Year ended 30 June Reported Taxable Income Income after objection Adjustment after Objection 2010 $80,314 $108,391 $28,077
The Respondent concedes that an amount totalling $10,000, which was identified by the Applicant as being a transfer made on 10 December 2009 from one of his bank accounts into another savings account in his name, should have been excluded from the Commissioner’s asset betterment calculation.[20] The Respondent consequently provided an updated asset betterment analysis, calculating the remaining unexplained taxable income as $18,077 for the relevant financial year.
[20] Respondent’s Post-Hearing submissions dated 21 February 2018, para 38.
The Respondent’s principal contention in relation to the financial year ended 30 June 2010 relates to an unexplained deposit of $13,000 made on 18 August 2009. The Applicant gave evidence that this relates to the sale of a Ford Falcon from him to his partner Samantha Heron.
The evidence before the Tribunal consists of the Applicant’s affidavit and bank account records, copies of the Vehicle Registration Renewal Notice, a letter from the Queensland Department of Transport and Main Roads, confirming that the vehicle was transferred out of the Applicant’s name on 28 January 2011, and the original renewal certificate, bearing a notation made by the Applicant indicating a date of sale. Ms Heron was not called to give evidence and although her banking records were summonsed, the records for the relevant date do not appear to have been summonsed, and therefore there is no proof that the funds came from her account.
The Applicant’s bank statement for the impugned transaction bears the words “my ford now”,[21] and Mr Hourigan gave evidence that this is an entry made by Ms Heron at the time of the deposit. The Applicant says that there was no written contract between him and Ms Heron, as they were a couple, and that he gave her the signed transfer documents, but she did not transfer the car into her own name. It was not until Ms Heron sold the car in January 2011 that it was transferred into the new buyer’s name. In other words, there is no official record that the car was ever transferred to Ms Heron which could substantiate the Applicant’s explanation for the deposit. The Respondent contends that as the evidence available does not identify the source of the funds, or corroborate that the payment came from Ms Heron, the Applicant cannot establish the requisite standard of proof. Although the documentary evidence before the Tribunal is scarce, I accept the Applicant’s evidence in relation to the sale of this vehicle and accordingly make an adjustment in respect of the $13,000 to exclude this amount from the asset betterment calculation.
[21] Exhibit 1, T-documents, Volume 2, T32 at page 620, Applicant’s bank statement for the period 1 July 2009 – 16 November 2014.
The further submissions from the Applicant lodged on 20 February 2018 include a signed statement from Chris Walters to the effect that, in the financial year ending 2010, he repaid a loan of $600 to the Applicant’s savings account. There is no corresponding deposit of that amount, on that date, in any of the Applicant’s bank accounts. The bank statements do however confirm that Mr Walters paid $600 to the Applicant’s savings account in the financial year ending 2011, and the loan will accordingly be dealt with for that particular year.
In seeking to explain the remaining $434.30 of ‘unexplained deposits’ identified by the ATO[22] comprising a deposit of $234.30 and $200, the Applicant gave evidence at the hearing that he did not know what the deposit of $234.30 on 30 December 2009 was, but that he could have been banking his loose change, which he did periodically. The Applicant stated that he was sure the $200 deposit in his account on 9 February 2010 was transferred into his account, and that he had already reported it in his income tax return as being income for personal training. The Applicant’s bank statement for 9 February 2010 indicates a cash deposit of $200.[23] I do not accept this evidence to be probative, and therefore do not accept that the Applicant has discharged the onus on him in respect of these amounts.
[22] Respondent’s Post-Hearing Submissions dated 21 February 2018, Schedule 1.
[23] Exhibit 1, T-documents, Volume II, T32 at page 642. Applicant’s bank statement for the period 1 July 2009 – 16 November 2014.
That means that the adjustment to the year ended 30 June 2010 should be reduced from $28,077 to $5,077.
In Bai v Commissioner of Taxation [2015] FCA 973, Rares J said:
[34] “The taxpayer had to satisfy the Tribunal, on a review of an objection decision, that the Commissioners opinion that there had been fraud or evasion was excessive, that is, she had the onus of proving that the Commissioner’s opinion was objectively wrong in order to discharge her onus of negating the precondition for the exercise of his power to amend her assessment under item 5 of section 170 (1) of the 1936 Act. If she had done so, then the whole amended 2005 assessment would have been set aside and the legal efficacy of the original assessment restored.”
In Gashi v Commissioner of Taxation (2013) 209 FCR 201 at [65], the Full Court said:
“… Even if a taxpayer was able to prove that an item in the asset betterment statement was wrong or should not have been included, but did not adequately explain the source or sources for the otherwise unexplained increase in wealth, the taxpayer would not discharge the onus under section 14ZZO of the TAA.”
Having regard to the authorities, it is clear that for the taxpayer to positively show that the opinion that there was fraud or evasion was wrong, he must establish his actual tax liability for that year. Despite the finding that the assessment should be reduced by $13,000, as the Applicant has not adequately explained the source or sources for the balance of otherwise unexplained deposits, the Tribunal cannot accept that he has discharged his onus under section 14ZZO of the TAA.[24]
[24] Gashi and Commissioner of Taxation (2013) 296 ALR 497 at [66].
