Pisani and Pisani

[2012] FamCA 532

FAMILY COURT OF AUSTRALIA

PISANI & PISANI [2012] FamCA 532

FAMILY LAW - PROPERTY SETTLEMENT – Wife claims husband engaged in fraudulent tax evasion which is denied by the husband – Discussion of whether Court is obliged to refer to Deputy Commissioner of Taxation - Procedural fairness – Question of degree - Where circumstances warrant referral – Where the potential liability would have a considerable impact on the asset pool it is appropriate to adjourn the s 79 proceedings until that issue is resolved – Where the property settlement proceedings are adjourned.

Family Law Act 1975 (Cth) s79

AVA & BVB [2000] 1 FLR 701
Biltoft & Biltoft (1995) FLC 92-614
Durieu & Wiggins (Unreported FamCA 4 February 1997)
Kelly & Kelly No 2 (1981) FLC 91-108
Malpass & Mayson (2000) FLC 93-601
Page & Vanker and Anor [1990] NSWCA 142
Prince & Prince (1984) FLC 91-501
re: Bailey (1990) FLC 92-117

APPLICANT: Mr Pisani

RESPONDENT: Ms Pisani

FILE NUMBER: SYC 1736 of 2010

DATE DELIVERED: 2 July 2012

PLACE DELIVERED: Sydney

PLACE HEARD: Sydney

JUDGMENT OF: Ryan J

HEARING DATE: 3 April 2012

REPRESENTATION

SOLICITOR FOR THE APPLICANT: Jordan Djundja

SOLICITOR FOR THE RESPONDENT: KP Lawyers & Barristers

Orders

1. That the Principal Registrar provide to the Deputy Commissioner for Taxation the following documents:

   (a)affidavit of Ms Pisani sworn 29 January 2012, filed 30 January 2012;

   (b)affidavit of Mr B sworn 29 January 2012, filed 30 January 2012;

   (c)affidavit of Ms B sworn 29 January 2012;

   (d)affidavit of Mr Pisani sworn 2 March 2012;

   (e)Expert Report of Ms J dated 31 October 2011; and

   (f)Ryan J’s reasons for judgment dated 2 July 2012.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Pisani & Pisani has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER: SYC 1736 of 2010

Mr Pisani

Applicant

And

Ms Pisani

Respondent

REASONS FOR JUDGMENT

1. In the context of defended property settlement proceedings brought pursuant to s 79 of the Family Law Act 1975 (Cth) (“the Act”) an issue has arisen about whether the Court should bring to the attention of the Australian Taxation Office (“ATO”) evidence of fraudulent tax evasion adduced by the wife in relation to the husband. According to the wife there is strong prima facie evidence of fraudulent tax evasion by the husband in relation to which she says it is appropriate and necessary for the material to be referred to the ATO.

2. The husband, who is professionally qualified and registered conducts a professional business which he owns, opposes referral.  Not only does he put into issue the evidence upon which the wife relies, it is argued on his behalf that referral is appropriate only “when a court finds evidence that a party has been guilty of fraud, tax evasion or some other criminal offence, … there must be clear and convincing evidence of such illegality either by admission or clear prima facie case or following hearing”.  It is argued that generally, individuals do not engage in fraudulent or criminal conduct and that the Court would require strong satisfaction of fraudulent tax evasion before referral.  It is further submitted that referral prior to completion of the final hearing will delay that hearing, probably increase the parties’ costs in these proceedings as well as incur costs in relation to an ATO audit.

