TOC Processing Pty Ltd and Commissioner of Taxation (Taxation)

[2022] AATA 2479

TOC Processing Pty Ltd and Commissioner of Taxation (Taxation) [2022] AATA 2479 (4 August 2022)

Division:SMALL BUSINESS TAXATION DIVISION

File Number:2019/1472-73          

Re:TOC Processing Pty Ltd  

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member R Olding

Date:4 August 2022

Place:Brisbane

The decision under review is affirmed.

................[SGD]................

Senior Member R Olding

Catchwords

TAXATION – INCOME TAX – where Commissioner of Taxation treated ‘unexplained deposits’ as assessable income – where applicant claimed the deposits where credit card deposits processed for an overseas company – where minimal contemporaneous records available to the support the applicant’s claims – where applicant’s director provided witness statements but for health reasons not available for cross examination – burden of proof not discharged – decision affirmed

Legislation

Income Tax Assessment Act 1936 (Cth), s 262A
Taxation Administration Act 1953 (Cth), s 14ZZK

Cases

Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148
Kais Jewellery (Syd) Pty Ltd and Commissioner of Taxation [2021] AATA 16

REASONS FOR DECISION

Senior Member R Olding

4 August 2022

1. This matter concerns the income tax liability of the applicant, TOC Processing Pty Ltd, for the years ended 30 June 2012 and 30 June 2013[1], and associated assessments of administrative penalties, along with an assessment of shortfall interest charge (“SIC”) in respect of the year ended 30 June 2012. 

   [1] See Exhibit 1, Hearing bundle, T10, page 54 and T11, page 58.

2. Progress towards finalisation of the review was hampered by serious health issues experienced by the applicant’s director, Mr Brett Goldsworthy. Earlier in the proceeding, Mr Goldsworthy provided evidence by way of witness statements with appended copies of documents. However, Mr Goldsworthy’s health deteriorated such that it became clear that he would not be able to participate in an oral hearing, as confirmed by medical evidence filed on this behalf. This unfortunate development meant Mr Goldsworthy could not be made available for cross examination regarding the contents of his witness statements.

3. In the circumstances, the parties’ representatives – each party was represented by counsel - agreed that the Tribunal should admit Mr Goldsworthy’s witness statements into evidence; take into account submissions as to what weight, if any, should be given to that evidence;[2] and decide the review on the papers, without an oral hearing.

   BACKGROUND[3]

   [2] This is consistent with the approach taken by the Tribunal in Kais Jewellery (Syd) Pty Ltd and Commissioner of Taxation [2021] AATA 16.

   [3] This summary is taken from the parties’ Statements of Facts, Issues and Contentions; the Witness Statement of Brett Goldsworthy, undated; and the Supplementary Witness Statement of Brett Goldsworthy, 16 March 2021.

4. The applicant lodged an income tax return for the 2012 income year on 26 June 2013 reporting nil taxable income but did not lodge a return for 2013 when it was due.

5. Following an audit, the Commissioner identified credit card deposits to the applicant’s merchant facility account with Bendigo Bank in the following aggregate amounts:[4]

   [4] Exhibit 1, Tab 5, Respondent’s Statement of Facts, Issues and Contentions, page 579, paragraph 13.

Income year	Merchant credits
2012	$43,227.86
2013	$4,357,664.60
Total	$4,400,892.46

1. Corresponding amounts were transferred from the applicant’s account to an account of another company controlled by Mr Goldsworthy: Scanalert International Pty Ltd (“Scanalert”).[5]

   [5] Exhibit 1, Tab 4, Applicant’s Statement of Facts, Issues and Contentions, page 538, paragraph 9.

2. Scanalert in turn transferred funds totalling $3,869,406 to three companies incorporated in the British Virgin Islands (“BVI”), as follows:[6]

   [6] Ibid, page 541.

Recipient	Amount transferred
Starville Holdings Limited (“Starville”)	$1,870,000
Telemax Industries Limited (“Telemax”)	$1,091,406
Western Global Firm Limited (“World Global”)	$908,000
Total	$3,869,406

1. The Commissioner considered the amounts deposited to the applicant’s account to be unexplained deposits. Accordingly, the Commissioner issued an amended assessment for 2012 and a default assessment for 2013, treating the deposited amounts as assessable income of the applicant. Associated assessments of administrative penalties for 2012 and 2013, and Shortfall Interest Charge (“SIC”) for 2012, were also issued.

2. The applicant objected against these assessments. On 25 February 2019, the Commissioner decided to disallow the objection (aside from a partial remission of the SIC).[7] It is that objection decision which is before the Tribunal for review.

   [7] Exhibit 1, Hearing bundle for 2019/1471 et al, T2, page 23.

