LDGL and Commissioner of Taxation (Taxation)
[2017] AATA 2779
•21 December 2017
LDGL and Commissioner of Taxation (Taxation) [2017] AATA 2779 (21 December 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2015/3536 - 3540
Re:LDGL
APPLICANT
COMMISSIONER OF TAXATIONAnd
RESPONDENT
DECISION
Tribunal:F D O’Loughlin, Deputy President
Date:21 December 2017
Place:Melbourne
The Tribunal affirms the decision under review
........................................................................
F D O’Loughlin, Deputy President
INCOME TAX – whether amended assessments excessive – burden of proof on applicant taxpayer – balance of probabilities - fraud or evasion – administrative penalty applied - whether requisite opinion formed – onus on applicant to show fraud or evasion opinion should not have been formed – decision affirmed
Legislation
Administrative Appeals Tribunal Act 1975 s 37
Income Tax Assessment Act 1936 ss 167, 170
Income Tax Assessment Act 1997Taxation Administration Act 1953 ss 14ZZK, 284-75, 284-90, 284-220
Cases
Bai v Federal Commissioner Taxation [2015] FCA 973
Binetter v Commissioner of Taxation [2016] FCAFC 163
Chief Executive Officer of Customs v JMI Trading Pty Ltd [2000] VSC 537
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Comptroller-General of Customs v Parker (2006) 200 FLR 44
Davis v Commissioner of Taxation (2000) 171 ALR 654
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Evans v Federal Commissioner of Taxation 89 ATC 4540
Federal Commissioner of Taxation v Australian Petroleum Suppliers Pty Ltd [2003] VSC 240
Federal Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146
Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149
Galea v Federal Commissioner of Taxation (1990) 21 ALD 722
Gauci v Commissioner of Taxation (1975) 135 CLR 81
George v Commissioner of Taxation (1952) 86 CLR 183
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation 91 ATC 4546
Kennedy v Administrative Appeals Tribunal (2008) 168 FCR 566
Ludwigs Canberra Bond Cellar Pty Ltd v Sheen (1982) 46 ACTR 13
McAndrew v Commissioner of Taxation (1951) 98 CLR 263
Moreau v Commissioner of Taxation (1926) 39 CLR 65
Parry v Federal Commissioner of Taxation 2004 ATC 2333
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402
Saffron v Federal Commissioner of Taxation (1993) 93 ATC 4456
Trautwein v Commissioner of Taxation (1936) 56 CLR 63
Vu v Commissioner of Taxation [2006] FCA 889Secondary Materials
Law Administration Practice Statement PS LA 2007/24
REASONS FOR DECISION
F D O'Loughlin, Deputy President
21 December 2017
For the 2008 to 2012 Years[1] the Respondent[2] amended the Applicant’s income tax assessments to include unexplained bank account deposits, and net movements in balances owed to IPS Co[3] and to adjust the net rental losses claimed in respect of investment rental properties.
[1]A 12 month period ending on 30 June of each year.
[2]The Respondent Commissioner of Taxation of the Commonwealth of Australia.
[3]A company that provides Independent Professional Services to clients that was controlled by the Applicant’s husband.
The Respondent imposed penalty under item 1 in s 284-90(1) of Schedule 1 to the Administration Act[4] at the rate of 50% for recklessness.
[4]The Taxation Administration Act 1953 (Cth).
The 2008 and 2009 Years’ amended assessments were made after the Respondent formed an opinion that there had been fraud or evasion for the purposes of item 5 of the table in s 170(1) of the 1936 Assessment Act.[5]
[5]The Income Tax Assessment Act 1936 (Cth).
Table 1 shows the taxable income amounts returned, the adjustments made in the amended assessments issued and the associated penalty imposed.
Table 1[6]
[6] Amounts rounded down to lower whole dollar.
2008
2009
2010
2011
2012
Total
Assessable income disclosed
$844
$49,354
$102,669
$148,811
$83,357
IPS Co payments assessed
$928,621
$127,984
$165,508
$1,222,113
Deposits
$487,947
$70,220
$16,903
$575,070
Net rental income adjustment
$40,819
$22,942
$27,644
$33,816
$125,221
Adjustment to assessable income
$528,766
$93,162
$973,168
$127,984
$199,324
$1,922,404
Tax shortfall assessed
$225,807
$36,161
$447,409
$56,136
$83,806
$849,321
Penalty at 50%
$112,903
$18,080
$223,704
$26,068
$41,903
$422,660
The Deposits total of $575,070 above is part of a larger total of $1,984,845.50 deposited to the Applicant and her husband Mr LDGL’s joint account.