In light of the evidence currently before the Tribunal, the Applicant has failed to prove that for the financial year ending 2010, there was no evasion of tax to the extent set out in paragraphs 25 and 28 in respect of approximately $5,000 of his income.
The assessment for the income year ended 30 June 2011
The adjusted taxable income for the income year ended 30 June 2011 imputed to the Applicant after the determination of the objection is as follows:[25]
[25] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 26.
Year ended 30 June Reported Taxable Income Income after objection Adjustment after Objection 2011 $21,586 $289,657 $268,071
In his evidence, Mr Hourigan accounted for transfers of money to him totalling $210,000. These can be categorised as being of two types: – a payment of $75,000 from Mr Peter Benjamin and three transfers totalling $135,000 from National Cellulose Australia Insulation Pty Ltd (NCAI).
The payment of $75,000 from Peter Benjamin
In his affidavit of 14 January 2018, the Applicant deposed that in or about August or September 2010, he entered into an oral contract with his father to the effect that Mr Hourigan Senior would lend the Applicant money to assist him in making home loan repayments and reduce his home loan interest.[26] The Applicant swore that while the money was broadly intended to be used toward the home loan, he was in fact entitled to use the loaned funds as and how he wanted.
[26] Exhibit 6, Affidavit of Mr Joshua Hourigan dated 14 January 2018, para 22.
Before any direct loans were transferred from his father, the Applicant said that Mr Benjamin had approached his father’s place of business, had seen lots of old machinery in a shed and offered $75,000 for the lot. The Applicant deposed that during negotiations with Mr Benjamin, Mr Hourigan Senior directed that the cheque should be paid to the Applicant, in accordance with their oral agreement.[27]
[27] Exhibit 6, Affidavit of Mr Joshua Hourigan dated 14 January 2018, para 30.
On 21 September 2010, an amount of $75,000 was deposited into the Applicant’s account by way of a bank cheque.[28]
[28] Exhibit 1, T-documents, Volume 2, T32 at page 660, CBA Streamline Account statements.
In his original objection, the Applicant claimed that the sum was a loan from his father. He submitted a copy of a Bendigo Bank cheque, made out in his name, which did not provide evidence of the payer,[29] and was subsequently asked to provide evidence of the source of the loan including bank statements of the account from which the funds were drawn.
[29] Exhibit 9, Summons documents relating to Bendigo Bank and Adelaide Bank.
In response to a further request for further information, the Applicant’s accountants advised as follows:[30]
“The machine was manufactured by The Insulation Man Partnership to produce insulation stock for the partnership’s and the company’s insulation business. The machine was sold by this partnership to P and C Benjamin for $75,000. P and C Benjamin then paid these funds directly to the taxpayer and as such are not assessable income to him.”
[30] Exhibit 1, T-documents, Volume 2, T25 at page 555. Response to request for further information dated 2 September 2016.
In the proceedings before this Tribunal, the Applicant declared that he did not give instructions to his accountants to write what I have set out above. In his affidavit, the Applicant deposed “I did not write that letter, but if my accountant did, he has got this wrong as it is not true. The receipt clearly states that the sale was for “misc machinery electric motors et cetera” and these were not manufactured by my father’s business.”[31]
[31] Exhibit 6, Affidavit of Mr Joshua Hourigan dated 14 January 2018.
At the hearing, the Applicant provided evidence that the cheque was drawn from an account of P and C Benjamin, allegedly as payment for machinery sold by Mr Hourigan Senior. The Applicant asserted that it was indeed for a shed full of miscellaneous old machinery, however no contract of sale was provided to the Tribunal.
The accountant obviously got his instructions from somebody, but a representative from the accounting firm was not called to give evidence. In a statutory declaration declared on 26 April 2017, Mr Hourigan Senior affirmed that “Peter Benjamin, aka PC Benjamin, owed me $75,000.” He did not elaborate as to why he was owed $75,000 or refer to any sale of machinery, or otherwise.
There are significant inconsistencies between the evidence provided by Mr Hourigan Senior, the Applicant and the letter from the accountant.
The Respondent accepts that the $75,000 was transferred to the Applicant by Mr Benjamin but contends that the circumstances of the transfer are largely unexplained. No contract of sale or evidence from Mr Benjamin has been produced. The Applicant did not lead any evidence at the hearing regarding the $75,000 transfer from Mr Benjamin. After it was put to the Applicant that, as Mr Benjamin’s bank details had been subpoenaed but not tendered, an inference may arise to suggest that the contents of the documents were adverse to the Applicant’s case, the Applicant elaborated that bank records could not be located but tendered a receipt from ‘P & C Benjamin’ entitled ‘Withdrawal bank cheque Joshua Hourigan.’ The receipt has been tendered in evidence, however it is not in chronological order in the receipt book and the receipt book was not produced to the Respondent, despite being requested, until the day of the hearing. The receipt book belongs to Mr Hourigan Senior, not the Applicant, and the Applicant was consequently unable to give any evidence as to the condition of the receipt book or satisfy the Tribunal that the receipt was produced contemporaneous to the alleged transaction. Mr Hourigan Senior was a vital witness in this matter whose evidence would have been most helpful to the Applicant. He was not called.
