MJPV and Commissioner of Taxation (Taxation)
[2020] AATA 1527
•6 May 2020
MJPV and Commissioner of Taxation (Taxation) [2020] AATA 1527 (6 May 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2016/4850-2016/4859
Re:MJPV
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s): 2016/4915-2016/4918
Re:SZGK
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Bernard J McCabe
Date:6 May 2020
Place:Sydney
The decisions under review be varied in accordance with the schedule to this decision.
..................................[sgd]......................................
Deputy President Bernard J McCabe
CATCHWORDS
TAXATION – income tax – objection to amended assessments – whether Commissioner can make amendments – whether fraud or evasion present – whether amounts to be classified as income – other explanations for deposits – whether amounts were loans – whether amounts were gambling winnings – amount assignable to a sale of a car – penalties – whether false or misleading rate or penalty appropriate – whether penalties should be remitted – decision varied
LEGISLATION
Income Tax Assessment Act 1936 s 167
Taxation Administration Act 1953 s 14ZZK
CASES
Binetter v Federal Commissioner of Taxation (2016) 249 FCR 534
Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) [1949] HCA 25; (1949) 79 CLR 296
Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614
Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149
Gashi v Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301
Ma v Commissioner of Taxation (1992) 37 FCR 225
Sullivan v Civil Aviation Safety Authority [2014] FCAFC 93; (2014) 226 FCR 555Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
REASONS FOR DECISION
Deputy President Bernard J McCabe
6 May 2020
The Commissioner of Taxation suspects Mr and Mrs Taxpayer, a married couple, did not disclose all their assessable income over a number of years. The Commissioner says the taxpayers should pay the tax they owe, and pay significant penalties assessed against the shortfalls. The taxpayers say there are perfectly good explanations for all of the money passing through their accounts. They say the shortfalls either do not exist or are much less than the Commissioner contends. If there are no shortfalls, there can be no penalties. But if there are shortfalls, the taxpayers say those penalties are too severe, and should be remitted.
In Mr Taxpayer’s case, the dispute relates to the years ending 30 June 2009, 2010, 2012, 2013 and 2014. He was issued with amended assessments in respect of those years on 27 October 2015 following a covert audit that commenced earlier that year. During the course of the audit, the Commissioner used an ‘asset betterment’ analysis. He identified activity that was suggestive of a higher level of income than Mr Taxpayer reported in his returns. The Commissioner issued amended assessments under s 167(b) of the Income Tax Assessment Act 1936 (ITAA36) for each of the years of income. The Commissioner also issued penalty assessments with respect to the shortfalls he identified in each year.
Mrs Taxpayer’s affairs were analysed in the same covert audit but she is in a slightly different position. She had not filed a return in the year ended 30 June 2013 because she claimed she earned so little during that period. The Commissioner issued a default assessment against Mrs Taxpayer with respect to that year pursuant to s 167(a) of ITAA36 and an amended assessment under s 167(b) with respect to the year ended 30 June 2014. (She had filed a return in the 2014 year of income.) The Commissioner was satisfied the covert audit had turned up activity which suggested Mrs Taxpayer had also under-reported or failed to report her income. She was issued with penalty assessments in respect of the shortfalls (although the basis for calculating the penalty for each year was different to Mr Taxpayer). Both taxpayers have asked the Tribunal to review the ensuing objection decisions.
Mr Taxpayer pointed out the amended assessments with respect to the 2009, 2010, 2012 and 2013 years of income were made against him after the statutory time limit in s 170 of ITAA36. The Commissioner relies on the ‘fraud or evasion’ exception to that rule. Mr Taxpayer bears the onus of satisfying me the Commissioner could not validly form the opinion there was fraud or evasion in each of those years of income: see Binetter v Federal Commissioner of Taxation (2016) 249 FCR 534; per Perram and Davies JJ at [93] and Siopis J at [2]. Mr Taxpayer denied there was any basis for the opinion there was fraud or evasion even as he conceded there might have been errors on his part in accounting for his income when he prepared his returns. He pointed out that merely identifying shortcomings in the way he accounted for assessable income would not be enough to ground an opinion of fraud or evasion if his failure was properly attributed to mere neglect or misunderstanding. He relied on well-known authorities to argue his conduct must be blameworthy before it could be regarded as ‘fraud or evasion’.
If I am not satisfied the fraud or evasion exception is available, Mr Taxpayer must succeed in relation to those years of income. It may be too late to make an amendment notwithstanding shortcomings in his accounting. The penalty assessments covering those periods would also be set aside. I should add there is no dispute I can deal with Mr Taxpayer’s amended assessment in respect of the 2014 year of income without having to make a finding on the ‘fraud or evasion’ issue since that amended assessment was within time. I am also able to deal with Mrs Taxpayer’s default assessment for 2013 and her amended assessment for 2014.
As it happens, the discussion of fraud or evasion cannot sensibly occur in isolation from my evaluation of Mr Taxpayer’s substantive case in relation to each year of income. It makes sense for me to review the evidence going to Mr Taxpayer’s primary liability in each of the relevant periods before making a finding about fraud or evasion in relation to the amended assessment.
The financial affairs of Mr and Mrs Taxpayer were – unsurprisingly - intermingled to some extent. I will deal with each taxpayer separately, starting with Mr Taxpayer, but their argument is essentially the same. They insist they did nothing wrong but say a number of specific amounts the Commissioner assumes to be assessable income are properly regarded as:
·loans, gifts or the proceeds of recreational gambling, or
·the proceeds of sales of motor vehicles and components.
If the taxpayers are right in relation to the characterisation of (any or all of) those amounts, the amounts in question should not be included in assessable income for the relevant year of income. The amount of the assessment for that year of income should be adjusted accordingly.
I will discuss the evidence in relation to each taxpayer below and explain my conclusions. I should first say something about the onus of proof.
The onus
The Commissioner says I should not be persuaded by (most of) the evidence the taxpayers advanced in support of their case. The Commissioner says a good deal of that evidence is in the form of self-serving testimony from the taxpayers and other friendly witnesses. Much of that evidence is not corroborated by documentary evidence. I note the Commissioner made some concessions during the course of the hearing in relation to Mrs Taxpayer in particular. I will deal with the impact of those concessions in due course.
Section 14ZZK(b) of the Taxation Administration Act 1953 (the TAA) provides the taxpayer in each case has the burden of establishing the assessment was excessive, rather than requiring the Commissioner to demonstrate the assessments were correctly made: see Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 623 per Brennan J (discussing s 190(b) of the ITAA36, the predecessor to s 14ZZK); see also Gashi v Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301 at [61] per Bennett, Edmonds and Gordon JJ. Taxpayers bear the onus because they are assumed to be in the best position to explain the detail of their own affairs. The Commissioner is typically guessing, albeit the guess is informed by documents or other evidence. That is especially true in a case like this, where the Commissioner has relied on an asset betterment analysis that involves an element of reconstruction. The taxpayer will not discharge his onus merely by establishing that the assessment flowing from the analysis was wrong. The taxpayer must go further and persuade me what the assessment should be, which ordinarily entails establishing the taxpayer’s correct (or more nearly correct) taxable income (although the taxpayer might also succeed to the extent he or she can identify errors in the computation of the original assessment that, when corrected, result in a recalculation of the correct amount: see Dalco at 631 per Toohey J).
While contemporaneous documentation and other objective evidence is the gold standard, the taxpayers pointed out in submissions that the Tribunal might be persuaded by a reasonable and coherent explanation provided by the taxpayer (or an interested witness, for that matter) that is uncorroborated: see, for example, Ma v Commissioner of Taxation (1992) 37 FCR 225. Of course, the fact such evidence is self-serving means it needs to be scrutinised carefully: see, for example, Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149 at [81]-[82] per Ryan, Jessup and Perram JJ. But I take the taxpayers’ point: uncorroborated evidence from the taxpayer or another interested witness is not inevitably unreliable. Much depends on the circumstances. A reasonable explanation for behaviour that is not, objectively speaking, improbable might readily be accepted without more. A taxpayer who tells a surprising or unlikely story, or whose credibility is open to question, invites scepticism. That scepticism might only be assuaged by corroborating evidence. Common sense is required as the Tribunal weighs the evidence.
I should add that I am not bound to accept evidence provided by a witness who is not called for cross-examination, or where the cross-examination was inconclusive. The evidence of a witness who tells an unlikely story, or a story that is at odds with other evidence or contrary to human experience, might be rejected notwithstanding the absence of answers during cross-examination which could have provided a positive reason for rejecting that witness’s evidence. Evidence that is not expressly contradicted may yet be unpersuasive. Section 14ZZK(b) does not speak of a rebuttable presumption that evidence is to be accepted in the absence of authoritative contradiction. I must actually be persuaded by the evidence, although I must (of course) approach that evidence with an open mind. What it takes to persuade will vary according to the circumstances. The obligation, in every case, is to act reasonably in my assessment of the evidence: see, generally, Sullivan v Civil Aviation Safety Authority [2014] FCAFC 93; (2014) 226 FCR 555 at [15] per Logan J.
The taxpayers provided statements from several witnesses who were not available at the hearing. I understand each of those witnesses had received a summons but they ignored their obligation. The taxpayers said I should not draw any adverse inferences in circumstances where the taxpayers did all they reasonably could to secure the attendance of the witnesses. I accept that I should not draw an adverse Jones v Dunkel inference in relation to those witnesses in the circumstances. The weight I attach to the evidence provided by such witnesses might still be affected. I will have more to say about those witnesses below.
I am also conscious of the fact the witnesses who gave evidence or who provided statements were recollecting events or transactions that occurred a number of years ago. It would be surprising if they had a clear recollection of all the detail in those circumstances. Allowance must be made for that fact. Additional allowance might be made for the fact the taxpayers were not sophisticated business-people who kept careful records or committed agreements to writing. They were used to dealing in cash. I formed the impression that Mr Taxpayer in particular enjoyed the idea of money – and he certainly enjoyed splashing it about – but did not treat it with care. He explained in his evidence that “it was and is common for people to flaunt wealth” within his social circle: transcript at p 122;[1] see also exhibit 5 at [16]. By way of example, he described in his evidence how he and his wife received cash gifts at their engagement party before setting out on a trip to the United States which saw them spend $20,000 on meals, entertainment and luxury goods in the course of a single week: transcript at pp 118ff. Mr Taxpayer also spoke of his largesse when he travelled to Sydney to meet with friends. Those free-wheeling trips typically involved significant expenditure on hotels and serviced apartments and alcohol. Overall, Mr Taxpayer presented as an intelligent man who took a jaunty approach to his financial affairs. He lived fast and, tragically, died young before the conclusion of the proceedings
[1] Two versions of the transcript were provided for the hearing each with different numbering. References in this decision to pages of the transcript are to the version of the transcript produced by Epiq.