The facts of the deposits to the Applicant’s bank accounts, and the money advanced by IPS Co are not disputed. Whether their character has been proven adequately is disputed.
Issues
The issues to be decided are whether the Applicant has demonstrated that the:
(a)amended income tax assessments for the 2008 to 2012 Years are excessive by showing the amount of her taxable income for each of the Years in dispute;
(b)Respondent was wrong in forming an opinion that there was fraud and evasion in respect of the 2008 and 2009 years; and
(c)the penalties were incorrectly imposed; and
(d)penalty should be remitted.
Contentions
The Applicant contends that she has discharged the burden of proof required of her. She contends:
(a)in relation to the IPS Co payments assessed, that the movements in the balances owed to IPS Co are not assessable as there was not a loan and IPS Co did not have a distributable surplus for the purposes of Division 7A of the 1936 Assessment Act, and at least as to part were expense reimbursements and not taxable as they were liable to Fringe Benefits Tax;
(b)in relation to the bank account deposits, that:
(i)just because an account is a joint account, it does not necessarily follow that the account holders jointly own the money deposited to it;
(ii)the deposits to the Applicant’s bank accounts and any cash held were attributable to payments made to and for the benefit of Mr LDGL;
(iii)any benefit enjoyed by the Applicant was in the nature of money provided by a husband to a wife for household expenditures and otherwise in and towards her advancement, and was not income;
(iv)of the $1,984,845.50 total of deposits referred to above, only a balance of $148,000 cannot be explained;
(v)the inference must be that the unexplained balance is of the same character as the explained deposits and as none of the amounts explained were in the nature of income, the $148,000 must bear that same character; and
(vi)the notion of income in Australia does not extend to unexplained deposits; and
(vii)treating an unproven amount as income if it cannot be demonstrated to be otherwise turns the effect of the Assessment Act on its head, and … that is wrong;
(c)the rental properties were beneficially owned by the Applicant and the deductions were properly claimed by her;
(d)in relation to the matters in (a) to (c) above, the Applicant is only obliged to address the grounds on which the objections were disallowed by the Respondent;
(e)there was no avoidance of tax due to fraud or evasion for the 2008 and 2009 income years and therefore the Respondent was prohibited from raising any amended assessment for these years;
(f)no penalties could be imposed as there was no tax shortfall for any Year or alternatively the requisite reasonable care and reasonably arguable positions were taken and/or adopted; and
(g)alternatively, penalty ought be remitted.
The Respondent doesn’t adopt or advance any positive case at all, and maintains that this is a burden of proof case. He contends that the Applicant is required to prove the exact amount of her taxable income and that she has not done so.
Evidence led
The Applicant led both documentary and witness testimony evidence.
The witness testimony evidence led included personal testimony by way of witness statement from the Applicant, witness statement and oral evidence from the Applicant’s husband, his brother Mr FGH, and a former senior employee of a construction company that provided services to a client of IPS Co.
The Applicant’s evidence was that she:
(a)was a housewife with limited education who suffered depression and needed to avoid stress;
(b)relied on Mr LDGL for the conduct and management of all of her financial affairs and he made decisions without involving or consulting her;
(c)had signed documents given to her without reading or understanding them;
(d)regarded the rental properties as hers notwithstanding title registrations;
(e)worked part time at IPS Co but her title of manager did not reflect the work she did;
(f)had no knowledge of the funds the Respondent alleges moved between IPS Co’s accounts and her account;
(g)had a credit card and received cash from Mr LDGL;
(h)did not know of the bank accounts which the Respondent has alleged received deposits;
(i)had no say in or knowledge of the transactions in issue;
(j)relied on Mr LDGL and the services of a registered tax agent for lodgement of her income tax returns,
and that Mr LDGL made all relevant deposits and payments, took care of preparing and lodging tax returns for her, and was responsible for the conduct and management of her financial affairs.
