SQYY and Commissioner of Taxation (Taxation)
[2023] AATA 4070
•5 December 2023
SQYY and Commissioner of Taxation (Taxation) [2023] AATA 4070 (5 December 2023)
Division:Taxation and Commercial Division
File Number(s): 2021/7411; 2021/7412
Re:SQYY
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Mr Rob Reitano, Member
Date:05 December 2023
Place:Sydney
The Commissioner's decision to disallow the objection is affirmed
........................[SGD]................................................
Mr Rob Reitano, Member
CATCHWORDS
TAXATION – section 14ZZK of the Taxation Administration Act 1953 – onus – assessment excessive or otherwise incorrect – failure to prove what assessment should have been – unexplained deposits – failure to produce records – personal services income – amount of persona services income not proven – amount of personal service income deductions not proven – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)
CASES
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Sabai v Commissioner of Taxation [2021] FCA 1353
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
REASONS FOR DECISION
Mr Rob Reitano, Member
01 December 2023
In the income tax years ending 30 June 2015 (2015 tax year) and 30 June 2016 (2016 tax year) the Applicant’s[1] income tax returns showed that he was not paid any salary or other income by GY, even though he worked as GY’s Chief Executive Officer in both years. Nor, according to the Applicant’s income tax returns, was he paid any money by CL which had an agreement with GY to provide GY with, amongst other things, his services as Chief Executive Officer.
[1] The Applicant was granted a pseudonym designated ‘SQYY’ as a consequence of a request made under s.14ZZE of the Taxation Administration Act 1953 (Cth) on 17 November 2023 to hold the hearing in private. The names of the corporate entities identified as ‘GY’ and ‘CL” are also pseudonyms to ensure the Applicant’s privacy is protected.
Despite what the Applicant’s income tax returns showed, GY’s 2015 and 2016 annual reports suggested that the income tax returns for the 2015 tax year and the 2016 year might not be correct. This was because GY’s 2015 annual report recorded that from 1 July 2014 to 31 December 2014, the Applicant was paid $154,704 as ‘cash salary and fees’, and for the calendar year 2015, was paid $414,300 and $36,000 as ‘fees and non-monetary benefits’. GY’s 2016 annual report recorded that for the calendar year 2016 the Applicant was paid $403,089 as ‘fees/remuneration’, $36,000 as ‘non-monetary benefits’ and $40,000 as ‘equity based payments for shares’.
Having become aware of these discrepancies, the Commissioner of Taxation (Commissioner), not without some justification, had his interest aroused and so conducted an audit of the Applicant’s tax affairs. As a result of the audit, the Commissioner was not satisfied with the income tax returns that had been furnished for the 2015 and 2016 tax years. So, the Commissioner, as he was entitled to do, exercised his power in s.167 of the Income Tax Assessment Act 1936 (ITAA 1936) to ‘make an assessment of the amount upon which in his or her judgment income tax ought to be levied’ on the Applicant for the 2015 and 2016 tax years.
The Commissioner’s ‘judgment’ was simple: relying on the figures in the annual reports, the Commissioner added the amount paid for the second half of 2014 to half the amount paid for the 2015 calendar year to arrive at the Applicant’s GY income for the 2015 tax year, which gave a total of $379,854; and then added half the amount paid for the 2015 calendar year to half the amount paid for the 2016 calendar year to arrive at the Applicant’s GY income for the 2016 tax year, which gave a total of $464,694. The Commissioner then added those amounts to the income that had already been declared for each of the years to arrive at default assessments of $380,189 for the 2015 tax year, and $576,073 for the 2016 tax year. I will refer to both assessments as the ‘default assessments’ in these reasons.
On 17 July 2019, the Commissioner issued notices of amended assessment for the 2015 and 2016 tax years based on the default assessments, together with a notice of assessment of shortfall penalties for both years for making a false or misleading statement.
On 30 July 2020, the Applicant lodged an objection against the default assessments. On 18 August 2021, the Commissioner decided to disallow the objection. It is that last decision which is the subject matter of this review.
