Huyng and Anor and Commissioner of Taxation
[2005] AATA 195
•10 March 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 195
ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2001/1141-1146
Nº VT2002/13-17
TAXATION ADMINISTRATIVE DIVISION
Re: NGOC LAM HUYNG
THI THANH NGA NGUYEN
Applicant
And: COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Mr B H Pascoe, Senior Member
Date: 10 March 2005
Place: Melbourne
Decision:The Tribunal varies the objection decisions under review to the extent of reducing additional tax by way of penalty to 60 per cent of the tax shortfall in each of the years ended 30 June 1992 to 30 June 1997 inclusive.
The Tribunal certifies that proceedings have terminated in a manner favourable to the applicant.
(sgd) B.H. Pascoe
Senior Member
INCOME TAX – amended assessments for six years – inclusion as assessable income of amounts alleged to be repayment of loans, loans or gifts – understatement of net income of clothing business of company owned by taxpayers – alleged wealth of parents in Vietnam – transfers of funds by way of contra – non acceptance of source of funds
Income Tax Assessment Act 1936
REASONS FOR DECISION
10 March 2005 Mr B H Pascoe, Senior Member
1. These are applications to review decisions of the respondent to disallow objections to amended assessments of income tax for the years ended 30 June 1992 to 30 June 1997 inclusive. The amended assessments were issued as a result of an audit of the applicant’s affairs and increased taxable income by a total of $2,082,500 over the six years for each of the two applicants. This amount was reduced by $12,500 in the year ended 30 June 1992 for each applicant in the decisions of objections.
2. At the hearing, the applicants, Mr Ngoc Lam Huynh (“Mr Lam”) and Ms Thi Thanh Nga Nguyen (“Ms Nga”), were represented by Mr M. Bearman of counsel. The respondent was represented by Ms H. Riley of counsel. Evidence was given by the applicants and a large number of family members, friends and other witnesses. Some evidence was received via video‑link with Ho Chi Minh City and much of the evidence required an interpreter, having been given in the Vietnamese language.
3. Mr Lam and Ms Nga are husband and wife and were directors and shareholders of a clothing company, NTT Clothing Manufacturer Pty Ltd (“NTT”). An audit of NTT was commenced by the respondent and extended to the two directors and shareholders. This case is somewhat unusual in that, while it was the respondent’s view that profit had been understated, no apparent attempt was made by the auditor to recalculate the net income of NTT and consider whether deemed dividends had been received by the shareholders; or to prepare an excess expenditure statement or asset betterment statement in relation to the two individuals. It was clear, early in the audit, that considerable real estate had been acquired, over the relevant period, by the applicants and by trusts with substantial loan funds from the individuals or NTT. Mr Lam then produced to the auditor a schedule of amounts allegedly received by him or his wife during the period by way of repayments of prior loans made to friends in Vietnam, loans from family and friends and gifts from family. This schedule totalled $4,165,000 over the six years. A decision was then made to include those total alleged receipts as assessable income whilst taking the view that such receipts were not from the sources claimed. The difficulty with this approach, which will be considered in more detail later, is that, if the Tribunal is not satisfied that such loans or gifts were made, there is no calculation of alleged shortfall of income to meet expenditure equal to the volunteered alleged sources of cash. Such a calculation may produce a greater or lower amount than that assessed.
4. Mr Lam was born in Mytho, South Vietnam (as it then was) in 1956. He said that his father was the chief of police in Mytho and was the owner of a soy sauce factory. He maintained that his father was very wealthy and was free in making funds available to his children. He said that, with the North Vietnamese victory in 1975, his father hid his savings of gold and United States (US) dollars, and had been able to transfer several hundred thousand US dollars to a Swiss bank account. Mr Lam said that he was forced to cease studies in 1975 when the communist government closed the university and, for the next 3 years, his family worked in the fields to produce food to eat. He said that in 1978 he retrieved 400 taels (a unit of weight used in eastern Asia, roughly equivalent to 38 grams). of gold from his father’s savings and purchased a large fishing boat. In 1969, he decided to flee Vietnam in the fishing boat with 125 passengers and crew. He said that he charged each of the 90 passengers a fee of 10 taels of gold or the equivalent US dollars. After paying 200 taels of gold as a bribe to harbour authorities, Mr Lam said that he did not want to risk taking the balance of the money (equivalent to 700 taels of gold) with him. He said he lent 200 taels of gold to Mr Huynh Van Sang, US$160,000 to Mr Huyng Van Thanh and, approximately, US$200,000 to his brother‑in‑law, Nguyen Van Tuong. It should be noted that, in subsequent evidence during the hearing, it appeared that one tael of gold was equivalent to approximately US$500. This would mean that the alleged loans were equivalent to some 900 taels of gold, not the 700 stated by Mr Lam.
5. Mr Lam arrived in Australia in 1980 and became an Australian citizen in 1982. He obtained employment in a small clothing manufacturing business in Adelaide. He returned to Vietnam in 1989 to visit his family. His father had been imprisoned by the Vietnamese government from 1975 to 1986. Mr Lam said that he planned to establish his own clothing manufacturing business and sought financial assistance from his family and the repayment of loans made to his three friends in 1980. On his return, he moved to Melbourne. He said that, after two years studying the clothing industry, he established NTT in 1991. He also said that, in order to obtain the necessary capital for the business, he made arrangements with his father to obtain the funds from the repayment of loans and took out additional loans from family and friends.
