Smith and Commissioner of Taxation (Taxation and business)
[2024] ARTA 49
•19 December 2024
Smith and Commissioner of Taxation (Taxation and business) [2024] ARTA 49 (19 December 2024)
Applicant/s: Adam Paul Smith
Respondent: Commissioner of Taxation
Tribunal Number: 2023/5258-5262
Tribunal:Senior Member Lye
Place:Brisbane
Date:19 December 2024
Decision:The Tribunal affirms the decisions under review.
.....................[SGD]..............................
Senior Member Lye
Catchwords
TAXATION – income tax – ordinary income - taxpayer burden of proof - deposits of proceeds from cattle sales and other deposits into joint personal bank account controlled by taxpayer and his wife – intermingling of business with personal monies – whether the taxpayer’s raised issues outside the grounds of objection – evasion – administrative penalties – statutory interest charge – late request for adjournment – objectives of the Administrative Review Act 2024 (Cth).
Legislation
Administrative Review Tribunal Act 2024 (Cth) – s 9
Income Tax Assessment Act 1936 (Cth) – s 166; s 167; s 170
Income Tax Assessment Act 1997 (Cth) – s 6-5
Taxation Administration Act 1953 (Cth) – s 14ZZK; Schedule 1 – s 284 – 20; s 284-75; s 280 – 100; s 280 – 160 (1)Fringe Benefits Tax Assessment Act 1986 (Cth) – s 31G
Cases
Aon Risk Services Australia Ltd V Australian National University (2009) 239 CLR 175
Binetter v Commissioner of Taxation [2016] FCAFC 163; 249 FCR 534
Bosanac v Commissioner of Taxation (2019) 374 ALR 425
Buzadzic v Commissioner of Taxation [2021] AATA 4820
Buzadzic v Commissioner of Taxation [2024] FCAFC 50
Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Commissioner of Taxation v Ross (in her capacity as the personal representative of the estate of Ross) and Anor (2021) 174 ALD 77; [2021] FCA 766
Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Gashi v Federal Commissioner of Taxation (2013) FCR 301; 296 ALR 497; [2013] FCAFC 30
George v Federal Commissioner of Taxation (1952) 86 CLR 183Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Jones v Dunkel (1959) 101 CLR 298
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 66 ATR 1
Reuter v Federal Commissioner of Taxation (1993) 111 ALR 716
Russell v Federal Commissioner of Taxation [2009] FCA 1224
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63; [1936] ALR 425
Vu v Commissioner of Taxation [2006] FCA 889
Yung v Commissioner of Taxation [2012] AATA 872
Statement of Reasons
The Applicant (Mr Smith) is a qualified accountant and registered tax agent[1] who also ran a cattle station (Wonganoo Station).
[1] Exhibit R1, T46.
Wonganoo Station is in Western Australia. It covers an area of 864,000 acres and is located more than 180 km from the nearest town. The Station is owned by a company, Stacpoole Pastoral Holdings Pty Ltd (Stacpoole Pastoral), of which Mr Smith is a co-director and a joint shareholder.
Mr Smith is in dispute with the Commissioner of Taxation (the Commissioner) about alleged underreporting of his assessable income for the financial years ending 30 June 2016 to 2020. The Commissioner issued Default Assessments[2] (the Assessments) on the basis that unexplained deposits into a joint bank account Mr Smith holds with Honni Behrendt (his wife), are ordinary income assessable to Mr Smith.
[2] Pursuant to ss 166 and 167 of the Income Tax Assessment Act 1936 (ITAA 36).
Mr Smith disputes the Assessments and contends that the Commissioner has wrongly attributed to him, income of Stacpoole Pastoral, and/or income which should have been shared with Ms Behrendt.
The primary question the Tribunal needs to determine is whether the Assessments are excessive and if not the correctness of penalty applied and whether any shortfall interest charge should be remitted. For three of the five years in dispute, the Tribunal must consider whether Mr Smith engaged in tax evasion.
The Tribunal’s authority to hear and determine the applications
Mr Smith lodged his application with the Administrative Appeals Tribunal on 10 July 2023.[3] On 14 October 2024, the Administrative Appeals Tribunal (AAT) became the Administrative Review Tribunal (the Tribunal). Under the transitional provisions in the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (the Transitional Act), applications for review to the AAT that were not finalised before 14 October 2024 are taken to be an application for review to the Tribunal. The Transitional Act gives the Tribunal the authority to continue and finalise any aspect of the review associated with these applications not already completed by the AAT. This decision and statement of reasons is made by the Tribunal.
[3] Exhibit R1, T1.
Decisions which are the subject of the applications
The decisions which are the subject of the applications listed are set out in the Commissioner’s Objection Decision dated 11 May 2023, in respect of Mr Smith’s income tax and penalty assessments for the tax periods ended 30 June 2016 to 30 June 2020 (collectively, the tax periods) and on shortfall interest charge (SIC) for the tax period ended 30 June 2016.[4]
[4] Exhibit R1, T8.
The 3 years ending 30 June 2016, 2017, and 2018 fell outside the statutory time limit for issue of Default Assessments unless attended by fraud or evasion.[5] The Commissioner relies on a determination that Mr Smith had engaged in tax evasion (the Evasion Determination) for these three years.
[5] See s 170 of ITAA 36.
Preliminary matter – request for adjournment
At the hearing and following the closure of evidence, Mr Smith made an oral application to adjourn the hearing for at least three to four weeks. Mr Smith submitted that:[6]
I have reflected over the last few hours regarding the matter and I believe there could be more evidence provided as to what I believe my assessable income should be. I understand that I have had time to provide that evidence in the past but given that it is a fact that the main issue or one of the main issues is the onus of proof, I would like more time to provide to the Commissioner and to the Tribunal more evidence to as to what my assessable income should be. So, I am asking you Tribunal to seek leave to provide that evidence which I believe should take for three to four weeks and then we reconvene.
[6] Hearing recording.
Mr Smith’s application was opposed by the Commissioner on the basis that it lacked utility.
Having heard from the parties, I refused the application, and advised Mr Smith that I would provide written reasons for the refusal as part of this decision.
In considering Mr Smith’s application, I am required to have regard to the objectives of the Tribunal in s 9 of the Administrative Review Tribunal Act2024 (the Act). Section 9 states:
9 Objective
The Tribunal must pursue the objective of providing an independent mechanism of review that:
(a) is fair and just; and
(b)ensures that applications to the Tribunal are resolved as quickly, and with as little formality and expense, as a proper consideration of the matters before the Tribunal permits; and
(c)is accessible and responsive to the diverse needs of parties to proceedings; and
(d) improves the transparency and quality of government decision‑making; and
(e)promotes public trust and confidence in the Tribunal.
Given the timing of the application, I also had regard to the decision of the High Court of Australia in Aon Risk Services Australia Ltd v Australian National University[7] (Aon). In Aon, the majority of the High Court found that when faced with a late application (mid-trial) for leave to amend of pleadings, the Supreme Court of the Australian Capital Territory (the Court) could and should consider case management issues and the potential adverse impact of the application if granted, not only on the parties to the immediate proceeding, but on the Court and other litigants. As the majority noted:
[112] A party has the right to bring proceedings. Parties have choices as to what claims are to be made and how they are to be framed. But limits will be placed upon their ability to effect changes to their pleadings, particularly if litigation is advanced. That is why, in seeking the just resolution of the dispute, reference is made to parties having a sufficient opportunity to identify the issues they seek to agitate.
[113] In the past it has been left largely to the parties to prepare for trial and to seek the court’s assistance as required. Those times are long gone. The allocation of power, between litigants and the courts arises from tradition and from principle and policy. It is recognised by the courts that the resolution of disputes serves the public as a whole, not merely the parties to the proceedings.