I must also acknowledge there has been a lengthy and regrettable delay in producing these reasons for decision. I am confident I have been able to deal with the challenge posed by the delay by careful reference to my detailed notes and the transcript and audio recordings of the hearing. The hearing ran for a number of days before being adjourned for an extended period so that further evidence could be taken. Those delays meant it was always going to be important to make careful notes and rely extensively on the transcript.
Mr Taxpayer’s case
In paragraph [76] of submissions, Mr Taxpayer’s counsel identified 13 different amounts which should not have been included in Mr Taxpayer’s assessable income in different years. I reproduce that table below (with appropriate redactions) because it provides a useful guide to Mr Taxpayer’s case:
Relevant Income Year
Description
Amount
30 June 2009
[PUP] Loan
$93,000.00
30 June 2010
Gambling activity winnings
$ 7,946.70
30 June 2013
Loan from [AA]
$75,000.00
30 June 2013
Engagement gifts
$44,000.00
30 June 2013
Gambling activity winnings
$73,795.62
30 June 2014
Loan from [PCC] Pty Ltd
$140,000.00
30 June 2014
Gift from [AA]
$45,000.00
30 June 2014
Loan from [LB]
$35,000.00
30 June 2014
Loan from [GT]
$50,000.00
30 June 2014
Sale of vehicle
$70,000.00
30 June 2014
Sales of two vehicles
$125,000.00
30 June 2014
Sale of engine parts
$12,500.00
30 June 2014
Gambling winnings
$27,226.90
Mr Taxpayer also argued there were significant problems with the way the Commissioner calculated Mr Taxpayer’s liability in the asset betterment analysis. In particular, Mr Taxpayer argued it appears certain amounts transferred between accounts were double-counted by the Commissioner. Mr Taxpayer’s submissions pointed out an amount debited from one account that was transferred to another of his accounts should not be counted as expenditure or income. As it happened, Mr Taxpayer explained in his evidence that he regularly transferred monies between his various accounts because, well, he was bored. He would amuse himself by moving money around. I was left with the impression of somebody whose motivation was mainly aesthetic, as if his various accounts were like bonsai trees that could be shaped and adjusted to achieve a more visually pleasing set of numbers: transcript at p 149. While that claim sounds bizarre, I accept Mr Taxpayer was indeed in the habit of playful transfers between his accounts. That does not mean that every transfer can be explained on this basis, of course.
That finding is relevant to the claim the Commissioner’s asset betterment analysis double counted the amounts that were transferred between accounts. That claim needs to be tested regardless of Mr Taxpayer’s motivation for making the transfers. The written submissions lodged on behalf of the Commissioner drew my attention (at [46]) to the asset betterment statement reproduced in exhibit one at p 216. That document includes entries in the row titled “DEDUCT: net assets at start” which the Commissioner says makes clear the amounts were not improperly taken into account. But Mr Taxpayer was able to provide a detailed analysis (set out in document MFI-1) which strongly suggests inter-account transfers were mistakenly included in the assessments. Subject to the balance of my findings, it will be necessary for the Commissioner to reconsider the assessments with a direction that any inter-account transfers are excluded.
I will now turn to the specific amounts which Mr Taxpayer says should not be treated as income. I will deal with them in the order set out in the table reproduced above.
The 2009 year of income
Mr Taxpayer says he received a loan advance of $93,000 from an acquaintance on 2 April 2009. If it was a genuine loan, then that amount should not be treated as income in Mr Taxpayer’s hands. There is no written loan agreement, although there is a letter (exhibit 4, p 9) dated 25 March 2009 addressed to “Whom It May Concern” which said the writer agreed to lend Mr Taxpayer “the amount of $93,000 for the deposit on a home loan”. The letter added: “The loan is conditional and is to be paid back on demand.” Mr Taxpayer gave evidence that he applied the loan advance towards the purchase of a property at Glenmore Park.
That sounds like a valid loan. The essential features of a loan appear to be present at any rate: there is an express acknowledgment of an advance accompanied by an obligation to repay at least that amount.
The Commissioner points out the Tribunal might be provided with documentary evidence of a loan but characterise the transaction differently if the evidence as a whole suggests the transaction was something else: see, for example, Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 247 per Lockhart J. That is obviously true. The Commissioner says there are a number of reasons for doubting whether the acquaintance in this case made any payment, and whether – if it was made – it was actually a loan notwithstanding the letter of 25 March 2009.
The Commissioner pointed out there is no corroborating evidence recording the payment of any advance by the acquaintance even though he said he paid by cheque. There is no evidence of such a cheque being deposited in Mr Taxpayer’s account; there are also unanswered questions about the source of the money. The acquaintance explained during cross-examination that he took the money out of his business, although he did not produce any evidence to confirm that. He deflected questions put during cross-examination on this issue by saying the amount would probably be recorded in the books of his business as a loan to him or personal drawings but suggested his sister-in-law – whom I infer took care of the business’s accounts – would be able to explain what occurred. She was not called for this purpose.
The Commissioner also pointed out the acquaintance’s account suggests he was oddly incurious about the details of the loan – so incurious in the circumstances as to call into question the veracity of his account. During cross-examination, the acquaintance agreed he did not ask the price of the property that was being acquired or whether it was being acquired alone or jointly with Mrs Taxpayer. He also did not ask about Mr Taxpayer’s ability to repay the loan, and did not ask what Mr Taxpayer was doing for work: transcript at p 227. He certainly did not seek any security for his advance. Curiously, when the acquaintance became aware the property in question had been sold in late 2012, he agreed he did not at that point discuss repayment or make enquiries about what Mr Taxpayer planned to do with the sale proceeds. He said he assumed Mr Taxpayer would use the sale proceeds to buy another house: transcript at p 228. Mr Taxpayer explained he did not feel obliged to tell the acquaintance of the sale of the Glenmore Park property. Mr Taxpayerpresumed he was at liberty to use the sale proceeds for other purposes notwithstanding the terms of the letter of 25 March 2009 which refer to a specific purpose for the loan: transcript at pp 98-99. That is an odd liberty to take with somebody who did not appear especially close to the taxpayer. Mr Taxpayer agreed he has never made any repayments on the loan. He also said he has never received a request for repayment – although the acquaintance, in his oral evidence, suggested he had recently raised the possibility of repayment because he wanted to use the monies to fund the construction of a new house: transcript at p 229. I note the acquaintance had insisted in his written statement (exhibit 16) that he had not asked hitherto for the money to be repaid because he did not need it.
The evidence of the acquaintance was vague. He did not recall some details of the transaction that one would expect him to recall, like the source of the money he advanced. But that is not the only reason for doubting the explanation offered by Mr Taxpayer. Mr Taxpayer and the acquaintance went to the trouble of preparing a document that purported to reinforce their evidence about the existence of a loan, but the evidence, taken as a whole, raises more questions than it answers. While Mr Taxpayer and the acquaintance (and exhibit 4) say there was a loan, their conduct suggests otherwise. Even if I accept the money was advanced as the witnesses claim, Mr Taxpayer and the acquaintance both behaved as if the money had been gifted to Mr Taxpayer, or perhaps invested with him. Exhibit 4 made clear the money was advanced for a specific purpose; Mr Taxpayer’s behaviour suggests he did not feel bound by the terms of that advance and was free to use the money as he sought fit without being genuinely expected to account for or repay the amount advanced.
The loan transaction – if that is what it was – was plainly uncommercial. It was not an arrangement between family or close friends, where an uncommercial transaction might be unremarkable. In a relationship between more distant acquaintances, one would expect more verifiable detail than the simple document reproduced in exhibit 4. At a minimum, one would expect a more fulsome and compelling explanation from Mr Taxpayer and the acquaintance about what was going on.
Even if I accept the acquaintance paid money to Mr Taxpayer in the 2009 year of income, the evidence as a whole leaves one with the uncomfortable suspicion that the explanation provided by Mr Taxpayer and the acquaintance is a fig leaf brought into existence to obscure the reality of what was going on. The arrangement might have been completely above board and exactly as described by Mr Taxpayer and the acquaintance, but – subject to one qualification – I am not persuaded Mr Taxpayer has discharged his burden of establishing the assessment for the relevant year of income was excessive.
The one qualification is the possibility of double counting of amounts transferred between accounts. Those calculations need to be revisited in light of my findings to ensure the amounts are not double-counted.
Of course, my conclusions about the extent of the shortfall are only a problem for Mr Taxpayer if the fraud or evasion exception applies. The Commissioner decided there was fraud or evasion because that was the most likely explanation for what the Commissioner took to be a mischaracterisation of the transaction between Mr Taxpayer and the acquaintance – assuming there was one.
I have already explained the taxpayer bears the onus of establishing the Commissioner should not have formed the opinion there was fraud or evasion: see, generally, Binetter. What does that expression mean?
In Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) [1949] HCA 25; (1949) 79 CLR 296, Dixon J considered what was required to establish ‘evasion’. His Honour explained (at 313):
I think it is unwise to attempt to define the word "evasion”. The context of [the relevant statutory provision] shows that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.
The requirement that there be something blameworthy in the taxpayer’s misstatement is reinforced by including the word ‘fraud’ in the statutory formulation. In this case, Mr Taxpayer denied there was a misstatement in the return because he argued the payment received from the acquaintance was a loan and therefore not taxable. I have already explained I am not persuaded by that claim, but does that conclusion – such as it is – inevitably mean there was fraud or evasion in the Denver Chemical sense?
One could imagine a variety of explanations for Mr Taxpayer’s misstatement. It is possible the misstatement was ultimately the product of negligence, or poor advice. It is also possible the taxpayer’s characterisation of the transaction as a loan was the product of an innocent misunderstanding of the nature of a loan transaction. I have already explained I was satisfied Mr Taxpayer was not a sophisticated businessman; it is possible he may have misunderstood the distinction between a loan and other relationships which involve the transfer of money. The evidence does not definitively point to him disguising the payment as a loan (for example, by generating the letter of 25 March 2009 to create a paper trail) in order to reduce the amount of tax payable, even if that possibility was also plainly open on the evidence. (A misstatement in those circumstances would presumably be a classic example of fraud or evasion.)