6. The alleged arrangement with Mr Lam’s father was that his father would receive the funds in gold or US dollars in Vietnam and advise the amount available. Mr Lam said that he then arranged to spread the word among the Vietnamese community that funds were available in Vietnam and that he could arrange for such funds to be made available to relatives in Vietnam without any commission charge. He said that people came to his house to give him an amount of Australian dollars and the name and address of the proposed recipient of the equivalent amount in Vietnam. He would tell them to advise the recipients to call on his father to collect the money. He would telephone his father within two or three days of receipt of the money and tell him the name of the proposed recipients and the amounts to be paid to them. He said that over the years he had received many hundreds of visits from members of the Vietnamese community to transfer money in this way. He maintained that his method of transferring money was popular as it avoided the use of banks and gave control over the withdrawal of moneys in Vietnam, avoided fees and enabled funds to be provided in Vietnam in gold or US dollars rather than the depreciating Vietnamese dong. Mr Lam also maintained that this system enabled him to receive in Australia the equivalent of funds held by his father in Vietnam on his behalf.
7. The list of funds which were provided to Mr Lam and Ms Nga was as follows (all expressed in Australian dollars):
Repayment of Loans – by payment of equivalent to father in Vietnam
9 April 1992 Huynh Van Sang – friend 130,000
12 June 1992 Huynh Van Thanh – friend 213,00027 June 1994 Nguyen Van Tuong – brother of Nga 250,000 593,000
Loans – by payment to father in Vietnam
6 July 1991 Nguyen Thi Lam 60,000
10 July 1991 Truong Phi Van 130,000
14 June 1992 Nguyen Thi Thu Nga 110,000
6 July 1992 Le Van Dao 140,000
22 January 1993 Huynh Thanh Hoa 190,000
20 February 1993 Huynh Van Thanh 376,000
10 November 1993 Luu Thanh 60,000
20 November 1993 Le Van Dao 120,000
10 February 1994 Huynh Than Hoa 90,000
24 April 1994 Lau Thanh 40,000
3 January 1995 Nguyen Van Tuong – brother of Nga 190,00022 August 1998 Le Thi Chinh – mother of Mr Lam, to be passed in due course to brother Huynh Ngoc Phung 360,000
5 October 1996 Huynh My Ngoc 120,000
20 November 1996 Nuynh Ngoc Tien 200,000 2,186,000
Loans – by relatives in Australia
12 March 1992 Nick Huynh – brother of Mr Lam 30,000
20 April 1992 Belinda Lam – sister-in-law of Mr Lam 25,000
16 April 1993 Nick Huynh – brother of Mr Lam 35,0002 May 1993 Belinda Lam – sister-in-law of Mr Lam 28,000 118,000
Gifts – in cash in Australia
15 September 1991 Le Thi Chinh – mother of Mr Lam 200,000
10 July 1991 Huynh Van Van – father of Mr Lam 240,000
14 June 1992 Huynh Van Van – father of Mr Lam 188,0006 July 1992 Luong Thi Bon – Mother of Nga 250,000
Gifts – by payment to father in Vietnam
27 August 1995 Nguyen Huu Thuan – brother of Nga 170,000
4 May 1996 Huynh Ngoc Thuy – sister of Mr Lam 220,000 1,268,0004,165,000
This total amount was included by the respondent as assessable income in equal shares in the respective years. On objection, the assessable income for the year ended 30 June 1992 was reduced by $12,500 in each case, being one-half of an alleged loan from Belinda Lam.
8. It is appropriate to commence with the evidence of the gifts alleged to have been received from family members. The first of them was from Le Thi Chinh, the mother of Mr Lam. In a handwritten document, which is undated, Le Thi Chinh states that she had “…given my son Huynh Ngoc Lam an amount of money being 200,000 (two hundred thousand) US dollars, to use as capital of his business, on 15 September 1991”. Le Thi Chinh affirmed this amount of gift at the hearing, by way of video evidence from Ho Chi Minh City. It is relevant to note that the money was said to have been brought to Australia in cash by Le Thi Chinh hidden in the back of a painting, packed in a carton. When asked about the source of these funds, she said that, prior to the communist take‑over in 1975, she owned a soy sauce factory in Vietnam and that US$200,000 was the accumulation of money derived from that business. She said that, during that time, the family lived on her husband’s salary as a police officer, so allowing her to save the profits from the factory. It is relevant that she made no mention of any accumulation of wealth by her husband or that, apart from the ownership of some real estate, she had recourse to funds in excess of that US$200,000. Although Le Thi Chinh had 10 children, it appears that, apart from a further alleged loan of US$360,000 in 1995, she made no gifts or loans to any of her children other than Mr Lam.
9. Le Thi Chinh said that, in 1995, she lent US$360,000 to Mr Lam, with the intention that this amount should be transferred by him to another son, Hiynh Ngoc Phung (Phung), who was also in Australia, for use by that other son in a business which he was contemplating. She said that the money was given to her husband for transfer to Mr Lam and she was not aware of the method by which it was transferred. As Phung did not commence any business, she said that she was happy for Mr Lam to use the money which was ultimately repaid through her husband. Le Thi Chinh said the funds came from sales of real estate in Vietnam.
10. Mr Lam's father, Huynh Van Van, gave evidence that he arrived in Australia on a visit in December 1992. He said that he carried US dollars hidden in the back of a painting which was packed in a carton as accompanying luggage on the aeroplane. He said that on arrival he gave Mr Lam the equivalent of A$240,000 in US dollars. Prior to leaving Australia, he gave the balance of the money, equivalent to A$188,000, to Mr Lam. In his evidence Huynh Van Van said that he had been Chief of Police in his home city of Mytho from 1970 and also owned a soy sauce factory. It is noted that his evidence of ownership of the factory is contrary to that of his wife, Le Thi Chinh. He said that he was able to open a Swiss bank account prior to 1975 as a means of avoiding the confiscation of his wealth. He made no mention of any other hidden store of gold or US dollars.