THE REGULATORY FRAMEWORK
The principles relevant to reviewing a decision of the Commissioner that concerns an assessment are well settled such that they only need be briefly referred to here.
Those principles are informed by s.14ZZK of the Taxation Administration Act 1953 (TAA) which provides that:
On an application for review of a reviewable objection decision:
(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving:
(i) if the taxation decision concerned is an assessment--that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case--that the taxation decision concerned should not have been made or should have been made differently.
The effect of s.14ZZK(b)(i) is that the taxpayer must prove that the Commissioner’s assessment is ‘excessive or otherwise incorrect’ and, significantly, ‘what the assessment should have been’.
The burden of proof is not discharged by showing that the basis for the Commissioner’s ‘judgment’ under s.167 of the ITAA 1936 is flawed or wrong. The Commissioner’s assessment will often be based on incomplete or unknown facts because that is, in very many cases, the reason that the Commissioner has engaged s.167 of the ITAA 1936 and made a judgment about the assessment. It follows that undoing the Commissioner’s judgment, represented in this case by the default assessments, has not much at all to do with what needs to be proved in a review of an objection decision that arises from an assessment made under s.167 of the ITAA 1936.
Sub-section 14ZZK(b)(i) acknowledges that it is the taxpayer who has the capacity to prove the facts that are relevant to an assessment because the taxpayer is in the unique position, very much unlike the Commissioner, of knowing the facts and circumstances relevant to the actual assessment.[2] In order to arrive at a conclusion that an assessment is incorrect or excessive, it is axiomatic that the taxpayer must prove her or his actual taxable income.[3] The required proof in the ordinary run of cases will mean that the taxpayer will need to show all of the relevant facts that give rise to income that has been received, as well as the facts relevant to any deductions that the taxpayer claims to be entitled to.
[2] Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63,87 – 88.
[3] Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, 621; 623 – 625.
A taxpayer is not entitled to rely on mere assertion that an amount does or does not represent income or a deduction. Those things must be proved from facts, documents, and any other evidence the taxpayer is able to marshal. Also, where an amount appears to have been received by a taxpayer, there generally will be a need for the taxpayer to explain its provenance. Leaving an amount unexplained gives rise to the real possibility that it was received as income such that the taxpayer will not meet the onus that s.14ZZK(b)(i) casts upon her or him.
Nor is the taxpayer entitled to rely upon the deficiencies that the Commissioner may have picked up, in audit or elsewhere, as though those deficiencies were the only matters that need be addressed. The authorities are clear: the Commissioner is entitled, absent express concession, to put a taxpayer to proof of all of the components of the taxpayer’s taxable income.[4] In this case, as he was entitled to, the Commissioner put the Applicant to proof of all facts relevant to the whether the assessments were incorrect or excessive and as to what the assessment should have been.[5]
[4]Sabai v Commissioner of Taxation [2021] FCA 1353, [50], [56] – [57].
[5] Sabai v Commissioner of Taxation [2021] FCA 1353, [72].
It is also necessary, albeit briefly, to deal with two of the sections of the Income Tax Assessment Act 1997 (ITAA 1997) concerning personal services income. This is because the Applicant’s case was that all of the income, he received was personal services income. Three sections of the ITAA 1997 are particularly relevant.
First s.86 – 15 of the ITAA 1997 provides that:
(1) Your assessable income includes an amount of *ordinary income or *statutory income of * personal services entity that is your *personal services income.
Second, s.87-15 records that the amount included in assessable income as personal services income can be reduced by ‘certain deductions to which the personal services entity is entitled: see section 86-20.’
Third, s.86 – 20(2) contains a formula for calculating the deductions that may be offset against personal services income:
Step 1. Work out, for the income year, the amount of any deductions (other than * entity maintenance deductions or deductions for amounts of salary or wages paid to you) to which the * personal services entity is entitled that are deductions relating to your * personal services income.
Step 2. Work out, for the income year, the amount of any * entity maintenance deductions to which the * personal services entity is entitled.
