McMullen and Commissioner of Taxation (Taxation)

[2018] AATA 4481

McMullen and          Commissioner of Taxation (Taxation) [2018] AATA 4481 (4 December 2018)

Division:TAXATION & COMMERCIAL DIVISION

File Numbers:         2017/2201-2017/2202

Re:Kelly McMullen  

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member Theodore Tavoularis

Date:4 December 2018

Place:Brisbane

The decisions under review are affirmed.

.....................…........[Sgd]............................................

Senior Member Theodore Tavoularis

CATCHWORDS

TAXATION – objection to income tax assessment – whether third party payments should be included in assessment of Applicant’s income – onus of proof –  where insufficient evidence was adduced to establish ‘reasonable explanation’ for third party payments - decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997

(Cth), ss 8-1, 40-30, 900-15, 900-20, 900-115,         900-120, 900-195

Taxation Administration Act 1953

(Cth), s 14ZZK, Schedule 1, ss 284-75, 284-90, 298-20

CASES

Briginshaw v Briginshaw (1938) 60 CLR 336

Federal Commissioner of Taxation v Dalco (1989) 168 CLR 614

Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540

Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81

Imperial Bottleshops Pty Ltd & Edgerton v Federal Commissioner of Taxation [1991] FCA 276

Ma v Federal Commissioner of Taxation (1992) 37 FCR 225

Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108

Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63

Rejfek v McElroy (1965) 112 CLR 517

Repatriation Commission v Smith (1987) 74 ALR 537

REASONS FOR DECISION

Senior Member Theodore Tavoularis

4 December 2018

INTRODUCTION

1. Mr Kelly McMullen (“the Applicant”) has a disagreement with the Commissioner of Taxation (“the Respondent”) about the amount of income tax he has been assessed to pay for the years of income ending 30 June 2014 and 30 June 2015, respectively (“the relevant years of income”). This disagreement initially took the form of the Applicant objecting to the Respondent’s assessments for the two relevant years of income.

2. The Respondent considered the Applicant’s objections for the relevant years of income and published its findings in a decision dated 17 March 2017.[1] It is these findings that constitute the reviewable decision for present purposes.

   [1] Exhibit 4, T-Documents, T2, pages 3-8.

3. At the core of the dispute are certain third party amounts which materialised in an account or accounts in the name of the Applicant or in other names. Suffice it to say – and I do not recall any argument on the point – that the Applicant had access to and a right to operate each of the accounts into which those third party payments materialised. The essence of the dispute is that the Applicant says the third party payments should not be included in the Respondent’s assessment of his income for either of the relevant years. The Applicant primarily bases this contention that he was prevented from being able to physically exert himself to derive this income due to his “…physical and mental condition at the time…”[2]

   [2] Exhibit 1, Applicant’s Statement of Facts, Issues and Contentions, page 1, [1].

4. For reasons that follow, I am of the view that the reviewable decision should be affirmed. As will be demonstrated in these Reasons, the Applicant has failed to discharge the onus upon him to prove the assessments were excessive.

   DISCREPANCY BETWEEN THE ORIGINAL TAXABLE INCOME ASSERTED BY THE APPLICANT AND THE AMENDED TAXABLE INCOME PROPOUNDED BY THE RESPONDENT

5. On 17 October 2017, the Applicant lodged his return for the year of income ending 30 June 2014. That return declared a taxable income of $19,255.00. He did not lodge a return for the following year of income ending on 30 June 2015 because, according to him, “…he meets non-lodgement criteria.”[3]

   [3] Exhibit 4, T-Documents, T5, page 46.

6. The Respondent was not satisfied with the figure declared as taxable income in the 2014 return and was likewise not satisfied the Applicant met the necessary criteria favouring non-lodgement of the 2015 return. The Respondent obtained additional documentary evidence about the other possible sources of recorded payments to the Applicant. These sources included payroll records from the Applicant’s employer, as well as financial records from banking institutions. The T-Documents contain financial documents such as bank statements, mortgage statements and a loan application.

7. This additional material, obtained and examined by the Respondent, discloses that the following amounts have been paid or otherwise credited to the Applicant. The analysis appearing in the Respondent’s Final Submissions is particularly instructive:[4]

   [4] See Exhibit 8, Respondent’s Final Submissions, pages 2-4, [8] – [17].

   (a)The payroll records indicate:

   (i)Payments to the Applicant for the 2014 year of income: $81,814.97;

   (ii)Payments to the Applicant for the 2015 year of income: $40,846.75;

   (b)The ANZ Access Account: This is the ANZ Access Advantage Cheque Account:

   (i)Total debits of $122,915.05 and total credits of $125,312.18 for the 2014 year of income;

   (ii)Total debits of $133,574.23 and total credits of $127,741.51 for the 2015 year of income;

   (iii)From the abovementioned respective credit figures, the Respondent has identified certain “unexplained deposits”, they being $88,627.70 for the 2014 year of income and $44,952.17 for the 2015 year of income. These unexplained deposits are recorded as “Transfer from Voss Capital Subcontractor Fees” or “Card Entry at Benowa Gardens Branch.”