11. It is relevant to note that Mr Lam gave evidence that the two alleged gifts from his father were given to him on two separate visits by his father. However, Immigration records produced by the respondent show that there was only the one visit in this period by Huynh Van Van. It is also noted that, in a sworn interview with officers of the respondent on 16 May 1997, Mr Lam said that the second gift by his father was hidden in furniture which was sent by sea in a shipping container. He told the officers of going to Port Melbourne to collect the furniture from the container.
12. Luong Thi Bon, the mother of Ms Nga, gave evidence that she came to Australia in 1989 and brought with her A$250,000 in cash, hidden in the back of a painting. She said that she wrapped the cash in newspaper and carried it to the factory to give it to Ms Nga in July 1994. She said that this was in response to her daughter explaining that she wished to expand the business but she did not have the sufficient funds to do so. Luong Thi Bon maintained that the gift was a legacy given during her lifetime to avoid disputes amongst her children after her death. The original source of the alleged funds used as a gift was not explained, nor the reason why no apparent gifts were made to her 14 other children. The respondent produced in evidence an application by Luong Thi Bon for a widow’s pension dated 1 July 1994, 8 days before the alleged gift. In that application, the only assets shown were $50 in cash and 89 cents in a bank account and it was stated that no gifts of money or property had been made. The only response given by Luong Thi Bon to questions relating to that application was a possible difficulty with the English language. She said that her original intention had been to use the money to buy a house but, as she was “getting old”, she decided to give it all to her daughter. No details of the business conducted by her daughter were discussed with her and she said that she did not want to know any details. Luong Thi Bon maintained that she wrote in Vietnamese a confirmation of having made the gift of $250,000 at her home. She was not able to produce her handwritten note and could not explain nor recall a document in the English language, produced in evidence, signed by her, Mr Nga and her two sons. This document stated:
As part of my wills to my children, Nguyen Thi Thanh Nga would be entitly inherited of exactly amount of $250,000.00 Australian dollars (Two hundred and fifty thousand dollars and zero cents.) from my total access.
I gave her this money to help maintaining her family business and this money was completely received by herself by the time of this paper was signed.
This paper proved the agreement between me and my daughter. It is not negotiable. No more or less the above conditions would be carried out without any agreement between me and my daughter. [sic]
13. Nguyen Huu Thuan, who allegedly made a gift of A$170,000 on 27 August 1995, was not called to give evidence nor provided a witness statement. No reasons were advanced for this. A document, handwritten in Vietnamese, was provided, with the English translation being:
I am Nguyễn Hữu Thuận, born in 1958, currently residing at number 480 Lê Ðại Hành, Ward 1, Mỹ Tho, Tiền Giang, Vietnam.
Have sent to my younger sister who is: Nguyễn Thị Thanh Nga, currently residing at number 6 Parsons Ave., Springvale, Australia, an amount of money being 170 thousand Australian dollars (one hundred and seventy thousand dollars).
My younger sister has full rights to use the amount of money mentioned above.
Mr Lam maintained that this amount was given to his father in Vietnam and transferred to him by means of the contra receipts in Australia.
14. An unsigned witness statement of Huynh Ngoc Thuy was tendered. The respondent conceded that Huynh Ngoc Thuy's oral evidence, proposed by video link, would accord with her statement and did not require her for cross‑examination. The statement said that Huynh Ngoc Thuy had been a medical practitioner since 1979. She is the eldest daughter in a family of 10 children and that she is divorced, with one daughter. She stated that she had made substantial amounts of money and, on being asked by her brother, Mr Lam, she gave him $220,000 on 4 May 1996. She did not state the currency in which the gift was made, or the method by which it was transferred; although, again, it would seem that it was allegedly transferred by Mr Lam’s father through the contra receipts in Australia. A handwritten document in Vietnamese dated 4 May 1996 was provided with the English translation being:
I am Huỳnh Ngọc Thủy, born in 1953, currently residing at address 126 Nguyễn An Ninh, Mỹ, Tiền Giang, Vietnam, have sent to my younger brother Huỳnh Ngọc Lâm an amount of money being 220,000 Australian dollars (two hundred and twenty thousand Australian dollars).
With this amount of money, my younger brother has full rights to use it.
It is noted that the wording of this document is almost identical to that produced in relation to the alleged gift of Nguyen Huu Thuan, although they are from separate families and the documents are some eight months apart in time.
15. The next alleged source of funds was the repayment of loans alleged to have been made in 1980. Huynh Van Sang was not required for cross‑examination; the respondent having accepted that he would affirm his statement of having repaid Mr Lam A$130,000 in April 1992. This statement does not indicate how Australian dollars were acquired or how the funds were provided to Mr Lam, although Mr Lam's statement said that the equivalent of A$130,000 was given to his father in Vietnam. Huynh Thanh Hoa gave evidence by video link from Ho Chi Minh City. He said that he commenced a successful construction business in 1980, when he was 18 years old with borrowed money, including the equivalent of US$160,000 in gold from Mr Lam. He said that he repaid in gold the then equivalent of US$160,000 to Mr Lam's father in June 1992. He said that in 1993, when Mr Lam was visiting Vietnam, he lent him a further 500 taels of gold, equivalent to US$260,000. The gold was said to have been given to Mr Lam's sister and Huynh Van Thanh was not aware of the method adopted to transfer the funds to Australia. He said that he was repaid the loan in gold by Mr Lam's sister in 1996. The third alleged loan repayment was said to have been by Nguyen Van Tuong. Mr Lam said that Nguyen Van Tuong had since died, but had repaid the 1980 debt by giving the equivalent of A$250,000 to Mr Lam's father in June 1994.