While it is possible to imagine a variety of innocent explanations for the mistake, that is not how Mr Taxpayer ran his case. Mr Taxpayer denied there was a misstatement because the payment in dispute was a loan advance. The Commissioner formed a view that there was fraud or evasion. That view was open to him, even if it was not the only possible explanation. It was incumbent on Mr Taxpayer to offer a superior alternative explanation that cast his misstatement in a more benign light – and which thereby displaced the Commissioner’s finding. I am not satisfied Mr Taxpayer discharged that onus.
It follows the objection decision with respect to Mr Taxpayer’s 2009 year of income must be remitted to the Commissioner for reconsideration with a direction that the Commissioner revisit the calculation of the liability in light of the possibility that transfers between Mr Taxpayer’s accounts were inadvertently double counted. The substance of the objection decision is otherwise affirmed. (The penalty decisions will be addressed below.)
The 2010 year of income
The amended assessment identified an additional $63,473.69 that should have been included in Mr Taxpayer’s assessable income during this period. At the hearing, the amount in dispute was $7,946.70 which Mr Taxpayer says represented the proceeds of gambling winnings.
There is no doubt Mr Taxpayer was a regular gambler. He said in his evidence that he was “a very lucky person in gambling. Like not just me saying that, a few people will say the same thing”: transcript at p 175. He said his friendship circle regarded him as a reliable source of horse-racing tips. To illustrate the point, he recounted how he received at least 25 messages from friends seeking guidance on form in the Melbourne Cup which was, coincidentally, run during the hearing: transcript at p 175. He explained he routinely made bets through on-course bookmakers and the TAB and (certainly in later periods) he used betting apps with online bookmakers. He did not restrict himself to the horses, though. He said he also played roulette and other games at the casino, and he also put money through the poker machines at casinos, pubs and clubs. He also gave evidence of betting on boxing and football matches: transcript at pp 175-178. When asked to explain how he went about placing bets, he described his betting practices with obvious delight: transcript at pp 178-181. He was able to remember the details of particular sporting fixtures and gave a blow-by-blow description of his gambling strategy in relation to at least one of those events.
I accept Mr Taxpayer’s claim that he was an avid gambler. He did not keep receipts recording his wins from gambling during this period. He agreed he also made losses, even as he claimed he was generally a lucky gambler. In the circumstances, I am satisfied he has discharged his onus in relation to his claimed gambling winnings during this period. I am not troubled that he has failed to identify precisely when and how he won particular amounts. While the claims are not supported by fulsome detail, his account (and the amount he claimed to have won) is not inherently unlikely given I accept his evidence that he gambled regularly and enthusiastically. It is unsurprising that an amateur gambler might report what is, after all, a relatively small profit from his wagering.
Mr Taxpayer did not appear to dispute the balance of the amount that was held to be income in the amended assessment. He also did not lead evidence challenging the Commissioner’s opinion that there was fraud or evasion in relation to the balance of income received in this year of income (although I accept, obviously enough, that the Commissioner could not have formed the opinion there was fraud or evasion in relation to the proceeds of the gambling).
The objection decision in relation to the 2010 year of income should be set aside and remitted for recalculation to ensure there was no double accounting of amounts transferred between accounts. The recalculation should also take account of my finding that the amount of $7,946.70 represented the proceeds of gambling. The objection decision should otherwise be affirmed. I will deal with the penalty decision below.
The 2012 year of income
Mr Taxpayer declared business income of $73,340 during this period which (after deductions) resulted in a taxable income of $68,870. The Commissioner increased that amount by $31,608.10 in the amended assessment. Mr Taxpayer says that is wrong, and insists he may have actually overstated his income in that period.
Mr Taxpayer pointed out he was incarcerated – and therefore unable to earn any income – between 13 April 2010 and 13 October 2011. He said his mother had provided financial support to the family while he was in gaol. He said she contributed to his mortgage and paid money in respect of other household expenses after she and Mr Taxpayer’s father and sister moved into Mr Taxpayer’s Glenmore Park home with his family: exhibit 5; transcript at pp 54ff. The analysis of his bank statements prepared by his lawyers (reproduced in MFI-1) shows regular payments from Mr Taxpayer’s mother in late 2011 and 2012: see MFI at pp 12ff. The payments were consistent in that they amounted to between $2500-3000 into one account in most months – although I note there were larger payments made in late May and June that did not fit that pattern. There were also regular monthly payments in roughly consistent amounts into another account: see MFI at pp 46ff.
Mr Taxpayer did not call his mother to give evidence at the hearing. The evidence about Mr Taxpayer’s unfortunate circumstances throughout part of the year of income is uncontradicted, however. The fact his mother made payments into his accounts that added up to a roughly consistent amount each month prior to 18 May 2012 is consistent with his account of how the family banded together during (and to some extent following) his incarceration. I accept his evidence that regular payments she made prior to 18 May 2012 (referred to in MFI-1 at pp 11-12 and 46-47) were not income but were likely made in respect of the mortgage and other household expenses. In written submissions in reply, Mr Taxpayer’s counsel pointed out the bank appeared to apply the monies deposited towards the mortgage repayments: at [39] and accompanying footnote. The character of the payments she made on 18 May and 14 June 2012 is less clear. Those payments did not fit into the established pattern and were not otherwise adequately explained. I accept those last two payments should be counted as income in the circumstances.
The analysis in MFI-1 also suggests a number of payments that may have been counted as income were in fact transfers between various accounts (including payments from transaction accounts to his credit card) maintained by Mr Taxpayer. For reasons I have already explained, I am satisfied the Commissioner should revisit those transfers between accounts to ensure he has not double-counted any amount. I also note there were a number of entries made in relation to Mr Taxpayer’s credit card accounts that may also have been counted inappropriately. For example, on 10 December 2011, an amount of $30.27 was deposited into his account; the analysis in MFI-1 suggests (at p 49) that amount resulted from a refund on a purchase. That same observation appears to apply to small amounts deposited on 4, 6 and 14 February and 17 March 2012. I am satisfied those amounts should not be included in Mr Taxpayer’s assessable income in light of that explanation.
The objection decision with respect to the 2012 year of income should be set aside and remitted to the Commissioner for recalculation having regard to these reasons. I should add I was unable to be satisfied the Commissioner should not have formed the opinion there was fraud or evasion in this case, particularly given the lack of proper explanation for the irregular payments by Mr Taxpayer’s mother in May and June 2012.
The 2013 year of income
The Commissioner concluded Mr Taxpayer understated his taxable income by $208,946.97 in the 2013 year of income. Mr Taxpayer’s evidence focused on several amounts that are in dispute.
The first of these was an amount of $75,000 deposited in Mr Taxpayer’s account on 25 February 2013. Mr Taxpayer said the amount was loaned by an associate to fund Mr Taxpayer’s purchase of a property in Maudsland. There is no do doubt the Maudsland property was purchased by Mr Taxpayer, or that he subsequently sold that property and purchased another in Cooribah. It appears he used the proceeds of the sale of the Maudsland property to purchase the Cooribah property.
The associate was called to give evidence. A summons was issued but he did not appear. Mr Taxpayer says I should not draw any adverse inference from the associate’s absence in circumstances where Mr Taxpayer has done all he reasonably could to secure attendance. I accept I should not draw an adverse inference but that does not relieve the taxpayer from his onus of persuading me of the factual proposition in issue. That task is complicated by the fact there is no written loan agreement or other contemporaneous documentation.
Mr Taxpayer said the associate was a friend who ran a prosperous jewellery business. Mr Taxpayer said he met this individual “through friends of mine, and through his jewellery store, and just became close to him like that”: transcript at p 100. Mr Taxpayer said they had known each other for approximately ten years, and they were close: transcript at pp 100-101. Mr Taxpayer said the associate was a godparent to two of his children: transcript at p 107. That evidence does not sit comfortably with Mr Taxpayer’s answers to other questions about the associate’s personal life. Specifically: during cross-examination, Mr Taxpayer agreed he had never met the associate’s girlfriend, and Mr Taxpayer knew almost nothing about her. That exchange unfolded as follows:
RESPONDENT COUNSEL: What was the nature of the relationship between Ms [girlfriend] and Mr [associate]?
MR TAXPAYER: I think they were seeing each other.
RESPONDENT COUNSEL: It was actually a boyfriend and girlfriend type of relationship?
MR TAXPAYER: Yes.
RESPONDENT COUNSEL: At that time, in February 2013, how long had they been together, to your knowledge?
MR TAXPAYER: I’m not too sure. I think they used to be married, and - I don’t too much of the story about their past, you know what I mean? Yes.
RESPONDENT COUNSEL: I see?
MR TAXPAYER: So I’m pretty sure that he was married (indistinct words) broken up, and that was his girlfriend on the side, so I’m not too sure.
If Mr Taxpayer was as close to the associate as he claimed, one would have thought Mr Taxpayer would know more of the associate’s personal circumstances.
The evidence of the loan agreement is vague. Mr Taxpayer recalled he had a conversation with the associate in the associate’s store one day about Mr Taxpayer’s desire to buy a property. Mr Taxpayer said he needed a loan and asked the associate for assistance. The associate volunteered to loan Mr Taxpayer $75,000: transcript at p 100-101. There is no evidence that the associate knew anything about Mr Taxpayer’s personal circumstances or his ability to repay the loan. (Mr Taxpayer said the two were close, but I have already expressed my doubts about that proposition.)
There was no term agreed for the loan. Mr Taxpayer said he knew he was obliged to repay the loan at some point although he agreed he had not made any repayments of principal at the time of the hearing. Mr Taxpayer said there was an obligation to pay interest on the loan although he was not specific about the rate and he agreed he had not regularly paid interest: transcript at p 104. There was also no security given in return for the loan.
Mr Taxpayer said in his statement of 2 November 2017 at [21] he planned to develop the vacant land in question and repay the associate out of the proceeds of a subsequent sale – although he said in cross-examination that he intended to build a home and reside there and perhaps borrow against the equity in due course: transcript at pp 107, 111-112. When questioned closely during cross-examination about the venture, it became apparent Mr Taxpayer was not in a financial position to develop the property at the time he bought it: transcript at p 106. He agreed in cross-examination that he planned to borrow money for the venture from a number of associates without disclosing the existence of the other lenders before approaching the bank for a loan to build a dwelling as if he owned all of the equity in the property: transcript at pp 106-107. At a minimum, that sort of subterfuge is inconsistent with Mr Taxpayer’s description of his close relationship with the associate.
