The Taxpayer and Commissioner of Taxation - [2004] AATA 40

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2004] AATA 40

ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2002/109

TAXATION APPEALS DIVISION

Re:

Applicant

And: COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal: Mr B.H. Pascoe, Senior Member

Date: 20 January 2004

Place: Melbourne

Decision:The Tribunal varies the decisions under review to the extent of allowing in part the applicant's objection to the amended assessments for the year ended 30 June 1995 to 30 June 1999 inclusive by finding that taxable income of each of the years was:
(a)year ended 30 June 1995               $46,627;
(b)year ended 30 June 1996               $42,103;
(c)year ended 30 June 1997               $50,948;
(d)year ended 30 June 1998               $40,617;
(e)year ended 30 June 1999               $99,480; and

that additional tax by way of penalty should be imposed at the rate of 50 per cent of the taxation shortfall pursuant to s 226H of the Income Tax Assessment Act 1936.
The Tribunal certifies that the proceedings have terminated in a manner favourable to the applicant.
B.H. Pascoe
Senior Member

TAXATION ‑ audit ‑ betterment statement ‑ gifts and loans by relatives and friends ‑ level of personal expenditure

Income Tax Assessment Act1936

Krew v Federal Commissioner of Taxation [1971] ATC 4213

Martin v Federal Commissioner of Taxation [1993] ATC 5200

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

REASONS FOR DECISION

20 January 2004 Mr B.H. Pascoe, Senior Member

These are applications by the applicant to review decisions of the Commissioner of Taxation (the respondent) to disallow objections to amended assessments of income based on income for the years ended 30 June 1995, 1996, 1997, 1998 and 1999. The amended assessments were issued after an audit of the applicant's affairs was carried out by the respondent.
At the hearing the applicant was represented by Mr B. Lewis, a solicitor, and the respondent by Ms D. Harding of counsel. In addition to the documents provided by the respondent pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, a significant volume of documents was tendered at the hearing by the parties. In accordance with s 14ZZE of the Taxation Administration Act 1953 (the Administration Act), the applicant requested that the hearing be in private.
In February 1999, the respondent commenced an audit of the applicant's affairs. Prior to this date she had lodged income taxation returns for each of the years ended 30 June 1995, 1996, 1997 and 1998 and subsequently lodged a taxation return for the year ended 30 June 1999. On 18 January 2001, the respondent issued amended assessments for each of the five years showing significant alleged understatements of income. The applicant objected to these assessments by letter dated 9 March 2001. By letter of 4 June 2001, the respondent advised that some credit adjustments would be made and further review would be considered if further information was provided. As no reply was received, the respondent determined the objection by allowing, in part, objections to the amended assessments for the years ended 30 June 1996 to 30 June 1999 inclusive, to the extent of the credit adjustments set out in the letter of 4 June 2001. The relevant amounts of taxable income after this were as follows:
Year ended As returned As determined Difference
after objection

30 June 1995                 $10,778  $63,322  $52,544
      30 June 1996                 $8,898  $217,749  $208,851
      30 June 1997                 $8,169  $200,464  $192,295
      30 June 1998                 $8,529  $120,452  $111,923

30 June 1999 $12,459 $308,789 $296,330

Additional taxation by way of penalty at the rate of 75 per cent of the taxation shortfall was imposed under s 226J of the Income Tax Assessment Act 1936 (the Act) in each amended assessment.