[114] Rule 21 of the Court Procedures Rules recognises the purposes of case management by the courts. It recognises that delay and costs are undesirable and that delay has deleterious effects, not only upon the party to the proceedings in question, but to other litigants. The Rule’s objectives, as to the timely disposal of cases and the limitation of cost, were to be applied in considering ANU’s application for amendment. It was significant that the effect of its delay in applying would be that a trial was lost and litigation substantially recommenced. It would impact upon other litigants seeking a resolution of their cases. What was a “just resolution” of ANU’s claim required serious consideration of these matters, and not merely whether it had an arguable claim to put forward. A just resolution of its claim necessarily had to have regard to the position of Aon in defending it. An assumption that costs will always be a sufficient compensation for the prejudice caused by amendment is not reflected in r 21. Critically, the matters relevant to a just resolution of ANU’s claim required ANU to provide some explanation for its delay in seeking the amendment if the discretion under r 502(1) was to be exercised in its favour and to the disadvantage of Aon. None was provided.
[7] (2009) 239 CLR 175.
Bearing the objectives and these principles in mind, I considered and weighed the following factors.
First, Mr Smith is an unrepresented litigant and so comes to these proceedings at a relative disadvantage. However, since his application to the Tribunal was lodged on 10 July 2023 (more than one year ago), Mr Smith has had every opportunity to lodge evidence and submissions with the Tribunal. His matter was also listed for a three-day hearing to give him the opportunity to present his case in person. Prior to that, he had opportunities both at audit and objection to provide relevant documents to the Commissioner. There had been no prior suggestion from Mr Smith that he had any additional evidence to lodge. Given the circumstances, it is not clear why Mr Smith had waited until the hearing to identify that he potentially held additional relevant documents to tender requiring adjournment.
Second, Mr Smith was on notice before the hearing commenced of the Commissioner’s contention that he had not discharged his onus because he had not proved what his correct taxable income should be. I understood Mr Smith to be suggesting that he proposed to tender documents addressing individual transactions rather than proving his actual taxable income. This did not suggest an approach that would address deficiencies in his case.
Third, any adjournment would lead to delay in resolution of Mr Smith’s application and lead to additional costs for him. Both Mr Smith and Ms Behrendt had expressed concern about the time the dispute had been on foot[8] and had incurred costs in travelling from the Northern Territory to Brisbane for the hearing and in arranging childcare for the duration of the hearing. Any continuance would add to their costs and inconvenience.
[8] Exhibit A2 at [22].
It would also require the Tribunal to allocate further hearing time for the applications which would indirectly impact other parties awaiting listing of their matters for hearing by the Tribunal. In this regard, section 9(b) of the Act requires me to consider the need for effectiveness in the Tribunal’s processes as well as fairness to the immediate parties.
Finally, any adjournment would also lead to additional cost for the Commissioner. The Commissioner had briefed counsel for the hearing. The hearing had been conducted based on the evidence lodged with the Tribunal. Even a remotely conducted continuance of the hearing would cause further cost to the Commissioner in addressing any additional material.
Mr Smith had already had an opportunity to lodge evidence, to engage with the Commissioner and to present his case to the Tribunal. Given the late stage of the application, the nature of the evidence proposed to be led, the potential for adverse impact on the parties, the Tribunal and other litigants, I was not satisfied on balance that an adjournment would be either effective or fair.
For these reasons, I refused Mr Smith’s application for adjournment and reopening of the hearing.
Background facts
In July 2015, Stacpoole Pastoral purchased Wonganoo Station. It seems that at least some funds for the purchase were provided by Westpac Bank.
During the tax periods, Mr Smith was co-director of Stacpoole Pastoral[9] with Mr Ernest Smith (Mr Smith’s father), and he and Ms Behrendt were also joint shareholders in the company with Mr Ernest Smith.
[9] Exhibit R1, ST 1.
On 1 March 2017, Mr Smith became a co-director and was also an equal shareholder with his father in a related company, Dews Pastoral Holdings Pty Ltd (Dews Pastoral).[10]
[10] Exhibit R1, T36.
Mr Smith told the Tribunal in submissions, and it was not controverted, that Mr Smith and Ms Behrendt purchased Wonganoo Station as a ‘family cattle farm’. The documentary evidence records the family (Mr Smith, Ms Behrendt and their 5 children) as living at Wonganoo Station during the tax periods.[11] Mr Smith told the Tribunal that the family moved to Wonganoo Station in or around mid-2015.
[11] See for example, Exhibit R1, T18, Mr Smith’s completed PLE worksheets for the tax periods.
It seems things did not go well with the family cattle farm. In May 2021, Westpac agreed to forbear until 31 October 2021, from taking action to recover monies, pending sale of Wonganoo Station and another property. On 10 May 2021, Mr Smith and Mr Ernest Smith entered a deed with Westpac whereby they agreed that the net proceeds of any cattle sale would be reported to Westpac and paid towards reducing the monies Westpac financed to Stacpoole Pastoral.[12]
[12] Exhibit R2, Tab 8, clause 4.4-5.
On 7 December 2020, the Commissioner, commenced a review[13] of Mr Smith’s income tax returns and, following an audit, formed the view that Mr Smith had failed to report all assessable income in his income tax returns for the tax periods.
[13] Exhibit R1, T17. Mr Smith was given notification of the review.
Specifically, the Commissioner was concerned about recurring unexplained deposits comprising proceeds from cattle sales for Wonganoo Station as well as other deposits into the joint bank account, which appeared not to have been reported by Smith in his income tax returns. The Commissioner was concerned these amounts had been used by Mr Smith for his personal expenses and had the character of income assessable to him.
The income tax returns
Mr Smith’s reported income for each tax period is recorded in the table below at [47].[14]
[14] The information in this table was obtained from the Commissioner’s Audit Decision and Reasons at Exhibit R1, T13 at [156].
On 14 February 2017, Mr Smith lodged his income tax return for the 2016 year.[15] Mr Smith did not list a main occupation in this return and reported income arising from allowances, earnings, tips, director's fees etc.
[15] Exhibit R1, T 56.
On 6 September 2018, Mr Smith lodged his initial income tax return for the 2018 year.[16] Once again, Mr Smith again reported income as arising from allowances, earnings, tips, director's fees etc and again, no main occupation was listed.
[16] Exhibit R1, T 58.
On 12 September 2018, Mr Smith lodged his initial income tax return for the 2017 year.[17] In this return, Mr Smith described his main occupation as a Beef Cattle Farmer or Farm Overseer employed by Stacpoole Pastoral. Once again, he reported income as arising from allowances, earnings, tips, director's fees etc.
[17] Exhibit R1, T 57.
On 4 October 2018, Mr Smith lodged an amended return for the 2017 year,[18] reducing his reportable income but still reporting it as arising from allowances, earnings, tips, director's fees etc. Mr Smith listed no occupation on the amended return.
[18] Exhibit R1, T 59.
On the same day, Mr Smith lodged an amended return for the 2018 year,[19] reducing his reported income arising from allowances, earnings, tips, director's fees etc. Again, no main occupation was listed.
[19] Exhibit R1, T 60.
On 7 July 2020, Mr Smith lodged his income tax return for the 2020 year.[20] Here he listed his main occupation as Accountant-General and his employer as Ernest Charles Smith ABN 77 955 967 166. He reported income in the form of salary and wages.
[20] Exhibit R1, T 61.
On 7 February 2021, Mr Smith lodged his income tax return for the 2019 year,[21] reporting directors’ fees ($1) and foreign assessable income.
The audit and objection process
[21] Exhibit R1, T 62.
Audit
As part of the Commissioner’s review,[22] Mr Smith was required to prepare and submit a completed Personal Living Expenses (PLE) worksheet for himself and his family. He also provided various other records to the Commissioner, including bank records.
[22] Exhibit R1, T13 at [26].
The Commissioner’s summary of the expenses identified by Mr Smith in the PLE worksheets for the tax periods is below:[23]
[23] Exhibit R1, T8 at [161].