Step 3 Work out the * personal services entity's assessable income for that income year, disregarding any income it receives that is your * personal services income or the personal services income of anyone else.
Step 4. Subtract the amount under step 3 from the amount under step 2.
Note 1: Step 4 ensures that, before entity maintenance deductions can contribute to the reduction, they are first exhausted against any income of the entity that is not personal services income.
Note 2: If the personal services entity receives another individual's personal services income, see section 86- 25.
Step 5. If the amount under step 4 is greater than zero, the amount of the reduction under subsection (1) is the sum of the amounts under steps 1 and 4.
Step 6. If the amount under step 4 is not greater than zero, the amount of the reduction under subsection (1) is the amount under step 1.
For present purposes, it is necessary to keep in mind that the formula requires a calculation of the amount of any deductions to which the personal services entity is entitled that are deductions relating to the taxpayer’s personal services income. The effect of that, read with the other steps, is that not all of the deductions of the personal services entity are permitted deductions by the taxpayer, but only those that relate to the taxpayer’s personal services income. The third step is important too because it requires calculation of the entity’s assessable income for the year disregarding any personal services income.
I will return to the importance of these two matters later.
THE ISSUE
In this review, there is only one issue that needs to be determined which is whether the Applicant has proven that the Commissioner’s assessment is ‘excessive or otherwise incorrect and what the assessment should have been’ so far as the assessment of his tax was concerned with the 2015 and 2016 tax years. As will be seen, because that issue has been determined adversely to the Applicant, it is not necessary to deal with the matter further than that. Consequently, it is also unnecessary to deal with the Commissioner’s case so far as it relied upon the application of Part IVA of the ITAA 1936.
THE FACTS
On 31 July 2014, the Applicant was appointed as the Executive Chairman, a director and Chief Executive Officer of GY. The Applicant ceased being Chief Executive Officer of GY on 3 March 2016. GY is an Australian Public Company listed on the Australian Stock Exchange.
As I recorded earlier, GY’s 2015 annual report recorded that from 1 July 2014 to 31 December 2014, the Applicant was paid $154,704 as ‘cash salary and fees’, $414,300 and $36,000 as ‘fees and non-monetary benefits’ for calendar year 2015; and GY’s 2016 annual report recorded that the Applicant was paid $403,089 as ‘fees/remuneration’, $36,000 as ‘non-monetary benefits’ and $40,000 as ‘equity based payments for shares’ for the calendar year 2016. Mr T, the Chief Financial Officer for GY provided evidence that the amounts of $414,300 and $403,089 were ‘the amounts payable to CL for the services of the Key Person’. It will be seen in a moment that the ‘Key Person’ was the Applicant.
The GY 2015 annual reports recorded that the Applicant’s services, and that of the Chief Financial Officer, were provided ‘pursuant to a Contract with a Service Company’. The GY 2016 annual report recorded that the Applicant’s services were ‘provided pursuant to a Contract with a Service Company’. The GY annual reports recorded that, with the exception of the Applicant, and in 2015, the Chief Financial Officer, the ‘terms of employment for all directors and senior executives are formalised in contracts of employment’.
The ‘Service Company’ referred to in the GY annual reports was CL. CL was a company registered in Hong Kong. The shares in CL are beneficially owned by [The Applicant’s initials] which is the trustee for The [Applicant’s surname] Family Trust. The beneficiaries of The [Applicant’s surname] Family Trust are the Applicant and his wife. The Applicant indirectly controlled CL.
The ‘Contract’ referred to in the GY annual reports was dated 28 April 2014 and was titled ‘contract for the provision of services’ (Contract). The Contract commenced on 28 April 2014. The Contract said that ‘[GY] engages [CL] and [CL] accepts the engagement to provide the Services on the terms and conditions set out in the Contract’.