3. The nature of the Court’s obligation in relation to the administration of the laws of this country, particularly, where there is evidence of fraudulent tax evasion, was considered by the Full Court of the Family Court of Australia in Malpass & Mayson (2000) FLC 93-601. An issue on appeal was whether the trial Judge in that case erred in failing to give the parties an opportunity to address the Court on the ramifications of a referral to the ATO. Relevantly, the Full Court (per Nicholson CJ, Murray and Kay JJ) said:

   29. In Durieu and Wiggins (unreported 14 February 1997, PA 6511/95) Halligan JR when considering whether to refer a matter to the Attorney General where there was evidence of tax evasion said:

   “The position, as a matter of legal principle, in my view, has been fairly strongly set out not only in a number of authorities — some reported, some not — but also has been dealt with in an article in the current notes of the Australian Law Journal, and in particular I quote from 70 ALJ 889, where, quoting from an unreported New South Wales Court of Appeal decision given on 7 December 1990 of Page v Vanka from the reasons of his Honour Justice Handley, the following appears:

   ‘In recent years the question of the duty of a court which is confronted with evidence of income tax fraud in the course of a hearing between parties other than the revenue authority has been discussed in a number of reported decisions. See Kelly v Raymor Illawarra Pty Limited (1982) 13 ATR 592 a decision of Wootton J in the Equity Division of this court; In the marriage of P and P [(1985) FLC ¶91-605] (1985) 9 Fam LR 1100, a decision of Lindenmeyer J of the Family Court; Petera Pty Limited v EAJ Pty Limited (1985) 7 FCR 375 a decision of Wilcox J, and finally Giorginis v Kastrati (1988) 49 SASR 371 a decision of the Full Court of South Australia. In that case, Von Doussa J, who delivered the principal judgment said at page 376:

   “Where a tax fraud or evasion is disclosed in evidence it is the court's duty to draw the evidence to the attention of the executive branch of government for such action as may be appropriate.”

   In my opinion this court would not be doing its duty to administer the laws of this country if it ignored this evidence and took no effective action to bring it to the attention of the appropriate authorities. In my opinion the Registrar of this court should be directed to forward to the Deputy Commissioner of Taxation the relevant part of these reasons for judgment together with a copy of the affidavit of Graham Bruce Godby of 26 June 1990.’

   In my view that is entirely on point in this particular case, and in my view it is authority that I should follow. It is consistent with the practice adopted in a variety of superior courts and dealt with in reported decisions referred to. The evidence, as I say, although I could not find that it is conclusive by any means, in my view provides prima facie evidence of fraudulent tax evasion. In my view, in the circumstances, to use the words of Handley JA, I would not be doing my duty to administer the laws of this country if I ignored the evidence and took no effective action to bring it to the attention of the appropriate authorities. I therefore propose to order that the Registrar forward to the Deputy Commissioner of Taxation copies of the mother’s affidavits filed in the proceedings, a transcript of her oral evidence and a copy of my reasons just given.”

   30. Recently, Charles J in the Family Division of the High Court of England in AVA and BVB [2000] 1 FLR 701 extensively discussed the competing interests in matrimonial causes between seeking a full and frank disclosure and at the same time protecting the revenue and not being party to a fraud upon the revenue. His Honour concluded at 728:

   “... that in ancillary relief proceedings in assessing the available assets the court has to consider liabilities to the Revenue and if it is satisfied that they exist it would be wrong for it to ignore them or to proceed on the basis that such liabilities will not be, or are unlikely to be, met because the Revenue will not be made aware of the relevant information, unless there is a compelling public interest which leads to the conclusion that to take this course would be in the overall public interest.

   ... the material that has caused the court to be satisfied that such liabilities or potential liabilities exist, or that there has been evasion or non-payment of tax which should be investigated and quantified by the Revenue, should be disclosed to the Revenue.”

   Then at 740:

   “... it would not be right for a court to regard the public interests in the administration of justice (and thus the resolution of private disputes) as a private or public interest that it can confer over competing public interests in deciding whether or not it should volunteer or instigate disclosure.”

   31. Despite these authorities we do not think that it necessarily follows that the Court is always under a duty to report the fact of commission of possible offences to relevant authorities including revenue authorities, although it clearly has the power to do so. Questions of degree must be relevant. There are many cases where minor irregularities are revealed in relation to taxation, social security and other issues. We think it unreasonable for the Court to burden itself with a duty to report all of these matters. Different considerations may apply in relation to more blatant and substantial irregularities. We leave the determination of this issue to be determined in a case where the point arises directly. It does not arise here for there is no dispute as to the Court’s power to make such a reference, as his Honour did.