The amended assessments issued as a result of the audit were based on a schedule setting out totals of bank deposits during a year less an identified capital receipt and gross income shown in the taxation returns lodged. Amounts expended on purchase of real estate, a motor vehicle and repayments of loans were then added to those figures. After lodgement of the application to this Tribunal and the provision of further documents and information relating to the applicant, the respondent conceded that the adjusted amended assessments were excessive. In a statement of facts and contentions filed by the respondent prior to the hearing, a re‑calculation of alleged taxable income based on a different method of calculation, described as the "Betterment Method," was submitted. This method set out assets and liabilities as at each year end, calculated the increase in net assets in each year and then added non business withdrawals from bank accounts and credit cards and deducted some non assessable sources of funds. The result of this exercise was to show alleged taxable income of each of the relevant years as:
Year ended 30 June Taxable Income
1995$63,283
1996$106,338
1997$76,495
1998$53,595
1999$88,848
It is clear that the initial audit by the respondent was commenced as a result of information implying that the applicant may have been involved in some illegal activities and the fact that she had acquired four residential properties at a cost of over $1.3 million between 1993 and 1999. It should be said at the outset that there was no evidence of any truth in the implication relating to illegal activities before the Tribunal.
The applicant emigrated from China to Australia in 1998. She adopted an anglicised version of her Chinese name after arrival. She has remained unmarried. The history of her real estate purchases was as follows:

