Sunraysia Harvesting Contractors Pty Ltd as trustee of the Sunraysia Harvesting Contractors Trust and Commissioner of Taxation (Taxation)
[2015] AATA 764
•30 September 2015
Sunraysia Harvesting Contractors Pty Ltd as trustee of the Sunraysia Harvesting Contractors Trust and Commissioner of Taxation (Taxation) [2015] AATA 764 (30 September 2015)
Division TAXATION & COMMERCIAL DIVISION File Number
2014/5565
Re
Sunraysia Harvesting Contractors Pty Ltd as trustee of the Sunraysia Harvesting Contractors Trust
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Numbers
2014/5566; 2014/5567
Re
Suleyman Erdogan
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Numbers
2014/5568; 2014/5569
Re
Hulya Erdogan
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President PE Hack SC
Date 30 September 2015 Place Brisbane In each application the decision under review is affirmed.
...........................[Sgd]...............................
Deputy President PE Hack SC
CATCHWORDS
TAXATION – income tax – assessable income – amended assessments – creditable acquisitions – amounts paid not allowable deductions – whether taxpayers entered into a sham arrangement – onus on taxpayer to prove assessments excessive – whether subcontracting companies genuine and real – arrangements never intended to create legally enforceable obligation – companies not making supply for consideration or carrying on enterprise – companies players in elaborate charade – evidence of applicant unimpressive and unconvincing – failure to show assessments excessive – objection decisions affirmed.
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth), ss 9-5, 9-10, 9-20, 11-5, 195-1
Income Tax Assessment Act 1997 (Cth), ss 8-1
Taxation Administration Act 1953 (Cth), 14ZZO, Schedule 1, ss 12-B, 12-35, 12-60, 16-30, 284-75, 284-80, 284-220, 298-20
CASES
Commissioner of Taxation v Ramsden [2005] FCAFC 39; 2005 ATC 4137
Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333
Hadjiloucas v Crean [1988] 1 WLR 1006
Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
REASONS FOR DECISION
Deputy President PE Hack SC
30 September 2015
Introduction
For a number of years Mr Suleyman Erdogan has operated a business of supplying casual labour to meet the seasonal demands of orchardists and vignerons. Until June 2011 he operated through a company, Alper Harvesting Contractors Pty Ltd (Alper). Alper contracted with growers to provide the casual labour required by growers and engaged employees to perform the work required by the growers. Alper was paid by growers and paid wages to the employees. It was required to account to the Commissioner of Taxation for tax instalments required to be deducted from wages paid to employees (PAYG deductions) and to the revenue authorities of the States for payroll tax.
In June 2011 the method of operation changed. A new entity, Sunraysia Harvesting Contractors Pty Ltd (Sunraysia), was incorporated. Sunraysia acted as the trustee of the Sunraysia Harvesting Contractors Trust (the Trust), a discretionary trust of which Mr Erdogan and his spouse, Mrs Hulya Erdogan, were beneficiaries. Sunraysia continued the role that Alper had in contracting with growers but, on the case Mr Erdogan advances, it no longer engaged employees. Instead, he says, it contracted successively with three other companies, Danood Pty Ltd (Danood), Jameron Pty Ltd (Jameron) and Kigra Pty Ltd (Kigra), for those companies to engage and pay employees, and, necessarily, to account for PAYG deductions and for payroll tax if necessary.
Following an audit of the affairs of Sunraysia, Mr Erdogan and Mrs Erdogan, the Commissioner concluded that the arrangements between Sunraysia and Danood, Jameron and Kigra were a sham. He gave effect to that conclusion by disallowing input tax credits claimed by Sunraysia on supplies said to have been made by those companies to it between 1 July 2011 and 31 December 2013. Additionally, GST shortfall penalties were imposed and a penalty was imposed on Sunraysia for its failure to deduct and remit PAYG amounts. So far as Sunraysia’s income tax affairs are concerned, the Commissioner determined that amounts paid to Danood, Jameron and Kigra were not allowable deductions but instead allowed the deduction of an amount calculated by reference to industry standards. One consequence of that was that the net income of the Trust increased. That increase was attributed by the Commissioner equally to Mr Erdogan and Mrs Erdogan as beneficiaries of the Trust. Their taxable incomes for the 2012 and 2013 income years were increased accordingly and shortfall penalties imposed on them.
Each of Sunraysia, Mr Erdogan and Mrs Erdogan objected to the various assessments or amended assessments but the objections were, in the main, disallowed. They seek a review of the Commissioner’s objection decisions. The assessment and objection process is explained in greater detail below.
Some Uncontroversial Factual Background
I do not understand what follows to be in issue. It is, in the main, taken from documents in the material. Alper was incorporated in August 2007.[1] Mr Erdogan and Mrs Erdogan were its only directors until July 2011 and they were its only members. Mr Andrew Dunner was appointed liquidator of Alper in a creditors’ voluntary winding up on 11 October 2011.
[1] Exhibit 3.
Sunraysia was incorporated on 7 June 2011.[2] At incorporation its sole director was Mr Mustafa Keles, Mr Erdogan’s brother-in-law (and Mrs Erdogan’s brother).[3] Mr Keles continued in that role, and was the holder of all of its issued capital, until 1 July 2013 when he was replaced by Mr Erdogan in both of those roles. Sunraysia’s registered office and principal place of business was, and remains, the address of an entity called “SME’s R Us”, described in the material as “Commercial Business Consultants”.[4] It advertised itself as giving advice to small to medium enterprises on corporate and personal insolvency, asset protection and tax minimisation.[5] Ms Samantha Toffoletti was a “consultant” with SME’s R Us.[6] Although Ms Toffoletti’s precise role at “SME’s R Us” never clearly emerged, it is not controversial that Mr Erdogan dealt with her. Ms Toffoletti was the settlor of the Sunraysia Harvesting Contractors Trust, created by deed dated 7 June 2011.[7] Mr Erdogan was the appointer of the Trust and the only named beneficiary of the Trust. The deed described other eligible beneficiaries including, relevantly, the spouse or children of a named beneficiary. The trustee of the Trust had an absolute discretion to decide to distribute any part of the income of the Trust to the persons named as beneficiaries or to persons who were members of any of the classes of eligible beneficiaries. By virtue of clause 9 of the trust deed, in the event of the trustee failing to exercise the discretion to distribute the income, the income not distributed would be held on trust for the “named beneficiaries” alive on 30 June.
[2] Annexure SE 3 to Exhibit 2.
[3]Transcript, page 24, line 22.
[4]Annexure A to Exhibit 5.
[5]Annexure A to Exhibit 4.
[6]Annexure A to Exhibit 4.
[7]Exhibit 1, pages 502 – 523.
Danood was also incorporated on 7 June 2011.[8] Its only director and member was Mr Danny Woods. It was wound up on a creditors’ voluntary winding up pursuant to a resolution of 24 September 2012. Mr Dunner was appointed liquidator. Danood’s registered office and principal place of business was at the premises of SME’s R Us.
[8] Annexure SE 8 to Exhibit 2.
Danood opened a bank account with National Australia Bank on 28 June 2011.[9] The account was styled “Danood Pty Ltd [as trustee for] Danood Trust” however there is no other evidence that Danood acted as a trustee. The signatories on the account were Mr Erdogan and Mr Woods.[10] The bank statements were addressed to Mr Erdogan’s residential address in Mildura apart from one statement sent “c/- NAB … Mundubbera” at a time when Mr Erdogan was working at Mundubbera and requested a redirection of his mail.[11] Mr Erdogan had a cheque book for the Danood account.[12]
[9] Exhibit 1, page 144.
[10] Exhibit 1, page 283.
[11] Transcript, page 55, lines 42 – 43.
[12] Transcript, page 56, lines 34.
There is a document in the material bearing the date 20 October 2011. It is described as a “Services Agreement” and purports to be between Sunraysia and Danood for the provision by Danood to Sunraysia of “Services”, an expression said in the body of the document to be described in Item 2 of the Schedule to the document. That item, and all other items in the Schedule, including the fee, the commencement and expiry date, and the payment terms, have been left blank on the document save for instructions on completing the items. The document has been signed for Sunraysia by Mr Erdogan and by someone described as “Danny Wood” (not Woods) for Danood.
