Huang and Commissioner of Taxation (Taxation) - [2024] AATA 397

Huang and Commissioner of Taxation (Taxation) [2024] AATA 397 (8 March 2024)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2021/10002
Re:Zhan Shan Huang
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President Boyle
Date:8 March 2024
Place:Perth

The Objection Decision dated 23 November 2021 is varied to allow the Applicant’s objection to the shortfall penalties.
.............[Sgd]................
Deputy President Boyle
CATCHWORDS
TAXATION – applications for review of objection decisions – whether income tax assessments issued under s 167 of ITAA 1936 and penalties were excessive or otherwise incorrect – applicant failed to discharge onus of proof pursuant to s 14ZZK of TAA 1953 in respect of the income tax assessments– applicant failure to keep adequate records s 262A of ITAA 1936 –– objection to penalty assessments – whether penalties issued pursuant to ss 284-75 of TAA 1936 were incorrect or excessive or should not have been made or been made differently –consideration of whether penalty objection decision comes within s 14ZZK(b)(i) or (ii) – shortfall amount not “as a result of” actions identified by Commissioner as being reckless - objections to penalties allowed – objection decisions varied to allow the Applicant’s objection to the shortfall penalties.
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) s 37(1AB)
A New Tax System (Goods and Services Tax) Act 1999 s 9-5
Income Tax Assessment Act 1936 (Cth) ss 6, 166, 167, 168, 170, 262A
Income Tax Assessment Act 1997 (Cth) s 995.1
Taxation Administration Act 1953 (Cth) ss 14ZZF, 14ZZK, 14ZZK(b), 14ZZK(b)(i), 14ZZK(b)(ii), 14ZZO, 14ZZQ, 284-75, 284-75(1), 284-75(4), 284-75(5), 284-75(6), 284-90, 284-90(1), 285-75(1), 298-20, 353-10
CASES
Baini and Commissioner of Taxation (2012) 87 ATR 627
Bosanac v Commissioner of Taxation [2018] FCA 946
Bosanac v Commissioner of Taxation [2019] HCA 41; 374 ALR 425
Carter and Federal Commissioner of Taxation (2013) 92 ATR 701
Commissioner of Taxation v Ross (in her capacity as the personal representative of the estate of Ross) and Another [2021] FCA 766
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Rigoli (2013) 95 ATR 94; [2013] FCA 784
Galea v Federal Commissioner of Taxation (1990) 21 ATR 1108
Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301; [2013] FCAFC 30
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
McPartland v Commissioner of Taxation [2022] AATA 686
Rigoli v Commissioner of Taxation [2014] FCAFC 29
Vita Hot Bread Pty Ltd and Commissioner of Taxation (2012) 87 ATR 678
Vu v Federal Commissioner of Taxation (2006) 63 ATR 341
SECONDARY MATERIALS
Commissioner of Taxation, Law Administration Practice Statement PS LA 2007/24 (20 December 2020)
Commissioner of Taxation, Law Administration Practice Statement PS LA 2012/5 (23 August 2012)
Commissioner of Taxation, Miscellaneous Taxation Ruling 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness, and intentional disregard (12 November 2008)
REASONS FOR DECISION
Deputy President Boyle
8 March 2024
THE APPLICATION

The Applicant seeks the review of the Respondent’s (Commissioner) objection decision dated 23 November 2021 (Objection Decision).[1]
[1] R1/7.
The Objection Decision disallowed the Applicant’s objections to the amended income tax assessments for the 2014 and 2015 income years (relevant years) in relation to the revised trust distributions for those years from the Rong Family Trust (RFT), and the Applicant’s objections to the associated shortfall penalties.
BACKGROUND
The following facts are taken primarily from the Commissioner’s Statement of Facts, Issues and Contentions dated 25 August 2022 (Commissioner’s SFIC). They are not disputed by the Applicant.
On 28 May 2015, the Applicant lodged his income tax return for the year ended 30 June 2014 (2014 income tax return).[2]
[2] R1/23-56.
On 10 June 2015, a Notice of Assessment for the year ended 30 June 2014 was issued to the Applicant.[3]
[3] R1/57.
On 11 December 2015, the Applicant lodged an amended 2014 income tax return,[4] which declared a trust distribution of -$233,148 from the RFT,[5] being a 37% share.[6]
[4] R1/59.
[5] R1/71.
[6] R1/233.
On 21 December 2015, a Notice of Amended Assessment for the year ended 30 June 2014 was issued to the Applicant. The amended return resulted in an adjusted refund paid to the Applicant of $53,861.49.[7]
[7] R1/133.
On 16 December 2015, the Applicant lodged his income tax return for the year ended 30 June 2015 (2015 income tax return),[8] which declared a trust distribution of -$355,606 from the RFT (R1/104), being a 35% share.[9]
[8] R1/95.
[9] R1/233.
On 8 January 2016, a Notice of Assessment for the year ended 30 June 2015 was issued to the Applicant.[10] The Applicant received a refund of $90,673.82.[11]
[10] R1/137.
[11] R1/137.
RFT Audit
The Commissioner conducted a review on the RFT and a issued a review finalisation letter on 22 February 2017 and, on 29 August 2017, an audit was commenced on the RFT (RFT Audit) to determine four issues, being:
(a)whether the RFT made a taxable supply of imported computer goods under s 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the period 1 July 2013 to 30 June 2017 (Issue 1);
(b)whether the RFT claimed GST credits correctly based on eligible purchases in its activity statements for the period 1 July 2014 to 30 June 2017 (Issue 2);
(c)whether the RFT correctly reported all its income in its Business Activity Statements (BAS) and Income Tax Returns for the period 1 July 2013 to 30 June 2015 (Issue 3); and
(d)whether the RFT was liable to penalty for making a false or misleading statement (Issue 4).
As part of the RFT Audit, on 13 November 2018, a formal interview was conducted with the Applicant under s 353-10 Sch 1 of the Taxation Administration Act 1953 (Cth) (TAA).
An audit finalisation letter was issued on 15 March 2019,[12] affirming the following from the position paper:
(a)On Issue 1, the RFT had made supplies of imported goods for domestic consumption, which were subject to GST under s 9-5 of the GST Act;
(b)On Issue 2, the RFT was not entitled to claim GST credits on these transactions as they are not considered to be creditable acquisitions of the RFT’s business;
(c)On Issue 3, the RFT did not report the correct amount of business income in its income tax returns and BAS for the period 1 July 2013 to 30 June 2015; and
(d)On Issue 4, the RFT is liable to a penalty amount of $1,366,686.00.
[12] R1/1444.
On 15 March 2019, a Notice of Amended Assessments of Net Amount was issued to the Applicant.[13] That notice contained information about how the RFT could exercise its review rights if it disagreed with the Notice.[14] On this same day, the Commissioner’s office issued the RFT with a Notice of Assessments of Shortfall Penalty, which also contained information about the RFT’s review rights.[15]
[13] R1/1455.
[14] R/1456.
[15] R1/1457-1458.
On 15 May 2019, the RFT through their lawyers, Kings Park Legal, lodged an objection against the amended assessment of GST net amount as well as the associated shortfall penalties for the following tax periods:[16]
[16] R2/1583.
(a)1 April 2014 to 30 June 2014;
(b)1 January 2015 to 31 March 2015;
(c)1 April 2015 to 30 June 2015;
(d)1 July 2015 to 30 September 2015;
(e)1 April 2016 to 30 June 2016;
(f)1 July 2016 to 30 September 2016;
(g)1 October 2016 to 31 December 2016;
(h)1 January 2017 to 31 March 2017; and
(i)1 April 2017 to 30 June 2017.
On 19 October 2021, the Deputy Commissioner of Taxation made a decision on the RFT’s objection disallowing the objection for all periods except 1 April 2014 to 30 June 2014.[17] The basis for allowing the objection in respect of the period from 1 April 2014 to 30 June 2014 was that the amendment to the RFT’s GST assessment for this period was made outside the period of review. As a result of this amendment, the associated administrative penalty on the shortfall for the period 1 April 2014 to 30 June 2014 was reduced to nil.[18]
[17] R2/1618.
[18] R2/1620.
The RFT did not appeal this objection decision.
Applicant Audit
On 27 March 2019, the Commissioner commenced an audit into whether the Applicant’s income tax returns required adjustment following the amendments to the RFT’s tax returns (the Audit).[19]
[19] R1/229.
On 6 May 2019, the Applicant was provided with the Commissioner’s Audit Position Paper.[20] Relevantly, the paper stated that:
(a)the Applicant was the sole director of Austin Computers Pty Ltd which is the corporate trustee for the RFT;
(b)during the RFT Audit, it was discovered that the RFT had lodged incorrect tax returns during the relevant years, when significantly more income was derived;
(c)as a result of the RFT Audit, the Applicant did not declare the correct trust distribution amounts for the relevant years;
(d)the Audit determined that the Applicant’s updated trust distribution for the 2014 income year was $2,983,144, and $2,452,925 for the 2015 income year; and
(e)the Applicant was liable to pay an administrative penalty amount of $1,435,044.43 for providing a false or misleading statement. The penalty rate was 50% of the shortfall amount and was imposed for recklessness.
[20] R1/232-7.
On 5 December 2019, the Audit was finalised, and the Commissioner issued the results of the Audit with reasons for decision (Audit Decision), which advised the Applicant that:[21]
(a)the position and reasons as outlined in the Audit Position Paper remained unchanged;
(b)$2,872,087.81 was outstanding as income tax payable; and
(c)a tax shortfall penalty of $1,436,043.85 had been imposed.
[21] R1/239.
On 9 December 2019, the Commissioner issued the Applicant with the following:
(a)Notice of Amended Assessment – Year ended 30 June 2014 (pursuant to s 155-35 of the TAA;[22]
(b)Notice of Amended Assessment – Year ended 30 June 2015 (pursuant to s 155-35 of the TAA;[23]
(c)Notice of Assessment for Shortfall Penalties – Year ended 30 June 2014;[24] and
(d)Notice of Assessment for Shortfall Penalties – Year ended 30 June 2015.[25]
[22] R1/213.
[23] R1/217.
[24] R1/221.
[25] R1/225.
Objection
On 20 January 2020, the RFT lodged an objection against the Audit Decision.[26] On 31 January 2022, the Australian Taxation Office (ATO) phoned the RFT’s legal representative (Mr Poli of Kings Park Legal) and advised that the objection of 20 January 2020 was invalid as there had been no notice of assessment for income tax issued to the RFT.[27] Mr Poli agreed that the objection should be made invalid and on 4 February 2020, the ATO issued a letter to the RFT advising that the objection was invalid.[28]
[26] R2/1597.
[27] R2/1684-1685.
[28] R2/1617.
On 20 January 2020, the Applicant through his legal representative, Kings Park Legal, lodged an objection to the Audit Decision.[29]
[29] R1/244.
On 23 November 2021, the Commissioner advised the Applicant that he had disallowed the objection (see [1] above) and provided reasons for the Objection Decision.[30] The reasons for decision stated that:
(a)Due to the lack of record keeping and discrepancies arising from the bank statement analysis conducted during the RFT Audit, a comparison was made between the RFT’s business and that of the small business benchmarks for the applicable industry - Computer Retailing.[31]
(b)The small business benchmarks have been developed based on statistical data collected from the income tax returns and business activity statements lodged by entities across various industries. Such tools are available to the Commissioner for use at his discretion along with data matching and referrals from the community. The application of small business benchmarks is at the discretion of the Commissioner.[32]
(c)Sections 14ZZK and 14ZZO of the TAA places the burden of proof on an entity/taxpayer to prove that, on the balance of probabilities, the assessments issued by the Commissioner are excessive or otherwise incorrect and what the assessments should have been. The Applicant did not support his objection with any evidence that would justify the RFT’s reported cost of goods (COGS) to sales ratio or the discrepancies found in RFT’s imported goods.[33]
(d)In the 2014 income year, the Applicant as sole director of Austin Computers (the corporate trustee of the RFT), resolved to distribute to the Applicant 37% of realised capital gains; franked dividends and franking credits; and other income. In the 2015 income year the Applicant as sole director of Austin Computers, the corporate trustee of the RFT, resolved to distribute to the Applicant 35% of realised capital gains; franked dividends and franking credits; and other income. The Applicant was therefore made presently entitled to the income of the RFT for the relevant years and was assessable on a share of the net income of the trust.[34]
(e)Given the Applicant’s involvement in the RFT’s business activities, his behaviour amounts to gross carelessness in relation to the tax shortfall. Accordingly, the base penalty of 50% was correctly imposed.[35]
[30] R1/9-22.
[31] R1/10.
[32] R/11.
[33] R1/11.
[34] R1/11-12.
[35] R1/15.
On 20 December 2021, the Applicant applied to the Tribunal for a review of the Objection Decision.[36]
[36] R1/1.
THE ISSUES
The Applicant’s Statement of Facts, Issues and Contentions dated 14 June 2022 (Applicant’s SFIC) identified the substantive issues for determination to be as follows:
(a)Whether the Tax Assessments issued for the 2014 and 2015 income years are excessive.
(b)Whether the Penalty Assessments issued for the 2014 and 2015 income years are excessive.
The Commissioner’s SFIC, slightly more expansively, identified the substantive issues for determination as follows:
(a)Whether the Applicant can demonstrate that the amended assessments issued by the Commissioner for the relevant years are excessive or otherwise incorrect for the purposes of s 14ZZK(b)(i) of the TAA; and
(b)Whether the shortfall penalties imposed are excessive or otherwise incorrect and, in that case, what the penalties should have been.
(c)Determination of the issue identified in (a) requires consideration of whether the Commissioner made errors in calculating the net income of the RFT in the relevant years; and
(d)Determination of the issue identified in (b) requires consideration of:
(i)Whether the Applicant is liable to pay an administrative penalty in respect of any income tax shortfall amounts pursuant to ss 284-75(1) and 284-90(1) of Sch 1 to the TAA;
(ii)What was the Applicant’s conduct for the purposes of calculating the base penalty amount under s 284-90 of Schedule 1 to the TAA; and
(iii)Whether the administrative penalty imposed on the Applicant should be remitted in whole or in part pursuant to s 298-20 of Sch 1 to the TAA.
In effect the parties have identified the same core issues for determination. The Commissioner’s more expansive definition of the issues for determination is, in my view, correct and more helpful in identifying the relevant questions to be answered.
LEGISLATIVE FRAMEWORK
Section 14ZZK of the TAA provides:
Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving:
(i) if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case—that the taxation decision concerned should not have been made or should have been made differently.
(Original emphasis.)
Section 284-75 of Schedule 1 to the TAA relevantly provides as follows:
Liability to penalty
(1) You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
...
(5) You are not liable to an administrative penalty under subsection (1) ... for a statement that is false or misleading in a material particular if you, ... took reasonable care in connection with the making of the statement.
(Original emphasis.)
Section 284-90 of Schedule 1 to the TAA relevantly provides:
Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table and subsections (1A) to (2), and section 284-224 if relevant:

