Mach and Commissioner of Taxation - [2004] AATA 933

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2004] AATA 933

ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2003/175‑177

TAXATION APPEALS DIVISION

Re: CHARLIE MACH

Applicant

And: COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal: Mr B.H. Pascoe, Senior Member

Date: 7 September 2004

Place: Melbourne

Decision:The Tribunal affirms the decision under review.

(sgd) B.H. Pascoe
Senior Member

INCOME TAX – audit of taxpayer's affairs – excess expenditure statement – sources of funds – purchase of motor vehicle – purchase of land – unexplained bank deposits – alleged loans for siblings and friends

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Federal Commissioner of Taxation v Dalco 90 ATC 4088

Federal Commissioner of Taxation v Munro 97 ATC 5041

Gauci and Ors v Federal Commissioner of Taxation 75 ATC 4257

McCormack v Federal Commissioner of Taxation 79 ATC 4111

McCauley v Federal Commissioner of Taxation 88 ATC 4605

REASONS FOR DECISION

7 September 2004 Mr B.H. Pascoe, Senior Member

This is an application to review a decision of the respondent to disallow objections to amended assessments of income tax for the years ended 30 June 1996, 1997 and 1998. The amended assessments resulted from an audit of the applicant’s affairs by the respondent.
At the hearing the applicant, Mr C. Mach, was represented by Mr F. Farrow of counsel, and the respondent by Mr C. Sievers of counsel. Evidence was given by Mr Mach; his three sisters, Ms Van Mach ("Van"), Ms Loan Mach ("Loan") and Ms Lan Mach ("Lan"); his father, Mr T. Mach; and two friends Mr Hoang Nguyen and Mr Can Dam. Evidence was given, also, by an officer of the respondent who conducted the audit.
The genesis of the audit was a report from the Australian Federal Police. The auditor prepared excess expenditure statements for the three years in dispute which disclosed an excess expenditure and which was then included as taxable income in amended assessments issued on 19 May 2000. Objections were lodged against such amended assessments on 1 May 2001 and those relating to the years ended 30 June 1997 and 1998 were allowed in part by decision of 24 March 2004.
In relation to the year ended 30 June 1996, the excess expenditure added to taxable income returned was $84,965. It was not in dispute that this amount was attributable, primarily, to the inclusion in expenditure of $71,961 on the purchase of a BMW motor vehicle and $24,050 as the balance payable on the purchase of a property at Inglis Street, Port Melbourne after allowance of a bank mortgage. It is an indication of the inexact nature of an excess expenditure statement that the documents provided by the respondent under s 37 of the Administrative Appeals Tribunal Act 1975 show that the actual purchase price of the BMW motor vehicle was $73,325 and the settlement amount on the purchase of Inglis Street was $23,613.
In relation to the year ended 30 June 1997, the excess expenditure originally added to taxable income returned was $19,762. Here, it was accepted that the primary reason for the excess was the inclusion of $16,900, being the balance payable on the purchase of land at Lot 39, Northumberland Park Estate, Sunshine after allowance for mortgage borrowing. Again, the documents show that this figure is incorrect in that the purchase price of the land was $67,500 and the amount available from the mortgage after disbursements on stamp duty and fees was $48,123, leaving $19,377 of expenditure from other sources. On objection, the respondent accepted that the property had been purchased in the joint names of Mr Mach, his father and mother. Consequently, the objection was allowed to the extent of excluding $11,667. This was on the basis of the respondent taking the purchase price as $67,500, the mortgage as $50,000 and excluding two‑thirds of the difference of $17,500.
In relation to the year ended 30 June 1998, the excess expenditure statement disclosed an excess expenditure of $9564. However, the auditor then recalculated a sales, gross profit and net profit figure of the gift shop business of Mr Mach. An estimate of average daily sales was made and extrapolated to estimated annual sales. The result was an alleged understatement of net profit of $41,676 and this was the figure added to the income previously shown on the return lodged. On objection, the respondent accepted that the business had not been operating for the full year and allowed the objection to the extent of reducing the amount of alleged‑omitted income to $16,100, being deposits to a bank account between 13 November 1997 and 24 December 1997 not otherwise explained.
It is appropriate to deal with each of the four matters in dispute in turn. These are the purchase of the BMW motor vehicle, the purchase of the property at Inglis Street, the purchase of the property at Lot 39, Northumberland Park Estate and the unexplained bank deposits.
In the objection lodged against the amended assessment for the year ended 30 June 1996, it was said that the vehicle belonged to Mr Mach's father and was purchased from funds borrowed by his sister Lan and secured by mortgage over her home. In his evidence at the hearing, Mr Mach said that he and his five siblings agreed to purchase a motor vehicle for their father in early 1996. He said that his father was proposing to obtain an Australian driving licence and liked BMW cars. In March 1996 a BMW motor vehicle was purchased for $73,325. Mr Mach said that the purchase price was funded as to $40,000 by his sister Lan, US$20,000 from his two sisters resident in the United States of America (USA), Van and Loan, and the balance between his other two sisters and himself. The purchase documents were in the name of his father, although signed by Mr Mach. He acknowledged that his father had not been successful in obtaining a driver's licence and the vehicle had been used by him and other family members, primarily, to convey his parents when required. Mr Mach noted that the Road Traffic Authority records showed that ownership of the motor vehicle had been transferred to him on 31 August 2001, but had no recollection of, nor could advance any reason for, the transfer some 12 months before the vehicle was sold.
Mr Mach said that the funds from his sisters in the USA were remitted by telegraphic transfer to an account in his name with the ANZ Banking Group (ANZ Bank). He said that he had opened the account for that purpose and advised the account number to his sisters. He said that his sister Lan arranged a bank cheque payable to the motor vehicle dealer for $40,000 and he drew the balance of $32,325 (after an earlier $1000 deposit) from the ANZ Bank account. He could not recall whether this was by way of bank cheque.