In that regard it is relevant to note that Mr Woods, who was called by the Commissioner, gave unchallenged and uncontradicted evidence that the signature on the document was not his and that he knew nothing of Sunraysia. It seems clear from Mr Woods’ evidence that he signed documents at the request of Ms Toffoletti to assist her set up other companies. He was paid by her initially to sign documents, including the opening of Danood’s bank account, and then later to sign more documents in connection with the liquidation of Danood. Mr Woods’ evidence, also unchallenged and uncontradicted, was that he did not use the Danood bank account or authorise anyone else to do so. That bank account, whilst opened in late June 2011, did not commence operating until 3 November 2011 when $29,156.90 was transferred to it from Sunraysia’s account. Thereafter, until early September 2012, deposits to the Danood account were predominately transfers from Sunraysia. There were very many withdrawals, many described as “wages”.
Also in the material are in excess of 100 documents that purport to be invoices from Sunraysia to Danood. The first of them is dated 18 October 2011,[13] prior to the date on which the “Services Agreement” was signed. The documents are all of a similar format. They are handwritten in a pre-printed and numbered invoice book, the type able to be purchased at newsagents and stationers. The Danood invoices were, remarkably, written by Mr Erdogan.[14] They record a very brief description of work, an extension of hours at an hourly rate and supervisor hours at a higher rate. The total is then grossed up by a “contractor’s fee” at a percentage that varies, but is commonly 11.5%, and by GST at 10%. The last of the Danood invoices is dated 27 August 2012.[15]
[13] Exhibit 1, page 691.
[14]Transcript, page 43, lines 32 – 36.
[15] Exhibit 1, page 834.
On 25 September 2012, Mr Dunner sent a circular to the creditors of Danood.[16] It read, in part:
I advise that the Shareholders and Directors of [Danood] have approached this office and requested that I assist them in calling the necessary meeting for the placement of the company into liquidation.
The member of the company held meeting on the 24th September 2012 for placement of the company into Creditors voluntary liquidation and Mr Andrew Leonard Dunner of this office was nominated the liquidator of the company…
The circular went on to call a creditors’ meeting on 4 October 2012. Mr Woods accepts that his signature appears on an ASIC Form 509, Summary of Affairs of a Company[17] (which shows nil assets and creditors in excess of $450,000) and on a Form 205, Notification of Resolution[18] (to wind up Danood), but says he knows nothing of the substance of these matters; he simply signed documents when asked to do so by Ms Toffoletti.
[16] Annexure F to Exhibit 4.
[17] Annexure D to Exhibit 4.
[18] Annexure E to Exhibit 4.
In the meantime the second of the companies, Jameron, was incorporated on 10 September 2012.[19] Its sole member and director was Mr James Cameron. Its registered office and principal place of business was at the premises of SME’s R Us. A bank account in the name “Jameron Pty Ltd [as trustee for] Jameron Trust” was opened at the National Australia Bank on 13 September 2012.[20] Transactions commenced on that account in mid-November 2012 and continued until mid-July 2013. Throughout that period statements for the account were sent to Mr Erdogan’s home address in Mildura. Mr Erdogan was the sole signatory on that bank account.
[19] Annexure SE-28 to Exhibit 2.
[20] Exhibit 1, page 175.
There is, in the material, a document described “Services Agreement”, bearing the date 10 November 2012, between Sunraysia and Jameron. Apart from the change in identity of one of the contracting parties it is relevantly identical to the Danood Services Agreement, right down to the uncompleted Schedule. The unchallenged and uncontradicted evidence of Mr Cameron, also called by the Commissioner, was that he was paid by Ms Toffoletti – $2,000 on 14 September 2012 with a balance of $1,000 “to be paid when Jameron is liquidated”[21] – to be the nominal director of Jameron but that what purports to be his signature on the Jameron Services Agreement is not his and that he knows nothing of Sunraysia’s dealings with Jameron or Jameron’s affairs generally. He executed various documents in connection with the liquidation of Jameron. Despite that, it would seem that Jameron was not put into liquidation but that application was made in April 2014 for its voluntary deregistration.[22] That application was lodged with ASIC by Ms Toffoletti.[23]
[21] Annexure A to Exhibit 5.
[22] Attachment SE-28 to Exhibit 2.
[23] Attachment D to Exhibit 5.
There are, again, a number of invoices in the material[24] which appear on their face to have been issued by Jameron, but in their content they are similar to the Danood invoices. According to Mr Erdogan these invoices were prepared by Ms Toffoletti from details provided to her by him.[25] Jameron’s bank account shows a similar pattern to that in Danood’s account. Large deposits or transfers from Sunraysia and multiple withdrawals, many noted as “wages”.
[24] Exhibit 1, pages 1232 – 1307.
[25] Transcript, page 89 generally.
Kigra was incorporated on 9 July 2013, shortly before the last of the transactions on the Jameron bank account. Ms Kim Graco was its only director and member. It was deregistered on 20 July 2014. Once again its registered office and principal place of business was at the offices of SME’s R Us. A bank account in Kigra’s name was opened with Westpac Banking Corporation on 12 July 2013. Substantial transactions commenced on the account in early September 2013.[26] Bank statements were sent to the address of SME’s R Us. Mr Erdogan and Ms Graco were each signatories on the bank account and Mr Erdogan had a debit card linked to the Kigra bank account which he used frequently and which he continued to use up until March 2014 despite the fact that the last invoice from Kigra to Sunraysia was dated 30 December 2013.
[26] Exhibit 1, page 206.
There is a document in the material that appears to be minutes of a meeting of Sunraysia,[27] in its capacity as Trustee of the Trust, held on 25 June 2012 and apparently signed by Mr Keles, by which it was resolved that:
… the net profit of the trust for the year ended 30 June 2012 be distributed to Nisa and Sanem Erdogan[[28]] so that their respective incomes from trust wages and trust distributions totals approximately $66,000 each and the balance of the profit be distributed equally to Suleyman and Hulya Erdogan.
There is a similar document in respect of the income of the Trust for the 2013 income year,[29] apparently signed by Mr Keles, and recording the minutes of a meeting held on 29 June 2013 by which it was resolved to distribute the net income of the Trust equally between Mr and Mrs Erdogan.
[27]Exhibit 1, page 1721.
[28] Adult children of Mr Erdogan and Mrs Erdogan.
[29]Exhibit 1, page 1720.
Mr Erdogan replaced Mr Keles as the director, secretary and only member of Sunraysia on 1 July 2013.[30] The evidence of Mr Erdogan was that it was his decision to remove Mr Keles as a director and that he had done so because Mr Keles “has been not going well” and Mr Erdogan was “not happy with [Mr Keles] running the company” .[31]
[30]Attachment SE-3 to Exhibit 2.
[31]Transcript, page 82, line 44 to page 83, line 8; page 247, lines 4 – 17.
Mr Allan Taylor was the accountant for each of Sunraysia, and Mr Erdogan and Mrs Erdogan in all of the years in issue. He prepared and lodged income tax returns for them for the 2012 income year but did so unaware of the trustee’s resolutions set out above. His evidence was that he was provided with the trustee’s 25 June 2012 resolution in or around February 2013 and thereafter lodged amended 2012 returns for both Mr Erdogan and Mrs Erdogan.[32] Whilst nothing turns on it, I suspect that Mr Taylor is mistaken in thinking that occurred in or around February 2013 as amended 2012 returns were lodged for both of them on 13 January 2014[33] that disclosed trust distributions of $79,457 (Mr Erdogan) and $79,456 (Mrs Erdogan). On 7 February 2014 the Commissioner made amended assessments of the taxable income of Mr Erdogan in the amount of $136,173 and of Mrs Erdogan in the amount of $134,884.[34]
[32] Exhibit 10, paragraph [15].
[33] Exhibit 1, pages 1592 – 1622 (Mr Erdogan); pages 1561 – 1591 (Mrs Erdogan).
[34] Exhibit 1, pages 1686 – 1689 (Mr Erdogan); pages 1690 – 1693 (Mrs Erdogan).
Mr Taylor lodged the 2013 returns for Mr Erdogan and Mrs Erdogan on 24 January 2014,[35] disclosing trust distributions of $21,457 (Mr Erdogan) and $21,456 (Mrs Erdogan). The returns were assessed as lodged.
[35] Exhibit 1, pages 1653 – 1683 (Mr Erdogan); pages 1623 – 1652 (Mrs Erdogan).