Types of expenses 2016 2017 2018 2019 2020 Housing expenses $41,200 $31,147.74 $31,791 $45,900 $5,160 Utilities $2,400 $2,400 $360 $360 $0 Food expenses – paid by Stacpoole Pastoral $0 $0 $0 $0 $0 Vehicle expenses – paid by Stacpoole Pastoral $0 $0 $0 $0 Household furnishings $600 $600 $600 $0 $0 Household services $1,560 $1,560 $1,560 $1,560 $1,560 Alcohol & tobacco $1,200 $1,200 $1,200 $1,200 $1,200 Clothing & footwear $600 $1,200 $600 $600 $600 School fees $450 $450 $500 $6,000 $6,000 Child support $2,114.38 $1,900 $0 $0 $0 Total living expenses $50,124.38 $40,457.74 $36,611 $55,620 $14,520
The Commissioner identified significant discrepancies between:
(a)the assessable income reported in Mr Smith’s income tax returns and the deposits into the joint account; and
(b)Mr Smith’s personal expenses as reported in the PLE worksheets, and the assessable income reported in his income tax returns.[24]
[24] Exhibit R1, T16 at [119].
On 28 July 2021, the Commissioner escalated the review to audit[25] and issued statutory information gathering notices to various banks and Mr Smith.[26]
[25] Exhibit R1, T55.
[26] Exhibit R1, T13 at [74]. The Commissioner obtained information and records from Mr Smith both voluntarily and by statutory notice.
The Commissioner issued a Position Paper to Mr Smith on 18 March 2022, setting out the audit process and advising Mr Smith that the Commissioner had determined Mr Smith’s assessable income using a ‘financial analysis methodology’[27] involving ‘the examination principally of [your] bank account statements and bank transactions lists to identify deposits which are unexplained and have the characteristic of ordinary income’.[28]
[27] Exhibit R1, T13 at [92].
[28] Exhibit R1, T13 at [93].
The Commissioner identified each of the deposits made to the joint account associated with Wonganoo Station and informed Mr Smith he characterised these as ordinary income of Mr Smith.[29]
[29] Exhibit R1, T13 at [114].
The Commissioner also identified other periodic or recurring deposits to the joint account with narrations such as:
·J.C. Smith & Associates Wonganoo pay 421520
·J.C. Smith & Associates Wonganoo laha 421520
·J.C. Smith & Associates Aps wages 421520
·Yalbago J.C Smith & Associates 421520
·Aps airtickets J.C. Smith & Ass 421520
·J.C. Smith & Associa Aps trailer 421520
·Aps parts J.C. Smith & Ass 421520
·Adam Smith Fs Capital Ltd 421520
·Rent J.C. Smith & Ass 421520
·Ernest Smith Plan Manager Fees.[30]
[30] The Commissioner only attributed 50% of the NDIS plan fees to Mr Smith. The other 50% were attributed to Ms Behrendt.
The Commissioner advised Mr Smith of his view that part or the whole of these deposits also comprised ordinary income of Mr Smith on the basis that they were regular, recurring amounts received by Mr Smith and used to fund his ‘personal and lifestyle expenses’.[31]
[31] Exhibit R1, T13 at [117].
The Commissioner also advised Mr Smith of his view that Mr Smith had not provided evidence to demonstrate the amounts had previously been reported as assessable income or were not assessable.[32]
[32] Exhibit R1, T16 at [119].
The Commissioner itemised the total expenses he said were paid by Mr Smith for each of the relevant years from the joint account and advised Mr Smith that he had adjusted the assessable income, making allowance for those expenses he had identified which appeared to be paid from the joint account on behalf of Stacpoole Pastoral.
The Commissioner set out in the Position Paper, the basis for the proposed Default Assessments, as follows:[33]
[33] Exhibit R1, T13, Table 8.
Income Year
2016
2017
2018
2019
2020
Income reported in ITRs:
GrossPayment(salaryand wages)
$0
$0
$0
$0
$25,000
Income from Allowances, earnings, tips, director's fees etc
$18,000
$5,000
$5,000
$1
$0
Assessableforeignsource income
$0
$0
$0
$43,113
$0
Original Taxable Income
$18,000
$5,000
$5,000
$43,114
$25,000
Tax Withheld
$0
$0
$0
$0
$12,201
Deposits/Incomeintobank account:
FromStacpoolePastoral Operations
$155,944.75
$88,115.83
$310,156.64
$64,655.41
$8,250.00
Additional Payments/Salary
$38,039.00
$6,500.00
$63,913.60
$14,064.72
Total Deposits
$193,983.75
$94,615.83
$310,156.64
$128,569.01
$22,314.72
Expenses:
Income Year
2016
2017
2018
2019
2020
Business Expenses Claimable from Mr Smith’s NAB account.
$66,316.42
$25,162.32
$179,610.65
$64,655.41
$8,250.00
Proposed Adjustment
$109,667.00
$64,453.00
$125,545.00
$63,913.00
$14,064.00
Taxable Income
$127,667.00
$69,453.00
$130,545.00
$107,027.00
$39,064.00
Tax Shortfall
$37,595.96
$13,771.28
$36,807.55
$23,313.85
$2,463.24
The Commissioner invited Mr Smith to respond to the Position Paper,[34] but Mr Smith did not do so.[35]
[34] Exhibit R1, T13.
[35] Exhibit R1, T1 [180]. At T14, Mr Smith warned the Commissioner following receipt of the Audit Decision and Reasons that he intended to object.
On 16 May 2022, the Commissioner provided his Reasons for Decision on Audit and issued the Default Assessments (the Assessments) based on the amounts in the above table.[36]
[36] Exhibit R1, T16.
The Evasion Determination
In respect of the financial years 2016 to 2018, the Commissioner made a Tax Evasion Determination on the following grounds:
(a)The tax reported in Mr Smith’s income tax returns bore no relationship to his private expenses and amounts withdrawn over the relevant tax period;
(b)Mr Smith consistently failed to record all his assessable income and then lodged amended income tax returns for the years ended 30 June 2017 and 2018 to further reduce his income;
(c)Mr Smith used monies from deposits for private expenses;
(d)Mr Smith did not provide information to the Commissioner in an attempt to inhibit the Commissioner from determining his correct taxable income position;
(e)Mr Smith exercised control over the accounts to which the deposits were made and would have been aware of the quantum of deposits received over the financial years, which he used personally;
(f)As director of Stacpoole Pastoral, Mr Smith used the joint account as a conduit to receive deposits and pay expenses for the company;
(g)Mr Smith was a qualified accountant and registered tax agent and would reasonably be expected to have been aware of his obligation to report all his assessable income and maintain a separate account for the company to his personal account;
(h)Mr Smith’s living expenses for the financial years exceeded his reportable income. A reasonable person would have suspected that not all their income had been reported; and
(i)The quantum of unreported income was significant and occurred in 5 consecutive years.
Based on (a) to (i), the Commissioner formed the view that Mr Smith committed a blameworthy act, namely non-disclosure of income to the Commissioner.[37]
[37] Exhibit R1, T16 at [190-1].
The Commissioner explained in the Position Paper the basis for his opinion that Mr Smith had engaged in avoidance of tax due to evasion.[38] These reasons were also recorded in his Reasons for Decision on audit.[39]
[38] Exhibit R1, T13, [157-191].
[39] Exhibit R1, T16 [160-194].
Penalty
The Commissioner also applied penalty, finding that Mr Smith was liable under s 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA 53) at a base penalty amount of 75% of the shortfall amount for the years in dispute based on conduct in the making of a false or misleading statement(s)[40] which demonstrated intentional disregard of a taxation law. He then applied a 20% increase to that amount for the financial years 2017-2020 for making false or misleading statements in the years following the financial year 2016.
[40] See ss 284-20 Taxation Administration Act 1953 (TAA 53) (statement made for a purpose connected with a taxation law); s 284-75 TAA 53 (statement which is false in a material particular).
