VCJN and Commissioner of Taxation (Taxation) - [2019] AATA 968

VCJN and Commissioner of Taxation (Taxation) [2019] AATA 968 (23 May 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2017/5858
Re:VCJN
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President Boyle
Date:23 May 2019
Place:Perth

The Decision is set aside and in substitution for the Decision there be a decision that the Applicant's objection be allowed to the extent that the Applicant's taxable income for the year ended 30 June 2015 be reduced to $129,678.
.........................[sgd]...............................................
Deputy President Boyle
CATCHWORDS
TAXATION AND COMMERCIAL DIVISION – objection decision – Income Tax Assessment Act 1936 (Cth) – loans treated as dividends – decision set aside and substituted
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) – s 43(1)(c)
Corporations Act 2001 (Cth) – s 254T
Income Tax Assessment Act 1936 (Cth) – ss 109, 109D, 109E, 109E(1), 109E(5), 109F, 109G, 109Q, 109Q(1), 190Q(2), 109Y, 109Y(1)
Taxation Administration Act 1953 (Cth) – ss 14ZU, 14ZZK, 14ZZK(a), Sch 1 260-5, Sch 1 340-5(3)
CASES
Atomic Skifabrik Alois Rohrmoser v Registrar of Trade Marks (1987) 13 FCR 199
Eldridge v Federal Commissioner of Taxation (1990) 90 ATC 4907; (1990) 21 ATR 897
Honest Reveira v Registrar of Trade Marks [2018] FCA 1122
Magliano and Secretary, Department of Education and Workplace Relations [2012] AATA 43
Sanctuary Lakes Pty Ltd and Commissioner of Taxation, Re (2012) 129 ALD 12, [2012] AATA 404
Ullah and Secretary, Department of Education and Training [2018] AATA 2159
Wilson and Minister for Territories, Re (1985) 7 ALO 225
REASONS FOR DECISION
Deputy President Boyle
23 May 2019
THE APPLICATION

The Applicant seeks review of the Respondent’s (Commissioner) decision to disallow the Applicant’s objection to the Commissioner’s assessment of the Applicant’s income tax liability for the year ended 30 June 2015 (the Decision).
The Commissioner had issued the assessment based on the Applicant’s self-assessment which had identified an assessable unfranked deemed dividend of $428,383 under s 109F of the Income Tax Assessment Act 1936 (Cth) (ITAA) representing the forgiveness of a loan in that amount. The Applicant had requested (R2 T1/6-7) that the Commissioner not treat the forgiveness of the loan as a dividend on the basis that the requirements of
s 109G of the ITAA were satisfied. That request was treated by the Commissioner as an objection under s 14ZU of the Taxation Administration Act 1953 (Cth) (TAA). The Commissioner disallowed that objection (R2 T2).
At some time after the Applicant lodged in the Tribunal the application for review of the Commissioner’s disallowance of the objection referred to in [2] above, the Commissioner determined that the relevant loan had not been forgiven in the year ended 30 June 2015 but rather in the following year. The Applicant agreed. The Commissioner, however, contended, and contends in these proceedings, that there was a deemed dividend in the year ended 30 June 2015 in the amount of $251,350 (subject to adjustment under s 109Y of the ITAA) being the amount of the unpaid minimum yearly repayment under s 109E(1) of the ITAA in respect of a loan by a relevant private company to the Applicant.
The grounds stated in the taxation objection R2 T1/6-7 (see [2] above), namely that the deemed dividend resulting from the forgiveness of the loan should, by operation of s 109G of the ITAA, not be treated as a dividend, was, as a result of the change of the Commissioner’s position referred to in [3] above, no longer applicable. At the commencement of the hearing on 8 March 2019, with the consent of the parties, pursuant to s 14ZZK(a) of the TAA, the Tribunal ordered that the Applicant’s grounds stated in his taxation objection be amended to reflect the Applicant’s statement of facts issues and contentions dated 31 October 2018 (the Applicant’s SFIC). Relevantly, the Applicant’s SFIC objected to the Commissioner’s assessment on the basis that, pursuant to s 109Q of the ITAA, the payment of less than the minimum yearly repayment of the loan under
s 109E(1) should not be treated as a dividend on the basis that the requirements of
s 109Q of the ITAA were satisfied. The hearing of the application proceeded on the basis of that objection.
BACKGROUND
The facts set out in the following paragraphs are taken from the Applicant’s and the Commissioner’s submissions made following the hearing and from the parties’ statements of facts, issues and contentions.
The Applicant was, at all material times, the sole director and shareholder of [omitted] (Company #1) and [omitted] (Company #2).
By 30 June 2010 Company #1, as a result of the sale of its property development on Broadway Nedlands that resulted in an assessable capital gain of $1,061,542 and a taxable income for that year of $1,647,034, incurred a capital gains tax liability of $312,883 (at that time only an estimate). At the same time it made a loan to its shareholder, the Applicant, of $1,408,700 (R2 T11 V1.118). At that point Company #1’s only potential income source was dividends from Company #2, which was also a property developer (R2 T11/112).
According to financial statements prepared by UHY Haines Norton Chartered Accountants (R2 T8), during the year ended 30 June 2010:
(a)
The Applicant’s liability to Company #1 (which was treated as a non-current asset of Company #1) increased from $270,231 (as at 30 June 2009) to $1,678,931

(as at 30 June 2010), an increase of $1,408,700;
(b)Company #1’s liability to Company #2 (which was treated as a non-current liability of Company #1 and stood at $545,733 on 30 June 2009) was repaid in full;
(c)Company #1 paid a dividend of $150,000 to the Applicant; and
(d)The Applicant’s liability to Company #1 became the most significant asset of Company #1 comprising $1,678,931 of total assets of $1,884,655.
The Applicant claims that the majority of the funds advanced by Company #1 to the Applicant were lent by the Applicant to Company #2. This apparently occurred in 2010. The Applicant says that the Commissioner has attempted “to cast doubt” on the Applicant’s claim that he advanced the money that he received from Company #1 to Company #2. In paragraph 1 of the Applicant’s submissions made after the hearing he points to paragraphs 21(b) and 21(e) of his 31 October 2018 SFIC as demonstrating that he did advance the money to Company #2. However, those paragraphs in the Applicant’s SFIC do not do that. Paragraph 21(b) of the Applicant’s SFIC refers to Company #1’s liability to Company #2 being paid out in the year ended 30 June 2010 (Note 7 to Company #1’s financial statements for year ended 30 June 2010) (R2 T8/80) from, according to the Applicant, the proceeds of the sale of the units developed by Company #1. Paragraph 21(e) of the Applicant’s SFIC refers to Note 3 of Company #1’s financial statements for that year which identifies an increase in the loan from Company #1 to Company #2 over that year from $50,000 to $128,983 (R2 T8/78). Obviously those entries in Company #1’s financial statements do not establish that the Applicant advanced $631,622 to Company #2.
The Applicant was cross-examined on this issue at the hearing. It was pointed out to the Applicant that the Report as to Affairs prepared by the receivers and managers of Company #2 in June 2012 (R2 T44) did not list the Applicant as an unsecured creditor