Base penalty amount

Item

In this situation:

The base penalty amount is:

1

You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a *taxation law (other than the *Excise Acts) by you or your agent

75% of your *shortfall amount or part

2

You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a *taxation law (other than the *Excise Acts)

50% of your *shortfall amount or part

3

You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law (other than the *Excise Acts)

25% of your *shortfall amount or part

Section 166 of the Income Tax Assessment Act 1936 (Cth) (ITAA 36) is as follows:
Assessment
From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner must make an assessment of:
(a) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and
(b) the amount of the tax payable thereon (or that no tax is payable); and
(c) the total of the taxpayer's tax offset refunds (or that the taxpayer can get no such refunds).
Section 167 of ITAA 36 is as follows:
Default assessment
If:
(a) any person makes default in furnishing a return; or
(b) the Commissioner is not satisfied with the return furnished by any person; or
(c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.
Section 168 of ITAA 36 is as follows:
Special assessment
(1) The Commissioner may at any time during any year, or after its expiration, make an assessment of:
(a) the taxable income derived (or that there is no taxable income) in that year or any part of it by any taxpayer; and
(b) the tax payable thereon (or that no tax is payable); and
(c) the total of the taxpayer's tax offset refunds for that year or that part of it (or that the taxpayer can get no such refunds).
(2) Where the income, in respect of which such an assessment is made, is derived in a period less than a year, the assessment shall be made as if the beginning and end of that period were the beginning and end respectively of the year of income.
Section 170 of the ITAA 36 empowers the Commissioner to amend an assessment and prescribes the time in which an assessment can be amended. Relevantly, item 1 of s 170 of the ITAA 36 allows the Commissioner to amend an assessment of an individual within two years after the day on which the Commissioner gives notice of the assessment to the individual and item 5 allows the Commissioner to amend an assessment at any time if the Commissioner is of the opinion there has been fraud or evasion.