Address Purchase Price Date of Contract Date of
Settlement

B Street

Richmond $83,000 25 February 1993 7 July 1993

R Street

Maidstone $90,000 25 May 1994 23 September 1994

8 P Court

Northcote $260,000 15 October 1994 15 March 1995

7 P Court

Northcote $240,000 13 April 1996 12 July 1996

B Street

Brunswick $740,000 December 1998 11 February 1999

The applicant said that B Street Richmond (B Street) was her home and a place from which she conducted a business of providing Chinese Therapy massage. At the same time in 1994/1995 she worked as a night attendant at a hotel and as a part‑time courier during the mornings. She acknowledged that she has no formal qualifications in massage but said that she had learned the art from a professor in China before emigrating. She was not registered, had no business cards and did not advertise. She had not maintained financial records for the massage business but believed that she had maintained an appointment book at the time. She resided at B Street until some time in 1996 when she moved to 8 P Court Northcote (8 P Court). She said that she did not rent out B Street but had a brother of a friend stay at the house to look after it for a period. The house was vacant for some time while minor renovations were completed prior to being leased. She denied knowledge of an application for registration of the premises as an exempt brothel in the name of two individuals whom she denied knowing. However she did acknowledge that it was her signature on the application dated 22 November 1996.
The applicant said that, in May 1994, she attended an auction of a property at R Street Maidstone (R Street) on behalf of a friend who was seeking to buy a house. She was the successful bidder at the auction but the friend decided not to proceed with the purchase. The applicant said that she borrowed the funds to meet the 10 per cent deposit from a Canadian friend and borrowed the balance of 90 per cent by way of a bank mortgage loan. She said that the friend's loan has since been repaid during the current year. The applicant said that R Street was rented out but had not retained records of rent received and had no memory of the amount of rent. She said that for much of the period, the property was leased through agents but she was not aware to which account the rent was paid. She said that, for a few months prior to the property being sold in December 1998, the property was leased through a friend but the tenants did not pay rent and were told to leave.
The applicant said that she decided to commence a business of providing accommodation for students from overseas. To that end she decided to purchase 8 P Court. She attended the auction and the property was passed in. In subsequent negotiations she arranged to purchase the property for $260,000. The applicant said that she gave the agent a cheque for the deposit but arranged that it would not be banked for one week as she had no funds in her bank account. She said that she arranged three credit cards through the banks. One card provided a $10,000 limit and another $15,000 limit. She utilised the funds drawn through these credit cards to finance the deposit on the property. In addition she delayed making repayments on the mortgage over B Street and R Street. For the first year of ownership of 8 P Court it was leased out through an estate agent. The applicant assumed that she had signed a rental agreement and received statements of rent received from the agents but had not retained any records and could not recall the account into which the rental cheques were deposited. She said that, after the year, neighbours were complaining of the noise made by her tenants and the lease was not renewed. She thought that it was in late 1995 or early 1996 that she moved into 8 P Court to commence her student accommodation business.
The applicant said that she saved as hard as she could to maintain her commitments. She said that, in early 1996, the adjoining house in P Court Northcote, number seven was to be auctioned as a result of the death of the owner. She was approached by the estate agent who indicated that the circumstances of the sale could produce a reasonable price. She said that she had no money with which to purchase the house but spoke to friends who agreed to lend sufficient for a deposit. She was the successful bidder at the auction at a price of $240,000. She said that she borrowed $20,000 from one friend and $4000 from another to fund the deposit and borrowed the balance by way of a mortgage.
The applicant said that initially, it was difficult to attract students to stay at her premises and she spent considerable time and money in contacting agents, buying presents, taking people to restaurants, etc. In those initial years the majority of the students were from a nearby high school. She said that she was in great difficulty meeting repayments on four mortgages and several credit cards. Her brother visited her and lent sufficient money to bring her repayments up to date. Other friends provided various amounts as loans to assist her and her brother provided further funds. She said that in 1998, her brother sent her $40,000 and asked her to buy a property for him. The prospective purchase did not eventuate and it was agreed that she could use the funds herself. As two of the major credit cards providers were refusing further credit and demanding repayment, the applicant said that she took out a second mortgage to repay the credit card debts.
It was said that in 1998, the majority of students staying at 7 and 8 P Court were attending city colleges or university and the applicant considered it more appropriate to have a property nearer to the city. She decided that the property at B Street Brunswick (the Brunswick property) was ideally placed. She decided to sell the property in R Street and use the proceeds after repayment of the mortgage as a deposit on the Brunswick property. She thought, also, that she could then sell the two properties in P Court to assist both in the funding of the new purchase and repay the loan from her brother, who was newly married. She purchased the Brunswick property in December 1998 and asked the agent to hold her cheque for the deposit of $74,000. The cheque was returned but subsequently she provided a new cheque for the deposit from the settlement of the sale of R Street. The applicant purchased the Brunswick property in her original Chinese name, even though all previous borrowings had been in her anglicised name because she was aware that her very poor credit record in her anglicised name would make further borrowing difficult. She obtained a mortgage loan from Perpetual Trustees Australia Limited, a lender not used previously. At the same time of settlement on the Brunswick property, the applicant consolidated her borrowings against the other three remaining properties by borrowing $653,000 against mortgages over those three properties. Although it