16. Of the 11 individuals who were said to have provided funds, by way of loans in Vietnam, by transfer through Mr Lam's father, 5 provided witness statements but, other than Le Thi Chinh and Huyng Van Thanh, were not required for cross‑examination by the respondent. One other person, Le Van Dao was said to have moved to another province in Vietnam and could not be contacted. Another person, Huynh Thanh Hoa was said to be in prison and not contactable. As noted earlier, Nguyen Van Tuong was said to have died in 1995. The only evidence supporting the alleged loan of A$120,000 by Huynh My Ngoc on 5 October 1996 is a short document in Vietnamese. He was not called to give evidence. Similarly, the only evidence supporting the alleged loan of A$200,000 “during 1996” was a short loan document in the name of Huynh Ngoc Tien, Mr Lam’s sister. Mr Lam said that there had been a falling out between his wife and Ngoc Tien, and he was unable to contact his sister to give evidence. There was no indication of how and where the funds were lent or provided to Mr Lam.
17. The remaining alleged loans in 1992 and 1993 were a total of $118,000 from Mr Lam's brother and sister‑in‑law, Nick Huynh and Belinda Lam. Both gave evidence that they wished to assist Mr Lam in his business and provided the loans from personal savings and from personal borrowings, through the "Hui" club arrangement. Both were in receipt of modest incomes in the relevant period and the purposes of the alleged loans at that time were not clear. It should be noted that the respondent accepted that the loan of A$25,000 from Belinda Lam in April 1992 had been made and the loan reduced the taxable income of each applicant by $12,500 in the objection decision.
18. Professor Phan Van Giuong, Associate Professor in the Department of Asian and International Studies at Victoria University of Technology, gave evidence at the hearing. He is a widely published author, a teacher of the Vietnamese language, society and culture and he is well versed in Vietnamese banking and finance. His evidence was that, prior to 1995, it was not possible to transfer funds from Vietnam through the banking system and funds transferred into Vietnam required the use of government regulated and controlled banks. He said that it was not uncommon for banking officers to be corrupt and demand bribes before releasing funds. He also said that withdrawals could be made in Vietnamese dong only, which particularly in the 1980s was subject to rapid devaluation. He told the Tribunal that the method alleged by Mr Lam of receiving funds in Australia and making equivalent funds available in Vietnam was common with expatriate Vietnamese and, if no commission was charged, he would have had no difficulty in raising a great deal of money by word of mouth in the Australian Vietnamese community. The Professor said that familiarity with Australian currency had developed in the last five years only and, even then in the cities but not in the rural areas. He believed that it was likely that ordinary Vietnamese could use foreign banks in Vietnam since approximately 1997.
19. Mr Lam produced a large volume of "receipts" in support of his claim of receiving money from expatriate Vietnamese in Australia and the providing of equivalent funds through his father in Vietnam. These showed a name, an amount and another name with an address in Vietnam. All were signed by Ms Nga and endorsed "paid". All of the receipts were said to be in the handwriting of either Ms Nga or her brother. It was noted that many receipts bore a date when Ms Nga was not present in Australia, such as between 7 and 27 April 1993, and no satisfactory evidence was provided to explain this. Mr Lam maintained that he would telephone his father within two to three days of receiving the money in Australia and advise him of the name of the person to be given money and the amount. His evidence was that the person in Vietnam would be advised by the Australian payer to call on his father to collect the money. Mr Lam was unable to explain how such funds were dealt with between 27 December 1992 and 29 August 1993, when his father was in Australia and when some 16 receipts were allegedly written.
20. From the large numbers of alleged providers of funds in Australia between February 1990 and May 1995 (the period for which receipts were produced at the hearing), four witnesses were called. One such witness, Nguyen Trong Khanh, provided a witness statement prior to the hearing. In that statement he said that he wanted to send A$6500 in two parts to relatives in Vietnam; he had heard through acquaintances that Mr Lam was able to transfer money; he called on Mr Lam, gave him $6500 and was given a receipt. In cross‑examination, Ms Nga initially denied that Nguyen Trong Khanh was her brother, but subsequently admitted that he was. In his oral evidence, Nguyen Trong Khanh acknowledged that he was Ms Nga’s brother and had worked for NTT in 1992 and 1993 while a student. He said that the Vietnamese recipients of his money were not relatives but a family who had helped to raise him as a child. He said the money was sent in two parts, but he was unable to recall the name of the second recipient. He accepted that he was a first year medical student in 1992, but maintained that he had accumulated the $6500 from Austudy payments and part‑time work.
21. The other three witnesses who said they gave money to Mr Lam to transfer to Vietnam were Vo Vang Tang; his wife, Le Thi Auh Hoa; and his niece, Vo Thi Thuyet Nga. All were involved in a restaurant, of which Mr Lam was said to be a customer, and all maintained that other customers had told them of his ability to arrange transfers of money to Vietnam. Vo Van Tang said that the money was sent in 1992 to a friend who lived some 120 kilometres from Mytho and who travelled to Mytho to collect the money from Mr Lam's father. He identified a receipt in the name of "Le" Van Tang as being for his money as, although the name was incorrect, the amount, date and name and address of the friend was correct. He said that the subsequent receipt in the name of Le Van Tang was not connected to him as the name and address of the intended recipient was unknown to him. He was unable to say how Mr Lam was able to recall that transaction some 11 years later and ask him to give evidence when the name on the receipt was incorrect.
