RHDB and Commissioner of Taxation (Taxation)

[2017] AATA 3091

RHDB and Commissioner of Taxation (Taxation) [2017] AATA 3091 (20 December 2017)

Division:TAXATION & COMMERCIAL DIVISION

File Numbers:         2014/3325-3334

Re:RHDB

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:The Hon. Dennis Cowdroy OAM QC, Deputy President

Date:20 December 2017

Place:Sydney

The decision under review is varied in respect of the inclusion of the motor vehicle in the taxpayer’s assessable income. Otherwise the decision is affirmed.

In the event that any further issue are to be determined by the Tribunal, either party may make application to the Registrar within 28 days of the publication of these reasons.

.................................[sgd]...............................

The Hon. Dennis Cowdroy OAM QC, Deputy President

Catchwords

TAXATION – income tax – whether payments made to the taxpayer or his company were for business expenses or whether such payments were made to the taxpayer for services and are included as taxable income – whether payments made by the taxpayer’s companies were by way of remuneration for services provided by the taxpayer to the companies – the effect of an agency agreement – the validity of a loan transaction – whether rental assistance constitutes a taxable benefit – whether rental moneys paid are taxable – whether the sale proceeds of a motor vehicle constitutes part of the taxpayer’s assessable income – whether income received constitutes personal services income – decision under review is varied.

LEGISLATION

Income Tax Assessment Act 1936 (Cth), ss 21A, 65, 167

Income Tax Assessment Act 1997 (Cth), Ch. 5, Div. 32, Sub-div. 900-D, ss 6-5, 15-2, 84-5, 84-15, 86-15(2), 87-10, 87-15, 87-18(3), 87-30, 900-20, 900-25, 900-30

Taxation Administration Act 1953 (Cth), Div. 84, ss 14ZZK(b), 14ZZO

CASES

Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1

Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341
Browne v Dunn (1893) 6 R 67
Case S56 85 ATC 408.
Case V60 88ATC 434
Commissioner of Taxation v Dixon Consulting Pty Ltd [2006] FCA 1748
Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
DSTE Litigation
Equuscorp Pty Ltd v Glengallan Investments Pty Limited (2004) 218 CLR 471
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088; 90 ALR 341
Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266
Federal Commissioner of Taxation v Cooke & Sherden 80 ATC 4140
Gashi v Federal Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
George v Federal Commissioner of Taxation (1952) 86 CLR 183
H R Sinclair and Son Pty Ltd v Federal Commissioner of Taxation (1966) 114 CLR 537
Jagelman v Federal Commissioner of Taxation (1996) 96 ATC 4055
Millar v Federal Commissioner of Taxation (2016) 243 FCR 302
Penrowse Pty Ltd and Federal Commissioner of Taxation [2013] AATA 10
R v Davis (1978) DLR (3d) 233
Radaich v Smith (1959) 101 CLR 209
Ransom v Minister of National Revenue [1967] 67 DTC 5235
Richard Walter v Federal Commissioner of Taxation [1995] FCA 480
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
Rigoli v Federal Commissioner of Taxation [2014] ATC 20-446; [2016] FCAFC 38;68 AAR 478
Roads and Traffic Authority of NSW v Commissioner of Taxation (1993) 43 FCR 223
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514
Skiba v Federal Commissioner of Taxation 2007 ATC 2467
Snook v London& West Riding Investments Ltd [1997] 2 QB 786
Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570
Tennant v Smith (1892) AC 150
Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 63
White Industries (Qld) Pty Ltd v Flower & Hart (A Firm) [1998] 29 ASCR 21

World Book (Australia) Pty Ltd v Federal Commissioner of Taxation (1992) 92 ATC 4327

SECONDARY MATERIALS

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement

Taxation Ruling TR 2001/8 Income tax: what is a personal services business

REASONS FOR DECISION

The Hon. Dennis Cowdroy OAM QC, Deputy President

20 December 2017

1. The taxpayer (‘RHDB’) (hereafter referred to as the taxpayer) seeks review of default assessments issued pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’) in respect of the financial years ending 30 June 2004, 2006, 2009, 2010, 2011, 2012 and 2013. Although the applications for review are separate, it is convenient for the matters to be considered together. 

2. The burden rests upon the taxpayer pursuant to s 14ZZK(b) of the Taxation Administration Act 1953 (‘TAA’) to establish that the assessments for primary tax in the relevant income years are incorrect: see Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 63 at 87-88; George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 201; Rigoli v Federal Commissioner of Taxation [2016] FCAFC 38; 68 AAR 478 at [25]-[28]; Gashi v Federal Commissioner of Taxation [2013] FCAFC 30; (2013) 209 FCR 301 at 314 – 315; 1 ATR 1 at [61]-[63]; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623; 20 ATR 1370 at 1374; 64 ALJR 166 at 169; 90 ATC 4088 at 4092; 90 ALR 341 at 345-346.

3. The taxpayer was assessed to income tax for the 2004 to 2013 income years based on the following unexplained receipts paid to the taxpayer, BRDA (‘BRDA’), or to the taxpayer’s former wife.

Receiving entities
Income Year	RHDB	BRDA	Mrs RHDB	Total ($)
2004	-	150,000	-	150,000
2005	30,558	-	30,558
2006	361,838	-	361,838
2007	62,839	-	-	62,839
2008	4,489	8,915	-	13,404
2009	80,984	377,930	-	458,914
2010	224,331	187,111	500,000	911,442
2011	311,101	159,614	500,000	970,715
2012	245,248	49,850	-	295,098
2013	275,427	79,894	-	355,321

1. “RHDB” column: The amounts in this column include amounts paid into the taxpayer's accounts, other amounts identified from AUSTRAC where the taxpayer was the named beneficiary, and other amounts including sums paid by KGWE (a company referred to later in these reasons) for the taxpayer's accommodation which the Commissioner considers were paid at the direction of, or on behalf of, the taxpayer.

2. “BRDA” column: The amounts include amounts deposited into the St George Bank account of BRDA and amounts for which the company is shown in AUSTRAC transaction reports as the beneficiary (being payments the Commissioner considers were made at the direction of, or on behalf of, the taxpayer).

3. "Mrs RHDB" column: The amounts in this column consist of amounts paid at the direction and/or on behalf of the taxpayer by associated entities in satisfaction of orders of the Family Court of Australia, namely the payment of two amounts of $500,000 to Mrs RHDB by each of AXEJ, a Singaporean company registered on 23 November 2007 and by UHED Investments Ltd (‘UHED‘), a company registered in the British Virgin Islands on 18 October 2007. The sole director of AXEJ and UHED is Mr CEDJ.

   History of Assessments

4. The Commissioner conducted an audit of the taxpayer’s taxation affairs for the years ending 30 June 2004 to 30 June 2013.

5. On 8 November 2013, the Commissioner assessed the taxpayer under s 167 of the ITAA 1936 and issued notices of assessment with the taxable income amounts as follows:

Income Year	Total ($)
2004	150,000
2005	30,558
2006	361,838
2007	62,839
2008	13,404
2009	458,914
2010	911,442
2011	970,715
2012	295,098
2013	355,321

1. On 8 November 2013, the Commissioner issued notices of assessment and liability to  pay penalty for failing to provide a document for each of the income years 2004 to 2012 as summarised  below:

Income Year	Tax-related liability	Base penalty amount (75%)	Increase by 20%	Total ($)
2004	61,057.00	45,792.75	N/A	45,792.75
2005	5,797.77	4,348.33	869.67	5,218.00
2006	162,659.81	121,994.86	24,398.94	146,393.80
2007	15,772.67	11,829.86	2,365.90	14,195.40
2008	360.60	270.45	54.05	324.50
2009	194,984.41	146,238.31	29,247.39	175,485.70
2010	407,784.95	305,838.71	61,167.74	367,006.45
2011	434,639.62	325,979.72	65,195.93	391,175.65
2012	115,922.53	86,941.90	17,388.35	104,330.25

1. On 14 November 2013, the Commissioner issued reasons for decision in relation to the audit.

2. On 8 January 2014, the taxpayer lodged objections against the notices of assessment for the 2004 to 2013 income years and the penalty assessments for the 2004 to 2012 income years.

3. On 16 January 2014 (by telephone) and on 12 February 2014 (by letter), the Commissioner requested further information to assist in the determination of the objections.

4. On 20 February 2014, the taxpayer sought a 90-day extension to provide the information requested.

5. The Commissioner did not grant the extension but advised the taxpayer that any information provided by the taxpayer up until the time that the notice of objection decisions issued would be taken into account.

6. On 26 June 2014, the Commissioner issued a notice of objection decision, wholly disallowing the objections without any additional information being provided by the taxpayer.

7. On 30 June 2014, the taxpayer lodged his application for review of the objection decisions with the Administrative Appeals Tribunal (‘Tribunal’).

8. On 30 June 2015, the taxpayer filed a notice of discontinuance with the Tribunal.

9. On 17 December 2015, the taxpayer filed with the Tribunal:

   (a)an  application  for  an  extension  of  time  to  file  an  application for  review of  the objection decisions; and in the alternative

   (b)an application for reinstatement of the proceedings filed on 30 June 2014.

10. On 30 May 2016, the Tribunal reinstated the proceedings filed on 30 June 2014.

11. On 9 September 2016, the taxpayer filed his first affidavit dated that day (‘first affidavit’). Thereafter, six additional affidavits were filed by the taxpayer. Another witness, CEDJ provided three affidavits. As will become apparent, Mr CEDJ has had a long-standing business relationship with the taxpayer and has been intimately involved with the taxpayer in the raising of money which was used for the purpose of litigation funding.

12. The Commissioner challenges the credit of the taxpayer, and points to the fact that no tax returns have ever been filed by either OKDH Pty Ltd (‘OKDH’) or by BRDA. Nor has the taxpayer filed any personal income tax returns since 1993 although he is and was a resident of Australia since that year.

13. The taxpayer was a shareholder, and had an indirect interest in and is or was a director of the following Australian corporations:

Entity	Applicant is Director for the following period	Shareholder
ZBDE P/L	30 Sept. 2004 to present	WBDK
BRDA	29 Sept. 1996 to present	RHDB, 1996 to present
NLEQ P/L	25 May 1998 to 21 Aug. 2000
OKDH P/L	19 June 2007 to present	RHDB, 19 June 2007 to present
OKDH Pty Ltd	24 May 1993 to present	RHDB
JDUE P/L	1 Dec. 2002 to 8 April 2013	CQYK P/L
UDEW
CQYK P/L	1 Dec. 2002 to 1 Aug. 2012	RHDB

TAXPAYER’S CLAIMS

1. There have been many changes to the taxpayer’s position from the time of the Commissioner’s determination and up to and including the hearing of these proceedings.

   Taxpayer’s first affidavit

   2003/2004

2. For the financial year ended 30 June 2004, the taxpayer, in his affidavit, sworn on 9 September 2016 (‘the first affidavit’) assessed his income at $17,619.35. The net amount assessed by the taxpayer was arrived at following business deductions. Such expenses include accommodation living in rented premises; motor vehicle expenses, insurance travel and other deductions the taxpayer also asserts, that he was reimbursed $32,119.78 by his company of which he is the sole director and shareholder namely BRDA.