In the context of those minutes it is relevant to note that in July 2014, whilst the Commissioner was dealing with the various objections, the solicitors for Sunraysia, Mr Erdogan and Mrs Erdogan obtained, and forwarded to the Commissioner, a document,[36] apparently signed by Mr Keles,[37] which read:
Mr Erdogan asked me to confirm the date at which the minutes were executed in regards to the 2013 Sunraysia Harvesting Trust.
I cannot recall the exact date but I can confirm it was sometime in July 2013.
[36]Exhibit 1, page 1468.
[37]There is no evidence from Mr Keles that he signed this document however the signature is quite like that appearing on the Trust’s 2012 and 2013 distribution minutes.
Also in the material is a deed, described as a deed of disclaimer and apparently signed by Mrs Erdogan on 12 August 2014, by which Mrs Erdogan unconditionally and irrevocably disclaimed any and all benefit in, and/or entitlement to, income of the Trust for the 2012 and 2013 income years.
In the meantime, the Commissioner had commenced an audit of Sunraysia’s GST activity statements for the period 1 July 2011 to 30 September 2013. On 28 March 2014 the Commissioner made an assessment of net amount payable in relation to activity statements for four months, September 2011, December 2011, March 2012 and June 2012 in the total amount of $240,257,[38] and a notice of amended assessment[39] of net amount for various months between July 2012 and December 2013 in the total amount of $453,402.[40] The adjustment made to the September 2011 activity statement related to input tax credits of $2,094 claimed in that month in relation to invoices addressed to third parties but the balance of the adjustment related to the rejection of $691,565 of input tax credits claimed on invoices from Danood, Jameron and Kigra.
[38] Exhibit 1, page 654.
[39] It is not clear why this was an amended assessment however nothing seems to turn on that. If it is a misdescription the assessment is still valid: Allan JHeasman Pty Ltd v Commissioner of Taxation [2014] FCA 1282; 2014 ATC 20-473 at [68] – [69].
[40] Exhibit 1, page 656.
Additionally, and by a notice dated 15 April 2014,[41] the Commissioner made assessments of shortfall penalty in the sum of $623,979. The penalty for September 2011 was calculated on the basis of a lack of reasonable care, warranting a penalty of 25% of the shortfall. For the other months the penalty was calculated on the basis of intentional disregard warranting a penalty of 75%, increased by 20% in reliance on s 284-220 of Schedule 1 to the Taxation Administration Act 1953 (Cth) on the basis that Sunraysia had a previous shortfall penalty.
[41] Exhibit 1, page 1427.
Next, the Commissioner imposed a failure to withhold PAYG deductions in the sum of $1,589,577.[42] That amount was calculated on the footing that an amount of $2,119,436 ought to have been, but was not, withheld by Sunraysia resulting, by operation of s 16-30 of Schedule 1 to the Administration Act, in a penalty in that sum which was thus remitted by 25%, under s 298-20 of Schedule 1 to the Administration Act, on the footing that the failure to withhold had resulted from intentional disregard.
[42]There is an earlier notice of 15 April 2014 at pages 1429 – 1431 of Exhibit 1 however it contains calculation errors and was replaced by the notice of 1 May 2014 at pages 1433 – 1435 of the same exhibit.
The Commissioner also considered the deductibility, for income tax purposes, of payments to Danood, Jameron and Kigra. It was determined that Sunraysia was not entitled to deduct payments totalling $2,366,824 in the 2012 income year and $2,877,751 in the 2013 income year but it was accepted that Sunraysia was entitled to deduct salaries or wages it would ordinarily have incurred by reference to industry benchmarks for labour hire supply services. It was determined that the distributable profit of Sunraysia, in its capacity as Trustee should be increased by $1,153,673 to $1,447,956 in the 2012 income year and by $1,406,050 to $1,433,196 in the 2013 income year.
Informed by the minutes signed by Mr Keles of meetings of the Trust said have been held on 25 June 2012 and 29 June 2013 the Commissioner determined to treat Sunraysia’s additional distributable profit equally between Mr Erdogan and Mrs Erdogan with the result that amended assessments were made of their taxable income in each of the 2012 and 2013 income years. For Mr Erdogan, his taxable income was increased by $576,836 to $713,009 in the 2012 income year,[43] and by $700,141 to $776,750 in the 2013 income year.[44] Shortfall penalties at 75% were imposed in each year on the basis of intentional disregard; that for the 2013 income year was increased by 20% by virtue of the 2012 shortfall penalty. Mrs Erdogan’s taxable income was increased by $576,837 to $711,721 in the 2012 income year,[45] and by $700,142 to $778,584 in the 2013 income year.[46] Shortfall penalties at 50% were imposed on the basis of recklessness. The 20% uplift was imposed but remitted.
[43] Exhibit 1, pages 1734 – 1737.
[44] Exhibit 1, pages 1740 – 1743.
[45] Exhibit 1, pages 1722 – 1725.
[46] Exhibit 1, pages 1728 – 1731.
It remains to mention that in the case of Sunraysia’s income tax affairs a penalty of $22,440 was imposed but as it was remitted in full at the objection stage it need not be further considered.
Each of Sunraysia, Mr Erdogan and Mrs Erdogan objected to the various assessments. On 16 September 2014,[47] the Commissioner decided to disallow all of Sunraysia’s objections save that relating to the $22,440 penalty. On 26 September 2014, further decisions were made disallowing the objections by Mr Erdogan[48] and Mrs Erdogan.[49]
[47] Exhibit 1, page 1524.
[48] Exhibit 1, page 1748.
[49] Exhibit 1, page 1746.
These proceedings were commenced on 20 October 2014.
Consideration
There is no controversy about the legislation and only brief reference to it is necessary. As a general rule a supplier of goods or services is liable to pay GST (at the rate of 10%) if the supply is made for consideration in the course of an enterprise carried on by a person registered, or required to be registered, for GST, provided the supply is not a GST-free supply or input taxed. The enterprise is entitled to claim input tax credits on “creditable acquisitions”. Amounts of GST and input tax credits are set off against each other to produce a net amount payable to, or by, the Commonwealth. A supplier accounts for the amount payable by a periodic activity statement.
The circumstances under which a creditable acquisition may be made are set out in s 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) in these terms:
11-5 What is a creditable acquisition?
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a * creditable purpose; and
(b) the supply of the thing to you is a * taxable supply; and
(c) you provide, or are liable to provide, * consideration for the supply; and
(d) you are * registered, or * required to be registered.
A thing is acquired for a creditable purpose to the extent it is acquired in carrying on the enterprise.
The concepts of “taxable supply” and “supply” are explained by s 9-5 and s 9-10 of the GST Act in this way:
You make a taxable supply if:
(a) you make the supply for * consideration; and
(b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and
(c) the supply is * connected with the indirect tax zone; and
(d) you are * registered, or * required to be registered.
However, the supply is not a * taxable supply to the extent that it is * GST-free or *input taxed.
(1) A supply is any form of supply whatsoever.
(2) Without limiting subsection (1), supply includes any of these:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of * real property;
(e) a creation, grant, transfer, assignment or surrender of any right;
(f) a * financial supply;
(g) an entry into, or release from, an obligation:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
…
Given that part of the Commissioner’s case is that I ought not be satisfied that any of Danood, Jameron and Kigra carried on an “enterprise” (for the purposes of s 9-5(b) of the GST Act) it is as well to note that the term is defined in s 9-20 of the GST Act in these terms:
(1) An enterprise is an activity, or series of activities, done:
(a) in the form of a * business; or
(b) in the form of an adventure or concern in the nature of trade; or
(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
(d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the * ITAA 1997 and to which deductible gifts can be made; or
(da)by a trustee of a * complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or
(e) by a charity; or
(g) by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or
(h) by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.
“Business” includes any profession, trade, employment, vocation or calling.[50]
[50]See s 195-1, GST Act.
It is common ground that Sunraysia, Mr Erdogan and Mrs Erdogan have the burden of demonstrating that the assessments were excessive,[51] but the parties’ submissions differ in the application of that principal in circumstances where the Commissioner has assessed on the footing that the arrangements between Sunraysia and Danood, Jameron and Kigra were a sham. The applicants’ written submissions contend that where, as here, the Commissioner alleges sham “the onus is on him to prove the charge” and that he must do so according to the Briginshaw[52] test.[53] I am unable to agree.
[51] By virtue of s 14ZZO of the Taxation Administration Act 1953 (Cth).
[52] Briginshaw v Briginshaw (1938) 60 CLR 336.
[53] Exhibit 14, paragraphs [40] – [41].