(R2 T44/290-291). The Applicant’s answer to that was to again refer to the entries in Company #1’s financial statements showing a loan by Company #1 to Company #2, not a loan by the Applicant to Company #2 (Transcript at 22-24). In the end the Applicant could not point to any relevant entry in the accounts of Company #2 that confirmed that he had lent money to that company. The impression that I got in listening to the Applicant’s evidence was that he did not differentiate between himself and his two companies, Company #1 and Company #2. He repeatedly pointed to the financial statements of Company #1 which showed that company lending money to Company #2 or Company #2’s debt to Company #1 being paid as evidencing the Applicant lending Company #2 money. The Applicant was unable to identify any financial records or other documentary evidence to substantiate him having advanced $631,622 to Company #2. About the only document that refers to the Applicant having advanced money to Company #2 is the Company #1 liquidator’s annual report to creditors dated 24 August 2015 (R2 T11) where in the update on the liquidator’s investigations (R2 T11/126), the liquidator reports that the company’s records show that an amount of around $1 million was outstanding from the director (the Applicant) and that the director had advised the liquidator that “the majority of the funds borrowed …were in turn loaned to a related entity [Company #2]”.
The Applicant’s evidence at the hearing was that at the time that he advanced the money to Company #2 “We had” a number of property development projects which were being completed and “we” were looking at “potential future opportunities in the marketplace” (Transcript at 13). It is not clear to whom “we” is a reference – Company #1, Company #2 or some other entity in which the Applicant had an interest. As noted above, in his evidence and his submissions the Applicant seemed not to differentiate between his companies and himself. The financial standing of Company #2 is dealt with at [30]-[34] below.
According to Company #1’s income tax return for the year ended 30 June 2010 it derived an income of $1,647,034 (R2 T18) as follows:

Interest $7,971

Gross Rent $9,770

Franked dividend (received from Company #2) $412,000

Franking credits (from Company #2) $176, 571

Net Capital Gain on disposal all real estate holdings $1,061,542

$1,667,854

Less: Deductions -$20,820

Taxable Income $1,647,034

According to that income tax return Company #1 had a liability to the Commissioner as at 30 June 2010 of $298,569.20. That liability has not been paid.
Company #1 ceased trading after the sale of its property development during the year ended 30 June 2010. Income tax returns lodged by Company #1 for the years ended

30 June 2011 and 30 June 2012 disclosed only interest income of $97,421 and $84,056 of which $92,822 and $81,679 respectively was attributable to interest payable by the Applicant in respect of Company #1’s loan to the Applicant.
The Applicant caused Company #1 to declare dividends as follows:

2010 2011 2012 2013 2014

Franked Dividends $150,000 $380,000 $360,000 $297,000 $282,942

Franking Credit $64,285 $162,857 $154,285 $127,285 $121,260

The Applicant says that he made the following repayments of principal and interest in reduction of the loan from Company #1:

Year ended 30 June 2011 2012 2013 2014

Repayments of Principal $300,000.00 $300,000.00 $280,000.00 $270,000.00

Interest $92,822.41 $81,679.99 $59,817.54 $39,562.29

The Applicant made substantially all of these repayments of principal and interest by means of setting off those amounts against his entitlement to the dividends from Company #1 that he caused Company #1 to declare (see [15] above).
The Applicant claims that by 30 June 2014 the only money owed by him to Company #1 was the loan made in the year ended 30 June 2010. The balance of the loan as at 30 June 2014, according to the Applicant, was $672,486 (R2 T32/244).
No further repayments of the loan were made after 30 June 2014.
Company #1’s income tax returns for the years ended 30 June 2010, 30 June 2011 and 30 June 2012 were not lodged until 22 April 2014 despite lodgment being due on

16 May 2011, 1 December 2011 and 3 December 2012 respectively. No income tax returns for subsequent years have been lodged.
On 22 April 2014, as a result of the lodgment of Company #1’s above income tax returns, the following self-assessed income tax liabilities (excluding associated General Interest Charge (GIC) for late or non-payment of those amounts) became due:

Year ended 30 June Unpaid self-assessed income tax liability (after deduction of PAYG credit)

2010 $298,569

2011 $29,222

2012 $25,217

Total $353,008

Those amounts and their associated GIC liabilities have never been paid or offset by credits.
On 4 July 2014 it was resolved at a meeting of creditors that Company #1 be wound up and liquidators appointed (R2 T11/112).
In a Summary of Assets and Liabilities of Company #1 dated 4 July 2014 that was prepared by the Applicant for the liquidator of Company #1 the Applicant stated that the only asset of Company #1 was its loan to a person described as “T Smith”, that it had a book value of $1,000,000 and that its estimated realizable value was nil. It is not disputed by the Applicant that he is “T Smith” although that is not his name.
In August 2015 the Applicant made an offer to the liquidator to settle his outstanding debt to Company #1 by the payment of $10,000.
At the Annual General Meeting of Creditors of Company #1 held on 23 September 2015 creditors were asked to vote on the following resolutions:
(a)to authorise the liquidator to accept the Applicant’s offer to pay $10,000 in full and final satisfaction of his debt to Company #1; or
(b)to agree to fund the liquidator to pursue the Applicant for the unpaid balance of the loan by Company #1 to the Applicant.
Company #1’s creditors did not vote in favour of either resolution.
In a notice from the liquidator of Company #1 to its creditors and members dated

16 November 2015, the liquidator advised his intention to seek to finalise the liquidation. This was because the creditors’ failure to vote in favour of either resolution gave him no other option.
The liquidation of Company #1 was finalised and a final meeting of creditors was held on 21 December 2015. The company was subsequently deregistered by ASIC. No dividend was paid to creditors.
Company #2’s last completed project was four apartments in a Perth Western suburb which was completed in May of 2010. As at 9 June 2011 only one apartment had been sold. The three remaining apartments had been offered for sale without success despite the asking price having been reduced from approximately $2.7 million to $2.1 million

(R2 T39)
An income tax return lodged on 7 December 2010 on behalf of Company #2 for the year ended 30 June 2010 disclosed a loss of $428,483 (R2 T17/190). Financial information included with that income tax return indicated during that year the net asset position of Company #2 (i.e. the difference between its total assets and total liabilities) changed from $926,858 as at 30 June 2009 to negative $26,161 as at 30 June 2010. In the same period its current liabilities increased from $298,958 to $8,512,815, and its current assets increased from $14,401,185 to $15,899,487 (R2 T17/190). No income tax returns for subsequent years have been lodged by Company #2.
On 2 March 2012 the Commissioner issued a notice to Westpac Banking Corporation (Westpac) pursuant to s 260-5 of Schedule 1 to the TAA requiring it to pay amounts it owed to Company #2 to the Commissioner in satisfaction of a debt owing by Company #2 to the Commissioner of $202,675.38 (R2 T42).
Receivers and managers were appointed in relation to Company #2 by Westpac on