None of this evidence was challenged. The Applicant contends that the evidence must be accepted. That contention is correctly made. However, acceptance of this evidence is not probative of the facts that bear upon whether the Applicant has discharged the burden on her to prove that the assessments are excessive.
Mr LDGL’s evidence was that:
(a)he was the principal of the IPS Co business that had clients both in Australia and overseas;
(b)on behalf of clients IPS Co received and paid money to and from overseas locations and that facilities with Macquarie Bank did not always enable direct transfers so he used a joint account with the Applicant for this purpose;
(c)two of IPS Co’s clients were foreign companies A Co and B Co both, controlled by people from the same European country;
(d)a controller of B Co introduced Mr LDGL, and therefore IPS Co, to A Co in 2007;
(e)by the first half of 2008, A Co and IPS Co had a relationship in which each assisted the other from time to time by allowing funds to be used, or fees owing not to be paid to meet cash flow needs on a running balance account basis. The amounts said to be involved were in the hundreds of thousands of dollars;
(f)a similar arrangement was in place between IPS Co and B Co;
(g)B Co owned, and A Co financed the acquisition and demolition of, a prominent and apparently problematic inner city building site. Mr LDGL was the demolition contract superintendent for this project and was required to certify works allowing progress claims to be made to the demolition contractor C Co. Amounts payable under that contract exceeded $13 million;
(h)funds were directed to IPS Co from A Co and B Co for payment to C Co as required to meet B Co’s obligations to C Co. This arrangement was introduced so as to address complaints that had been made with the timeliness of payments made by B Co to C Co. Mr LDGL’s evidence was that he thought it [made] perfect sense [to pay C Co on behalf of [B Co] in order to ensure that A Co’s money was being spent [appropriately].;
(i)IPS Co itself had cash flow difficulties during the same period which caused it to rely on money from A Co and B Co to meet its needs;
(j)the deposits to the bank accounts were for his benefit;
(k)the IPS Co balance movements were not loans affected by Division 7A of the 1936 Assessment Act and were not liable to assessment under Division 7A for the additional reasons that there was no distributable surplus, and at least as to part because they were fringe benefits; and
(l)the Applicant was the beneficial owner of the rental properties and the deductions claimed were claimed appropriately.
Mr FGH gave evidence of the historical process of preparation of financial statements for IPS Co which fed into relevant tax returns and of the process of reconstructing those so as to prosecute the present applications to the Tribunal. His evidence, and the reconstructed financial statements, if accepted, indicates that IPS Co did not have any distributable surplus precluding the operation of Division 7A of the 1936 Assessment Act.
The former C Co executive gave evidence of the contract between B Co and C Co and of difficulties in getting paid for work done and receiving payment from IPS Co on behalf of B Co by cheque and sometimes direct payment to the C Co bank account.
The documentary evidence comprised:
(a)reconstructed financial statements and other financial information prepared by Mr FGH with Mr LDGL’s assistance prepared in early 2015 that included:
(i)an analysis reconciliation for the 2008 to 2012 Years inclusive;
(ii)an analysis of the deposits into and payments made from a Commonwealth Bank account for the 2007 through 2010 Years;
(iii)a reconstruction of Director's loan account reconstruction for the 2008 through 2013 Years;
(iv)a summary of income and expenses in the Business Cheque Account for the 2008 and 2009 Years;
(v)a summary of expenses paid by personal credit cards for the 2008 and 2009 Years;
(vi)financial statements and tax reconciliations for the 2008 through 2012 Years; and
(b)bank statements, accounts and other financial records.
If the witness testimony led by and on behalf of the Applicant and the reconstructed financial statements were accepted without scrutiny, the Applicant’s contentions would be accepted. However, when scrutinised they cannot properly be so accepted.
The reconstructed financial statements cannot be accepted as accurate.
The reconstruction of financial statements needs to be seen in the context of first, the reason for the need for a reconstruction, second the absence of source vouching records that evidence the various entries made; third the process by which the reconstruction was undertaken; and fourth, the amount and type of income reported in those statements and the fee income claimed to have been earned from A Co and B Co.