Reliance was placed upon observations of Williams J in Danmark Pty Ltd v Federal Commissioner of Taxation[54] to the effect that it is for the Commissioner to prove a charge of sham. But Danmark did not concern s 14ZZO of the Administration Act or any equivalent; it concerned a section of the Income Tax Assessment Act 1922 (Cth) which permitted the Commissioner to assess individuals in a particular way if the Commissioner was of the opinion that a company had been formed for the purpose of relieving individuals of liability to which those individuals would have been subject had the company not been formed. The Commissioner contended that Danmark Pty Ltd and another company had been formed for the purpose of relieving Mr William Smith of a tax liability. The factual issue was whether Mr Smith’s children held their shares beneficially, as they said, or whether they were mere dummies for their father, as the Commissioner contended. It was in that context that Williams J said:
If the Commissioner charges that a secret or covinous arrangement between the children and their father exists behind the cloak of the apparent facts, the onus is on him to prove the charge.
[54] (1944) 7 ATD 333, 364.
The true position was explained in Richard Walter Pty Ltd v Commissioner of Taxation[55] where Lockhart J said:[56]
Use of the word “sham”, in some cases, and this is indeed one of them, obscures the fundamental issue between the parties. Essentially, it is for the taxpayer to prove that an assessment is excessive: …. The onus of proving that the assessment is excessive lies upon the taxpayer; although the evidentiary onus in a particular case may shift from time to time. In this case, the appellant has the burden of establishing that the alleged loans to it by Morlea are not income. It is common ground that if this burden is discharged and it is established that the payments here are in fact loans, then the appellant will succeed, provided it survives the possible application of s 260.
I mention this because it is a misconception in my view to assert that the Commissioner has the burden of establishing that a transaction is a sham. The Commissioner may, as he did in this case, submit that the relevant transactions were a sham and of no force or effect. In some cases the evidentiary onus may shift to the Commissioner to establish what the real transaction is for which the sham transaction is a cloak (assuming there is a real transaction); but at most this is an evidentiary onus which may shift back and forth depending upon the facts of the case and inferences which it is proper for the Court to draw. It remains that the burden of proving that an assessment is excessive lies upon the taxpayer. [citations omitted]
To similar effect, Hill J said:[57]
These principles work out in the present case in the following way. The Commissioner alleges that the payments from Morlea to Richard Walter are income. In order to show that the assessment is excessive Richard Walter must thus show on the balance of probabilities that the payments are not income. It seeks to do that in the present case by making a case that the payments were loans. If this case is accepted, Richard Walter will, but subject to the s 260 issue, be entitled to succeed. In the present case it sought to show the amounts in question were loans through the evidence of Mr Holden who swore that they were and that the accounts reflecting them were correct. His Honour did not believe Mr Holden, finding that there was no intention that the loans would be repaid. This being the case, the payments in question were not loans. Whether they had some other character may have relevance to the question of sham, but that can for the moment be put to one side. It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income. If the taxpayer does not do this it will not have satisfied the onus of showing that the assessment is excessive.
Even if it had been necessary to determine whether the so-called loan transactions were shams, the onus could not have been on the Commissioner to show what the real transaction was, of which the payments formed part. Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise... But as that case itself illustrates, that is in the overall context of the statutory imposition of the burden of proof on the taxpayer and does not place upon the Commissioner an onus of satisfying the Court that there was a sham.
The onus not being upon the Commissioner to show a sham, so too the onus cannot be on the Commissioner to show what the genuine transaction was which is said to have been obscured by that sham. [citations omitted]
[55] (1996) 67 FCR 243.
[56] At 245 – 6.
[57]At 259.
For the present case the Commissioner alleges that the arrangements between Sunraysia and Danood, Jameron and Kigra were not as they appear to be. Those companies, it is said, were not genuine arm’s-length entities, contracting with Sunraysia to provide the labour required by Sunraysia’s customers and employing the workers required to meet its contractual obligations. That case is clearly articulated in the Commissioner’s Statement of Facts, Issues and Contentions and, to the extent to which it might be thought that the Commissioner has an evidentiary onus, that onus is plainly discharged, not least by the unchallenged and uncontradicted evidence of Mr Woods and Mr Cameron.
It is for Sunraysia to show that the assessments were excessive and it seeks to do so by showing that the arrangements with Danood, Jameron and Kigra were genuine and real and that there was no disconnect or inconsistency between appearance and reality of documents and actions.[58]
[58]Applicants’ submissions (Exhibit 14), paragraphs [21] and [22].
In my view Sunraysia has failed to discharge that onus. For the reasons that follow, I am not satisfied, on the balance of probabilities, that payments by Sunraysia to Danood, Jameron and Kigra were made in accordance with a contract between those entities for the subcontracting company to provide labour to meet Sunraysia’s obligations to growers.[59] Indeed, were it necessary, I would have been affirmatively satisfied that Sunraysia’s arrangements with Danood, Jameron and Kigra were never intended to create any legally enforceable obligation between Sunraysia and the subcontractor and were simply part of a scheme devised by SME’s R Us to allow Sunraysia to avoid remitting PAYG deductions for persons who were, and remained throughout, its employees.
[59]Whilst I am not satisfied the companies were, in truth, subcontractors it is convenient to use that description in these reasons.
One curious aspect of the matter is the absence of relevant, and one might think, critical witnesses – Mr Keles, at least, but also Ms Toffoletti.
Mr Keles is Mr Erdogan’s brother-in-law. He was the only director of Sunraysia between June 2011 (when it was incorporated) and July 2013 (when Mr Erdogan removed him as a director). Mr Keles, Mr Erdogan thought, “probably” went to SME’s R Us with him.[60] Large sums were transferred from Danood’s bank account to Mr Keles’ bank account,[61] and also from Jameron’s bank account.[62] Mr Keles lives in Mildura (where Mr Erdogan lives) and Mr Erdogan saw him as recently as three to four months prior to the hearing.[63] Mr Erdogan could proffer no reason that would prevent Mr Keles from giving evidence at the hearing.
[60]Transcript, page 47, lines 33 – 34.
[61]$70,000 on 23 December 2011 (Exhibit 1, pages 149 and 454) and $80,000 on 9 July 2012 (Exhibit 1, pages 160 and 424) are obvious examples.
[62]$100,000 on 31 December 2012 (Exhibit 1, pages 180 and 436) and $30,000 on 23 July 2013 (Exhibit 1, pages 188 and 449).
[63] Transcript, page 140, lines 4 – 9.
Mr van der Walt, counsel for Sunraysia, submitted that no adverse inference ought be drawn from his absence because he “was not crucial to proving the real transactions between Sunraysia and the subcontracting companies”.[64] I do not agree. The question is not what the real transactions were – the transactions themselves were adequately documented in bank accounts and suchlike – the question is, in what circumstances did those transactions take place. The material demonstrates that Mr Keles was intimately involved in Sunraysia’s business dealings, at least to July 2013; he was its only director to that time. His absence was not explained.
[64] Exhibit 15, paragraph [11].
The absence of Ms Toffoletti also was unexplained. On the account of events given by Mr Erdogan in the course of cross-examination the arrangements were structured as they were at her suggestion. Additionally, she seemingly had an ongoing role in the functioning of the three companies (although Mr Erdogan’s evidence on the point was far from clear[65]). It is not an answer to say as Sunraysia does, that Ms Toffoletti would have relied heavily on the privilege against self-incrimination. There is no evidence that would suggest that would occur or that criminal proceedings are likely. There is no apparent reason why Sunraysia’s advisers could not have approached Ms Toffoletti to give evidence and, at worst, provided hearsay evidence of her attitude. In the absence of even that evidence I do not regard it as a reasonable inference to draw that she would have claimed privilege against self-incrimination.
[65] The evidence is helpfully set out in paragraph [52] of the applicant’s submissions (Exhibit 14).
There is a further category of witness whose absence ought be commented on, the employees of Danood, Jameron and Kigra. One person, said to be in that class, Mr Recep Aktepe, provided an affidavit sworn on 22 April 2015. It read:
1I was employed by Danood Pty Ltd between October 2011 and July 2012.
2I was employed by Jameron Pty Ltd between November 2012 and June 2013.
3I was employed by Kigra Pty Ltd between September 2013 and December 2013.