The Commissioner declined to exercise his discretion to remit the penalty finding, on the basis that Mr Smith had demonstrated intentional disregard of a taxation law when lodging his income tax returns.
The total penalty applied by the Commissioner for the tax periods was $95,720.40.[41].
[41] Exhibit R1, T16 at Table 11.
Shortfall Interest Charge (SIC)
The Commissioner calculated SIC attaching to the tax shortfall as owing by Mr Smith[42] and determined that remission[43] of SIC was not appropriate in Mr Smith’s case, based on the Evasion Determination.
[42] Section 280-100 TAA 53.
[43] As provided for by s 280-160(1) of the TAA 53.
The Commissioner’s reasons in respect of both penalty and SIC were also explained in the Position Paper and repeated in the Reasons for Decision on Audit.[44]
[44] Exhibit R1, T13 at [192-246] and T16 at [195-262].
Objection
On 18 May 2022, Mr Smith lodged an objection to the Assessments (the Objection).[45] In the Objection, Mr Smith told the Commissioner:
The income included in my personal income assessments, as amended by the ATO, relates to income and expenses declared and filed by Stacpoole Pastoral Holdings Pty Ltd in its company tax returns. The information requested by the ATO during the audit process was supplied and clearly states that the income and expenses were earned and incurred by Stacpoole Pastoral Holdings Pty Ltd. The income relates to the sale of cattle owned by Stacpoole Pastoral Holdings Pty Ltd. Under state legislation and according to Property Identification Codes relating to those cattle, the cattle sold were owned by Stacpoole Pastoral Holdings Pty Ltd, under PIC code WCWI0006. . [sic] It is not possible to sell cattle without a Property Identification Code. The purpose of these tags is to allocate ownership of these cattle. So I really do not see how I can be taxed personally for cattle that are not owned by me. The ATOs position is based on the fact that the proceeds of these cattle sales were paid into a personal bank account. If it were that easy to avoid income tax for a company I would just set up a bank account in a country with no personal income tax! The income and expenses have already been declared and filed in the income tax return of the rightful owner of those cattle, Stacpoole Pastoral Holdings Pty Ltd.
[45] Exhibit R1, T1 (Annexure C). The Commissioner granted Mr Smith an extension of time to object to the Default Assessments. The Objection Process is provided for in Part IV TAA 53.
On 11 May 2023, the Commissioner issued his Objection Decision, upholding the Assessments (including penalty and SIC) and affirming the Tax Evasion Determination for the years ended 30 June 2016 to 2018.
On 28 October 2024, the Tribunal ordered by consent of the Commissioner, that Mr Smith was permitted to include three additional grounds of objection, namely:
(a)The assessments issued to him are excessive in respect of each of the income years in issue because he had joint bank accounts with another person, which the Respondent did not properly take into account (Additional Ground 1);
(b)The Respondent was not entitled to form the view that there was fraud and/or evasion so as to have an unlimited period of review in relation to some or all of the income years in respect of which assessments issued (Additional Ground 2); and
(c)The assessments issued to him are excessive in respect of each of the income years in issue because the Applicant and another person were jointly shareholders in the company, Stacpoole Pastoral Holdings Pty Ltd, which the Respondent did not properly take into account (Additional Ground 3).
Following the hearing, the Tribunal wrote to the parties and sought by the direction any further submissions on the question of whether two issues raised by Mr Smith at hearing, were supported by his existing grounds of objection.[46]
[46] Tribunal directions dated 22 November 2024 and 29 November 2024.
The parties responded with written submissions.[47] Following receipt of these, the Tribunal made directions further amending Mr Smith’s grounds of objections by consent to include the following two grounds:
(a)That the assessments issued to him are excessive on the basis that he was entitled to claim living away from home allowance pursuant to section 30 of the Fringe Benefits Tax Assessment Act (1986) (Cth) (Additional Ground 4); and
(b)That the assessments issued to him are excessive because the Commissioner did not take into account Stacpoole Pastoral’s negative cashflow in the financial years ended 30 June 2019 and 2020, when calculating the amount under s 167 of the Income Tax Assessment Act 1936 (Cth) (Additional Ground 5).
The statutory framework
[47] Submissions from Mr Smith dated 19 November 2024 and from the Commissioner on 4 December 2024.
Assessments under s 167 ITAA 36
Where the Commissioner is not satisfied with an income tax return lodged by a taxpayer, he is authorised by s 167 of Income Tax Assessment Act 1936 (ITAA 36) to make an assessment of the taxable income he thinks should be taxed and the assessment will become the taxpayer’s taxable income for the purposes of s 166 ITAA 36.
It is accepted that assessments issued under s 167 ITAA 36 bear fundamentally different characteristics to an assessment issued under s 166 ITAA 36.[48] This recognises that the Commissioner comes to an audit as a stranger to a taxpayer’s affairs and, in making the assessment, may not be in the full possession of the facts pertaining to the taxpayer. As a consequence, the assessments may necessarily involve judgement calls by the Commissioner. As the Chief Justice of the High Court noted in Trautwein v Federal Commissioner of Taxation:[49]
In the absence of some record in the minds or 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.
[48] Commissioner of Taxation v Ross (in her capacity as the personal representative of the estate of Ross) and Anor (2021) 174 ALD 77 at [48]; [2021] FCA 766 (Ross).
[49] 56 CLR 63 at 87 per Latham CJ; [1936] ALR 425 (Trautwein).
Consequently, assessments issued pursuant to s 167 of ITAA 36 are not to be treated as a proxy for calculation of a taxpayer’s actual income.[50] That said, they must be based on a reasonable rationale or basis using the information available to the Commissioner.[51]
[50] Ross at [75] per Derrington J.
[51] Commissioner’s opening submissions at 12.
In the present case, the Commissioner adopted the unexplained deposit method at audit by assessing the amounts of unexplained income as taxable income. He also gave notice[52] that considering the nature of the unexplained deposits to the joint account, and as permitted by s 167 ITAA 36, he was obliged in the conduct of the audit, to guess to some extent as to Mr Smith’s assessable income.
[52] Trautwein at 87 and Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 616 (Dalco). Also note the distinction assessment pursuant to s 166 and a Default Assessment issued pursuant to s 167; see Ross, [48] per Derrington J.
The Applicant’s onus and the standard of proof before the Tribunal
A taxpayer’s application to the Tribunal is limited to their grounds of objection.[53]
[53] Section 14ZZK TAA 53.
To succeed in an application which seeks to challenge the assessment, a taxpayer must demonstrate that the assessment is excessive[54] by establishing the correct amount of taxable income[55] for each tax period in dispute and by showing how that assessment exceeded their taxable income.[56]
[54] ibid.
[55] Trautwein at 87; Dalco; Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301, 296 ALR 497, [2013] FCAFC 30 at [61-67] (Gashi).
[56] Dalco at 621.
It is well established that a taxpayer will not succeed in this process by simply identifying errors on the Commissioner’s part[57] or by demonstrating mistakes on particular calculations.[58]
[57] Trautwein at 87.
[58] Trautwein at 112; Dalco at 625. See also Steward J’s observations in Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212 at [88-89].
Having made the assessment, the Commissioner bears no onus in respect of it and is not obliged to support the assessment before this Tribunal with evidence. [59]
[59] George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 204 per Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ (George); Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89; Bosanac v Commissioner of Taxation (2019) 374 ALR 425 per Nettle J at 436-7; Vu v Commissioner of Taxation [2006] FCA 889 (Vu).
Unless there is an agreement between the Commissioner and the taxpayer to confine the issues which are in dispute, the Commissioner will be entitled to rely upon any failure by the taxpayer to meet the burden of proof to demonstrate the excessiveness of the assessment.[60]
[60] Gashi at [61].
The standard of proof a taxpayer is required to meet in each aspect of an application to this Tribunal challenging the assessment is the civil standard i.e., a state of satisfaction on the balance of probabilities where the taxpayer bears the onus of satisfying the Tribunal.[61]
[61] McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 303 per Gibbs J where his Honour referred to previous authorities, George and McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263.