   (c)The ANZ Select Account: This is the ANZ Select Account. The Applicant also received assessable welfare payments from the Department of Human Services as follows: $18,509 for the 2014 year; and $17,948 for the 2015 year. Both of these sums were paid into this second ANZ Select Account and are thus demonstrably separate from the abovementioned sums credited to the ANZ Access Account for the 2014 and 2015 years of income.

   (d)The home loan with Westpac: The Applicant applied for a home loan. The funder was Westpac. He provided the usual qualifying particulars in his application for the facility. For example, he told Westpac his monthly income was $6,781; that his gross annual income was $113,750; and that he had monthly liabilities of $1,100. The relevant Westpac home loan statements disclose payments of interest in the respective sums of $22,566.33 for the 2014 year of income and $21,925.86 for the year ending 30 June 2015.

   (e)Other accounts: The Applicant also referred to an NAB Account in the name of his mother, namely Lily Kelly McMullen. The Respondent has noted that the singular withdrawal from this NAB Passbook Account that reconciles with the various deposits made into the ANZ Access Account is in the sum of $4,300. This deposit occurred on 13 May 2014, which is during the 2014 year of income. Further payments have been made by the Applicant’s mother from a certain Westpac Account in her name. Those payments were made directly into the Applicant’s abovementioned Westpac home loan account.

   THE NATURE OF THESE PROCEEDINGS

8. Section 25 of the Administration Appeals Tribunal Act 1975 (Cth) (“AAT Act”) provides that Applications may be made to this Tribunal for the review of decisions that have been made pursuant to another enactment. The reviewable decision of the Respondent made on 17 March 2017 is such a decision.[5] Aside from having the reviewable decision reviewed in this Tribunal, the Applicant could have also appealed the reviewable decision to the Federal Court of Australia.[6] There is thus no question that this Tribunal has jurisdiction to entertain and determine this Application.[7]

   [5] See s 25(1)(b) of the AAT Act.

   [6] See s 14ZZ (1)(a)(ii) of the Taxation Administration Act 1953 (Cth).

   [7] See s 14ZZ (1)(a)(i) of the TAA.

   WHO BEARS THE ONUS OF PROOF?

9. Section 14ZZK of the Taxation Administration Act 1953 (Cth) (“the TAA”) stipulates two things:

   (1) In this review, the Applicant can only agitate matters arising from the grounds stated in the reviewable decision. Section 14ZZK of the TAA provides that an applicant in a matter such as this can only agitate additional issues if the Tribunal so orders. I have not done so at any stage during the hearing, nor has any such order been made at any of this Application’s interlocutory stages.[8]

   (2)   The Applicant bears the onus of proof in these proceedings. The relevant onus is on the civil standard, specifically, on the balance of probabilities. In essence, this requires the Applicant to establish it is more likely than not that the Respondent’s assessments for the two years of income were excessive and thus wrong. This standard is to be contrasted to the criminal or “beyond reasonable doubt” standard of proof, which the High Court has held to be “…inappropriate to the determination of any such fact in any civil action tried in any court in Australia where there are no statutory provisions to the contrary…”[9]. This application is clearly not a criminal proceeding and, in the absence of any statutory provision to the contrary, the civil or “balance of probabilities” burden of proof applies. The Full Court of the Federal Court has instructively differentiated between actual “probabilities” compared to “mere possibilities”: “There is… a distinction of substance to be drawn between the probabilities on the one hand and mere possibilities, even if they are real as distinct from fanciful, on the other...”.[10]

   In addition to negatively proving that the assessments were excessive and therefore wrong, the Applicant must also positively prove what the corrected assessment should be so that each of the two assessments are made right or “more nearly right”.[11] It is necessary that “The amounts assessed represent the Commissioner’s bona fide judgement as to the amount of the taxpayer’s taxable income and the power to make the assessment was validly exercised. The assessments being valid, the burden was on the taxpayer to prove the amounts were excessive.”[12]

   [8] Section 25(4A) of the AAT Act sits squarely within s14ZZK of the TAA because it provides “The Tribunal may determine the scope of the review of a decision by limiting questions of fact, the evidence and the issues that it considers.”

   [9] Rejfek v McElroy (1965) 112 CLR 517 at 520.

   [10] Repatriation Commission v Smith (1987) 74 ALR 537 at 538 per Beaumont J, with whom Northrop and Spender JJ agreed.

   [11] Federal Commissioner of Taxation v Dalco (1989) 168 CLR 614 at 88.

   [12] Ibid at 88.

10. There is no compulsion on the Respondent to demonstrate that the assessments were correctly made. As noted by Latham CJ,  “…conceivably, there might be a case where it appeared that the assessment might be taken to have been upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the Commissioner for further consideration.” [13] Similarly, there is no requirement on the Respondent to provide evidence to back up its assessment for either of the relevant years of income. As noted by the High Court, there is no “…onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. …unless the appellant shows by evidence that the assessment is incorrect, it [the assessment] will prevail.” [14]

    [13] See Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 88.

    [14] Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89, per Mason J.

