Robert Upson and and Commissioner of Taxation

[2014] AATA 896

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL             )

)  No: 2013/0140; 2013/0141

Taxation Appeals Division  )        2013/0142 & 2013/0143

Re: Robert Upson

Applicant

And: Commissioner of Taxation

Respondent

AND

ADMINISTRATIVE APPEALS TRIBUNAL             )

)  No: 2013/0146; 2013/0147

Taxation Appeals Division  )        2013/0148 & 2013/0149

Re:Beryl Upson

Applicant

And: Commissioner of Taxation

Respondent

CORRIGENDUM

TRIBUNAL:             Deputy President P E Hack SC

DATE:   18 December 2014

PLACE:                  Brisbane

The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975, to alter the text of the decision in this application as follows:

The word “tenable” where it appears at paragraph 21 should read “taxable”.

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Deputy President

[2014] AATA 896

Division	Taxation Appeals Division
File Numbers	2013/0140; 2013/0141; 2013/0142 and 2013/0143
Re	Robert Upson
APPLICANT
And	Commissioner of Taxation
RESPONDENT

AND

Division	Taxation Appeals Division
File Numbers	2013/0146; 2013/0147; 2013/0148 and 2013/0149
Re	Beryl Upson
APPLICANT
And	Commissioner of Taxation
RESPONDENT

Decision

Tribunal	Deputy President P E Hack SC
Date	4 December 2014
Place	Brisbane

In each application the decision under review is affirmed.

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Deputy President P E Hack SC

CATCHWORDS

INCOME TAX – default assessments – administrative penalty imposed – objection to amended assessments – decisions under review affirmed

LEGISLATION

Income Tax Assessment Act 1936 (Cth) ss 166, 167

Taxation Administration Act 1953 (Cth) ss 14ZY, 14ZZ, 14ZZK; Schedule 1 ss 284-75, 284-80, 284-90, 284-220

CASES

Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Rigoli (2013) ATC 20-407; [2013] FCA 784
Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301; [2013] FCAFC 30
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Rigoli v Federal Commissioner of Taxation (2014) ATC 20-446; [2014] FCAFC 29

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

REASONS FOR DECISION

Deputy President P E Hack SC

4 December 2014

Introduction

1. In 2010, following a five day trial, Mr Robert Upson was found guilty of the offence of carrying on the business of unlawfully trafficking in the dangerous drug cannabis sativa on dates unknown between 1 June 1997 and 30 September 2007. He was sentenced to imprisonment for eight years. Part of the Crown case was that during those years almost $1.3 million was deposited, in cash, into accounts in the name of Mr Upson and his spouse Mrs Beryl Upson. Neither Mr Upson nor Mrs Upson lodged tax returns during those years.

2. Unsurprisingly, the Commissioner of Taxation became interested in the affairs of
   Mr and Mr Upson. The Commissioner is unconcerned with the source of income, he is concerned only to ensure that all assessable income is brought to account. In 2008 the Commissioner commenced an investigation into the affairs of Mr and Mrs Upson. It resulted in the Commissioner making default assessments, that is, assessments authorised by s 167 of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), of the taxable income of each of Mr and Mrs Upson for the 2004 to 2007 income years.
   Mr and Mrs Upson objected to the assessments. The Commissioner disallowed the objections.

3. Mr and Mrs Upson seek a review of the objection decisions.

4. For the reasons that follow the objection decisions were correct. They will be affirmed.

   The applicable legal principles

5. The applicable principles are not in doubt. By virtue of s 166 of the ITAA 1936, the Commissioner is obliged to make an assessment of the amount of the taxable income of a taxpayer and of the tax payable thereon. Where, amongst other things, a person makes default in furnishing a return, the Commissioner is empowered to make an assessment, called a default assessment, of the amount upon which, in the Commissioner’s judgement, income tax ought be levied and that amount is the taxable income of that person for the purpose of s 166 of the ITAA 1936.[1] A taxpayer dissatisfied with an assessment may object against it in the manner set out in Part IVC of the
   

   [1]See Income Tax Assessment Act 1936 (Cth) s 167.

   Taxation Administration Act 1953 (Cth) (the Administration Act).