As it turns out, Mr Taxpayer did not approach the bank for a loan after acquiring the property. He said he drew up plans for the redevelopment but decided to sell the property about a year after he acquired it before the plans were realised: transcript at pp 108-109. Curiously, he said he did not expressly inform the associate of his change in plans. He said the associate was aware that the property was sold. Mr Taxpayer said he would have revealed as much to the associate in the course of one of many social interactions they enjoyed. the associate was apparently unconcerned. He certainly did not enquire about when the loan would be repaid: transcript at pp 110-112. Mr Taxpayer subsequently used the proceeds of the sale of the property towards the acquisition of the property in Cooribah. As I understand the evidence, Mr Taxpayer proposed paying out the loan using the proceeds of the sale of the Cooribah property but that money was taken by the Commissioner using a garnishee order: transcript at p 112.
There is a further curiosity. The money, when it was advanced, was not paid by the associate. The advance was made from an account operated by the associate’s girlfriend, whom Mr Taxpayer agreed he had never met, and of whom he knew almost nothing. He was unable to explain why the associate chose to make the payment in that way. As Mr Taxpayer explained it, he asked the associate for the money, who readily agreed, and the agreed amount made its way into Mr Taxpayer’s account. He said he assumed the money came from the associate when it turned up in the account. Mr Taxpayer said he did not make further enquiries into the source of the money because he recognised the agreed amount: transcript at pp 103-104.
Written submissions on behalf of Mr Taxpayer suggested that, in the alternative, the amount may have been paid as a gift. That submission cannot be accepted because Mr Taxpayer was explicit in his evidence that the amount “was a loan, definitely a loan”: transcript at p 113. There is some basis for thinking Mr Taxpayer understood the distinction between a loan and a gift because he insisted that an additional payment of $45,000 received from the same associate on 19 August 2013 was a christening gift for Mr Taxpayer’s daughter: transcript at p 113. I will return to the evidence in relation to that payment in due course.
The evidence in relation to the advance of $75,000 from the associate raises more questions than it answers. While it is not inherently unlikely that a close friend would loan money on a handshake, the totality of the evidence about that relationship does not persuade me the associate and Mr Taxpayer were close friends. The circumstances in which the money was advanced by the associate’s girlfriend are also odd. In the circumstances, I am not persuaded the money was advanced by way of loan. It should have been included in Mr Taxpayer’s taxable income.
Mr Taxpayer also claims he received around $44,000 in cash gifts from friends in connection with his engagement to Mrs Taxpayer in or around April 2013. He received most of the money when the couple threw an engagement party. That amount should not be included in his taxable income for the 2013 year of income, he argued.
There is no doubt Mr Taxpayer and his wife were subsequently married. I have no reason to doubt they threw an engagement party. (I note Mr Taxpayer’s accountant, who gave evidence at the hearing, recalled attending the event). I also have no reason to doubt it may have been a lavish affair. Mr Taxpayer explained in his statement that it was common for people in his circle of friends to throw extravagant engagement and wedding parties: at [16]. Mr Taxpayer did not produce evidence to confirm the costs associated with hosting the event which was held at the Shangri-La Hotel in Sydney: transcript at pp 114-115. He said in cross-examination that around 100 guests were invited and treated to drinks and canapes. He claimed he paid for the event using his credit card, although he said there may have been a series of smaller charges and he was vague about whether part of the costs of the event might have been met out of cash provided by guests.
It is plausible that the taxpayers received cash gifts from friends and well-wishers at or in connection with such an event. But such a large amount? Mr Taxpayer recalled in his earlier 13 February 2017 statement at [24] that the couple received $44,000 in gifts in connection with the event, which amount was banked, but in his later statement he ventured that the amount received was in excess of $44,000. That precise amount was the balance remaining after some of the cash was spent – he was unsure how much - before the money was banked: 2 November 2017 statement at [15]; see also transcript at pp 115-116. He acknowledged the money was banked in several different deposits over several days. He explained he and his then fiancé enjoyed the sensation of having cash in their pockets: transcript at p 118. He also said he gave his mother $10,000 to hold while he and his fiancé went overseas following the party.
Mr Taxpayer accepted he did not have a strong independent recollection of the amount received in connection with the engagement party. He agreed he arrived at the figure of $44,000 through a process of reconstruction: transcript at p 116. He did recall that most of his friends would have gifted $1000 but some of them gave the couple as much as $4,000 or $5,000. He did not identify which guests provided which amount.
While I accept the taxpayers threw an engagement party and that guests may well have gifted cash to the couple, it is simply impossible to be precise about the amount. Mr Taxpayer’s evidence of the way in which he arrived at the estimate is not convincing. He described a process of guesswork that involved an element of reconstruction that did not inspire confidence. I am not persuaded I should accept the amount claimed was a gift. The whole amount should therefore be counted as part of taxable income in the relevant year of income.
The same thing can be said about the amount of $73,795.62 (or perhaps $54,239.80 depending on the analysis) received in the year of income which Mr Taxpayer says should be characterised as the proceeds of gambling. Mr Taxpayer referred to a series of deposits which he said represented winnings from various gambling ventures. I have already accepted Mr Taxpayer was a regular gambler, so the evidence that he won money is not, of itself, unlikely. But whereas I was prepared to accept his estimate in relation to the (comparatively modest) amount he won in the 2010 year of income, his estimate of the larger amount or amounts in the 2013 year of income invites further scrutiny. Most amateur gamblers are unlikely to consistently win larger amounts (unless, of course, they are consistently wagering eye-wateringly large sums). His counsel, Mr Bickford, took Mr Taxpayer through the various deposits that were said to be attributable to gambling, amongst other things. It was apparent Mr Taxpayer had limited recollection of the particular deposits. He volunteered explanations based on a process of reconstruction. For example, he concluded some payments were the product of poker machine winnings as opposed to the proceeds of other forms of gambling because the deposit was not in round dollar figures: transcript at p 48. Other deposits were assumed to be the proceeds of gambling on the roulette table at the casino because the deposit was made in Sydney: transcript at p 47. I note Mr Taxpayer gave a different account of his deposits to the one he has offered at earlier points. During his evidence in chief, he explained an amount of $30,500 that he had previously described as winnings was, a refund of a deposit: transcript at p 45. That is not to say he was being untruthful in his evidence – merely that his recollection was uncertain and unreliable. That is unsurprising given the passage of time, but it does not assist me in my task.
Mr Taxpayer was able to verify some of the deposits were made by cheques drawn by gambling establishments, hotels or clubs. He retained copies of some of those cheques and they were reproduced in his statement (exhibit 5 at SR-4). I am satisfied the amounts in the cheques reproduced in the statement should be excluded from his taxable income, but it is difficult to be sure how much of the balance of the amount claimed is properly characterised as the proceeds of gambling. In those circumstances, only the amounts referred to in the copies of the cheques exhibited to the statement should be excluded from Mr Taxpayer’s assessable income.[2]
[2]
Date of cheque Amount 24 August 2012 $6000 24 August 2012 $5506.40 22 November 2012 $2504 24 November 2012 $2000 Total: $16,010.40 I should add that Mr Taxpayer was unable to satisfy me that the Commissioner should not have formed the opinion there was fraud or evasion in this particular year of income. I make that finding in particular in light of the uncomfortable impression I formed in the face of the unsatisfactory evidence surrounding the $75,000 loan from Mr Taxpayer’s associate.
The 2014 year of income
That brings me to the evidence in relation to the 2014 year of income. The Commissioner says Mr Taxpayer’s taxable income should be increased by $425,256.93.
I have already referred to the $45,000 payment made on 19 August 2013 that was characterised as a gift from the jewellery-store owning associate who was godfather to Mr Taxpayer’s child. I have already expressed my scepticism about whether Mr Taxpayer and the associate were as close as Mr Taxpayer contends. The story in relation to the $45,000 payment requires further scrutiny, however. Mr Taxpayer’s daughter is handicapped, and the gift was said to be made in order to provide for her welfare. Mr Taxpayer said the associate was a devout catholic and took his responsibility as godfather very seriously. I note Mr Taxpayer originally identified the $45,000 payment as a loan advance before correcting himself, which does not inspire confidence in the quality of his recollection or the reliability of his reconstruction: see transcript at p 114.
There is no record of the terms of this remarkably generous gift, and no account of how the money was spent. The associate did not provide evidence that corroborated the payment or its purpose. I note the payment was made some time after the associate had already advanced a large sum of money to Mr Taxpayer: one is left to wonder why the associate did not simply forgive part of the existing debt (assuming it was a loan, of course) rather than make a separate payment. Such a large payment would be an extraordinary gesture in any event given I am not persuaded the associate was a close friend or relative of Mr Taxpayer. In all the circumstances, I think more is required before I could be confident the amount should be characterised as a gift. It follows I accept the amount should be regarded as part of Mr Taxpayer’s assessable income.
Mr Taxpayer referred to other amounts he said should be characterised as loan advances which should not be counted as part of taxable income. The first of these was a deposit in the amount of $35,000 received from an individual I will refer to as LB. Mr Taxpayer claimed the loan was advanced on 26 September 2013. There is no written loan agreement. Mr LB gave evidence at the hearing and confirmed he loaned the money to Mr Taxpayer and that it has since been repaid. Both confirm the loan was repaid in instalments. Mr Taxpayer did not keep a written record of the repayments. LB says he did keep a written record of the repayments but he did not produce that document at the hearing. Mr Taxpayer said the loan was used to assist him to purchase the Maudsland property.
LB’s evidence in relation to this loan was not inherently unlikely. While there are some question marks over the failure to record the terms of the loan or the repayments, his evidence was sufficient in the circumstances to persuade me that the payment was properly characterised as a loan. It should not be counted as part of his taxable income.
Another amount that Mr Taxpayer says should be characterised as a loan advance was a payment of $50,000 on 10 October 2013 by an individual whom I will refer to as GT. I was told GT was the father of Mr Taxpayer’s best friend. The best friend was Mr Taxpayer’s ‘best man’ at his 2014 wedding. GT did not speak English well; Mr Taxpayer described laboured conversations between them given the language barrier: transcript at p 35.
Mr Taxpayer said he needed a loan in order to launch a new business venture in 2014. Mr Taxpayer said he planned to produce his own line of clothing. GT’s son said he would ask his father about obtaining the money: Mr Taxpayer’s 2 November 2017 statement at [24]. Mr Taxpayer agreed in cross-examination he did not actually strike the loan agreement with GT; it was brokered by GT’s son. That is not what he said in his earlier statement at [47]. There is no written record of the loan, and no security. There was no requirement to pay interest. Mr Taxpayer says he has repaid a portion of the principal, but those repayments were not recorded and they were made in any event to GT’s son, not to GT. A balance of around $30,000 remains and Mr Taxpayer has not made further payments in over four years. Mr Taxpayer described a haphazard process of repayment in which he would hand random amounts to GT’s son. He also said he did not regard repaying this debt as a priority compared to some other debts, which seems odd: transcript at pp 166-167.