is not clear from the records, it would appear that part of this loan was utilised in meeting the balance of settlement money on the Brunswick property against which she had a specific mortgage of $518,000. The applicant said that she was still $30,000 short of the required settlement amount and the vendor issued a recision notice. She said that she borrowed the required amount from a friend. Another friend was said to have lent her a further $45,000 to both update her outstanding repayments and to make necessary renovations, such as a new kitchen at the Brunswick property. The applicant acknowledged that she had a friend sign a letter on the letterhead of "All Australia ‑ China Service Centre" advising that the applicant, in her Chinese name, was employed as a manager at a salary of $61,000 pa. She said that the lender required evidence of sufficient income so she used the letterhead of a business name that had been registered by her but had never operated. She thought her intention to commence a business in that name was in 1990 but no business eventuated and she could not pay the rent of a shop leased for the purpose. In November 1999 the applicant borrowed a further $64,000 by way of second mortgage over the Brunswick property and in December 1999, a further $82,000 by way of second mortgage over the other three properties. She said that these accounts were borrowed primarily to repay the various outstanding loans from friends.
The applicant said that she provides full board to students including food. She has both girls and boys. She has not advertised although, at one time she prepared brochures for promotional trips to China in 1997 and 1999. She uses a letterhead stating "Overseas Students Office." Students stay with her for varying periods ranging from 2 weeks to 18 months. She believed that she had a record of students who have stayed with her but cannot now locate it. Generally, she has managed alone but her mother helped out during a visit and other friends have assisted from time to time. When she moved to Brunswick, she arranged for another person to look after the houses in P Court. On occasions the students are left to look after themselves. Some students are referred to her by the local high school and she is registered with Homes Stay Victoria to which she pays a fee of $30 per month for each student referred to her by that organisation. She said that students pay between $150 and $165 per week depending on the size of the room. Some pay fortnightly and some pay monthly in Australian currency. She has not kept accurate records of receipts and payments. The applicant said that the Brunswick property took some time to prepare for use as accommodation and had very few students in residence when the respondent's auditor first visited in late 1999. The applicant said that she needed to project a good image to parents who are very demanding of good quality accommodation for their student children. Most of her students came through recommendations from other students.
The applicant said that as part of projecting the necessary image she looked to purchase a new car. She said that she found a second hand Mercedes Benz 190E in September 1996 for which the dealer's asking price was $35,000. Through a friend who was also a friend of the car dealer, she arranged to purchase the car for $30,000 and to take out a loan of $25,000. She said that she did not have the $5000 balance but borrowed this amount on a credit card. The car was repossessed in 2001 after she defaulted in her repayments on the loan. The applicant mentioned that the car was used 90 per cent of the time for business in transporting students and was rarely used for private purposes. Again she has no records, although maintained that she had kept a logbook at one time.
The applicant said that she had prepared her own income taxation returns and did not employ an accountant. She acknowledged that she had used estimates of income and deductions and had not maintained records. She said that her understanding of written English was not good and she regularly signed documents presented to her without reading the documents. She maintained that she had tried to be as accurate as possible with the preparation of the income taxation returns. She said she is careful with spending and rarely buys new furniture or equipment preferring to buy from second hand dealers. She purchases most of her food requirements from the market. She noted that her telephone accounts were high and, although she has a rule that students are not to use the telephone for overseas private calls, such expensive calls are often made. She believed that 70 per cent of calls were made by students, 15 per cent by her for business purposes, particularly overseas marketing calls and some 15 per cent as private.
When initially asked whether she knew a Mr G, the applicant said that she knew him only as a former chef at the hotel at which she worked. Subsequently she acknowledged that she was aware that Mr G ran hotels and brothels and, during 1996 he had asked her to assist him as an interpreter with the girls working at one of his establishments. She believed that the girls were from Thailand and, as she could not speak Thai, was of no assistance. She said that she attended the premises on some five evenings but "just watched TV".. She said that she did accompany some of the girls to the bank to remit money to Thailand but did not use her bank account for that purpose other than identifying herself as a customer. The applicant denied that she had any other association with Mr G or received any payment from him.
The applicant complained that the actions of the respondent made her feel as if she was regarded as a criminal and had significantly effected her health. She maintained that she came from a well-educated family and had been brought up to be honest. Her family was part of a culture to help if any family member was in trouble and she considered it a great shame to have to involve her family and friends in seeking to demonstrate that she had not avoided her taxation obligations.
The applicant's youngest brother Mr K, had provided a statutory declaration and gave evidence that, in late 1998, he travelled from his home in Japan to China and loaned the applicant the equivalent of $6000. He said that, in August 1997, he visited his mother in Australia and gave her $5000. Mr K was later told by his mother that the $5000 was subsequently given to the applicant. Another brother Mr Z, is currently a resident in Sydney but was formerly a resident in Japan. He provided a statutory declaration and gave evidence at the hearing. He believed that he had provided some $100,000 to his sister, the applicant, between 1990 and 1998. He was unable to recall all amounts but referred to three amounts:
·$35,000 on or about 29 July 1996,
·$40,000 sent from Japan on or about 20 May 1998, and
·$25,000 sent by post or other ways from Japan.