3. No original records of either the taxpayer or of his company were provided.

   2005/2006

4. In this financial year, the applicant claimed that he was paid director’s fees from BRDA amounting $125,076.19. The taxpayer sought to explain the receipt of such monies together with business expenses which he deducted. However, again, no records were produced either by the taxpayer or by BRDA.

   2006/2007

5. Income for this year is no longer in issue.

   2008/2009

6. During the financial year 2008/9, the taxpayer commenced work for AXEJ, a Singaporean registered company controlled by Mr CEDJ, allegedly pursuant to an agency agreement. Both AXEJ and the agency agreement are discussed more fully hereunder. The expenses claimed in this year included rental of premises, motor vehicle expenses, food, leisure and fitness expenses travel and miscellaneous expenses.

7. In addition, the taxpayer claims to have debited various expenses for both BRDA and OKDH, another company conducted by the taxpayer and Mr CEDJ. The taxpayer claimed that he was entitled to have received, by way of reimbursement, $132,567.29, for his business’ expenses in this tax year from OKDH and from AXEJ.

8. The taxpayer claims in this financial year he had an assessable income of $163,338.91. The Commissioner has issued an assessment for $458,914.

   2009/2010

9. In this financial year, the taxpayer states that he operated two Westpac bank accounts and held credit card accounts with Westpac and Citibank. The taxpayer assesses his taxable income at $160,463.47. The calculation was made by him after deductions of claimed business expenses, such as accommodation, motor vehicle expenses, food, leisure and fitness insurance and miscellaneous expenses. No original records have been provided by the taxpayer or by any of his companies or by AXEJ in this financial year, and for reimbursement of expenses.

10. The taxpayer also refers to a payment of $500,000 paid by AXEJ under an agreement (‘the UHED Loan’). This subject is more fully considered later but it relates to a payment made to his wife pursuant to Consent orders made in the Family Court of Australia. The taxpayer asserts that such payment constituted a loan. The Commissioner claims that the payment, although made to the taxpayer’s wife, comprised monies owing or to be owed for his personal services for Mr CEDJ’s companies.

11. The Commissioner has assessed the taxpayer’s income for this financial year in the amount of $911,442. Such calculation is made upon deposits passing into the taxpayer’s accounts.

    2010/2011

12. The taxpayer calculates his assessable income as $73,931.03 taking into consideration monies he received, including a further payment of $500,000 (being payment under the UHED Loan) and after deducting his business expenses and reimbursements claimed by him for various companies. Again, no original records of the taxpayer or his companies have been produced.

    2011/2012

13. The taxpayer stated he maintained the bank account and credit card accounts referred to previously. He stated that this year’s taxable income is $15,518.12 after taking into account his assessable income. As stated before, the taxpayer claimed that deposits into his account were either made pursuant to the UHED Loan or by way of reimbursement from his companies and AXEJ.

14. In this financial year, the taxpayer resided at rented premises and on about 1 June 2012 to the end of that financial year, he resided at other rented premises. The taxpayer claims that in this period, at the direction of Mr CEDJ, another of Mr CEDJ’s companies namely KGWE Investments Limited (‘KGWE’), a company incorporated in the British Virgin Islands paid rental. The taxpayer claimed that rent was claimed as a business deduction because it was necessary for him to reside in Sydney in order to perform his obligations under the AXEJ agency agreement (‘the agency agreement’).

15. The deductions which were claimed follow the same pattern as previously.

16. The Commissioner has assessed the income of the taxpayer for this financial year as $295,098.

    2012/2013

17. Adopting the same methodology and nominating the same bank account and credit cards, the taxpayer claimed his income was $70,881.24. The same methodology was adopted as previously. Deposits under the UHED Loan were identified and also from KGWE.

18. The Commissioner assesses the taxpayer’s income for this financial year to amount to $355,321.

    Taxpayer’s second affidavit

19. On 31 January 2017, the taxpayer revised the statements and conclusions made in his first affidavit in respect of his expenses and income. The taxpayer claimed that in the 2003/2004 tax year, as a result of his investigations, he found that he was owed more money by way of reimbursement from his company BRDA.

    2005/2006

20. Adjustments were also made to this tax year for almost all the items referred to. The taxpayer claimed that despite such adjustments, there is no change to his assessed taxable income for this year.

    2006/2007

21. Income for this year is no longer in issue.

    2008/2009

22. The taxpayer adjusted his claimed assessable income of $160,527.95 to $207,527.77. Again such adjustment arose because of the recalculation of numerous expenses.

23. As a result of recalculation, the taxpayer reduced his claimed assessable income of $160,463.47 to $146,289.30.

    2010/2011

24. The taxpayer, having made similar adjustments, as in the previous years, reduced his claimed assessable income from $173,931.03 to $101,891.50.

    2011/2012

25. The taxpayer had asserted that his taxable income was $15,518.12, having revised his calculations he provided a revised assessment of $15,243.84.

    2012/2013

26. The taxpayer, in his second affidavit, reduced his calculation of his taxable income from $70,881.24 to $31,774.91.

27. The taxpayer provided a third affidavit sworn on 20 February 2017 (‘the third affidavit’) which annexed the EYMX trust deed.

28. The taxpayer’s fourth affidavit sworn on 7 June 2017 (‘the fourth affidavit’) sought to describe the basis of reimbursements and how they arose from the entities that provided funds to him.

29. The taxpayer’s sixth affidavit sworn on 15 September 2017 (‘the sixth affidavit’) claimed that where deposits had been made by the various companies, namely, BRDA and AXEJ, which exceeded the amount of the expenses claimed, the excess was always intended to be a loan. This subject is discussed fully hereunder.

    BACKGROUND

    Residency

30. The taxpayer had originally relied upon his overseas origins, having been born in the United States of America, as a reason for his omission to lodge income tax returns.

31. The taxpayer, up to the commencement of the hearing before the Tribunal, claimed he was not an Australian resident, and that for this reason he was not required to lodge tax returns.

32. The taxpayer was shown in the movement records of the Department of Immigration and Border Protection (formerly Department of Immigration and Citizenship) as being present in Australia for the following periods:

Income Year	Days in Australia
2001	347
2002	346
2003	349
2004	316
2005	361
2006	317
2007	359
2008	351
2009	309
2010	299
2011	253
2012	285
2013	257

1. The taxpayer, having being confronted with such details, abandoned this issue on 9 September 2016.

   Taxpayer’s Occupation

2. In 1993, Mr CEDJ acquired an Australian company (OXRI) and renamed it OKDH Pty Ltd. Such company was used for investment banking and third party litigation funding. OKDH was registered on 15 April 1993. The taxpayer has been sole director from 24 May 1993 to date and also its secretary.

3. In 1996, the taxpayer incorporated BRDA. The taxpayer has been sole director and shareholder of that company since its registration on 27 September 1996.

4. In June 2006, the taxpayer commenced the establishment of an entity which became the EYMX. The establishment was formalised by a deed on 31 May 2007. The purpose of the fund was to provide litigation funding.

5. On 18 July 2006, another company was created, namely JLEY Pty Ltd which became the trustee of the EYMX. It is now deregistered.

   ISSUES

6. Several discrete issues arise for consideration. The Tribunal will consider only these issues since their determination will underpin the taxation liability consequences. The issues are:

   (a)whether deposits made to the taxpayer or to his company BRDA were for genuine business expenses incurred in the promotion of the taxpayer’s business or by businesses conducted by Mr CEDJ; or whether such payments were in reality payments made to him for services rendered by the taxpayer and are therefore to be included in the taxable income of the taxpayer;

   (b)whether payments made by his companies BRDA, OKDH and by AXEJ allegedly for reimbursement of business expenses, were in reality payments by way of remuneration for services provided by the taxpayer to the companies;

   (c)the effect of an agency agreement made between the taxpayer and AXEJ;

   (d)the validity of a loan transaction, known as the UHED Loan, by which $1 million was paid to the taxpayer’s wife;

   (e)whether rental assistance received by the taxpayer in respect of his residential accommodation in Sydney from KGWE constituted a taxable benefit;

   (f)whether rental moneys paid by BRDA is to be treated as taxable in the hands of the taxpayer;

   (g)whether the sale proceeds relating to the sale of a motor vehicle constitutes part of the taxpayer’s assessable income;

   (h)whether income received by OKDH constitutes personal services income.

   REIMBURSEMENT OF BUSINESS EXPENSES

1. The taxpayer claims to being involved in the operation and management of litigation funding in Australia since the late 1990s, initially on behalf of his own companies, BRDA and OKDH. However, as he needed additional capital, such activities were expanded in or about 2003 by the involvement of Mr CEDJ and his companies, which were incorporated either in Singapore or in the British Virgin Islands.

2. The taxpayer states that from 2007, following the incorporation of AXEJ, he spent much more time working in Singapore where he worked closely with Mr CEDJ, assisting him to procure investors for AXEJ’s litigation funding business. The taxpayer claims that he was not paid for such services.

3. The taxpayer states that while he was not paid by Mr CEDJ, he was “to assist Mr CEDJ to establish AXEJ’s litigation funding business from which funds would then come to fund litigation in Australia which in turn would in the future result in the return, from which I would receive a percentage”.

4. The taxpayer also stated that AXEJ agreed to take over funding the cases which were then being funded by the EYMX. However, the basis of the takeover was limited to the payment of moneys payable under security for cost orders and adverse cost orders made against the litigants.

5. The taxpayer identified six proceedings instituted apparently in either the Supreme Court of New South Wales or in the Federal Court of Australia where litigation funding was provided. Significantly, as is referred to hereunder, no mention was made of the major litigation proceeding where a multi-million dollar recovery was made, namely the LRHY Settlement.

6. The taxpayer states that he has not received any remuneration from AXEJ. The absence of remuneration was allegedly because he was only entitled to receive remuneration at the end of a 10 year term as provided by the agency agreement referred to hereunder. Also, the taxpayer claims that the litigation cases which he selected for funding returned no profits.

7. The sole director of AXEJ was and remains Mr CEDJ. The current secretary is Ms VXKR who has held such office since 9 August 2010. AXEJ was described as being a significant investor in the EYMX, and according to the taxpayer, AXEJ was a dominant shareholder in the EYMX.

8. The taxpayer claims that AXEJ, which had a relationship through Mr CEDJ, with himself and his companies, was involved in litigation funding of claims in excess of $2 billion since the late 2000’s. The taxpayer claims that because he was the sole director and shareholder of BRDA and OKDH, expenses were incurred, by those companies and by the taxpayer in connection with the promotion of the business of AXEJ, which conducted its business in Singapore.

9. The taxpayer was also a non-executive director of WBDK, a company incorporated in Singapore. This company leased premises from AXEJ, and Mr CEDJ was a Director. According to the financial statements prepared for WBDK, no remuneration was paid to the taxpayer. The Commissioner refutes such claim.