Mr Mach maintained that two amounts of $11,053.16 and $30,517.67 deposited to the ANZ Bank account represented the transfer of US$10,000 from one sister Van, and US$30,000 from the other sister Loan. There are several difficulties with this evidence. First, the account was first opened with the deposit of $11,053.16 on 7 March 1996 with the other deposit on 8 March 1996. It is difficult to accept that Mr Mach was able to advise his sisters of the account number prior to their arranging a telegraphic transfer when the first alleged transfer was the opening deposit. No reference is made to the deposits as being by way of telegraphic transfer in US currency, although I accept that the absence of such a reference does not mean that they were not funds received in that form. A further difficulty is that, on 7 March 1996, the InterBank rate of exchange was US.7638 to one Australian dollar, indicating that a deposit of $11,053.16 was equivalent to approximately US$8442, not the US$10,000 alleged. The second deposit at .7667 was equivalent to US$30,298 and it is quite possible that this deposit was, in fact, the equivalent of US$30,000. A further difficulty with Mr Mach's evidence was that this total amount of $50,570.83 was drawn from the account in five withdrawals of $9000 each and one of $5570 between 19 March 1996 and 2 April 1996. The final payment for the BMW motor vehicle was made on 21 March 1996 by which date only $18,000 had been drawn from the account, not the $32,325 said to have been used from these funds for the motor vehicle purchase.
The sisters Van and Loan gave separate evidence by telephone from the USA. Both affirmed that they had transferred US$10,000 each for the purchase of the motor vehicle for their father. Loan affirmed that she had transferred a further US$20,000 for Mr Mach by way of a loan for the purchase of a house. Neither sister could recall the name of the bank in the USA through which the transfer was arranged. Loan thought that the funds had been transferred on two occasions, one of US$20,000 and the other US$10,000 combined with that of her sister. On the other hand, Van thought that she had transferred her US$10,000 independently from the transfer by her sister of US$30,000.
Mr Mach's other sister, Lan, said that she had agreed to contribute $40,000 towards the purchase of the BMW motor vehicle for her father. She said that she arranged with the Bank of Melbourne to borrow $60,000 on security of her home. Documentary evidence showed that a loan of $60,000 was approved on 4 February 1996. A settlement authority was signed by Lan and her husband for the Bank of Melbourne to pay two cheques to Lan, being $29,729.50 and $30,000. The date of the settlement authority is not clear, but appears to be in late February. In addition, there are words in brackets after the amount of $30,000 which are unclear, but appear to be, "To be advised later when picked up". In her oral evidence Lan accepted that she received two cheques payable to herself from the Bank of Melbourne, but did not believe that she had deposited them in a bank account. She maintained that part of the money borrowed was for the purchase of a car for her father, but accepted that she had not told the bank of that intention and that the loan application had referred to the purpose as being for the purchase of another house. She believed that she had requested a cheque for $40,000 from the bank with the balance used in her own business. Initially, in her oral evidence, Lan said that she used some of the funds for the purchase of another house in her name. However, after she was reminded that documents showed the sale of one house in November 1997, she acknowledged that the other house was purchased in late 1997 or early 1998. She then said that the new house was financed by the net proceeds of sale of the first house after payment of the $60,000 mortgage with the balance borrowed from her sisters in the USA and friends. Lan said that, in March 1996, she and Mr Mach went to the ANZ Bank in Footscray to purchase a bank cheque to pay for the BMW motor vehicle. There was no substantiating documentary evidence of this.
Again, there are difficulties with the evidence of Lan providing $40,000 toward the purchase of the motor vehicle. I accept that the settlement authority is not necessarily definitive that the loan was made by the two cheques for the amounts set out in that authority. Nevertheless, there is no other evidence of a cheque for $40,000 from this source. The settlement authority was signed in February 1996, but the purchase order for the BMW was not signed until 12 March 1996, indicating that the model of vehicle and its price were not determined until that date. While accepting, also, that these events took place some eight years ago, it has to be said that Lan was vague and somewhat contradictory in her evidence.
Mr T. Mach, the father of Mr Mach, said that he considered obtaining an Australian driving licence in early 1996. He did some studies in road law and had some driving lessons, but did not do a driving test for a licence. He said that he had heart problems and had been advised not to drive with the medication he was taking. He said that his children had advised against driving. Nevertheless, he maintained that, because of the love and respect for him by his children, they decided to buy him a BMW motor vehicle. He said his son drove him whenever it was needed. He confirmed his understanding of the relative contributions to the cost by his children. Mr Mach Senior could not recall any transfer of the motor vehicle to his son in August 2001.
Overall, it is difficult to accept the personal evidence of the source of the funds for the purchase of the BMW motor vehicle where there is no documentary evidence to support the assertions and what documentary evidence was produced appears to contradict those assertions. It is clear that, whether the total amount of $50,570 represented transfers from the USA, it was not a source of funds for the purchase of the BMW motor vehicle. Consequently, I do not accept that the sisters in the USA contributed the equivalent of US$20,000 to the purchase. Again, the evidence of the sister Lan was unconvincing and not supported, if anything contradicted, by the limited documentary evidence. All that can be accepted was that she and her husband borrowed $60,000 in February 1996. What the funds were used for is unclear.
Under s 14ZZK of the Taxation Administration Act 1953, the applicants bear the onus of proving that the assessments were excessive. It is clear from decisions of the courts in cases such as Federal Commissioner of Taxation v Munro 97 ATC 5041; McCormack v Federal Commissioner of Taxation 79 ATC 4111; Gauci and Ors v Federal Commissioner of Taxation 75 ATC 4257; and McCauley v Federal Commissioner of Taxation 88 ATC 4605 that, in the words of Lockhart J (at 4613):
…It is for the taxpayer to prove that the assessment is excessive and the onus lies upon the taxpayer to prove that funds to acquire the assets in question were not derived from undisclosed income. The source of these funds is peculiarly within the knowledge of the taxpayer.