Mr FGH gave evidence that at the time income tax returns were required to be prepared and lodged it had been impossible to produce a set of financial statements that would be correct and hence income tax returns were not lodged. This outcome was the product of the process by which financial records were maintained for IPS Co. That process was that the company provided partially annotated bank and credit card statements to its accountants. On receipt the statements were coded and entered into accounting systems and in theory at least this process would lead to preparation of financial statements and tax returns. The practice was that Mr LDGL was often away from Melbourne and the accountants were usually left with incomplete annotations on the primary records of money flows. The accounting firm staff had to use educated guesswork as to the nature of transactions that were not coded. In some cases bank statements were not available at all.
The need for an accounting record reconstruction arose because primary business records were not available. Those primary business records were not available to Mr LDGL or Mr FGH because they had been abandoned. Following a failure to lodge income tax returns and Business Activity Statements by IPS Co for the 2009 to 2012 Years and annual statement periods that ended on 30 June 2009 and 2010, the Respondent commenced an audit of IPS Co’s taxation obligations between 24 March 2012 and 24 October 2013. On 28 March 2013, as part of that audit, the Respondent issued notices pursuant to s 264 of the 1936 Assessment Act, s 128 of the FBT Assessment Act[7] and s 353-10 of the Administration Act to IPS Co, requiring IPS Co to provide information and to produce documents by 3 May 2013. On 2 May 2013 Mr LDGL placed IPS Co into voluntary liquidation. A degree of information was provided to the liquidator and IPS Co’s financial and business records were boxed in over 300 boxes and the liquidator was informed that they were available for collection at IPS Co’s offices. The liquidator did not collect the boxes. Sometime later IPS Co and Mr FGH (or the entity through which he conducted his tax agent and accountancy business) and any related parties vacated that office and the boxes of company records were left there. In this regard, the liquidators reported in the following terms:
The director has completed and submitted a report as to affairs which has been lodged with ASIC. We have received limited books and records of the company from the director. On examining the limited records that have been provided we note that the books and the records of the company appear incomplete and inadequate as they are limited to bank statements, financial statements for the period ‘08 to ‘12 and a contract of sale of business.
[7] The Fringe Benefits Tax Assessment Act 1986 (Cth).
Mr FGH’s explanation for the liquidation was:
Unfortunately, due to the amount of the audits, onerous requests arising from those audits, and the Australian Taxation Office using the full extent of their powers granted by the legislation, although I do not believe that the way they have been used is in keeping with the spirit of the legislation, [IPS Co] was placed in voluntary liquidation by [Mr LDGL]. As the Company had sold its core asset, the contract with the [Commonwealth Government Department], compounded by the fact that as it was no longer trading there were no other sources of income available to sustain the professional advisers required and expenses incurred in order to comply with all these requests from the Australian Taxation Office.
In order to comply with the Corporations Act requirements regarding the liquidation of the company, [IPS Co] provided all documents, working papers, etc. in their or [my] possession that belonged to [IPS Co] to the liquidator.
It is a difficult task to reconcile Mr FGH’s evidence with the liquidator’s report and the retention of over 300 boxes of company records. Further, it is not without significance that the abandonment occurred after an audit had been commenced by the Australian Taxation Office.
The process of reconstruction of financial statements involved the use of those corporate and financial records and bank and credit card statements that were available, with old computers containing some of that information, and Mr LDGL’s memory. Underlying documents that supported unexplained entries in bank and credit card statements were generally not available.
The amounts deposited and withdrawn from the joint account of Mr LDGL and the Applicant include amounts connected with IPS Co’s business operations. That means that the provenance of the entries to the joint accounts needs to be established before the financial statements, and anything that flows from them, can be accepted as reliable.
The arrangement between IPS Co and A Co to the effect that:
(a)the money involved in A Co’s funding of B Co’s obligations to C Co was directed to IPS Co so as to allay concerns with B Co meeting its obligations to C Co; and
(b)IPS Co was permitted to use large sums of that money itself to meet its cash flow difficulties and needs,
that the Applicant relies on to explain a significant value of deposits to a bank account, is not corroborated by contemporaneous documents or evidence from independent sources. Great caution is required in accepting the asserted arrangement, and explanation of the associated deposits. The need for that caution is heightened because the amount of non-government client income reported in the reconstructed IPS Co financial statements is less than the amount of revenue the evidence discloses was earned from A Co and B Co, two of a number of government clients, which leaves open the possibility that at least some of the money deposited in the joint account was IPS Co’s income.