11 April 2012 (R2 T43) and a liquidator was appointed by Westpac in January 2015 (R2 T11).
In correspondence received by the Commissioner from the liquidator of Company #2, the liquidator advised that no dividend was likely (R2 T48/317)
THE HEARING
The application was heard on 8 March 2019. The Applicant was self-represented and the Respondent was represented by Mr Slater.
The material before the Tribunal at the time of the hearing was:
·Applicant’s statement of facts, issues and contentions dated 31 October 2019 including seven annexures (Exhibit A1);
·Applicant’s response to Respondent’s amended statement of facts, issues and contentions dated 6 March 2019 including four annexures (Exhibit A2);
·
Respondent’s amended statement of facts, issues and contentions dated

27 February 2019 (Exhibit R1);
·Tribunal Documents (three volumes) (T1-T94) (Exhibit R2); and
·Recalculation document of the Applicant’s tax payable for 2015 (handed up during the hearing) (Exhibit R3).
The Tribunal also received submissions from the parties after the hearing as follows:
·Respondent’s post hearing submissions received 26 March 2019; and
·Applicant’s post hearing submissions received 18 April 2019.
THE ISSUES
Does the exception to the Company #1 dividend being taken to be paid apply as set out in s 109Q(1) of the ITAA, (after considering the circumstances required by s 109Q(2) of the ITAA), namely:
(c)did the Applicant fail to make the minimum yearly payment because of circumstances beyond his control; and
(d)will the Applicant suffer undue hardship if he was treated as having derived that dividend?
THE LEGISLATIVE FRAMEWORK
Section 109D of the ITAA relevantly provides:
Loans treated as dividends
Loans treated as dividends in year of making
(1)A private company is taken to pay a dividend to an entity at the end of one of the private company’s years of income (the current year) if:
(a)the private company makes a loan to the entity during the current year; and
(b)the loan is not fully repaid before the lodgment day for the current year; and
(c)Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and
(d)either:
(i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or
(ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.
Section 109E of the ITAA relevantly provides:
Amalgamated loan from a previous year treated as dividend if minimum repayment not made
Amalgamated loan treated as dividend in first year in which payment is less than minimum yearly repayment
(1)A private company is taken to pay a dividend to an entity at the end of one of the private company’s years of income (the current year) if:
(a)the private company made an amalgamated loan to the entity in an earlier year of income; and
(b)the amalgamated loan is not repaid at the end of the current year; and
(c)the amount (if any) paid to the private company during the current year in relation to the amalgamated loan falls short of the minimum yearly repayment of the amalgamated loan worked out under subsection (5) for the current year; and
(d)section 109Q does not apply in relation to the current year.
Note:The amalgamated loan does not give rise to a dividend for that year if the minimum yearly repayment is not made and the entity satisfies the Commissioner that treating the loan as a dividend would cause hardship. See section 109Q.
Amount of dividend
(2)The amount of the dividend is taken to be the amount of the shortfall mentioned in paragraph (1)(c), subject to section 109Y.
Note:Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.
What is an amalgamated loan?
(3)For the purposes of this Division, a private company is taken to make a loan (the amalgamated loan) to a single entity during a year of income if the private company makes one or more loans (constituent loans) to the entity during the year, each of which:
(a)is not fully repaid before the lodgment day for the year; and
(b)would cause the company to be taken under section 109D to pay a dividend to the entity at the end of the year, apart from section 109N; and
(c)has the same maximum term for the purposes of that section.
The amount of the amalgamated loan is the sum of the amounts of the constituent loans that have not been repaid before the lodgment day for the year of income in which the amalgamated loan is made.