10. The taxpayer claims that business expenses incurred by him on behalf of Mr CEDJ’s companies were debited to the credit cards of the taxpayer on the basis that the taxpayer would be reimbursed from time to time by AXEJ. The taxpayer claims that the establishment of his litigation funding business required extensive networking, including dinners with prospective clients to build relationships, taking of potential investors overseas, entertaining litigants’ lawyers and insolvency practitioners.

11. The taxpayer claimed travel expenses as follows:

Income Year	Amount
2004	35,851.86
2006	37,338.09
2007	16,606.13
2009	51,475.94
2010	29,541.80
2011	78,999.51
2012	91,797.03
2013	100,328.59
Total	$442,640.91

1. The methodology adopted by the taxpayer to explain his taxable income was to identify “population” of his various accounts; then prepare a schedule recording for each year, receipts of income in each account; then to prepare a schedule of expenses for each year.

2. No original documents have been produced by the taxpayer. Rather, extensive spread sheets have been provided, which are claimed to have been prepared by the taxpayer and which purport to separate claims for personal expenses and business expenses. The spread sheets are stated to have been prepared from entries in credit card account statements or contained in bank statements.

3. As detailed hereunder, from about 2010, Ms VXKR, in Singapore, made the assessment of whether the taxpayer’s expenses were of a business or personal nature. The taxpayer did not assist in the categorisation when the spread sheets were compiled by Ms VXKR to separate business expenses from personal expenses in respect of the income years claimed year by year.

4. Based upon the information provided in the spread sheets, the taxpayer claims that all deposits made into the taxpayer’s accounts sourced from overseas, as detected by AUSTRAC, were in fact reimbursements of expenses. For example, on 9 January 2009, an amount of $39,215.69 was paid to the taxpayers’ MasterCard account pursuant to an agreement with Mr CEDJ. Further, on 26 May 2009, $40,000 was paid to the taxpayer’s account by arrangement with Mr CEDJ. The taxpayer claims that such payments are examples of payments made under an agency agreement, referred to hereunder, as reimbursement for expenses he has incurred.

5. As to payments received from BRDA, the taxpayer acknowledges that in the financial year 2008/9, he received director’s fees of $33,000. He states that payment was made in respect of work performed by that company and for OKDH. Other payments were identified to the taxpayer’s credit card accounts made by BRDA which the taxpayer claims was reimbursement for expenses incurred on behalf of BRDA.

6. The taxpayer has provided several affidavits for use in this hearing. The taxpayer’s first affidavit refers to two accounts held with Westpac. The taxpayer also refers to a Westpac MasterCard account, two Westpac bank card accounts; a Citibank Platinum card MasterCard; a Citibank Visa silver card; an American Express personal card account; an American Express Gold card account; and a National Australia Bank “National Visa Gold” card account.

7. The taxpayer deposes that any amounts he received were paid into one of the bank accounts referred to or into the Citibank MasterCard. The taxpayer states:

   “…There were no other bank or credit card accounts which were held or maintained by me, or on my behalf, during the FY2003/04, in which money was deposited for me. I did not receive any cash payments, nor did I have cash available to me, other than as disclosed in this affidavit”.

8. The taxpayer stated in his evidence that this is the “first stab” at calculating his income. Subsequently, in his affidavits, he made a “second stab” then a third “stab” at attempting to identify his taxable income. The taxpayer claimed that certain amounts deposited into his account comprised gifts of money made by his father. Although initially challenged by the Commissioner, this challenge is no longer maintained.

9. The taxpayer has attempted to list all expenses relating to his rented residential accommodation, in various suburbs of Sydney, together with other living expenses such as the running cost of a motor vehicle, expenses of food, school fees for the education of his children. Other living expenses for the financial year include leisure and fitness expenses, insurance, entertainment, travel, and interest. Further, the taxpayer claims to have expended monies on various miscellaneous expenses.

10. The records disclose that BRDA paid rental of the residential accommodation of the taxpayer in eight residential properties between 6 February 1989 and November 2012. These various properties were located across New South Wales.  

11. KGWE (a company controlled by Mr CEDJ) paid the taxpayer’s rental for his residential accommodation between 13 May 2011 and 31 May 2012 at a unit. KGWE also paid rental for the taxpayer’s residence at premises between 3 September 2012 and 5 March 2013, and at other premises in the period 1 July 2012 to 18 September 2012. The taxpayer denies that any of such payments were made by way of remuneration from either BRDA or by KGWE.

12. The Commissioner contends that all “reimbursements” claimed by the taxpayer comprise assessable income. In some instances, the reimbursements exceeded the amount claimed by the taxpayer (‘excessive reimbursements’). The Commissioner submits that the whole of the “reimbursements” being the ‘excessive reimbursements’ ($301,022.59) and the ‘business reimbursements’ of $762,250.91, should be included in his assessable income under s 6-5 or s 15-2 of the ITAA 1997.  Accordingly the applicant’s income for each of the relevant Income Years should be increased by the amount of the ‘business reimbursements’ as follows:

Income Year	‘Business Reimbursements’ – income of the applicant
2004	32,119.78
2006	80,282.63
2009	81,002.87
2010	183,805.82
2011	105,214.77
2012	115,231.70
2013	122,000.00
Total	$719,657.57

1. The Commissioner’s assessments are predicated upon the fact that no original documentation has been produced by the taxpayer to verify the sources of funds, nor to verify business expenses. In the years in question, substantial sums have been paid into accounts of the taxpayer from overseas sources.

   Consideration

2. The taxpayer is liable to pay personal income tax on the gross amounts paid to him from BRDA, OKDH and AXEJ, and any other benefits such as rental paid by KGWE. The taxpayer has claimed that monies received were reimbursement of expenses.

3. In the presentation of his application to the Tribunal, the taxpayer has sought to separate out from a portion of the payments he has received from his companies and from AXEJ on the basis that they were ‘business reimbursements’. Such reimbursements are categorised as follows:

   ·computer costs and maintenance ($10,871.72);

   ·office equipment ($7,168.71);

   ·motor vehicle purchase/expense ($159,204.66);

   ·insurance ($8,425.68);

   ·client food & liquor ($41,120.16);

   ·telecom ($14,847.43);

   ·client entertainment ($90,602.72);

   ·travel expenses ($442,640.91).

4. It became apparent, shortly before this hearing, that the reimbursement exceeded the business expense. The taxpayer sought to classify such payments as “excessive reimbursements.” In his seventh affidavit, sworn on 15 September 2017, three days before the commencement of the hearing before this Tribunal, the taxpayer claimed that the excessive reimbursements constituted loans. The taxpayer deposed:

   “This amount should not have been included in the Amended Taxable Income calculations for the Financial Year 2008/2009 at paragraph 96 of my Second Affidavit as it was not an excess repayment, as any amount paid to me over and above the business expenses incurred by me was to be rolled over or accounted for as a loan to be used against future expenses I incurred under the AXEJ Agency Agreement”.

5. Similar claims were made in respect of other taxable years where overpayments were detected.

6. Such suggestion had never previously been made. There is no factual basis for suggesting that loan exists, other than the taxpayer’s assertion, and no basis advanced for any repayment of such excessive reimbursements. No documentation has been produced to support such claim.

7. The taxpayer’s claims of expenditure for business purposes, was the subject of extensive cross-examination. The taxpayer referred to his dissection of entries in his credit cards statements for business and personal use. On cross-examination, his assertions were shown, in several instances, to be wrong. For example, he included in his business expenses reported for BRDA, a holiday for his family to Bali. Another business expense related to his wife’s equestrian sports, although this was later classified as a personal expense in the applicant’s amended statement.

8. Apart from credit card statements, no records of any kind were produced to verify the nature of the expenditure claimed as constituting business expenses.

9. The Tribunal has no confidence that other expenses, for entertainment, such as Telstra stadium tickets at a cost of $1800, Martin Place Bar costs, musical instrument claim, Hard Rock Café costs, motor vehicle claims, and the travel expenses claimed, such as the holiday to Koh Samui, were truly business expenses for the purposes of the ITAA 1936. Claims for “client food and liquor” and costs of attending sporting venues such as Telstra Stadium at Homebush Stadium, are to be considered against the requirements of Division 32 of the ITAA 1997.

10. The same methodology was adopted by the applicant in respect of monies paid to him from his own companies, and from Mr CEDJ’s companies for each tax year in dispute. However, no records were produced in answer to a summons issued to BRDA requiring the company to produce financial statements and accounting records evidencing the payment of director’s fees. No Business Activity Statements have ever been provided by that company to the Commissioner. Nor did Mr CEDJ produce any records in response to a summons issued to him.

11. The taxpayer’s second attempt to define his income was contained in his second affidavit sworn on 31 January 2017 (‘the second affidavit’). By this time, Westpac had produced records pursuant to a summons issued by the Commissioner.

12. The taxpayer claimed that such records were unavailable to him but then sought, in his second affidavit, to explain and provide answers for many matters not dealt with in his first affidavit.

13. The taxpayer acknowledged that the second affidavit was his “second stab”. In the first affidavit, the taxpayer assessed his income for the financial year ended 30 June 2012 as $70,881.24. For example, the second affidavit reduced that amount by $39,000. The taxpayer attempted to explain the difference of $39,000 by stating that it represented funds which had been paid to him “over and above the expenses that reconcile with, say, the credit cards to date”. He continued:

    “Now, my recollection, and I’m just not certain at the moment, is that $39,000 is generally – or those expenses are treated by [AXEJ] at that point in time were generally only one credit card when, in fact, there are quite a number of them.”

14. The taxpayer asserted that he “took all steps personally to go to the relevant institutions and asked them to retrieve as much data to comply with the summons as possible.”  He claimed that they could not retrieve data. The taxpayer took no further steps to obtain documents from his bank. The taxpayer appeared to take umbrage at the fact that a summons, issued by the Commissioner, revealed considerably more information concerning the existence of his bank accounts and credit card accounts than he had disclosed in his first affidavit.

15. In the taxpayer’s second affidavit, amendments were made to virtually all of the items of claimed expenditure referred to in the taxpayer’s first affidavit. The taxpayer claims that the amended income figures are “refreshments”. Again, no documentation has been produced. The Tribunal notes that the auditors for AXEJ stated they were not satisfied with the treatment of payments made to the taxpayer in 2010 in respect of the taxpayer’s classification of travel and entertainment. The auditors were unable to obtain sufficient information to ascertain the correctness, occurrence, cut off and accuracy of such claims.

16. The taxpayer made a third “stab”, in his more recent spread sheets, at attempting to establish his income for the 2011 and 2013 income years. In his evidence, he claims to have a nil income.

17. The Commissioner submits that amounts received and claimed to be reimbursement were in truth paid to the taxpayer as remuneration for the provision of his personal services in the development and management of the litigation funding business conducted by AXEJ and/or BRDA.

18. To constitute reimbursement, there must be a correlation between the actual cost and the expenditure. As Hill J in The Roadsand Traffic Authority of NSW v Commissioner of Taxation (1993) 43 FCR 223 at 228:

    “It seems to me that the concept of reimbursement requires that the payment in question be made by reference to actual cost, that is to say that there would need to be some correspondence between the payment and the expenditure incurred, even if the reimbursement were to be but partial reimbursement.”