22. Le Thi Anh Hoa said that she gave $2600 to Mr Lam in 1993 to provide the equivalent to a friend in Vietnam. She said that the friend lived some 800 kilometres from Mytho and she was not aware of how the friend travelled to Mytho to collect the money. She was not aware of the currency given to the friend in Vietnam, but Mr Lam had promised to provide Australian dollars. She was unable to say how Mr Lam had identified her as a person who transferred money through him some 10 years later.
23. Vo Thi Thuyet Nga said that she transferred money to a relative through Mr Lam in 1994. She said that the relative lived approximately one hour's travel by motor bike from Mytho and somebody brought the equivalent in Vietnamese dong to the relative. All three witnesses said that they saw Mr Lam only when they provided the money for transfer. All three witnesses said that they received a receipt from him, but could not explain how the receipt was not in his handwriting.
24. A relevant part of the evidence of Mr Lam related to remittances of funds in 1998 and 2001 to Swiss bank accounts. These remittances, as shown in Austrac reports, were:
Date
Amount $
Ordering Customer
Beneficiary Customer
Receiving Bank
22 October 1998
110,000
Huynh, Ngoc L
Ngoc Lam Huynh and Thi Thanh Nga Nguyen
British Bank of the Middle East, Geneva
22 October 1998
700,000
Huynh, Ngoc L
Van Huynh, Van
British Bank of the Middle East, Geneva
4 December 1998
900,000
Lam, Huynh Ngoc
Van Van, Huynh
UBS Zurich
19 March 2001
107,974
Lam, Huynh Ngoc
Van Van, Huynh
UBS Zurich
27 March 2001
327,000
Lam, Huynh Ngoc
Van Van, Huynh
UBS Zurich
16 August 2001
1,480,000
________
3,624,974
________
Lam, Huynh Ngoc
Van Van, Huynh
UBS Zurich
Mr Lam accepted that all such transfers to Swiss bank accounts were made by either himself or his wife. He maintained that approximately $2 million was for his father to repay debts owed to family and friends in Vietnam. He accepted that the balance of approximately $1.6 million was his own money to be kept for him by his father. He said that it was done to protect his only remaining asset and it was unrelated to taxation matters. He said that, as a result of the attack on him by the Australian Taxation Office, the clothing business was closed down in 1998 and nobody wanted to do business with him.
25. A large part of the hearing time was spent relative to NTT's expenditure, particularly, that described as sub‑contractor expenses and purchase of materials. In relation to the sub‑contractors, evidence showed that a large number of cheques in the names of alleged sub‑contractors were made payable to cash and such cash was regularly collected at the bank by Mr Lam or Ms Nga. It was said that this was common practice in the industry to meet the requirement for cash by sub‑contractors. However, neither of the two sub‑contractors who were called to give evidence was able to say that he received cash in payment of his invoice. The company claimed expenses for payments to a large number of alleged sub‑contractors, several of which were said to be involved in money laundering and not the providers of labour. One sub‑contractor, Le Van Quol, knew of only two other sub‑contractors he saw at the factory between 1992 and 1996. The other, Truong Viet Thinh was aware that other sub‑contactors were used because he saw them at the factory. Many of the alleged invoices from sub‑contractors were in the handwriting of Ms Nga who said that some sub‑contractors asked her to do it. Neither of the sub‑contractors who gave evidence said that the invoices were prepared otherwise by themselves or their wives. The respondent calculated the number of garments alleged to have been made by sub‑contractors in the year ended 30 June 1996 from the invoices provided in evidence. This total figure was approximately 50 per cent higher than the number of garments said to have been sold by NTT in that year. On consideration of all of the evidence, I am satisfied that there was an overstatement of sub‑contract expenditure by NTT. The evidence did not allow any attempt at calculating the extent of that overstatement.
26. The respondent alleged that there was a further significant overstatement of the expenses claimed by NTT as purchasers of materials. Several cheque butts, which appeared to be private expenditure, were put to the applicants in cross‑examination. I am satisfied that two cheques, totalling $55,705, in August 1998, were for the purchase of gold, and false invoices were created in an attempt to disguise the purchases as being for business purposes. In August and September 1995 four cheques totalling $35,579 were drawn by NTT, payable to a supplier, Charles Parsons Pty Ltd, and marked "please pay cash". While Charles Parson Pty Ltd was a supplier to NTT, its statement for the period showed smaller amounts owing and paid. Mr Lam said that a former employee of the supplier came to the factory with some cheap materials and did not provide invoices. Again, I am satisfied that these payments were not for the purpose alleged and did not constitute an expense of the company.
27. Another area of concern in the calculation of the net income of NTT in each of the relevant years was the amounts of expenditure said to have been incurred in cash by Mr Lam. In his witness statement, he said:
…
NTT retained an accountant, Mr Kenneth Ang to assist it in meeting its company law and taxation obligations. All the records of the company were made available to him in the preparation of taxation returns. How this worked in practice was as follows. The company often had cash flow difficulties. This was because it would not be paid for garments it manufactured until well after they were delivered. This could take months. However, in the meantime, the company had to pay wages, as well as for sub‑contractors, rent, and other expenses. It often did not have the money to pay from its own resources. In those cases, I would pay the expenses myself from the funds that I had, or had borrowed, as I have described above. I usually paid these types of expenses in cash. I often converted amounts of cash for precisely this purpose. I did not keep any particular record of the expenses that I paid because at the end of every financial year, a discrepancy would show in the books of the company between its outgoings for the year and the amount that the company had actually outlaid from its own resources. That discrepancy was the result of my personally paying the company's expenses. At the end of every year of income, that discrepancy was shown in the books of the company as a loan from me to it. The loan was not otherwise documented. I did not charge interest.