When Mr Aktepe gave his evidence it was obvious that he had very limited English such that arrangements were made to have an interpreter for him the following day. It was also evident from the whole of his evidence, including that given with the assistance of an interpreter, that he had no genuine recall of the names of entities that may have employed him or any periods of employment. I propose to give no weight to his affidavit. He did agree, in answer to a leading question, that he received a group certificate from Danood,[66] and that he had always received group certificates for other companies he had worked for,[67] but none of them were produced. Moreover, the evidence was given in response to leading questions and through an interpreter. I cannot be confident that evidence is reliable.
[66] Transcript, page 230, lines 35 – 38.
[67] Transcript, page 233, lines 1 – 4.
No other employee was called. In particular, the supervisors, said by Mr Erdogan to be the link between the employees and Ms Toffoletti (on behalf of the employing company) were not called to explain how the claimed new arrangements worked.
The Commissioner urged me to draw adverse inferences against Sunraysia from the absence of these witnesses. I need not do so; it is enough to say that Sunraysia bears the onus of showing that the arrangements between Sunraysia and the subcontracting companies were genuine and real. The absence of Mr Keles, Ms Toffoletti and others involved in the implementation of the arrangements means that Mr Erdogan’s evidence is the principal source of information about the arrangements and there is no satisfactory explanation of many matters that call out for explanation. One prime example is the large transfers of funds to the account of Mr Keles. The absence of Ms Toffoletti is particularly acute given it is part of Sunraysia’s case that it was she, and not Mr Erdogan, who controlled Danood (and presumably the other two companies).[68]
[68]Exhibit 14, paragraph [51].
Whilst Mr Erdogan presented unimpressively in the witness box and the Commissioner’s submissions detail various aspects of his evidence that were said to be vague and non-responsive, it must be borne in mind that he is not a fluent English speaker. In those circumstances, it is possible that his lack of fluency contributed to the matters relied on by the Commissioner. But even making allowance for that difficulty there were matters in his evidence, including startling changes to some of it, which left me with an unfavourable impression of his evidence. My factual conclusions are also considerably informed by reference to facts not in dispute.
One of the many curiosities of the case concerns Mr Erdogan’s evidence in chief, given by way of an affidavit comprising 16 paragraphs and exhibiting six lever-arch folders of documents of doubtful relevance. No more than a handful of those documents were referred to during the evidence or submissions. The affidavit was sworn on 19 February 2015 at which time Mr Erdogan (or his lawyers) had access to the section 37 documents which included the Commissioner’s detailed statement of reasons and the various documents relied upon by the Commissioner to inform his factual conclusions that the arrangements with Danood, Jameron and Kigra were a sham. Mr Erdogan had the opportunity, if he chose to do so, of putting on evidence in reply once the Commissioner lodged the evidence of Mr Woods and Mr Cameron. He did not do so.
Mr Erdogan’s evidence is devoid of any reference to his dealings with SME’s R Us, the circumstances under which the new arrangements came about, how Sunraysia operated before and after the arrival of Danood or even a hint of the reasons for adopting the new arrangements. It may be that the choice of language of the affidavit was that of Sunraysia’s lawyers – the matter was not explained – but the result was that Mr Erdogan chose not to give an account of events when he might reasonably have been expected to do so. It also had the result that Mr Erdogan did not commit himself to a sworn version of events prior to being cross-examined.[69]
[69] Mr Erdogan gave no oral evidence in chief of any substance.
Mr Erdogan’s approach does not inspire confidence.
I turn then to the evidence that was elicited from Mr Erdogan, mainly in cross-examination. He spoke of first attending SME’s R US with Mr Keles[70] in about April 2011.[71] The evidence of those initial discussions is, with respect to him, confused and confusing. There were suggestions that the proposed arrangements would assist with a payroll tax problem,[72] although it never emerged how that would occur. It was also suggested there would be “less headache” for Mr Erdogan.[73] He apparently received a document from Ms Toffoletti explaining the corporate structure,[74] but he said she did not explain much of it to him and, whilst he read it, he did not understand some of it properly.[75]
[70] Transcript, page 47, line 34.
[71] Transcript, page 47, line 38.
[72] Transcript, page 245, lines 1 – 30; page 246, lines 12 – 22.
[73] Transcript, page 77, lines 15 – 16.
[74] Exhibit 2, page 67.
[75] Transcript, page 248, lines 1 – 10.
The case for Sunraysia is that it was Ms Toffoletti, and not Mr Erdogan, who controlled Danood. She acted as agent for Danood (and the other companies) and was Mr Erdogan’s point of contact for his dealings with the companies.[76] Reference was made to passages in Mr Erdogan’s evidence to support that proposition. But the submission fails to come to grips with the fact that Mr Erdogan had control over the bank accounts. In the case of Danood he and Mr Woods were the signatories on the account; in the case of Jameron, he was the sole signatory and in the case of Kigra he and Ms Graco were signatories. It does not come to grips with the fact that Danood’s bank statements and Jameron’s bank statements were sent to Mr Erdogan’s residential address. Whilst it may be accepted that many of the bank withdrawals were made electronically, it does not come to grips with the fact that in excess of 240 cheques were drawn on the Danood account, cheques Mr Erdogan must have signed. It does not come to grips with the fact that some 89 cheques were drawn on the Jameron account, cheques Mr Erdogan must have signed. In the case of Kigra, and even assuming it was Ms Graco who signed cheques drawn on the Kigra account (and there is no evidence she did), it does not come to grips with the fact that, contrary to his initial denial, he obtained and used a debit card linked to Kigra’s bank account and, even more tellingly, used it for some three months after Sunraysia’s arrangement with Kigra ceased.[77]
[76] Exhibit 14, paragraphs [51] – [52].
[77] Transcript, page 145, lines 9 – 27.
What can also be demonstrated in relation to the Kigra bank account is the remarkable coincidence in the times when Sunraysia made its wage payments electronically and when Kigra made its similar payments. The documents that demonstrated the coincidence were exhibited to Mr Erdogan’s affidavit and described as “Westpac Bank payroll reports for Kigra Pty Ltd for the period 11 September 2013 to 11 December 2013” but lacking any other explanation. According to Mr Erdogan at one stage in his evidence he picked up the Westpac payroll report from Ms Toffoletti.[78] It remained unclear why Mr Erdogan needed to access the payroll records of Kigra or why he made handwritten notations on those records indicating the location of the various groups of workers.
[78] Transcript, page 219, line 40.
The documents are electronic payment receipts from Westpac Bank. They detail payments made electronically by Kigra and Sunraysia and the time and date the request was submitted. Thus, it can been that at 6.22 AEDT on 7 November 2013[79] Sunraysia submitted a request to make three transfers to nominated accounts (including, as it happens, those of Mr and Mrs Erdogan described as “WAGES 03.11.2013”). On the same day, at 7.25 AEDT, Kigra submitted its request for 50 transfers also described as “WAGES 03.11.2013”.[80] There are at least five other similar instances, on 19 September 2013 at 9.47 AEST (Sunraysia)[81] and 9.54 AEST (Kigra),[82] on 26 September 2013 at 9.34 AEST (Sunraysia)[83] and 9.40 AEST (Kigra),[84] on 9 October 2013 at 14.32 AEDT (Sunraysia)[85] and 15.46 AEDT (Kigra),[86] on 17 October 2013 at 8.40 AEDT (Kigra)[87] and 7.39 AEDT (Sunraysia),[88] and on 31 October 2013 at 7.14 AEDT (Sunraysia)[89] and 8.16 AEDT (Kigra).[90]
[79] Page 1848 of the annexures to Exhibit 2.
[80] Page 1845 of the annexures to Exhibit 2.
[81] Page 1900 of the annexures to Exhibit 2.
[82] Page 1899 of the annexures to Exhibit 2.
[83] Page 1890 of the annexures to Exhibit 2.
[84] Page 1891 of the annexures to Exhibit 2.
[85] Page 1882 of the annexures to Exhibit 2.
[86] Page 1881 of the annexures to Exhibit 2.
[87] Page 1874 of the annexures to Exhibit 2.
[88] Page 1876 of the annexures to Exhibit 2.
[89] Page 1862 of the annexures to Exhibit 2.
[90] Page 1857 of the annexures to Exhibit 2.
Mr Erdogan first attempted to explain the coincidence of times by recalling that he was with Ms Toffoletti at the times and used her computer.[91] When asked whether he had attended her work premises at 6.22am on 7 November 2013 he then agreed that he had not.[92] Then he suggested that one of the supervisors had accessed his computer using a personal identification number and other details provided by Ms Toffoletti.[93] I reject his explanation.