11. As will be noted  later in these Reasons, the Applicant has produced relevant bank statements, reconciliations and payroll records in support of his contentions. The mere production of that material does not remove or modify the abovementioned onus of proof upon him. That material must be utilised by the Applicant to discharge the onus that the assessments were excessive and thus wrong. Critically for present purposes, the Applicant discharges the onus by applying his documentary (and any other) evidence to demonstrate, on the balance of probabilities, that the assessments raised by the Respondent for the two years of income exceed his actual substantive liability.[15]

    [15] Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623.

12. The Applicant does not meet the requirements of the burden by simply pointing to some kind of error or mistake in how the Respondent has arrived at the assessments for the two relevant years of income. If there was such a demonstrable error in what the Respondent did in reaching its conclusions in those assessments, then it would be open to this Tribunal to set aside either or both of those assessments and remit either or both of them back to the Respondent for further consideration, as stipulated by Latham CJ in Trautwein’s case.[16] The Applicant must utilise his evidence and convince a decision maker that his evidence, on the balance of probabilities, displaces the Respondent’s methodology behind the assessments for the relevant years of income and that, accordingly, the amount(s) propounded by the Applicant should be substituted for the amount(s) assessed by the Respondent.[17]

    [16] See Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 88.

    [17] Martin v Federal Commissioner of Taxation (1993) 93 ATC 5200.

    HOW DOES THE APPLICANT DISCHARGE ITS BURDEN OF PROOF?

13. It is, to my mind, important in applications such as this to clearly identify not just the burden of proof incumbent upon an Applicant, but how an Applicant must convince the Tribunal that he has discharged it. A potentially complicating factor is the reality that this Tribunal is not bound by the rules of evidence and that it may inform itself on any matter in such manner as it thinks appropriate.[18] Thankfully, the evidentiary compass to be followed by the Tribunal is to be found in Dixon J’s (as His Honour then was) formative judgement regarding the civil or balance of probabilities standard of proof.[19] For the Applicant to convince this Tribunal of the facts it propounds to demonstrate that the assessments were excessive and thus wrong:

    …the Tribunal must feel an actual persuasion of its occurrence or existence… It cannot be found as a result of a mere mechanised comparison of probabilities independently of any belief in its reality…it is enough that the affirmative of an allegation has been made out to the reasonable satisfaction of the Tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the Tribunal. In such matters ‘reasonable satisfaction should not be produced by inexact proofs, indefinite testimony or indirect references’.

    [my underlining]

    [18] See s 33(1)(c) of the AAT Act.

    [19] Briginshaw v Briginshaw (1938) 60 CLR 336.

14. Applied to the present matter, the Applicant will not discharge his burden of proof by merely inviting the Tribunal to engage in some type of “like-for-like” comparison of probable outcomes when comparing the evidence he adduced to the methodology adopted by the Respondent in arriving at the revised assessments for the relevant years of income. Rather, he must, to the reasonable satisfaction of the Tribunal, demonstrate that the assessable income he propounds for the 2014 and 2015 years is, more likely than not, the correct assessment of his income for those years and should be preferred over the revised assessments of the Respondent.

15. As noted by the Respondent, the discharge of the evidentiary burden in applications such as this should be analysed in a unique way because all of the evidence propounded by a taxpayer is squarely within the taxpayer’s possession or control.[20] Indeed, the Respondent has based its revised assessments on information squarely within the purview of the Applicant. It is not as if, for example, the Respondent has obtained an independent third party expert’s report about what the Applicant’s assessable income was for the relevant years of income.

    [20] See Exhibit 8, Respondent’s Final Submissions at [24], citing Latham CJ in Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87-88.

16. The law affords an Applicant in these types of applications some opportunity to arrive at a “reasonable explanation” for how, for example, injections of cash from external third party sources have attracted the attention of the Respondent resulting in a revised assessment(s). This largesse applies even when, as is presently the case, the Applicant denies or takes issue with sources of income he had not previously disclosed to the Respondent. Provided the Applicant can adduce “…acceptable evidence of how he spends his time and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved.”[21]

    [my underlining]

    [21] Ma v Federal Commissioner of Taxation (1992) 37 FCR 225 at 230.

17. The process of demonstrating a “reasonable explanation” was defined by Hill J thus:

    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, must, however, be ‘tested more closely and received with the greatest caution’…some other corroborative evidence would normally be required which makes it more probably than not that his sworn testimony is to be believed.[22]

    [my underlining]

    THE NECESSARY NATURE OF THE APPLICANT’S SOURCES OF FUNDS UTILISED BY THE RESPONDENT IN THE REVISED ASSESSMENTS: THE DEFINITION OF “ORDINARY INCOME”

    [22] Imperial Bottleshops Pty Ltd & Edgerton v Federal Commissioner of Taxation [1991] FCA 276 at [31].

18. In order to properly ground any revised assessment, the Respondent must do so on the basis of the Applicant’s “assessable income”. Section 6.5 of the Income Tax Assessment Act (1997) (Cth) (“the ITAA”) stipulates that assessable income includes income according to ordinary concepts, which is called “ordinary income”. Ordinary income can be derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

19. Ordinary income has no legislative definition. The common law has sought to define the term by ascribing certain characteristics to sums received by a taxpayer. To fall within the definition of ordinary income, those receipts must be of a periodic, recurring and regular nature. Fullagar J, in Federal Commissioner of Taxation v Dixon,[23] thought receipts by the taxpayer in that case had the character of income:

    3. The circumstances attending the payments in question… seem to have been the same as those attending the payments in question in the case before us… In the present case there is no express statement as to how the monies were paid, but it seems safe to infer… that payments were made periodically at regular intervals.