6. The Commissioner must decide whether to allow, wholly or in part, or disallow, the taxpayer’s objection.[2] A person dissatisfied with the Commissioner’s objection decision may apply to the Tribunal for a review of the decision or appeal to the Federal Court against it.[3] Section 14ZZK of the Administration Act provides:

   On an application for review of a reviewable objection decision:

   …

   (b) the applicant has the burden of proving…that the assessment is excessive or otherwise incorrect and what the assessment should have been.

   [2]See Taxation Administration Act 1953 (Cth) s 14ZY.

   [3]See Taxation Administration Act 1953 (Cth) s 14ZZ

7. The assessments in issue in these proceedings are default assessments. The authorities establish that it is not enough for an applicant to point to error in the methodology adopted by the Commissioner in making the assessments; the applicant must demonstrate what the actual amount should be. The applicable principles were explained by Pagone J in Federal Commissioner of Taxation v Rigoli[4] in this way:

   [4](2013) ATC 20-407; [2013] FCA 784. His Honour’s reasoning and conclusions were described as “entirely correct” on appeal: see Rigoli v Federal Commissioner of Taxation (2014) ATC 20-446; [2014] FCAFC 29.

   [8]… In Gashi^[[5]], the Court had held that a taxpayer wanting to challenge an assessment made under s 167 upon the asset betterment method of calculation could only do so by establishing the actual taxable income for the period in dispute saying at [63]:

   [5]Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301; [2013] FCAFC 30.

   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^[[6]] at 623-5 and Trautwein^[[7]] 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: Dalco at 624.

   [6]Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614.

   [7]Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63.

   The reason for this conclusion lay in the difference between assessments made under s 166 and those made under s 167 which at [53]-[55] the Court had explained:

   The s 167 power is necessarily different to that in s 166. Under s 166, the power is to “make an assessment of the amount of the taxable income”. The phrase “taxable income” is defined to mean “assessable income” minus ‘deductions”: s 4-15 of the 1997 Act and s 6(1) of the 1936 Act. Under s 167, that process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part) because of one of the preconditions to the exercise of the power in
   sub-paras (a) to (c) of s 167 – a failure by a person to lodge a tax return, the tax return is deficient or the Commissioner has reason to believe that a person who has not lodged a return has derived taxable income. It is for those reasons that the balance of s 167 empowers the Commissioner to make an assessment of the amount upon which income tax ought to be levied and for that amount to be deemed to be the taxpayer's taxable income for the purposes of s 166.

   The third part of the section – the deeming provision – would be futile if it was necessary for the Commissioner to undertake a process of the kind referred to in s 166. As the Commissioner submitted, the assessment of the “amount” in s 167 is not constrained by a process of subtracting “deductions” from “assessable income”. Instead, in making his judgment of the “amount” that becomes taxable, the Commissioner may use what is known as the “asset betterment” method: Trautwein at 87, 99-100 and 105.

   The asset betterment method, and the resulting assessment, is necessarily a guess to some extent and “almost certainly inaccurate in fact”: Trautwein at 87. It is therefore “no part of the duty of the Commissioner to establish affirmatively what judgment he formed [under s 167 of the 1936 Act], much less the grounds of it, and even less still the truth of the facts affording the grounds”: George v Federal Commissioner of Taxation^[[8]] at 204.

   The need, therefore, for a taxpayer to prove the “actual taxable income” in order to establish the excessiveness of an assessment made under s 167 was not so much that the assessment in Gashi was based upon the asset betterment basis of calculation as that it was made under s 167 where the “process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part)”. The figure arrived at by the Commissioner under s 167 may in any given case be based upon calculations similar to those where the taxpayer has furnished a return under s 166, but an assessment under s 167 is fundamentally different from one under s 166. A taxpayer seeking to establish that an assessment under
   s 167 is excessive needs to establish not that some element in the assessment is wrong but that “the amount upon which in [the Commissioner's judgment] income tax ought to be levied” was the taxpayer's actual taxable income. The primary obligation of a taxpayer is to furnish a return of income under s 166 and an assessment under s 167 does not provide a means by which taxpayers may be relieved of their obligation to establish their actual taxable income. It is, rather, a means by which the Commissioner may impose a liability where the taxpayer has failed to furnish a return.

   …

   [10]A taxpayer seeking to challenge an assessment under s 167 will not succeed merely by proving error by the Commissioner: George v Federal Commissioner of Taxation (1952) 86 CLR 183; Dalco. The task for the taxpayer on objection is not to prove that the Commissioner erred but to prove, albeit on the balance of probabilities (see Ma v Commissioner of Taxation (1992) 37 FCR 225), the correct amount upon which tax should be levied. The subject matter of challenge to an assessment under s 167 of the 1936 Act is “the amount” upon which the Commissioner has determined tax ought to be levied. The subject matter of challenge in such cases is not to the individual elements of assessable income and deductions which together would have made up taxable income to the assessment if it had been made under s 166.