Given these discrepancies in the evidence, and the absence of oral evidence from Mr Hourigan Senior, the Applicant has not discharged the onus of establishing, on the balance of probabilities, that the payment of the $75,000 was not income and that there was no fraud or evasion in respect thereof.
The $135,000 from NCIA
On 8 November 2010, three deposits ($50,000, $50,000, $35,000) were made into the Applicant’s savings account. In his statutory declaration dated 3 May 2017, Mr Hourigan Senior declared that the three amounts constituted a loan from him to his son, which was made incrementally between 5 and 8 November 2010. From the evidence available to the Tribunal, that appears to be incorrect.
The financial records show that of the three transactions totalling $135,000, $85,000 emanated from the company National Cellulose Insulation Pty Ltd Australia (‘NCIA’), and $50,000 from Insulation Man (‘IM’).[32]
[32] Exhibit 1, T-documents, Volume 2, T32 at page 665, Applicant’s bank statements for the period 1 July 2009 to 16 November 2014.
In response to a request for further information in relation to the transactions, the Applicant advised that, although the funds were transferred directly to him from the company’s bank account, the company was in fact repaying a loan to Mr Hourigan Senior, who then directed the funds to the Applicant instead.[33] By letter dated 2 September 2016, the Applicant’s accountants advised that, after investigation, they had established that the funds were lent directly to the taxpayer, and as the funds were loaned, they were not assessable income.[34] Notwithstanding the Applicant’s contention that the funds were provided from his father personally, there is no evidence that the loaned funds were ever repaid to NCIA, and it would follow that he would remain as a debtor to the company upon liquidation.
[33] Exhibit 1, T-documents, Volume 1, T23 at page 469, Response to request for further information dated 18 July 2016.
[34] Exhibit 1, T-documents, Volume 2, T25 at page 555. Response to request for further information dated 2 September 2016.
NCIA’s balance sheets for the years 2010 and 2011 do not show Mr Hourigan Senior as a creditor of the company, but they do confirm that a loan was made to the Applicant for $85,000.[35] The balance sheets do not indicate why the payment was made or how the company became indebted to Mr Hourigan Senior. Mr Hourigan Senior was not a director or secretary of the company when the payments were made, and in fact ceased to be so on 17 May 2009, 5 days after the company was created.[36] The funds therefore could not have originated from Mr Hourigan Senior, as he had no involvement with the company at the time. There was no document produced to show he was a creditor of the company. No officer of the company was called to give evidence. The Applicant confirmed on 18 July 2016 that he was not listed as a debtor when NCIA went into liquidation.[37]
[35] Exhibit 1, T-documents, Volume 1, T23 at page 469. Response to request for further information dated 18 July 2016.
[36] Exhibit 2, Supplementary T-documents, ST7 at pages 1244-1266, Notice to Creditors for NCIA (in Liquidation).dated 19 December 2011.
[37] Exhibit 1, T-documents, Volume 1, T23 at page 469, Response to request for further information dated 18 July 2016.
Furthermore, Mr Hourigan Senior’s income tax returns for the years 2009 to 2012 show an income of $43,249 (2009); $20,020 (2010); $125,166 (2011) and $18,995 (2012).[38]
[38] Respondent’s Post-Hearing submissions dated 21 February 2018, para 68.1.
In contrast, the tax returns of NCIA for the financial years ended 2009 and 2010 show:[39]
[39] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 26.
NCIA 2009 2010 Income $766,383 $737,584 Net Assets $536,468 $1,052,618
The NCIA liquidator’s report dated 19 December 2011 shows nil assets, and credits of $418,200 (of which, $416,000 is owed to the Respondent).[40]
[40] Exhibit 2, Supplementary T-documents, ST7 at page 1267; Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 37.
The Applicant gave evidence that the deposits made into his bank account were made, so far as he was aware, by his father. In his statement, the Applicant declared that his father had called him in early November 2010, to inform the Applicant that he had transferred money to put towards his home loan. He did not know that they had come from the company. So far as he was concerned, he personally owed the money to his father. He says he has no idea of how the transactions were accounted for in the company books, and had no reason to ask, as he believed the loan to come from his father. There was no written loan agreement between his father and either NCIA or IM.
The Respondent contends that, other than the denial that these sums represent payment for work, there is no satisfactory explanation for the basis on which the payments were made.[41] The Respondent argues that, given the payments were made by NCIA so close to the company winding up, they can ‘only properly have occurred in the course of business.’[42]
[41] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 38.
[42] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 38.
Given the inaccuracies in the statutory declaration by Mr Hourigan Senior, and the failure of his father to give evidence, together with the concerns raised in the paragraphs above, I cannot accept the veracity of the Applicant’s evidence, or accept that the $135,000 was not assessable income. The Applicant has failed to discharge the onus placed upon him.
