The Taxpayer and Commissioner of Taxation
[2009] AATA 726
•18 September 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 726
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/1400-1404
TAXATION APPEALS DIVISION ) Re THE TAXPAYER Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date18 September 2009
PlacePerth
Decision The Tribunal affirm the decisions under review.
...(sgd) Mr A Sweidan............
Senior Member
CATCHWORDS
Income Tax - whether “advances” made by an associated company to the applicant were in fact income of the applicant - whether applicant has discharged the onus of showing that the amounts of the advances were not income - whether applicant's failure to disclose the amounts of the advances as income in his income tax returns and other steps taken by the applicant constitute "fraud or evasion" - whether applicant liable for penalties - decisions under review affirmed
LEGISLATION
Income Tax Assessment Act 1936 ss 25(1A), 226J, s226G, 226H
Income Tax Assessment Act 1997 s 6-5
CASES
Tolich v Commissioner of Taxation [2007] FCA 1195
Commissioner of Taxation v Dalco (1989) 168 CLR 614
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Stone v Federal Commissioner of Taxation (1918) 25 CLR 389
Macmine Pty Ltd v Commissioner of Taxation (1979) 53 ALJR 362
McCormack v FCT (1979) 143 CLR 284
Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466
Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656
G.P. International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124
Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375
Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42
Macquarie Finance Ltd v Federal Commissioner of Taxation (2004) 57 ATR 115
Federal Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 489
Vincent v Federal Commissioner of Taxation (2002) 124 FCR 350
Denver Chemical Manufacturing Co v The Commissioner ofTaxation(NSW) (1949) 79 CLR 296
Nozzi Pty Ltd v Commissioner of Taxation [2003] FCA 356
Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345REASONS FOR DECISION
18 September 2009 Mr A Sweidan, Senior Member Background
1.At all relevant times the applicant was a Director of Viscount Nominees Pty Limited which acted as trustee of the Viscount Trust (Viscount Nominees). Viscount Nominees also acted as trustee of the Tiga Trust. The other Director of Viscount Nominees was the applicant’s associate Mr A.
2.Subsequent to an audit of the taxation affairs of the applicant, his associate and related entities, the Commissioner issued Notices of Assessment or Amended Assessment to the applicant on the dates for the respective years and increasing his income from the amount returned by the amounts deemed additional income as set out in the table below:
Year Assessment Date Returned Amended Income Additional Income 1995 Assessment 27 July 2007 -$20,302 $35,911 $56,213 1996 Assessment 27 July 2007 $2,209 $98,877 $76,366 1997 Amended Assessment 27 July 2007 $56,750 $82,235 $25,485 1998 Amended Assessment 27 July 2007 $38,285 $40,677 $2,392 1999 Amended Assessment 27 July 2007 $38,971 $53,971 $15,000 Total Additional Income $175,456
3.The Commissioner made a determination pursuant to section 170(2)(a) of ITAA 1936 on 31 May 2007 having formed the opinion that the applicant had avoided tax by fraud or evasion permitting the Commissioner to issue amended assessments.
4.The Commissioner also imposed a penalty of 75% of the tax shortfall arising from the applicant not having disclosed advances and payments to and on behalf of the applicant by Viscount Nominees as income in the applicant’s income tax returns for the relevant years.
5.Objections by the applicant to the assessments were disallowed by the Commissioner and the applicant now seeks a review by this Tribunal of that decision.
Source of Advances
6.The following facts which are not in dispute appear from the Commissioner’s Statement of Facts:
7.During the period 1 July 1993 to 30 June 2000, the applicant was involved in the promotion of (what were found by the Federal Court in Tolich v Commissioner of Taxation [2007] FCA 1195 to be) tax avoidance schemes known as Travel Vision International and Travel Vision Australia.
8.The schemes involved the use of limited recourse loans to leverage the income tax deductions claimed by participants, with the funding for the limited recourse loans being created by the use of bills of exchange which were subject to a “round robin” arrangement, and never converted to cash.