19. See also definitions of “reimburse” referred to in Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341 at 350 – 351; H R Sinclair and Son Pty Ltd v Federal Commissioner of Taxation (1966) 114 CLR 537; Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 at 276 – 27;  Penrowse Pty Ltd and Federal Commissioner of Taxation [2013] AATA 10 at [20]; R v Davis (1978) DLR (3d) 233 at [13]; Ransom v Minister of National Revenue [1967] 67 DTC 5235 at [9] – [22]; Case S56 85 ATC 408.

20. Taxation Ruling TR 92/15[1] also contains commentary on the word “reimburse”. Paragraph 10 thereof states that the word “reimburse” implies:

    “that the recipient is to be compensated exactly for an expense already incurred

    …

    As a result, a requirement that the recipient vouch or substantiate expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A further indication of a reimbursement is where the recipient is required to refund unexpended amounts to the provider.”

    [1] Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement

21. The taxpayer has referred the Tribunal to the decision of the High Court of Australia in Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 at 276-277 where the Court referred to the enquiry which is to be made, namely:

    “is the receipt income according to ordinary concepts?….It may be added, in the case of a voluntary payment the first enquiry must be to identify what the payment is for.”

22. Such decision had relied upon observations in Squatting Investments Co Ltd vFederal Commissioner of Taxation (1953) 86 CLR 570 at 6-7 where the Court said:

    “The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances.”

    At page 279, the Court said:

    “for it is a commonplace that a gift may or may not possess an income character in the hands of the recipient”

23. Such authorities confirm the principle that the character of a receipt is assessed by reference to its character in the hands of the taxpayer: Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 5-6; Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266.

    FINDING

24. The claims of the taxpayer are rejected for the following reasons:

    (i)No documentation of any kind, other than entries on credit card accounts and ex post facto compiled spread sheets, have been provided to support the claim made by the taxpayer that the amounts paid constitute reimbursement. Entries on credit card accounts do not contain the requisite information to satisfy the Tribunal that the claimed expenses constitute allowable deductions.

    (ii)During the course of cross-examination of the taxpayer, discrepancies were revealed. For example, it was shown that expenses were claimed as business expenses when they are related to a family holiday to Bali. Even though the claimed expenses related to a tax year which is no longer in dispute, it portrays unreliability in the claims of the taxpayer.

    (iii)The taxpayer states that his computer, containing all of his source records, was stolen in 2012, and produced a police report verifying his report. Accordingly, he claims that this is his reason for the non-production of his records. However, this fact was not revealed until the taxpayer provided his fourth affidavit. No previous suggestion of this important allegation was made at an earlier time although there was ample opportunity for the taxpayer to rely upon such allegation.

    (iv)Since filing his application with the Tribunal, the taxpayer has repeatedly revised his assessable income estimate, without supporting records.

    (v)There has been no attempt to source duplicate records in the absence of the originals. For example, in respect of his missing banking records, his attempt to locate such records, other than one cursory enquiry of Westpac and NAB, was non-existent. The Commissioner was readily able to obtain production of such documents by issuing a summons, and such a produce was always available to the taxpayer but not availed of.

    (vi)There is no explanation provided why records have not been prepared and provided in respect of the taxpayers’ companies. For example, deposits are made in the bank accounts of BRDA on 21 July 2004 of $50,000; 17 September 2004 of $50,000 and 21 July 2005 of $1,324,638. These deposits are unexplained.

    (vii)The taxpayer distances himself from a statement representing his income of $250,000 a year paid to him by WBDK to an agent who sought information concerning a proposed tenancy for certain premises. The taxpayer, or someone on his behalf, warranted to the agent that he was a full-time director of WBDK and had been for six years and one month. Based upon the denials of Mr CEDJ, the Tribunal is satisfied that the statement of income is misleading, deceptive and false.

    (viii)The taxpayer also sought to distance himself from Mr CEDJ, claiming that he had a falling out and he had had no conversations with him for about two years. Such assertion is unusual taking into consideration the fact that Mr CEDJ has sworn three affidavits in support of the taxpayer in these proceedings.

    (ix)Ms VXKR was not called as a witness to explain her alleged allocation of business expenses.

1. Chapter 5 – Administration – of the ITAA 1936, contains detailed provisions referring to the obligation of a taxpayer to maintain travel records (s 900 – 20), retaining such records (s 900 – 25) and defines the meaning of “work expense” (see s 900 – 30). Business travel expenses require substantiation (see Subdivision 900 – D). In respect of reimbursements generally, a summons was issued to both BRDA and to OKDH for the production of records relating to this question. Despite the fact that the taxpayer is the sole director and shareholder of each company, no documents were produced by either company. Further, the Tribunal notes that neither company has ever filed tax returns since their incorporation. The taxpayer was asked why returns had not been filed. He responded:

   “I actually can’t answer that.”

2. Also, discrepancies were revealed when it was realised by the taxpayer that there had been an over reimbursement of so-called expenses. The taxpayer then claimed that the excess, over his purported expenses, were paid to him by way of a “loan”.

3. The Tribunal is satisfied that such explanation is recent invention. The taxpayer described his altered income assessment as follows:

   “I think I had a sea change on the characterisation of the excess reimbursements”

4. The taxpayer’s memory was vague; for example, he could not provide an explanation for a deposit paid to a firm of solicitors on account of the taxpayer on 6 July 2007 for $129,000.

5. In the absence of any documentation supporting the payments made to the taxpayer as being “reimbursement” for expenses, the Tribunal is unable to accept that such amounts constitute reimbursement, in the sense defined in the above authorities.

6. It follows that the claim by the taxpayer, that the amounts paid into his accounts by his companies and by AXEJ, cannot be accepted as reimbursements. Rather, they are payments for services provided by him to such companies. The Tribunal also notes that there appears to have been a non-disclosure of income. A judgment of the Supreme Court of New South Wales in 2012 refused to a “facilitation fee” of 5% of $17 million being payable to the applicant for his services: see DSTE Litigation at [54]. The taxpayer has made no reference to such entitlement. Further, there is silence from the taxpayer in respect of any income from WBDK from 9 March 2007 to 30 June 2009 for his services to that company. It would be unusual for services to have been provided gratuitously. The accounts do not disclose the arrangement under which the taxpayer was providing his services.

   AGENCY AGREEMENT

7. AXEJ, as previously referred to, was incorporated in Singapore by Mr CEDJ on about 23 November 2007. It was apparently created for the purpose of operating a litigation funding business in Singapore with Singaporean investors. Mr CEDJ was sole director and the sole shareholder was UHED. The sole director and shareholder was Mr CEDJ.

8. The taxpayer says that in December 2007, he had a conversation Mr CEDJ concerning the need for litigation funding in Australia. The taxpayer offered to introduce funding opportunities to AXEJ in return for remuneration.

9. The taxpayer states that on 8 January, he entered into a 10 year agreement with AXEJ which has been referred to as “the agency agreement”. The taxpayer states that, pursuant to the agreement, his role was to spend time networking with Australian stakeholders including lawyers, accountants, professionals and business personnel.

10. The taxpayer states that, under the terms of the agreement, he was to be reimbursed for all his expenses incurred in the performance of his duties as an agent including accommodation, travel, entertainment, hotels and communications and other out-of-pocket expenses. The taxpayer has provided names of six cases which he introduced to AXEJ.

11. The taxpayer states that he had the agency agreement prepared following a conversation with Mr CEDJ. He then met with Mr CEDJ when he produced the agreement to him in early January 2008. The taxpayer states that Mr CEDJ agreed with the terms. It was then signed by the taxpayer. Mr CEDJ did not then sign it. Instead, the taxpayer states that Mr CEDJ took it away with him and then returned an executed copy by email from Singapore. The taxpayer cannot locate the email returning the completed agreement.

12. Mr CEDJ gave a different version of the circumstances of the signing. He stated that he would have signed the agreement before the taxpayer. He did not have the original document.

13. The agency agreement relied upon by the taxpayer is stated to be between the taxpayer or his nominee and AXEJ and bears a date in handwriting of 8 January 2008. The document purports to be signed by Mr CEDJ for AXEJ and the taxpayer.

14. Clause 4.1 of the agreement purports to appoint the taxpayer as agent of AXEJ:

    “for the provision of Litigation Funding, for the Term of 120 months from the date this Agreement is first signed, in the Territory, all subject to the rights and obligations of the Parties as set out in this Agreement”

15. Clause 4.2 provides:

    “The Agent will for so long as it is the Agent for the Territory, use its best efforts to market, sell, distribute and promote Litigation Funding in the Territory”.

16. The Territory is defined in clause 11 to include the United States, and the British Commonwealth countries including Australia New Zealand, Singapore and Hong Kong.

17. The entitlement to payment, described as Agent Payments are contained in clause 10.1, which provides: –

    “At the conclusion of the Term, the Litigation Funder [AXEJ] must make a Commission Payment to the Agent, at the Litigation Funder’s sole discretion but not less than 10% of profits realised by the Litigation Funder on a “whole of life” basis for the entire portfolio of funded cases during the term. For clarity’s sake, the Commission Payment shall be based on the profit performance of all litigation funding undertaken by the Litigation Funder which was introduced by the Agent, at the end of the Term”.

18. It is the taxpayer’s contention that payments made to him by AXEJ were pursuant to clause 10.1.

19. The Commissioner contends that the agency agreement is a sham. In particular, the Commissioner relies upon the circumstances in which the Agreement was allegedly signed; the unusual terms of such agreement; and the disparity between the rights and obligations purportedly conferred by the express terms; and the subsequent conduct of the parties entered into.

    Consideration

20. The taxpayer does not have a clear recollection of the year in which the agency agreement was signed, but he claims it was signed by him, while sitting in a car at Rushcutters Bay. He did not recall whether the document signed was a draft. He states that he was present with Mr CEDJ in the car for 30 to 40 minutes discussing a range of activities while they looked over documents. The taxpayer said that Mr CEDJ did not sign the document at that time, and that the date of 8 January 2008 was not written by the taxpayer. Even though he has known Mr CEDJ for more than 20 years, during which they had a close business relationship, he states that he could not identify whether the handwriting of the date was that of Mr CEDJ. Subsequently, in his evidence he said that it might “have been another time” when the document was signed.

21. However, the taxpayer also testified that the agreement may have been signed “in Rushcutters Bay or in Potts Point”. Yet he maintained later that he “certainly” had a recollection of the events surrounding the signing of the document.

22. With regard to alleged reimbursements payable pursuant to the alleged agreement, the taxpayer said that in effect, it was “my expectation he would always say “yes”, in response to a request for money by the taxpayer to Mr CEDJ. An entry in the EYMX Trust ledger of the firm of solicitors records a deposit into the account on 6 July 2007 of $129,021.92 stating “On Account of (the taxpayer)”. Yet in his second affidavit, the taxpayer gave detailed evidence of his procedure which he described as the usual procedure for seeking Mr CEDJ’s approval prior to incurring expenses on behalf of AXEJ. The taxpayer said he would contact Mr CEDJ and have a conversation to the following effect:

    “CEDJ I need to (I would identify the category of expense and its general purposes) for the purpose of advancement of AXEJ’s litigation funding business.”