Mr Z said that he sent from Japan on several occasions the limit of 200,000 yen allowed by Japan. This amount would have been equal to A$3,000‑3,500.

Ms J.K gave evidence that she had been a close friend of the applicant for 15 years. She said that she often provided loans to the applicant, the largest being $20,000 in 1996 when she was aware that the applicant urgently needed money. Ms J.K said that the amount came from cash gifts on her wedding. She said that a further amount of $10,000 was loaned to the applicant in 1998. She maintained that she had kept a list of loans to the applicant but had destroyed it after the applicant paid her $45,000 as a repayment in December 2000.
Ms R.Q provided a letter prior to the hearing and gave evidence at the hearing of having lent the applicant $20,000 in February 1999 for the purchase of the Brunswick property. She said that this amount had been taken from a redraw facility with "the RACV." She gave evidence of a further loan of $10,000 in 1999 from money held by her, belonging to her sister, Ms J.Q. She said that the sister left the money during a visit to Australia. This latter evidence was confirmed by Ms J.Q, who said that she brought the funds into Australia on a visit in 1996 and had been advised by her sister that it had been lent to the applicant in February 1999. She said that it had since been repaid.
A statutory declaration by the applicant's mother, Mrs L, was tendered which stated that the following sums had been loaned to the applicant:
·$10,000 in November 1994 and taken to Australia by friends,
·$8000 in April 1997 while staying in Australia with the applicant, and
·$5000 in early 1998 from an amount provided by her son Mr X in 1997.

Mrs L is resident in China and was not available to be cross-examined at the hearing.

A statutory declaration by a Ms M.C was tendered. In this it was stated that Ms M.C left approximately $10,000 with the applicant in early 1997 during a visit to Australia. It was stated also, that in early 1999, Ms M.C and four companions lent $45,000 to the applicant during a visit to Australia as, having recently acquired the Brunswick property, the applicant had a need for the money. Ms M.C is a resident of Hong Kong and was not available for cross‑examination.
A further statutory declaration from a Mr Y.W was tendered. He was said to be overseas on a business trip and not available to attend the hearing. In the declaration, eight loans totalling $77,080 between 24 October 1994 and 28 June 1997 were listed.
One of the principle issues in this case was whether a source of funds to the applicant consisted of alleged loans from family and friends. In the betterment statement prepared by the respondent prior to the hearing, the following amounts were accepted as having been received by the applicant:
Year ended 30 June 1995:
From Mrs L  $10,000
From Mr Y.W  $11,000
$21,000
Year ended 30 June 1997
From Mr Z  $35,000
From Mr Y.W  $32,700
$67,700
Year ended 30 June 1998
From Mr Z  $39,990
Year ended 30 June 1999
From Ms R.Q  $20,000

It would appear that the amounts were accepted as being substantiated from bank and credit card records. In the submissions for the applicant the following amounts were said to have been provided by family and friends:

Year ended 30 June 1995:
                  From Mrs L  $10,000
                  From Mr Y.W.  $10,000
  $20,000
Year ended 30 June 1996
                  From Ms J.K  $20,000
                  From Mr Y.W  $2,600
  $22,600
Year ended 30 June 1997
                  From Mr Z  $35,000
                  From Mr Y.W  $61,400
  $96,400
Year ended 30 June 1998
                  From Mr Z  $39,990
                  From Mr Y.W  $3,000
                  From Ms M.C  $10,000
                  From Mrs L  $8,000
                  From Mr X via Mrs L               $5,000
  $65,990
Year ended 30 June 1999
                  From Ms R.Q  $20,000
                  From Mr X  $6,000
                  From Ms J.Q  $10,000
                  From Ms M.C  $45,000
$81,000