    …

    7. It seems to me that the appellant’s [i.e. taxpayer’s] receipts from MacDonald, Hamilton & Co. [i.e. the source of the receipts] must be regarded as having the character of income. They were regular periodical payments – a matter which has been regarded in the cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient… This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent. What the employing firm decided to do, and what it really did, in relation to the respondent…, was ‘to make up the difference between their present rate of wages and the amount they will receive’. What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for the equivalent pro tanto of – the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added.

    [23] Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 565.

    WHAT THE APPLICANT CONTENDS ABOUT HIS RECEIPT OF THE THIRD PARTY PAYMENTS

1. The themes arising from the totality of the Applicant’s contentions have, to my mind, been correctly identified by the Respondent.[24] Variously stated, they are:

   [24] See Exhibit 8, Respondent’s Final Submissions, dated 11 December 2017, pages  6-7, [29].

   (a)That the Applicant disagrees “… the ‘third party’ amounts applied to [his] income.” The Applicant contends that, “These amounts cannot be substantiated by the Tax Office…”[25]

   [25] Exhibit 1, Applicant’s Statement of Facts, Issues and Contentions, page 1, [1].

   (b)That the Applicant had ceased remunerative employment for the entity responsible for payments recorded in the payroll records and could not have derived the income asserted by the Respondent. Further, and in the alternative, to the extent that such payments appear in his payroll records, those payments were incorrectly attributed to the Applicant’s sales number which had previously served as an identifying mechanism or cypher for the Applicant while employed by that employer.

   (c)The Applicant was not capable of engaging in remunerative employment during the relevant years of income due to his physical and mental condition. He says:

   During the period 2013-2014 I was employed until approximately September (2013)... I have also had severe shoulder injuries over a lengthy time, resulting in a complete right shoulder reconstruction in May 2015. I was unable to drive or perform any task that required the use of my upper body for several months. In the same year I ruptured my right Achilles tendon and was wheelchair bound for many months up to April 2016. I have also been taking prescribed opiate painkilling medication over this time, which makes it impossible for me to hold down employment. I have not received any income, apart from the pension, and that situation is still current. I have other severe disabilities which will eventually require spinal surgery, left shoulder reconstruction and eye surgery. Please understand if some of the timeline is not fully correct, it will simply be my lucidity with the medication.[26]

   In further support of this incapacity-styled contention, the Applicant sought to adduce certain medical evidence from a Dr Drew Heinemann. In a report dated 29 May 2017, Dr Heinemann said:

   This is to certify that Kelly is a regular patient of mine. He has had a rough several years, requiring a number of surgeries from May 2015 to, most recently, 13/03/2017. In between surgeries, he is on regular long term high dose narcotic medication to control his chronic pain. As a result, he has been unable to work from 05/05/2015. It is unlikely that any of his current problems are going to significantly improve. In fact, it is more likely that he will require further surgery in the future with the gradual worsening of his symptoms and subsequent disability. It is my opinion that it is unlikely that he will ever be able to return to work.[27]

   (d)Having to care for his mother in her twilight years has prevented him from engaging in remunerative employment during the relevant years of income. He said:

   In August 2013 my Mother, 96 years old and blind, fractured her hip and I stayed home to care for her until she went to hospital. Shortly after that I started receiving a disability pension. After caring for my Mother for 29 years, she passed away in October 2014 leaving me emotionally devastated and under a great deal of stress.[28]

   (e)The third party payments comprised either: (a) transfers from the account of his late mother; (b) transfers between his various bank accounts; or (c) withdrawals from his superannuation account. In a letter forwarded to the Respondent on 6 February 2017, the Applicant’s representative said these things:

   I have attached the excel appendix that you originally sent me with some comments on there. Also attached is a NAB bank account that was in Kelly’s mum’s name that shows where some of the money that he was depositing into bank accounts was coming from. There is also another account with Westpac that proves this. But he cannot get access to this now that his mother is [sic] passed away.

   Kelly wanted me to reiterate that he was never in a strong position financially as he was looking after his mother for almost 28 years. She was blind for the last 10 years of her life & it was not only difficult – but costly to look after her. Which is why he got so much of his mum over the years.[29]

   (f)As I understood the evidence, the Applicant sought to explain his receipt of funds from his mother “over the years” on the basis of caring for her. I presume that the final sentence of the Applicant’s Representative’s abovementioned email should read “Which is why he got so much of his mum’s money over the years.”

   [26] Exhibit 1, Applicant’s Statement of Facts, Issues and Contentions, undated but received by the Tribunal on 16 June 2017, first annexure: “objection letter”.

   [27] Ibid, third annexure: “HMC Hinterland Medical Centre” report.

   [28] Exhibit 1, Applicant’s Statement of Facts, Issues and Contentions, undated but received by the Tribunal on 16 June 2017, first annexure: “objection letter”.