4. Their Honours’ observations that questions of degree in relation to whether the Court is “always” under a duty to report “possible offences” puts into context the notion of there being an absolute obligation irrespective of the magnitude of the alleged breach.  Their Honours left for another case consideration of whether “in relation to more blatant and substantial irregularities” the Court is obliged to refer.  Nothing said by their Honours would suggest that the Court should fail to refer in appropriate circumstances, including, in circumstances similar to those discussed in the cases mentioned in the passages referred to.

5. In Page v Vanker and Anor [1990] NSWCA 142 (to which reference is made in the Malpass & Mayson passages recorded earlier) the salient passage is found in the judgment of Handley JA (with whom Mahoney JA and Wardell AJA agree).  At par 25, Handley JA said:

   The "fresh evidence" affidavits filed by the appellant in support of his application for a new trial included one by Graham Bruce Godbee sworn 26 June 1990. This disclosed that an independent witness who gave evidence at the trial and whose evidence was accepted by the trial judge worked for Hynbrood Pty Limited during part of 1985 under one false name for two weeks a month, and under another false name for the other two weeks. Later that year he again worked for the company for two weeks a month under his real name disclosing his correct address, and for the other two weeks under another assumed name and a false address. This is strong prima facie evidence of fraudulent tax evasion.

6. And at par 26:

   In my opinion this Court would not be doing its duty to administer the laws of this country if it ignored this evidence and took no effective action to bring it to the attention of the appropriate authorities.  In my opinion the Registrar of this Court should be directed to forward to the Deputy Commissioner of Taxation the relevant part of these reasons for judgment together with a copy of the affidavit of Graham Bruce Godbee of 26 June 1990. 

7. Wardell AJA said:

   I agree with Handley JA that the Registrar should be directed to send the material he mentions to the Deputy Commissioner of Taxation.

8. It is apparent that the evidence was not tested before their Honours and constituted an affidavit sworn by one person about the conduct of another.  This was accepted by Handley JA as strong prima facie evidence of fraudulent tax evasion.  Van Doussa J in Giorginas & Kastrati (1998) 49 SASR 371 considered that referral is required when tax fraud or evasion is disclosed in evidence.

9. Nothing said by their Honours in Page v Vanker and Anor or Malpass & Mayson establishes that a referral should only be made after the evidence of fraudulent tax evasion has been tested or following admission. 

10. The arguments about why the Court would refer only after the evidence is tested are well set out in the written submissions relied upon by the husband (dated 3 April 2012).  These include prejudice to the trial (delay), expense and the avoidance of practical mischief occasioned by unmeritorious or malicious allegations (for example, damage to reputation).

11. On the other hand, as the various cases considered by their Honours in Malpass & Mayson demonstrate, the Court’s ability to make final property orders which are just and equitable is compromised if the Court is unable to determine the extent of the parties’ (or a party’s) liabilities.  In Prince & Prince (1984) FLC 91-501 and re: Bailey (1990) FLC 92-117 where the potential liability would have a considerable impact on the asset pool, the Court held that it was appropriate to adjourn the s 79 proceedings until that issue was resolved. A different approach would be appropriate where the Court is able to make an allowance for a particular liability or the liability may be appropriately disregarded. Kelly & Kelly No 2 (1981) FLC 91-108; Biltoft& Biltoft (1995) FLC 92-614.

Is there evidence of fraudulent tax evasion?