Failure to address remainder
The asset betterment analysis shows that the Applicant failed to account for a remaining $58,071 of unreported income for the financial year ended 30 June 2011.[43]
[43] Respondent’s Post-Hearing submissions dated 21 February 2018, para 71.
Following the hearing, the Applicant provided signed statements from friends and family members, to the effect that he was repaid various loans in the 2011 financial year which were incorrectly included in the analysis. I will address each loan separately.
On 28 June 2018, the Applicant’s brother declared that he repaid a sum of $825 into the Applicant’s savings account on 1 September 2010. The Applicant’s brother declared that the sum was for concrete purchased on his behalf. The Applicant’s bank statements reflect that $825 was paid on 1 September 2010[44] and I accept that this amount constituted a loan and should not be included in the asset betterment analysis.
[44] Exhibit 1, T-documents, Volume 2, T32 at page 668, Applicant’s bank statements for the period 1 July 2009 to 16 November 2014.
In a signed statement, Chris Walters declared that he repaid the Applicant $600 on 14 April 2010.[45] While there is no corresponding deposit for that amount on that date in the Applicant’s bank statements, the statements do show that $600 was paid to the Applicant by Chris Walters on 14 April 2011. I am satisfied that the statement contains a typographical error, and that the $600 should be excluded from the analysis for the financial year ended June 2011. Chris Walters also declared that he repaid $100 to the Applicant on 15 April 2011. The Applicant’s bank statements confirm that an amount of $100 was transferred by Chris Walters on 15 April 2011 and I therefore accept that this amount should be excluded from the analysis.
[45] Applicant’s Post-Hearing submissions dated 4 July 2018, statement from Chris Walters dated 27 June 2018.
The Applicant’s sister-in-law provided a statement declaring that she transferred $70 to the Applicant on 8 June 2011 to contribute to a birthday present for his mother.[46] The Applicant’s bank statements reflect that on 8 June 2011, $70 was transferred from Robyn Hourigan, for the purpose of his mother’s present. I therefore accept that this amount should be excluded from the analysis.
[46] Applicant’s Post-Hearing submissions dated 4 July 2018, statement from Robyn Hourigan dated 28 June 2018.
Finally, Joanne Allen signed a statement declaring that she repaid a $500 loan to the Applicant on 24 June 2011. The Applicant’s bank statements corroborate that on 24 June 2011, Joanne Allen transferred $500 to the Applicant and I accept that this amount should be excluded.
In addition to post-hearing submissions, the Applicant provided a schedule of transfers confirming the amounts of money referred to above, and also indicated that on 21 March 2011, he received $20,000 for the sale of his truck. The Applicant’s bank statements confirm that on 21 March 2011, he was paid $20,000, bearing the description ‘Neil Haase Truck’.[47] Purportedly to corroborate this account, the Applicant provided an annotated photocopy of the Vehicle Registration Renewal Notice for the Vehicle, including a note regarding a ‘disposal date’ of 26 April 2011. He stated that he would supply further documentation from Queensland Transport to confirm that the truck was transferred out of his name on 26 April 2011, however no further documents have been lodged with the Tribunal. Given the lack of independent or probative evidence available to me, I do not accept the Applicant’s argument in respect of the $20,000 deposit.
[47] Exhibit 1, T-documents, Volume II, T32 at page 675. Applicant’s bank statements for the period 1 July 2009 to 16 November 2014.
In his schedule, the Applicant further recorded that he received $350 from Dan Milne on 20 December 2010 for a loan repayment. There was no signed statement provided by Mr Milne to verify that these funds represented a loan repayment, but the Applicant’s bank statements confirm that on 20 December 2010, the Applicant was transferred $350 from an account titled ‘djmilne’, bearing the description “money from dan.”[48] The Applicant also recorded that he received $200 from David Ashby on 16 June 2011. The Applicant stated that these funds constituted a refund for flights that he had paid for. No statement was provided to the Tribunal by Mr Ashby, however the Applicant’s bank statement on 16 June 2011 reflects that Mr Ashby transferred $200, referencing a “Syd airfare.”[49] There is no evidence from these third parties to verify the Applicant’s account of the funds, and the Tribunal must approach self-serving statements with caution, however, having regard to the Applicant’s corresponding bank statements, I accept that on the balance of probabilities, these amounts are loan repayments and do not constitute income.
[48] Exhibit 1, T-documents, Volume 2, T32 at page 668. Applicant’s bank statements for the period 1 July 2009 to 16 November 2014.
[49] Exhibit 1, T-documents, Volume 2, T32 at page 668, Applicant’s bank statements for the period 1 July 2009 to 16 November 2014.
In light of my findings, the Applicant has not established his actual assessable income, or proven that the balance of the adjustment, amounting to $265,426, was not income. He has failed to discharge the onus placed upon him in respect of the opinion that there was evasion.
The assessment for the income year ended 30 June 2012
The adjusted taxable income for the income year ended 30 June 2012 imputed to the Applicant after determination of the objection was as follows:[50]
[50] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 26.