   [29] Ibid, second annexure: “Email dated 6 February 2017 (3:02pm) to ‘RDR PGH Objections’”.

2. The Applicant produced nothing in the way of independent and verifiable evidence to support his contention that the Respondent’s revised assessments are excessive, and therefore, wrong. Likewise, it was his evidence alone that propounded the contention that his payroll records were somehow incorrectly attributed to his sales number or identifying cipher. Aside from the abovementioned report of Dr Heinemann – who did not give evidence at the hearing – there is nothing before the Tribunal of an independent or expert nature to demonstrate the Applicant was precluded from engaging in remunerative employment during the relevant years of income. I attribute little or no weight to the report of Dr Heinemann, given that the Respondent did not have a chance to test his evidence under cross-examination at the hearing. The author of the abovementioned email (and the Applicant’s representative) is an accountant and not a medical expert. As such, no weight can be attributed to anything he said in his email to the Respondent about the Applicant’s apparent incapacity to work during the relevant years of income.

3. I am mindful that there is a dearth of any documentary explanation for these first three contentions of the Applicant. The Applicant gave evidence about these contentions at the hearing and such evidence can only be construed as self-serving. I am also mindful that the Applicant’s own evidence about his state of mind, whether the Applicant’s revised assessments are wrong and whether his employer (or whoever else) wrongly attributed payments to him in the relevant payroll records, ought be “tested more closely and received with the greatest caution.”[30] In the absence of any corroborative evidence for these three contentions, I am reluctant to migrate to the view that his sworn but self-serving testimony should be believed.

   [30] Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111.

4. As noted by the Respondent, what is clear and irrefutable as a matter of record is the evidence confirming the Applicant’s receipt of periodic, recurring and regular deposits into his ANZ Access Account during the relevant years of income and that such payments were derived from one of two sources: either (1) they were direct deposits from his employer or (2) card entries that squarely correlated with the employer’s payroll records. Likewise with the Applicant’s withdrawal of funds from his superannuation account, which were directly credited into the ANZ Access Account.

5. The obvious conclusion is that each of (1) the direct deposits from the Applicant’s employer; or (2) the card entries; and (3) the amounts transferred from the Applicant’s superannuation fund and credited to his ANZ Access Account did not form part of the unexplained deposits applied by the Respondent in producing the revised assessments for the relevant years of income. Those payments were, and could only have ever been characterised as assessable income in the form of ordinary income received by the Applicant on a periodic, recurring and regular basis.

6. It seems clear to me, in quite a decisive way, that the purpose and effect of these payments to the Applicant was to make an addition to his earnings and, as such, undoubtedly formed part of his income during the relevant years of income. The overall purpose and result of these payments was to make up the difference between the Applicant’s own disclosed level of income and the amount he actually did receive. While the Applicant may propound that those third party payments were not salary or remuneration, their character is such that they can be nothing other than a substitute for the equivalent of his salary or wages which he would have earned in the absence of his present contentions. To again quote Fullagar J, “As such it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted, and that to which it is added.”[31]

   [31] Federal Commissioner of Taxation (1952) 86 CLR 540 at 567-568.

   ADJOURNEMENT OF THE HEARING AND FILING OF FURTHER MATERIAL

7. Although the Applicant’s representative at the hearing did his level best to put across the Applicant’s case, he is, by profession, an accountant. As such, and as he frankly told the hearing, the conduct of these types of matters in forums such as this is not part of his usual work domain. Such a frank submission is to be respected and treated with caution to ensure due procedural fairness for the Applicant and, indeed, the Respondent, and to otherwise protect the procedural integrity of the hearing.

8. Two issues arise from this. First, the Applicant’s representative thought approximately two hours of hearing time would effectively see this hearing completed. This was an inadvertent underestimation because the opening of the case and the totality of the Applicant’s evidence in chief and the Respondent’s cross-examination of him effectively consumed all of the two hearing hours. Second, it became apparent from the Applicant’s evidence that further witness statements (and their oral testimony) would be required to give any semblance of meaningful context to the Applicant’s contentions about the source of many of the third party payments utilised by the Respondent in formulating the revised assessments.

9. The hearing was consequently adjourned to a second day to facilitate (1) the Applicant’s obtaining of this evidence; and (2) the receipt of oral evidence from those witnesses. I made the usual directions for the parties to file and serve any additional material and submissions upon which they intended to rely by certain dates prior to the second day of the hearing.

   OTHER SOURCES OF FUNDS IDENTIFIED BY THE APPLICANT

10. Pursuant to the directions I made at the end of the first day of the hearing, the Applicant filed further submissions.[32] These submissions should be quoted in full:

    [32] See Exhibit 7: Applicant’s Further Submissions, undated but received by the Tribunal on 5 October 2018.

    We believe the amounts of additional income added to Kelly’s returns for the years ended 30 June, 2014 & 2015 to be excessive. We would like the following amounts to be reduced from the amended assessments;

    ·$24,150 amounts taken from Lily’s NAB passport account. These were denied originally given they weren’t able to be reconciled with the amounts going into Kelly’s account. After the initial hearing it is obvious that the amounts are never going to exactly match the deposits. This is due to the sporadic nature of Kelly’s deposits & the additional amount of cash that Kelly had access to.