    CEDJ would say: “those expenses are fine for you to incur on AXEJ’s behalf”.

23. It is put to the taxpayer that such evidence was false. The taxpayer responded:

    “I don’t think so. I mean as I said to you earlier, often I’d speak with CEDJ three or four times a day at this period on a range of things, mostly WBDK oriented as well. He would seek my advice on things. And if I needed to I’d raise that I needed some bucks transferred”.

24. The taxpayer denied that his evidence was incorrect. However, he agreed that there was no occasion when Mr CEDJ refused a request for amounts which he said were quite “reasonable”.

25. The taxpayer states that he found it necessary to enter into such agreement because during 2007, EYMX was “running out of money” and he needed to raise more money. At that stage, he had no other source of income other than management fees being paid to him by his company. He was living on money provided by his father who was the owner of the JDNW located in Minnesota, USA. The taxpayer stated that the amount of $40,000 was initially paid to him by Mr CEDJ through AXEJ in about January 2009.

26. Mr CEDJ testified, that the agency agreement was signed in Singapore on 8 January 2008. Mr CEDJ did not recall if the agreement was signed by the taxpayer on that day. Mr CEDJ said that the handwritten date was written by him.

27. The taxpayer has submitted that it was not directly put to either Mr CEDJ or to him that the amounts labelled as reimbursement were, in fact remuneration, paid to the taxpayer for his personal services. Such submission, however, overlooks the cross-examination when it was put to the taxpayer:

    “…it was your understanding that Mr CEDJ would provide you with moneys whenever you asked him for them”.

    The taxpayer replied:

    “Well, Mr CEDJ’s a pretty hard-nosed businessman. I don’t think that it’s a given that when I ask him, he’s going to give it to me”.

    The taxpayer was subsequently asked:

    “And your understanding was that in terms of when you would ask for money – so I’m asking you about your understanding at the time you signed this agreement. Okay?”

    Answer – “yes”

    “Your understanding at that time was that when you would ask Mr CEDJ for money, he would give it to you. That’s right isn’t it?

    Well, as I’ve always found with people, when they’re flush with cash they’re more likely to part with it, than when they’re not.

    Well, my question – – –?

    So at that point in time, yes”

28. The Tribunal found that the answers provided by the taxpayer on this issue were unconvincing.

    Finding

29. For the following reasons, the Tribunal does not accept the taxpayer’s claims:

    (i)the original agreement has not been produced;

    (ii)the agreement contains most unusual and uncommercial terms. For example, it does not envisage any payment being made to the taxpayer until the conclusion of the Term;

    (iii)AXEJ holds the sole discretion for payment of any amount;

    (iv)payment, when due, is not to exceed 10% of the profits of all the entities;

    (v)there is no explanation for:

    ·         payments having been made before the end of the term; or

    ·         any correlation of payments to entitlement

    (vi)no original documentation exists, of any kind, from AXEJ indicating the purpose of the payments;

    (vii)no records have been produced to show any entitlement for any reimbursement or payment; and

    (viii)the circumstances of the signing of the document provided by the taxpayer and by Mr CEDJ are wholly inconsistent.

30. For the above reasons, the claim that the payments received by the taxpayer as reimbursements fails. The Tribunal does not consider that the agency agreement was intended to have the legal effect it purported to have.

31. If there was an agreement signed by the parties in the format produced, at its highest, it was representative of a loose transaction by which the taxpayer might be recompensed for services provided by him. It is not necessary to find that the agency agreement is a sham: see Richard Walters v Federal Commissioner of Taxation [1995] FCA 480 at 259 F-G. For that reason, it was not necessary for counsel for the Commissioner to put to the taxpayer the assertion that the agreement was a sham, since no such finding was necessary.

    UHED LOAN

32. An issue arose concerning payments received by the taxpayer in FY2010 and FY2011: In this period, a total of $1,356,929.80 was claimed to be loaned to the taxpayer by Mr CEDJ. It is essential to consider the background surrounding the issue which has been referred to throughout as the UHED Loan. This was claimed to be a loan facility said to be provided by UHED to the taxpayer on 20 January 2010.

33. On 11 January 2010, the Family Court of Australia made orders by consent (‘the Consent Orders’) that the taxpayer pay his former wife, Mrs RHDB, the sum of $850,000. Subsequently, the taxpayer agreed to pay his former wife an additional $150,000.

34. The taxpayer states that he did not possess funds at the time of the matrimonial settlement to make the payments under the Consent Orders. However, he contacted Mr CEDJ and states that, in consequence, an agreement was reached whereby Mr CEDJ’s company, UHED, would provide him monies by way of loan in the amount of $1,500,000 to permit payment of the $1 million to the wife and an additional payment of $500,000 to provide him with living expenses for the ensuing years. As a consequence, a loan agreement was prepared between UHED and the taxpayer.

35. A photo copy of a document dated 20 January 2010, signed by Mr CEDJ on behalf of UHED and the taxpayer, was produced to the Tribunal. The original document was not produced. The document refers to a loan facility for amounts of AUD$1,500,000; that interest was to be capitalised at 5% and it was specified that the term of the loan was 10 years, making it repayable in October 2020. Interest was to be payable at the end of the term of the loan.

36. The taxpayer states that funds were advanced to him under the loan and were paid directly from a Citibank account held by UHED, although some funds were paid at the direction of Mr CEDJ either by AXEJ or by KGWE.

37. In the financial year 2009/10, an advance of $500,000 was made under the loan agreement which is paid to the taxpayer’s former wife.

38. In the financial year ended 30 June 2011, the taxpayer received, pursuant to the alleged loan payments, as follows:

    28 October 2010 – $50,000

    28 October 2010 – $100,000

    28 October 2010 – $500,000 (paid to the applicant’s former wife)

39. During the FY2011, the taxpayer received payments under the loan totalling $699,864.11.

40. The Commissioner contends that the loan agreement is a sham. The Commissioner submits that it was in truth, an arrangement pursuant to which the taxpayer would be reimbursed for his services to AXEJ, and monies owing to him by AXEJ for such services would be paid to the taxpayer’s wife in the guise of a loan.

41. The Commissioner further submits that the funds paid under the agreement represented the taxpayer’s entitlement in the LRHY Settlement.  Since AXEJ had been a part funder of the LRHY Settlement, it received remuneration, and it was such remuneration which entitled the taxpayer to payment for his services. The evidence revealed that that settlement produced a net result to the funders of $34,900,000.

42. The taxpayer submitted that, notwithstanding that the LRHY Litigation was successful, it did not generate per se any entitlement to distributions for any of the unit trust holders in the EYMX. No supporting documentation has been produced.

43. In cross-examination, the taxpayer denied the contention of the Commissioner that there were funds owing to him under the LRHY Settlement, and pointed out that the LRHY Settlement did not occur until September 2010, months after the January 2010 Family Court settlement, and accordingly, there was no association between the LRHY Settlement and the Family Court settlement.

44. Monies were paid into the Trust account of the firm of solicitors on 28 October 2010, recording a deposit of $3.75 million. The entry records:

    “Received from UHED Investment Inc LRHY Resolution”

45. On the same day, UHED paid $500,000 to the taxpayer’s ex-wife and $100,000 into an account of the taxpayer. The taxpayer had not disclosed these transactions in his evidence. Further, the taxpayer did not disclose the existence of the settlement of the LRHY Litigation at all, even though it represented a significant successful outcome of litigation funding. The taxpayer described the omission as “an oversight”.

46. It was put to the taxpayer in cross-examination, and the taxpayer agreed, that UHED was distributing proceeds from the settlement of the LRHY Litigation although he rejected the suggestion that the monies paid to his ex-wife represented his share of the LRHY Settlement.

    Consideration

47. The taxpayer could not recall the circumstances in which the UHED Loan document was signed, yet in a subsequent answer, the taxpayer stated that Mr CEDJ “signed it later, as usual”, after he (the taxpayer) signed it. Mr CEDJ had no recollection whether he signed the loan agreement at the same time as the taxpayer.

48. The Tribunal notes that clause 4 of the Minutes of Consent Orders in respect of the settlement between the taxpayer and his wife provided that within 21 days of the orders being made, OKDH and the taxpayer was to provide irrevocable directions and authority for certain entities to pay monies to the wife.

49. Clause 4.1 relevantly provides that JLEY Pty Ltd or any other trustee for the time being of the EYMX would pay to the wife “any monies due and payable to the husband and/or the Second Respondent [OKDH Pty Ltd] to which they are entitled from time to time… pursuant to Agreements between the husband and/or the Second Respondent …and JLEY…”

50. Clause 4.2 provides:

    “CEDJ and WBDK to pay the wife monies due and payable to the husband and/or the Second Respondent… by way of repayments of loans made by them to WBDK (“the WBDK loans”)…”

51. The taxpayer asserted, during the Tribunal hearing, that the consent orders were “drafted very poorly” and said:

    “In my view, just agreeing to an amount with her, and any other conditions, was fine…

    I was happy to agree to that, because it didn’t exist, so what is the drama?”

52. Clause 4.2 of the loan agreement purports to imply that either the taxpayer and/or OKDH had previously lent funds to WBDK. No detail exists relating to any such payments. Further, “repayment” by UHED as referred to in Cl. 4.2 is wholly inconsistent with the assertion of a “loan” being made to the taxpayer. The obligation to repay to the wife, the loan made by the taxpayer and/or OKDH to WBDK, is unexplained.

53. The taxpayer has referred the Tribunal to the decision in Commissioner of Taxationv Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 where the joint judgment of Sackville and Lehane JJ referred to the characteristics of a loan, which included a promise to pay upon demand. The taxpayer’s counsel submitted that the Commissioner never put to the taxpayer that he had no intention to repay the loan. The taxpayer relies in support on Allied Pastoral Holdings Pty  Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; Browne v Dunn (1893) 6 R 67 as referred to in Jagelman v Federal Commissioner of Taxation (1996) 96 ATC 4055.

54. The Tribunal rejects this submission. It was clearly put to the taxpayer that the document was in effect not a loan but rather a device by which monies would be paid to him or at his direction for his services. Such question clearly raised the issue of whether the document purporting to be a record of a loan was a genuine document. Further, the taxpayer had been on notice of this issue since 16 November 2016. It was not necessary, in these circumstances, to put this issue to the taxpayer: White Industries (Qld) Pty Ltd v Flower & Hart (A Firm) [1998] 29 ASCR 21 at 69 per Goldberg J.