Section 109Q of the ITAA provides:
Commissioner may allow amalgamated loan not to be treated as dividend
(1)A private company is not taken under section 109E to pay a dividend at the end of one of its years of income (the current year) because of an amalgamated loan to an entity if:
(a)the amount paid to the private company by the entity in the current year in relation to the loan is less than the minimum yearly repayment of the loan for the current year worked out under subsection 109E(5); and
(b)the entity satisfies the Commissioner that:
(i)     that amount was less than the minimum yearly repayment because of circumstances beyond the entity’s control; and
(ii)    the entity would suffer undue hardship if the private company were taken under section 109E to pay a dividend to the entity at the end of the current year because of the loan.
(2)In deciding whether he or she is satisfied, the Commissioner must consider:
(a)the entity’s capacity, at the end of the year of income in which the amalgamated loan was made, to repay the loan; and
(b)any circumstances that have reduced the entity’s capacity to repay the loan; and
(c)whether the entity took all reasonable steps to make payments relating to the amalgamated loan during the current year equal to the minimum yearly repayment of the loan for the current year; and
(d)whether the entity has made payments relating to the loan as soon as possible after the current year equalling the difference between:
(i)     the minimum yearly repayment for the current year; and
(ii)    the amount of payments made during the current year relating to the loan.
Subsection 109Y(1) of the ITAA provides:
Proportional reduction of dividends so they do not exceed distributable surplus
Reduction of amounts of dividends
(1)If, apart from this section, the sum of all the dividends a private company is taken under this Division to pay at the end of the year of income would be more than the company’s distributable surplus for that year, the amount of each of those dividends is the amount worked out under subsection (3).
Subsection 109Y(2) sets out the formula by which the company’s distributable surplus is calculated and subsection 109Y(3) sets out the formula by which the amount of the dividend that a private company is taken to pay is calculated. The operation of these two subsections is not in contention.
Section 14ZZK of the TAA is as follows:
Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving:
(i)if the taxation decision concerned is an assessment–that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii)in any other case–that the taxation decision concerned should not have been made or should have been made differently.
Whilst not a court, and hence not a forum where pleadings and the rules of evidence strictly apply, in considering the application the Tribunal is confined in its inquiries and deliberations by the taxpayer’s objection and must act upon the evidence placed before it: Eldridge v Federal Commissioner of Taxation (1990) 90 ATC 4907 at 4921; (1990) 21 ATR 897; also Sanctuary Lakes Pty Ltd and Commissioner of Taxation, Re (2012) 129 ALD 12, [2012] AATA 404 at [249].
CONSIDERATION
It is not disputed by the Applicant that he did not pay the minimum yearly repayment of the loan by Company #1 to him for the purposes of s 109E(1)(c) of the ITAA in the year ending 30 June 2015. It is also not disputed by the Applicant that the loan in question was an amalgamated loan and that Company #1 is a private company for the purposes of the relevant subsections of s 109 of the ITAA.
The Commissioner says (and the Applicant does not dispute) that the minimum yearly repayment for that year calculated using the formula in s 109E(6) of the ITAA was $251,350 (calculation set out in paragraph 86 of R1). The Commissioner concedes that the available distributable surplus of the Applicant’s private company, Company #1, for the year in question was $149,698. By operation of s 109Y(1) of the ITAA, the Applicant is taken, subject to s 109Q of the ITAA, to have been paid a dividend in an amount equivalent to the minimum yearly repayment, less any amount by which that deemed dividend exceeds the company’s distributable surplus for the year. In other words, the deemed dividend equates to the available distributable surplus of $149,698. The Applicant does not dispute that calculation.
As set out at [38] above, the issue is whether the exception under s 109Q(1) of the ITAA to the non-payment of the yearly repayment minimum, or in this case the available surplus, being taken to be a dividend paid applies. Under s 109Q(1) of the ITAA the Applicant must satisfy the Tribunal that he:
(e)did not make the minimum yearly payment because of circumstances beyond his control (s 109Q(1)(b)(i)); and
(f)will suffer undue hardship if he was treated as having derived the deemed dividend (s 109Q(1)(b)(ii)).
The parties’ submissions
The Applicant’s case was largely responsive to the Commissioner’s case and submissions. It is therefore appropriate to look at the matters and arguments raised by the Commissioner and to consider the Applicant’s responses.
The Commissioner submits that on the evidence the Applicant has failed to show that he was unable from his own financial resources (property investments, superannuation and ability to borrow) to meet the minimum repayment in the relevant year.
In relation to the Applicant’s argument that the Global Financial Crisis (GFC) in 2008 and the continuing effect of that crisis on economic conditions in the relevant year was the cause of the Applicant not paying the minimum yearly payment, the Commissioner says that the GFC in 2008 and its effect on economic conditions in the relevant year (2015) were not unusual, uncommon, abnormal or unexpected. World events, to the extent that they are background facts, were too indirect or remote to be a real cause of the Applicant's failure to pay the minimum repayment in the relevant year.
The Commissioner submits that, in any event, in his evidence the Applicant confirmed that at the time he received the money from Company #1 and allegedly loaned the money to Company #2 (the Commissioner does not concede that the money was loaned to Company #2) he knew of and accounted for the effect of the GFC in 2008 and its then continuing effect. In that sense these circumstances were not “beyond his control”.
The Commissioner submits that there is no undue hardship in the Applicant being treated as having received the deemed dividend as the deemed dividend (and its tax consequences) does not cause the Applicant’s financial circumstances. It is apparent from the circumstances disclosed in R2 and the admissions of the Applicant in evidence that he has or had an ability to meet the obligations. If the tax consequences are a hardship, the burden is not undue as the hardship of his personal financial circumstances arises not from the tax consequences but rather his other financial obligations.
The Commissioner points to the following facts to support his contentions (Paragraph 11 of Commissioner’s submissions made after the hearing):
(a)[Commissioner] By 30 June 2010 Company #1, on the sale of its property development generated an assessable capital gain of $1,061,542 and a taxable income for that year of $1,647,034. It incurred a capital gains tax liability of $312,883 (at that time only an estimate). At the same time it made a loan to its shareholder, the Applicant, of $1,408,700 (R2 T11/118). At that point Company #1’s only potential income source was dividends from another property developer, namely Company #2 (R2 T11/112). The Applicant says that he loaned the “majority” of that money to Company #2. In evidence the Applicant confirmed that he was not an expert in international economics and his evidence about the GFC and his perception of its effect was based only on his experience trying to sell developed units at the time of these events. He also confirmed that at the time he received the money from Company #1 and allegedly loaned it to Company #2, he knew of and accounted for the then circumstances of Company #2 which were difficult because of the downturn in demand for property and he knew of and accounted for the effect of the GFC in 2008 and its continuing effect on property sales. In opening his case the Applicant said:
We found ourselves adversely effected by the advent of the GFC, the global financial crisis which basically commenced around about September 2008 and over the ensuing few years, had a dramatic adverse effect on the property market – residential property market and I can only comment on Western Australia and the Perth market where our projects, plus an additional project we had. We had built some – three townhouses, an apartment and a shop in Eagle Bay in – down south. That market was even more adversely affected by the global financial crisis than the Perth market for various reasons.
So at the critical date, 30 June 2010, we were in the process of selling various properties to reduce our debt, to free up our equity, to make profits we’d hoped.
(Transcript at 12)
The Applicant explained that, although he was aware of that effect, he was optimistic that Company #2 would sell its property but that selling the developed properties of Company #2 proved more difficult than he had hoped.
(b)[Commissioner] On 27 May 2011 the Applicant prepared a personal income tax return for the year ending 30 June 2010 reporting dividends (R2 T21/205) leading to a tax refund of $34,916.56 (R2 T26/232). The Applicant reported dividends in personal income tax returns for years ending 30 June 2011, 2012, 2013 and 2014 (R2 T22/210, T23/215, T24/220, T25/226).
(c)[Commissioner] As at 30 June 2011 Company #1 was not trading and its only income was interest payable by the Applicant on his loan. It paid a dividend to the Applicant as its shareholder from retained profits (the majority of which was made on the sale of its property development) by setting off payment of the dividend against the Applicant’s obligations under his loan from Company #1 to make repayments of principal and interest (R2 T9/86, T11/119). This system for dividends and payments continued in 2012 and 2013 (R2 T10/97, T11/119, T20/203). This system was only possible because Company #1 had not lodged its income tax return for the year ended 30 June 2010. As subsequent events showed, the lodging of that return would immediately trigger Company #1’s obligation to pay its income tax liability for that income year (i.e. $298,569.20). Company #1 did not have the means to pay that tax liability and at the same time continue the above system of offsetting declared dividends against the Applicant's loan repayment obligations.
[Applicant’s response] The Applicant disputes the Commissioner’s assertion that as at 30 June 2010 Company #1 was not trading and its only income was interest payable by the Applicant and says that at that time Company #1 was still a 50% shareholder in Company #2 which he expected to still pay dividends to Company #1.
[Tribunal comment] The Tribunal agrees with the Commissioner’s assessment of the arrangements that the Applicant had caused Company #1 to put in place and that Company #1 was not in a position to pay its tax liability and the dividend to the Applicant.
(d)
[Commissioner] On 11 April 2012 Westpac appointed receivers and managers to Company #2 (R2 T11/121, T43/277). The receivers’ report as to affairs does not identify the Applicant or Company #1 as unsecured creditors (R2 T44/290).

In evidence the Applicant was unable to identify a document indicating that the money he had loaned from Company #1 was provided by him to Company #2.
[Applicant’s response] The Applicant in response again cites the paragraph of his submissions which refer to financial statements of Company #1.
[Tribunal comment] These financial statements do not evidence that the Applicant advanced any money to Company #2. In explanation of the fact that the Company #2 receiver’s and liquidator’s reports do not show the Applicant as a creditor, the Applicant’s only explanation is that the reports are incorrect.
That is not an acceptable explanation. The fact is that, as the Commissioner points out, none of Company #2’s financial statements, presumably prepared at the direction of the Applicant, or statutory reports prepared by the receiver/manager and the liquidator of Company #2 evidence any advance by the Applicant to Company #2. In the end all that the Tribunal has is the Applicant’s claim that that is what he did with the money that he borrowed from Company #1 notwithstanding that none of the documents support that claim.
(e)[Commissioner] On 22 April 2014 Company #1 prepared a company income tax return for the period ending 30 June 2010 reporting net income of $1.647m (including capital gains tax event of $1.062m) leading to a tax obligation of $298,568.77 (R2 T18/196). Within three months a liquidator was appointed (R2 T11/112).
(f)[Commissioner] In the year to 30 June 2014:
(i)according to accounts prepared by the Applicant’s accountants, the Applicant’s superannuation fund received a payment of $393,486 arising from a property development (R2 T51/326, T55/336, T58/345); and
(ii)
the Applicant’s superannuation fund paid out to the Applicant as its member $570,000 (R2 T58/345). The Applicant produced statements for two bank accounts for the period March 2014 to June 2016 and said these bank accounts record the money he received from his superannuation fund (A2 annexure 8). The Applicant conceded that the returns prepared by tax agents for his superannuation fund indicate significantly more money was drawn on the fund in the relevant years (R2 T55-61/336-357).