Year ended 30 June Reported taxable income Income after objection Adjustment after objection 2012 $30,595 $236,578 $205,983
Amounts totalling $206,026.62 were transferred to Mr Hourigan’s CBA account during the period 23 September 2011 to 9 May 2012.[51] By letter dated 2 September 2016, the Applicant informed the Respondent that the loans had originated from Ms Heron.[52] The Applicant stated that he had been in a relationship with Ms Heron from the age of 17 and they lived together as man and wife for about 8 years. He stated that in 2011 and 2012 she was treated as one of the family by his parents and was working for his father in the family business.
[51] Exhibit 1, T-documents, Volume 2, T25 at page 555, Response to request for further information dated 2 September 2016.
[52] Exhibit 1, T-documents, Volume 2, T25 at page 555, Response to request for further information dated 2 September 2016.
In his statement dated 14 January 2018, the Applicant swore that in November 2011 his father called him and said that he wanted to lend him some more money to pay down his home loan. The Applicant alleged that, as his father did not have his home loan details, he was going to transfer the money to Ms Heron so that she could transfer it directly to the home loan account. He said that he would do it straight away. The Applicant agreed that these transfers were to be part of the loan that they had agreed on. He says that he didn’t see any problem with this as he and Ms Heron were permanently together as a couple.
On 22 and 23 November 2011, a total sum of $200,000 was paid to Ms Heron and she transferred it to the Applicant’s savings account. Ms Heron was not called as a witness. They have since fallen out. The Tribunal acknowledges that it seems implausible that Mr Hourigan Senior, wanting to loan money to his son, paid his son’s partner despite knowing at least one of his son’s personal bank accounts, even if he did not know the home loan account details. There is no evidence before the Tribunal as to why the transfer was so urgent, and in fact, at the hearing, the Applicant confirmed that he had already repaid $300,000 of his home loan in December 2011, with only approximately $13,000 remaining on the home loan. It is further troubling as to why Mr Hourigan Senior was not called as a witness to corroborate the details and nature of such a large payment, particularly when the Applicant had been put on notice that the Respondent believed the funds to be assessable income. The evidence available to the Tribunal indicates that, unlike other witnesses who were not called, the Applicant enjoyed a close relationship with his father and there are no barriers known to the Tribunal which would have impeded Mr Hourigan Senior from attending the hearing, or giving evidence by phone if he was so required. In other words, there is no explanation for the failure to call Mr Hourigan Senior as a witness.
While this Tribunal is not bound by the rules of evidence, I would be entitled to assume that, having been a person whom the Applicant might reasonably be expected to call and who would reasonably be considered a friendly witness, Mr Hourigan Senior’s evidence would not have assisted the Applicant’s case.[53] However in the present case, I do not believe that the circumstances are appropriate to impose the application of the Jones v Dunkel rule.
[53] Jones v Dunkel (1959) 101 CLR 298; Kuhl v Zurich Financial Services [2011] 243 CLR 361 at [384]-[385].
I suspect that Mr Hourigan Senior’s absence is for personal reasons. He did provide a statutory declaration to assist with the proceedings. The Respondent did not require his presence for cross examination, or substantially challenge the Applicant’s testimony regarding the alleged loans. The evidence quite clearly shows large sums of money were transferred from the father to the son. Mr Hourigan Senior and the Applicant assert that the transactions are loans and there is no evidence to the contrary. The Applicant swore under oath that he has repaid the loans and although documentary evidence was not provided to the Tribunal which can wholly substantiate this account, it remains largely uncontested evidence.
In his affidavit, the Applicant confirmed that the money was to help pay down his home loan and that he transferred the money to his home loan account. During cross-examination, when it was put to the Applicant that the money was not in fact applied to the home loan, he replied: “It probably did down the track. I’m not sure, but it would have went – it would have went in and out of – whether it was on my home loan or whether it went into my award saver, it was whatever I needed at the time.”
The reality of the situation is that $200,000.00 was transferred into the Applicant’s savings account on 24 November 2011 and remained in that account until 13 June 2012. It was not applied to the home loan account. None of the funds advanced were applied to reduce the Applicant’s home loan (other than $73.30 on 12 December 2011).[54] As at November 2011, the home loan account balance was $12,999.72 and remained that way until 12 April 2013.[55] In post-hearing submissions, the Respondent produced evidence of how the funds were in fact spent, establishing that instead of applying the funds to the home loan, they were used to meet every day and business expenses, repay credit card payments, make cash withdrawals, make loans to third parties, and to make loan repayments to his father.[56] The Respondent underscored that it was peculiar that the Applicant used the same funds that were borrowed to repay his father.
[54] Exhibit 1, T-documents, Volume II, T34 at pages 820-831, Applicant’s Home Loan statements for the period 12 August 2008 to 30 June 2014.
[55] Exhibit 1, T-documents, Volume II, T34 at pages 820-831, Applicant’s Home Loan statements for the period 12 August 2008 to 30 June 2014.
[56] Respondent’s Post-Hearing submissions dated 21 February 2018, para 82.3.