The ‘Services’ were ‘the chief executive services to be provided by the Contractor and to be performed by the Key Person as described in Schedule 1, and includes the provision to GY of all Contract Material’. The Services in Schedule 1 were, in general, executive management services of one kind or another. The ‘Key Person’ was the Applicant. ‘Contract Material’ was, in general terms, documents and things brought into existence for the purpose of providing the Services. The Contract provided that, with the agreement of the Board of GY, employees or subcontractors of CL, other than the Applicant, could provide the Services. The Contract provided that, with the approval of the Board, the contract could also be sub-contracted.
The Contract required GY to pay CL a minimum amount of US$300,000 per annum ‘plus annual increments exclusive of costs and allowances’ that were set out in Schedule 2 to the Contract, as well as allowance for ‘out of pocket expenses’ for an amount of AUD$3,000 per month. The minimum payment of US$300,000 was expressed to be as compensation for the provision of the services of the ‘Key Person’. The Contract provided for bonus payments. The minimum amount of US$300,000 per annum was to be paid in 12 equal monthly instalments in arrears subject to invoices being provided and CL fulfilling its obligations under the Contract. Schedule 2 also provided for the payment of approved out of pocket expenses by way of reimbursement and required ‘claims’ to ‘clearly show details of expenses actually incurred and receipts must be supplied’ . There were also terms about payments that related to ‘Additional Services’ to those contained in Schedule 2 that were subject to the approval of the Chief Financial Officer or the Board of GY.
There were 27 invoices issued by CL to GY over the period 30 September 2014 to 25 March 2016 that were tendered in evidence. The invoices for the 2015 tax year totalled US$451,768. The invoices for the 2016 tax year totalled US$724,332. For the 2015 tax year of US$275,000, according to the invoices there appears to be the total of the monthly payments of US$25,000 under the Contract. For the 2016 tax year $225,000 appears from the invoices to be monthly payments of US$25,000 under the Contract. They would appear to represent the payments in respect of the Applicant. The discrepancy in the contracted amounts appears to be because some invoices have not been produced. In any event, the amounts paid by GY to CL in both years exceeded US$300,000 for each year.
There were several other individuals employed under contracts of employment with CL over the relevant tax years who also undertook work for GY. The Applicant did not have a written contract of employment with CL.
The Applicant’s 2015 tax return and 2016 tax return showed that his taxable income was $355 and $111,725 respectively. The Applicant’s case carries with it the concession that those tax returns were not correct.
WHAT SHOULD THE ASSESSMENT HAVE BEEN?
As I have already observed, the onus is on the Applicant to prove what his actual income tax assessment was in relation to the 2015 and 2016 tax years. As I have already noted, the Commissioner made it clear from the outset that this was not a case where the Commissioner made concessions such that the issues were confined.
The Applicant contended that, for the 2015 tax year, his taxable income was $233,696, which was made up of $394,383 being the total of CL’s receipts from GY, less $160,687, which was the total of CL payments to its contractors and employees.
The Applicant originally submitted that his taxable income for the 2016 year was $101,054, which was made up of CL’s receipts from GY of $770,836, less CL expenses of $669,782. After the close of the evidence, the Applicant amended these figures, and instead contended that his taxable income for the 2016 year was $386,092 which was made of $929,714 as income less CL expenses of $543,622.
The make-up of the respective figures for receipts, payments and expenses was set out in a document prepared by the Applicant’s representative which was in two parts: one part was headed ‘Deposits from [GY] Shown on the Bank Statements of [CL] for the Period 26 November 2014 to 27 June 2016’; the other part was headed ‘Summary of Payments by [CL] From Bank Pass Sheet (sic) for the Period 26 November 2014 to 27 June 2016’. That part of the document contained four headings across the top “Fees’, ‘Salary’, ‘Contractors’ and ‘Total’ for 2015 and five headings “Fees’, “Salaries’, ‘Contractors’ ‘Office Equipment’ and ‘Div/Dis’ for 2016. Under each heading there appeared dates and figures. There was no explanation in the documents about why amounts had been included or why other amounts had not been included. I will refer to the documents as the ‘particulars document’ in the remainder of these reasons.