9.During that period, participants in the schemes claimed deductions totalling $76.9 million, of which $14.9 million represented cash contributions by participants, and $62 million represented funds created by means of a round robin of bills of exchange.
10.A portion of the $14.9 million in cash contributions paid by the participants in the schemes was paid to or for the benefit of the applicant, via a series of entities culminating in the Viscount Trust, an entity associated with the applicant, as shown in the following table:
Year of Income Amount 30 June 1995 $56,213 30 June 1996 $76,366 30 June 1997 $25,485 30 June 1998 $2,392 30 June 1999 $15,000 Total $175,456
11.These payments were styled as “loans” to the applicant from the Viscount Trust, and were accounted for in loan accounts either in the name of the applicant, or in the name of the applicant and his wife jointly.
Issues for the Tribunal
12.The primary issue for decision by the Tribunal is whether or not the amounts advanced to and payments made on behalf of the applicant by Viscount Nominees in the relevant years and described as “loans” were income and should be included in the calculation of the assessable income of the applicant for those years.
13.Subsidiary issues are:
13.1if the advances and payments were income, whether the omission of the relevant amounts from the income tax returns of the applicant and other steps taken by the applicant resulted in the avoidance of tax by fraud or evasion; and
13.2in that event, whether the applicant is liable to pay additional tax by way of penalty, and the quantum of such penalty.
Applicant’s Contentions
14.The applicant asserts that the advances and payments made by Viscount Nominees to and for the benefit of the applicant were loans which created “legal debtor and creditor obligations” between Viscount Nominees and the applicant.
15.Further, the applicant asserts that the advances are not income according to ordinary concepts and do not fall within any of the legislative provisions relied upon by the Commissioner in support of the assessments.
16.It is asserted that the applicant’s intention when drawing funds from Viscount Nominees was at all material times for the funds to be repaid to Viscount Nominees.
17.As well, it is asserted that the fact that the advances are recorded in the accounts of Viscount Nominees as loans to the applicant supports the applicant’s assertions in that regard.
18.The applicant also asserts that the advanced funds have been repaid in the manner set out below and that this shows that the loans were advances as he contends and not income. The fact of the repayment while said to be “not critical to the applicant’s burden of proving that the assessments are excessive” is nevertheless asserted to be “a crucial element in support of the applicant’s purpose and intention that at all material times the amount drawn from Viscount Nominees would ultimately have to be repaid”.
19.The applicant denies that there was fraud or evasion.
20.Finally, the applicant asserts that if the round robin arrangements referred to below were not legally effective to repay the advances then they have in effect been repaid by subsequent advances which he made to the group of entities as a whole which were “agreed to be set off against the amounts owed by the applicant……..” so that the group as a whole owes him money.
tribunal’s Findings I
Repayment of Advances
21.It is appropriate to first consider the way in which the advances were purportedly repaid. On 12 March 1997, the directors of Viscount Nominees as trustee for the Viscount Trust resolved to distribute out of the corpus of the trust fund, the amount of $250,000 to the Tiga Trust. The directors further resolved to satisfy the distribution by the drawing and acceptance of a bill of exchange (the bill) in that amount.
22.On 12 March 1997, the bill was drawn by Viscount Nominees as trustee for the Viscount Trust in favour of Viscount Nominees as trustee for the Tiga Trust. On the same day it was endorsed by the Tiga Trust to the applicant. The bill was endorsed under s 21 of the Bills of Exchange Act 1909 expressly negativing the endorser’s liability to the holder. On 13 March 1997, the applicant endorsed the bill (again without recourse) to the Viscount Trust.
23.On 13 March 1997, the directors of Viscount Nominees as trustee for the Viscount Trust resolved to accept the bill of exchange in full satisfaction of all moneys owing by the applicant, and the applicant and his wife, with any surplus to constitute an unsecured loan by the applicant to the Viscount Trust, and to cancel the bill.