Mr Taxpayer’s evidence about the clothing business suggested the venture was, at best, embryonic. His account of the operation (such as it was) and his role suggested it may not have amounted to more than an indulgent hobby, or a whimsical adornment for his chosen lifestyle. Having said that, he was able to point to samples of clothing that he apparently designed and commissioned. His accountant also mentioned in the course of his examination in chief that Mr Taxpayer had started to make money out of the venture by early 2014, although that evidence appears to rely on Mr Taxpayer’s assertions: transcript at p 274.
Neither GT nor his son gave evidence at the hearing. That evidence would potentially have provided valuable support for what was otherwise a curious story. I do not doubt Mr Taxpayer was interested in establishing a line of clothing – he was able to refer to samples at the hearing – or that he required capital for that purpose. But the account of the circumstances in which the money was paid and repaid (or the absence of terms which governed the payment) is not persuasive. I am not satisfied the amount should be excluded from Mr Taxpayer’s taxable income.
Mr Taxpayer says a much larger payment in the amount of $140,000 is explicable as a loan advance from an entity associated with Mr Taxpayer’s accountant. I will refer to the accountant as SK. SK explained in his written and oral evidence that he was a personal friend of Mr Taxpayer. They had known each other for many years, and they attended social events together. SK confirmed he was a guest at the engagement and wedding of the Taxpayers: transcript at p 272.
I should make a general comment about SK’s evidence. As the accountant for Mr Taxpayer, he had the potential to offer valuable insights into Mr Taxpayer’s business practices. It became clear during cross-examination that he relied on what he was told by Mr Taxpayer when completing the accounts and preparing returns. When asked about a number of expenditures during the course of cross-examination, he made it clear he deferred to what he was told by Mr Taxpayer in order to account for each amount: see, for example, answers to questions at pp 279-280.
The evidence surrounding the $140,000 payment on 13 September 2013 is in a special category because SK was involved in the transaction and presumably had intimate knowledge of what was going on.
In his statement, SK said he agreed to loan Mr Taxpayer the money to fund the purchase of the Maudsland property. He said it was not uncommon for him to loan money to people: statement at [2]. He said his lending activities were private arrangements with existing clients of his accounting practice: transcript at p 286. He explained he controlled a number of different businesses that had access to cash at various times, including entities conducting childcare centres and a construction company. He said he would use his own funds to make loans and, I infer from his evidence, he also relied on monies sourced from the various businesses. He also borrowed money from banks which he would on-loan. (He did not think he needed to tell the bank that he was lending the money they made available through liens of credit secured against his own assets: transcript at p 290.) He was vague about how long he had engaged in these lending practices and suggested he only made loans “on occasion”: transcript at p 286. He said that, at the time of the hearing, he had one other loan to a client in the amount of $200,000 that was current: transcript at p 290.
Mr Jedrzejczyk, who appeared for the Commissioner, questioned SK about the circumstances of the loan during cross-examination. SK did not recall when or how Mr Taxpayer went about asking for a loan, and SK said Mr Taxpayer would have nominated the figure and the purpose. SK recalled in cross-examination that he may have sighted the contract of sale and said he assumed he did some sort of search – like checking the listing on realestate.com.au: transcript at p 285. His absence of rigorous due diligence is surprising in circumstances where he made clear in his evidence that he relied on Mr Taxpayer’s claims about his income and expenses when completing Mr Taxpayer’s tax returns. He added that he was not aware of Mr Taxpayer having other sources of income over the years apart from the reported amounts, which were patchy (most obviously there was a gap in Mr Taxpayer’s earnings while he was incarcerated): transcript at p 287. He insisted he did some sort of analysis of Mr Taxpayer’s ability to service his obligations and repay the loan, but he did not produce those documents: transcript at p 289. He said he was not worried even though he knew Mr Taxpayer was a regular gambler: transcript at p 293.
SK initially he insisted he did arrange for security to be taken over the property. He said his usual practice when making loans of this nature was to prepare the documentation for a caveat that could be registered but “I only register it if I need to”: transcript at p 286. In the course of the same answer, he said he could not find any record of the documents in this case and admitted “I can’t recall doing it, to be honest, back then”.
SK’s evidence suggests a casual approach to security that does not make sense. He agreed in cross-examination that he knew Mr Taxpayer was borrowing money from other lenders to buy the property, but he did not ask who or what they were to be told or what priority or security any of them might require. He said he believed Mr Taxpayer proposed buying the property with a view to building a dwelling that he would flip. SK knew Mr Taxpayer would approach a bank to fund the construction. SK said he expected Mr Taxpayer would then meet his obligations out of the proceeds of sale of the property. But SK also said he knew Mr Taxpayer was going to build a family home, which does not sit comfortably with the idea of developing and selling the property: transcript at p 288. SK conceded in cross-examination that he was more careful when it came to performing due diligence in more recent times: transcript at p 290.
As it happens the terms of the loan were recorded in a written agreement. The ‘deed of loan’ was annexed to SK’s statement. He explained his lawyer had prepared the document as a template for use in loan transactions. The template document was not filled out with the benefit of legal advice. For example, the parties to the loan were described as ‘mortgage’ and ‘mortgagee’ even though there was no mortgage created. SK agreed in cross-examination that the document was not completed at the time the monies were advanced to Mr Taxpayer: transcript at p 292. SK said he did not recall why he had paid over the monies before finalising the terms of the document: transcript at p 293. The agreement was also ignored in a number of respects. For example, SK agreed Mr Taxpayer did not at any stage comply with his obligation under the agreement to produce regular profit and loss statements and other accounting information. The document also included clauses discussing a mortgage but it is plain they were included as boiler-plate in the template which had no effect: transcript at p 295.
The agreement also provided for repayment of the loan by September 2018 and the payment of interest. SK said Mr Taxpayer did not make any interest payments after 2014. When questioned about that in cross-examination, SK appeared remarkably incurious about the circumstances which brought about the failure to pay interest. He also said he was not aware at the time that the Maudsland property was sold in 2014: transcript at p 296. He said he learned of the sale after the event and became aware Mr Taxpayer purchased another property. He did not take any steps to secure the debt against that or any other property: transcript at p 298. He did not recall any details about the new property and claimed at the hearing he was unaware the property had since been sold: transcript at p 297.
SK insisted in cross-examination that he still expected to be repaid but he was unable to explain why. He had not made any demand for repayment under the terms of the loan. He offered, lamely, that he expected Mr Taxpayer would keep his word: transcript at p 298.
Taken as a whole, SK’s evidence raises questions about whether he was, in truth, a creditor with respect to Mr Taxpayer. While they filled out and executed a loan agreement, that documentation appeared to be a purely formal exercise. While the loan agreement expressly included an obligation to repay by a particular date and a (high) rate of interest, it also included a number of terms the parties did not make the pretence of honouring. The document was signed after the monies were paid over following remarkably lax due diligence which appeared to depart from SK’s usual practice, and the parties did not subsequently behave as creditor and debtor. Whatever language he used to describe the relationship – and whatever steps he took to sign a loan agreement – SK behaved more like a passive investor in Mr Taxpayer’s business.
Mr Taxpayer said in his evidence that the document was signed after the monies were advanced and that the document was intended to facilitate SK taking some sort of security over the property if it became necessary in the future. Mr Taxpayer made plain that he did not want SK to register any security in the short term because that would compromise the ability to raise further loans: transcript at p 141. Interestingly, Mr Taxpayer explained his plans for the Maudsland property using the plural “we”, which was consistent with SK being a knowing party to the venture: transcript at p 143.
I note there was also evidence given about a fax header which date stamped the loan agreement 27 April 2011. I was unable to get to the bottom of that curiosity and do not make any finding about it, one way or the other.
The evidence raises questions about the characterisation of the advance. Mr Taxpayer may have had a genuine belief that he was involved in a debtor-creditor relationship, but the behaviour of both he and SK suggests the relationship might be characterised differently. In any event, they have not persuaded me the money should be characterised as a loan. It should therefore be included in Mr Taxpayer’s taxable income.
That brings me to the evidence surrounding the sale of motor vehicles in October and December 2013 for a total consideration of $125,000. That amount was comprised of two deposits into Mr Taxpayer’s accounts. The first deposit in the amount of $85,000 was made on 17 October 2013. The second deposit was in the amount of $40,000 and occurred on 23 December 2013. I note Mr Taxpayer originally suggested in his statement that these monies were wedding gifts but he confirmed at the hearing he was mistaken: transcript at p 31. His explanation for the mistake was not especially reassuring, and called into question the quality of his recollection and reconstruction. He said he saw the figures in question added up to around $125,000 and recalled that was the amount he received for his wedding so he assumed those deposits were the wedding gifts when he made his statement. At the hearing, he acknowledged the wedding gifts were made in the subsequent year of income (he was married in August 2014). He decided the monies deposited in October and December 2013 were actually the proceeds of sales of various vehicles.
The evidence in relation to the various vehicles was confusing. Mr Taxpayer referred to at least three sales of motor vehicles and a car engine during this period. The first was a VK Commodore ‘track car’. A track car is a vehicle was used for motorsports rather than for regular driving on the street. Mr Taxpayer said he built the track car out of parts over a long period. There was no record of the vehicle being acquired, owned or sold, and there was no other evidence that one would expect from a car enthusiast like photographs of Mr Taxpayer with the vehicle. He said he sold the vehicle for $75,000 to a friend, MG, who was a mechanic. Interestingly, MG did not pay for the vehicle himself. His then girlfriend used money in her account to fund the purchase. MG said he had warehoused the money in his girlfriend’s account in an attempt to conceal the funds from his ex-wife. While that evidence might be taken to reflect unfavourably on his character, it had the ring of truth. The girlfriend was not called to give evidence.
MG confirmed the vehicle was unregistrable and in poor shape. He said the vehicle was incapable of doing more than two laps on the track and he only took it out once. It is unclear why MG would have paid such a large amount of money for the vehicle in those circumstances. There is no record of the vehicle being subsequently sold, wrecked or transferred.