Based on the evidence provided by the witnesses I accept that Ms J.K provided $20,000 in 1996. There is no apparent other source of funds for the deposit on 7 P Court and I accept the evidence of Ms J.K. I accept also, that during the year ended 30 June 1998 gifts of $8000 and $5000 were received from the applicant's mother. In the year ended 30 June 1999, I accept that the applicant received $10,000 from Ms J.Q through her sister Ms R.Q and a further $6000 from her brother, Mr X. The further amounts alleged to have been received from friends I am not prepared to accept. Whilst there is a statutory declaration from Mr Y.W setting out specific amounts totalling $77,080 over some three years and the respondent has accepted two of those amounts, he was not available for cross‑examination and the evidence of the applicant was that funds were lent by him from time to time but were also repaid at some time. It would be inappropriate to treat these as a source of funds without an equivalent offsetting adjustment for repayments. There is simply no acceptable evidence to deal with these alleged additional loans. The alleged loans by Mrs M.C cannot be accepted with no oral evidence or cross‑examination, no specific corroboration and the general vagueness of the statement provided.
In his submission, Mr Lewis sought to argue that the relevant assessments against which objections were lodged and which are the subject of the proceedings were not valid assessments. It was said that they did not result from a judgement as to income taxation which ought to be levied, given that there were clear mistakes in the calculation of alleged taxable income and ignored relevant facts which ought to have been known or ascertained by the auditor. It was said that the respondent had accepted that the original assessments were excessive and had provided a completely new basis of calculating alleged taxable income without allowing the applicant to object in the normal way to this new and revised calculation. In relation to this argument, it is clear that the combined effect of s 175 and s 177 of the Act requires the Tribunal to regard assessments as having been duly made and its role is limited to a consideration of whether the assessments are excessive and, if so, by how much. As in this case, it may well be that the Tribunal can arrive at its conclusion having regard to a different method of arriving at a calculation of taxable income. In relation to this question, it is relevant to note the comments of Hill J in a paper delivered to a Law Council of Australia conference in October 2001 where he stated:
…
There is an important qualification to the Tribunal's jurisdiction and that is to be found in the combined effect of ss175 and 177 of the Income Tax Assessment Act 1936 ("the 1936 Act") and similar provisions in other assessment acts, in that matters going to the validity of the assessment or, more accurately, but confusingly, its "due making", can not be the subject of consideration by the Tribunal. The issue in the Tribunal is, as it is in the Court, whether the assessment is excessive … But the Tribunal has no power to determine matters of validity. That is left to the Courts exercising, in the federal Australian constitutional context, judicial power.

While it is clear that the Tribunal is bound to accept the validity of the assessments it is clearly appropriate to accept the concessions of the respondent and use the calculation of taxable income contended by the respondent for the purpose of these proceedings.

Although not necessarily conceding that such an approach was appropriate, Mr Lewis provided a revised betterment statement for consideration and the variations from the respondent's calculation can be addressed. These variations can be summarised:
(a)     inclusion of an asset in 1994 of $4500 alleged as cash held for deposit on R Street;
(b)     increase of liability on the Commonwealth Bank of Australia (CBA) credit card at 30 June 1995 by $47;
(c)     inclusion of motor vehicle loan at $27,000 in each of the 1997, 1998 and 1999 years where the respondent had shown a balance of loan of $29,939, $22,894 and $17,611 respectively;
(d)     included substantially different figures for private expenditure in each year;
(e)     excluded from the calculation the respondent's figures for the private proportion of motor vehicle repayments;
(f)     excluded amounts described in the respondent's statement as "private home loan repayments" but said in the hearing to be the respondent's estimates of the value of private accommodation;
(g)     excluded amounts of $4000, $3000 and $4000 described by the respondent as private loan repayments in 1995, 1996 and 1999 respectively; and
(h)     included as sources of funds additional private loan from family and friends beyond those accepted by the respondent.

It is appropriate to deal with each of these variations.