Why the Applicant’s father directed the money in the way he did, is odd. However, what is clear is that Mr Hourigan Senior paid $200,000 to the Applicant’s partner, who promptly transferred the funds to the Applicant, ostensibly to reduce his housing loan. The Applicant says it was a loan to him from his father, via Samantha. It is clear from the financial records that the money did go via Ms Heron to the Applicant. He has therefore explained how he came by the money. It was not earned by personal exertion. It was simply a loan. The fact that it was not documented or that it was transferred indirectly is not of significance, given that it was a transaction based on mutual trust between the Applicant’s father, Ms Heron, and himself. Nor is it significant that the Applicant did not use it or indeed need it for the purpose for which Mr Hourigan Senior thought he did.
At the hearing, Mr Hourigan explained the nature of the payment further:
‘We were very close my father and I, we speak every day, so he said to me that he’d help me out and he said, ‘Look I’ll loan you some money to help pay down your home loan and you won’t be struggling as much’. And so he did but he just calls me and says, ‘Hey, I’ve just transferred you some money’, so I look into my bank account and there is money in my account. That’s just the relationship that my father and I have. So he helped me out and he said, ‘Look just give it back to me whenever I need the money back’ and so I just transferred it to him. If he said, “Josh, you know, transfer me 20 grand”, I’d transfer him $20,000 back. There is nothing to lie, your honour, that’s just how our family is.”
In final submissions, the Applicant noted three ways of proving a loan, being: to produce evidence of a loan agreement, by proving that the loan was in fact made, and/or by proving that the loan has been repaid.[57] The Applicant argues that while there was no written agreement as to the terms of the loan, he gave sworn evidence which was not challenged that an oral agreement was made, and that the making of the loan has been clearly proven.[58] He further submits that there is evidence that he has repaid, or substantially repaid the loans. He provided a schedule setting out the alleged loan repayments. All of the repayments referred to are made in the 2013 and 2014 income years.
[57] Applicant’s Post-Hearing submissions dated 20 February 2018, para 25.
[58] Applicant’s Post-Hearing submissions dated 20 February 2018, para 26.
Despite his contentions, he did not produce any document that showed to whom the substantial amounts of money paid from his accounts were paid. While the account statements corroborate that, in the 2013 and 2014 financial years, prior to being audited, he paid a total of $477,618.41 out of his savings account, the statements do not establish where the funds were transferred. There is no evidence proffered by the Applicant or his father to confirm that the funds were in fact loan repayments, or were even received by Mr Hourigan Senior. The Respondent further questions the Applicant’s ability to repay the loans in the relevant financial years despite reporting an income of $10,573 and $22,237 respectively.
Given the evidence however, the Tribunal is satisfied that the payments amounting to $200,000 were not taxable income in the hands of the Applicant. I accept that they were a loan to him from his father. An adjustment of about $6000 remains. In his statement, the Applicant declared that he did not understand how the remaining balance was calculated and does not know the source of the income. The Applicant stated that he would deal with it in evidence. Despite this, there is no evidence before the Tribunal to establish the source of the remaining $5,983 and, given the onus he bears, the Tribunal cannot conclude that this sum does not represent taxable income. The Applicant has not discharged the onus of showing there was no fraud or evasion in this year to the extent of approximately $6,000.
Assessment for the year ended 30 June 2013
The adjusted taxable income for the income year ended 30 June 2013 imputed to the Applicant after determination of the objection was as follows:[59]
[59] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 26.
Year ended 30 June Reported Taxable Income Income after objection Adjustment after Objection 2013 $10,573 $36,270 $25,697
The Applicant maintains that amounts totalling $11,142.55 deposited into his savings account comprised repayments of loans from third parties amounting to $7,747.55 and loan repayments from Samantha Heron of $3,385.00.[60] In his statement, the Applicant stated that the loan repayments from Ms Heron comprise a repayment of $385 regarding a car service, and $3000 being Ms Heron’s contribution to a holiday in Thailand. I am satisfied by his sworn evidence and the corroborating bank statements that this amount from Ms Heron is not income and is to be excluded from the asset betterment analysis.
[60] Exhibit 6, Affidavit of Joshua Hourigan dated 14 January 2018, para 73.
In his evidence, the Applicant gave a breakdown of the sum of $7,747.55 that he alleges were loans from other third parties, and referred to the contemporaneous bank statements which contained descriptions with respect to each amount. The bank statements indicate as follows:
Date Transaction description Amount ($) 13/09/12 Transfer from David Ashby-Whit Kaching David diet 50.00 13/10/12 Cash dep brand Wfield Lvrpool 300.00 17/10/12 Direct credit – dan randall dan randall 185.00 26/10/12 Transfer from David Ashby-Whit Kaching Daves meal plan 30.00 11/12/12 Transfer from Georgina Gray 3000.00 13/12/12 Transfer from Georgina Gray 4000.00 8/3/13 Direct credit Zurich insurance 182.55 7,747.55
In his post-hearing submissions, the Applicant gave evidence that the funds received from David Ashby had already been declared as income in his tax return, and should not have been included again in the asset betterment analysis. In the Income Tax Return relating to the 2013 financial year, the Applicant reports a supplementary income of $1043, however, it is unclear as to what this is comprised of. The Applicant also gave evidence that the funds received from Dan Randall related to loan repayments. Mr Randall did not provide a signed statement to confirm the nature of the funds as the Applicant could not contact Mr Randall, and after having regard to the Applicant’s bank statements, I do not accept that, on the balance of probabilities, the Applicant has discharged the onus of showing it should not have been included as income.