The reconstructed financial statements are based on memory of financial matters going back some years. In his cross examination MR LDGL displayed that his memory of his financial affairs was not perfect.
During cross-examination Mr LDGL was unable to explain the provenance of deposits of the amounts made on the dates listed in Table 2 below.
Table 2
Date
Amount
31 January 2008
$670,000
23 April 2008
$500,000
15 May 2008
$65,000
18 August
$178,913.40
27 February 2009
$270,000
30 April 2009
$419,982
23 September 2010
239,970
14 February 2011
$1 million
24 March 2010
$2,090,000
16 June 2010
$600,000
The inability to explain these deposits needs to be considered in the context of:
(a)an asserted careful and methodical review of available records to reconstruct IPS Co’s financial records undertaken relatively recently, and after the presently disputed assessments from the Respondent were received;
(b)Mr LDGL having conducted a business which Mr FGH asserts had true revenues from a government agency and other clients as set out in Table 3 below:
Table 3
Year
IPS Co income from C’th Gov’t Dep’t
$
Private Client Income
$
% C’th Gov’t Dep’t income of Total income.
2008
42,742
574,688
6.9
2009
622,135
447,250
58.2
2010
2,288,247
852,221
72.9
2011
3,831,495
678,664
85
2012
932,578
950,839
49.5
(c)the unexplained amounts being significant when compared with the non-government revenue which was reported; and
(d)the Applicant having been put on notice that she bore a particular burden of proof (set out below).
In these circumstances, Mr LDGL’s explanation to the effect that he had not been asked about the unexplained amounts in Table 3 does not assist the Applicant.
The true revenues asserted to have been received from the government agency in Table 3 do not accord with the amounts the agency advised, which were for 2008 $42,669, for 2009 $46,574, for 2010 $2,514,658 and for 2011 $3,648,172. While the difference over the four years is not material, and Mr FGH’s amounts overstate the amount reported by the agency, the difference shows the reconstructed statements might not be accurate because they appear to have ignored a very reliable source of information that was provided to Mr LDGL on 5 March 2015.
Before the audit had started, the Respondent asked Mr LDGL to provide details of offshore bank accounts. Mr LDGL did not disclose all of the bank accounts that the Respondent either was aware of, or came to be aware of, from other sources. Those other accounts were:
(a)accounts held by Mr LDGL:
(i)UBS Switzerland
(ii)UBS Switzerland: Account Number
(iii)Friedrich Wilhelm Raiffeisen Bank
(iv)BRD Group Societe Bank
(v)ING Belgium: NV/SA (former Bank Brussels Lambert SA); and
(b)a joint account held by the Applicant and Mr LDGL with Bendigo and Adelaide Bank Ltd.
Reluctance or failure to answer questions fully does not assist in the process of having uncorroborated assertions accepted.
Other difficulties standing in the way of accepting the Applicant’s contentions are;
(a)incomplete evidence concerning a deposit of $342,175.25. The provenance of this previously unexplained deposit, being the money received for the sale of a boat, can be accepted. The Applicant asserts that the boat was a personal use asset and subject to particular CGT rules. However, and recognising that boats are not generally known to be sound investments or the subject matter of profit making by sale schemes, the Respondent points to the undeniable fact that there is no evidence on which any characterisation of the sale proceeds can be based;
(b)an absence of evidence of amounts asserted to be fringe benefits coupled with an absence of any amounts reported as fringe benefits on annual PAYG payment summaries and, apart from $3,855 for the 2008 financial years, no reported employee contributions in respect of fringe benefits received in the reconstructed financial statements;
(c)the circumstances in which the source financial information became unavailable to the Applicant and Mr LDGL; and
(d)incomplete evidence concerning the rental deductions. It can be accepted that the Applicant was the sole beneficial owner of the relevant properties. However there is evidence that the debt on which interest was payable was used for mixed purposes and was not wholly deductible, and evidence was not led as to the amount of the apportionment.
The necessary conclusion is that the Applicant has failed to demonstrate the character of all of the sources of money available to her and what her taxable income is.