24.It is undisputed that the transactions on the bill of exchange were simply a round robin of promises to pay. There was no transfer of actual funds, and the evidence shows that none of the relevant entities had actual funds sufficient to support the bill. The assets of the Viscount Trust consisted primarily of loans. The Tiga Trust did not operate a bank account and had minimal assets.
25.The effect of the endorsements negativing liability was that only Viscount Nominees as trustee for the Viscount Trust was ever liable on the bill, and by reason of the round robin was liable only to itself.
26.On 11 July 1997, the Directors of Viscount Nominees as trustee for the Tiga Trust resolved to distribute $250,000 out of the corpus of the Tiga Trust Fund to the applicant, and to satisfy that distribution by crediting the Applicant’s loan account in the books of the Tiga Trust.
27.The net effect of the above transactions was that Viscount Nominees as Trustee for the Viscount Trust now owed the applicant the balance of the $250,000 after taking in to account the advances made to and for the benefit of the applicant.
Application of Advances
28.In the income years 1995 and 1996, the Viscount Trust General Ledger shows regular advances of $5,000 a month described as “VCCI” and “Venture Capital Advances” to or for the benefit of the applicant and in 1996 and 1997 of monthly payments to FAI Life for the applicant’s benefit, all of which together with other advances, were debited to applicant’s or applicant’s and his wife’s loan accounts.
Tribunal’s Findings II
advances to the Applicant through the Loan Accounts
29.For the reasons set out below the Tribunal does not accept the applicant’s assertions that the advances were loans. In the Tribunal’s opinion the advances are income of the applicant.
30.The Tribunal finds that the arrangements put in place by the applicant and Viscount Nominees are not consistent with the advances being loans and in this regard the Tribunal notes the following:
30.1At no relevant time were there any written loan agreements or agreed terms of repayment in respect of the advances;
30.2 the purported loans were unsecured and do not bear interest.
30.3the applicant apparently regarded the Viscount Trust as the “bank” of a group of his associated entities from which he could and did draw funds as and when required by him.
31.The Tribunal notes that other than the self-serving statements of the applicant and his associate and the accounting entries which they caused to be made, there is no evidence to support the assertion that the advances were loans. There is certainly no such objective evidence.
32.It is not necessary for the Tribunal to determine whether the round robin arrangement by which it is claimed that the advances were repaid is legally effective. The applicant’s alternative assertion as to “repayment” by set-off also cannot assist him in the face of the Tribunal’s finding that the advances were income.
33.The Tribunal is of the view that the transactions of 12 and 13 March 1997 clearly show that the applicant was not under any obligation to repay the amounts advanced to him or on his behalf. The applicant and his associate Mr A purported to distribute corpus (i.e. amounts not taxable as income) not only so as to extinguish any existing balances owing to the Viscount Trust but also to allow further advances to be made without an obligation to repay. The transactions were, to say the least, artificial and contrived and in the Tribunal’s opinion they are inconsistent with any intention or obligation to repay the advances.
34.While it clearly suited the applicant’s purpose to have the advances labelled as loans, having regard to all of the facts the Tribunal finds that there was in reality no loan. The Tribunal is of the opinion that the conduct of the applicant, as director of Viscount Nominees, supports the inference that the amounts debited to the loan accounts were dealt with on his behalf without the applicant having any intention or obligation to repay them. As noted above this is manifest most clearly in the round robin of the bill of exchange, artificially extinguishing any balances owing and creating a credit balance in the loan accounts.
35.At the hearing it was claimed by Mr A and the applicant that the reason for the round robin arrangements was “because of potential commercial litigation” - evidence of A – Transcript p35 line 19. This was something put forward by the applicant and A for the first time at the hearing and in the Tribunal’s view it is reasonable to infer from the evidence of Mr A that he and the applicant had discussed (on the day prior to the hearing) what “non-tax” reason could be suggested for the round robin. There is no adequate explanation for why this was not put forward earlier – including at the objection stage, or in the witness statements filed by any of the applicant’s witnesses or in any other documents before the Tribunal. It is unsupported by any other evidence. Further, it is not apparent how the arrangements carried out could have operated to defeat the claims of any creditor of the applicant or his entities. The Tribunal does not accept this attempted explanation.