The Applicant was not able to explain the difference.
[Applicant’s response] In relation to the amount received by the Applicant through his superannuation fund, the Applicant says that based on the bank statements of the superannuation fund his superannuation fund received a total of $651,025 in the three financial years 2014, 2015 and 2016 (para. 11(f) of Applicant’s submissions after hearing). It appears, and the Tribunal does not understand the Applicant to dispute, that all of the funds in the superannuation account were paid to him or were available to him. The Applicant says (Applicant’s post hearing submissions para. 11(f)) that:
… These are the only two bank accounts ever operated by my SMSF. As is stated in Item 101 k of my SFICS No 2, the total amount of income received by my SMSF (and demonstrated by bank statements) for the 3 years financial years ending June 2014, 2015 and 2016 was $651,025. After deducting two lump sum payments of $100,000 each to Westpac and my ex-partner the balance of $451,025 represents approx. $150,000 per annum.
There are therefore inconsistencies in the numbers presented in the T55 schedule. Eg the schedule refers to Allocated earnings of $492,012 and an Income Stream Payment of $570,000, for the 2014 year. How can these alleged payments have been made when the total income received in this 2014 year, as shown by the bank statements, was the significantly lesser amount of $428,545 (which includes interest of $3,545 accrued on the balance)
As stated in my testimony at the hearing on 8th March 2019, the only explanation for these alleged incorrect larger payments are to do with accounting standards and the way accounts are presented. I have requested clarification on these items from my accountants. They refuse to provide any additional comment because I have not paid their previous years accounting fees, which regrettably I am presently unable to do. However, bank statements should be taken as the definitive proof of what I am saying.
The Respondent also refers to T58 page 345. Again the numbers presented of $492,012 (Allocated Earnings) and $570,000 (Income Stream Payment) are inconsistent / incongruous with funds actually received by my SMSF for this 2014 year ($428,545).
[Tribunal comment] As the Applicant concedes in his above submissions, as he did at the hearing, he is unable to explain the difference between the superannuation fund’s financial returns and the bank records. Under s 14ZZK of the TAA the Applicant bears the burden of proving that the assessment is excessive or otherwise incorrect (see [44] above) and the Tribunal must act upon the evidence placed before it. The inability of the Applicant to be able to explain why it is that the financial statements of the superannuation fund, prepared on his instructions by his accountant, show a significantly higher income than the Applicant asserts must call into question the Applicant’s assertion that the lower figure indicated by the bank statements is correct.
However, even if the Tribunal were to take the Applicant’s figures as correct, the question is whether those figures (even in the absence of other income and assets) support the argument that the Applicant’s failure to make the minimum yearly repayment in the year ended 30 June 2015 was because of circumstances beyond his control.
The Applicant says that his superannuation fund received $651,025 over the three year period ending 30 June 2016. In his submissions set out above, the Applicant refers to the superannuation fund having two bank accounts, however, annexure 8 to the Applicant’s SFIC (A2) only contained bank statements for one account, namely, Bank of Queensland account number [omitted] [account 1] in the name of [omitted]. At the hearing the Applicant handed up bank statements for account number [omitted] [account 2] which was, apparently, the second account operated by the superannuation fund. From March 2014 to 30 June 2015 receipts into account 2 were relatively minor totalling around $4000 which appears to have come from account 1 in any event. The statements for account 1 show total payments into that account in the period from 24 March 2014 to 26 March 2015 of over $694,000 with all of those funds (barring $1.07) being paid out by 31 March 2015. The balance of the account as indicated by the bank statements (A2 annexure 8) was effectively nil from April 2015. The Applicant explains his use of the figure of $651,025 as being what was received by the superannuation fund rather than the actual figure of $694,000 by deducting an amount of $43,626 from the actual total as being an amount received from Medibank “to cover an earlier Dr of $55,000” (A2, item 101k). That may have been the case, however, what the money received into the superannuation fund’s bank account was used for, or the reason for it being paid into the account, are irrelevant to the amount that was, as a matter of fact, received into the account.
The issue for determination by the Tribunal is whether the Applicant’s failure to pay the minimum yearly repayment of $149,698 (see [47] above) in the year ending

30 June 2015, was “because of circumstances beyond the [Applicant’s] control”

(s 109Q(1)(b)(i) of the ITAA). Importantly, the full amount of $694,000 was paid out of the account before 30 June 2015. Looked at in that light, prior to the time when the minimum payment should have been made, the Applicant had received from his superannuation account over $694,000 and even at the beginning of the period when the minimum yearly payment should have been made, namely 1 July 2014, the balance of the Applicant’s superannuation account was still $254,395

(A2 annexure 8) and after that date, but prior to 30 June 2015, a further $265,000 was paid into and out of the superannuation fund account. As the Commissioner notes, the fact that the Applicant chose to make other payments, including a payment to the bank of $100,000 and a payment to his ex-partner of $100,000 are not circumstances beyond his control even if those two payments caused there to be insufficient funds in the account.
Other than the two $100,000 payments, no explanation was provided by the Applicant as to what happened to the balance of the money, some $494,000, which passed through the superannuation bank account prior to 30 June 2015.