Burden of proof
This matter is inescapably a burden of proof case where the scope of s 14ZZK of the Administration Act is enlivened. The Respondent contends that this is not a single issue type of case where the character of a particular amount is in issue and demonstrating the relevant character of that amount determines the outcome.
In his contentions dated 9 October 2015 the Respondent said:
44The Commissioner contends that the Applicant has failed to provide sufficient material to prove [her] actual taxable income for each of the Relevant Periods.
45The Commissioner contends that the assessable income disclosed in the [Applicant’s] ITRs fails to account for:
(a) the FBA Net Payments; and
(b) the Bank Deposits.
46Further, having regard to the fact that the [Applicant] maintained bank accounts that did not form part of the Commissioner’s amended assessments, including a number of offshore accounts held by Mr LDGL, the [Applicant has] provided insufficient material on which any reliable conclusion can be formed about [her] actual taxable income.
47In the absence of material to satisfy the Tribunal of the character of the FBA Net Payments and the Bank Deposits, and account for all other funds available to [the Applicant] during the Relevant Periods, the Applicant is unable to demonstrate that the Income Tax assessments and Penalty assessments are excessive (emphasis added).
The Applicant has been on notice as to what was required to discharge the burden she carried.
In his submissions the Respondent said:
The manner in which a taxpayer can discharge … [the] burden varies with the circumstance. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which … the assessment depends, it will suffice… to show that … [the taxpayer] is entitled to succeed on that point. Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment.
This submission is correctly made. The burden of proof imposed by s 14ZZK of the Administration Act requires a taxpayer to establish that the relevant assessment is excessive. In this context, excessive means the amount of the assessment exceeds what it should be.[8] What this means is that a taxpayer must establish the claim he or she asserts.[9] It is not enough to show that the Respondent made an error[10] or that an assessment may be wrong.[11] Taxpayers must go further and show what the correct position should be,[12] or what correction should be made to make the assessment right or more nearly right,[13] or the amount that should be assessed for tax,[14] or show that he or she has been assessed to a liability which the Assessment Acts[15] does not impose.[16]
[8]Commissioner of Taxation v Dalco (1990) 168 CLR 614, 621 per Brennan J with whom Mason CJ and Dawson, Gaudron and McHugh JJ agreed and 631 per Toohey J. McAndrew v Commissioner of Taxation (1951) 98 CLR 263.
[9]Trautwein v Commissioner of Taxation (1936) 56 CLR 63, 87 per Latham CJ, Moreau v Commissioner of Taxation (1926) 39 CLR 65, 70 per Isaacs J.
[10]Trautwein above, 87 per Latham CJ, Dalco above, 621 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
[11]Trautwein above at 112 per Dixon and Evatt JJ, Dalco above, 625 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed, 631 and 633 per Toohey J.
[12]Trautwein above at 87 per Latham CJ.
[13]Trautwein above at 88 per Latham CJ.
[14]Trautwein above at 103/4 per Starke J., Dalco above at 625 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
[15]The Income Tax Assessment Act 1997 (Cth) and the 1936 Assessment Act.
[16]Trautwein above at 111 per Dixon and Evatt JJ., Dalco above at 624 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed and 626 per Deane J and 631 per Toohey J, George v Commissioner of Taxation (1952) 86 CLR 183 at 201 per Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ.
There is no onus on the Respondent under the Assessment Acts[17] or the Administration Act and there is no requirement that an assessment be supported by evidence.[18] It is not necessary for the Respondent to show that a taxpayer’s assessable income was at least a particular figure or that a particular amount is assessable. And if the Respondent chooses to make such an assertion and fails to prove it, that failure does not bear upon whether the taxpayer has discharged the statutory burden of proving an assessment is excessive.[19]
[17]The 1936 Assessment Act and the Income tax Assessment Act 1997 (Cth).
[18]Gauci v Commissioner of Taxation (1975) 135 CLR 81, 89 per Mason J (in the minority but not on this point, see Dalco above per Brennan J at 624).
[19]Vu v Commissioner of Taxation [2006] FCA 889, 9 per Finn J., Galea v Federal Commissioner of Taxation (1990) 21 ALD 722 per Hill J.