Section 262A of the ITAA 36 states:
(1) Subject to this section, a person carrying on a business must keep records that
record and explain all transactions and other acts engaged in by the person that
are relevant for any purpose of the Act.
…
(2) The records to be kept under subsection (1) include:
(a) Any documents that are relevant for the purpose of ascertaining the person’s income and expenditure; and
(b) Documents containing particulars of any election, choice, estimate,
determination or calculation made by the person under this Act and, in the
case of an estimate, determination or calculation, particulars showing the
basis on which and method by which the estimate, determination or
calculation was made.
…
(3) A person who is required by this section to keep records must:
(a) Keep the records in the English language so as to enable the records to be readily accessible and convertible into writing in the English language; and
(b) Keep the records so as to enable the person’s liability under the Act to be readily ascertained.
…
THE PARTIES’ CONTENTIONS
The Commissioner
The Commissioner’s SFIC made submissions as follows:
(a)Pursuant to s 14ZZK(b)(i) of the TAA, the burden of proving that the amended assessments are excessive and what the correct assessments should have been rests entirely with the Applicant.
(b)In order to discharge that burden, the Applicant must prove, on the balance of probabilities, the correct amount of his taxable income, and the tax payable thereon.
(c)Pursuant to s 14ZZK(b)(i) of the TAA, the burden of proving that the Penalty Assessment is excessive or otherwise incorrect and what it should have been rests entirely with the Applicant.
(d)In order to discharge that burden in relation to the penalty assessments, the Applicant must prove, on the balance of probabilities, that:
(i)the conduct by him or his tax agent was not reckless in relation to the operation of the taxation law; or
(ii)his circumstances warrant the remission of the administrative penalties, in part or in full.
The amended assessments
(e)The RFT’s and the Applicant’s record keeping was deficient, such that the claimed business income amounts could not be verified. The use of benchmarking in the RFT Audit (which had consequences for the Applicant’s own income tax assessment) was appropriate in the circumstances to calculate the net income of the RFT for the relevant years.
(f)The Applicant has not provided objective evidence in support of his application. In the absence of appropriate records evidencing the RFT’s income during the relevant years, the Applicant has not demonstrated that there were any errors in the Commissioner’s calculations of the net income of the RFT for the relevant years.
(g)With respect to the relevant years, the Applicant has not discharged the onus of proving, as is required by s 14ZZK(b) of the TAA on its proper construction, the correct amount of his taxable income, and the correct amount of tax payable thereon. As such, the Applicant has not established that the amended notices of assessment issued to him during the relevant years were excessive.
Administrative Penalty
(h)The Applicant is liable for an administrative penalty under s 284-75(1) of Schedule 1 to the TAA for making false or misleading statements to the Commissioner, namely:
(i)on 28 May 2015, when he lodged his 2014 income tax return that incorrectly declared the amount of trust distributions received from the RFT;
(ii)on 11 December 2015, when he lodged his amended 2014 income tax return that incorrectly declared the amount of trust distributions received from the RFT; and
(iii)on 16 December 2015, when he lodged his amended 2015 income tax return that incorrectly declared the amount of trust distributions received from the RFT.
(i)The Applicant’s conduct for the purpose of calculating the base penalty amount under s 284-90 of Schedule 1 to the TAA amounted to ‘recklessness’ as:
(i)the Applicant is not a new entrant to the tax system;
(ii)the Applicant is an experienced businessman with multiple businesses in Australia and overseas;
(iii)the Applicant is a beneficiary of the RFT and the sole director of Austin Computers. The Applicant had full knowledge of the operations of the RFT and of the circumstances surrounding the shortfall amount;
(iv)in the Applicant’s formal interview, he acknowledged he did not retain records (physical or electronic) in respect of the RFT, despite understanding his obligations around record keeping. Further, the Applicant did not reconcile the financial reports, MYOB system and income tax returns with source documents or ensure the transactions in the bank accounts were verified; and
(v)the shortfall amount resulted from the disregard of, or the indifference to, a risk that was foreseeable by the Applicant as a reasonable person.
(j)Having regard to Law Administration Practice Statement PS LA 2012/5 Administration of the false or misleading penalty – where there is a shortfall amount, the Applicant’s circumstances do not warrant a remission of the penalties, in part or in full, because the application of the administrative penalty in the Applicant’s case would not provide an unjust or unreasonable result.
(k)The Applicant has not demonstrated his circumstances warrant a remission of the penalties, in part or in full. The exemptions provided by ss 284-75(5) and 284-75(6) of Schedule 1 to the TAA, are not applicable in this case as the behaviour that resulted in the shortfall has been determined to be ‘recklessness’ by the Applicant.
The Applicant
The Applicant’s SFIC made submissions to the following effect:
(a)The amounts included by the Commissioner in the amended assessments were incorrect. The RFT Trust correctly reported all of its business income with respect to the relevant years.
(b)In making the amended assessments the Commissioner has relied upon the COGS to sales benchmark for the ‘computer retailing industry’ (“Benchmark”), however:
(i)the Benchmark is derived from an analysis of the data reported from businesses with a turnover of between $30,000 to $15,000,000, in circumstances where the RFT’s turnover was greater than $15,000,000 and had on average in the prior ten years been in excess of $20,000,000 and hence the Trust’s business is not comparable to those included in the Benchmark data;
(ii)being in Western Australia, the RFT was experiencing a different business environment to that of many of the business from which the Benchmark data was obtained;
(iii)the RFT’s business comprised online sales in a competitive retail market and sales to wholesale customers, such as large businesses who purchase a large volume of computer products in a single order following a competitive tender process and hence such stock is sold at a lower gross profit margin;
(iv)notwithstanding that the Commissioner audited the RFT’s GST and income tax compliance for the period 1 July 2013 to 31 December 2017, the Commissioner has not made any amendment to the RFT’s income tax liability with respect to the periods 1 July 2015 to 30 June 2016 and 1 July 2016 to 30 June 2017 arising from the application of the Benchmark. The Commissioner has not applied his methodology consistently and hence the assessment appears to have not been made upon any reasonable basis.
(c)In making the assessments of assessable income in each of the 2014 Year and the 2015 year, the Commissioner has purportedly conducted an analysis of the RFT’s bank statements for the relevant years in which:
(i)only analysed the credit transactions and not the debit transactions in the RFT’s bank statements;
(ii)did not analyse the related entities from which the alleged unreported sales was transferred to the RFT’s bank account and did not analyse corresponding debit transactions where money was transferred from the RFT’s bank account to those related entities.
(d)The alleged unreported sales in the RFT’s returns are in fact transfers between related entities whereby funds were transferred between the RFT and other related trusts, via the bank account for Grand Plan Investments Pty Ltd, for the purpose of reducing the interest expense of the related trusts. Therefore, the Commissioner has made an erroneous determination that transfers of capital sums from related parties is income from unrelated sources.
(e)The Commissioner has included in the amended assessments cash transactions deposited to seven bank accounts belonging to Ms Zhao Zhang and/or Go Slash Pty Ltd, accompany controlled by Mrs Huang. The RFT has no knowledge of these accounts except for the account into which the wages for Ms Zhang were paid.
(f)The Commissioner asserted that the RFT failed to report its sales and failed to declare cash sales. However, the Commissioner failed to consider the change in the trading history of the RFT over the approximately twenty years of carrying on the same business, whereby the nature of the RFT’s sales has become increasingly more reliant on internet based sales, credit card, EFTPOS, and electronic funds transfer, whilst conversely the volume of cash sales has steadily decreased over time which is entirely consistent with the general reduction in cash transactions, particularly for higher value products.
(g)In essence, the Commissioner has alleged that the RFT has not properly reported its sales wholly on the basis of the conduct of bank accounts to which the RFT and/or the Applicant has no knowledge or access and the conduct of an unrelated company that is controlled by Mrs Huang who is the owner of the suspect cash transactions. The cash transactions and ‘suspicious’ activity, belongs to and is the responsibility of Ms Zhao Zhang and not the Applicant.
Penalty
(h)The penalty assessments are excessive to the extent that the RFT, and by extension the Applicant, did not derive the purported additional income.
Penalty remission
(i)In alternative to the above, the penalty amount ought to be remitted to nil.
(j)The Applicant contends that he is not liable to a penalty pursuant to section 285-75(1) of TAA because the Applicant did not make a statement to the Commissioner that was false or misleading in a material particular because the Applicant correctly reported its taxable income.
(k)Alternatively, if the Applicant did make a statement to the Commissioner that was false, the Applicant was not reckless in making any such statement(s) because the shortfall is the result of:
(i)The Commissioner’s flawed analysis of the RFT’s bank statements whereby only credit transactions were ‘analysed’ and debit transactions were not;