The Applicant’s cousin, Jordan Leslie, provided a signed statement to confirm that they reimbursed $300 to the Applicant on 13 October 2012. I am therefore satisfied that the deposit of $300 made on 13 October 2012 did not constitute assessable income. I further accept the Applicant’s evidence concerning the direct credit from Zürich Insurance for $182.55 as being a refund for travel insurance, and not income. The adjustment should therefore be amended in respect of the above.
However, I do not accept the evidence in relation to the transfers from Georgina Gray. In the schedule of transfers provided to the Tribunal with his post-hearing submissions, the Applicant stated that the two amounts constituted the repayment of a loan from his friend, Mr Jase Calvert. There was no statement from Mr Calvert to confirm that the money came from him, or represented a loan repayment. The Applicant stated that he no longer is in contact with Mr Calvert, and hasn’t been for many years. The corresponding bank statements indicate that the payment was made from an account in the name Georgina Gray for ‘G funds,’ and I cannot be satisfied that this amount does not constitute income, as there is no satisfactory explanation for the discrepancy between account names, and no independent evidence to substantiate the claim that it was a loan repayment.
Ms Robyn Hourigan, the Applicant’s sister, provided a statement to confirm that she paid $82 to the Applicant’s savings account on 18 July 2012 in order to reimburse the Applicant for paying her accountants for her tax return. The Respondent included this amount in calculating the Applicant’s non-taxable receipts and accordingly, I do not need to amend the adjustment in respect thereof.[61]
[61] Exhibit 1, T-Documents, Volume 1, T2 at pages 32-52, Reasons for decision dated 28 September 2016.
There remains the sum of approximately $14,554 of unreported income which is not the subject of evidence or any contention by the Applicant. He has not given any satisfactory explanation in respect of the balance of the adjustment, and I cannot conclude that it was not assessable income.
Accordingly, while I accept that the adjustment should be reduced to $21,829.45, the Applicant has not discharged the onus of proof in relation to the 2013 financial year.
The assessment for the income year ended 30 June 2014
The adjusted taxable income for the income year ended 30 June 2014 imputed to the Applicant after the objection was as follows:
Year ended 30 June Reported Taxable Income Income after objection Adjustment after Objection 2014 $22,237 $56,516 $34,279
The Applicant did not provide any documentary evidence or lead any oral evidence at the hearing in regard to the 2014 financial year. He therefore did not discharge his onus to prove, on the balance of probabilities, that there was no fraud or evasion of his true tax liability.
Are the taxable assessments excessive?
A taxpayer who seeks to prove that an assessment based on an asset betterment method of calculation is excessive must positively prove their actual income.[62]
[62] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 23; Dalco v Commissioner of Taxation (1990) 168 CLR 614.
The Respondent contends that the Applicant has not discharged the burden of proving his actual taxable income for the subject years.[63] I am satisfied that the Applicant has not established his taxable income for any of the subject years. I am satisfied that he has not discharged the onus of proving that he was not guilty of fraud or evasion. I am however satisfied that, on the balance of probabilities, he has established that the asset betterment statement and the Commissioner’s assessment are excessive to the extent that I have set out in this decision.
[63] Exhibit 5, Respondent’s Statement of Facts, Issues and Contentions dated 20 June 2017, para 25.
What is the Applicant’s actual taxable income?
Following my conclusions above, I have adjusted the Applicant’s taxable income for the subject years as follows:
The adjustment for the income year ended 30 June 2010
Given the concessions made by the Respondent in respect of the $10,000 and the Applicant’s evidence concerning the $13,000 constituting payment for his car, the adjustment remaining for the financial year ended 30 June 2010 is $5,077, resulting in a taxable income of $85,391.
The adjustment for the income year ended 30 June 2011
As the Applicant’s evidence pertaining to the $75,000 and $135,000 deposits was unsubstantiated and could not be accepted, the adjustment remaining for the financial year ended 30 June 2011 is $265,426, resulting in a taxable income of $287,012.
The adjustment for the income year ended 30 June 2012
As I have accepted that the $200,000 transferred to the Applicant did not constitute income, the adjustment remaining for the financial year ended 30 June 2012 is $5,983, resulting in a taxable income of $36,578.
The adjustment for the income year ended 30 June 2013
Following my findings of fact in relation to the repayment of loans from various third parties, the adjustment for the 2013 financial year is $21,829.45, resulting in a taxable income of $32,217.45.
The adjustment for the income year ended 30 June 2014
As the Applicant did not provide any evidence to the Tribunal in relation to the 2014 financial year, the adjustment of $34,279 remains, resulting in a taxable income of $56,516.
Are the administrative penalties imposed excessive?