In seeking to meet that standard, a taxpayer cannot simply raise or infer matters without supporting evidence and effectively leave the Tribunal to draw inferences about a matter or to effectively investigate to calculate the taxpayer’s correct taxable income.
The taxpayer also does not discharge their onus by simply pointing to or raising ‘possibilities’.
As Finn J observed in Vu v Commissioner of Taxation:[62]
In this setting, where positive proof of the provenance of the moneys in the account was necessary, if Mr Vu was to show his assessments were excessive, there could be no possible place for a presumption such as is now advanced. Equally, in light of the Tribunal’s reasoning and finding, the inference proposed could not properly be said to be the most probable and reasonable deduction from the established facts: cf Holloway v McFeeters (1956) 94 CLR 470 at 477. The applicant’s failure to discharge the burden cast on him was not an advantage to him. Rather it left unestablished what was needed to be established if he was to succeed before the Tribunal. No process of inference could overcome that disadvantage.
[62] Vu at [28].
As the Tribunal also noted in Yung v Commissioner of Taxation:[63]
Mere assumptions, guesswork and speculation are not accommodated in the process of arriving at conclusions. There must be a body of evidence that might reasonably sustain a relevant finding of fact or permit the Tribunal to draw an inference.
[63] [2012] AATA 872 at [18].
The concept of ordinary income
In making the Assessment, the Commissioner determined that the deposits to the joint account were ordinary income derived by Mr Smith and so could be included in his assessable income.
Section 6.5(1) of ITAA 97 provides that a taxpayer’s assessable income includes ordinary income. Ordinary income includes the ordinary income ‘derived directly or indirectly from all sources, whether in or out of Australia, during the relevant year’.[64]
[64] Section 6.5(2) ITAA 97.
Ordinary income is ‘derived’ by a taxpayer as soon as it is applied or dealt with in any way on their behalf or as they direct.[65]
[65] Section 6.5(4) ITAA 97.
The term ‘ordinary income’ is not defined in ITAA 97 and the question of what constitutes ‘ordinary income’ in a particular case must be determined with reference to the caselaw and the circumstances of each case.
However, the Courts have found there are some common indicators that payment may be ‘ordinary income’. These include evidence that the payments are periodic or recurring to a recipient,[66] where a payment was made for a service rendered[67] and where evidence can be led to show a person is reliant on a payment or that they derived some benefit from a payment.[68]
Analysis of the issues and evaluation of the evidence
[66] Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 557, per Dixon CJ and Williams J (Dixon); Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 215.
[67] See for example, Reuter v Federal Commissioner of Taxation (1993) 111 ALR 716; (1993) 93 ATC 4037.
[68] Dixon at 557.
Preliminary observations
Mr Smith advanced four issues which he contended challenged the correctness of the assessments. Each of these is addressed below.
In support of these issues, Mr Smith filed the following evidence:
(a)A witness statement from Ms Behrendt;
(b)Sample advertisements for cooks and cleaners on cattle stations (various) including food and board (the advertisements);
(c)ATO guidance – Banking your business income to a private account? (the guidance);
(d)A Deed of Forbearance between Westpac Banking Corporation, Stacpoole Pastoral and Dews Pastoral (signed 10 May 2021) (the Deed); and
(e)Stacpoole Pastoral company tax returns for the financial years 2016-2020 (the company returns).
Mr Smith chose not to give personal evidence to the Tribunal. This was despite the fact that he was a signatory to the joint account and was a co-director of Stacpoole Pastoral. He also chose not to adduce any other documentary evidence or evidence from an external accountant or from his tax agent who lodged his income tax returns.
I do not consider it appropriate in the circumstances of this case to draw an adverse inference from Mr Smith’s decision not to give evidence and would note that the Commissioner made no such submission.[69] Mr Smith did inevitably stray at times during the hearing into giving evidence as part of his submissions. I advised the parties that, in circumstances where Mr Smith had elected not to give evidence, I would treat these statements with caution, and, where they are unsupported by documentary evidence, and subsequently contested, I would, and have, attached little weight to them.
[69] In accordance with the rule in Jones v Dunkel (1959) 101 CLR 298.
The Commissioner had put Mr Smith on notice prior to the hearing[70] that he did not consider, based on the evidence lodged, that Mr Smith had discharged his onus in accordance with the established legal principles. He repeated that contention at the conclusion of the hearing. I have addressed each of Mr Smith’s contentions below, but ultimately, I accept the Commissioner’s contention.
[70] Both in his Statement of Facts Issues and Contentions and in his opening written submissions.
Issue 1 – treatment of income of Stacpoole Pastoral
Before the Tribunal, Mr Smith contended the deposits into the joint account representing cattle sale proceeds for Wonganoo Station should not be attributed to him personally because they were the income of Stacpoole Pastoral. He advanced three arguments in support of this contention.
In advancing these arguments, Mr Smith assumed that the deposits into the joint account could not be treated as ordinary income assessable to him because both he and those responsible for preparing the financial reports and returns for Stacpoole Pastoral, treated them as income of Stacpoole Pastoral. He did not deny that the cattle sale proceeds were deposited into the joint account and, other than taking issue with the use of the word ‘lifestyle’, Mr Smith did not appear to contest that at least on some occasions, the proceeds were used to pay his expenses.
The Commissioner had contended that the deposits, once made to the joint account, were intermingled with other monies, and were used to fund Mr Smith’s expenses and his lifestyle. Mr Smith did not lead evidence (documentary or otherwise) about what happened to the monies once the deposits were made to the joint account, including whether any attempt was made to quarantine the funds
The issue of intermingling of funds was addressed by the Tribunal in Buzadzic v Commissioner of Taxation:[71]
The first general consideration concerns intermingling of various entities’ money. Using available funds and credit cards and intermingling of various entities’ money (including personal money) as has occurred in the present matter is not of itself improper. There may be various reasons for managing money this way. Using readily available cash to service the most pressing need, using private credit cards for business expenditures to secure airline loyalty points, and moving cash to and from home loan accounts so as to minimise interest accruals on a home loan might well be some of those reasons. However, if that type of activity is undertaken, the records kept of it need to allow the appropriate unmingling to be effected with a degree of confidence that the unmingling process is accurate, and the financial statements and balances produced are also accurate, and not merely a speculative end product of antecedent speculation.
The present circumstances call for, or require, a degree of record keeping that ensures that amounts transferred between accounts of different entities and for different purposes are accurately accounted for and can be explained if the need arises. By merging his business and personal affairs in the way he did, Mr Buzadzic created a situation which made these tasks difficult. A warning was made [sic] by Isaacs J in Stone:11
A man is, of course, at liberty to keep his records as he pleases, subject to express statutory provision…. But, if he chooses to keep them so as to afford no sufficient internal evidence of the nature of the transactions they record, he must be prepared to take the consequences of his own omission.
A similar warning was made by Davidson AJ in Sabiel where his Honour said:12
although a person is not bound to keep the best of books or the best system of accounting that is available, nevertheless, if through the want of records of this kind he falls into a position which is hostile to himself, he has to put up with it unless he can establish from other facts appearing in evidence that the case he is putting forward is correct.
A failure to create and retain records can have consequences for a taxpayer seeking to discharge its onus of proof.13
[71] Buzadzic and Commissioner of Taxation (Taxation) [2021] AATA 4820 (24 December 2021) at [104-106].
Mr Smith’s first contention was made with reference to the company tax returns for Stacpoole Pastoral. Mr Smith submitted that the company’s income tax returns (including monies relating to the sale of cattle) were evidence that these deposits had been reported as income of Stacpoole Pastoral and so they could not be attributed to him as ordinary income.
The company returns[72] reported gross figures representing sales of goods and services for each year. There was no evidence before the Tribunal to explain how those gross figures were arrived at or what sales were included in the calculation of these figures. The Tribunal cannot be satisfied without further evidence that the returns were calculated based on the same receipts as were represented by the deposits to the joint account.