    ·$21,000 paid in cash to Kelly from the Baillie family as evidenced in the Statutory Declaration already submitted.

    ·$30,000 found in Lily’s granny flat after Daniel Tippmanu [sic] cleaned the dwelling. This is also evidenced in a Statutory Declaration which is attached with this letter.

    ·$9,950 for the 2014 year and $3,450 the 2015 year withdrawals and periodical payments from to Kelly from Lily’s Westpac bank account….

    We also want to make note that the amounts being relied upon as income come from what we believe to be a questionable source.

    After considering the above we would like to discuss how the amounts will be specifically relate [sic] to each financial year.[33]

    [33] Ibid at 1.

11. Two primary and, in my view, insurmountable difficulties arise from the Applicant’s contention that the above sums should not have been taken into account by the Respondent when issuing the revised assessments. First, there is a complete dearth of any contemporaneous documentary evidence demonstrating the passage or flow of funds from any of the above sources that materialised as cash deposits into the ANZ Access Account upon which the revised assessments are based. Second, the only evidence about the passage or flow of funds from these sources is the Applicant’s oral testimony that he gave at the hearing. That evidence goes no further than saying he would receive these cash amounts and then, at some later but unspecified time, he would incrementally deposit those funds, in varying amounts, into various bank accounts either in his name or under his control.  

12. During cross-examination, the Applicant was taken to specific payment items that he caused to be transferred into his own accounts:

    So this is another one of your accounts, this is the Access Select cheque account, is that correct? --- Well, the same one that we had before.

    No, I don’t think that’s the case. If you can – okay? --- Sorry, no, no, no, this is the – yes, this is the account that my pension used to go into, yes.

    Yes, that’s correct? --- And then from there it’s virtually directly transferred out into my Access cheque account, if you look at it that way.

    Yes. So that’s exactly where I was taking you. So if you then go to 27 December, ANZ internet bank funds transfer, transfer to that account for $680, is that correct? --- Yes.

    Now, if I could take you to page 282? --- 282?

    Yes? --- On T 12?

    Yes. So on 18 December there’s an entry, the corresponding entry for that transfer of $830, is that correct? --- Yes. Yes.

    So in that situation you just transfer the accounts directly across? --- Always, yes. Because I had to make sure the payments that went out from me to anyone I was paying was coming out of my Access cheque account. The payments that went into my account was going into the Access savings account, I think you can call that.

    Yes. So all the inbound – all those transactions could be described as transfers in your accounts? --- That’s all they were.

    Yes? --- I usually did that online, I didn’t have to go to the bank to do it.

    Yes? --- And more often than not the payments that I’d made as cash payments into my cheque account - - -

    I haven’t asked you a question. Sir, if I could take you to ST, don’t know if you have a copy of that with you, the supplementary T docs? --- Is it in this book here?

    No. Sir, can I have you turn to page 910? --- What page?

    Nine hundred and ten. So not the first columns, but the next four they list transactions in your bank accounts. Do you accept that those transactions were made into your account? --- If it was a card entry, yes.

    So you accept that there were card entry payments and direct transfers from Vivos Capital that added up to a total of $88,627.70? --- Yes.

    So you accept that? --- Yes.

    So you accept that you received $88,627.70 and none of those payments were described as transfers? --- Well, they were transfers. When I say transfers, the money - - -

    No, no, that’s not the question? --- Okay. Okay. Forget – but you want me to answer that question. I’ve said it a couple of times before that I was drawing money from my mother’s account and putting it into my account as well. I’ve also had payments that I’ve made, borrowed from friends that I’ve put into my account.

    Which mother’s account was that? --- The Westpac account. Quite often I was drawing cash out with a card from that and then going into my bank. It might not have been on the day, might’ve been a week later, two weeks later.[34]

    [34] Transcript, page 17, lines 29-47 and page 18, lines 1-43.

13. This evidence confirms the Applicant’s methodology can only be construed on the basis that these payments were always intended as a substitute for the equivalent amount of salary or wages he would otherwise have earned but for these transfers. The transferred funds can thus have no other characterisation than ordinary income. I concur with the Respondent’s contention: this evidence from the Applicant was both entirely self-serving and unconvincing.[35] As such, it must be “tested most closely and received with the greatest caution.”[36]

    [35] Exhibit 8, Respondent’s final submissions, page 8, [34].

    [36] Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111.

14. According to the Applicant’s evidence, the basic premise behind what he was doing with this periodic and regular migration of funds out of and back into accounts he either owned or controlled was to electronically pay his bills. His evidence about how he dealt with, for example, the $24,150 he received from his mother’s NAB Passport Account and the $9,950 he received from her Westpac Bank Account, is, to my mind, inherently implausible:

    So you transfer – so you withdraw money from an account that you control only to deposit it into another account you control? --- Yes. To make payments.

    Why wouldn’t you just transfer it across? --- Well, no, I didn’t have authority to do that. I was given authority to actually draw money out. I couldn’t go and change anything on there. It was just a power of attorney that I could withdraw cash on her behalf. I don’t know how it worked but that’s the way it was.

    WITNESS: but that’s the way it was.