1. On 30 January 2012 the wife filed an affidavit sworn by her the day before.  It is her evidence that in early 2009 the husband brought a box home which he told her contained $30,000.00 from a developer client.  Thereafter he, on a weekly or fortnightly occurrence, brought home boxes of money which he counted, recorded on a running list and stored in the pantry.  On one occasion she heard the husband ask her father to count the money in a box and to confirm that it contained $30,000.00.  With this request she said her father complied and that he confirmed the amount. She gave evidence about clandestine behaviour by the husband in relation to the money and that in August 2009 he told her that the cash in the boxes amounted to $400,000.00.

2. According to the wife, following a domestic incident in the home on 25 January 2010, in accordance with police advice, she stayed overnight at her parents’ home.  When she returned the following day she noticed that the boxes which contained the cash were gone.  The husband told her he had removed the cash to a safer place.

3. The wife’s father, Mr B, swore an affidavit on 29 January 2012 which was filed the following day.  He gave direct evidence of seeing the husband with “large sums of cash in a rectangular cardboard box” (during 2009).  According to him, the husband asked him to count the money in a box and confirm that it contained $30,000.00 which he did.  In addition, he gave evidence of a conversation with the husband about a client of the husband who was “paying me in cash little by little”.  Requests were made by the husband during 2009 for the wife’s father to stay in “the house.  I have a lot of cash in the house and you never know what can happen”.  In addition, it is alleged that during the latter part of 2009 the husband asked the wife’s father to invest $200,000.00 in a joint venture, to which the husband would add “$400,000.00 in cash”.  Having taken advice from his financial advisor, the wife’s father declined.

4. Ms B swore an affidavit on 29 January 2012 which was filed the following day.  Ms B is the wife’s mother.  The gravamen of her evidence is that she corroborates that given by her husband.  In addition, she deposes to conversations with the husband, for example, “you see these boxes?  They have a lot of money.  Nobody should know about them”.  So that it is clear, she saw the boxes but did not herself examine their contents.

5. In support of a referral to the ATO, the solicitor for the wife relies upon a single expert report, prepared by Ms J.  Ms J is a chartered accountant retained by the parties to value their interests in various entities which relevantly, comprise the husband’s professional business, M Pty Ltd.  The gravamen of the submission made by the solicitor for the wife is that there is a core consistency between the evidence that the husband did not account in the business for all income earned by it and the expert’s conclusions, particularly in relation to the growth in professional staff but not an increase in professional fee income and income earned compared to industry norms. 

6. For example, at par 101, Ms J said:

   The increase in FTE staff members in [M Pty Ltd] (refer paragraph 61) has not resulted in a similar increase in professional fees rendered.  I would have expected that the additional staff would have correlated with an increase in fees generated in FY2009 and FY2010.  One explanation for this lack of correlation between staff members and fees generated is that at 30 June 2010 the Business has had a material increase in WIP.  I do not have sufficient information to accurately calculate WIP as there is no time recording system utilised in the Business.  If WIP is in fact higher than my assumed WIP then this will result in a material understatement in my valuation of [M Pty Ltd].  (Report dated 31 October 2011, p 16) [footnote omitted] 

7. In relation to office procedures, she records at par 64:

   Despite charge-out rates being assigned to staff, the Husband asserts that there is no [business] management system in place to monitor job progress or record time spent by staff on specific client matters.  (p 12)  [footnote omitted] 

8. She comments, at pars 81 and 82:

   I have normalised staff costs.  The percentage of reported staff costs over revenue is 46% in FY2008, 67% in FY 2009 and 74.3% in FY2010, as set out above. 

   FY2009 and FY2010 staff costs were well above industry standards of 46.1% of revenue.  In my opinion, [M Pty Ltd’s] combined wages and contractor fees for FY2009 to FY2010, based on the mix of staff and use of contractors, are excessive compared to industry standards.  (p 13) [footnote omitted] 

9. The wife also relied upon deeds of settlement between the husband and a former client of his.  Of particular relevance is the husband’s successful claim against Company N for outstanding fees in the amount of $283,400.00.  As is correctly pointed out, those fees alone correspond to more than 50 per cent of the entire fees which the husband said were rendered in the relevant year (2010).