In Federal Commissioner of Taxation v Dalco 90 ATC 4088, Brennan J said (at 4093):

…the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment…

Mr Farrow argued strongly that the onus on the applicant is not one of providing strict proof, but of satisfying the Tribunal on the balance of probabilities. There is no dispute that this is the appropriate standard of proof. In Federal Commissioner of Taxation v Munro 97 ATC 5041, Lockhart J set out the principles relating to onus of proof as follows (at 5049‑5050):

…
The taxpayer has the burden of proving that the amended assessment is excessive (s 14ZZK(b)(i) of the Taxation Administration Act 1953). That section is expressed in substantially the same language as s 190(b) of the Assessment Act which was repealed by Taxation Laws Amendment Act (No 3) 1991 (Cth).
In McCormack v Commissioner of Taxation (1979) 143 CLR 284 Gibbs J said that s 190(b) of the Assessment Act placed the burden of proving that the assessment was excessive upon the taxpayer and that on ordinary principles the taxpayer therefore bore the burden of proving the facts necessary to make out his or her case (at ATC 4120; CLR 301). To discharge the burden of proving that the assessment is excessive the taxpayer in McCormack (a s 26(a) case) was required to prove affirmatively on the balance of probabilities that the property was not acquired for the purpose of profit making by sale. His Honour said that the burden may be discharged by drawing inferences from the evidence, but he rejected (at ATC 4121; CLR 303) the argument that a taxpayer can succeed simply because there is no evidence from which it can be concluded that the relevant purpose of profit making existed; since this would mean that the burden of proving the existence of that purpose lies on the Commission. That would, his Honour said, be to invert the onus of proof. His Honour also said at ATC 4121; CLR 303:
"…The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property, the appeal must fail."