    SENIOR MEMBER: If you could withdraw money out under the power of attorney, what precluded you from paying money directly out from that account to third parties under that power of attorney? --- I suppose it was possible but never – never – never any thought about it.

    Have you got a copy of the Power of Attorney? ---Not with me, no.

    Did it limit your power to do anything for your mother in any respect, if so, how? --- I can’t – I can’t remember. I mean, I’m trying to – I’m trying to think of the situation. Money that went into my mother’s account, she was basically not paying me rent but she was actually paying me towards living expenses because I looked after her for about 26 years and at no stage there was any agreement for her to pay my rent or anything like that, she just used to help me out.

    So, no copy of the Power of Attorney? --- I will have one somewhere but I haven’t got it with me.

    And you can’t recall how it might condition the way you could act for her? --- No, I can’t. I think it just – it wasn’t a full – it was just authority to deal with her finances basically.

    So who formed the view to not pay third parties directly out of her account, you? --- Yes, it would’ve been me.[37]

    [37] Transcript, page 16, lines 34-46 and page 17, lines 1-22.

15. As noted by the Respondent, the constant and recurring migration of funds from other sources towards his own accounts was not limited to third party sources. There was a regular practice of him transferring funds between his mother’s bank accounts and his own Westpac Home Loan account:

    So there was interest debited in the 2015 year. So Mr McMullen, you lodged your tax return in the 2014 year. You said you had a taxable income of $19,255, is that correct? --- I’m presuming it’s correct, if that’s what you are saying.

    So you have paid more in interest than you have in income in that year? --- Well, as I said to you, most of it was coming from my mother’s account which you can – if you look at her Westpac account, it shows the transfers going out to the home loan account.[38]

    [38] Transcript, page 13, lines 43-46 and page 14, lines 1-4.

1. The Applicant asserts that he received $21,000 in cash “…from the Baillie family…”. In response to questions in cross-examination about his receipt of this sum, he said these things:

   Yes. How was it paid to you? --- In cash.

   In cash? --- Yes. There was a very dear friend of my mother’s, myself and a gentleman that I worked with for a few years when I actually worked at Boss but I got to know them better because my separated wife was looking for a job and Sharon actually worked at some company in Southport that were trying to help her find a job. We got to be good friends after that.

   So there’s no record beyond the statutory declaration of that loan? --- No, short of me putting it into my account in smaller spells.

   SENIOR MEMBER: So Mr Bailey lent you the money? --- Mrs – Mrs Bailey.

   So Mrs Bailey lent you the money, $21,000? --- Yes. It was - it was more just giving it to me as a hep [sic] because she knew the circumstances I was under.

   And you say it was a cash advance? --- Basically, yes. Yes. She was actually a - - -

   Basically or - - - ? --- Well, it was, there wasn’t a cheque payment.

   And if it was a cash advance why isn’t the fact that it was a cash advance referred to – why isn’t that referred to in the statutory declaration? --- I didn’t think there was a necessity. I’m sure that could be done, I didn’t think of asking John.

   So Mr Bailey would be prepared to go on oath and provide a supplementary statutory declaration - - -? --- Yes, I’m sure he would, yes.

   --- That he provided you the money in cash? --- Yes. I actually phoned him up two weeks ago to request it and he’s quite happy to.

   Do you think we could phone him today, right now? --- If he’s available.

   Well, let’s just get through your evidence and we’ll hear what Mr Bailey’s got to say about whether he lent you the sum of 21,000? --- Not him, sorry, his wife Sharon. Sorry.

   His wife. Someone called Bailey lent you an amount of money of $21,000 in cash? ---In two – in two payments.[39]

   [39] Transcript, page 19, lines 26-45 and page 20, lines 1-19.

2. The Statutory Declaration referred to in the Applicant’s evidence is that of John Baillie. Its content is as follows:

   I, John Baillie, of [address redacted] in the state of Queensland, do solemnly and sincerely declare that Mr Kelly McMullen being a family friend did borrow a total sum of $21,000 twenty one thousand dollars from my wife Sharon Vera Baillie in approxt [sic] Oct/Nov 2013 and again in Oct/Nov 2014. It was in 2 payments of $12,000 and $9,000.00. As my wife has sinced [sic] passed away this is to confirm my knowledge of this arrangement.

   And I make this solemn declaration conscientiously believing the same to be true, and by virtue of the provisions of the Oaths Act 1867.[40]

   [40] Exhibit 3, email dated 7 September 2017 to the Respondent’s representative (the Statutory Declaration of John Baillie is the second annexure for this email).

3. Mr Baillie’s written evidence does not advance the Applicant’s contention that the $21,000 represented a loan. Put at its highest, Mr Baillie’s evidence is that he was aware of the transaction, but had no involvement in it whatsoever. I agree with the Respondent’s contention. “There is no loan agreement, nor any documentary evidence of payment or any subsequent repayment.”[41] This evidence is profoundly lacking in both plausibility and credibility. It should be discounted in its entirety.

   [41] Exhibit 8, Respondent’s Final Submissions, page 8, [37].