3. The applicant says the amounts credited to its merchant facility account at Bendigo Bank represented payments received from an unrelated company - South East Horizon Info-Tech (“SEHI-T”) - for which it was undertaking “batch processing” of payments from “member sales transactions” for a fee of “5%-7%”.[8] The transfers to Scanalert were, the applicant says, made to facilitate the international transfers to Starville, Telemax and World Global, or other recipients as directed by a representative of SEHI-T, because international payments could not be made from the Bendigo Bank facility.

   [8] Witness Statement of Brett Goldsworthy, undated, [10]. This percentage would be central to the commercial arrangement described by Mr Goldsworthy and to the calculation of the applicant’s assessable income. That being so, and having regard to the short period over which the payments were received, it is surprising that the applicant’s charges were not specified with greater precision.

4. If the payments to those entities are deducted from the credit card deposits, and bank fees and charge-back charges absorbed by the applicant (as it says it was required to do under the commercial arrangements for undertaking the payment processing service for SEH-IT) are taken into account, the applicant would have made a loss in 2013. On that basis, the applicant submits that there is no shortfall to attract penalties in respect of the 2013 income year.[9]

   [9] For reasons that were never explained, the applicant made no submissions in relation to the 2012 income year.

5. Alternatively, the applicant submitted that the amounts received into the merchant facility account were held on behalf of SEHI-T and on that basis were never assessable income of the applicant.

6. The Commissioner submitted that the applicant has not discharged the burden of proving the assessments are excessive. In particular, that there is little evidence beyond the necessarily self-serving statements of Mr Goldsworthy to support the applicant’s claims and that the relationship between the applicant and the other parties has not be adequately explained.

   BURDEN OF PROOF

7. The applicant has the burden of proving that the assessments are excessive and what the assessments should have been: Taxation Administration Act 1953 (Cth), s 14ZZK. Unless the Commissioner agrees to confine the issues in dispute, this means that to succeed the applicant must prove what its actual taxable income was for 2012 and 2013.

8. Put another way, on the premise that the Commissioner has not confined the issues in dispute, the applicant could not succeed by merely proving that its deductions exceeded the amount treated by the Commissioner as assessable income or that those amounts were not assessable income. The applicant would need to prove what amount should have been assessed.

9. Under one of the alternative bases on which it put its case, the applicant appears to have approached the matter on the basis that the Commissioner had accepted that its income is confined to the total amount received into the merchant facility account. If that were so, the applicant would need only prove that it is entitled to deductions for the amounts paid out and bank fees and charges claimed.

10. The Commissioner did not in his Statement of Facts Issues and Contentions or in written submissions expressly confine the issue in dispute to whether the applicant is entitled to the deductions, including for the amounts said to have been paid out at the direction of SEHI-T, as claimed by the applicant. Indeed, the Commissioner expressly confirmed in response to a question from the Tribunal that he has not confined the issue in dispute to whether the deductions are allowable and puts the applicant to proof of its taxable income.

11. Accordingly, I approach the matter on the basis that to succeed the applicant must prove the amount of its taxable income. The applicant seeks to discharge that burden by establishing that the amounts received into the merchant facility account do not form part of its assessable income or alternatively that its assessable income is confined to the aggregate of those amounts and is more than offset by the amounts paid out through Scanalert and other allowable deductions such as bank charges. Both submissions require consideration of whether the evidence establishes that the arrangements with SEHI-T have the character asserted by Mr Goldsworthy.

12. In considering whether the applicant has discharged the burden of proof, I approach this matter on the basis that the principles to be applied include the following:

    (a)There is no requirement that direct evidence of a taxpayer may only be accepted if corroborated, for example, by documentary evidence; a fact may be found on the basis of the uncorroborated evidence of a witness.

    (b)However, self-serving statements should be given close scrutiny.

    (c)Nevertheless, evidence of a taxpayer is not to be regarded as prima facie unacceptable.[10]

    (d)If the taxpayer succeeds in ‘weighing down [the] scales ever so slightly in [the taxpayer’s] favour then [the taxpayer] has discharged the burden [the taxpayer] carries’.[11]

    [10] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148, 155; and Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.

    [11] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [88].

13. The importance of giving close scrutiny to uncorroborated self-serving statements is amplified in this case by the fact that, regrettably, Mr Goldsworthy is not available for cross-examination. In that regard, the Commissioner did not submit that Mr Goldsworthy’s witness statements should be given no weight but nor did he accept that they accurately described the character of the payments or the relevant contractual circumstances. 

14. I approach the witness statements with the requisite care indicated by the authorities, but without a default position that they are not to be accepted. In so doing, I also take into account that there are curiosities in the statements which it is not possible to explore and clarify in cross examination. For example, Mr Goldsworthy’s statement that he is unable to recall why the applicant’s 2013 income tax return was lodged in 2018 and the absence of financial records mentioned below. Further, there are some inconsistencies in the evidence contained in the witness statements; for example, in his first witness statement Mr Goldsworthy stated that he has been involved in the payment processing industry since 1988, whereas in his second statement he said he had been involved in the industry since 1999.