I accept MG paid Mr Taxpayer an amount of money via an account conducted by his girlfriend. But the evidence about the substance of the transaction – the sale of a vehicle – is less clear cut. MG and Mr Taxpayer both insisted it was a sale of goods, but the transaction appeared so obviously uncommercial that one wonders if the transaction was cover for something else. I accept the transaction might have been exactly as the witnesses described – people can make singular choices in relation to collector items and leisure equipment which defy commercial explanation – but I would have expected more evidence like photographs of MG, at least, revelling in his purchase to support the claim.
The evidence in relation to two other vehicle transactions during this period is in an even less satisfactory state. That is significant because the two sales most closely approximate the deposits in question. Mr Taxpayer claimed he sold a Holden Clubsport vehicle for $85,000 cash in October 2013. While Mr Taxpayer named the purchaser of this vehicle in his statement, that individual did not provide a statement of his own or give evidence at the hearing. Mr Taxpayer did not produce documentation to substantiate his claim he originally acquired the vehicle from a dealer and there was no other record in evidence of him ever owning the vehicle in advance of the sale. There is also no record of Mr Taxpayer buying or selling a Ford F6 vehicle in December 2013. Mr Taxpayer said the sale was conducted though carsales.com.au but he did not produce the sort of documentation one would expect.
The same criticism can ultimately be made of the evidence in relation to a sale of a V8 car engine in May 2014. Mr Taxpayer says he sold the engine to an unidentified purchaser for $12,500. He claims he was paid for the engine in instalments. He did not have any records or other evidence confirming the engine existed, or that he acquired it or that he acquired the parts used in the engine. Given Mr Taxpayer’s uncertain process of recollection and reconstruction, it is difficult to be confident that the sale occurred as he described.
The objection decision should be set aside and remitted for recalculation to ensure there has not been double-counting of any amounts that were merely transferred between accounts. The decision is otherwise affirmed save with respect to the amount I am satisfied was received from LB and which should not be included in Mr Taxpayer’s assessable income.
I will deal with the penalty assessments below after I explain my reasons in relation to Mrs Taxpayer’s affairs.
Mrs Taxpayer’s case
Mrs Taxpayer did not file a return in the 2013 year of income because she says she earned less than the threshold. In her evidence, she explained she received some Centrelink benefits and modest wages from a part time job in the relevant period as a book-keeper. The Commissioner issued a default assessment and concluded Mrs Taxpayer’s taxable income was $195,077. He reached that view after the covert audit which included an asset betterment analysis. It appears Mrs Taxpayer – who did not marry Mr Taxpayer until August 2014 – only came to the attention of the Commissioner because of his interest in Mr Taxpayer.
The principal focus of the dispute in the 2013 year of income appears to arise out of Mr Taxpayer’s dealing with a second-hand 2009 Mercedes Benz ML63 motor vehicle. The vehicle was estimated in the Redbook at $171,500 when new, but it was four years old and already had 75,000 kms on the odometer when it was acquired. As I understand the Commissioner’s case, the Redbook value of the vehicle (or a significant part of that value) should be attributed to Mrs Taxpayer in the 2013 year of income when the vehicle was acquired.
There was a good deal of evidence led at the hearing about the circumstances in which the vehicle was acquired. Mr Taxpayer said he saw the vehicle advertised on carsales.com.au for between $70,000-80,000 but was ultimately able to buy it for $32,500 because of its age and because the vehicle exhibited a number of serious faults that would require expensive repairs. He said he went for a test drive of the vehicle with a friend, DD, who was a mechanic. They concluded the vehicle was “running like shit”: transcript at p 126. Mr Taxpayer gave examples of the type of repairs that would be required and their cost. In cross-examination, Mr Taxpayer was asked whether $32,500 represented an unusually low price for a premium motor vehicle even allowing for its reported shortcomings. He agreed it was a “sensational” price and suggested he had “kicked a goal” when he completed the deal: transcript at p 126. I note Mr Taxpayer’s evidence about the purchase price is consistent with the information recorded in the vehicle registration transfer application which is annexed to exhibit 13.
The evidence about the state of the car does not sit comfortably with the roadworthy certificate issued on 15 April 2013. The certificate is reproduced in exhibit 2 at p 136. The inspector did not identify and record the major defects that Mr Taxpayer said were obvious on the vehicle and which justified the low price. Mr Taxpayer shrugged at this in cross-examination, pointing out it was possible to get a road certificate if one knew the right people: transcript at p 129. Mr Taxpayer said DD agreed to carry out the repairs required for free although Mr Taxpayer agreed to pay for the necessary parts. There is no record of him acquiring the parts but he claims the work was done.
Mr Taxpayer said he paid for the vehicle using cash on hand. It is odd that he would have so much cash lying about in circumstances where he was borrowing money from other people at the time.
The written submissions lodged on behalf of the Commissioner pointed out there were some discrepancies between the evidence of Mrs Taxpayer and the evidence given by Mr Taxpayer and DD in relation to the acquisition of the vehicle. For example, Mrs Taxpayer said she accompanied the two men when they first inspected the vehicle. Neither of the two men suggested Mrs Taxpayer was present. Mrs Taxpayer did not remember seeing the female owner of the vehicle on that occasion and only recalled a male being present. She assumed he was the owner’s partner or husband. Mr Taxpayer and DD said the seller’s wife was present at the time of the inspection although Mr Taxpayer agreed he dealt with the husband.
I am not satisfied that anything turns on these minor discrepancies. It would not be surprising if there were minor inconsistencies between individual accounts given the passage of time and differing perspectives. Mrs Taxpayer’s evidence does not add to or detract from the account of Mr Taxpayer, supported by DD, which is offered up in support of his claim that the vehicle was acquired for $32,500 in the 2013 year of income.
While the evidence raises obvious questions that go to Mr Taxpayer’s affairs – in particular, the question about where he got the cash to fund the purchase – there is no particular reason to doubt the vehicle was acquired in the 2013 year of income at a knock-down price in light of the observations of DD in particular. While I note the roadworthy certificate does not support Mr Taxpayer’s claims about the state of the vehicle, I acknowledge a roadworthy certificate may be an unreliable guide. There is certainly no reason to suppose the sale by the vendors was other than an arms’ length transaction in which they achieved a price that was acceptable to them. It therefore makes no sense to rely on the ‘Redbook’ value for determining what (if any) amount should be attributed. The value that should be attributed is $32,500. But attributed to whom?
On the one hand, the evidence makes clear Mr Taxpayer negotiated the purchase and used money available to him to fund the transaction and make good on any repairs. Mrs Taxpayer also said in her statement that her husband loaned her $32,500 to make the acquisition, although she seemed less certain about that during cross-examination: transcript at p 216-217. On the other hand, the vehicle’s registration was transferred into her name, and she confirmed it was bought for her: transcript at p 214. She acknowledged she signed the registration transfer document: transcript at p 205. While registration does not of itself signify ownership, it points in that direction.
While I accept the vehicle was acquired at a knockdown price, the absence of a convincing explanation for the source of the cash used to make the purchase suggests the (reduced) value should be attributed to either Mr or Mrs Taxpayer. Given the vehicle appears to have been bought for her and was in her name, I am not satisfied she has discharged the onus of establishing the entire (if reduced) value was improperly counted as part of her taxable income in the circumstances.
The objection decision in relation to the 2013 year of income should be varied so that the reduced value of the vehicle is included in her taxable income. The objection decision is otherwise affirmed.
That brings me to the 2014 year of income. Mrs Taxpayer filed a return in this year of income but the amended assessment following the covert audit adjusted her taxable income from $96,702 to $367,705 – an increase of $271,003 in her taxable income which resulted in a shortfall of $119,703.50. Mrs Taxpayer’s evidence focused on several disputed amounts.
I should say at once the Commissioner has conceded there was sufficient evidence to establish Mrs Taxpayer won $21,491.40 in a wager on the outcome of a ‘State of Origin’ rugby league match. That money was banked into her account on 19 July 2013. I agree that amount should not be counted as part of Mrs Taxpayer’s taxable income. There is no reason to attribute any portion of that amount to Mr Taxpayer notwithstanding the fact he was undoubtedly the source of the tip and may well have placed the bet on Mrs Taxpayer’s behalf.
The Commissioner also attributed 50% of the value of the Maudsland property to Mrs Taxpayer during the 2014 year of income. That property was acquired in the 2013 year of income before Mr and Mrs Taxpayer were married. Mrs Taxpayer’s name was on the title of the property. The Commissioner says it was a joint asset and the value should be attributed accordingly.
There is no evidence to suggest Mrs Taxpayer contributed anything towards the purchase of the Maudsland property. I have already discussed Mr Taxpayer’s evidence of how the acquisition was funded. While I was not persuaded by aspects of his story, there is no basis for concluding any of the equity in the property was provided by or on behalf of Mrs Taxpayer. It seems likely that Mr Taxpayer included her name on the title as a merely formal recognition of her status as his partner (the couple were actually married in August 2014).
I note the Commissioner accepted in written submissions that the half share in the property should not be attributed to Mrs Taxpayer. That presumably means the entire value of the property should be attributed to Mr Taxpayer.
There was also an argument over a deposit of $75,000 into Mrs Taxpayer’s account in May 2014. Mr Taxpayer says that amount represents the proceeds of the sale of the Mercedes Benz ML63 that was acquired the previous year. The deposit slip dated 22 May bears a note to that effect. Interestingly, Mrs Taxpayer confirmed in cross-examination that the writing on the deposit slip was hers (transcript at p 215) but added she could not recall if she made the note at the time of the deposit or more recently as she was preparing her evidence: transcript at pp 215-216. She subsequently confirmed she did not recall making the deposit herself and did not know for sure who did – although she assumed it was Mr Taxpayer.
The Commissioner says the entire amount should count as part of Mrs Taxpayer’s taxable income.
I have already said I accepted Mr Taxpayer purchased the Mercedes at a knockdown price in April 2013 but I also accepted the (reduced) value of the vehicle should be attributed to Mrs Taxpayer in the 2013 year of income. If the vehicle was sold in May 2014 for $75,000, that represented a handsome profit. Mr Taxpayer said his friend DD had worked on the car for free and fixed the defects which prompted the previous owners to sell for such a low price. I have already noted there is no record of Mr Taxpayer paying for spare parts. Mrs Taxpayer confirmed DD worked on the car but she did not appear to have first hand knowledge or a clear recollection: transcript at p 215. Having said that, the Commissioner’s evidence about the Redbook value of the vehicle suggests $75,000 was closer to the mark for that vehicle, so a sale at that price is not inherently unlikely. But the buyer paid in cash. A cash transaction of that size invites scrutiny.