On those figures it would seem that the Applicant had sufficient funds available to him in the period up to 30 June 2015 to make a payment of $149,698 to Company #1 in respect of the loan.
(g)[Commissioner] On 4 July 2014 Grant Thornton partners were appointed joint and several liquidators of Company #1 (R2 T11/112).
(h)[Commissioner] On 13 January 2015 a Federal Court Registrar appointed a liquidator to Company #2 (R2 T47/315).
(i)[Commissioner] On 18 March 2015 the liquidator of Company #2 reported to creditors that there was no dividend likely for creditors (R2 T48/317).
(j)[Commissioner] On 17 April 2015 the Applicant sought a release from his tax obligations (R2 T62/358) indicating he had been unemployed since 30 June 2014, received fortnightly income of $6,000 superannuation and had fortnightly expenses totalling $5,448 (including home mortgage payments of $2,818 per fortnight), a home (valued at $1.1 million) that was mortgaged, no other real estate and a superannuation fund he valued at $23,478 (R2 T62/362-363, 365). The release was refused (R2 T63/374). The Applicant's evidence was that by unemployed he intended to mean that he was not receiving a payment from a third party and that was, he thought, different to what he admitted doing in the period namely running a business on his own account developing properties through a unit trust associated with his superannuation fund. He confirmed that this request for a release did not disclose the amount he had drawn on the superannuation fund nor did it disclose a property in Greece which he estimated was presently worth approximately $700,000 and was subject to a mortgage of approximately $230,000.
[Applicant’s response] The Applicant in his submissions after the hearing says:
As stated at the Tribunal Hearing, at the time I sought release of my tax obligations (17th April 2015), I was “unemployed” and therefore not earning any income from external sources, apart from drawing down funds from my SMSF.
As outlined in my SFICS No 2 in Item 101 k, I had available an amount of approx $450,000 from my SMSF, over three years, as the result of my funds involvement in two property developments at [redacted]. At the time of my application for release of my tax obligations (April 2015) these developments had been completed for approx 10 months. The funds drawn down from my SMSF of approx $150,000 pa during this period, is consistent with my disclosure in my application.
The statement by the Respondent .... “He confirmed that his request for a release did not disclose the amount he had drawn on the superannuation fund nor did it disclose a property in Greece which he had purchased etc”, is misleading and incorrect.
As pointed out in the paragraph above, my pension draw downs from my SMSF are consistent with the income stated in my tax relief application dated April 2015. Also, the property in Greece was purchased in 2002 and was obviously therefore not the result of income earnt by my SMSF some 10 years later. The Respondent’s inference here is that I had surplus funds over and above my disclosed income from my SMSF, that were channelled elsewhere. This inference is incorrect and refuted.
[Tribunal comment] The Tribunal does not agree with the Applicant. The Applicant’s focus seemed to be trying to justify his claim in his application for release from payment of tax debt dated 17 April 2015 that his sole income was $6000 a fortnight from superannuation payments received (R2 T62/362) and a similar statement in his application for release from payment of tax debt dated

4 February 2016 that his sole income was $7000 a fortnight from superannuation payments received (R2 T64/380). When cross-examined on these numbers the Applicant’s evidence was:
MR SLATER:    Seven thousand dollars per fortnight, $182,000 per annum. That is significantly less than those amounts we saw in your superannuation fund returns?
APPLICANT:     Okay. Well, just on that point, the point I was trying to make by way of my SFICs and the bank statement was that the bank statements show, in that three year period, I received $694,000, over a three year period. Okay? And I go on to make the point that 200,000 was paid – 100,000 was paid to Westpac and 100,000 was paid to my co-director as settlement on personal guarantees, if you like. So, that reduced the amount, less the Medibank amount of 40,000-odd, reduced the net amount to 450, which is, divided by three years, is approximately 150,000 per annum. And I make that point in my SFICs.
The Applicant’s reasoning does not stand scrutiny. The fact is that $694,000 was paid into and out of the superannuation account, presumably paid to the Applicant, by March 2015, that is, prior to his application for release from payment of tax debt dated 17 April 2015 (R2 T62). What that money paid to the Applicant was used for is irrelevant to his declaration in April 2015 that his income from the superannuation fund was $6000 a fortnight, equating to $156,000 per annum. In the 13 month period leading up to his claim in the 17 April 2015 document (R2 T62) he had received $694,000. The Applicant’s expenses, which would presumably include the two $100,000 payments, are dealt with in Part 2 of Section D of the Application for release (R2 T62/363). There was no basis for the Applicant to reduce his stated income from the superannuation fund payments declared in Part 1 of Section D (R2 T62/362) based on what he did with the money received.
Similarly, there is no basis for the Applicant reducing his declared income in that document by averaging what he received between April 2014 and March 2015

(i.e. $694,000) over three years, 2014, 2015 and 2016. That is particularly the case when at the time that he is making a declaration on 17 April 2015 as to his fortnightly income, one of the years over which the Applicant seeks to average his income to justify the figure that he used had not even occurred.
The Tribunal does not accept the Applicant’s explanation for his failure to disclose the property in Greece. The statement that “the property in Greece was purchased in 2002 and was obviously therefore not the result of income earnt by my SMSF some 10 years later” is non-sequitur and irrelevant. The requirement in the Application for release form (R2 T62) was to “Provide a description of each asset and its current market value” (R2 T62/365). The Applicant’s statement that the property in Greece was purchased 10 years earlier and was not the result of income earned through his SMSF is clearly not an explanation for his failure to disclose an asset, apparently in his name, worth, according to the Applicant’s evidence at the hearing, around $700,000 on which there is a $200,000 mortgage (Transcript at 62).
(k)[Commissioner] In the year to 30 June 2015:
(i)[Commissioner] The Applicant’s superannuation fund received a payment of $142,260 arising from a property development (R2 T52/329, T55/336).
[Applicant’s response] The amount stated of $142,260 as being received by my SMSF is incorrect. The correct amount is $143,895 as shown on page 349 of T59. Again there are inconsistencies in the accounts. (Applicant’s post hearing submissions para. 11(k)(i)).
(ii)[Commissioner] The superannuation fund paid out to the Applicant as its member $476,663 (R2 T59/350).
[Applicant’s response] As is stated in f (i) above, there are inconsistencies in the schedule referred to in T55 page 336. Clearly from the bank statements presented I did not receive the amount of $476,663, described as an Income Stream payment. The actual amount received in the year to 30th June 2015 (as per the bank statements) was significantly less ($223,506), which forms part of the $651,025 mentioned as the 3 years income in f(i) above. (Applicant’s post hearing submissions para. 11(k)(ii)).
(iii)[Commissioner] The Applicant had purchased a property for development in North Perth for $1,010,000 (R2 T64/384) (the “North Perth property”). The Applicant’s evidence and documents he provided (A1 annexure 9) (Settlement agent settlement statements) confirm the North Perth property was settled on the day after the Applicant’s request for a release from his taxation obligations was refused. The Applicant would not concede that the purchase was in fact arranged some time before settlement or that his application for a release from his taxation obligations should have identified the proposed purchase and redevelopment plans. The Applicant insisted that he acquired the North Perth property using 100% finance and without any equity in the project from his own assets. He agreed that the purchase was intended to enable the payment of a return to him and his business partner.
[Applicant’s response] The Respondent refers to my purchase of a property at [redacted] North Perth, and states “The applicant’s evidence and documents he provided Ex A1 annexure 9 confirm the North Perth property was settled on the day after the applicant’s request for a release from his taxation obligations was refused. (i.e. 28/5/15)” I don’t understand the relevance of this statement (Applicant’s post hearing submissions para. 11(k)(iii)).
[Tribunal comment] Fairly obviously the point that the Commissioner is making is that, having made an application on 17 April 2015 to be released from his tax debt on the basis that he did not have the means to pay that debt, the Applicant had the ability at the time that he made that application for release, or within days or weeks thereafter, to borrow over $1 million to purchase a development property. The Applicant was cross-examined on this and also on the Applicant’s statement of position as at 27 May 2015 which he gave to the liquidator of Company #1 and which is referred to in the liquidator’s Annual Report to Creditors (R2 T11/124). The Applicant’s evidence was that the statement of position given to the liquidator did not include the North Perth property because the purchase of that property settled the following day, 28 May 2015. The Applicant was cross-examined on his failure to disclose to the liquidator the fact that the he was to settle on the purchase of the North Perth property on the day after his statement of position. The following exchange took place:
MR SLATER:      This is dated – the statement says May ‘15, position provided by director on 27 May ‘15. You knew that settlement of the property occurred on 28 May ‘15. Are you saying that you didn’t know that the next day that you would acquire the North Perth property?
APPLICANT:       Well, I – it was dated 27 May and on that day I did not own North Perth and I make the point again, I did – it was totally funded by debt. Okay? So, I didn’t have any equity in North Perth. I want to be very clear about that, because that’s obviously what this is all about. I did not have any equity in North Perth. Okay?
MR SLATER:      Are you saying that the loans were all arranged on 28 May?
APPLICANT:       No, no.
…
DEPUTY PRESIDENT:   You knew the purpose of it, though, didn’t you? You knew it was for the liquidator to present to the creditors to see whether it was worth pursuing you?
APPLICANT:       But I chose not to disclose it, Deputy President, simply because, (a) I didn’t own the property at that time and, (b) I had no equity.
DEPUTY PRESIDENT:   You didn’t think that the following day you would own a property, whether it be counterbalanced by a liabilities, as a statement of assets and liabilities?
APPLICANT:       Well, I could have – I guess I could have shown purchase of a property for $1 million as an asset and the debt to the bank of 700 and 300 personal loan. Okay? I could have shown that, it would have equated to nil. Okay? It’s just that date. I signed an asset and …
DEPUTY PRESIDENT:   Are you saying you deliberately made that choice not to do that?
APPLICANT:       Look, I honestly cannot remember.
DEPUTY PRESIDENT:   Can you recall why – it seems awfully coincidental, you give a statement as at 27 May and the following day you become the owner of a property? Who chose 27 May as the datum date for that?
APPLICANT:       Well, I presume that I was asked by the liquidators to provide information on that day and I did. Is that so wrong? I mean, I’m sorry. The inference here is that I was trying to cheat the system, I wasn’t. I provided a statement of assets and liabilities on 27 May.
DEPUTY PRESIDENT:   The purpose of which you knew was to determine whether it was worth pursuing you to recover the debt?
APPLICANT:       Look, I don’t know whether that was put to me. Certainly, they asked me for a statement of assets and liabilities and I provided it to them.
DEPUTY PRESIDENT:   You’re saying is, that you evidence is you didn’t know that that would be used to make a determination of whether it was worth pursuing you?
APPLICANT:       Yes, I guess so. Yes, I guess, but it’s all part of the procedure, isn’t it?
DEPUTY PRESIDENT:   What do you think the purpose of your providing a statement to the liquidators was?
APPLICANT:       So that they could understand my position, on that day, on that day at that point in time. They wanted …
DEPUTY PRESIDENT:   You don’t think they would have been interested what your position would be the following day?
APPLICANT:       The position the following day, Deputy President, is a nil balance, nil balance. It’s been proven.
DEPUTY PRESIDENT:   That’s up to them to make that call, isn’t it?
APPLICANT:       Okay. All right. Well, but I wasn’t asked to …
The Applicant’s evidence in relation to this issue was not convincing.