    THE EVIDENCE

15. In addition to setting out his long experience in the payment processing industry, in his witness statements Mr Goldsworthy provided considerable detail regarding the arrangements he says he entered into with nTrust Corp, a Canadian company which carried on business as a global on-line automotive wholesaler, to provide payment processing services in Australia. He set out how the applicant was established to provide payment processing services for SEHI-T and the three BVI companies mentioned above, described as the “sales companies”, and the background discussions and business relationships leading up to that relationship.

    23.There is some documentation attached to Mr Goldsworthy’s second (supplementary) witness statement relating to payment processing activities, such as a merchant agreement between the applicant and Bendigo Bank and a payment processing agreement between nTrust and SEHI-T. However, this material does not document the arrangements between SEHI-T and the applicant.  There is other material of a general nature relating to nTrust Corp and to the applicant (when it was known as nCrypt) but again this material does not document the arrangements described in Mr Goldsworthy’s statements relating to the funds passing through the applicant’s merchant facility account. Similarly, a letter of engagement between nTrust Corp and a company apparently controlled by Mr Goldsworthy refers to consultancy and facilitation of banking and merchant services but does not provide any details regarding the processing services to which the subject entries are said to relate; that is not surprising, as the applicant is not a party to the engagement described in the letter.

16. The applicant, through its written submissions, has averted to an inability to contact potential witnesses. As the submissions put it:[12]

    23. The legal team representing Mr Goldsworthy in this matter have endeavoured to contact the parties that are mentioned in the defence to establish witnesses for cross examination. In the current circumstances and particularly because of the pandemic, this task has proved exceptionally difficult.

    24. The further evidence required to support the operational aspects of [the applicant] have been impossible to obtain due to the challenging aspects of this case that concern the geographical location of the witnesses, the pandemic, the poor English comprehension, or none at all, and the passing of time.

    25. The Applicant is medically unwell, the parties that could verify the operation aspects of [the applicant] are not living in Australia, these parties have an understandable reluctance to appear in a foreign court to give testimony against a foreign government tax authority.

    26. In terms of the pandemic COVID19 has made travel almost impossible, witnesses are uncontactable due to various reasons, some because they may have died, moved jobs and by doing so they no longer remain contactable through known email or phone numbers. In any event, we have been unable to contact any of them.

    [12] Exhibit 7, Applicant’s submission in Reply dated 22 March 2022.

17. It would have been preferable to see advice of this kind in sworn or affirmed form and containing more specific details of the attempts to contact particular witnesses.  However, as the submissions note on the final page, they have been prepared by the applicant’s counsel. I accept these comments as far as they go.

18. Some of these issues may not have been so acute had the application for review been pursued with greater expedition after it was filed some three years ago.  Further, so far as the submissions attribute difficulties to the pandemic and the passage of time, I observe that the applicant was on notice that it had a serious taxation issue well before the advent of the pandemic in 2020. The assessments issued on 1 May 2017 and the objection was (substantially) disallowed on 25 February 2019. The application for review has been in the Tribunal since March 2019.

19. Nevertheless, it is not uncommon for closer focus on evidentiary matters to occur once counsel has been engaged. And there have been difficulties for the legal team in obtaining instructions due to Mr Goldsworthy’s serious and evolving health issues.

20. Having regard to the identified difficulties, the essence of the applicant’s submissions on the evidence is found in paragraph 27 of its final written submissions dated 22 March 2022, as follows:

    In summary due to the time that has elapsed, the advent of the Pandemic and its accompanying chaos. (sic) The assumptions made by the Commissioner in relation to characterising the $4,400,892.46 as ordinary income is unreasonable when evidence other than that of Mr Goldsworthy is impossible to obtain in the circumstances.

21. Acknowledging the difficulties in obtaining testimony from international witnesses at this stage does not, though, explain, why what Mr Goldsworthy provided in the way of contemporaneously created records or documentation to corroborate his evidence is so surprisingly sparse. In that regard, other than the bank statements and some documentation between the applicant and Bendigo Bank in relation to the establishment of the facility, the Tribunal does not have the benefit of any substantial records of the transactions and contractual arrangements said to have been entered into by the applicant. There are no financial statements, minutes of meetings of the applicant or Scanalert, or even a contractual document evidencing the terms on which the applicant is said to have received over $4M into its account and paid out a similar amount to Scanalert as part of the provision of batch processing services to SEHT-I.