1. The chronology hereunder shows the puzzling history:

Date

Event

8 Nov. 2013

Respondent issues s. 167 assessments – based on the limited information available – basically on AUSTRAC reports

17 Dec. 2013

In context of seeking to have departure probation order (DPO) set aside applicant advises respondent there is no written UHED Loan agreement (and only for $1 million)

8 Jan. 2014

Applicant lodges ‘bare’ objections (T34)

12 Feb. 2014

Respondent requested, by letter, further information – no response (T37)

9 Sept. 2016

Applicant files First Affidavit – annexes a written UHED Loan Agreement

Applicant files Applicant’s SFIC – the SFIC is ‘bare’. [Exhibit Y]

16 Nov. 2016

Respondent files Respondent’s SFIC and notifies the applicant that sham will be alleged in respect of the UHED Loan Agreement

24 Nov. 2016

Applicant sought particulars of allegation

1 Dec. 2016

Respondent, based on limited information available, gives particulars in Para [11] (as far as then known to him) - but makes it clear that he will be relying on further evidence to be filed and whatever is adduced at the hearing. [Exhibit Y]

1. Mr CEDJ was also cross-examined on the issue of the UHED Loan. He agreed that AXEJ signed over to UHED, the benefit of a funding agreement for another corporation (MXWQ), and $5 million was assigned to UHED. Mr CEDJ also testified that the taxpayer’s wife had made direct contact with him by telephone concerning the payment of monies to her. Whether such funds were to be provided from Mr CEDJ, AXEJ or UHED is unclear. However Mr CEDJ did not dispute that monies would be paid to the taxpayer’s wife. Such payment was treated as a certainty, rather than question of whether a loan would be made, and the terms thereof.

2. Mr CEDJ said that no steps had been taken to recover the monies advanced under the UHED Loan because he was “relying on the integrity of our relationship and friendship over a long period of time”. He acknowledged that the “loan” might not be repaid.

3. As will be referred to subsequently, the Commissioner sought to obtain financial details of the matrimonial settlement which was agreed between the taxpayer and his wife from the Family Court of Australia.

4. Such attempt was prevented by AXEJ when it commenced proceedings in the Federal Court of Australia. Such Court determined that the information should remain confidential

5. The Tribunal also notes that the Family Court Consent Orders imposed stringent conditions preventing the taxpayer’s wife from disclosing the financial arrangements of the taxpayer and of his associates. The orders required the wife to deliver up all documents in her position relating to business dealings of the taxpayer.

6. In the event that the documents were in electronic format, the wife was required to copy the same onto a DVD and/or CD to be provided to her solicitors and shall thereafter:

   “do all acts and things to destroy the electronic documents which may be saved her computer and/or to any other electronic device in her possession and/or control and thereafter the husband’s documents shall remain in the offices of the wife’s solicitors in a sealed envelope pending the husband’s compliance with Orders 2 and 3 and 6”.

7. It was further provided that upon completion of the orders relating to the Financial Agreement, all of the husband’s documents held by the wife’s solicitors were to be provided to the husband’s solicitors and all electronic documents were to be destroyed.  Accordingly, the Tribunal has been deprived of information which could have assisted in its determination, yet it was always within the power of the taxpayer to approve of the release of such information.

8. Mr CEDJ gave evidence to suggest that there was an existing and continuing obligation upon the taxpayer to repay UHED in October 2020. However, it emerged in cross examination of Mr CEDJ, that UHED was removed from the register of companies on 3 May 2016 at the direction of Mr CEDJ. This important fact was not mentioned by Mr CEDJ until he was subjected to cross-examination. It must follow that unless action is taken to reinstate the company, the obligation of the taxpayer to repay any monies under the loan agreement has dissolved.

9. No original loan document was produced, and no explanation was provided in its absence by the taxpayer. Mr CEDJ claimed that the original loan document was probably in electronic form. No such electronic version was produced.  Mr CEDJ said however that the source of the repayment would be the taxpayers’ entitlement to success fees.

10. It is surprising that neither the taxpayer nor Mr CEDJ kept an original copy of such document in case the loan needed to be enforced.  No documentation of any kind was produced by the solicitors who allegedly prepared the loan document to verify that it was a genuine document. Mr CEDJ produced no documents in answer to a summons issued on UHED for production.

11. The taxpayer’s former solicitor also received a summons, issued by the Commissioner, to produce the loan agreement. In reply, the solicitor responded that there were no documents. The taxpayer claims that he gave instructions in a hurry to his solicitor and that his solicitor did not understand that he held such document. The solicitor was not called as a witness by the taxpayer to confirm that he misunderstood his instructions. The taxpayer seems to suggest that the obligation rested upon the Commissioner to call evidence of such facts. Such submission misunderstands the fact that the taxpayer bears the burden of proof in this application.

12. Another discrepancy lies in the fact that the name of UHED is confused. Item 1 of the loan agreement identifies the lender as UHED Investments Ltd, whereas monies were received from UHED Investment Inc. This is again another unexplained and confusing fact. It could have been explained by the taxpayer or witnesses called on behalf the taxpayer.

    Finding

13. There is evidence that another corporation namely WBDK of which Mr CEDJ, the taxpayer and two other persons were directors, could have owed money to the taxpayer for his services. Mr CEDJ acknowledged that repayments would be made to the taxpayer for his services. He agreed that there would not be a repayment of the UHED Loan; instead there would be an offset against commission owed to the taxpayer.

14. The Tribunal is satisfied that the payments which were made under the UHED Loan were intended to be by way of remuneration to the taxpayer for his services, either already performed or to be performed, but were characterised by the agreement as a purported loan. Whether the loan funds paid were dependent upon the anticipated LRHY Settlement or whether the source of such funds was related to credits which the taxpayer may have accumulated and was expecting to receive for his services as monies owing to him for work done for AXEJ is immaterial.

15. It may have been that a settlement, the LRHY Litigation, was anticipated but the Tribunal finds it unnecessary to determine whether it was the LRHY Litigation which was going to be the catalyst for the payment of monies. Rather, the Tribunal considers that the taxpayer claimed an entitlement for his services and that it was convenient for the taxpayer to settle his wife’s claim against him for her property settlement by drawing down on funds or owing to him and paying it to his wife through the device of the UHED Loan.

16. The Tribunal is not satisfied that the monies under the UHED Loan agreement constituted a loan; rather it appears to be a device by which the taxpayer was remunerated for his services. The Tribunal therefore concludes that the loan agreement did not intend to be a loan: but had an entirely different purpose namely to conceal the true nature of the payments that were being made to the taxpayer. It did not have any “apparent, or any, legal consequences”: see Equuscorp Pty Ltd v Glengallan Investments Pty Limited (2004) 218 CLR 471. See also Millar v Federal Commissioner of Taxation (2016) 243 FCR 302 at [46] (Pagone J); [82] per Davies J where his Honour said:

    … The finding of a legally effective deposit by the superannuation fund and a legally effective loan to Mr and Mrs Millar from the Samoan entity required evidence from which the Tribunal could confidently decide that a legally effective deposit and a legally effective loan had been created rather than being a disguise to enable Mr and Mrs Millar to access the money in their superannuation fund.  It was the absence of that evidence that led the Tribunal to conclude that Mr and Mrs Millar had not discharged their burden of proof in light of the other evidence, including inferences, and the lack of evidence from Mr Gould, that the impugned documents and transactions were created for the purpose of providing a smokescreen to disguise the true position.  Accordingly, I would dismiss the appeal.

17. The Commissioner claims that the loan document is a sham.  A sham was defined by Diplock LJ in Snook v London& West Riding Investments Ltd [1997] 2 QB 786, in effect, as a transaction which is not intended to have the effect which it purports to have. However, there is no positive onus on the Commissioner or the Tribunal to satisfy itself that the UHED Loan documents constitute a sham. In Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243, Hill J delivering a judgment of the full Federal Court said at 259(D-F) that:

    “…the onus could not have been on the Commissioner to show what the real transaction was, of which the payments formed part. Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise: Coppelson v Commissioner of Taxation (Cth) (1981) 52 FLR 95. But as that case itself illustrates, that is in the overall context of a statutory imposition of the burden of proof on the taxpayer and does not place upon the Commissioner an onus of satisfying the Court that there was a sham.”

18. It is not necessary to determine whether the “loan” is a sham: see Richard Walter v Commissioner of Taxation at 259 F-G.

    RENTAL

19. The Commissioner states that the taxpayer occupied residential premises in the relevant period is as follows:

Lease period	Residential property
6 Feb. 1989 – 15 Mar. 1992	Sydney
16 Mar. 1992 – 11 Jan. 1996	Whale Beach
12 Jan. 1996 – 5 Feb. 1998	Whale Beach
6 Feb. 1998 – 11 Jan. 2001	Clareville
12 Jan. 2001 – 24 June 2002	Newport
25 June 2002 – 10 Mar. 2004	Newport
1 Mar. 2004 – 16 May 2011	Elanora Heights
13 May 2011 – 31 May 2012	Darling Point
November 2012 –	Potts Point

1. BRDA made monthly rental payments for the residential accommodation of the taxpayer at Elanora Heights from its St George Bank account as follows:

Income Year	Rent paid ($)
2009	51,800
2010	46,900
2011	37,100

1. KGWE paid amounts of at least $71,101 and $120,250 in respect of the residential accommodation of the taxpayer at Potts Point from its St George Bank account.

2. In FY2011, FY2012 and FY2013, the taxpayer received payments from KGWE on behalf of AXEJ for rental of a residential property Darling Point; and from 1 June 2012 to 30 June 2012 at  Double Bay. The amounts paid, in respect of rental, was $147,351.

3. The taxpayer submits that such amount should not be treated as income by virtue of the operation of s 21A of ITAA 1936. The taxpayer maintains that rental was paid by KGWE because that company could not be a lessee due to the letting agent’s prohibition on allowing foreign corporations to be the lessee. The taxpayer maintains that s 21A was not referred to in the Commissioner’s Reasons for Decision; and that it would be a denial of natural justice and procedurally unfair if the Commissioner was permitted to place reliance upon such provision.

4. The taxpayer also submits that for s 21A to be engaged, there needs to be a “non-cash business benefit” as defined, that is, the provision of property or services provided wholly or partly in respect of the business relationship. The taxpayer submits that there is no business relationship. The taxpayer was not personally carrying on a business but was working pursuant to the provisions of the agency agreement, essentially providing his own services.

5. Further, it is submitted that income has to be derived or earned before any consideration of tax on any rental benefit arises. Further, the Tribunal’s attention has been drawn to a decision in Case V60 88 ATC 434. In that decision it was held that in order for the former s 26(e) of the ITAA 1936 to apply, something of value must have been received by the taxpayer.

6. The taxpayer had included payments of rental as part of his reimbursements claiming they were of a private nature. In his second affidavit, the taxpayer excluded such payments and denied that the benefit received by him was assessable, on the basis that he was required to live in Australia to carry out his activities under the AXEJ agency agreement.

   Consideration

7. Section 21A deems a “non-cash business benefit” to be convertible to cash for the purpose of s 65. Such deeming provision was enacted in consequence of the decisions in Tennant v Smith (1892) AC 150 and in Federal Commissioner of Taxation v Cooke & Sherden 80 ATC 4140.

8. It should also be observed that s 21A requires that the benefit be of an “arm’s length value” is defined as:

   “…The amount that the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider under a transaction where the parties to the transaction are dealing with each other at arm’s length in relation to the transaction.”