10. To adopt the words used by Handley JA in Page v Vanker and Anor the evidence relied upon by the wife provides “strong prima facie evidence of fraudulent tax evasion”.

11. As was earlier referred to, the husband denies that he has engaged in fraudulent taxation evasion.  In a large affidavit, he denied each allegation made by the wife and her parents.  He provided a detailed description of the billing methodology utilised in his professional business.  He deposed that accounts are rendered to clients at the end of each project in relation to which it is his practice “to keep the amounts outstanding to me from any one client as low as possible so as to maintain income flow to the business”.  Clearly, a different approach was taken with Company N.  According to the husband, as each item of work is completed the work is invoiced and that invoice forwarded to the client.  Cash payments, according to him, are rare and, when made, immediately receipted and banked.  Self evidently, the gravamen of the wife’s evidence is that irrespective of the system in place, it was not adhered to.

12. In relation to developer clients, there are 12.  It is the husband’s experience that although these clients are involved in developments which involve large sums of money, the transactions are not undertaken in cash. 

13. Attached to the husband’s affidavit are the professional business financial statements for the years ended 2009 and 2010 which disclose trade debtors in the amounts of $66,000.00 and $170,000.00 (rounded out) respectively.  The significance of these documents is to refute the wife’s father’s evidence that there was a discussion with the husband about a client who owed $250,000.00.

1. There are a variety of documents (loan agreements) which the husband entered into in late 2011 which, relevantly, he says show his personal indebtedness and answer the wife’s claim that the income he disclosed from the business was insufficient to support his lifestyle.

Discussion

1. As was earlier mentioned, the evidence relied upon by the wife provides strong prima facie evidence of fraudulent tax evasion.  Potentially, the amount which may be due to the ATO, in the context of both parties’ contentions as to the pool of assets, is not insignificant.  If the husband’s formulation of the asset pool is accepted, there is a deficiency of assets.  The wife views the asset pool differently and claims there are net assets of approximately $1 million.  While the asset pool cannot yet be determined, if the husband is correct about the value of the parties’ assets, and, as alleged by the wife, he has engaged in fraudulent tax evasion, adjudication of the property settlement applications at this time without referral to the ATO, makes the parties vulnerable to an application by the ATO to set aside the orders.  Again, predicated upon the husband’s assessment of the asset pool, it is not possible to make provision for satisfaction of a possible liability to the ATO. 

2. These difficulties are not adequately addressed by either a hearing on that discrete issue or waiting until after the final hearing.  The former involves not insignificant costs which if there is a deficiency of assets, is undesirable.  The latter makes it extremely difficult, if not impossible, to finalise the asset pool and deal with the potential liability.  Of course, referral does not automatically result in an ATO audit.  It is the Court’s experience that an assessment is made by the ATO about whether to do so.  The point being, that it is not appropriate to infer that referral will necessarily result in an expensive audit or reputational damage.  That an audit and its associated costs may follow are nonetheless relevant factors.  So that it is clear, it would not be appropriate to expose the husband to the potential costs of an audit unless there existed proper reasons for so doing. 

3. Counsel for the husband provided a précis of the type of challenge that would be made to the wife and her parents’ credibility.  This included the wife’s failure to disclose this evidence sooner and asserted inconsistencies between the witnesses.  As to the former, this issue was disclosed on the first day that the property proceedings were to be listed before the docket Judge.  Nor is it significant that the wife did not complain to police about removal of the boxes of cash after the domestic incident on 25 January 2010.  These matters and the asserted inconsistencies do not, in my view, taint the evidence adduced by the wife.

4. On balance, I am satisfied that it is appropriate that the evidence relied upon in these proceedings and discussed above is referred to the Commissioner for Taxation.  The property settlements proceedings will be adjourned and should be relisted after the Deputy Commissioner has informed the parties if there is to be an investigation.

I certify that the preceding twenty nine (29) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Ryan delivered on 2 July 2012.

Associate:     

Date:              2 July 2012