How that "discrepancy" could be calculated without a record of the expenses was not made clear. On the other hand, Mr Ang's evidence was that a cash book showing expenses paid by the directors in cash was provided to him and he prepared the financial statements of the company from the cheque butts and the cash book without any significant questioning of the information. He acknowledged that he was neither an auditor nor an expert in the clothing industry. The cash book was said to be now missing.
28. Mr M. Peck, a chartered accountant, gave evidence of having reviewed the operations of NTT for the purpose of ascertaining whether it had the capacity to manufacture more garments than the number recorded as sales in the financial statements. While his report went to considerable pains to demonstrate a lack of capacity to have produced sales in excess of those recorded, he did not consider profit margins or expenses for sub‑contractors or materials. Given that I am satisfied those expenses were overstated and there was a consequential understatement of the net income of NTT, Mr Peck's evidence was of no assistance to the Tribunal.
29. While I am satisfied that NTT's net income was understated, the evidence did not allow any estimate to be made of the amount by which it was understated. Whether such amount, if regarded as a dividend under s 108 or s 109 of the Income Tax Assessment Act1936 (the 1936 Act), when added to the acknowledged gambling losses (again unqualified) and living expenses of the applicants, would account for the alleged additional income of $4,165,000 over the relevant years is not possible to estimate on the evidence provided.
30. In dealing with my finding in relation to the alleged funds received by way of gifts, repayments of earlier loans and further loans, it is appropriate to begin at Mr Lam’s position in 1975. His evidence was that his father had accumulated a substantial amount in gold, US dollars and funds in a Swiss bank account. His father's evidence referred only to some funds in the Swiss bank account. His mother's evidence did not support the allegation that the father had any substantial funds at all, with her having savings from the profits of the soy sauce factory. Mr Lam said that, after working in the fields, he used 400 taels of his father's hidden gold to purchase a fishing boat. His mother made no mention of these occupations and, to the contrary, said that he worked as a salesman, selling home made cigarettes and cassette radios. She maintained that her wealth consisted of some real estate, 50 taels of gold and some US dollars. As a consequence of the significant conflict in this evidence, I do not accept that Mr Lam used 400 taels of any hidden wealth of his father to purchase a large fishing boat, capable of carrying 125 passengers and crew. If this is not accepted, then neither can his evidence of collecting 900 taels of gold or the equivalent. The further consequence is that I cannot accept his evidence of lending 700 taels of gold or the equivalent in US dollars to two friends and a brother‑in‑law and the alleged subsequent repayment in 1992 and 1994. This in turn results in my not being satisfied that his father was in possession of such proceeds of repayments of the alleged loans in contra to receipts in Australia.
31. On balance, I am unable to accept the evidence of Mr Lam in relation to alleged loans from various friends and relatives in Vietnam. These amounts were alleged to have been given to Mr Lam's father in Vietnam. The largest amount alleged was $376,000 from Huynh Van Thanh. He provided evidence by video link. As indicated above, I do not accept that funds were lent to him by Mr Lam in 1980 and repaid in 1992. As a consequence, I am not prepared to accept his evidence of a loan to Mr Lam in 1993. His evidence of that alleged loan, the manner in which the loan was made and repaid, and the purpose of the alleged loan was vague and unconvincing. While Nguyen Van Tuong, who was said to have lent Mr Lam $190,000, is now deceased, no explanation for an apparent inability to contact his widow to whom the loan was said to have been repaid was provided. Again, Nguyen Van Tuong was one to whom a loan was said to have been made by Mr Lam in 1980 and I do not accept that this was so. Consequently, I am unable to accept that a subsequent loan was made in 1995. It is difficult to accept the failure to provide any evidence in corroboration of the alleged loan of $200,000 from Nuynh Ngoc Tien, Mr Lam’s sister. Given that I do not accept the truth of these loans, the failure to provide corroborating evidence of several other alleged lenders and the vagueness of the evidence relating to the manner by which the alleged loans were made, I cannot accept that such loans were made.
32. Similarly, I am unable to accept the alleged loan of $360,000 from Mr Lam's mother in August 1995. The evidence was vague as to how the money was made available. While it was said that this loan was initially for the use of Mr Lam's brother, Phung, no evidence in corroboration was provided by Phung. Mr Lam said that, while he believed Phung and his wife are living somewhere in or around Sydney, he had been unable to contact him. From the evidence of the mother, Le Thi Chinh, it is difficult to accept that she had access to such a large amount of money in 1995, in any event.
33. While the respondent, in the decision on the relevant objections, accepted that $25,000 had been lent to the applicants by Belinda Lam in 1992, I am unable to accept the evidence that loans totalling $118,000 were made by Nick Huynh and Belinda Lam. The evidence was very vague as to the source of the funds and the reasons for the loans. I am not satisfied that the alleged lenders had the resources to make such loans.