For the applicant it was submitted that she held $4500 in cash prior to 30 June 1994 for use in payment of the deposit on the purchase of R Street. There is no clear evidence of this. The respondent had included as an asset at 30 June 1994 the amount of $9000 being a 10 per cent deposit on the $90,000 purchase price. At 30 June 1995 the asset of R Street was shown as $94,500 and it is assumed that this allowed for the cost of stamp duty and legal fees. It appears likely that the applicant assumed that the additional $4500 was held in cash prior to 30 June 1994, but given the lack of evidence of this, the likelihood that it was an assumption only and the alleged source of the cash being an unnamed friend, the existence of this as an asset prior to the relevant date cannot be accepted.
It is not clear how the applicant alleges that the liability on the CBA credit card was $47 greater than that accepted by the respondent. The respondent's figure appears to be confirmed by a photocopy of the credit card statement as at 27 June 1995 and I have been given no reason to accept this small adjustment.
The applicant's figures for the motor vehicle loan cannot be accepted. The betterment statement appropriately includes the actual liability as reduced by repayments as at the end of each financial year. There appears to be no basis for retaining the liability at the same figure in each year when repayments were made.
The amounts shown as non business withdrawals from bank accounts and credit cards or private expenditure is necessarily added to the increase in net assets to calculate the amount of funds which must have become available during a year of income. The respondent alleges that the calculation is based on withdrawals from accounts. Unfortunately, very limited detail of the method of calculation was provided to the Tribunal. On the other hand, Mr Lewis had gone to considerable lengths in seeking to analyse every bank or credit card transaction over the relevant year. Extensive documentation was prepared and supplied to the Tribunal. Unfortunately, the large volume of documents were difficult to follow and it is clear that the analysis required considerable amount of assumptions as to the reason for the expenditure and its relationship to the derivation of income. Little was provided by way of hard evidence as to the amounts of expenditure that constituted allowable deductions. Nevertheless, I am prepared to accept that an honest attempt involving considerable time and, presumably, expense was made to arrive at private expenditure. It would appear, also, that Mr Lewis was seeking to arrive at a figure for allowable deductions that coincided with that shown by the applicant in the income taxation returns lodged. There were clear anomalies where the amounts shown as claimed deductions did not appear to equate with calculations of actual interest payable on loans. However, on balance and given the major difficulty which has confronted the Tribunal in seeking to arrive at a correct or preferable decision on this question, with the confusing amount and quality of the information produced, I am prepared to accept the applicant's calculation of private expenditure subject to my further comments on items (e) and (f) above.
As indicated above, much of the alleged deductible expenditure was based on estimates and with little or no supporting evidence. In the respondent's betterment statement, amounts of $8600, $8600, $9710, $10,580 and $12,210 in the 1995 to 1999 years were added as the private use of premises and motor vehicle. Although the respondent described the amounts attributed to private use of premises as the value of the accommodation used it was more appropriate to regard such an adjustment as the private or non‑income producing proportion of interest and other expenditure on property used for rental or business purposes. The applicant argued that these amounts were excessive. However, it is clear that the rented premises were not income producing for periods being made available to friends or simply left vacant. In addition the applicant used premises for her own accommodation. Furthermore, as indicated earlier, the calculation of private expenditure by Mr Lewis has been made using many unverified exemptions as to the quantum of deductable expenditure. Consequently and as a somewhat unscientific attempt at reaching a reasonable balance in this very unsatisfactory matter, I will adopt the respondent's calculation of private proportion of expenditure.
The remaining two items proposed by the applicant as variations of the respondent's calculation cannot be accepted. Given the acceptance of private loans as a source of funds, it is clear that identified repayments of such loans must be treated as an application of funds to increase the calculation of taxable income. The alleged sources of funds by way of private loans or gifts from family and friends have been dealt with under paragraph 25 above.
Reference has been made in these reasons for decision of the unsatisfactory nature of the evidence in these proceedings and the consequent necessity to make assumptions. It is clear that s 14ZZK of the Administration Act imposes on the applicant the burden of proving that the relevant assessments are excessive. While estimates made on inexact evidence have featured in many decisions of this Tribunal and the Courts (see for example, Krew v Federal Commissioner of Taxation [1971] ATC 4213 and Martin v Federal Commissioner of Taxation [1993] ATC 5200), much of the evidence or lack of evidence has limited the ability to embark on appropriate estimates. In Martin (supra) Davies J said at p5207:
…An unwilling taxpayer, even though he is a tax evader whose evidence is not reliable, should not be assessed to tax on gross income. The Act requires that a judgement be made as to allowable deductions. I have sought to undertake this task, doing the best I can on the inadequate information available, and keeping in mind that the burden of proof lies on the taxpayer, Mr Martin.
…

The comments of Latham CJ in Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 63 are relevant to this matter where he said at pp87 and 88:

…The circumstances that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. (See cases cited by Isaacs J. In Williamson v. Ah On (1926) 39 C.L.R. 95, at pp. 113‑115). Obviously the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer.
In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.
The application of sec.39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right ‑ and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right…