Administrative Penalty
Under Schedule 1 of the TAA, a person is liable for an administrative penalty if they make a statement to the Commissioner and the statement is false or misleading in a material particular.[64] There is no ‘automatic’ penalty imposition of 75% of the shortfall amount following a finding of fraud or evasion under section 170(1) of the ITAA.[65] The Miscellaneous Taxation Ruling 2008/1 (‘MT 2008/1’) gives the following guidance as to the imposition of administrative penalties:[66]
Where a shortfall amount results from a failure to take reasonable care, the base penalty under item 3 of the table in subsection 284-90(1) is 25% of the shortfall amount. Where recklessness as to the operation of a taxation law results in a shortfall amount, the base penalty amount is 50% of the shortfall amount under item 2 of the table in subsection 284-90(1). A base penalty amount of 75% of a shortfall amount applies under item 1 of the table in subsection 284- 90(1) if the shortfall amount results from intentional disregard of a taxation law.
[64] Taxation Administration Act 1953, Schedule 1, Section 284-75.
[65] Respondent’s final submissions dated 26 June 2018, para 19.
[66] MT 2008/1, para 21.
The ruling further expounds the concepts of ‘reasonable care’, ‘recklessness’ and ‘intentional disregard’ within Schedule 1 of the TAA.
Reasonable care is not defined and is therefore given its ordinary meaning under the TAA. MT 2008/1 provides that taking ‘reasonable care’ in making a statement to the Commissioner requires giving appropriately serious attention to comply with obligations under taxation law. The standard of care is measured objectively, using the care expected of a reasonable ordinary person, however the taxpayer’s circumstances are relevant, and in imposing a penalty on the basis of a failure to take reasonable care, consideration must be given to the circumstances surrounding the making of the false or misleading statement to determine whether a reasonable person in the same circumstances as the taxpayer would have exercised more care. Nevertheless, the actual intentions of the taxpayer are not relevant in this assessment.
There is no presumption that the existence of a shortfall due to a false or misleading statement is automatically a result of a failure to take reasonable care – there must be evidence to support the conclusion that the standard of care by the Applicant fell short of what would be reasonable in the circumstances.[67] Member McCabe (as he was then), in considering the previous penalty regime under s 226G of the ITAA, which is materially similar to the relevant provisions under Schedule 1 of the TAA, held:[68]
“[the section] should not be approached on the basis that a penalty is imposed in the event of a shortfall, with the possibility of an exemption if the taxpayer is able to satisfy the decision maker that the taxpayer … took reasonable care. A penalty… is not triggered until the decision maker is satisfied that both limbs of the section are satisfied.”
[67] MT 2008/1 at para 42.
[68] Reeders v Federal Commissioner of Taxation [2001] AATA 933 at [16].
Recklessness is provided as connoting more culpable conduct than a mere failure to take reasonable care but less culpable than an intentional disregard of taxation law. The ruling indicates that behavior will be reckless if it falls significantly short of the standard expected of a reasonable person in those circumstances, and therefore requires consideration of the extent or degree to which the conduct abandons reason.[69]
[69] MT 2008/1, para 101.
The penalty for intentional disregard of a taxation law is the most severe sanction, and thus is only warranted in response to a serious failure to comply with a taxation law. The test is subjective, and critically, requires an actual intention on behalf of the entity, or actual knowledge that a statement is false. The entity must understand the legislation, its operation and application, and deliberately ignore the law.[70]
[70] MT 2008/1, para 112.
In the objection decision, the Respondent determined that the shortfall resulted from an intentional disregard of a taxation law, as the Applicant was held to have understood his obligations under the taxation law and deliberately set out to disregard that law.[71] The Respondent contended that the discrepancy between the Applicant’s reported income and his asset acquisition was so significant that he could not have simply overlooked the increase to his income.[72]
[71] Respondent’s final submissions dated 26 June 2018, para 19; Exhibit 1, T-documents, T2 at page 48, Reasons for decision dated 28 September 2016, para 98.
[72] Respondent’s post-hearing submissions dated 21 February 2018, para 106.
Given the above findings, I think it is appropriate in the circumstances for the Commissioner to reconsider the penalties and shortfall interest charges imposed upon the Applicant, and for each party to make and exchange written submissions in respect thereof within 14 days of the date of this decision.
CONCLUSION
The decision under review is:
(a)To the extent that it deals with the taxpayer’s primary tax liability for the subject years, set aside and remitted to the Respondent in accordance with these reasons; and
(b)To the extent that it deals with the imposition of penalties and shortfall interest charges, I will allow the Applicant and Respondent to reconsider and make further submissions within 14 days of the date of this decision regarding their respective positions.
I certify that the preceding 108 (one hundred and eight) paragraphs are a true copy of the reasons for the decision herein of Deputy President R I Hanger QC
...........................[sgd]....................................
Associate
Dated: 10 September 2018
Date of hearing: 12 February 2018 Date final submissions received: 29 June 2018 Counsel for the Applicant: John Rivett Counsel for the Respondent: Simon Grant Solicitors for the Respondent: Australian Government Solicitor
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