34. The remaining issue in relation to the alleged source of funds is the allegedly large gifts from family members. The first was said to have been $200,000 from Le Thi Chinh. The evidence did not satisfy me that she had such a sum available, whether it was in US dollars or Australian dollars. It is difficult to accept that she would risk carrying such a sum of money concealed in the back of a picture, given the illegality of taking such a sum out of Vietnam and the breach of Australian law. There was no explanation as to why Mr Lam was the sole beneficiary of what, if it existed, was the bulk of her wealth with several other children receiving nothing. My rejection of this evidence is strengthened by the conflicting evidence relating to a further alleged gift of diamonds while Le Thi Chinh was in Australia. It was said that 18 diamonds were hidden in the back of the painting also. There were numerous anomalies in the evidence of Mr Lam and Ms Nga in relation to the alleged sale and sale price of these diamonds, to the extent that it remains unclear as to whether they existed and, if they did, what was realised from their sale. Although any alleged proceeds of the sale of diamonds were not included in assessable income, the conflicting stories add weight to the previously existing doubt on the evidence of each gift from Le Thi Chinh.
35. There is a similar conflict in the evidence in relation to the alleged gifts by Mr Lam's father, Huynh Van Van. In this case, he was said to have carried the equivalent of $428,000 in cash in the back of a picture with him on an aeroplane. This is extremely difficult to accept. This disbelief is strengthened by the statement made by Mr Lam in a sworn interview on 16 May 1997, where he alleged that there were two transfers of cash, the second being by ship. I do not accept his evidence at the hearing, that this was a result of his confusion at the interview and difficulties of language. At the time he spoke of having to collect the furniture in which the second amount of money was hidden. There, again, was no acceptable explanation of the source of the funds or the particular reason why such a large amount would be provided to the one son of Huynh Van Van among 10 children in the family. The difficulty of believing the evidence is further strengthened by the extreme vagueness of the evidence of Mr Lam as to how and where he exchanged the alleged US dollars provided by his father into Australian dollars. It would be expected that the method of exchanging such a large amount of cash would remain in his memory. As a consequence, I am not satisfied that the onus of proof of the gift from Huynh Van Van has been discharged.
36. The evidence of the alleged gift of the mother of Ms Nga, Luong Thi Bon, is equally difficult to accept. The source of such a large amount of money is in doubt. In her evidence, Luong Thi Bon said that she had been able to hide some wealth after the communist take‑over, but could not recall how much. She said that she had 15 children and needed the money to look after them. She maintained that she converted her funds to Australian dollars before she left Vietnam in 1989 but, given the evidence of Professor Phan Van Giuong, it is very doubtful that such an amount of Australian dollars would have been available in Vietnam at that time. She alleged that she brought the money, again in a painting, and held the money with her in cash in Australia from her arrival in 1989 to June 1994, when she gave it to Ms Nga. However, the evidence of her son Nguyen Trong Khanh (Danny Nguyen) was that the family struggled financially after their arrival in Australia. There was inadequate money for school books and clothes and money was borrowed from friends. This is in significant conflict with the suggestion that, during that critical period, the mother had $250,000 in cash. The financial limitations are also in line with the pension application by Luong Thi Bon. A further difficulty with the evidence of this alleged gift was that it was said that Ms Nga needed the money for her business. The balance sheet of NTT at 30 June 1994, three days after the alleged gift, showed that the company had provided $430,373 by way of an unsecured loan to the trustee of a family trust which had substantial real estate investments. This does not appear to indicate a need for substantial funds to operate the business of NTT.
37. The two remaining alleged gifts from family were from Ms Nga’s brother and Mr Lam’s sister. The similarity of wording of the two allegedly contemporaneous documents, the failure to call the brother to give evidence or explain such failure, the vagueness of the details of currency in which the gifts were made and the method of making the gifts and the lack of credible evidence of the source of the alleged gifts, coupled with the fact that I do not accept the evidence of alleged gifts from the parents, result in my not accepting that these two alleged gifts were made.
38. It follows from the foregoing that I am not satisfied that the applicants have discharged the onus of proof that sums totalling $4,165,000 were obtained in the years ended 30 June 1992 to 30 June 1997 inclusive, from repayments of loans, loans or gifts.
39. A significant issue in this matter is the evidence of the applicants of having received significant amounts of money from people of Vietnamese origin in Australia for transfer of equivalent funds to relatives or friends in Vietnam out of funds held by Mr Lam's father. There are a number of difficulties in accepting this evidence. First, it relies on acceptance of the evidence that Mr Lam's father had available to him the equivalent amount of funds to those alleged to have been received in Australia. As set out in the foregoing, I do not accept that the father had either substantial initial funds of his own or had received substantial amounts in Vietnam on behalf of his son. The second difficulty is the failure to explain how the alleged funds were transferred during the eight months during which Huynh Van Van was in Australia, how Ms Nga signed receipts in a period when she was not in Australia and how and why receipts were written by Ms Nga when three of the witnesses said they saw Mr Lam only and received receipts from him on handing him the money. The next difficulty is that of only four witnesses out of the hundreds of alleged providers of money in Australia; one was Ms Nga's brother, and the remaining three were all related. There was a disparity in the names on the receipts; Nguyen Trong Kanh was unable to recall the name of one alleged beneficiary of his money; there was conflict in the evidence of whether the alleged beneficiary came to Huynh Van Van's house or the money was delivered to such beneficiary, and a lack of knowledge by some of the witnesses as to the currency received by alleged beneficiaries.
40. In view of all these difficulties, I am unable to accept the evidence of these transactions having occurred. While it may seem unlikely that the applicants had gone to the extensive trouble of fabricating the large number of receipts produced, I am not satisfied that they are what they were purported to be. It is of no value to seek to speculate as to the actual transactions and purposes covered by these documents.