22. In relation to the absence of financial statements, Mr Goldsworthy stated:

    The (applicant) did not maintain a general ledger or financial statements because the credit card payments were not the sales of the (applicant) and not the income of the (applicant). The credit card payments belonged to sale companies which received the funds less the (applicant’s) processing fees and the processing charge made by the Bendigo Bank and the charges by the Westpac Bank and Commonwealth Bank for transferring funds to the sales companies.[13]

    [13] Witness statement of Brett Goldsworthy, undated, [12].

23. Respectfully, that is not an adequate explanation for the failure to maintain proper records. Under s 262A of the Income Tax Assessment Act 1936 (Cth), a company carrying on a business “must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of [the] Act.”  The applicant’s records, such as they are, patently do not explain the transactions it says it entered into.

24. That is not to say that an applicant who does not comply with s 262A, and therefore cannot produce appropriate records, cannot discharge its burden of proof, which it may in an appropriate case do by direct evidence or other means. However, businesses fail to maintain the records required by law at their peril if the occasion for proving their taxable income before the Tribunal arises.

25. Here, the absence of appropriate records is largely unexplained. Further, it arises in the context of amounts in excess of $4M passing through the applicant’s account over a period of a mere five months. Self-evidently, these are not insignificant amounts. It is to be expected that an entity handling such sums of money would maintain records explaining the receipts and payments. That is so even if, as the applicant maintains, the payments were processed on behalf of SEHI-T.

26. The matter comes down to this.  The Tribunal is asked to accept the applicant’s explanation in circumstances where:

    (a)In excess of $4M has been deposited to the applicant’s bank account over a five month period.

    (b)Those monies have been transferred to another account controlled by Mr Goldsworthy.

    (c)Substantial amounts, approaching $4m, have been transferred from that account to companies incorporated in the British Virgin Islands.

    (d)There are no financial statements or other records relating to the transactions in evidence.

    (e)There are no minutes of directors meetings recording the basis on which these substantial sums have been received and dealt with by the applicant or Scanalert.

    (f)There is no contractual document or even formal correspondence in evidence recording the basis on which the applicant and Scanalert received and dealt with these substantial sums of money.

    (g)The absence of such records and documents, in the face of a legal requirement to maintain records that explain matters relevant to taxation liabilities, is not adequately explained.

    (h)Other than the bank statements, there is no substantial third-party evidence that supports the applicant’s account (although reasons for the absence of such evidence were provided as discussed above).  Although copies of various emails and other documents in evidence[14] may relate to payment processing, they do not set out the arrangements Mr Goldsworthy describes and are largely unexplained in his witness statements and the applicant’s submissions.

    (i)Mr Goldsworthy’s witness statements, which are necessarily self-serving, are now not able to be tested in cross examination.

    [14] Supplementary Witness Statement of Brett Goldsworthy, 16 March 2021.

1. Additionally, there is evidence that Mr Goldsworthy was the beneficial owner of an entity established in the Cayman Islands. That may or may not be relevant to the approach to taxation transparency and compliance that he brought to the applicant’s affairs. Again, this is now unable to be explored in cross examination.

2. It may be the case that the applicant operated as Mr Goldsworthy set out in his witness statements. However, I am duty bound to affirm the objection decision unless I am satisfied on the evidence that the assessments are excessive and that the applicant’s taxable income is as the applicant asserts.

3. I am unable to be so satisfied in respect of the 2012 income year in relation to which, as already noted, the applicant has made no submissions. In respect of the 2013 year, as set out above, very substantial deposits and transfers and the underpinning legal relationships are not the subject of contemporaneous records of the kind both required by law and expected to be created and obtained for such substantial movements of funds. Further, Mr Goldsworthy’s evidence is now unable to be tested in cross examination. In those circumstances, having regard to the factors summarised above, I am unable to be satisfied that the deposits are not income of the applicant nor that the amounts transferred to Scanalert or the other expenses claimed are deductible outgoings. 

   DISPOSITION OF REVIEW

4. For these reasons, I am not satisfied that applicant has proved the income tax assessments are excessive or what its taxable income was for the 2012 or 2013 income year. The applicant did not make any submissions regarding the calculation or remission of the penalty and SIC assessments other than to submit that there are no shortfalls of income tax to attract penalty or SIC. As I have concluded that the applicant has not discharged the burden of proving the primary tax assessments are excessive, and the applicant has not challenged the penalty or SIC assessments on any other basis, it follows that I cannot be satisfied those assessments are excessive.

5. Accordingly, the objection decision must be affirmed.

I certify that the preceding 39 (thirty-nine) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding

......................[SGD].................................

Associate

Dated: 4 August 2022

Date of hearing on the papers:	30 May 2022
Date final submissions received:	7 July 2022
Counsel for the Applicant:	M Donovan
Solicitors for the Applicant:	Holt Lawyers
Counsel for the Respondent:	G Coveney
Solicitors for the Respondent:	Australian Government Solicitor