[72] Exhibit A2.
More fundamentally, and as was observed by the Tribunal in Buzadzic, Mr Smith bore the burden of demonstrating that the cattle sales proceeds deposited into the joint account had been managed in a way which retained their character as income of Stacpoole Pastoral. There was no evidence before the Tribunal about how the deposits were recorded and quarantined from personal income and expenses in the joint account and there was also no evidence as to how Mr Smith and the tax agent formed the view that they comprised income of Stacpoole Pastoral when they had been deposited into the joint account and, on some occasions, may have been used to pay expenses.
In the circumstances, I cannot accept Mr Smith’s first contention that the company’s income tax returns (including monies relating to the sale of cattle) demonstrated that these deposits had been reported as income of Stacpoole Pastoral and so could not be attributed to him as ordinary income.
Second, Mr Smith contended that he had deposited monies from cattle sales in the joint account because Westpac would have applied those funds in repayment of funds owing (leaving no funds to pay for the expenses of the cattle station). In support of this contention, Mr Smith referred to the Deed.
Mr Smith placed great emphasis on the Deed. He told the Tribunal he wanted to correct the record about his reason for making the deposits, but I also understood him to contend that it provided a plausible explanation for the deposits into the joint account which supported their continued characterisation as income reportable for Stacpoole Pastoral. In submissions, he told the Tribunal that because all proceeds from cattle sales were to be paid to Westpac ‘we came to have no choice but to deposit all cattle sales into my wife and my joint bank account’.[73]
[73] Exhibit A1 at 2(e).
The Deed is not dated but was attached to an email chain between Mr Smith and Chris Kruger of Westpac dated 10 May 2021. Mr Kruger’s email was addressed to both Mr Smith and his father, and it suggests the Deed when proposed by Westpac, represented a new arrangement:
Please find attached Deed of Forbearance ("Deed") for Stacpoole Pastoral Holdings Pty Ltd & Dews Pastoral Holdings Pty Ltd. The Bank has agreed to extend the expired Bank Bill Business Loan ("BBBL'') facilities to 31 October 2021 whilst you pursue the sale of Yalbalgo & Wonganoo Stations and the new arrangements are to be documented under Deed of Forbearance, noting the terms of the facilities have expired and the Bank is not in a position to continue the facilities under normal credit criteria.
The documentary evidence before the Tribunal suggests the Deed was only in operation towards the end of the final year of the tax periods. As neither Mr Smith nor Mr Ernest Smith gave evidence to the Tribunal, they could not be questioned about the Deed or any prior arrangement between Westpac and Stacpoole Pastoral.
As already noted, Mr Smith did not lead any evidence about how he managed the funds once they were deposited into the joint account. He seemed to assume that because he classified them as income of Stacpoole Pastoral, they would retain that characterisation.
Based on the evidence before me, I do not accept that the Deed provides any basis for the Tribunal to find that the deposits into the joint account did not take on the character of ordinary income once in his hands.
Mr Smith’s third contention was that the guidance was proof that, contrary to the Objection Decision, the ATO permitted or endorsed deposits of business income into personal accounts.
The guidance is an information document published by the ATO. The copy in evidence before the Tribunal is notated as ‘last modified 13 September 2022’. There was no evidence before the Tribunal that Mr Smith had relied on a former version of the guidance during the tax periods.
In any event, the guidance relevantly states:
Do you keep track of any business income in your private accounts so that you can report it correctly in your business tax return?
We have no concerns with business owners banking their business takings or other sales in private accounts. However, it becomes an issue when this income isn't reported.
A good way to avoid this problem is to establish a separate business bank account and only deposit your sales and other business income into this account. This can help you with record keeping and monitoring your business’s cash flow.
Remember, your business income includes all sales, whether they're cash or electronic (for example, internet sales). These are all assessable income sources and must be reported on your business’s tax return. You also need to report earnings for service exhibits your business provides.
The ATO uses many tools to identify income earned and to check if it matches income reported.
If you are unsure about what income you need to declare, check our online resources or consult with a tax professional for advice. Your tax professional can help you record and report your business income correctly.
[Emphasis added]
I do not accept that the guidance assists Mr Smith to prove that the deposits should have been treated as income of Stacpoole Pastoral.
I would note, the guidance emphasises the importance of maintaining proper records for business expenses. It encourages taxpayers to seek professional guidance to ensure compliance with reporting requirements. Mr Smith is a qualified accountant and since April 2021, a registered tax agent. It is reasonable to assume that for Mr Smith, the guidance should have been unsurprising and well understood.
Finding on issue 1
Based on my conclusions about each of these contentions, I cannot be satisfied that Mr Smith has demonstrated that the monies from the business of Stacpoole which were deposited into the joint account were not assessable to him because they were reported as assessable to Stacpoole Pastoral.
Issue 2 –income in the joint account should be equally apportioned to Ms Behrendt
Mr Smith alleged that the Commissioner had incorrectly treated all deposits made to the joint account as his income alone, even though the personal bank account where the deposits were made belonged to both the Applicant and Ms Behrendt, who both held almost equal shareholdings in Stacpoole Pastoral, and who both worked at the cattle station that was owned by Stacpoole Pastoral. Ms Behrendt provided a statement to the Tribunal[74] and was cross-examined.
[74] Exhibit A2.
Ms Behrendt told the Tribunal that:
(a) She was not and had never been a director of Stacpoole Pastoral;
(b) She had been a shareholder of Stacpoole Pastoral together with Mr Smith and his father since its incorporation;
(c) She had worked with her husband and 4 of her 5 children on the cattle station:
My work involved cooking, cleaning, mustering, processing cattle, performing mill runs to check waters, amongst a million other things. A typical workday lasted around 12 hours and when mustering around 16 hours. Cooking and cleaning involved performing these duties not only for my family, but also contract workers and permanent workers that we employed during that 5 year period [emphasis added];
and
(d) The joint account is the account that business transactions for the family farm were transacted from.
In cross examination, Ms Behrendt conceded:
(a) There was never a formal contract of employment between herself and Stacpoole Pastoral;
(b) She was not employed elsewhere during the tax periods; and
(c) she did not declare any income from the deposits into the joint account in her income tax returns for the tax periods. Nor had she since lodged any amended income tax returns for the period.
Ms Behrendt gave her evidence openly and readily to the Tribunal. Her evidence discloses that Stacpoole Pastoral employed contract and permanent workers, but she did not explain in her statement and was not asked to elaborate on about how they were engaged. Nor did Mr Smith provide any other evidence about their terms of engagement.
I accept Ms Behrendt saw herself as supporting her husband and her family to make a success of their life on Wonganoo Station. However, I do not accept that she was employed by Stacpoole Pastoral. There was certainly no documentary evidence before the Tribunal to support such a contention and Ms Behrendt herself conceded that she had never reported any salary or wages in her income tax returns.
Further, the Commissioner had assessed Mr Smith based on his role as director of Stacpoole Pastoral. At no time was Ms Behrendt a director of Stacpoole Pastoral.
Ms Behrendt was a shareholder of Stacpoole Pastoral, but there was no evidence before the Tribunal that any dividend had ever issued to Ms Behrendt during the tax periods.
There was no other evidence before the Tribunal which supported Mr Smith’s contention that 50% of the cattle sale proceeds deposited to the joint account should be shared with Ms Behrendt.
For completeness, I note that the Assessment concerned the deposits from cattle sales as well as other deposits. With the exception of the ‘Ernest Smith Plan Manager Fees’, which the Commissioner apportioned between Mr Smith and Ms Behrendt and were not in dispute, there was no evidence before the Tribunal to suggest that these other deposits should be apportioned to Ms Behrendt. Nor was there any evidence to suggest that the deposits were assessable to Ms Behrendt and again her evidence was that she had not accounted for income in her tax returns or sought to amend them in light of the audit.