Most of the evidence about the sale came from Mr Taxpayer. Mrs Taxpayer did not appear to play a role in the transaction whereas she claimed she witnessed the purchase of the vehicle the previous year. Mr Taxpayer’s evidence about the sale raised more questions than it answered. Mr Taxpayer did not recollect the identity of the buyer, which is odd. He said the buyer was a person introduced by a(n unnamed) friend: transcript at pp 130-131. His recollection of the sale was certainly less detailed than his recollection of the purchase of the same vehicle in 2013. There was no documentation produced in relation to the sale, which also seems odd. Transferring a car usually creates a paper-trail.
These question-marks over the sale are a problem for Mrs Taxpayer because Mr Taxpayer said he paid the proceeds of the sale into his wife’s account. He said that sale accounts for a deposit in May 2014. His rationale for making the deposit into his wife’s account was unclear. He was asked about this in cross-examination (transcript at p 130):
RESPONDENT COUNSEL: Was there any particular reason why the money from the sale of the car was paid into [Mrs Taxpayer’s] account?
MJPV: Just because it’s my wife. I can give her whatever I like. There was no real reason for it. As I said, it’s my wife; like, I just give her anything she wants. There was no reason behind it - sort of no explanation that, like, can leader to – yes, there’s nothing.
I assume Mr Taxpayer was indicating he gave the proceeds of the sale to his wife (or at least deposited the funds into her account) as an act of largesse and a demonstration of affection. Mr Taxpayer’s explanation does not sit comfortably with the fact $74,700 was transferred out of Mrs Taxpayer’s account on 26 May 2014. Mrs Taxpayer was asked about that transfer during cross examination. The exchange (transcript at p 216) proceeds as follows:
RESPONDENT COUNSEL: Are you able to provide any explanation of why that was done?
MJPV: Because it wasn’t my money, so it wasn’t to stay in my personal account.
RESPONDENT COUNSEL: When you say it wasn’t your money, do you mean that it was [Mr Taxpayer’s] money?
MJPV: Well, it was from the sale of the vehicle. I didn’t purchase the vehicle, so…
To complicate matters, Mrs Taxpayer asserted in her statement that the money used to purchase the vehicle in 2013 was treated as a loan to her from her husband. There was a suggestion that the transfer of $74,700 in May 2014 was used to discharge that debt. Mrs Taxpayer accepted in cross-examination that her husband had never actually told her he was loaning her money to buy the car. As far as she was concerned, she said she had nothing to do with the funds and assumed the funds belonged to her husband: transcript at pp 216-217.
Ultimately, I have to decide whether Mrs Taxpayer has established I should exclude from her taxable income a large cash deposit into her account which she and her husband claim represents the proceeds of an undocumented sale of a car to persons unknown. Mrs Taxpayer was not involved in the sale, and Mr Taxpayer’s evidence of what transpired is vague and unsatisfactory. Mr Taxpayer apparently deposited the funds in the account without reference to Mrs Taxpayer following the alleged sale, and he shortly thereafter arranged for a similar amount to be transferred out of the account. Mr Taxpayer’s evidence in relation to the deposit and transfer is not convincing: his claim in cross-examination that he was honouring his wife when he made the deposit is not consistent with the decision to withdraw a similar amount shortly thereafter, and it is contradicted by Mrs Taxpayer. Having said that, Mrs Taxpayer also failed to provide a consistent explanation for the dealing: she suggested in her statement that there was a loan, but she effectively withdrew that claim during cross-examination. There is also doubt over the notes on the deposit slip that appear to tie the deposit to the sale of the vehicle. Those notes may not have been contemporaneous.
The evidence in relation to the deposit of $75,000 on 26 May is confused and confusing. I am not satisfied Mrs Taxpayer has established the deposit in question represented the proceeds of a sale of a vehicle that might not have been taxable. It follows that amount was properly included in her taxable income.
That leaves an alleged advance to Mrs Taxpayer from her father, whom I will call KP. KP says he loaned Mrs Taxpayer $60,000 on or about 14 November 2013. The loan is undocumented and KP did not charge interest on the advance. No repayments have been made.
Mrs Taxpayer said she asked for the money to fund her wedding. I have no reason to doubt the wedding was an expensive affair. She said it ultimately cost in excess of $80,000: transcript at p 220. That sort of expense is unsurprising given Mr Taxpayer’s evidence that people in the Taxpayers’ social circle tended to spend heavily on events like weddings and engagements. KP, in cross-examination, confirmed his daughter appeared to be anxious about the cost of the wedding and he agreed to help her for that purpose: transcript at p 241.
I note there was no direct evidence of all these expenditures on the wedding: transcript p 220. The wedding did not take place until August 2014. While advance planning for such a large event is to be expected, it is surprising that such a large amount of money would be required in a lump sum in November 2013.
KP said he attended the bank on 12 November 2013 to access his savings account so he could provide the loan to his daughter. In cross-examination, he insisted the entire amount was transferred to his daughter’s account but it was pointed out the bank statements record the amount being withdrawn in cash: transcript at pp 243, 244. KP said the money was definitely transferred rather than withdrawn when he visited the branch. The Commissioner’s written submissions point out the bank statement distinguishes between withdrawals and transfer.
As it happens, KP was no stranger to dealing in cash. He said he enjoyed gambling. He also acknowledged he kept a large amount of cash at home. He said he did not necessarily trust the banking system: transcript at p 240. He agreed he had cash on hand at his home on 12 November 2013 yet he decided to go to the bank to make the arrangements. Interestingly, two days later, he said he deposited $65,000 in cash in his bank account. He was asked why he bothered going to the bank on 12 November if he had the money on hand at home; he did not offer a coherent explanation: transcript at p 243. He explained he decided to deposit the $65,000 on 14 November because there was little money left in the account. It is not clear why he was so concerned about the contents of his bank account if (as he claimed) he did not trust banks and always kept cash at home: transcript at p 240.
Taken at face value, KP’s evidence suggests he has an interest in the outcome of these proceedings. He acknowledged he has not yet been repaid any of the money he advanced his daughter. He said he remained hopeful his daughter would repay the money in the future. Mrs Taxpayer’s ability to do that may depend on the outcome of these proceedings. KP is also presumably interested in helping his daughter.
It is not difficult to believe KP would loan money to his daughter, nor is it surprising that a loan would be undocumented. But the evidence Mrs Taxpayer and KP gave about the purpose of the loan is unconvincing given the money was provided in a lump sum so far in advance of the wedding and there was no evidence of significant expense being incurred at that point. KP did not clearly explain why he chose to go to the bank to access his savings account when he already had cash on hand; his suggestion that it was more convenient to transfer the money was not born out by the bank statement which suggests the money was withdrawn from the account rather than transferred.
I am ultimately unsure what was going on with the deposits and withdrawals in KP’s account. I accept he had a financial interaction with his daughter but the evidence does not clearly establish any of the monies in Mrs Taxpayer’s account were referable to a loan provided by KP. In those circumstances, the $60,000 amount in dispute must be included in Mrs Taxpayer’s taxable income.
The objection decision should be varied in accordance with these reasons.
PENALTIES
I found there were tax shortfalls in each of the years of income for each taxpayer. That brings me to the question of administrative penalties. I will deal with Mr Taxpayer’s position first.
Mr Taxpayer and the penalty and remission decisions
The Commissioner assessed Mr Taxpayer as being liable to administrative penalties equal to 75% of the shortfall in each year of income. The Commissioner also relied on s 284-220(1) of Schedule 1 to the TAA to increase the base penalty amount by 20% in the years following the 2009 year of income.
Mr Taxpayer argued the penalties were not imposed at the correct rate having regard to all the circumstances. He added the 20% uplift served no purpose. He also argued the penalties and interest should be remitted pursuant to s 298-20 of Schedule 1 to the TAA.
The rate of penalty
Section 284-75(1) of Schedule 1 to the TAA says a taxpayer is liable for an administrative penalty if the taxpayer makes a statement to the Commissioner that “is false or misleading in a material particular, whether because of things in it or omitted from it”. Section 284-75(5) says the taxpayer is not liable to pay an administrative penalty for a false statement if the taxpayer – and the taxpayer’s agent, if there is one – took reasonable care in connection with the making of the statement. There is a further exception in s 284-75(6) available where the taxpayer engaged a tax agent and provided that agent with all of the relevant taxation information. I do not understand Mr Taxpayer to be relying on the exception in sub-section (6) even though he did engage a tax agent.
The actual rate of the base penalty is determined with reference to the table in s 284-90(1). The Commissioner says Mr Taxpayer’s shortfall - or part of the shortfall - in each year of income results from the intentional disregard of a taxation law. The Commissioner reached that view because he concluded Mr Taxpayer’s understatement of his income in each year was so significant that he must have known there was no proper basis for making the statement.
Mr Taxpayer disagreed with that assessment, but it is incumbent upon him to establish the Commissioner was wrong and persuade me that a different rate of penalty is applicable in each year of income.
I have already pointed out Mr Taxpayer was not a sophisticated businessman. He dealt freely in cash and spent money on gambling, leisure and social activities with an almost joyous sense of abandon. He was not given to careful record-keeping. The findings I made about his propensity for transferring money between accounts because he was bored and wanted to play with the figures illustrate his singular, almost child-like approach to the management of his money and affairs.
Mr Taxpayer used an accountant to prepare his tax returns. The accountant gave evidence at the hearing about the way he dealt with Mr Taxpayer. I was told Mr Taxpayer provided bank statements and other source documents to his accountant to prepare his tax returns each year. Mr Taxpayer then provided explanations to the accountant for particular deposits and withdrawals. Those explanations were the product of a process of reconstruction on Mr Taxpayer’s part that depended almost entirely on the quality of his recollection. I have already explained I have concerns about the quality of that recollection: it would be hard enough for someone trying to reconstruct events occurring years before if that person had access to contemporaneous documents and records. The challenge was so much the greater if they had lived life at Mr Taxpayer’s furious pace with his carefree approach to money. His reconstructions should be treated with caution because, at a minimum, Mr Taxpayer was guessing about particular amounts in dispute – although the Commissioner inferred Mr Taxpayer was actively dissembling. Whatever the motivation, the evolving process of reconstruction was obvious even as Mr Taxpayer gave evidence. On a number of occasions, he changed evidence he had already given about the source of particular deposits or the nature of particular expenditures as his recollection changed. That evidence regarding Mr Taxpayer’s haphazard approach to managing his tax affairs on its face suggests he did not take reasonable care, and was likely reckless. But was there an intentional disregard of the law?