(ii)The Commissioner’s erroneous application of the Benchmark to the RFT’s business; and
(iii)The Commissioner’s wrong treatment of Ms Huang’s transactions through the bank accounts as income.
(l)The penalty amount ought to be remitted in full in light of the matters stated at subpara (k) above.
The Applicant filed an outline of submissions which expanded on some of the issues and contentions identified in the Applicant’s SFIC as follows:
(a)The Benchmark for the ‘Computer Retailing’ industry applied by the Commissioner to increase the sales revenue (and profit) is inappropriate. The Commissioner wrongly relied on cash deposits, suspicious activities (Ms Huang and Go Slash) and unidentified deposits.
(b)The Applicant has no knowledge of the origins of such transactions or the business activities of Ms Huang or her company, Go Slash.
(c)The alleged unidentified deposits in the RFT’s bank account were ‘internal transfers’ between the various trusts that are controlled by the Applicant.
(d)RFT trading since 1999 showed that the COG/sales ratios of between 84% and 95%. The business carried on by the RFT is that of retailing and wholesaling computers, computer hardware/components and computer accessories.
(e)The RFT operated Austin Computers as a high-volume turnover and relatively low-margin business income predominantly derived from card transactions and electronic funds transfer with a much smaller volume of sales transactions completed where payment is received by way of cash and/or cheque.
(f)During the relevant years, the RFT had a point-of-sale (POS) system and merchant facilities provided by Westpac Bank at each of the physical store locations and also had a merchant facility linked to the online store’s checkout system. Each of the RFT’s merchant facilities were only linked to the RFT’s Westpac Bank account and were not linked to any other bank account.
(g)The RFT did not receive payment for any of its sales into any bank account other than the RFT’s Westpac Bank account.
(h)During the relevant years, the RFT maintained an inventory management and POS system called Digital Assist which recorded each individual sale transaction and produced an invoice in triplicate for each transaction. One copy of the invoice was provided to the customer, one copy went to the warehouse to pick the order and the third copy was retained at the premises where the sale occurred and then periodically packed into boxes and transported to the Bibra Lake outlet and/or Midland premises for storage.
(i)The bookkeeper employed by the RFT performed the data entry for the sales and expenditure into MYOB on behalf of the RFT. Live bank feeds were not available for MYOB and the Digital Assist software did not speak directly to MYOB and hence manual data entry into MYOB was required.
(j)The RFT’s bookkeeper manually entered the daily sales data into MYOB from the RFT’s bank statements and for customers who made purchases on account, the bookkeeper entered the sales data from the invoices produced by Digital Assist so that a debtors control account could be maintained.
(k)Where payment for sales was received by way of either cash or cheque:
(i)the cash and cheques were transferred from the store at which the sale occurred to the RFT’s Osborne Park office;
(ii)the accounts staff at the Osborne Park office would attend to depositing any cash and cheques at a branch of the Westpac Bank, typically the Osborne Park branch and on occasion at the Applecross branch;
(iii)the deposit of cash and cheques with the bank incurred fees for each deposit made; and
(iv)the accounts staff attended to deposits cash and cheques at the Westpac bank several times each month.
(l)In about August 2016 the Applicant caused the RFT to franchise the business of Austin Computers and RFT then became a wholesaler to the franchisees which operated the retail stores formerly operated by the RFT.
(m)The Applicant was pursuing other business opportunities overseas, predominantly in China, from about the time that the RFT franchised the physical stores trading as Austin Computers.
(n)While the Applicant was residing overseas, the franchisee at the Bibra Lake store and the new tenant at the former Midland store disposed of the various boxes of hard copy sales records that were formerly stored at those premises by the RFT.
(o)The Digital Assist POS system maintained by the RFT was initially hosted on a local physical server located at the Osborne Park office and was transferred to a cloud-based server in about 2016. The digital record of the Digital Assist software was only backed up for a 30-day period when it moved to the cloud server and as such those digital records are no longer available for the relevant years.
The Applicant’s outline of submissions made submissions on the law to the following effect:
(a)Under s 14ZZK(b)(i) of the TAA, the Applicant bears the burden of proving that amended assessments and penalty assessments are excessive or otherwise incorrect and what they should have been.
(b)The applicable standard of proof to which the Applicant must satisfy the Tribunal is on the balance of probabilities, that is the Applicant’s position is more likely to be correct than not.
(c)The taxpayer must prove that the relevant assessments are excessive, which is achieved by proving or otherwise demonstrating what the correct taxable income should be.[37]
[37] Bosanac v Commissioner of Taxation [2018] FCA 946 at [81]) (Bosanac FC).
(d)The Commissioner is not required to show that the relevant assessments were correctly made and may rely upon the failure of the Applicant to discharge its evidentiary burden to prove the excessiveness of the assessments to uphold the assessments.[38]
[38] Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624.
(e)Other than as a tool that the Commissioner may be permitted to use in making a default assessment,[39] where there are insufficient or no records available upon which the Commissioner can make an assessment of the taxpayer’s assessable income, the benchmarks have no legislative basis or authority.
[39] S 167 of Income Tax Assessment Act 1936 (Cth) (ITAA 36).
(f)The Tribunal has accepted the use of the benchmarks in previous cases, however, the cases in which the use of Benchmarks has been accepted by the Tribunal is limited to those cases where the taxpayers’ circumstances are consistent with the relevant sample group from which the benchmark statistics have been derived.
(g)In the present case, the Benchmark was derived from business within a specified ‘industry code’ that have a turnover range of between $30,000 and $15,000,000 which has the effect of reducing the sample size of the statistics by 54% meaning that only 46% of the total businesses within an industry code are included in the statistical sample group for the Benchmark.
(h)The methodology adopted by the Commissioner in calculating the Benchmark specifically excludes business from the statistical sample group where such businesses are ‘mixed businesses’ that operate under more than one industry code.
(i)The Benchmark is not an appropriate, or statistically valid, tool to be used in circumstances where the subject taxpayer’s business:
(i)has a turnover that is in excess of the maximum turnover range used in the sample group; and
(ii)operates in more than one industry group/code.
(j)The Commissioner asked the Applicant to provide the Commissioner with the hardcopy business records for the RFT, however, the Applicant was unable to do so because those hardcopy records were no longer within the custody or control of the Applicant.
(k)The digital and hardcopy records that the Applicant was unable to provide with respect to the RFT were the records produced by the RFT’s inventory management and POS system, Digital Assist. The Applicant also provided the RFT’s MYOB records which were created from the data produced by Digital Assist being manually entered into MYOB by the RFT’s bookkeeper.
(l)Those records are therefore a reliable secondary source of the RFT’s sales, purchases, other income and other expenditure that was relied upon by the RFT in preparing and lodging its income tax returns.
(m)The RFT’s Westpac bank statements for the relevant years as the sales as shown in the bank statements are consistent with the sales recorded in the MYOB system by the RFT.
(n)Digital Assist software was principally an inventory management software. In the relevant years the Digital Assist software could not be integrated with MYOB such that transactions could automatically populate the MYOB records and as such the data was required to be re-entered into MYOB for the purposes of enabling the RFT’s accountant to prepare financial statements, reports and the annual income tax returns on behalf of the RFT.
(o)The Applicant relied on his bookkeeper and accounts payable/receivable staff to ensure that all of the data produced by Digital Assist with respect to sales and purchases was recorded in MYOB.
(p)The RFT and the Applicant have complied with their obligations to keep records pursuant to subsections 262A(1), (1D) and (2) of the ITAA 36.
(q)In the circumstances, it was not open for the Commissioner to make the amended assessments pursuant to section 167 of the ITAA 36.
(r)Alternatively, if the records were not sufficient for the Commissioner to make an assessment of the RFT net income, it was not open to the Commissioner to make an assessment based on the Benchmark. Rather the Commissioner ought to have made the amended assessments using an extrapolation from previous years returns as described in Practice Statement Law Administration PSLA 2007/24.
(s)In relation to the use of benchmarks, the present case is sufficiently distinguishable on its facts that the decisions of the Tribunal in Vita Hot Bread Pty Ltd and Commissioner of Taxation,[40] Carter and Federal Commissioner of Taxation,[41] and Baini and Commissioner of Taxation,[42] (“benchmark decisions”) that the Tribunal is not bound to follow those decisions.
(t)In the present matter the Commissioner has not made the amended assessments on a reasonable basis as required by PS LA 2007/24 and section 167 of the ITAA 36 because he has relied on the Benchmark knowing that the Benchmark is not statistically valid for any businesses which have turnover outside the range of the sample groups, and which operate in more than industry group/code.
[40] (2012) 87 ATR 678.
[41] (2013) 92 ATR 701.
[42] (2012) 87 ATR 627.