The reason for the liquidator being provided with a statement of the Applicant’s position was clearly to enable the creditors of Company #1 to make an informed decision on whether to pursue the Applicant for the $1 million that he owed Company #1 or to accept the $10,000 settlement offer that he was making. The fact that the Applicant had the ability to borrow over $1 million to purchase an investment property, irrespective of the terms on which the funds were borrowed, and the fact that he expected to generate profit from the development of the property being purchased, would have been relevant to the creditors’ consideration of the offer of settlement for $10,000 and the Applicant would have appreciated that to be the case.
(iv)[Commissioner] The Applicant's income tax return dated 4 February 2016 (R2 T3/22) declared a taxable income of $409,143 (including a self-assessed deemed unfranked dividend of $428,383 based on s 109F of ITAA) (R2 T3/32) and caused the Assessment to issue for a tax obligation of $171,203.05 (R2 T4/62). This is the Assessment the subject of this application.
(l)[Commissioner] On 24 August 2015 the liquidator of Company #1 reported that the Applicant had reported to the liquidator that the Applicant “does not have capacity to pay the loan in full” and provided to the liquidator a statement of his personal financial position showing a deficiency of assets of $213,000 with real estate in Australia and Greece (Assets $1.4m Liabilities $1.6m excluding the loan from Company #1 (R2 T11/124). The Applicant's evidence initially was that he did not understand that the request by the liquidator for a statement of assets and liabilities was in the context of a decision by creditors whether to pursue the applicant for repayment of the Company #1 loan. After further questions about an offer made by the Applicant to settle the whole of the loan obligation with a payment of $10,000, the Applicant conceded he knew or could infer the request for the statement of assets and liabilities was related to the question of whether to pursue the applicant for repayment.
[Applicant’s response] The issue raised by the respondent here is whether
“I understood at the time the liquidator of [Company #1] requested a statement of my assets & liabilities, was in the context of a decision by creditors whether to pursue me for repayment of the [Company #1] loan”. My answer to that question at the Tribunal Hearing was that I could not recall the conversation about this issue with the Liquidator, some 3 and a half years ago. I was simply asked for a statement of my financial position, which I provided (Applicant’s post hearing submissions para. 11(l)).
[Tribunal comment] See comment at (j) and (k) above.
(m)
[Commissioner] On 23 September 2015 there was a meeting of creditors of Company #1 which considered the report by the liquidators (R2 T11/108) and the potential for a recovery from the Applicant of the loan from Company #1.

The meeting did not pass a resolution to pursue the Applicant and did not pass a resolution to accept the offer of $10,000 from the Applicant and as a consequence the liquidator proceeded to wind up Company #1 (R2 T12/124). The Applicant in evidence acknowledged that he knew of the outcome of the meeting.
(n)
[Commissioner] On 16 November 2015 the liquidator of Company #1 reported the conclusion of his administration and that there was no return to creditors

(R2 T12/173). The Applicant in evidence acknowledged that he knew that the liquidation of Company #1 was completed.
(o)[Commissioner] On 4 February 2016 the Applicant:
(v)
Prepared (as already mentioned) a personal income tax return for the year ending 30 June 2015 reporting taxable income of $409,143