The Applicant’s case proceeded on the basis that the only income he received in either the 2015 or 2016 tax years was his personal services income that derived from the work he did for CL and for which CL received payment. Thus, the Applicant’s case was that his taxable income was confined to ‘personal services income’ as defined by s. 87-15 of the ITAA 1997. From that, the Applicant submitted he was entitled to deduct various ‘payments’ and ‘expenses’ that CL had made or incurred.
The Applicant’s evidence about his assessable income was confined to what he said was his personal services income. That evidence was deficient in that it failed to identify any basis for why he said the amount he claimed was personal services income, and why other amounts that were paid by GY to CL were not part of his personal services income. Further, there was evidence that he received other payments that were unexplained which left open the probability that they too were income. Moreover, his proof was deficient in relation to that which he identified as personal services income because his evidence failed to reveal what payments made by GY were personal services income and what, if any, offsets should be deducted from that income and why. I set out below the important deficiencies that have informed those conclusions.
First, there were a series of payments by GY over the 2015 and 2016 tax years which were paid into the bank accounts of The [Applicant’s surname] Family Trust, or the joint account that the Applicant had with his wife. They were on the following dates and in the following amounts: 10 October 2014 for $41,789.89; 24 November 2014 for $14,029.39; 9 February 2015 for $6861.78; 26 March 2015 for $21,917.66; 8 April 2015 for $2831.35; 19 May 2015 for $17,902.91; 3 July 2015 for $22,707.33; 13 July 2015 $17,640.27; and $54,555.58 on 27 August 2015.
All of the transactions in the bank statements had alongside them the letters and word ‘[GY] expenses’. There was no satisfactory explanation concerning what the payments were for. The Applicant was unable to recall the details of those payments, although for the first of them, ‘imagined it was a catch up of quite a lot of expenses’. It was suggested from the bar table after the Applicant had given his evidence that, the Applicant had undertaken a ‘check’ with the Chief Financial Officer of GY which ‘confirmed’ that the amounts were reimbursements for expenses.
I am not satisfied that the amounts were for reimbursements of expenses, especially given that none of the documents behind them, receipts or credit card statements, that might substantiate that they were for expenses, have been tendered in evidence. Significantly, the Contract required receipts to accompany claims by CL for reimbursement, so, it would seem, if there were such documents that proved they were expenses being reimbursed, the documents would be in existence. The amounts of each deposit involved, and the total amount, are large. In the absence of evidence proving the expense that support the payments, I am unable to determine what the deposits related to at all. The Chief Financial Officer of GY did not give evidence. I am not prepared to accept untested hearsay about such a significant matter especially when the Applicant was on notice that the Commissioner was insisting on proof of such things. It is also not at all clear why the amounts were being reimbursed, if that is what was happening, to The [Applicant's surname] Family Trust or to the Applicant by GY when the Contract required them to be reimbursed to CL.
Second, on 30 June 2015 The [Applicant’s surname] Family Trust bank account recorded two payments to the bank account held by the Applicant and his wife as ‘trf salary $75,000’. The Applicant acknowledged one of these payments was his salary but that had not been included in his taxable income. There was no satisfactory explanation for why this was not included as part of the Applicant’s assessable income. There was no satisfactory explanation in the evidence about why this amount should not feature in the Applicant’s assessable income.
Third, there are deposits to CL’s bank accounts that are not included in CL’s income as calculated in the particulars document. It is not necessary to deal with them all, but some examples are a deposit of HK$144,891.46 on 16 December 2014 about which the Applicant, at least initially, could not explain, but later gave an explanation that it concerned something he had read in an email about a payment; a deposit of US$71,081.60 on 27 November 2015 from GY, which the Applicant said he was unable to explain and ‘would have to find out’; a deposit of US$49,956.61 on 25 May 2016 from GY. The Applicant was unable to explain most of these payments, perhaps except for the first one which even then, and rather unsatisfactorily, relied upon what he said he been told or read in a document from someone else. The consequence of the omission of these payments is that the income that is asserted to have been CL as recorded in the particulars document is understated.