The result of the foregoing is that it is appropriate to find that the decisions on the objections under review should be varied on the basis of the findings to reduce taxable income assessed as follows:
Year ended 30 June 1995:
Taxable income objection decision  $63,322
Less concessions by respondent prior to hearing                       $39
$63,283
Adjustment to private expenditure
per respondent  $29,387
per applicant  $12,731
$16,656
Adjusted Taxable Income  $46,627
Year ended 30 June 1996:
Taxable income per objection decision  $217,749
Less concessions by respondent prior to hearing                $111,411
$106,338
Less private loan  $20,000
$86,338
Adjustment to private expenditure
per respondent  $69,042
per applicant  $24,807
$44,235
Adjusted Taxable Income  $42,103
Year ended 30 June 1997:
Taxable income per objection decision  $200,464
Less concessions by respondent prior to hearing                $122,969
  $76,495
Adjustment to private expenditure
per respondent  $85,699
per applicant  $60,152
  $25,547
Adjusted Taxable Income  $50,948
Year ended 30 June 1998:
Taxable income per objection decision  $120,452
Less concessions by respondent prior to hearing                $66,857
  $53,595
Less private loan  $13,000
  $40,595
Adjustment to private expenditure
per respondent  $55,390
per applicant  $55,412
         $22
Adjusted Taxable Income  $40,617
Year ended 30 June 1999:
Taxable income per objection decision  $308,789
Less concessions by respondent prior to hearing                $219,941
  $88,848
Less private loan  $16,000
  $72,848
Adjustment to private expenditure
per respondent  $25,883
per applicant  $52,515
$26,632
Adjusted Taxable Income  $99,480

It is noted that, in the year ended 30 June 1999, a capital gain of $46,210 on the sale of R Street has been correctly included. While of no evidentiary value, it is of interest to note a degree of consistency in the adjusted taxable income for each of the five years after allowances for the capital gain in 1999. In relation to the evidence it is clear that Mr Lewis spent considerable time and effort in an endeavour to analyse the applicant's transactions over a long period without the benefit of any suitable records from the applicant. It is not necessarily a criticism of those efforts that the Tribunal has been unable to accept the results that those efforts sought.

It is relevant to note that, in cases such as this, the evidence of the applicant herself is of major significance. Here, it is difficult to accept that the applicant has not provided any evidence to support the calculation of income shown in the taxation returns lodged. While she apparently continues her activities of providing student accommodation she has not produced any records of past or present students accommodated. It has been difficult to accept that she has acquired four properties without, as at the date of each acquisition, having any available funds. While not necessarily directly relevant to the calculation of taxable income her evidence relating to her association with Mr G and the application for registration of B Street as an exempt brothel was vague and unsatisfactory and relevant to the general credibility of her overall evidence.
The final issue in this case is the level of additional taxation imposed by way of penalty. The respondent had imposed the penalty under s 226J of the Act, which applies when a taxation shortfall was caused by the intentional disregard by the taxpayer of the Act or the regulations. Given the evidence of the taxpayer and her accepted limitations in relation to written English, I am prepared to accept that the shortfall was not caused by intentional disregard of the legal requirements. Section 266G of the Act applies where there is a failure to take reasonable care and s 226H of the Act applies where the shortfall or part of it was caused by the recklessness of the taxpayer with regard to the correct operation of the Act or regulations. Here the failure to maintain any records and the general consequences of this case result in my view that s 226H of the Act applies to impose additional taxation equal to 50 per cent of the amount of the taxation shortfall.

I certify that the thirty‑seven [37] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B.H. Pascoe, Senior Member

(sgd) Olympia Sarrinikolaou
Clerk

Date/s of Hearing: 22 and 23 September 2003

Date of Decision:  20 January 2004
Solicitor for the applicant:            Mr B. Lewis
Counsel for the respondent:        Ms D. Harding
Solicitor for the respondent:         Australian Taxation Office