   [8](1952) 86 CLR 183.

8. As I explain below, both Mr and Mrs Upson fall well short of discharging that onus.

   The Commissioner’s approach

9. It is as well to start by examining the approach taken by the Commissioner before considering the matters raised by Mr and Mrs Upson.

10. The income years in issue in the proceedings are those from 2004 to 2007. Neither
    Mr Upson nor Mrs Upson lodged returns for those years despite them receiving, even on their own case, considerable income. The Commissioner’s audit identified several sources of income for each of them. For present purposes it will suffice to describe the sources as:

    (a)Austrac data showing receipt of funds from overseas;

    (b)Unexplained deposits to Mr and Mrs Upson’s bank accounts;

    (c)Data disclosing considerable share trading;

    (d)Dividends and interest receipts; and,

    (e)Real estate acquisitions and disposals.

    Overseas funds

11. Records from Austrac disclose that Mr Upson received an amount of $24,022 in the 2005 income year and a further amount of $24,363 in the 2007 income year.[9]
    

    [9] Exhibit 3, pages 1 – 4.

    The Commissioner was unable to identify the source of the funds but treated these amounts as Mr Upson’s assessable income in those years.

    Deposits to bank accounts

12. In each of the income years in question the Commissioner identified deposits, predominantly in cash, to a joint bank account (xxxx 244) at the Heritage Building Society. Some transactions – transfers from other accounts, for example – were excluded. The Commissioner attributed half of the total to each of Mr and Mrs Upson as follows:

    2004          182,380

    2005          584,938

    2006          101,227

    2007          473,123

    Additionally, the Commissioner identified dividend or distribution payments to that account, not otherwise accounted, for which he attributed equally to Mr and Mrs Upson as follows:

    2004          212

    2005          1,042

    2006          577

    2007          2476

    Share trading

13. The Commissioner obtained information about the online share trading accounts held by Mr Upson (xxxx 700) and Mrs Upson (xxxx 978). Those accounts showed a great number of deposits, as well as interest, on which, in some cases, tax had been withheld. Additionally, the Commissioner identified capital gains and capital losses from share trading. The Commissioner also identified instances when Mr Upson and Mrs Upson acquired shares or paid calls on shares with funds that could not otherwise be traced. The Commissioner treated those sums as assessable income. Neither Mr Upson nor
    Mrs Upson challenges this aspect of the Commissioner’s case – either as to its methodology or the calculation of amounts. It is not necessary to set out the various amounts.

    Dividends and interest

14. The Commissioner identified, from documents provided to the Commissioner by third parties, dividends, interest and other payments made to Mr and Mrs Upson as well as amounts of tax withheld.

    Real estate

15. In November 2004 Mr and Mrs Upson acquired real property in Tweed Heads. Some $67,027 of the purchase price could not be traced to any of their bank accounts or any other source. The Commissioner treated that sum as money available to them and as their income equally. In November 1998 Mr and Mrs Upson acquired real property at Buaraba for $95,000. It was sold in January 2007 for $337,000. The Commissioner took the view that it was not their principal place of residence and calculated a net capital gain in the 2007 income year.

    Living expenses

16. Finally, the Commissioner assumed that Mr and Mrs Upson would have required funds for day to day living expenses and assumed those costs to have been funded by an unknown source. He undertook a calculation of household expenditure using data provided by the Australian Bureau of Statistics to come up with a base amount (for each) in the 2004 income year of $35,149. That amount was increased by the percentage increase in the consumer price index in the 2005, 2006 and 2007 income years.

    the assessments

17. The result of all of this was that on 28 April 2009 the Commissioner made default assessments attributing taxable income to Mr and Mrs Upson as follows:

Mr Upson	Mrs Upson
2004	183,132	359,818
2005	446,338	598,916
2006	122,348	144,811
2007	384,352	482,054

The Commissioner imposed a penalty at 75% in reliance on s 284-75(3) of Schedule 1 to the Administration Act to item 7 of s 284-90(1) of the Schedule. In the 2005, 2006 and 2007 years the penalty was increased by 20% in reliance on ss 284-75(3) and
284-220(1)(e) of Schedule 1 to the Administration Act. The penalty assessments were made on 1 May 2009.