[91] Transcript, page 224, lines 5 – 24; page 239, lines 1 – 14.
[92] Transcript, page 240, lines 45 – 46.
[93] Transcript, page 241, line 43; page 242, line 30.
As it seems to me, the compelling inference to be drawn from the coincidence of timing, from the similarities between the two categories of documents and from the fact that Sunraysia’s electronic payment receipts were interspersed with Kigra’s receipts is that one person undertook all transactions and that person was Mr Erdogan.
Finally, it seems not to be in issue that Mr and Mrs Erdogan had a housing loan and that, whilst a majority of interest transfers to that account came from their joint account xxx5295,[94] there were internet transfers made from the Danood and Jameron accounts with the same notation:
“Internet Transfer Deposit loan
Suleyman Hulya”[95]
Mr Erdogan gave an unconvincing explanation that Ms Toffoletti arranged these transfers,[96] but he could not explain why the companies would make payments to him and Mrs Erdogan. Equally unconvincing was his evidence regarding various internet transfers from the Jameron account including “Suleyman Air Fee” in the amount of $2,050 on 18 December 2012,[97] “Suleyman Ticketfee” in the amount of $3,800 on 31 January 2013,[98] and “Suleyman Ticketfee” in the amount of $4,150 on 26 April 2013.[99]
[94] Annexure SE77 to Exhibit 2.
[95] 3 July 2012 (page 160, Exhibit 1), 1 July 2013 (page 189, Exhibit 1) and 18 July 2013 (page 190, Exhibit 1).
[96] Transcript, pages 180, lines 15 – 20.
[97] Exhibit 1, page 178.
[98] Exhibit 1, page 182.
[99] Exhibit 1, page 185.
These matters demonstrate convincingly that Mr Erdogan was able to access the accounts of Danood, Jameron and Kigra and that he did so, including a number of instances where he did so for his personal benefit. The evidence of Mr Woods and Mr Ewing is that they played no part in the financial affairs of Danood and Jameron. There is no evidence from Ms Toffoletti about her role in the financial affairs and none from Mr Keles.
Whilst it is undoubtedly the case that each of Danood, Jameron and Kigra was the creature of Ms Toffoletti I reject Sunraysia’s claim that those companies were controlled by her and not by Mr Erdogan. The evidence does not allow me to reach a concluded view on whether she had any financial control; she was not called and Mr Erdogan’s evidence on the point is most unsatisfactory. What does emerge very clearly is Mr Erdogan’s control over the financial affairs of the companies, a level of control that is inimical to the notion that those companies operated at arm’s length to Sunraysia and Mr Erdogan. On the financial side the evidence points overwhelmingly to Mr Erdogan exercising financial control.
The same is true of other of the business affairs of the companies. The prime example of that is the creation of the Danood invoices. They were handwritten by Mr Erdogan.[100] Once Jameron came into the picture Mr Erdogan no longer handwrote its invoices; however, even on his account, he obtained the information required for Ms Toffoletti to prepare the invoices and forwarded that information to her.
[100] Transcript, page 43, lines 33 – 36.
There was a further significant area where, even on Mr Erdogan’s evidence, he is shown to have had an unusual level of involvement in the affairs of the subcontracting companies and that relates to the subcontractor’s fee. That evidence, it must be said, was somewhat confusing. At first Mr Erdogan appeared to say that he determined the level of fee that the subcontracting company charged.[101] In subsequent evidence,[102] he suggested that Ms Toffoletti unilaterally determined the fee and when it should be changed. On either basis, what is absent is the process of bargaining that might be expected between arm’s-length parties. It will be recalled that the Schedule to the Danood “Service Agreement” left uncompleted the mechanism for calculating the subcontractor’s fee. The Danood invoices (written out by Mr Erdogan) show a “contractor’s fee” initially of 9%, then at 10%, 11.95% and 11.50%, and thereafter changing between 11.50% and 11.95%. No explanation was offered for the many changes other than that Ms Toffoletti “just wants more percentage”.
[101] Transcript, page 65, lines 43 – 45.
[102] Transcript, page 85, lines 15 – 41.
What does emerge from the material, a point emphasised in the Commissioner’s submissions, was that after the arrival of Danood it was “business as usual”. In June 2011 the employees who had been employed by Alper “just started working for … Sunraysia”.[103] When a subcontracting company emerged it was Mr Erdogan who told the employees of the fact of the new employment.[104] Between 27 August 2012 (when Danood’s involvement ceased) and 16 November 2012 (when Jameron came on to the scene) Sunraysia paid the employees directly.[105] Notably, during that period the fee charged by Sunraysia to the growers did not change from that charged during Danood’s time and during Jameron’s time.
[103] Transcript, page 34, lines 43 – 44.
[104] Transcript, page 66, lines 44 – 47.
[105]Transcript, page 67, lines 10 – 28.
There were numerous documents that demonstrated that Sunraysia had acted as if were the employer of the workers where, for example, it paid for workers’ clothing,[106] or for embroidering that clothing with its name,[107] or for workers’ accommodation,[108] or for medical attention for workers,[109] or for workers’ compensation,[110] or for equipment for workers,[111] or been identified as the employer for the purposes of compensation medical certificates.[112] These are matters where it might have been expected that the subcontracting company would have met these expenses rather than Sunraysia.
[106]Exhibit 1, pages 917, 1037, 1132 and 1173.
[107]Exhibit 1, page 917.
[108]Exhibit 1, pages 980, 981, 1125, 1126, 1150 and 1189.
[109]Exhibit 1, pages 1005 and 1231.
[110]Exhibit 1, pages 1006 – 1008.
[111]Exhibit 1, pages 1009, 1010, 1097, 1132 – 1136, 1147, 1161, 1194 and 1205.
[112] Exhibit 1, pages 1003 and 1231.
It is right to say, as Sunraysia does, that each of Danood, Jameron and Kigra existed as companies duly incorporated with a real person as a director in at least two cases. And it is also true that documents that purported to be tax invoices from subcontracting companies to Sunraysia have been produced. Those invoices may even reflect work performed by employees. But I am not satisfied that the arrangements between Sunraysia and each of Danood, Jameron and Kigra were as they purported to be. On the contrary, I consider that the circumstances overwhelmingly point to the conclusion that Danood, Jameron and Kigra were part of a façade created by Ms Toffoletti to permit Sunraysia to avoid remitting PAYG deductions.
In Raftland Pty Ltd v Commissioner of Taxation[113] Gleeson CJ, Gummow and Crennan JJ said of the term “sham” that it “is ambiguous and uncertainty surrounds its meaning and application”. Their Honours referred to observations of Mustill LJ in Hadjiloucas v Crean[114] where his Lordship said:
… it is necessary to distinguish between three situations in which, aside from any question of rectification, the court may take an agreement otherwise than at its face value. The first exists where the surrounding circumstances show that the arrangement between the parties was never intended to create any legally enforceable obligation. The second is the case of the “sham,” in the sense in which that word has been used in numerous cases, including Snook v London and West Riding Investments Ltd [[115]]. Correctly employed, this term denotes an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties. The third situation is one in which the document does precisely reflect the true agreement between the parties, but where the language of the document (and in particular its title or description) superficially indicates that it falls into one legal category, whereas when properly analysed in the light of the surrounding circumstances it can be seen to fall into another.
[113] (2008) 238 CLR 516; [2008] HCA 21 at [35].
[114] [1988] 1 WLR 1006, 1019.
[115][1967] 2 QB 786, 802.
In my view the present case falls into the first of these categories – the arrangements between Sunraysia and Danood, Jameron and Kigra were never intended to create any legally enforceable obligation. That conclusion emerges clearly from the material but a number of matters stand out.
First, Mr Woods and Mr Cameron were “straw men” – they were paid to assume a role as member and director in their particular company. There is no reason to suppose that Ms Grace was in any different position. Neither Mr Woods nor Mr Cameron performed any function in the management of their companies: they knew nothing of the affairs of the companies, they undertook no transactions on the companies’ bank accounts and they knew nothing of Sunraysia.
Next, the documents that purport to record the contracts between Sunraysia and Danood and Jameron have been executed on behalf of the subcontractor by someone who was not, but was pretending to be, the director. Moreover the critical details of the contract are, in each case, not completed.