Prior to the hearing, the Commissioner also filed an outline of submissions which expanded and further explained the Commissioner’s case. The outline was to the following effect:
(a)The Applicant was at all relevant times was the sole director of the RFT’s corporate entity, Austin Computers, as well as a beneficiary of the RFT.
(b)During the relevant years, the RFT controlled and operated six computer retail stores in Western Australia and maintained a warehouse in New South Wales. From 1 January 2016, the RFT franchised the six stores and became the exclusive wholesaler to them.
(c)The RFT’s quarterly activity statements were prepared and lodged by its bookkeeper, under the supervision of the Applicant (in his capacity as sole director). The bookkeeper entered transactions into MYOB using the RFT’s bank statements - she did not reconcile these figures with the sales records generated by POS, supplier tax invoices, or cash sales records.
(d)The RFT’s tax agent prepared and lodged the RFT’s tax returns based on MYOB records prepared by the RFT’s bookkeeper and did not verify the MYOB records with any of the source documents.
(e)As a result of the RFT Audit, the Commissioner concluded that the RFT lacked sufficient records to support the business income reported. Due to the lack of record keeping and discrepancies arising from the bank statement analysis conducted, a comparison was made between the RFT’s business and that of the Benchmark. The RFT’s business income was amended in line with the Benchmark based on the COGS to sales ratio.
(f)The net income of the RFT was also revised to take into account the additional income identified by the RFT Audit.
THE HEARING AND THE EVIDENCE
Hearing
The evidence in the application was heard on 16 and 17 May 2023. Mr T Poli appeared for the Applicant and the Ms V Long-Droppert appeared for the Commissioner. The Applicant and Stephen Alan Hollyock gave oral evidence at the hearing. The following documents were admitted into evidence:
(a)Applicant Statement dated 5 July 2022 (A1);
(b)Witness Statement of Stephen Hollyock dated 20 December 2022 (A2);
(c)Commissioner’s section 37 T-documents filed 2 February 2022 (R1);
(d)Commissioner’s supplementary section 37 T-documents - ST1-ST8 filed 25 August 2022 (R2);
(e)Commissioner’s supplementary section 37 T-documents - ST9-ST11 filed 20 December 2022 (R3); and
(f)Commissioner’s supplementary section 37 T-documents - ST12 filed 20 February 2023.
At the conclusion of the evidence on 17 May 2023, the parties asked for closing submissions to be made in writing. Accordingly, on a timetable proposed by the parties, I made orders that the Applicant file and serve closing submissions by 9 June 2023, that the Commissioner file and serve closing submissions by 30 June 2023 and that the Applicant file and serve any reply by 7 July 2023.
Following the filing of a minute of consent signed by the parties, on 20 July 2023, I made directions extending time for the filing and service of closing submissions with the time for the Applicant to file and serve submissions being extended to 28 July 2023, the time for the Commissioner to file and serve submissions being extended to 1 September 2023 and the time for the Applicant to file and serve any reply extended to 8 September 2023. The parties’ respective submissions were filed as follows:
(a)The Applicant’s closing submissions on 29 August 2023;
(b)The Commissioner’s closing submissions on 19 November 2023.
The Applicant did not file any closing submissions in reply.
Evidence
The Applicant provided a statement dated 5 July 2022 and what was described as a supplementary statement dated 12 May 2023.[43] The Applicant also filed a witness statement of Stephen Hollyock signed 20 December 2022.[44] The Commissioner provided an affidavit of Amy Leigh Joseph affirmed on 20 December 2022 and filed documents pursuant to s 37(1AB) of the Administrative Appeals Tribunal Act 1975 (Cth) (as amended by s 14ZZF of the TAA) and supplementary documents and further supplementary documents. Ms Joseph’s affidavit related to an interlocutory matter and its contents are not relevant to the substantive issues to be determined in the application.
[43] A1.
[44] A2.
The Applicant’s statement of 5 July 2022,[45] insofar as it is relevant, set out the matters contained under the heading Background in [4]-[24] above and some of the claims made in the Applicant’s SFIC set out in [36] above. Material to present considerations, the Applicant’s statement of 5 July 2022 described the business operated by RFT in slightly more detail as follows:
[45] A1.
(a)Austin Computers started the business of retailing and wholesaling computers, computer hardware and computer accessories in 1996. The business was transferred to RFT in 1999.
(b)The business operated from seven physical locations across the suburbs of Perth and through a web-based online store. From 2010 sales through the online store were the largest single component of the business by value of sales.
(c)In addition to the store-based and online sales, the business also had large commercial and government customers through competitive tender as well as wholesale to computer retailers and IT businesses.
(d)From 2002 to 2014 the business had revenues between $17.5 and $23.6 million. In 2015 the RFT revenue decreased to $14.8 million due to the sale of part of the business, namely that part operated through the Osborne Park outlet, to a trust, the Austin Computers Osborne Park Trust (ACOP Trust) which was controlled by the Applicant’s son.
(e)The business model employed by the Applicant was a high turnover/smaller margin. This enabled the Applicant to grow the business and gain customer loyalty by providing high quality computers, hardware and accessories at competitive prices.
(f)High volumes meant that the business could not hold high levels of stock for any significant period. The high volumes also enabled the business to get rebates from suppliers.
(g)The nature of the computer industry is that technology is constantly advancing meaning that old technology stock had to be substantially discounted.
(h)The business model is significantly different to a business providing IT services to customers.
(i)Between 2000 and 2014 the ratio of costs of goods to sales was consistently between 84% and 91%.
(j)As a result of the end of the mining boom and increase in cheap imports with GST exemption in 2012 profit margins further decreased. No-one in the industry would have made profit margins of 39%.
(k)The ACOP Trust continued to use the RFT Westpac account after the sale of the Osborne Park business in 2012. In March 2016 the ACOP Trust sold the Osborne Park business back to RFT.
(l)From 2016 the RFT franchised the physical store locations and became the exclusive wholesaler to those franchises. The RFT remains a purely wholesale business which sells to the franchises at a 3% mark-up.
(m)The business has traditionally had a relatively low proportion of cash sales. Over the years, more customers switched to using credit cards in preference to cash and cheques.
(n)Each physical store has a POS system. Payments to the online store were purely by credit card.
(o)Each day RFT would receive a statement from Westpac for each of the stores. Cash from cash sales would be processed through the POS system in the store. The cash from the cash sales was sent to the Osborne Park office and banked periodically.
(p)The majority of sales were effected by funds transfer or credit card.
(q)The sales data was manually input into the RFT MYOB system by RFT’’s bookkeeper Ms Su Yan. She would send invoices and bank statements for archiving at the Bibra Lake store warehouse periodically.
(r)Electronic data for the relevant years was backed-up every 30 days. The data is no longer available from the cloud server.
(s)The hard copies of the documents that the Applicant had stored at the Bibra Lake and Midland stores were disposed of by the franchisees who purchased those businesses.
(t)In relation to the moneys coming into the seven bank accounts operated by the Applicant’s wife treated as unexplained income by the Commissioner, the Applicant’s wife operated those accounts, and he cannot get the details of the accounts because of family court proceedings. In the relevant years the Applicant’s wife was conducting her own business. He has no knowledge of the cash deposits into those accounts and denies that they represent undisclosed sales by RFT.
The Applicant’s supplementary statement of 12 May 2023 was to the following effect:
(a)In preparing for the hearing, the Applicant has undertaken a price comparison of 1,494 products sold by Austin Computers compared to two of its main competitors, PLE Computers and Umart. The products the subject of the comparison are sold by Austin Computers through its online store.
(b)He has calculated that the average profit margin for Umart on the products was approximately -5%, for PLE Computers it was approximately 5% and for Austin Computers approximately 10%.
(c)Since online shopping Austin Computers has had to match its competitors’ prices and for resellers, such as Austin Computers, it is not uncommon to make a loss on some products because customers are only prepared to pay so much.
(d)Austin Computers has never generated the level of profit used by the Commissioner to calculate the amended assessments.
The statement of Mr Hollyock dated 20 December 2022 was to the following effect:
(a)He is a chartered accountant and a registered tax agent. He has been the RFT accountant and tax agent since 2000. He prepared the tax returns for the years 2000 to 2017.
(b)He prepared those tax returns and financial statements based on the MYOB data maintained by the RFT bookkeeper and Digital Assist software which detailed the stock held for each store.
(c)He is aware from what the Applicant told him that the Digital Assist software does not integrate with MYOB and that the sales data was manually input into the MYOB system by the RFT bookkeeper.
In cross-examination, Mr Hollyock confirmed that the source information for the statements that formed the basis of the tax returns was the MYOB data. The Digital Assist POS records were used to determine stock on hand as at 30 June and the debtor figure.[46] His practice had been to contact the Applicant before the end of the financial year to get him to print reports from Digital Assist for the end of year. If the reports were not printed at the time, they ceased to be accurate. Digital Assist was a “perpetual system” which provided a snapshot of stock and debtors on the particular day that the report is run. Mr Hollyock confirmed that he was otherwise reliant on the MYOB data and that he had nothing to do with the input of data into that system. He also confirmed that in order to verify the MYOB reports one would need to have the hardcopy records that the Applicant says were thrown out by the franchisees.[47]
[46] Transcript at 111.
[47] Transcript at 113.
Mr Hollyock also referred in cross-examination to the role played by bank statements in preparing the annual accounts and tax returns. His evidence was that “bank statements [were] reconciled virtually on a weekly basis” and that if the sales data manually input by the bookkeeper into the MYOB system was incorrect, the MYOB would not reconcile with the bank statements and the “creditors would be out”. While Mr Hollyock agreed that there was no way of reconciling “if cash sales of the company were not being all deposited into the bank” his evidence was that “the debtors printouts from Assist,… had a system whereby cash sales were allocated to the name of the manager for that store”. This was, however, something that would have to be picked up and checked at the time.[48]
[48] Transcript at 114-116.
In re-examination Mr Hollyock stated that, while it was the case that he relied on the accuracy of the data input into the MYOB system by the RFT bookkeeper, he had no reason to believe that that data was not being accurately input. He confirmed that he had not checked that that was the case as that was not part of his engagement, that not being the role of accountants doing annual accounts and tax returns. His evidence e was that “it is simply not cost-effective” to do that.[49]
The parties closing submissions
[49] Transcript at 120.
The Applicant
The Applicant’s closing submissions dated 29 August 2023 were to the following effect:
(a)The Commissioner used the Benchmark to increase the sales figures for the relevant years. The Benchmark is not reflective of the RFT business.