1. Next, on various dates during April 2011, the Commissioner made amended assessments for each of the 2004 to 2007 income years. The reason for the amendment does not emerge from the material but the result was that Mr and Mrs Upson were assessed on taxable incomes as follows:

Mr Upson	Mrs Upson
2004	211,585	369,266
2005	477,307	606,385
2006	155,781	160,740
2007	394,622	460,562

1. Mr and Mrs Upson lodged objections to the amended assessments in March 2012. They did not object to the imposition of penalty but sought the exercise of the Commissioner’s discretion to remit that penalty. The objections advanced the propositions that the amounts of cash banked were the proceeds of a business of retrieving golf balls that

   
   

   Mr Upson and Mrs Upson had operated between 1986 and 1995. Those proceeds had been retained, in cash, during the intervening years.

2. On 4 December 2012 the Commissioner wholly disallowed the objections. These proceedings were commenced on 8 January 2013. Finalisation was delayed because of proceedings taken against Mr Upson by Queensland authorities under proceeds of crime legislation.

   Consideration

3. Mr and Mrs Upson tendered a considerable amount of evidence including a number of witness statements. None of the witnesses were required for cross-examination. The fundamental difficulty for Mr and Mrs Upson is that their case never came to grips with what they were required to show – what the actual amount of their tenable income was in each of the four years. Instead they sought to demonstrate, unsuccessfully as it seemed to me, that the Commissioner was in error in some aspects of his approach.

4. It seemed to be a significant part of the case for Mr and Mrs Upson that, on their arrival in Australia from New Zealand in 1986 and in the period immediately thereafter, they had significant amounts of cash available to them. There is evidence that they sold a number of properties in New Zealand between 1983 and 1987 but absolutely no evidence of the net proceeds after the discharge of various mortgages that are evident from the copies of title documents that comprise Exhibit 16. Mr Upson claimed to have available $680,000. That coincides with the gross sale value of 11 properties listed in a report prepared for the proceeds of crime proceedings. Given that the extract from that report makes reference to an affidavit of Mr Upson (presumably in those proceedings) which, in turn, refers to two mortgages being discharged, it is inconceivable that
   Mr and Mrs Upson had hundreds of thousands of dollars in cash available to them. The notion that they kept cash of that order secreted within their residence for many years is, with respect, absurd. Whilst the Commissioner did not call any evidence to directly contradict that of Mr and Mrs Upson, I consider it to be inherently implausible and unreliable. The implausibility is compounded when it is recalled that, on
   Mr and Mrs Upson’s case, after eschewing banks and financial institutions for many years, they commenced depositing amounts of cash, invariably just under $10,000 and frequently on more than one occasion in a single day, into their joint bank account and into share trading accounts. The reason for this change of heart was never satisfactorily explained.

5. The same is true of Mr Upson’s evidence about his earnings, in cash, from salvaging and reselling golf balls. The material establishes well enough that he operated such a business but he made no attempt to demonstrate the extent of the earnings of that business beyond the evidence of the accountant, Ms Bundersen, who relied on assumptions based only on Mr Upson’s evidence.

6. Mr and Mrs Upson accept that much of the income that the Commissioner has treated as assessable income has that character, although they make no effort to quantify those amounts or to segregate them into income years. They have not established what their actual taxable income was in any of the income years in question and accordingly have not established that the assessments were excessive.

7. Mr and Mrs Upson did not challenge the imposition of penalty or its uplift pursuant to
   s 284-220(1)(e) of Schedule 1 to the Administration Act. They submitted that the penalties should be remitted in full on the basis that they had “proved” the source of the funds. As is apparent, I do not accept that to be so. But this is not a case that would warrant the remission of penalties. Mr and Mrs Upson obviously made a conscious decision not to lodge income tax returns whilst earning considerable income and acquiring considerable wealth. There is no unfairness in the operation of the statute in such circumstances. No basis is shown for remission of any part of the penalty.

1. The result is that in each application the objection decision will be affirmed.

I certify that the preceding 26 (twenty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

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Associate

Dated   4 December 2014

Dates of hearing	20 and 21 October 2014
Applicants	In person
Counsel for the Respondent	Ms. M Brennan
Solicitors for the Respondent	Australian Taxation Office