36.The regular advances, particularly in 1995 and 1996, are consistent with receipts to the applicant from the profits of Viscount Nominees derived from promoting the projects referred to above. That finding is also consistent with the applicant’s description of the Viscount Trust as “the banker” in the group.
Determining Income – relevant Law
37.The applicant was a resident of Australia at all relevant times. Under s 25 of the Income Tax Assessment Act 1936, his assessable income includes the gross income derived directly or indirectly from all sources whether in or out of Australian, and which is not exempt income, an amount to which ss 26AC or26AD applies, or an eligible termination payment. Section 25 applies for the years before the 1997-98 year of income: s 25(1A).
38.The Income Tax Assessment Act 1997 applies to the 1997-98 and later years. Under that Act, the applicant’s assessable income includes income according to ordinary concepts: s 6-5.
39.Income shall be deemed to be derived by a person even though it is not actually paid over to him, but is reinvested, accumulated, capitalised, carried to any reserve “or otherwise dealt with on his behalf or as he directs”: Income Tax Assessment Act 1936, s19. This section does not apply to the 1997-1998 or later years of income. Sections 6-5 and 6-10 of the 1997 Act treat an entity as having derived an amount if the amount has been applied or dealt with on the entity’s behalf.
40.Section 6-5 of the Income Tax Assessment Act 1997 provides as follows:
6‑5 Income according to ordinary concepts (ordinary income)
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.
Note: Some of the provisions about assessable income listed in section 10‑5 may affect the treatment of ordinary income.
(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
(3) If you are a foreign resident, your assessable income includes:
(a) the *ordinary income you *derived directly or indirectly from all *Australian sources during the income year; and
(b) other *ordinary income that a provision includes in your assessable income for the income year on some basis other than having an *Australian source.
(4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
41. In determining what constitutes ordinary income, the Courts have formulated the following tests:
41.1Whether the amount of money is the product of any employment, services rendered or business: FCT v Harris (1980) 43 FLR 36;
41.2Whether the payment is periodic or a lump sum: FCT v Dixon (1952) 86 CLR 540;
41.3Whether the taxpayer expects to receive an amount on a regular basis so that he or she can rely on it for regular requirements: FCT v Dixon (1952) 86 CLR 540.
42.The relevant authorities also show that in determining whether an amount paid to a taxpayer has the character of income, it is necessary to have regard to:
42.1the quality of the amount in the hands of the taxpayer and not to the character of the expenditure to the payer: Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656 at [20] and [55]; G.P. International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136; Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 at 216;
42.2the whole of the surrounding circumstances or factual matrix, and not just to the contract under which the amount is paid or payable: Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375 at 385; Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 53.
43.Case law makes it clear that each case depends upon its own set of circumstances and that the Tribunal may consider the substance rather than the form of the transaction, particularly where an amount is paid as part of a wider, composite transaction: see e.g.,Macquarie Finance Ltd v Federal Commissioner of Taxation (2004) 57 ATR 115 at [61], [64] (Hill J), on appeal [2005] FCAFC 205; (2005) 146 FCR 77 at [109] – [111] (French J), [169] – [170] and [187] (Hely J), and [251] – [253] (Gyles J).
44.In taxation cases in particular it may be necessary to disregard the labels used by the parties: Federal Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 489 at 495; Vincent v Federal Commissioner of Taxation (2002) 124 FCR 350 at [62] – [72]. Here, the Tribunal is of the view that little, if any, weight should be given to the description of the advances as loans. The applicant and Mr A controlled Viscount Nominees and were able to “label” the advances so as to best suit their purposes.