(b)The Commissioner also included cash deposits into seven bank accounts totalling $4.32 mill in the period from October 2013 to December 2017 in the amended assessments. These were the Applicant’s wife’s, not his transactions. The amended assessment also included “suspicious” activities by Go Slash, a company controlled by the Applicant’s wife and $11.7 mill in deposits over the period from July 2014 to December 2017. The Applicant has no knowledge of the origin of such deposits made into his wife’s bank accounts.
(c)The deposits into the bank accounts treated as income by the Commissioner, were transfers of surplus funds between companies to offset interest expenses in related entities.
(d)In total:
(i)the RFT transferred the sum of $410,000 to Grandplan in the 2014 incomeyear and $628,000 in the 2015 income year; and
(ii)Grandplan transferred the sum of $1,140,000 to the RFT in the 2014 income year and $2,802,000 to the RFT in the 2015 income year.
(e)The transfers from Grandplan to the RFT were subject to a complying Division 7A loan agreement.
(f)The RFT operated Austin Computers as a high-volume turnover and relatively low margin business operation which enabled the business to be price competitive.
(g)The Applicant reiterated the explanation of the RFT business and its record keeping practices (use of MYOB and Digital Assist) set out in the Applicant’s SFIC, the Applicant’s Outline of Submissions and the Applicant’s statements as summarised above.
(h)Similarly, the Applicant’s closing submissions on the law repeated the submissions made in that regard in the Applicant’s SFIC and Outline of Submissions (see [37] and [38] above).
(i)The Applicant’s closing submissions in relation to the penalties repeated the submissions in that regard made in the Applicant’s SFIC and the Applicant’s outline of submissions.
The Commissioner
The Commissioner’s closing submissions dated 17 November 2023 were to the following effect:
Legal principles
(a)Section 262A of the ITAA 36 (see [35] above) requires the taxpayer to keep records so as to enable the taxpayer’s liability under that act to be readily ascertained and s 167 of the ITAA 36 allows the Commissioner to issue a default assessment (see [35] above).
(b)The Commissioner cites Dalco at 618-9 at 20 to the effect that if one of the situations referred to in subsections (a), (b) or (c) of s 167 of ITAA 36 exists, the Commissioner or his delegate is empowered to make an assessment and the amount of that assessment becomes the taxpayer’s taxable income even though the amount may not be in truth the taxpayer’s taxable income.
(c)Pursuant to section 14ZZK(b) of the TAA, the Applicant must prove, on a proper evidential basis and to the requisite standard of proof, not only that the Commissioner’s assessment is excessive, but what is the correct assessment that should be made in its place.
(d)The Commissioner cites Commissioner of Taxation v Ross (in her capacity as the personal representative of the estate of Ross) and Another at [75],[50] and Steward J in Bosanac FC.
[50] [2021] FCA 766.
(e)The commissioner is not required to show that the assessment was correctly made and is entitled to rely on any deficiency of proof of excessiveness to uphold the assessment.[51]
[51] Citing Brennan J in Dalco.
(f)If the Commissioner’s assertions as made are not proven, such a failure does not discharge the Applicant’s statutory burden.[52]
[52] Vu v Federal Commissioner of Taxation ((2006) 63 ATR 341 at 344); Galea v Federal Commissioner of Taxation ((1990) 21 ATR 1108 at 1115) and BosanacFC at [9], [73].
(g)The Applicant’s evidence is unreliable. The Applicant’s evidence in cross-examination was inconsistent with his evidence-in-chief. The Commissioner cites four examples.
(h)Further, in cross-examination the Applicant conceded that he did not read the tax returns (there are half a dozen trusts) and normally he just signs them without reading them. Even if he did go through them in detail, he would not understand them.[53]
[53] Transcript at 24.
(i)This was contrary to Mr Hollyock’s evidence that he would “sit across the table [from the Applicant) for many hours explaining the contents of the accounts and tax returns” and that the tax returns would be sent to the Applicant with a cover letter which pointed out the tax position of all of the entities, what problems had been encountered and an overview of the BAS position. It was, according to Mr Hollyock, “fairly thorough”.[54]
[54] Transcript at 20-25.
(j)The Applicant was cross-examined about when he became aware of the ATO’s concern about the anomalies in the MYOB data. The Applicant gave evidence to the effect that he had not personally been aware of the MYOB issue until the week prior to the hearing. There is ample documentary evidence to the contrary which was put to the Applicant in cross-examination.[55]
[55] Transcript at 40.
(k)The Applicant admitted in cross-examination that he and Mr Hollyock, the Applicant’s only other witness, met the week before the hearing to discuss their evidence. The Applicant’s evidence as a whole should not be accepted or, alternatively, it should not be accepted where it is not substantiated by objective documentary evidence.
(l)To the extent that the Applicant relies on the evidence of Mr Hollyock, the conferencing of the two witnesses in the week prior to the hearing diminishes the force of that can be given to the oral evidence.
Record keeping
(m)During the RFT Audit, the Commissioner made numerous requests of the Applicant for source documentation. This included electronic and hard records, such as access to Digital Assist, and original tax invoices. However, no primary records were supplied to support the RFT business activity statements.
(n)From April 2018 to December 2018 (identified by the Commissioner) measures were taken to obtain access to RFT’s electronic business records. Notwithstanding these requests the information was not provided nor was the location of RFT’s main server identified to allow ATO access for the audit. In December 2018 and January 2019, the ATO followed up with Mr Poli for the requested documents via emails. However, Mr Poli did not provide a response to these two emails.
(o)Despite numerous requests, the RFT did not supply records including daily sales reports from POS, cash sales records, debtors and creditors, customs documentation and original suppliers’ tax invoices for the audit.
(p)MYOB records were eventually obtained from RFT’s tax agent and third party information obtained from Westpac and various agencies.
Records adduced cannot be relied upon
(q)The Applicant has failed to establish a proper evidentiary basis for a finding that the amended assessments were incorrect or excessive. The Applicant’s assertion that RFT was correctly returned by the RFT in its income tax return for each of the relevant years cannot be sustained on the evidence before the Tribunal.
(r)The process by which cash sales of Austin Computers were recorded means that the records which have been produced to the Tribunal cannot be relied upon to verify the business income of the RFT.
(s)RFT’s quarterly statements were prepared and lodged by its bookkeeper. The Applicant gave evidence that the bookkeeper entered cash transactions into MYOB using only the RFT bank statements. She did not reconcile these figures with the sales records generated by Digital Assist, supplier tax invoices, or other cash sales records.[56]
[56] R1/494; R1/1345-1347; Transcript 63 lines 5-15; Transcript 68 line 45; Transcript 69 lines 0-10.
(t)The bookkeeper also stated in the interview with the ATO that the data given to the accountant to prepare the documents for the company were not reconciled with the cash sales.[57] The Applicant did not call the bookkeeper as a witness and none of the sales managers from Austin Computers was called to give evidence.
[57] R4/1716 lines 0-10.
(u)The financial statements and tax returns were prepared based on the MYOB financial statements prepared by the RFT bookkeeper, and debtor and stock reports. The accountant who prepared the tax returns and financial statements from 2000-2017 did not verify the MYOB records with cash sales records from Digital Assist or original invoices. That tax agent agreed that in order to analyse sales in Digital Assist, one would have to have regard to the hardcopy printouts of those sales.
(v)The accuracy of the cash sales recorded in MYOB, and in turn the tax returns, depended on all of the cash from cash sales at Austin Computers being deposited in the Westpac bank account of RFT. That would not pick up where a sale is effected outside that banking system. Further, the tax agent’s evidence was that the RFT had accounts additional to the Westpac account.
(w)The tax agent did not have access to Digital Assist. He was not the author of the inventory and stock reports generated by Digital Assist, nor was he the author of the MYOB data. The reports prepared by him are wholly hearsay as he relied on data prepared by other people.
(x)In summary, there are no source records (Digital Assist data or original invoices) available to the Tribunal to analyse whether the cash sales of Austin Computers reconcile with the reported income of the RFT in the relevant years. The individuals who may have been able to give evidence about the process by which cash sales were recorded, reconciled and deposited were not called as witnesses. The Tribunal ought to draw a Jones v Dunkel inference.[58]
[58] [1959] HCA 8; (1959) 101 CLR 298.
(y)Further, consistently with findings of the ATO audit into the affairs of the RFT, the MYOB data available to the Tribunal show discrepancies between the MYOB data and BAS payments of the RFT.
Cost of Goods to Sales ratio
(z)The ATO’s COGS to sales ratio benchmark range for businesses in the Computer Retailing sector for businesses with a turnover of in excess of $600,000 is 54% 69%. The Applicant has failed to justify the COGS to sales ratio reported in the years ended 30 June 2014 (87.8%) and 30 June 2015 (94%).
(aa)While the Applicant led evidence of the nature of the business operated by RFT, it was unsubstantiated by any objective documentary evidence. The analysis by Mr Hollyock of the historical COGS to sales ratio is hearsay and cannot be relied on as evidence of RFT’s COGS to sales ratio.
Benchmarking appropriate
(bb)There is no onus on the Commissioner to justify the basis of the amended assessments. The Applicant must show the amended assessments are excessive and what should be his correct assessable income, even if the benchmarking figure is incorrect (which is not conceded by the Commissioner).
(cc)In circumstances where the Applicant record-keeping was deficient it was open to the Commissioner to apply the small business benchmarks.
(dd)A section 167 amended assessment may not be in truth the taxpayer’s taxable income, The Commissioner does not need to show that the Amended Assessments were correctly made. Accordingly, the Applicant’s submissions about the amended assessments having the effect of “increasing sales” and the submissions about the appropriateness of the use of benchmarks are not relevant.
(ee)As to the Applicant’s contention that the benchmarks are not statistically relevant to the RFT:
(i)The businesses that are excluded from the calculation of the benchmark ratios for being mixed businesses are those that reported multiple activities on their tax returns, not businesses that do, in fact, carry on a mixed business. The RFT reported only one business activity on its tax returns for the relevant years: Computer Retailing.
(ii)Aside from the reported turnover, FRT’s business would form part of the population used to calculate benchmark ratios for Computer Retailing based on the ATO methodology;
(iii)RFT’s reported turnover for the financial year ended June 2015 was less than $15,000,00060 and the average reported turnover of the RFT for the relevant years was $17,303,922;
(iv)The Commissioner applied the average cost of sales percentage of 61% in the amended assessments which was entirely appropriate in circumstances where the reported turnover of the RFT could not be verified because source documentation was not produced by the Applicant;
What the Amended Assessments should have been?
(ff)Even if the Commissioner made an error in calculating the amount of the relevant assessments by utilising the Benchmark (which is denied), that does not discharge the Applicant’s onus of proof.
Have the penalties been correctly applied?
(gg)The Applicant’s returns contained false or misleading statements in that they incorrectly declared amounts received from the RFT.
(hh)For the purposes of calculating the penalty, the Applicant’s conduct was reckless.
CONSIDERATION
Operation of s 14ZZK(b)(i) of the TAA