The Commissioner’s supposition that the shortfall resulted from intentional disregard of the law is certainly open on the facts. Mr Taxpayer may indeed have been consciously understating his true income or intentionally mischaracterising expenditures. I acknowledge there are alternative, more innocent explanations that would suggest a lower rate of penalty is appropriate. Mr Taxpayer might have been confused – about the nature of a loan as opposed to some other form of relationship, for example – as a consequence of poor quality advice, or naivety. I have already noted that was not the case Mr Taxpayer ran at the hearing, which is problematic in circumstances where he must persuade me the Commissioner was wrong, and that an alternative, more favourable explanation should be preferred.
Mr Taxpayer faces a further difficulty in his challenge to the Commissioner’s decision on the rate of penalty. Section 284-90 makes clear that the assessment of a 75% rate is available where the taxation shortfall or part of the shortfall is attributable to intentional disregard. While Mr Taxpayer initially asserted there was no shortfall in any of the income years, at the hearing his case focused on particular deposits, expenditures or amounts. In doing so, he implicitly (if not explicitly) accepted there remained a shortfall in each of those years (albeit not as great as the Commissioner contends). It follows that, even if I accepted and preferred innocent explanations for the particular amounts discussed at the hearing, there was little evidence directed to the residue of the shortfall in each year. In those circumstances, it is difficult for me to conclude Mr Taxpayer has discharged his onus.
In all the circumstances, Mr Taxpayer has not persuaded me the Commissioner was wrong in his assessment of the rate of penalty. While acknowledging there is a possibility Mr Taxpayer was merely careless or perhaps reckless, he has not discharged his burden of proof. The Commissioner’s assessment (in this respect, at least) must stand.
The uplift
Mr Taxpayer says the Commissioner should not have imposed the additional 20% penalty on top of the base penalty amount pursuant to s 284-220 in Schedule 1 of the TAA in the years of income following 30 June 2009 in which there was a shortfall. In written submissions, Mr Taxpayer’s counsel pointed out that the uplift provision was intended to provide an additional deterrent to a taxpayer who had already gotten into trouble and become liable to a penalty. It was argued that Mr Taxpayer’s difficulties arose out of a single factual matrix that was uncovered in the course of a covert audit. The amended assessments were all issued on the same day. In those circumstances, there was no opportunity for Mr Taxpayer to modify his behaviour in response to a finding that was made in support of the assessment of penalty for a particular year.
The Commissioner had little to say about the uplift penalty in submissions lodged on his behalf. I was told Mr Taxpayer had failed to discharge his onus of demonstrating the uplift should be imposed. I disagree. Mr Taxpayer offered cogent reasons why the uplift should not be imposed. That aspect of the penalty assessment should be set aside.
Should penalties and interest be remitted?
The Commissioner says Mr Taxpayer failed to establish any reason why penalties and interest should be remitted pursuant to s 298-20 of Schedule 1 of the TAA. Mr Taxpayer’s evidence at the hearing, and the submissions made following the hearing, did not focus on the issue. But the story does not end there.
Mr Taxpayer passed away following the hearing. While his case for remitting the penalties if he had survived was not persuasive, it is difficult to see what purpose would be served in persisting with the penalties now. They would, in effect, be paid out of his estate. The deterrent or punitive value of the penalties has diminished or disappeared; only their burden remains. To impose penalties in the circumstances would be an example of the sort of unreasonable behaviour discussed by Logan J in Sullivan v Civil Aviation Safety Authority.
I am satisfied the penalties should be remitted in their entirety in the unusual circumstances following Mr Taxpayer’s death. I reach a different conclusion in relation to the shortfall interest charges. There is nothing in the evidence or the submissions or in the circumstances of Mr Taxpayer’s demise which suggest it would be appropriate to waive the interest charges. The shortfall amounts in each year of income represent a debt due to the Commonwealth. There is nothing unreasonable about the imposition of interest in the circumstances.
The objection decision with respect to penalties is varied to remit the entirety of the penalties. The decision not to remit the shortfall interest charges is affirmed.
Mrs Taxpayer and the penalty and remission decisions
Mrs Taxpayer received a default assessment in the year of income ending 30 June 2013. She did not make a false statement to the Commissioner that led to a tax shortfall. Indeed, the whole point was that she did not make any statement at all about that year of income. The Commissioner was forced to identify the shortfall without the benefit of her assistance. Having identified a shortfall, he imposed an administrative penalty pursuant to s 284-75(3). The rate of penalty was 75% of the shortfall pursuant to item 7 in s 284-90(1) of Schedule 1 to the TAA.
I have concluded the shortfall was much smaller than the Commissioner identified because I reached a different view as to how Mrs Taxpayer should have accounted for the value of the Mercedes Benz motor vehicle. But it appears there is still likely to be a shortfall. Given she did not file a return and the conditions in s 284-75(3) are satisfied, it would appear the penalty is assessed at the correct rate.
Mrs Taxpayer’s position in the 2014 year of income is different. For a start, the objection decision relates to an amended assessment, not a default assessment. The penalty was imposed on a taxation shortfall that was a result of a false statement.
I found the shortfall in the 2014 year of income was somewhat less than the Commissioner had assessed after identifying amounts that were the proceeds of gambling. Importantly, however, I was not persuaded the monies provided by Mrs Taxpayer’s father, KP, should be treated as a loan that would be excluded from her assessable income. The Commissioner said the shortfall, or part of it, was properly regarded as the result of an intentional disregard of the taxation laws.
I accept a finding of intentional disregard is open on the facts. I have already discussed my reservations about the evidence from Mrs Taxpayer and her father about the amount in question. She did not succeed in persuading me the Commissioner’s amended assessment was wrong. The evidence does not clearly establish the assessment of the base penalty was wrong either.
I would reach a different view with respect to the uplift which increased the base penalty amount in the 2014 year of income. The submissions lodged on behalf of Mrs Taxpayer pointed out the purpose of the uplift provision was to impose an additional penalty on a taxpayer who had been caught out before. But the default and amended assessments were issued on the same date following a covert audit. There was no opportunity for Mrs Taxpayer to learn anything from the default assessment. Moreover, as I have already explained, the taxation shortfall in the 2013 year of income arose largely out of a particular set of circumstances that did not reflect badly on her, and bore no resemblance to what was alleged against her in the following year of income. I am satisfied it would not be reasonable to impose an uplift in those circumstances.
That brings me at last to the question: should the penalties and shortfall interest charges be remitted? The evidence and submissions lodged in connection with the hearing do not set out a persuasive case for remitting the penalties pursuant to s 298-20 of Schedule 1 to the TAA or remitting the shortfall interest charges. Having said that, Mrs Taxpayer’s circumstances changed upon the death of her husband. While the parties did not make any submissions in this connection, I have no reason to doubt Mr Taxpayer’s death was a terrible blow to his wife. She has been left to raise the couple’s child alone. As Mr Taxpayer explained in his evidence, the child has special needs. It must also be said the evidence suggests that, at least in the 2014 year of income, Mrs Taxpayer was aware of and involved in the problematic transactions uncovered in the Commissioner’s covert audit.
I am satisfied it would be unreasonable to impose the full penalty in both years of income given Mrs Taxpayer’s unusual circumstances – specifically, the fact she has been left to raise her daughter with special needs following the untimely death of her husband. Those special circumstances prompt a closer look at her liability in the 2013 year of income. Her conduct in relation to the Mercedes Benz, at most, would be regarded as the product of a want of reasonable care; by analogy, the penalty should be fixed at 25% with the balance being remitted. Her conduct in the 2014 year of income was more problematic. The evidence suggests she was closely involved in the questionable transactions with her father that she claimed to be a loan. I am not satisfied it would be appropriate to remit the entirety of the penalty given Mrs Taxpayer’s complicity in those transaction. Remitting the entirety of the penalty would be a step too far in those circumstances. I am satisfied that half of the penalty should be remitted.
The objection decision with respect to penalties should be varied in accordance with these reasons.
I certify that the preceding 157 (one hundred and fifty -seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe
....................................[sgd]....................................
Associate
Dated: 6 May 2020
Date(s) of hearing: 6 to 9 November 2017, 1 Febraury 2018 Date final submissions received: 25 May 2018 Counsel for the Applicant: Mr P Bickford Solicitors for the Applicant: Small Myers Hughes Lawyers Counsel for the Respondent: Mr R Jedrzejczyk Solicitors for the Respondent: Craddock Murray Neumann Lawyers SCHEDULE
MJPV
2009 Income Year
The objection decision be set aside and remitted to the Commissioner for reconsideration with a direction that:
(a)the Commissioner recalculate the applicant’s liability in light of the possibility that transfers between the applicant’s accounts were inadvertently double counted.
The objection decision is otherwise affirmed.
2010 Income Year
The objection decision be set aside and remitted to the Commissioner for reconsideration with directions that:
(b)the Commissioner recalculate the applicant’s liability in light of the possibility that transfers between the applicant’s accounts were inadvertently double counted; and
(c)the amount of $7,946.70 is the proceeds of gambling and excluded from the applicant’s assessable income.
2012 Income Year
The objection decision be set aside and remitted to the Commissioner for reconsideration with directions that:
(d)the Commissioner recalculate the applicant’s liability in light of the possibility that transfers between the applicant’s accounts were inadvertently double counted; and
(e)the amounts deposited on 10 December 2011, and 4, 6 and 14 February and 17 March 2012 be excluded from the applicant’s assessable income.
2013 Income Year
The objection decision be varied such that the amounts in the cheques adding up to $16,010.40 be excluded from the applicant’s assessable income.
2014 Income Year
The objection decision be set aside and remitted to the Commissioner for reconsideration with directions that:
(f)the Commissioner recalculate the applicant’s liability in light of the possibility that transfers between the applicant’s accounts were inadvertently double counted; and
(g)the amount of $35,000 is a loan from LB and excluded from the applicant’s assessable income.
Penalties
The objection decision in respect of penalties for each of the income years be varied to remit the entirety of the penalties.
The decision not to remit the shortfall interest charge is affirmed.
SZGK
2013 Income Year
The objection decision be varied so that the reduced value of the vehicle is included in her taxable income.
2014 Income Year
The objection decision be affirmed.
Penalties
The objection decision in respect of penalties for each of the income years be varied as follows:
(a)the penalty for the 2013 income year be fixed at 25% with the balance being remitted;
(b)the penalty for the 2014 income year be remitted
(c)remit the uplift for the 2014 income year.
Key Legal Topics
Areas of Law
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Tax Law
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Administrative Law
Legal Concepts
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Penalty
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Remedies
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Procedural Fairness
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Intention
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Statutory Construction
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