The manner in which a taxpayer’s burden might be discharged varies with the circumstances. If a dispute concerns assessability of an identified amount, then a taxpayer may show that the assessment is excessive by demonstrating that that amount is not assessable without any examination of the balance of the assessment.[20] This might be shown by demonstrating that the amount was derived by someone else.[21] If a dispute is not so confined then any shortfall in proof of the amount by which an assessment is excessive is problematic for a taxpayer.[22] In these circumstances, a taxpayer needs to prove the actual amount that should be assessed.
[20]Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
[21]Dalco above at 626 per Deane J.
[22]Dalco above at 624 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
There are two further principles connected to the burden of proof principles outlined above that have a particular relevance in this proceeding.
(a)The first concerns self-serving evidence. The evidence of witnesses who have interests that turn on whether that evidence is accepted, typically parties to an application in the Tribunal, needs to be approached critically,[23] and will necessarily be the subject of careful scrutiny.[24] Similar principles ought be applied to the evidence of those who have close relationships with parties to a proceeding, such as a director and shareholder. In Imperial Bottleshops,[25] where business expenditures were said to have been incurred, Hill J expanded on the caution required and said:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be "tested most closely, and received with the greatest caution": Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as "prima facie unacceptable", cf McCormack v Federal Commissioner of Taxation (1978-9) 143 CLR 284 at 302 per Gibbs J.[26]
Importantly, in Imperial Bottleshops, there was substantial, corroborating evidence from two employees of a supplier to the taxpayer and six current or former employees of the taxpayer. In addition, the statement of wealth did not show unexplained accumulations of assets that were inconsistent with the taxation position asserted by the taxpayer. The corroborating evidence, together with a rational reason for an absence of records, allowed Hill J to form a view that the taxpayer should be believed.[27]
(b)The second concerns the limited circumstances in which inferences can be drawn. They can be drawn from observed facts. Mere assumptions, guesswork and speculation are not accommodated in the process of arriving at conclusions.[28] There must be a body of evidence that might reasonably sustain a relevant finding of fact or permit the Tribunal to draw an inference.[29]
[23]See Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149, 81- 82 per Ryan, Jessup and Perram JJ and their explanation of the remarks of Fullagar J in Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402, 403.
[24]See Davis v Commissioner of Taxation (2000) 171 ALR 654, 47 per Hill J.
[25]Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation 91 ATC 4546.
[26]At 4552.
[27]Imperial Bottleshops, 4554-4555.
[28]See Tisdall v Webber (2011) 193 FCR 260, [128] per Buchanan J, with whom Tracey J agreed.
[29]See Tisdall, above, at [127] per Buchanan J, with whom Tracey J agreed.
In cases where the burden of proving an assessment is in issue, two things are possible; first, it may be the case that the amount of the assessment made by the Respondent may not be the true taxable income and tax payable determined by applying the Assessment Acts to the taxpayer’s circumstances if adequate proofs were available, and, second, a taxpayer may well be giving an honest account in his her or its evidence, but the evidence does not demonstrate that the assessment is excessive in the requisite sense.
In the present case, the Applicant has not discharged the burden on her as noted above.[30] A finding cannot be made as to the provenance of the deposits to bank accounts and the reconstructed financial statements of IPS Co cannot be accepted as reliable. This means that the Applicant has not demonstrated what her taxable income is.
[30] See paragraph [36].
While there may be a good case advanced concerning at least some of the rental deductions claimed and the proceeds of sale of the boat, the absence of discharging the burden required makes this part of the Applicant’s case academic.
Fraud and evasion
The Applicant contends that:
(a)the exercise of the power to form the opinion that there was fraud or evasion has miscarried in two respects. First it miscarried because there weren’t the correct or appropriate factual bases for the formation of that opinion (the facts relied upon by the Commissioner were wrong) and second, in the alternative, there were no legal basis for the formation of that opinion;
(b)the relevant enquiry is directed to the acts or omissions of the Applicant and there weren’t any here that meet the fraud or evasion standard;
(c)in the alternative; if the acts and omissions of the Applicant’s agents are taken into account, then presently those acts are to be ignored because, if there were relevant assessable amounts, then those agents did not act within the scope of their authority because they were authorised to return amounts that were assessable and not act improperly and omit such amounts; and
(d)a spouse who chooses to rely on the efforts or activities of his or her respective spouse is exonerated from responsibility for the misdeeds of the active spouse and is protected from the implications of what may amount to illegal behaviour of the active spouse.