9. The taxpayer resided in Sydney to carry out his function as an agent on behalf of AXEJ, and accordingly, the payment becomes part of his remuneration package. Because of the Tribunal’s finding concerning the validity of the agency agreement, the Tribunal rejects a contention that the payment of rental was made pursuant to clause 10.2 of such Agreement.

10. Unlike the circumstances referred to in Case V60, there is no suggestion that the taxpayer was required to live in any specific premises. In that decision, the pivotal fact related to the necessity for the employees to reside at residential accommodation at a mine site as part of their maintenance engineering and superintendent’s duties. The residences so provided are found not to be a taxable benefit, because the taxpayers would have preferred to reside in their own houses located nearby. The employer required the taxpayers to reside in the accommodation provided by the employer.

11. As an alternative, the taxpayer contended that the rental payment should be treated as being equivalent of payment for hotel accommodation. However, payments for hotel accommodation are deductible where the taxpayer stays in such a hotel in the course of his income producing activities. In the present circumstances, the taxpayer has moved to Sydney to promote business for the principal in return for rental and remuneration. Accordingly, the taxpayer’s submission is rejected.

12. It follows that the payments of rental are properly assessable as part of the taxpayer’s income.

    MOTOR VEHICLE

13. The taxpayer was provided with funds by AXEJ to purchase a new motor vehicle for his use. The purchase price in 2010 was $145,000. It was apparently used by the taxpayer and was registered in the taxpayer’s name. The taxpayer submits that it was held on “resulting trust for AXEJ”, and claimed that payment was for a company vehicle. There is no evidence to support such contention.

14. The vehicle was sold in February 2016. The circumstances of its sale are conflicting. The taxpayer states that he sold the vehicle to his solicitor, FVJX. The taxpayer said that FVJX had lent him money “and in consideration for that, I sold her the car (the taxpayer stated that he owed FVJX more than $60,000 at that time) for the amount of $42,500”. He states that he tried to give the car back to Mr CEDJ, but that Mr CEDJ said to “just get rid of it”.

15. Mr CEDJ stated in his affidavit, dated 8 June 2017, that the vehicle,

    “has subsequently been used to facilitate my attendance at meetings and client events”

16. The records of Roads and Maritime Service (‘RMS’) record a transfer of the motor-vehicle to Mr CEDJ.[2] However, there is no evidence of any payment passing to Mr CEDJ or to AXEJ and nor to FVJX. Nor is there any evidence that Mr CEDJ, who has returned to live in Sydney, has attempted to reclaim any interest in the vehicle. Mr CEDJ said that the taxpayer “actually signed the transfer, but I didn’t take it up”. Yet the RMS record shows to the contrary. Mr CEDJ said in respect of the transfer of the vehicle to FVJX:

    “… but I felt that that was not appropriate, and suggested that he transfer the vehicle to her, in fulfilment of the funds that she provided to meet I believe in particular our rent obligations here”.

    [2]  Exhibit B

17. No RMS record has been produced to show that FVJX is, or was, the registered owner of the vehicle.

18. The Tribunal is not satisfied that it was provided to the taxpayer as part of the taxpayer’s emoluments, and that the amount received on sale of the vehicle constitutes part of his remuneration. The disinterest expressed by Mr CEDJ in the vehicle suggests that he made the payment for its purchase and was thereafter unconcerned how the vehicle was used. The Tribunal considers that the evidence indicates that it was in fact a gift to the taxpayer. In these circumstances it would be erroneous to consider the value of the vehicle as a taxable item.

    PERSONAL SERVICES INCOME

19. The applicant contends that the income of OKDH does not constitute personal services income: such income is income of OKDH, since that company was a personal services business (‘PSB’) within the meaning of s 87-15. It so qualified as a PSB because it satisfied the tests in s 87-15(2). The taxpayer claims that he was the only person providing services on behalf of OKDH to JLEY, and was paid management fees. The taxpayer claims the services provided by him were personal services since the management fees were paid by way of reward for the personal efforts of the taxpayer in soliciting litigation funding. The taxpayer asserts that the fees paid to OKDH were based on the value of assets under management rather than based on services performed.

20. In the taxpayer’s fifth affidavit sworn 14 August 2017 (shortly before the hearing commencement), the taxpayer claimed the maintained business premises. The taxpayer states:

    In or around the period from March 2008 to July 2008, OKDH maintained business premises at … Sydney … A copy of the BRDA invoice to OKDH in the amount of $8,800 and paid by EYMX is included at Tab 23 of Exhibit “PFL-2” to my First Affidavit.

    During that period, the …Premises was used for the office of OKDH and I worked form there and had meetings with investors and consultants and conducted calls to lawyers, accountants and funded clients and other businesses for OKDH.

    In or around the period from July 2008 to March 2009, OKDH maintained business at … Woolloomooloo… A copy of the invoice from BRDA to OKDH in the amount of $68,824.80 which was paid by EYMX is included at Tab 27 of Exhibit “PFL2” to my First Affidavit.

    During that period, the Woolloomooloo …Premises was used for the office of OKDH and I worked form there, had meetings with investors and consultants and conducted calls to lawyers, accountants and funded clients and other businesses for OKDH.

    In or around the period from March 2009 until at least July 2010, OKDH maintained business premises at Sydney. During that period, the premises was leased by EYMX from Ord River Resources Limited and the rental payments were paid directly from the EYMX’s … trust account named ‘General Trust Funds’. A copy of the EYMX General Trust Funds account statements showing rent payments made on 19 May 2009 and 7 October 2010 to Ord River Resources appears at Annexures E and F to my Fourth Affidavit on the pages marked ‘ST65-1015’ and ‘ST77-1065’ respectively.

1. The taxpayer also states in such affidavit:

   At all relevant times I resided at premises at [premises],[premises], [premises] and [premises] were used only for conducting the activities related to the management of the EYMX by OKDH.

2. Pursuant to clause 7.9, all of the expenses of OKDH were paid by the trustee. In FY2009 and FY2010, management fees were paid by JLEY to OKDH being $278,045.44 and $99,000 respectively.

3. Division 84 of the TAA relevantly provides that the ordinary or statutory income of another entity is treated as the individuals “personal services income” if income is mainly a reward for the individual’s efforts or skills and would be such if it was the individual’s income.[3]

   [3] s 84–5(1) ITAA 1997

4. The taxpayer asserts that the Commissioner is in error in treating the income received as personal services income. The taxpayer claims that he attended five days per week in normal business hours at premises used only for conducting activities relating to the management of the EYMX by OKDH. The Commissioner has referred to other work performed by the taxpayer in respect of AXEJ. The taxpayer submits that the Commissioner is incorrect in comparing activities undertaken for one entity compared with those of another entity at the same premises.

5. Further, the taxpayer asserts that the business will be a PSB if the “results” test is satisfied. Such test is satisfied if an individual satisfies the three conditions set out in s 87–18(3) of the ITAA 1997 in relation to at least 75% of his personal services income during the year. The conditions require the production of a result; supply of plant and equipment; and liability for defects. The taxpayer refers to the decision in World Book (Australia) Pty Ltd v Federal Commissioner of Taxation (1992) 92 ATC 4327 at 4331 per Meagher JA.

6. The taxpayer submits that OKDH was entitled to fees if it managed the trust business. It was not based on hours worked; rather its remuneration was a fixed amount of consideration for the undertaking of management.

   Consideration

7. This issue was raised in the Commissioner’s Statement of Facts, Issues and Contentions filed on 16 November 2016. Accordingly, the Commissioner is entitled to rely upon it.

8. The object of s 87-10 is to:

   “define * personal services businesses in a way that ensures that it covers genuine businesses but not situations that are merely arrangements for dealing with the * personal services income of individuals.”

9. The Tribunal has considered the evidence, and the submission of the taxpayer. However, the Tribunal concurs with the submissions of the Commissioner.  The Tribunal repeats the Commissioner’s submissions on this issue which it adopts.

10. OKDH is the manager of the EYMX which was established in or about June 2006 under a trust deed.  The trustee of the fund was JLEY Pty Ltd.  The EYMX was established for the purpose of raising funds for litigation funding.[4]

    [4] 1^st Affidavit at paras [151]-[154]

11. The taxpayer was the sole director of OKDH, had no employees and maintained no financial records.[5]  In respect of deriving moneys from JLEY, OKDH is treated as being synonymous with the taxpayer.[6]

    [5] T49.2, Exhibit A

    [6] 1^st Affidavit at para [275], Tab 28 and clause 4.1 of the Consent Orders

12. During the hearing, there was little evidence provided concerning the King St Wharf premises. It established that a desk and telephone constituted the office equipment.

13. OKDH was paid a manager’s fee that was calculated based on a formula contained in clause 7.1 of the trust deed. Broadly, the formula is based on the funds under management (broadly equivalent to 5% of the funds under management). Under clause 7.9, all expenses of OKDH are paid for by the trustee (which would exclude the taxpayer being entitled to any deductions under Division 84).

14. During the 2009 income year, the management fees paid by JLEY to OKDH were:[7]

    [7] 1^st Affidavit at para [247]

Date	Amount ($)
28/10/2008	23,100.00
10/11/2008	186,067.11
10/11/2008	68,878.33
Total	278,045.44

1. During the 2010 income year, the management fees paid by JLEY to OKDH were:[8]

[8] 1^st Affidavit at para [297]

Date	Amount ($)
4/8/2009	99,000.00

1. Division 84 (Personal Services Income),[9] subject to certain exclusions, applies to situations where a person’s personal service income has been alienated by an individual.

   [9] ITAA 1997

2. The taxpayer is the only person providing services on behalf of OKDH to generate the management fees.  The services being provided by the taxpayer are personal services as the management fees are paid as a reward for the personal efforts of the taxpayer in seeking out matters for litigation funding and organising the funding: s 84-5(1).

3. OKDH is a personal service entity as it is a company whose ordinary income includes the personal services income of the taxpayer: s 86-15(2).

4. The Tribunal also concurs with the observations set out in the Commissioner’s Submissions, which now follow since the factual conclusions are accepted by the Tribunal.

5. The personal services business test (with the exception of the results test) does not apply if 80% or more of the personal services income is from one source: see s 87-15 Note 2  In that case, an individual’s personal service income is not to be taken to be from the conduct of a personal services business unless a personal services determination is in force when the personal services income is gained or produced: s 87-15(1)(Note 2) and s 87-15(3).

6. The taxpayer’s individual personal services income constitutes 80% from OKDH.  The taxpayer has failed to discharge the onus of establishing the income from OKDH was less than 80%.  The taxpayer for the 2009 and 2010 income year concedes income of:[10]

   ·$155,963.35 from BRDA/OKDH; and

   ·‘excessive reimbursements’ of $51,564.42 and $138,490.33 for the 2009 and 2010 income year, respectively, from BRDA/OKDH and AXEJ,

   but has not allocated or establishes a particular amount attributable to OKDH so as to establish that less than 80% of the taxpayer’s personal assessable income is from OKDH.