Gibbs J agreed with the statement of Mason J a few years earlier in his dissenting judgment in Gauci & Ors v FC of T 75 ATC 4257 at 4261; (1975) 135 CLR 81 at 89‑90 in these terms:
"The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessment should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.
...
The crux of the matter is that when in a s 26(a) case an appellant seeks to overcome the onus created by s 190(b) by adducing evidence as to his intentions with a view to establishing the purpose of the acquisition was not a s 26(a) purpose and that evidence is not accepted, he has not discharged the onus which he bears. At best, from the appellant's viewpoint, the evidence stands in a situation in which it is equivocal, neither establishing a s 26(a) purpose nor denying the existence of such a purpose. At worst, the judge may, in the circumstances, be able to infer the existence of a s 26(a) purpose. In either event the appellant fails to discharge the onus and the appeal fails."

Stephen J agreed with what was said on this matter by Gibbs J and he too endorsed the statement of Mason J in Gauci (at ATC 4123; CLR 306).
In MacMine Pty Ltd v FC of T 79 ATC 4133; (1979) 53 ALJR 362 Gibbs J confirmed the views expressed in McCormack by him about the onus of proof which lies upon a taxpayer by virtue of s 190(b) of the Assessment Act (at ATC 4139; ALJR 366). Stephen J confirmed his agreement in McCormack with what Gibbs J said on the subject of s 190(b) (at ATC 4146; ALJR 371).
Murphy J said (at 378) that s 190(b) places on the taxpayer the burden of showing that the assessment is excessive and therefore that the circumstances giving rise to liability to such assessment did not exist. His Honour said that:
"The plain intention of Parliament is to raise a presumption of the existence of the circumstances which attract liability to the tax assessed."

Here, the BMW motor vehicle was purchased on an order signed by Mr Mach, but in the name of his father. There is no suggestion that any part of the purchase price was paid by the father. At the time he did not possess a driving licence and, in fact, said that his children were opposed to him driving because of his heart condition. It is difficult to accept that the registration was transferred to Mr Mach subsequently without the knowledge of either Mr Mach or his father. As stated above, I do not accept that funds for the purchase were provided by either sister in the USA and cannot be satisfied on the balance of probabilities that the alleged funds were provided by Mr Mach's sister Lan. There was no evidence of any funds provided by his other siblings. Consequently, I do not accept that the funds for the purchase of the BMW motor vehicle came from a non‑income source. It is unnecessary for the respondent to provide any evidence of the likely source of the funds.
In relation to the purchase of the property at Inglis Street, the objection to the amended assessment stated that:
…the purchase price of $90,000 was financed by a loan of $70,000 from the bank of Melbourne and a loan from my sister residing in the United States of an amount of $39,517.67 remitted to my bank account on 8 March 1996.

In his evidence at the hearing, Mr Mach acknowledged that settlement of the purchase was made in September 1995 and the funds were not available from his sister at that time. He said that he borrowed $9000 from Mr Hoang Nguyen (Hoang) and $18,000 from Mr Cam Dam (Cam) in September 1995 and repaid those borrowings in March 1996 from funds provided by his sister. He said that Hoang was an older brother of a very close friend and that Cam is a friend who had done business with his father in Vietnam. He believed that he had told his sister in 1995 that he needed the money to buy Inglis Street, but she could not provide a loan at that time so he borrowed from the two friends. He said that he repaid the two friends in cash, drawn in amounts of $9000 from the ANZ Bank account after receipt of the funds from his sister. He maintained that he did not draw the $18,000 for Cam in one amount as this was too much to carry from the bank at one time.