The Applicant’s contentions do not address what is required in the present circumstances.
The Respondent says that the Applicant bears the onus of providing evidence that satisfies the Tribunal as to the cause of the tax shortfall, and that cause did not constitute fraud or evasion. Further, the Respondent contends that that has not been done.
The decision in Bai[31] is relevant in these circumstances. That decision was the subject of the appeal decision in Binneter & Ors.[32]Perram and Davies JJ begin their decision to the effect that a taxpayer carries the onus of showing that there was no fraud or evasion[33] or that the Respondent had not formed the requisite opinion,[34] and explain that there is no onus on the Respondent to show that the assessment was correctly made;[35] and that while this Tribunal can re-examine whether, on the evidence before it, there was fraud or evasion, and can substitute its opinion for the Respondent’s, the issue for this Tribunal is whether the taxpayer has discharged the onus of showing that the fraud or evasion opinion should not have been formed. If a taxpayer does not do that, the amended assessments stand.[36]
[31] Bai v FCT [2015] FCA 973 at [34]
[32]Binetter v Commissioner of Taxation [2016] FCAFC 163. The relevant decision concerning fraud or evasion and the burden of disproving it being the joint decision of Perram and Davies JJ. Siopis J agreeing in these aspects of the joint reasons.
[33]At [2016] FCAFC 163 [80].
[34]At [2016] FCAFC 163 [81].
[35]At [2016] FCAFC 163 [92].
[36]At [2016] FCAFC 163 [93].
The manner in which a taxpayer would achieve such a goal in an income case depends on the particular circumstances. A taxpayer could demonstrate there was no omission of income and therefore no avoidance of tax. Alternatively, a taxpayer could demonstrate that the amounts, while assessable, were not included in assessable income returned for a reason that shows that while there was a shortcoming, it was a shortcoming that fell short of a blameworthy act in the Denver Chemical[37] sense.
[37]At (1949) 79 CLR 313 Dixon J.
Provided the Respondent has formed the requisite opinion, in an income case, the effect of the Binneter decision, and those on which it is based, may well be to make a fraud or evasion finding unchallengeable independently of the challenge to the assessability of the relevant amount. If that is so, that is not a matter that the Tribunal can alter. Thus the Applicant’s contentions at paragraph [48] above, in the present circumstances. cannot be accepted
Where the character of an amount remains unestablished and the taxpayer has not proven the amount is not assessable, it is difficult, if not impossible to:
(a)form any view as to the level of shortcoming, if there be one;
(b)form a view as to whether there has been an innocent mistake or a blameworthy act; and
(c)say that the taxpayer has demonstrated that there was not fraud or evasion.
Penalty
The considerations concerning the approach to challenging the fraud or evasion opinion[38] apply to the penalty imposition. The failure to demonstrate that the amounts were not assessable as income means the level of seriousness of any shortcoming has not been established and whether there was reasonable care or otherwise, or more serious shortcomings have not been established or disproven as the case may be. Similarly, whether the safe harbor rules apply has not been established.
[38]Paragraphs [28] to [34], particularly paragraph [31].
Again, in an income case this may make the penalty unchallengeable independently of the substantive assessment challenge. Again, if that is so, it is not something the Tribunal can alter.
Remission of penalty
The Applicant repeats the contentions as to why penalty is not payable in support of her contention that any penalty should be remitted.
Given the foregoing, the contentions in support of remission must fail. The three contentions concerning liability to penalty have not been made out. Accordingly, there is nothing to support a remission.
Decision
The Tribunal affirms the decisions under review.
I certify that the preceding 59 (fifty-nine) paragraphs are a true copy of the reasons for the decision herein of
Deputy President F D O'Loughlin....................[sgd]....................................
Associate
Dated 21 December 2017
Dates of hearing 31 October, 2-3 November 2016
Final submissions received: 8 November 2016 Counsel for the Applicant Dr N Orow Solicitors for the Applicant Blackstone Waterhouse Zouki Counsel for the Respondent Mr N Evans Solicitors for the Respondent Australian Taxation Office Dispute Resolution
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