4. A further source of funds propounded by the Applicant relates to the $30,000 apparently “found” by a domestic cleaner of the mother’s abode. This domestic cleaner, in turn, apparently alerted the Applicant to the discovery. In cross-examination, the Applicant said:

   …Plus my mother had a lot of cash on hand, she had saved up a lot of money, she was – you know, she had worked all her life.

   Your mother on the pension had a lot of cash? --- Not a lot of cash, she had cash that she’d saved up at different times. I don’t know where she got it from. She would pay me – give me money at certain times I could make use of on her behalf or to help me out. I’ve already mentioned that earlier.[42]

   [42] Transcript, page 19, lines 7-14.

5. By the time the hearing resumed for a second day, the Applicant had obtained a Statutory Declaration from the domestic cleaner, Mr Daniel Marc Tippmann. In his Statutory Declaration, Mr Tippmann said:

   I, Daniel Marc Tippmann, of [address redacted] in the state of Queensland do solemnly and sincerely declare that I have known Kelly and his mother Lily close to 7 years. Some time in February 2014 Kelly was made aware of the fact that his mother was not able to travel up and down the stairs after his surgery of the granny flat [sic]. Kelly asked me to help clean the granny flat as he was incapasitated [sic] with a ruptured Achiles [sic] tendon. During this process, I had found in the wardrobe of Lily’s bedroom a box which had some religious artifacts [sic]. Also a sealed envelope and on passing this to Kelly we discovered was a sum in excess of $30,000.

   And I make this solemn declaration conscientiously believing the same to be true. And by virtue of the provisions of the Oaths Act 1867.[43]

   [43] Exhibit 6, Statutory Declaration of Daniel Marc Tippmann, declared on 4 October 2017.

6. This evidence verges on the absurd and should be discounted in its entirety for three reasons:

   (1) the possibility that the Applicant’s mother who subsisted on pension benefits somehow had the capacity to save an amount of $30,000 seems very remote;

   (2) the only independent evidence about these funds is the unconvincing and self-serving evidence of Mr Tippmann, who, in the course of his cleaning duties, apparently stumbled upon the money by finding a box apparently located in a wardrobe in the mother’s bedroom. One wonders how his cleaning duties initially led him to the inside of a wardrobe in the first place. One also wonders as to why he did not leave the box as and where he found it and proceed with his cleaning duties as the vast majority of cleaners would do. He was apparently compelled to uplift the box, notice it contained religious artefacts and a sealed envelope and to alert the Applicant about these contents. After so alerting the Applicant, we are expected to believe that he and the Applicant opened the sealed envelope and discovered “…a sum of money in excess of $30,000”; and

   (3) the Applicant seems to have the misplaced notion that causing a third party to discover a box – apparently not previously known to the Applicant, even though he had the daily care and control of his mother – somehow lends credibility to the evidence of this inadvertent “find”. It does not.

7. For the reasons outlined above, I reject the Applicant’s evidence. As noted by the Respondent, even if one was to accept the Applicant’s evidence, the shortfall between the additional sources of funds and the unexplained deposits received by the Applicant during the relevant years of income amounts to the not inconsiderable sum of $133,579.37.

8. The Applicant has fallen well short of discharging the onus of proof incumbent upon him in this Application. Not only has he failed to show, on the balance of probabilities, that the revised assessments were excessive and therefore wrong, he has also failed to positively prove what correction(s) should be made to either or both of those assessments. He has thus made no genuine attempt to make those assessments right or “more nearly right”.[44] This is self-evident from the remaining shortfall between the asserted additional sources of funds and the unexplained deposits for the relevant years of income in the sum of $133,579.37.

   [44] Federal Commissioner of Taxation v Dalco (1989) 168 CLR 614 at 88.

   FINDINGS

9. Having regard to the totality of the evidence, I make these findings:

   (a)The Applicant has failed to discharge the onus of proof incumbent upon him in this review. In particular, the Applicant:

   (i)Has failed to establish, on the balance of probabilities, that the Respondent’s revised assessments for the relevant years of income were excessive and thus wrong; and

   (ii)Has failed to prove how those revised assessments can be corrected in order to make them right, or “more nearly right”;

   (b)The Applicant’s evidence purporting to justify both the origin and characterisation of the subject funds he has received lacks plausibility and credibility. The totality of the Applicant’s evidence and that of his witnesses ought be rejected;

   (c)The additional sources of funds and unexplained deposits received by the Applicant for the relevant years of income were of a periodic, recurring and regular nature and thus took on the character of ordinary income; and

   (d)There is a marked and incurable absence of contemporaneous documentary evidence supporting the Applicant’s version of how these additional funds were received by him. As noted by the Respondent, the payroll records of Voss Capital provide an explanation just as likely as the Applicant’s explanation regarding the source of those unexplained deposits.

   DECISION

10. Accordingly, I affirm the objection decision under review.

I certify that the preceding 44 (forty-four) paragraphs are a true copy of the reasons for the decision herein of Senior Member Theodore Tavoularis

................................[Sgd]............................................

Associate

Dated: 4 December 2018

Date of hearing:	11 September 2017 and 11 December 2017
Applicant:	In person (with his accountant)
Advocate for the Respondent:	Mr K Bragg of Counsel
Solicitors for the Respondent:	Australian Taxation Office Dispute Resolution