Next, Mr Erdogan is demonstrated to have exercised considerable control over the financial affairs of each of the subcontracting companies and there is a complete absence of acceptable evidence of any other person exercising financial control. It is not a question of drawing adverse inferences, there is simply no evidence from either Mr Keles or Ms Toffoletti that they played any role in the subcontractor’s affairs and I am simply unable to accept Mr Erdogan’s evidence about the involvement of Ms Toffoletti in these matters.
Finally, there is the body of evidence that demonstrated a “business as usual” approach with little of substance changing when, on Sunraysia’s case, Danood, Jameron and Kigra were acting as its subcontractors.
Reference should be made at this point to the evidence of Sunraysia’s solicitor, Mr Konrad Wojtasik, and the work undertaken by him in reconciling subcontractors’ invoices with funds moving from Sunraysia’s bank account into the subcontractor’s bank account and apparent wage payments coming from the subcontractor’s bank account. Notwithstanding the industry of Mr Wojtasik in undertaking the task, I am well short of being satisfied that it does anything other than emphasise the depth of the charade. The fact that money may have moved in the manner to be expected in a conventional contractor and subcontractor relationship does not deal adequately with all of the indications to the contrary. When coupled with the absence of credible evidence about the day-to-day operations of the subcontractors, Mr Wojtasik’s analysis is not of assistance to me.
Given that conclusion I accept, as the Commissioner submits, that there was no taxable supply; Danood, Jameron and Kigra were not making a supply for consideration, nor did any of them carry on an enterprise; they were simply players in an elaborate charade. It follows that Sunraysia did not make creditable acquisitions in its dealings with those companies. The Commissioner was right to deny Sunraysia input tax credits in respect of those dealings.
For similar reasons I am not satisfied that payments made by Sunraysia to any of Danood, Jameron or Kigra were deductable under s 8-1 of the Income Tax Assessment Act 1997 (Cth). They were not incurred by Sunraysia in gaining or producing its assessable income nor were they necessarily incurred in carrying on a business for the purpose of gaining or producing that income. I do not understand Sunraysia to suggest to the contrary where I have found the creditable purpose argument against it all.
There is a further discrete aspect of the Commissioner's treatment of Sunraysia’s GST net amount. It relates to an amount assessed for the September 2011 tax period. Sunraysia claimed input tax credits of $10,087 on its activity statement. At audit, the Commissioner reduced that to $7993 on the basis that Sunraysia was not the recipient of the suppliers for the claims disallowed. The individual invoices are listed in the Commissioner's reasons for decision.[116] All but one were addressed to Alper; one is addressed to someone called Ibrahim Mutlu. In correspondence to the Commissioner following the audit,[117] Sunraysia, by its solicitors, contended that some invoices “were addressed to Alpers [sic], but this was only because account databases had not been updated” and that others, whilst not “expressly addressed” to Sunraysia, were addressed to individuals acting on its behalf, and related to expenses incurred by Sunraysia.
[116]Exhibit 1, page 15.
[117]Exhibit 1, page 1474 & ff.
Necessarily, it is Sunraysia’s task to show the assessment was, in this respect, excessive. In its Statement of Facts, Issues and Contentions, Sunraysia contended that the input tax credits claimed in the September 2011 statement corresponded with its general ledger which in turn “was based on tax invoices held by [Sunraysia]” during the quarter ended 30 September 2011.[118] Reference was made to its general ledger[119] and a bundle of invoices[120] described by Mr Erdogan as “copies of tax invoices held by [Sunraysia] for the quarter ended 30 September 2011 dated various”.[121]
[118]Exhibit 11, paragraphs [22] and [23].
[119]Annexure SE-6 to Exhibit 2.
[120]Annexure SE-7 to Exhibit 2.
[121]Exhibit 2, paragraph [23].
The difficulty, as it seems to me, is that the fact of Sunraysia holding the invoices is of no moment whatsoever. What needs to be shown is that Sunraysia (and not the persons to whom the invoices were addressed) acquired the goods or services for a creditable purpose and that it provided, or was liable to provide, consideration. It has made no attempt to demonstrate either of those things. It is possible, by reference to the general ledger, to discern what might be payment by Sunraysia of some, at least, of the invoices; for example, payment to Countrywide Austral for $595, however that appears to represent payment for an advertisement in the name of Alper. Moreover, the largest component of the claim is an amount of $17,447.32 said to have been paid to Elders yet the Elders document attached to Mr Erdogan’s affidavit shows that to have been a payment made by Alper on 10 June 2011.
I am not satisfied that Sunraysia has discharged its onus in relation to this assessment of the GST net amount.
The question that next arises concerns the administrative penalties imposed by the Commissioner. There is no dispute about the general operation of Division 284 of Schedule 1 of the Administration Act. It makes a taxpayer liable to an administrative penalty if, amongst other things, the taxpayer makes a false or misleading statement about a tax-related matter. The amount of that penalty is determined by reference to the “shortfall amount” and the characterisation of the conduct that led to the shortfall amount. It is sufficient for present purposes to say that it follows from earlier conclusions that Sunraysia has a GST shortfall amount because its tax-related liability for the various GST periods, worked out on the basis of its activity statements, was less than it would have been had those activity statements not been false or misleading.[122]
[122]Item 1, s 284-80(1), Schedule 1 to the Administration Act.
For the September 2011 period the Commissioner imposed the penalty at 25% on the basis that the shortfall resulted from a lack of reasonable care. That appears to me to be somewhat generous to Sunraysia given that the bulk of the shortfall was attributable to a payment shown on the material to being paid by someone other than Sunraysia; however, in the absence of any argument to the contrary from the parties, I would not disturb that finding.
The Commissioner characterised the conduct that led to the remaining shortfall amounts as intentional disregard of a taxation law. I entirely agree. Sunraysia acted through Mr Erdogan. He may well have been unsophisticated but I do not doubt that he must have comprehended the scheme to which he became party as being one to evade the obligation to deduct and remit PAYG amounts while still claiming input tax credits on amounts paid to the subcontracting companies. On the view I take of the matter, Sunraysia, by Mr Erdogan, never intended to create any legally enforceable obligation to Danood, Jameron or Kigra. Given Mr Erdogan’s demonstrated control over the financial affairs of the three companies it is impossible to conclude other than that he, and thus Sunraysia, intended to evade the operation of the taxation laws. It could not be concluded that Sunraysia provided all relevant taxation information to its agent, Mr Taylor, hence Sunraysia cannot rely on the safe harbour provisions in s 284-75(6) of Schedule 1 to the Administration Act.
Sunraysia did not suggest that the 20% uplift to the penalty did not result from the operation of the statute to its circumstances or that remission of the penalty was otherwise warranted. I need not consider those matters beyond observing that there is plainly no basis for any remission.
The next issue concerns the imposition of penalties pursuant to Subdivision 12-B of Schedule 1 of the Administration Act. In the circumstances, as I have found them to be, Sunraysia was obliged, by either s 12-35 or s 12-60 of Schedule 1 of that Act, to withhold prescribed amounts from payments made to its employees and remit those amounts to the Commissioner. It failed to do so and, by operation of s 16-30 of Schedule 1, became liable to pay to the Commissioner a penalty equal to the amount not withheld and remitted. The Commissioner, in reliance on the general power of remission in s 298-20 of Schedule 1 to the Administration Act, remitted 25% of the penalty thus imposed. I do not understand Sunraysia to submit that any further remission is warranted.
In the result, I conclude that the Commissioner’s objection decisions in relation to Sunraysia were correct. They will be affirmed.
I turn then to the assessments against Mr and Mrs Erdogan. There is no doubt, given my conclusions regarding Sunraysia, that its distributable income increased and there is no argument that it increased in the amount calculated by the Commissioner. There are three issues that remain to be determined. The first concerns the incidence of the additional income. Should it be attributed equally between Mr and Mrs Erdogan in accordance with the 2012 and 2013 Trust distribution minutes as the Commissioner submits or should I, as Mr and Mrs Erdogan submit, except the apparent statement of Mr Keles that the distribution minutes were made in July 2013. In that latter event, Mr and Mrs Erdogan submit that the trust resolutions were “invalid”, (although I suspect “ineffective” might be a more apt description were their argument to be accepted), and that Mr Erdogan, as the only named beneficiary alive on 30 June 2012 and 30 June 2013, took all of the income by default.
The next issue concerns Mrs Erdogan’s claimed disclaimer – is it, as she contends, effective.