Hoang and Cam gave evidence in support of the evidence of Mr Mach that he borrowed $9000 and $18,000 respectively from them. Both said that the loans and subsequent repayments in March 1996 were in cash. Neither could provide any documentary evidence of the loans or repayments. It is relevant that there are no bank records substantiating the borrowing of $27,000 and the source of the bank cheque for $23,513.45 paid in final settlement of the purchase of Inglis Street on 7 September 1995.
The concerns and doubts about the source of funds said to be from the sisters resident in the USA have been noted earlier. Of further interest is the fact that the bank account to which the alleged funds were deposited was opened on 7 March 1996 and the last transaction was 2 April 1996, being a withdrawal of all but 83 cents of the balance. The account was in the name of Phong Truong Mach which appears to be the Vietnamese name of Mr Mach, otherwise known as Charlie Mach. At the same time he had an account with another branch of the ANZ Bank. There was no explanation as to why it was necessary to open this account in a different name solely to receive deposits of $50,570.83 and why that sum was withdrawn in five separate amounts of $9000 and one of $5570. The withdrawal of three amounts of $9000 was said to be the repayment of the loans from Hoang and Cam. However, I have difficulty accepting that reluctance to carry $18,000 in cash was the reason for drawing $9000 on successive days. Given my considerable doubt that the source of the funds was from the sisters in the USA in light of the vagueness of their evidence, the lack of any documentary evidence and difficulty of relating the amounts to the alleged amounts of US dollars, I do not accept that the funds were borrowed from Hoang and Cam and repaid from funds lent by the sister Loan. Consequently, I do not accept that Mr Mach has discharged the onus of proof that, on the balance of probabilities, the funds used in the balance of purchase price of Inglis Street came from a non‑income source.
In relation to the purchase of the land at Lot 39, Northumberland Park Estate, little was advanced in evidence as to the source of funds for Mr Mach's one‑third interest in the amount paid over and above the sum borrowed on mortgage. His evidence was solely that it came from his savings and that he kept a supply of "cash in his pocket". Again, I am unable to accept a non‑income source of funds for that outgoing.
The final issue is the inclusion of $16,000 of unexplained deposits in the year ended 30 June 1998. Mr Mach's explanation of the source of these funds was that they represented money drawn previously from the bank account for purchase of stock, but unused and re‑banked. He said that, when he first leased the shop in October 1997, it was old and needed extensive renovations. He said that this was not completed until just before Christmas. He was unable to specify a date on which trading commenced other than it was "shortly" prior to Christmas 1997. It is relevant to note that a bank account in the name of "Charlie Mach Hoai Thu Gift Shop" was opened with the Commonwealth Bank on 8 January 1998 and deposits of amounts in round $100 multiples were deposited regularly from that date. If the shop was opened in December 1977, it is not clear where proceeds of sales prior to 8 January 1998 were banked. Mr Mach said in his evidence that proceeds were banked to the Commonwealth Bank account every day. Given the lack of any evidence substantiating the evidence of redeposits of previous withdrawals, the lack of any major withdrawals in the relevant period from his previous ANZ Bank account, which was closed on 2 February 1998, and the difficulty of accepting that proceeds of sales prior to Christmas 1997 were otherwise accounted for, I do not accept the evidence of Mr Mach as to the source of the $16,100. It is relevant to note that this amount was the total of five deposits of between $2000 and $5100 in November and December 1997, appearing more akin to revenue than re‑banking unused funds. Consequently, I am not satisfied that these deposits were from a non‑income source.
It follows from the foregoing that I am not satisfied that Mr Mach has satisfied his onus of proof that the amended assessments in question are excessive. His explanation of the source of funds has changed over the period since the audit, when it has been brought to his attention that either amounts or dates are not consistent with the earlier explanations. His evidence at the hearing was supported by unsubstantiated evidence of family and friends who may well have been expected to provide such support. While accepting that each of their written statements was, in all likelihood, prepared by Mr Mach's solicitor, it is noticeable that they are couched in almost identical terms. On the balance of probabilities, I cannot be satisfied that the evidence should be accepted.
Consequently, the objection decisions under review should be affirmed.

I certify that the twenty‑four [24] 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: 30 July 2004
4 August 2004

Date of Decision:  7 September 2004
Counsel for the applicant:            Mr F. Farrow
Solicitor for the applicant:            Asia Pacific
Counsel for the respondent:         Mr C. Sievers
Solicitor for the respondent:        Australian Taxation Office Legal Practice