41. As stated at the commencement of these reasons, the assessments were not supported by any excess expenditure calculations, asset betterment statements or recalculation of the likely profit of NTT. The assessments were based solely on the schedule of alleged loan repayments, loans and gifts provided by Mr Lam. It is clear that a combination of s 175 and s 177 of the 1936 Act and Part IVC of the Taxation Administration Act1953 place an onus of proof on the applicants to prove that the assessments are excessive and the validity of the assessments is not affected by reason that the respondent may have failed to take further steps to justify such assessments. However, assessments in such cases as these are normally supported by calculations of unexplained wealth or expenditure. It would have been helpful to the Tribunal's deliberations if the respondent had made such calculations since the Tribunal does not accept the evidence of the applicants that a particular amount identified by them was obtained in non‑assessable circumstances. However, one particular piece of evidence referred to in paragraph 24 above, is relevant. After the commencement of the audit of the applicants' affairs, they transferred $3,624,974 from Australia to Swiss bank accounts. That is a clear indication that, prior to the final transfer, they possessed a net wealth of at least that amount. If to that amount is added the admitted gambling losses of Mr Lam during the relevant period and the likely living expenses during the period, it is likely that a total equal to the additional taxable income assessed would be demonstrated. It is noted that taxable incomes, disclosed by the applicants in their income tax returns lodged for the relevant years, were very modest amounts.
42. It follows from the foregoing that I am not satisfied that the applicants have discharged their onus of proof that the assessments were excessive. While it may well be that a substantial part of the additional assessable income came from the profits of NTT, it is not necessary for either the respondent or the Tribunal to attribute a particular source to that additional income. It is for the applicants to prove that it was not assessable income.
43. The applicants submitted that s 170 of the 1936 Act precluded the amendment of the assessments for the years ended 30 June 1992 to 30 June 1993 as they were amended outside four years from the date on which the original assessments became due and payable. However, this limitation does not apply where there has been an avoidance of tax and that avoidance is due to fraud or evasion. It is clear that less tax was paid on those original assessments than ought to have been paid, so there was an avoidance of tax. Given my findings, I am satisfied that the applicants were well aware, at the time of lodgement of the returns for those years and the payment of the original assessments, that there was a significant understatement of taxable income. This constitutes evasion and, as a consequence, s 170 of the 1936 Act does not preclude the amendment of those earlier assessments.
44. The final issue is the imposition of additional tax by way of penalty on the tax shortfall of each year. The respondent levied such additional tax at an amount equal to 75 per cent of the amount of shortfall in each year pursuant to s 226J of the 1936 Act. This section applies where the shortfall was caused by the intentional disregard by the taxpayer or by a registered tax agent of the Act or the regulations. Again, I am satisfied that the applicants were well aware of the understatement of taxable income and wilfully disregarded their obligations under the legislation to report the correct amount of income. Consequently, and for other than the year ended 30 June 1992, I am satisfied that the provisions of s 226J applied. However, this section applied only to tax shortfalls in relation to the year ended 30 June1993 and subsequent years of income. For prior years, s 223 applied. Under that section, a taxpayer is liable to additional tax by way of penalty equal to double the amount of the tax payable on omitted income. Both penalty sections are subject to a discretion to remit part or all of the additional tax under s 227. In the amended assessments for the year ended 30 June 1992, the imposition of additional tax of 75 per cent of the tax payable on the omitted income had to have involved the exercise of the discretion under s 227 of the 1936 Act to remit the additional tax to that percentage.
45. In my view, this level of additional tax is appropriate to be consistent with subsequent years. It remains to consider whether the provisions of s 226Y of the 1936 Act apply to this case. That section provides for a reduction of the amount of additional tax by 20 per cent where a taxpayer voluntarily told the Commissioner in writing about a shortfall or part after being informed that a tax audit was to be carried out and the taxpayer's disclosure could reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit. Here, the disclosure by Mr Lam of the list of alleged loan repayments, loans and gifts may well be argued as not telling the Commissioner "about a shortfall", but solely alleging a source of funds which may arise as an issue during the audit.
46. On the other hand, it is clear that the respondent accepted at face value the applicants admission of the quantum of funds available and, while not accepting that the source of the funds was as alleged, did not then embark on a lengthy investigation to identify any other amount of necessarily available funds to meet the expenditure incurred or to quantify that expenditure on a year‑by‑year basis. While accepting that it could be successfully argued that, strictly speaking, s 226Y of the 1936 Act does not apply, I am of the view that its intention should be considered and applied in the exercise of the discretion under s 227. Consequently, I find that, pursuant to s 227, the amount of additional tax payable by way of penalty should be reduced by 20 per cent, to 60 per cent of the tax shortfall in each of the years of income involved. Again, while s 226Y does not apply to the year ended 30 June 1992, the exercise of the discretion under s 227 of the 1936 Act to remit the additional tax to 60 per cent is appropriate in the interests of consistency.
47. It follows from the foregoing that the objection decision under review should be varied only to the extent of reducing additional tax by way of penalty to 60 per cent of the tax shortfall in each of the years ended 30 June 1992 to 30 June 1997 inclusive.
I certify that the forty‑seven [47] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member
(sgd) Catherine Thomas
Clerk
Dates of Hearing: 18—29 October 2004
3 December 2004
Date of Decision: 10 March 2005
Counsel for the applicant: Mr M. Bearman
Solicitor for the applicant: Rigby CookeCounsel for the respondent: MS H. Riley
Solicitor for the respondent: Australian Government Solicitor
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