Finally, there is the issue of penalties – imposed at 75% on the basis of intentional disregard (and increased by 20% in the 2013 year) in the case of Mr Erdogan and 50% on the basis of recklessness in the case of Mrs Erdogan.
I do not accept the argument of Mr and Mrs Erdogan concerning the time of execution of the Trust minutes. First, and contrary to those submissions, Mr Keles’ later document says nothing about the 2012 minutes. His letter to the solicitors refers only to “the minutes … executed in regards to the 2013 Sunraysia Harvesting Trust”. I cannot read that document as saying anything about the 2012 minutes. But beyond that, Mr Keles was not called and his absence was not explained. I see no reason to prefer his later unsworn account of events over what is, on the face of it, a contemporaneous account, forwarded to the tax agent of Mr and Mrs Erdogan and relied upon by that agent in lodging their 2013 income tax returns. His later account was prepared after the Commissioner’s audit and gives no explanation for the apparent change in his account of what occurred. On the most favourable view to Mr and Mrs Erdogan, the presence of two unsworn and contradictory versions leaves me not satisfied that they have discharged the onus of proof in this respect.
There are legal and factual hurdles in accepting Mrs Erdogan’s “disclaimer” as being effective. First, and at the most basic level, there is simply no evidence that the signature appearing on the document is that of Mrs Erdogan. I am unable to locate any proven document with her signature on it; Mr Erdogan did not identify it as his signature and neither Mrs Erdogan nor the person said to have witnessed the signature were called to prove it. In other circumstances it would be appropriate, in the absence of a particular challenge, to infer that the document was executed by Mrs Erdogan. The circumstances of the present case are not such that I regard it as proper to draw the inference.
Those circumstances include, in particular, that Mrs Erdogan was not called to give evidence despite the fact that an affidavit, said to have been sworn by her, was produced at the outset of the hearing and leave was given, not only to rely on that affidavit but also for her to give evidence by telephone to obviate the need for her to travel from Mildura for the hearing. Ultimately, her affidavit was not relied upon and she was not called but no reason for that change was given. In those circumstances I consider it proper to infer that her evidence would not have assisted her case,[123] on this and other aspects.
[123]See Jones v Dunkel (1959) 101 CLR 298, 308.
But beyond these matters I regard the deed as legally ineffective. The position was expressed in this way by the Full Court in Commissioner of Taxation v Ramsden:[124]
[124][2005] FCAFC 39; 2005 ATC 4137 at 4144 and 4147.
[30]Until disclaimer, a beneficiary's entitlement to income under a trust is operative for the purposes of s 97 of ITAA from the moment it arises notwithstanding that the beneficiary has no knowledge of it (Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274; (1991); 91 ATC 4213 at 4215). A beneficiary may disclaim an entitlement on its coming to his or her knowledge. At law an effective disclaimer operates retrospectively, and not merely from the time of disclaimer.
…
[51]Where a donee asserts disclaimer, mere silence or inactivity will not be sufficient: there must be ‘some act to show his dissent’: Federal Commissioner of Taxation v Cornell at 401. The right to disclaim will be lost if a beneficiary accepts the gift: Re Stratton's Disclaimer [1958] Ch 42. In that case, Jenkins LJ said (at 54) that the beneficiary is free to choose ‘whether to avail himself of (the gift) or not until such time as he has either unequivocally disclaimed or unequivocally accepted the gift’.
[52]Subject to one possible qualification, it was common ground on the hearing of the appeal that a beneficiary may not disclaim after acceptance of the relevant gift. The possible qualification arises out of the observations of the Queensland Supreme Court in Lewis v Lohse [2003] QCA 199 that a bequest may be disclaimed after initial acceptance provided that no prejudice has been occasioned to another. Whether or not that is the law in relation to a bequest, Re Paradise Motor Co at 1143 decides that the position is otherwise in relation to an inter vivos gift: see also Lady Nass v Westminster Bank Ltd [1940] AC 366 at 401 and Hardoon v Belilious [1901] AC 118 at 123.
[53]A donee may indicate acceptance of a gift by positive conduct. In addition, if a donee knows of a gift, and does not disclaim it within a reasonable period having regard to the circumstances of the particular case, the donee is ordinarily treated as tacitly accepting it: J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd [1985] VR 891 at 930-931. In that case McGarvie J pointed out that the significance of inactivity over time is that it may operate in an evidentiary way to found an inference that the beneficiary has accepted the gift. At 931 his Honour said:
In the absence of positive conduct by which the donee indicates acceptance, the right to disclaim is lost because the court makes a presumption of fact or draws an inference. The presumption or inference is that by remaining silent beyond the time when he would be expected to decline the gift if not accepting it, the donee has tacitly accepted. The inference in the case of a donee is easy to draw because it is human nature to accept gifts. With a gift such as one under a trust deed or a will it is not normally considered necessary to indicate acceptance, but a beneficiary who desires not to receive what is given would commonly indicate that desire. Inaction by the beneficiary is consistent with acceptance. …
The test for whether a beneficiary is entitled to disclaim is whether in the circumstances he has accepted by words or conduct or has remained silent for so long that the proper inference is that he has determined to accept the interest.
In the present case the material shows that Mrs Erdogan lodged an amended 2012 income tax return, showing a distribution from the Trust of $79,456, on 13 January 2014 and her 2013 income tax return, showing a distribution from the Trust of $21,456, on 24 January 2014. Some seven months later, and assuming rather than deciding, that Mrs Erdogan executed the deed of 12 August 2014, she purported to disclaim any and all benefit in all entitlement to income of the Trust in the 2012 and 2013 years. Given that the tax returns acknowledged receipt of distributions from the Trust it was too late for her to disclaim. I regard the tax returns as indicating acceptance by positive conduct. It is not to the point, as she submits, that there is no evidence before the Tribunal that she did in fact receive payments of money in respect of trust resolutions. There is no evidence from her that she did not; no evidence from her explaining why her income tax returns disclosed the receipt of distributions from the Trust and no evidence that would seek to explain why she did nothing for some seven months after her income tax returns demonstrated knowledge on her part of the distributions from the Trust. I am not satisfied that the purported disclaimer is effective.
I am, consequently, not satisfied that either of Mr or Mrs Erdogan has shown that the assessments are excessive.
Mr Erdogan’s submissions accept that it is not possible to argue for a penalty other than one based on intentional disregard were I to find “sham”. I agree and, were it necessary to do so, would simply rely on what I have said regarding the culpability of Sunraysia. Mr Erdogan has not submitted that remission of penalty is warranted. It is not.
In the case of Mrs Erdogan, it is submitted that she can rely on the “safe harbour” provisions in s 284-75(5) & (6) of Schedule 1 to the Administration Act and that her conduct was neither reckless nor showed intentional disregard. It is submitted that she took reasonable care.
Section 284-75(6) operates to prevent a taxpayer who has used a tax agent from being liable for an administrative penalty where, amongst other things, the taxpayer gives to the tax agent “all relevant taxation information”. I am not satisfied that Mrs Erdogan did so. It is obvious that Mr Taylor was not aware of the true nature of the arrangements between Sunraysia and the subcontracting companies. In turn, that meant that Mr Taylor was not aware of all relevant taxation information; it was relevant to know the circumstances under which Sunraysia, as trustee of the Trust, operated because that determined the liability of the beneficiaries. Section 284-75(5) operates where the taxpayer and the tax agent took all reasonable care in connection with the making of the statement that was false or misleading. Mrs Erdogan submits that nothing in the evidence discloses that she had anything to do with the business of Sunraysia. Even if that were so, and I do not consider it is, I have no evidence that is capable of satisfying me that she took all reasonable steps. I have no evidence from her as to her involvement, or lack of involvement, in the affairs of Sunraysia. I have no evidence from her as to her knowledge, or lack of knowledge, about the affairs of Sunraysia. Simply put, Mrs Erdogan has failed to discharge her onus.
In the result the objection decisions relating to Mr and Mrs Erdogan’s assessments will be affirmed.
I certify that the preceding 97 (ninety -seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC ...............................[Sgd].........................................
Associate
Dated 30 September 2015
Dates of hearing 9, 10 & 11 June 2015; 17 July 2015 Counsel for the Applicant Mr M van der Walt Solicitors for the Applicant Small Myers Hughes Lawyers Counsel for the Respondent Mr VG Brennan Solicitors for the Respondent Australian Taxation Office, Review and Dispute Resolution
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