At [46] of Ross, Derrington J summarised the effect of s 14ZZK(b)(i) of the TAA as follows:
The parties generally agreed that the effect of s 14ZZK(b)(i) is that the taxpayers bear the burden of proving, on the balance of probabilities, both that the assessment is “excessive” and, also, what the assessment should have been to make the assessment right, or “more nearly right”: Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at 88; [1936] HCA 77; [1936] ALR 425 (Trautwein) per Latham CJ; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623–5; 90 ALR 341 at 343–5 (Dalco) per Brennan J and at CLR 632– 4; ALR 350–1 per Toohey J; Gashi v Commissioner of Taxation (2013) 209 FCR 301; 296 ALR 497; [2013] FCAFC 30 (Gashi) at [61]–[67]. It was also not in dispute that the onus is to the civil standard, being the balance of probabilities. It should always be kept steadily in mind that the rationale for the onus imposed by s 14ZZK(b)(i) is that the facts relating to a taxpayer’s taxable income are peculiarly within their knowledge and they must be taken to know what their income is and how it was derived: Trautwein at CLR 87. It follows that there is no undue harshness in requiring a taxpayer, who has failed to lodge a return or whose return is not compliant with the taxation legislation, to bear the onus of establishing their true taxable income for the relevant income year.
At [48] Derrington J made the following observations:
Some guidance as to that question can be gleaned from a more granular analysis of the principles concerning the onus as they have been synthesised in the authorities. In general terms, the relevant authorities establish as follows:
1) An assessment under s 166 is fundamentally different to an assessment under s 167 and, necessarily, the manner in which they can be challenged are also fundamentally different: Gashi [61]–[67]; Rigoli v Commissioner of Taxation (2014) 141 ALD 529; [2014] FCAFC 29 (Rigoli) at [12].
(2) The assessment by the “asset betterment method” is a legitimate form of assessment: Trautwein at CLR 86–87, 99 – 100 and 105; even though it necessarily involves an amount of guesswork and, whilst almost certainly inaccurate to some extent, it is no part of the Commissioner’s duty to establish what judgment he has formed in making a s 167 assessment: Gashi at [55]; George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 204; [1952] ALR 961 (George). Clearly enough, any inaccuracy follows from the circumstances which impel the Commissioner to make a default assessment, being that a process of calculating assessable income less deductions is not possible: Rigoli at [12].
(3) It is not part of a review of an objection decision concerning an assessment under s 167 to seek to identify the facts the Commissioner adopted for the purpose of making the assessment and whether those facts disclose a taxable income: Gashi at [55]; George at 204. The principal fact which the Commissioner is required to determine in making an assessment pursuant to s 167 is “the amount of income upon which ... income tax ought to be levied”: Gashi at [56].
(4) It is insufficient to discharge the burden under s 14ZZK(b)(i) in relation to an assessment under s 167, whether based on the asset betterment method or otherwise, to merely demonstrate that the Commissioner formed a judgment about the taxpayer’s taxable income on a wrong basis and that the amount assessed far exceeded the taxpayer’s taxable income: Gashi at [62]; Rigoli at [12].
(5) In order to establish that an assessment under s 167 is excessive, a taxpayer must positively prove their “actual taxable income” and, in doing so, must demonstrate that the amount of tax levied by the assessment exceeds their actual substantive liability: Gashi at [63]; Dalco at CLR 623– 5; ALR 345–7; Trautwein at CLR 88; Ma v Federal Commissioner of Taxation [1992] FCA 359; (1992) 37 FCR 225 at 230; [1992] FCA 359; 27 ALD 601 at 605 (Ma); by, in effect, furnishing a return of actual income which involves establishing both sides of the equation: Bosanac v Commissioner of Taxation (2019) 267 FCR 169; [2019] FCAFC 116 (Bosanac (FC)) at [57].
(6) ...
(7) ...
(8) These principles can result in a situation where the default assessment can be assumed to be inaccurate in some respects but, in the absence of the taxpayer establishing what their actual taxable income was, it must nevertheless stand: Gashi at [77]–[79]; Woellner and Zetle, “Satisfying The Taxpayer’s Burden Of Proof In Challenging A Default Assessment – The Modern Labours Of Sisyphus?” [2014] JlALawTA 11.
(9) The ultimate question in Part IVC proceedings relating to an assessment made under s 167 is whether the amount of the assessment is excessive. That places no burden on the Commissioner to show that the assessments were correctly made: Dalco at 623– 4; ALR 345. The manner in which the taxpayer can discharge the burden may vary with the circumstances but “absent agreement with the Commissioner to confine the issues for determination in a Pt IVC proceeding, the Commissioner is entitled to rely upon any deficiency in the taxpayer’s proof of the excessiveness of the amount assessed in seeking to uphold the assessment”: Gashi at [61]. See also Dalco at CLR 624; ALR 346.
(10) There may be cases where the amount of taxable income depends upon the legal complexion of known facts or upon specific factual questions. In such a case, a taxpayer may successfully discharge the onus by establishing that the Commissioner included in their taxable income amounts which ought not to have been included: Dalco at CLR 624; ALR 347. However, such a situation would only arise where the Commissioner agrees to a process which is different to that described above by confining the scope of the dispute between him and the taxpayer to certain enumerated amounts. One might expect some clear expression of that agreement, involving as it does an abandonment of the advantages accorded to the Commissioner in s 167 in respect of defaulting taxpayers.
The Full Court of the Federal Court in Gashi v Federal Commissioner of Taxation observed at [61]:[59]
In seeking to establish in Pt IVC proceedings that an assessment issued under s 167 is excessive, the ultimate question was and remains whether the amount of each assessment was excessive: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623. Section 14ZZO of the TAA places the burden of proving each assessment is excessive on the taxpayer: Dalco at 623 citing George at 189. The TAA does not place any onus on the Commissioner to show that the assessments were correctly made: Dalco at 624 citing Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 at 89. Indeed, absent agreement with the Commissioner to confine the issues for determination in a Pt IVC proceeding, the Commissioner is entitled to rely upon any deficiency in the taxpayer’s proof of the excessiveness of the amount assessed in seeking to uphold the assessment: Dalco at 624.
[59] (2013) 209 FCR 301; [2013] FCAFC 30.
The paragraph of Gauci v Federal Commissioner of Taxation cited by the Full Court in Gashi in the above passage was (per Mason J):[60]
The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.
[60] [1975] HCA 54; (1975) 135 CLR 81.
In Federal Commissioner of Taxation v Rigoli,[61] in a discussion regarding Gashi, Pagone J said:
The need, therefore, for a taxpayer to prove the “actual taxable income” in order to establish the excessiveness of an assessment made under s 167 was not so much that the assessment in Gashi was based upon the asset betterment basis of calculation as that it was made under s 167 where the “process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part)”. The figure arrived at by the Commissioner under s 167 may in any given case be based upon calculations similar to those where the taxpayer has furnished a return under s 166, but an assessment under s 167 is fundamentally different from one under s 166. A taxpayer seeking to establish that an assessment under s 167 is excessive needs to establish not that some element in the assessment is wrong but that “the amount upon which in [the Commissioner’s judgment] income tax ought to be levied” was the taxpayer’s actual taxable income. The primary obligation of a taxpayer is to furnish a return of income under s 166 and an assessment under s 167 does not provide a means by which taxpayers may be relieved of their obligation to establish their actual taxable income. It is, rather, a means by which the Commissioner may impose a liability where the taxpayer has failed to furnish a return.
[61] (2013) 95 ATR 94; [2013] FCA 784 at [8].
More recently, the operation of s 14ZZK(b) of the TAA was considered by Charlesworth J in McPartland v Commissioner of Taxation.[62] The following parts of her Honour’s judgment in that matter are relevant to the present case. At [18] her Honour referred to Brennan J’s explanation in Dalco of the burden on the taxpayer referred to by the Full Court in Gashi (see [56] above). Her Honour went on to note (at [20]), that, as in the present case, the Commissioner had put the taxpayer “to proof both on the question of whether the assessment was excessive and on the question of what the assessment should have been" and that, accordingly, “[i]n accordance with the authorities discussed below, it could not suffice for the McPartlands to show that the default assessments were erroneous”.
[62] [2022] AATA 686.
Her Honour went on the observe at [21]:
As Brennan J said in Dalco (at 624) an objection decision is not to be regarded as a pleading confining the issues on any appeal, and the Commissioner is not precluded from putting the taxpayer to proof of the true amount of his taxable income. In a case where the issues on an appeal are not confined by agreement, the Commissioner is entitled on an appeal to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. Thus, even before the enactment of s 14ZZK of the TAA in its present form, the burden of showing that an assessment is excessive could not be discharged by pointing to some error of fact or law affecting the methodology of the assessment.
Charlesworth J at [24] referred to the High Court judgment in Bosanac v Commissioner of Taxation (Bosanac HC):[63]
… the Commissioner had made a concession that some income amounts included in a default assessment were not taxable. As Nettle J explained, the taxpayer could not discharge his onus by simply deducting the conceded amounts from the assessment:
29… The onus remained on the plaintiff to adduce evidence sufficient to establish on the balance of probabilities the true amount of his taxable income.
[63] [2019] HCA 41; 374 ALR 425.
At [113] and [114] her Honour said:
It was submitted that the words “if so” in these passages incorrectly assumes that the onus imposed by s 14AAK(b)(i) involves a two stage process, whereby a taxpayer must first establish that the assessment is excessive as a precondition to the Tribunal considering the question of what the assessments should have been. It was further submitted that the passages involve an impermissible focus on the factual basis for the default assessment, an approach inconsistent with the principles established by the authorities cited earlier in these reasons.
Read as a whole, I do not consider the Tribunal to have understood or approached its task in that way. The passages do no more than to state the obvious, namely that the taxpayer cannot in any case succeed on an application for review without establishing that the assessments are excessive. That onus must be discharged in all cases. It is not a task that focusses on the identification of error in the factual basis for a default assessment, but refers instead to an excess in the outcome of the assessment, as a matter of arithmetic. The passages recognise that it will not be sufficient for the taxpayer to show that their taxable income is less than the assessed amount, without also showing precisely by how much.
The Applicant argues that the application of the Benchmark to determine the turnover/profit of the RFT was inappropriate because the businesses on which the Benchmark is based are different to the business conducted by the RFT (see [37] above). Relevant to the Applicant’s attack on the basis upon which the Commissioner made the default assessments under s 167 of the ITAA 36, the Full Court of the Federal Court in Rigoli v Commissioner of Taxation;[64] (Rigoli FC) made the following observation at [12]:
While the Commissioner’s assessment for Mr Rigoli under s 167 was not made on the basis of asset betterment, the primary judge noted (at R[8]) that the reasoning in Gashi was not confined to an assessment on asset betterment. Rather, it was on the basis that under s 167 the “process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part)”. Even if the process under which the Commissioner reached a figure under s 167 was similar to the process for the purpose of s 166 in circumstances where the taxpayer had actually furnished a return, an assessment under s 167 was fundamentally different from one under s 166. A taxpayer seeking to establish that an assessment under s 167 is excessive must establish not that some element in the assessment is wrong but that “the amount upon which [in the Commissioner’s judgment] income tax ought to be levied” was the taxpayer’s actual taxable income. In short, the primary obligation of a taxpayer is to furnish a return of income under s 166 and an assessment under s 167 does not provide a means by which taxpayers may be relieved of their obligation to establish their actual taxable income. It is, rather, a means by which the Commissioner may impose a liability where the taxpayer has failed to furnish a return.
And at [14]:
… The primary judge also noted the observation in Ma v Federal Commissioner of Taxation [1992] FCA 359; (1992) 37 FCR 225 that the task for the taxpayer on objection is not to prove that the Commissioner erred but to prove, on the balance of probabilities, the correct amount upon which tax should be levied.
[64] [2014] FCAFC 29.
The assessments issued by the Commissioner in the present case were not based on a so-called “betterment method”. As explained at para 12 of the Objection Decision reasons for decision (see [23] above):[65]
As a result of the audit conducted on the RFT, it was found the trust lacked sufficient records to support the business income reported. Due to the lack of record keeping and discrepancies arising from the bank statement analysis conducted, a comparison was made between the trust’s business and that of the small business benchmarks for the applicable industry - Computer Retailing.
[65] R1/10.
The Commissioner also added to the income assessed by applying the Benchmark further amounts representing what the Commissioner described as “unexplained deposits” and transactions in accounts associated with RFT. These are explained in para 22 and 23 of the Objection Decision reasons.[66] The Applicant seeks to explain, or distance himself from these transactions as being associate with his wife, not the RFT (see [46(t)] above).
[66] R1/11.
Whether the Benchmark is reflective of the business conducted by RFT is not determinative of whether the default assessment was excessive or what the Applicant’s “actual taxable income” was (see [48](4) and (5) of Derrington J’s judgment in Ross quoted at [55] above). As Derrington J found, the same burden applies “under s 14ZZK(b)(i) in relation to an assessment under s 167, whether based on the asset betterment method or otherwise.” The issue before the Tribunal is not whether the methodology adopted by the Commissioner to calculate the amount of the default assessments was flawed or potentially inappropriate, it is whether the amounts of the default assessments were “excessive or otherwise incorrect” and “what the assessment(s) should have been” (s 14ZZK(b)(i)). Even if I were to accept the criticisms made by the Applicant, they would not establish either of the elements of s 14ZZK(b)(i).
The Applicant argues that a more appropriate method of calculating the Applicant’s income would have been extrapolation from previous years returns as described in Practice Statement Law Administration PSLA 2007/24 (see [39(r)] above). I assume that this is a reference to “Example 3 – extrapolation from prior year returns and third party information” set out in PSLA 2007/24. There are two problems with this argument. The first is that it falls foul of the principle that the Commissioner does not have to justify his assessment under s 167 of the ITAA 36. The second problem is that any extrapolation of the taxable income for the relevant years would run into the same problem which gave rise to the audits and the s 167 ITAA 36 default assessments in the first place, namely, a lack of source documents to prove the actual income. The necessary source records for the years leading up to the relevant years which would verify income for those years are also missing.
Did the Applicant discharge the burden of proof?
First element: has the Applicant established that the assessments are excessive or otherwise incorrect?
The significant focus of the Applicant’s two statements and his evidence at the hearing, and that of Mr Hollyock’s statement and his evidence at the hearing, was the type of business operated by RFT. In both cases, the evidence went to the margin in the business operated by RFT and argued that the ratio of costs of goods to sales for RFT was consistently higher than the Benchmark applied by the Commissioner. Mr Hollyock in his statement (para 8 and 9) referred to a series of spreadsheets produced by him that had been sent to the Commissioner which,[67] according to Mr Hollyock, accurately reflected the RFT income for the years in question. The spreadsheets were, according to para 9 of Mr Hollyock’s statement, based on “the income tax returns lodged on behalf of RFT and the annual trial balances”.
[67] R1/381-392.
Mr Hollyock’s statement and those of the Applicant described how the RFT sales and other data was collected and recorded. The process described by the Applicant and Mr Hollyock involved the manual transfer of certain data into the MYOB system. The financial statements and tax returns were prepared based on the MYOB financial statements prepared by the RFT bookkeeper, and debtor and stock reports. However, Mr Hollyock, who prepared the tax returns and financial statements from 2000-2017, did not verify the MYOB records with cash sales records from Digital Assist or original invoices. The person responsible for inputting that data into the MYOB system was not called to give evidence. There is no direct evidence to establish that the data transfer from the POS system into the MYOB system was undertaken accurately.
Most significantly, however, the Applicant is unable to produce the source records which contain the data which would verify the figures apparently used by the Applicant and Mr Hollyock or which would establish RFT’s actual income. Pursuant to s 262A of the ITAA 36 (see [35] above) it is the obligation of the RFT/the Applicant to keep those records. The reason that the Commissioner had to issue a default assessment under s 167 of the ITAA 36 (see [32] above) was because of the Applicant’s failure to keep the records required by s 262A.
As noted above, at most the Applicant raised an assertion that RFT trading history showed that the COG/sales ratios were different to that in the Benchmark used by the Commissioner in making the default assessment. There are several things to note about that argument. Firstly, there was no independent or documentary evidence establishing RFT’s historical profit or, for the purposes of distinction, the data used in establishing the Benchmark, or at least none to which I was taken. Secondly, even if there were, that would not discharge the Applicant’s onus of establishing that the default assessments are excessive or otherwise incorrect. As Charlesworth J put it in McPartland, “the burden of showing that an assessment is excessive could not be discharged by pointing to some error of fact or law affecting the methodology of the assessment” (see [60] above). At the highest, the Applicant argues that the methodology used by the Commissioner in calculating the default assessments was inappropriate.