Onus of Proof
45.Under s14ZZK (b)(i) of the Taxation Administration Act 1953 the applicant has the burden of proving that the assessment in each year is excessive. Section 14ZZK reflects the longstanding law that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income: see Commissioner of Taxation v Dalco (1989) 168 CLR 614 at 625; George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 201; Stone v Federal Commissioner of Taxation (1918) 25 CLR 389, at 392, 393.
46.One effect of the burden being placed on the taxpayer is that the Act does not place any onus on the respondent to show that the assessments were correctly made: Macmine Pty Ltd v Commissioner of Taxation (1979) 53 ALJR 362, at 366, 371, 381; McCormack v FCT (1979) 143 CLR 284, at 303, 306, 323; Commissioner of Taxation v Dalco at 625. The issue is whether the applicant taxpayer has satisfied the burden cast by s 14ZZK of proving that the assessment is excessive: Commissioner of Taxation v Dalco at 620, 631; Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 at 479. In particular, the Commissioner is entitled to rely on any deficiency in proof of excessiveness of the amount assessed: Federal Commissioner of Taxation v Dalco at 625.
47.In this case the Tribunal finds that the applicant has not displaced the onus which rests on him.
Fraud or Evasion
48.The notices of assessment issued by the Commissioner are conclusive evidence of the due making of the assessment.
49.For the years of income 1995 and 1996, there was no assessment, so the assessments made on 27 July 2007 are original and not amended assessments, and are not subject to the time limits in s 170(2).
50.For the other years of income, the Commissioner formed the view that the avoidance of tax was due to fraud or evasion, and thus the assessments could be amended at any time. On the evidence, and in particular having regard to the payment of what in the Tribunal’s view was clearly income to the applicant through advances purporting to be loans, the Tribunal is of the opinion that there is evasion in the relevant sense; that is, there has been an intentional withholding of information from the Commissioner so as to avoid the payment of tax: see Denver Chemical Manufacturing Co v The Commissioner ofTaxation(NSW) (1949) 79 CLR 296, at 313.
Penalty
51.A taxpayer is liable to pay additional tax by way of penalty equal to 75% of the amount of a tax shortfall where the shortfall is caused by the intentional disregard by the taxpayer of the Act or regulations: Income Tax Assessment Act 1936, s226J. The applicant was assessed to additional tax on that basis, and that assessment was confirmed on objection.
52.The applicant has the burden of proving that there was no intentional disregard of the law, and the penalty under s 226J should not have been imposed: see Nozzi Pty Ltd Commissioner of Taxation [2003] FCA 356 at [12]; Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345 at [42]. The applicant has failed to discharge that onus.
53.The legislation treats “intentional disregard” separately and more seriously than lack of reasonable care (s 226G) or recklessness with regard to the correct operation of the Act (s 226H). Section226J requires “an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally”, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations”: Price Street Professional Centre at [43] (Collier J).
54.The evidence here reveals that the applicant was a principal player in a series of artificial transactions, calculated to disguise the real character of the payments made to or on behalf of the applicant through Viscount Nominees. The applicant was both the relevant taxpayer and a director of Viscount Nominees in its capacity as trustee of the relevant trusts.
55.The Tribunal finds on the evidence, and in particular:
55.1 the applicant’s role in and control of Viscount Nominees;
55.2 the fact that he is an intelligent astute and experienced businessman;
55.3the history of the relevant transactions, and especially the round robin transactions relating to the $250,000 loan in 1997;
that the applicant deliberately and intentionally failed to return income that he had received, that he took steps to disguise such income as loans or advances and that the assessment of penalty by way of additional tax of 75% of the tax shortfall should accordingly be upheld.
Decision
56.The Tribunal affirms the decisions under review.
I certify that the 56 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: ..(sgd) T Freeman............
AssociateDate/s of Hearing 27 August 2009
Date of Decision 18 September 2009
Counsel for the Applicant Mr D Romano
Solicitor for the Applicant Wilson and Atkinson
Counsel for the Respondent Mr J Allanson SC and Mr T Burrows
Solicitor for the Respondent Australian Government Solicitor
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25
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