Finding on issue 2
In the circumstances, I cannot be satisfied that the Commissioner had incorrectly treated all deposits made to the joint account as Mr Smith’s income alone, even though the personal bank account where the deposits were made belonged to both the Applicant and Ms Behrendt, who both held almost equal shareholdings in Stacpoole Pastoral, and who both undertook work at the cattle station that was owned by Stacpoole Pastoral.
Issue 3 – the question of entitlement to living away from home allowance
The Commissioner had identified recurring deposits to the joint account bearing the notation ‘Wonganoo Laha J. C. Smith & Assoc 421520’ on 1 July 2015 and 30 June 2016 and again in the following year. These payments totalled $15,500 comprising individual deposits of $500. The Commissioner treated these amounts as income of Mr Smith.
Mr Smith contended that the family’s living expenses (food and fuel) were met by Stacpoole Pastoral for their work on Wonganoo Station during the tax periods. He contended this supported the recurring payments of living away from home allowance (LAFHA) under the Fringe Benefits Tax Assessment Act (1986)[75] (FBTAA) for their work on Wonganoo Station. He submitted that as LAFHA is not assessable, these had been incorrectly considered by the Commissioner.
[75] Section 30.
Mr Smith did not produce any evidence such as any personal or company records to the Tribunal to establish his entitlement to LAFHA for the purposes of s 30 of the FBTAA, including evidence that he was 'employed’. To the contrary, Mr Smith’s income tax returns for all but one of the relevant years (2020), did not list him as being employed and no LAFHA was paid in that year.
There was also no evidence before the Tribunal to suggest Mr Smith was required to live in one place and work in another during the relevant tax periods. In fact, the evidence before the Tribunal, which came from Mr Smith himself via the PLE worksheets, was that Mr Smith and his family resided at Wonganoo Station.[76]
[76] Exhibit R1, T18. Mr Smith listed the address for Wonganoo Station as his and his family’s residential address for each of the years in the relevant tax periods.
The only evidence Mr Smith referred to in support of this contention was a bundle of job advertisements for cooks and workers with meals and board included which he had provided to the Commissioner. For example:
Fortescue Cattle Company run a 500,000 acre Cattle breeding and backgrounding operation at Sylvania Station in the Pilbera region of WA, 50 Kms SE of Newman. We are seeking an individual to join our team on the 1st of June 2024 to finish off the season. This is a diverse role suited to an energetic individual who is willing to work independently and remotely. Previous experience favourable but not essential. WiFi, meals & accommodation provided.
[emphasis added]
Mr Smith contended to the Tribunal[77] that the advertisements:
Demostrates [sic] that provision of meals to employees and their families and cooking of meals by staff is in the normal course of business on a cattle station. Employment contracts were not in place as they are not a mandatory requirement, so there is no detailing of LAFHA or job descriptions, which is also typical of a family owned and operated company. LAFHA allowance was within reasonable amounts as per legisalation [sic].
[77] Exhibit R2.
Mr Smith did not point to any evidence which established that Stacpoole Pastoral accounted for paying any LAFHA to Mr Smith during the relevant periods.
Finding on issue 3
In light of the evidence, I do not accept that Mr Smith has established any entitlement to LAFHA for the relevant periods.
Issue 4 – the contention that the Commissioner should have considered Stacpoole’s negative cashflow
Mr Smith contended that the Commissioner had failed to consider the fact that in 2019 and 2020, Stacpoole Pastoral had a negative cashflow when calculating his assessable income for these tax periods. This contention was set out in his Statement of Facts, Issues and Contentions, with tables he had prepared for the 2019 and 2020 years which purported to attribute company losses for each year to his personal tax position.
I understand Mr Smith to be contending here that it was only fair that ‘company losses’ as calculated by him in the tables, should be treated as personal deductions for the purposes of calculating his assessable income.
Mr Smith’s contentions and proposed calculations were unsupported by any evidence or any explanation as to how, at law, these ‘company losses’ (even if they were correct), which was not demonstrated, could be applied to his personal tax position.
Finding on issue 4
In the circumstances, there is no basis for me to accept the information in the tables should have been considered by the Commissioner in calculating his taxable income.
Summary finding
Returning to the authorities, the evidence which has been presented to the Tribunal and each of Mr Smith’s contentions was directed to challenging specific issues or transactions forming part of the Assessment. For the reasons I have provided, the Tribunal is not able in the circumstances to accept these contentions. He has therefore failed to demonstrate that the Assessment was excessive.
Mr Smith has also failed to establish what his correct income should be. I acknowledge that in his opening written submissions to the Tribunal, Mr Smith did make an attempt via the tables, to represent what he considered to be the correct amount of taxable income for two of the years when addressing issue 4. However, this attempt was limited to the question of the loss position for the 2019 and 2020 years and, in any event, I have found I cannot accept or rely upon the information in the tables.
It follows that Mr Smith has also failed to demonstrate how the Assessment exceeded his correct taxable income.
The Evasion Determination
Mr Smith challenged the validity of the Evasion Determination which supported the Default Assessments issued for the years 2016-2018.
The concept of ‘evasion’ is accepted to encompass a ‘culpable’ or ‘blameworthy’ act by a taxpayer but is necessarily a lesser act than ‘fraud’. As was observed by Dixon J in Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW)[78] it can include the intentional omission of income from a tax return without adequate explanation, lest the Commissioner consider the taxpayer liable to a greater extent.
[78] (1949) 79 CLR 296
In making the Evasion Determination, the Commissioner had determined that Mr Smith had engaged in a blameworthy act, namely the non-disclosure of income to the Commissioner. As noted above, this finding was supported by detailed reasons.
Mr Smith’s task in respect of this issue was to show that the Commissioner’s opinion that there was evasion should not have been formed.[79]
[79] Binetter v Federal Commissioner of Taxation [2016] FCAFC 163; 249 FCR 53, at [93] per Siopis, Perram and Davies JJ.
Finding on the Evasion Determination
Mr Smith made brief submissions to the Tribunal but did not lead any evidence to support his contentions about the Commissioner’s opinion in forming the Evasion Determination.
As the Full Court of the Federal Court observed in Buzadzic v Commissioner of Taxation[80] (Buzadzic), the making of such submissions is insufficient to discharge Mr Smith’s onus in respect of the Commissioner’s opinion on fraud or evasion:
Mr Buzadzic submits that the Tribunal erred in concluding that the requisite blameworthiness existed. However, the problem with that submission is that there was no such conclusion. The Commissioner formed the opinion that there was blameworthy conduct. It was for Mr Buzadzic to discharge the onus of proving to the satisfaction of the Tribunal that there was no blameworthy conduct on his part. If he did not do so, the Commissioner’s opinion was not successfully impugned.
[80] Buzadzic v Commissioner of Taxation [2024] FCAFC 50 at [38], endorsing the approach taken by the Tribunal.
The Commissioner had explained in his reasons for the Evasion Determination that his opinion was based on several factors which together caused him to form the opinion Mr Smith had engaged in the blameworthy act of non-disclosure of income. These included factors which went to the heart of the Assessment – such as Mr Smith’s failure to account for all his assessable income in his income tax returns for the tax periods.
As the Tribunal in Buzadzic at first instance, also observed:[81]
As a practical matter, a taxpayer may demonstrate that there was no fraud or evasion by showing that there was no amount omitted from taxable income; for example, by showing that the amounts included in their assessable income were not assessable. Alternatively a taxpayer could demonstrate that the amounts, while assessable, were not included in assessable income returned for a reason that shows that while there was a shortcoming, it was a shortcoming that fell short of a blameworthy act in the Denver Chemical sense. That is, even if the Tribunal finds that the amounts not disclosed by the taxpayer were assessable, there will be no fraud or evasion if the taxpayer can show a reasonable excuse for omitting the amounts from his assessable income.