Similarly, even if I were to accept the Applicant’s evidence about the cash transactions and “suspicious activity” in the bank accounts included in the default assessments, that would not establish that the default assessments are excessive or otherwise incorrect. It would again simply be an attack on the methodology employed by the Commissioner in making the default assessments, default assessments which were necessitated by the Applicant’s failure to keep records as required by s 262A of the ITAA 36. In any event, I do not find the Applicant’s explanations of these transactions particularly convincing. It is not, in my view, sufficient explanation for the Applicant, the controller of the RFT and its business, to say that he cannot really explain these transactions which, he says, were associated with his wife’s business. His wife did not provide a statement or give any evidence to support that assertion.
I do not accept that the Applicant has discharged the burden of proof under s 14ZZK(b)(i) to prove that the assessments were excessive or otherwise incorrect.
Second element: has the Applicant established what was RFT’s taxable income was in the relevant years?
The Applicant cannot produce the source documents from which the income and profit of the RFT could be established. As is explained in Reasons for the Audit decision and the reasons for the Objection Decision, the default assessments were issued under s 167 of the ITAA 36 because the RFT’s actual income/profit could not be established because of RFT/the Applicant’s inability to produce comprehensive source records. Efforts had been made by the Commissioner during the audit to have records produced by the Applicant (see [53](m)-(p) above). Notwithstanding those requests over a considerable period, the documents have not been produced. More recently explanation has been provided by the Applicant as to why those documents cannot be produced, namely they were disposed of by the franchisee who purchased one of the outlets (see [46(3)] and [49] above). That may be the case, however, it is the Applicant’s legal obligation under s 262A of the ITAA 36 to ensure that those records are kept. He failed to do so.
For the reasons summarised by the Commissioner in the Audit Position Paper, and the reasons for Objection Decision and as summarised in [53(q)-(y)] above, the records that have been produced by the Applicant are not sufficient to establish, on the balance of probabilities, what the RFT income and profit was in the relevant years. Even if I were to accept that some of the elements included by the Commissioner in the amended assessments issued under s 167 of the ITAA 36 were not income, for the reasons explained by the Courts in Ross ([54-5] above), Gauci ([57] above), Rigoli ([58] above), McPartland ([59] above) and Bosanac ([61] above) the burden is on the Applicant, as the High Court put it in Bosanac, to “adduce evidence sufficient to establish on the balance of probabilities the true amount of his taxable income”. I am not satisfied that the Applicant has done that.
I therefore find that the Applicant has also failed to establish the second element of s 14ZZK(b)(i) of the TAA, namely, what his taxable income in the relevant years was.
Were the shortfall penalties correctly imposed and should the penalties be remitted in whole or in part?
The Commissioner’s position in relation to penalties and remission is set out in [36(h)-(k)] above and the Applicant’s position on the penalties and remissions is set out in [37(h)-(l)] above.
Insofar as the Applicant contends that no penalties apply because he correctly declared his income, my finding that that the Applicant is unable to discharge the burden of proving what his actual taxable income was, that is, what the assessment should have been (s 14ZZK(b)(i) of the TAA), addresses that part of the Applicant’s argument.
The Commissioner calculated the base penalty amounts under s 284-90 of Sch 1 to the TAA on the basis that the Applicant/RFT had been reckless. The Commissioner characterised the Applicant’s conduct as being reckless for the reasons set out in [36(i)] above. The Commissioner says that the Applicant has acknowledged he did not retain records (physical or electronic) in respect of the RFT, despite understanding his obligations around record keeping. Further, according to the Commissioner, the Applicant did not reconcile the financial reports, MYOB system and income tax returns with source documents or ensure the transactions in the bank accounts were verified. The Commissioner says that the shortfall amounts resulted from the disregard of, or the indifference to, a risk that was foreseeable by the Applicant as a reasonable person.
Under item 2 of the table in s 284-90 of Sch 1 to the TAA, a 50% penalty is applicable where there is “a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by [the taxpayer] or [their] agent as to the operation of a taxation law”. Relevantly, s 284-75 of Sch 1 to the TAA provides that a taxpayer is liable to a penalty if they “make a statement to the Commissioner… under a taxation law”, and “the statement is false or misleading in a material particular”.
The starting point for liability to a penalty is s 284-75 of Sch 1 to the TAA (see [29] above). The Commissioner identified the “statement” or “statements” which he says are “false or misleading” for the purposes of ss 284-75 and 284-90 of Sch 1 to the TAA, as being the returns lodged by the Applicant for the relevant years. The Commissioner’s contention is that the returns were “false or misleading” in that they understated the Applicant’s taxable income. I note paras 27 to 34 of the Audit Position Paper which referred to Miscellaneous Tax Ruling MT 2008/1 and the fact that the Applicant could not claim to have taken reasonable care by accepting the Trustee of the RFT’s advice as to the Applicant’s share of the distribution because he “knew, or could reasonably be expected to have known, the [that] information was wrong”.[68]
[68] R1/235.
For the reasons set out above, I have found that the Applicant has not discharged the burden of proving the two elements of s 14ZZK(b)(i) of the TAA Act in relation to the Commissioner’s assessments of the Applicant’s taxable income in the relevant years. Subsection 14ZZK(b)(i), however, is limited to cases where the “taxation decision concerned is an assessment”. The term assessment is not defined in the TAA. However, generally when referring to assessments, the TAA is referring to assessment of the taxpayer’s assessable amount (e.g. Schedule 1, Chapter 4, Part 4-1). Consistent with that approach, although not specifically incorporated into the TAA, s 6 of the ITAA 36 defines assessment as the ascertainment of the amount of taxable income. Similarly, the term assessment is defined in s 995.1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97) relevantly to mean the ascertainment of the assessable amount.
By contrast, the provisions that deal with penalties, in particular Subdivision 284-B of Sch 1 to the TAA, do not refer to the determination of liability for or calculation of the amount of a penalty as being an “assessment” or as being “assessed”. The section by which the base penalty is determined, s 284-90 of Sch 1 to the TAA, refers to the penalty being “worked out”. It is not clear, therefore, whether a decision to impose a penalty and the determination of the level at which the penalty is to be imposed is “a decision concern[ing] an assessment” as distinct from a decision concerning a determination, notice or decision which are also defined as a taxation decision in s 14ZZQ of the TAA.
The taxation objections in the present case (see [14] above) included separate objections against the assessments of the amounts of taxable income and objections against the penalties imposed. The significance of whether the Commissioner’s decisions in relation to the objections against the penalties were “decisions concern[ing] an assessment” is that s 14ZZK(b)(i) of the TAA applies only to a decision concerning an assessment. If a decision concerning a penalty is not a decision concerning an assessment, it will not come within the operation of s 14ZZK(b)(i) of the TAA. It will, however, come within the operation of s 14ZZK(b)(ii) of the TAA (see [28] above). The relevant statutory consideration under that subsection is whether the taxation decisions concerned, namely the imposition of penalties under Item 2 of s 284-90 of Sch 1 to the TAA, “should not have been made or should have been made differently”.
If the objection decisions relating to the penalties come within s 14ZZK(b)(ii) and not s 14ZZK(b)(i) of the TAA, the Applicant does not have to establish the second element of s 14ZZK(b)(i), namely what the assessment should have been. He bears the burden of proving that the decisions to impose the penalties should not have been made or should have been made differently.
What then do we look at to determine whether the decision should not have been made or should have been made differently? The logical starting point would be looking at the objection decisions and the reasons given by the Commissioner for imposing the penalty under Item 2 of s 284-90 of Sch 1 to the TAA. Those reasons are set out in the Objection Decision. They come down to the claim that the Applicant was reckless for the reasons set out in para 57(d) of the Objection Decision.[69] They were that the Applicant:
In your formal interview you acknowledged you did not retain records (physical or electronic) in respect of the RFT, despite understanding your obligations around record keeping. Further, you did not reconcile the financial reports, MYOB system and income tax returns with source documents or ensure the transactions in the bank accounts were verified.
[69] R1/14.
Item 2 of s 284-90 of Sch 1 to the TAA (see [30] above), as with the other items in the table, requires the shortfall amount to be “as a result of a statement described in subsection 285-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a taxation law”.
The difficulty that I have with the Commissioner’s imposition of the penalty under this item for the reasons stated by the Commissioner, is that the shortfall amount did not result from the reckless disregard of the taxation law identified by the Commissioner. It is not disputed by the Applicant that from at least some time after he sold the franchises starting in 2017, he failed to keep copies of the relevant records, either electronically or in hard copy. His evidence, which was not disputed, was that the franchisee at the Bibra Lake store and the new tenant at the former Midland store disposed of the various boxes of hard copy sales records that were formerly stored at those premises by the RFT (see [38] above). That failure to keep the relevant accounting records was, according to the Commissioner, reckless and in breach of the Applicant’s obligation sunder s 262A of the ITAA 36.
That failure to keep the relevant records in breach of s 262A of the ITAA 36, however, did not cause the statements relied on by the Commissioner, namely the income tax returns for the relevant years, to be false or misleading. That failure simply caused the Applicant to be unable to discharge the burden of proof under s 14ZZK(b)(i) of the TAA. The claimed falsity of the statements relied on by the Commissioner arose before the claimed reckless act of failing to keep copies of the relevant records. The claimed falsity of the statements that supposedly gave rise to the shortfall, therefore, cannot have resulted from the recklessness relied on by the Commissioner.
The second element of recklessness relied on by the Commissioner was the failure to reconcile the financial reports, MYOB system and income tax returns with source documents or ensure the transactions in the bank accounts were verified. I do not accept that the evidence establishes that there was such a failure. The statements of the Applicant (see 46(n)-(i) above) and Mr Hollyock go into some detail on the accounting procedures used by the RFT business. Mr Hollyock expanded on these procedures, particularly in relation to the preparation of the tax returns, in his evidence at the hearing (see [49]-[51] above). While the accounting and recording procedures used by the RFT as described by the Applicant and Mr Hollyock may have had gaps, and the ability to now test the consequences of any such gaps has been compromised by the failure of the Applicant to keep hard copies of certain records, I do not accept that there was a failure to reconcile the financial reports in the way described by the Commissioner. The process described by Mr Hollyock did involve ongoing reconciliation by the bookkeeper and, to a more limited extent, Mr Hollyock at the time of preparing the tax returns and trial balances. Even if there was a failure as described, I do not accept that it was reckless as that term is explained in paras 42-46 of the Objection Decision reasons,[70] or MT 2008/1 which is referred to in that explanation.
[70] R1/13.
Further, I am not satisfied that if there was a failure as described by the Commissioner, it would have even got the level of a failure to take reasonable care as that term is defined in paras 27-29 of MT 2008/1 for Item 3 of s 284-90 of Sch 1 to the TAA to apply.
I am therefore satisfied for the purposes of s 14ZZK(b)(ii) of the TAA, that the Applicant has proved that the Commissioner’s Objection Decision in relation to the penalties should not have been made or should have been made differently.
Further, even if the decisions relating to the penalties are to be treated as decisions concerning assessments under s 14ZZK(b)(i) rather than s 14ZZK(b)(ii) of the TAA, I am satisfied that the assessment based on recklessness under Item 1 of s 284-90 of Sch 1 to the TAA was excessive or otherwise incorrect and that the assessment should have been that no penalty was applicable. I am therefore satisfied that the Applicant has established the two elements of s 14ZZK(b)(i) of TAA and thereby discharged the burden of proof under that subsection in relation to the penalties.
The Applicant’s objection to the penalties should be allowed. As I have found that the objection to the penalties should be allowed, there is no need to consider the issue of whether the penalties should be remitted pursuant to s 298-20 of Sch 1 to the TAA.
DECISION
The Objection Decision dated 23 November 2021 is varied to allow the Applicant’s objection to the shortfall penalties.

I certify that the preceding 95 (ninety-five) paragraphs are a true copy of the reasons for the decision herein of Deputy President Boyle

.............[Sgd]..........................
Associate
Dated: 8 March 2024

Date(s) of hearing:

16 & 17 May 2023

Solicitors for the Applicant:

Mr Timothy Poli

Solicitors for the Respondent:

Mr Stephen Hotger

*Base penalty amount*
Item	In this situation:	The base penalty amount is:
1	You have a shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a taxation law (other than the *Excise Acts) by you or your agent	75% of your *shortfall amount or part
2	You have a shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a taxation law (other than the *Excise Acts)	50% of your *shortfall amount or part
3	You have a shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a taxation law (other than the *Excise Acts)	25% of your *shortfall amount or part

Date(s) of hearing:	16 & 17 May 2023
Solicitors for the Applicant:	Mr Timothy Poli
Solicitors for the Respondent:	Mr Stephen Hotger