   [10] See Annexure A to Respondent’s Opening Submissions

7. The taxpayer could have made an application for a determination under s 87-15(1)(b) that his services to OKDH constituted a personal services business. The taxpayer has made no such application. Accordingly, it is not open to the taxpayer to dispute the application of Division 84 by reference to the personal services business tests.

   BUSINESS PREMISES TEST

8. Section 87-30 makes provision for the “business premises test” for a PSB.  Pursuant to (1) thereof, an individual or a personal services entity (‘PSE’) satisfies the business premises test in an income year if, at all times during the income year, the individual or entity maintains and uses business premises:

   (a)at which the individual or entity mainly conducts activities from which personal services income is gained or produced; and

   (b)of which the individual or the entity has exclusive use; and

   (c)that are physically separate from any premises that the individual or entity, or any associate of the individual or entity, uses for private purposes; and

   (d)that are physically separate from the premises of the entity to which the individual or entity provides services and from the premises of any associate of the entity to which individual or entity provides services.

9. The taxpayer submits that there is no requirement to maintain or use the same business premises throughout the year. The taxpayer refers to the decision in Dixon Consulting Pty Ltd v Federal Commissioner of Taxation [2006] FCA 1748 at [36] where Emmett J set of the provision:

   “Paragraph (a) requires that the Company mainly conducts the activities from which the personal services income was gained or produced at the relevant business premises. That requirement would be satisfied even if the Company conducted such activities, in part, from some other premises.”

10. The taxpayer submits that Taxation Ruling TR 2001/8[11] (‘TR 2001/8’) provides some assistance in interpreting the provisions of s 87-30 namely that the test is not aimed at discriminating against cases where activities commence or cease in the income year or are conducted on a part-time basis; secondly the use of the word “mainly” in s 87-30(1)(A) means that the generation of personal services income must be the primary use to which the businesses premises are utilized. More than 50% of the activities conducted on at the premises by the individual must be directed at producing the personal services income. The taxpayer submits that OKDH had exclusive possession of the premises which it occupied to the exclusion of all others: see Radaich v Smith (1959) 101 CLR 209 at 222. The premises occupied for use by OKDH.

    [11] Taxation Ruling TR 2001/8 Income tax: what is a personal services business

11. As has been pointed out by the Commissioner, even if the taxpayer were able to challenge the application of Division 84, the only question remaining would be the “business premises test”: s 87-30(1).

12. It follows that the management fees paid to OKDH during the 2009 and 2010 income years are to be included in the assessable income of the taxpayer: s 84-5(1). The taxpayer has not established that any deductions might be available under s 86-20.

13. In the taxpayer’s sixth affidavit dated 14 August 2017 (‘the sixth affidavit’), the taxpayer has sought to establish that OKDH carried on business in premises separate to his private residence. Such evidence includes the following:

    (i)A tax invoice dated 29 July 2008 from BRDA to OKDH seeking payment of office rent at premises of King Street wharf;

    (ii)A tax invoice dated 20 March 2009 from BRDA to OKDH seeking payment of office rent at Woolloomooloo premises and an email seeking payment from EYMX to OKDH Pty Ltd (trading as BRDA);

    (iii)EYMX general trust journal entries recording that EYMX are being used to pay “rental fees”;

    (iv)Financial statements of EYMX referring to “managers rent”;

14. The evidence adduced by the taxpayer on this issue of occupancy of the claimed business premises was generalised. It should be noted that the first two items relate to payment of rent on premises for use by BRDA and not OKDH. Further, no lease agreements have been produced which establish who is the lessee of the premises;

15. The taxpayer did not suggest but he conducted his business for AXEJ at any place sufficient to that of OKDH;

16. The ASIC records establish that the principal place of business of OKDH since 30 April 2005 has been Elanora Heights which was the private residential premises of the taxpayer. Accordingly, such entity does not comply with the business premises test.

17. Accordingly, the taxpayer has failed to establish that the premises he has claimed as business premises were used exclusively by OKDH. It should also be observed that in the years 2009 and 2010 any business premises used by OKDH was simultaneously be used for the taxpayer’s business as an agent of AXEJ.

    RESULTS TEST

18. The taxpayer submits that OKDH satisfied the results test in the years 2009 and 2010 because the income was generated for producing a result. The taxpayer submits that pursuant to TR 2001/8, the results test is based on the traditional criteria for distinguishing between independent contractors and employees. Further, the taxpayer submits the authorities make it plain that the essential ingredient of “producing a result” is performing a service that achieves a specific outcome, and not doing work: Skiba v Federal Commissioner of Taxation 2007 ATC 2467.

19. The taxpayer submits that he, as the Manager, is engaged as an independent contractor and not as an employee and refers to clause 13.1 which authorises OKDH to be the Manager. Since there are no controls over the manager except that the manager performs its duties, OKDH is an independent contractor and the management fee is paid for producing the result.

    Consideration

20. The Tribunal finds that the results test, in this matter, has no application for the following reasons.

21. To satisfy the results test for an income year, it must be established that at least 75% of the personal services income of the taxpayer included in the ordinary income of OKDH is for producing a result; that OKDH supplied the plant, equipment or tools of trade to perform the work which resulted in the result; that OKDH would be liable to the cost of rectifying any work performed.

22. In the present circumstances, the management fees paid to OKDH were paid solely for the services of the taxpayer. They were not dependent upon production of a result, calculated as a percentage of the assets under management.

23. On the available evidence, OKDH gained its income irrespective of “producing a result”; it was determined by its management agreement.

24. Accordingly, the results test does not apply.

    PENALTIES

25. No basis emits for any remission of the penalties imposed.

    SUMMARY

26. The Tribunal has considered, as requested by the parties, the principal issues arising in this application. The Tribunal has not been requested to undertake an analytical enquiry into the actual amounts claimed to represent the taxpayer’s income. Rather the hearing has concentrated on the resolution of principal issues namely the question of reimbursements, the effect of the agency agreement and of the UHED Loan agreement, rental, the motor vehicle and personal services income. Such resolution will guide the parties in respect of the actual assessments. During the hearing, the parties reached agreement on several issues such as Sundries and apparently in respect of the JDNW shares held by the taxpayer. The Tribunal found that both immediately prior to the hearing commencing and during the hearing, the parties made amendments to various issues, which the Tribunal found confusing. Even in final submissions in reply, the Commissioner sought to reinstate a submission which was previously abandoned. Since there is no indication that the taxpayer consented, this issue has not been considered. If the Tribunal has omitted any matter which the parties seek to have resolved, then the Tribunal will allow 14 days of the publication of this decision to enable the parties to make an application in respect of any matter not already dealt with by this decision.

27. The Tribunal has determined that this application does not succeed the absence of any original records, the absence of any tax returns of OKDH, and, of BRDA for the whole of the relevant period does not justify the Tribunal in reaching a conclusion different to that of the Commissioner. As was observed by Latham CJ in Trautwein v Federal Commissioner of Taxation at 87:

    “in the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the Legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.

    The application of s 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess, and that it is therefore very probably wrong. It is prima face right, and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right.”

28. The same observations were made in Rigoli v Federal Commissioner of Taxation 68 AAR 478 at 488 where are [27] the full Federal Court adopted the passage of Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ in George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 201 where their Honours said:

    “the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer on establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income;…”

29. During the hearing, the taxpayer sought to alter the taxable position he claimed to be correct, on several occasions. The Tribunal concludes that at best, the amounts which the taxpayer has claimed, for example in respect of reimbursements, rise no higher than guesswork. As referred to by Latham CJ, the guesswork is probably wrong.

30. The Tribunal is not satisfied that the Commissioner’s assessments are incorrect. In seeking to establish in Part IVC proceedings that an assessment issued under s 167 is excessive, the ultimate question was and remains whether the amount of each assessment is excessive: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623. Section 14ZZO of the TAA places the burden of proving each assessment is excessive on the taxpayer: Dalco at 623 citing George at 189. The TAA does not place any onus on the Commissioner to show that the assessments are correctly made: Dalco at 624 citing Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89. Indeed, absent agreement with the Commissioner to confine the issues for determination in a Part IVC proceeding, the Commissioner is entitled to rely upon any deficiency in the taxpayer’s proof of the excessiveness of the amount assessed in seeking to uphold the assessment: Dalco at 624.

31. What must a taxpayer do to discharge the onus of proving that a s 167 assessment is excessive? As explained earlier, the process of assessment under s 167 of the ITAA 1936 differs from the process of assessment under s 166. Unsurprisingly, and consistent with the reason for the Commissioner being entitled to judge an amount as taxable under s 167, it is insufficient for a taxpayer to show error on the Commissioner’s part: Dalco at 621 and 623.

32. A taxpayer who seeks to establish that a s 167 assessment based on the asset betterment method of calculation is excessive must positively prove his or her “actual taxable income” and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer: Dalco at 623-625 and Trautwein at 88.  The taxpayer must show that the unexplained accumulated wealth was from non-income sources.  The manner in which a taxpayer discharges that burden is not defined or specified – it varies with the circumstances. [See also the full Federal Court decision in Rigoli v Federal Commissioner of Taxation 2014 ATC 20-446; [2016] FCAFC 38.]

33. The conclusions of the Tribunal are based upon:

    ·The changing nature of the evidence provided by the taxpayer as evidenced by his affidavits seeking to justify payments as reimbursements. The evidence is clearly unreliable;

    ·The evidence surrounding the creation of the Agency Agreement and its content;

    ·The evidence surrounding the UHED Loan documents;

    ·The absence of any original documentation;

    ·The extreme lengths to which the taxpayer and AXEJ went to ensure that financial records used for Family Law settlement were not made available to the Commissioner nor to the Tribunal; and

    ·Answers to questions both by the taxpayer and Mr CEDJ which the Tribunal regarded as so vague as to be implausible.

34. The taxpayer has the burden of “establishing affirmatively that the amount of taxable income for which he has been assessed, exceeds the actual taxable income”. See Isaacs AJC in Federal Commissioner of Taxation v Clark (1927) 40 CLR 246 and see also Gashi v Federal Commissioner of Taxation at [63].

35. The onus of proof on the taxpayer has not been discharged, other than in respect of the motor-vehicle.

    DECISION

36. The Tribunal finds that the decision of the Commissioner, the decision under review, is the correct and preferable decision subject to the finding in respect of the motor vehicle.

1. The decision under review is varied in respect of the inclusion of the motor vehicle in the taxpayer’s assessable income. Otherwise the decision is affirmed.

2. In the event that any further issue are to be determined by the Tribunal, either party may make application to the Registrar within 28 days of the publication of these reasons.

I certify that the preceding 256 (two hundred and fifty- six) paragraphs are a true copy of the reasons for the decision herein of The Hon. Dennis Cowdroy OAM QC, Deputy President

.................................[sgd]...............................

Associate

Dated:   20 December 2017

Dates of hearing:	18-22, 25 September and 3 October 2017
Counsel for the Applicant:	Mr D McGovern and Ms Kaur-Bains
Solicitors for the Applicant:	Squire Patton Boggs
Counsel for the Respondent:	Ms Collins and Mr O'Brien
Solicitors for the Respondent:	Australian Government Solicitor