In this particular case, to discharge the onus regarding fraud and evasion, Mr Buzadzic needed to provide evidence as to the sources of the amounts deposited into the bank accounts. Based on the evidence before it, the Tribunal does not accept the explanations proffered by Mr Buzadzic for the deposits. The character of the amounts deposited remain unexplained and he has not proven the amounts to be non-assessable. In the absence of an accepted explanation for the amounts, Mr Buzadzic has failed to demonstrate the omission of these amounts from his assessable income were not attributable to a blameworthy act. Approached differently, the Tribunal has nothing on which it can evaluate the seriousness of any shortcoming, there is nothing on which the Tribunal can rest a conclusion that there was not such a blameworthy act.
[81] Buzadzic at [201-2].
Mr Smith faces a similar difficulty. The Assessment was based on the Commissioner’s conclusion that the various deposits to the joint account over a period of five years, which were not reported in his annual income tax returns, are assessable to him, including the three years covered by the Evasion Determination. Mr Smith has not led evidence to challenge this conclusion.
I would add that among the limited evidence Mr Smith led was that he had deposited the cattle sale proceeds into the joint account to avoid triggering Stacpoole Pastoral’s obligations under the Deed. I infer from this that Mr Smith intentionally deposited the cattle sale proceeds into a personal bank account to avoid his obligations to Westpac under the Deed but then but then did not report those deposits the Commissioner.
In the circumstances, Mr Smith has not demonstrated that the Commissioner should not have formed the opinion that there had been evasion in the years 2016 to 2018.
Penalty and SIC
Penalty
Mr Smith was assessed for base penalty amount of 75% for each of the years with uplift of 20% for the years 2017 to 2020.
The Commissioner determined Mr Smith had made false or misleading statements to him in his income tax returns for the relevant tax periods which led to the tax shortfalls. In making these statements, the Commissioner determined Mr Smith had demonstrated intentional disregard for the law because:[82]
(a)He failed to report the deposits to the joint account in his income tax return and then benefits from them to fund his personal expenses;
(b)The difference between the amounts originally reported and the tax shortfall was significant;
(c)The errors were not isolated or demonstrative of a misunderstanding of the law but were repetitive and deliberate;
(d)He would have been aware of the deposits;
(e)As an accountant, he should have been aware of his taxation obligations; and
(f)The quantum of the additional income is significant.
[82] Exhibit R1, T16 at [235].
As to the meaning of ‘intentional disregard’, the Commissioner referred the Tribunal to Russell v Federal Commissioner of Taxation[83] where Logan J (with acknowledgement of Collier J’s observations in Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 66 ATR 1 at [43], stated at [180]:
As made clear by the Explanatory Memorandum to the Taxation Laws Amendment (Self-Assessment) Bill 1992 which introduced s 26J, s 226J requires knowledge by the taxpayer that, for example, it has claimed a deduction knowing that it is not allowable. Accordingly, “intentional disregard” of the ITAA 1936 or regulations requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations. The legislation treats “intentional disregard” differently from, and more seriously than, negligence to comply with the Act (cf s 226G) or recklessness with regard to the correct operation of the Act (cf s 226H).
[83] [2009] FCA 1224; 74 ATR 466.
The Commissioner then applied a 20% increase to that amount for the financial years 2017-2020 for making false or misleading statements in the years following the financial year 2016, on the basis that Mr Smith’s conduct continued in the years 2017 to 2020.
The Commissioner had formed the view that Mr Smith had not made any voluntary disclosures and formed the view that there was no other basis for remission of penalty.
Mr Smith submitted to the Tribunal that:
(a)there was no shortfall or, it was less than the amount assessed;
(b)in the alternative, he and his tax agent took reasonable care to comply with his obligations under the taxation laws; and
(c)further in the alternative, the Commissioner should have exercised his discretion to remit penalty.
Consideration of penalty
I have already found that Mr Smith has not discharged his onus in respect of the tax shortfall.
I have also noted that Mr Smith did not give evidence to the Tribunal himself and did not call his accountant or tax agent to give evidence or produce any documentary records which challenged the Commissioner’s opinion. I am therefore unable to assess the merit of his assertion that he and his tax agent took reasonable care in the preparation of Mr Smith’s returns.
Once again, I note that Mr Smith referred the Tribunal to the Deed. He asked the Tribunal to accept that he only deposited the amounts in the joint account to place them beyond the reach of Westpac given the need to pay expenses.
There is an element of calculation behind Mr Smith’s stated intention to defeat the Deed and Westpac by redirecting funds to the joint account. However, as I have already noted, I cannot be certain from the date of the Deed, and, absent direct evidence from Mr Smith, that the Deed was in effect for each of the tax periods because it was only signed on 10 May 2021.
I can however, rely on the fact that Mr Smith was a qualified and practising accountant and a company director during the tax periods.[84] As such, he should have well understood how taxation law applied to his personal circumstances, his obligation to properly record and manage business income so that it did not become intermingled with personal income and expenses, and his legal obligation to correctly report all his assessable income in each year to the Commissioner.
[84] Exhibit R1, T61.
I cannot accept, given his qualifications and experience, that Mr Smith was not aware of the risk he was taking in depositing the amounts from the cattle sales into the joint account from which personal expenses were paid, of not quarantining the moneys, of not taking care when claiming LAFHA and the consequences of not reporting all deposits to the joint account to the Commissioner in his income tax returns.
In all the circumstances, I cannot be satisfied that Mr Smith has discharged his onus of proving that his conduct did not demonstrate intentional disregard of a taxation law. On this basis, I cannot be satisfied that the base penalty of 75% applied for each of the years is excessive.
In respect of the 20% uplift for the years 2017 to 2020, there is evidence that Mr Smith’s conduct was repeated in each year following the first year of the tax period. Given this and the fact that Mr Smith has not discharged his onus of proving that his conduct did not demonstrate intentional disregard of a taxation law, I am not satisfied that the uplift should have been remitted.
SIC
Mr Smith submitted the interest should be set aside because of his argument that the default assessment was excessive. I have found that Mr Smith has not satisfied the Tribunal that the Assessment was excessive.
The Commissioner drew attention to the fact that, in this case, the Tribunal is only required to consider remission of SIC for the 2016 year, given the amount not remitted by the Commissioner for that year was more than 20% of the tax shortfall. He observed that Mr Smith had not advanced any reason to show why remission for the 2016 year is appropriate.
Mr Smith was the subject of an Evasion Determination for the 2016 year. I have found that Mr Smith has not discharged his onus of providing that the Commissioner’s opinion which supported the Evasion Determination should not have been made. Therefore, the Commissioner was entitled to issue the Amended Assessment for that year.
I accept that Mr Smith and Ms Behrendt have both complained of delay in the conduct of the Commissioner’s audit and objection processes. However, I also can see that the Tribunal documents record, at times that Mr Smith delayed in responding to the Commissioner’s requests.[85] Mr Smith did not make any submissions on this in respect of SIC.
[85] Exhibit R1, T16 at [56-61], [64-65], [67].
On the evidence before me, I cannot form a conclusive view about the full cause for any delay.
In the circumstances, I am unable to be satisfied that interest should be remitted for the 2016 year.
DECISION
For the reasons outlined above, the Tribunal affirms the decisions under review.
Date(s) of hearing: 5 November 2024 Date final submissions received: 19 November and 4 December 2024 Solicitors for the Applicant: Self-represented Solicitors for the Respondent: Australian Taxation Office ANNEXURE A: EXHIBIT REGISTER
Exhibit Description of Exhibit Date/s Filed with the Tribunal R1 T-Documents and Supplementary T-Documents 18 August 2023 and 1 November 2024 R2 Joint Hearing Book Various A1 Applicant’s Outline of Opening Submissions 4 December 2024 A2 Statement of Ms Honni Rose Behrendt, Undated 17 June 2024
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Taxable Income
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Tax Compliance
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Penalties
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Intentional Disregard
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