Fourth, the particulars document recorded as expenses amounts of $11,016 and $77,412 which were both under the heading ‘Office Equipment’. The amount of $77,412 was for a motor vehicle that was driven by the Applicant and his wife. The payment of $11,016 was to Hermes, but no further explanation of it was offered, although again, from the bar table, it was suggested it was for the purchase of a briefcase. The amounts were one reason why the amounts in the particulars document were varied by the end of the hearing. The two items of “Office Equipment’ were not presented any longer as expenses. It is, however, significant that the amount presented as ‘Office Equipment’ bears no fair resemblance to what the payment was in fact for, and so casts doubt over the reliability of the records more generally, as well as doubts over the reliability of other evidence concerning documents that were not produced at all.
Fifth, there was an amount of US$23,676.72 withdrawn from CL’s bank account on 26 January 2016 that was not included in the particulars document that initially the Applicant said he had no idea what it was for, but later recalled that it was gift, an expensive watch, for an employee. He was unable to explain why it had not been included in the particulars document and said that it was something that he would need to take advice on.
Sixth, the Applicant does not, in his calculation of his taxable income, include the payment of $3000 per month which he received either in respect of out of pocket expenses or as car allowance. Some of those payments appear to have been paid to The [Applicant’s surname] Family Trust. The Applicant was unable to explain why he had not included those amounts, saying that he would have to ask his accountant about them.
Seventh, apart from these matters there was no satisfactory explanation as to why amounts were included in the particulars document either as income or as payments or expenses, and others were not.
Finally, I should generally observe that a deal of the Applicant’s evidence was unpersuasive because, on many occasions, the Applicant conceded he did not know things or would need to refer questions to others such as his accountant. If those others were the source of answers about what the Applicant’s assessment should have been or were able to explain aspects of the Applicant’s tax affairs, or even to explain monies going in and out of GY’s, CL’s, and his own bank accounts, they should have been called to give evidence. Additionally, aspects of the Applicant’s evidence were also unpersuasive because, at times, it appeared that he was answering questions with an eye focused upon what the implication of his answer might be for his case. On one occasion he said so much.
These matters lead inevitably to the conclusion that the Applicant has failed to prove that the Commissioner’s assessment is excessive or otherwise incorrect. The Applicant has failed to prove what the assessment should have been because of the deficiencies in his proof that I have identified.
There is yet another difficulty with the Applicants proof, which follows from his contention that all of his income was personal services income because the income paid to CL was for his work or was mainly a reward for his services. There are two deficiencies in the way in which the Applicant has gone about proving these matters.
First, if the payments that were made to CL were to be included, or alternatively not to be included as part of the Applicant’s personal services income, there needed to be some explanation as to why, or why not, they were or were not included as part of the Applicant’s personal services income. There was no such explanation offered. Likewise, and secondly there was no explanation as to why any of the payments or expenses out of CL that were claimed to be ‘deductions’ could be treated as such. That required, under step one of s.86-20, some calculation of the amount of any deductions to which CL was entitled that are deductions relating to the Applicant’s personal services income. No such calculation was, or was able to be, done on the evidence. The section also required calculation of the entity’s assessable income for the year disregarding both the Applicants personal services income and that of others. Again, the evidence does not permit such a calculation to be undertaken.
I am unable to find that the default assessments are excessive or otherwise incorrect. The Applicant has not proven what the actual assessment of his tax should have been for the 2015 and 2016 tax years.
DECISION
For these reasons I affirm the Commissioner’s decision to disallow the objection.
| I certify that the preceding 51 (fifty-one) paragraphs are a true copy of the reasons for the decision herein of Mr Rob Reitano, Member |
......................[SGD]...............................................
Associate
Dated: 01 December 2023
| Date(s) of hearing: | 21 and 22 November 2023 |
| Advocate for the Applicant: | Mr A Sneddon, Tax Advisor |
| Counsel for the Respondent: | Mr K Josifoski |
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