(including unfranked dividend of $428,383) (R2 T3/32) leading to the Assessment of a tax debt of $171,203.05 (R2 T4/62).
[Applicant’s response] It appears the Respondent may be trying to make the inference that I declared a taxable income of $408,143 for the year end 30th June 2015, on 4th February 2016, approx 3 months after the liquidation of [Company #1]. As stated in (k) (iv) above by the Respondent, this amount of taxable income was the result of the “deemed unfranked dividend of $428,383, based on s 109F of ITAA 1936”. i.e. a dividend raised on a loan forgiven. These were not funds received by myself, and thus not available to me to repay the [Company #1] loan (Applicant’s post hearing submissions para. 11(o)(i)).
[Tribunal comment] While it may be that the income declared by the Applicant in the tax return for the year ended 30 June 2015 represented the deemed dividend arising from the forgiveness of the loan (later accepted as occurring in the following year) the Tribunal notes that during the year ended 30 June 2015 the Applicant had received the vast majority of the $694,000 paid out of the superannuation fund in that financial year (see Tribunal comment on k(iii) above).
(i)[Commissioner] The Applicant sought a release from his tax obligations (R2 T64/375) indicating he had been unemployed since 30 June 2014, received fortnightly income of $7,000 superannuation and had fortnightly expenses totalling $7,000 (including home mortgage payments of $3,911 per fortnight) (R2 T64/380, 381). His residence had changed to a home purchased for $1,250,000 on 10 June 2015. There was no value given for his superannuation. Although partly sold already the request indicated that the North Perth property was mortgaged in the amount of $1,325,000 and had a current market value of $1,350,000 (R2 T64/384). The release was refused (Ex R2 T65 V3.392). The Applicant objected (Ex R2 T66 V3.394). The objection was withdrawn, the Applicant instead choosing to challenge the Assessment, ultimately by this application (R2 T67/409). The Applicant repeated that he intended “unemployed” to mean that he did not receive payments from a third party and was not intended to mean he was not working on property developments. The Applicant agreed that the application for a release disclosed some of the money he had received from the superannuation fund. The request disclosed receipt from the superannuation fund of $7,000 per fortnight or $182,000 per annum which is more than the amount recorded in returns to the respondent for the same financial year (R2 T55/336, T60/352-354). This amount was significantly less than the amount received from the superannuation fund in previous years. The release this time did not disclose the value of the superannuation fund, although it did disclose an investment in the Winthrop Unit Trust which appeared to be half owned by the superannuation fund. The Applicant agreed that the release, again, made no reference to his property in Greece.
[Applicant’s response] The Respondent states that the North Perth property was partly sold. This is incorrect. At the date of my Application for Release (4/2/2016) none of the 3 lots created by the subdivision had been sold (Annexure 11 of my SFICS No 2). My statement that I was unemployed was meant that I was not in receipt of income from my services as a Project Manager (Applicant’s post hearing submissions para. 11(o)(ii)).
(p)[Commissioner] In the year to 30 June 2016:
(i)The Applicant’s superannuation fund received no payment arising from a property development (R2 T53/331, T55/336).
(ii)The superannuation fund received a contribution from the Applicant as its member $4,025 (R2 T60/354).
(iii)On 9 February 2016 lot 2 of the 3 North Perth property lots was sold for $480,000 (R2 T68/413).
[Applicant’s response] The Respondent’s statement that “On 9th February 2016 lot 2 of the North Perth property was sold for $480,000” is incorrect. The correct date is 1st September 2016 (Annexure 11 of my SFICS No 2). Please note that the full net sale proceeds ($434,844) were collected by BankWest as part repayment of their loan (Applicant’s post hearing submissions para. 11(p)).
(iv)The Applicant’s income tax return dated 9 October 2017 (R2 T89/525) declared a loss of $26,760 (R2 T89/526) and, as a consequence, there was no tax payable (R2 T90/530).
(q)[Commissioner] On 9 March 2017 the Applicant by his accountants, Moore Stephens, objected to the Assessment referring to s 109G of the ITAA36 (R2 T1/6, T5/64) (the “Moore Stephens objection”).
(r)[Commissioner] In the year to 30 June 2017:
(i)The Applicant’s superannuation fund received a payment of $111,826 arising from a property development (R2 T54/335, T55/336).
(ii)The superannuation fund:
(1)Received a contribution from the Applicant as its member $52,869 (R2 T61/357).
(2)       Paid out to the Applicant as its member $140,160 (R2 T61/357).
(iii)The Applicant has not lodged an income tax return for the year to 30 June 2017.
(iv)On 22 April 2017 lot 3 of the North Perth property 3 lots was sold for $450,000 (Ex R2 T69 V3.416).
[Applicant’s response] The Respondent’s statement that “On 22nd April 2017 lot 3 of the North Perth property 3 lots was sold for $450,000”, is incorrect. The correct date is 26th June 2017 (Annexure 11 of my SFICS No 2). Please note that the full net sale proceeds of $416,365 were collected by BankWest as part payment of their loan (Applicant’s post hearing submissions para. 11(r)).
(s)
[Commissioner] On 14 July 2017 the Applicant provided to the Commissioner a statement of his personal assets and liabilities position (but not his income or expenses position). The statement suggests a deficiency of assets of $554,000 with two real estate properties in Australia and none in Greece (R2 T13/179 – see also T11/124). The Applicant resided at one property (which he valued at $1,250,000 and said it was mortgaged for $1,170,000). According to the Applicant's Statement of Position provided to the respondent as at June 2017

(R2 T13/179) the North Perth property was mortgaged to the extent of $940,000 and valued by the Applicant at $900,000. This document does not disclose the property in Greece.
[Applicant’s response] The Statement of Position referred to here by the Respondent, was dated June 2017, and supplied by my accountants to the Respondent on 14th July 2017
Up to 26th June 2017 I still owned two lots at North Perth, which was disclosed on the Statement of Position. The non disclosure of the Greece property was an oversight on my behalf. It had however been disclosed previously to the Liquidators of [Company #1] (Applicant’s post hearing submissions para. 11(s)).
[Commissioner] On 16 July 2017 lot 1 being the last of the North Perth property three lots was sold for $432,500 (R2 T70/418). The Applicant provided settlement statements for the three units (A2 annexure 11) which identify some costs associated with the sale of the units. The Commissioner notes that the 3 lots on the North Perth property realised $1,362,500.
(t)[Applicant’s response] The Respondent states that “on 16th July 2017 lot 1 being the last of the North Perth property 3 lots was sold for $432,500” This is incorrect. This property was sold on 25th August 2017 (Annexure 11 of my SFICS No 2)
The net proceeds from the sale of the 3 lots was $1,322,129, after deducting sales commissions, settlement costs, rates & taxes etc. (Annexure 11 of my SFICS No 2). i.e. some $40,000 less than shown here by the Respondent ($1,362,500) (Applicant’s post hearing submissions para. 11(t)).
Mandatory considerations s 109Q(2) of the ITAA
(a) The Applicant’s capacity to repay the loan at the time of the loan

In determining whether the Commissioner is satisfied that the elements of subsection 109Q(1)(b) of the ITAA have been met, subsection 109Q(2)(a) requires the Commissioner to consider the taxpayer’s capacity to repay the loan at the end of the year in which the loan was made. In the present case it is not disputed that the loan was made in the year ending 30 June 2010. The Commissioner contends that the Applicant had an uncertain ability to meet the obligations relating to repayment at the end of the 2010 financial year. The terms of repayment are those prescribed by s 109E(5) of the ITAA. This obligation was reflected agreements (A1 Annexures 2-6) between the Applicant and Company #1 which related to earlier periods. It is not, however, disputed that the Applicant’s obligation in relation to the amalgamated loan made in the financial year 2010 was to make the minimum yearly repayment in succeeding years, including the year ended 30 June 2015.
The Commissioner argues that the Applicant’s uncertain capacity to repay the loan can be inferred from:
(a)The method actually used by the Applicant to meet the minimum yearly repayments from 30 June 2011 to 2013 was setting off dividends that he, as the sole director and shareholder of Company #1 declared. There were no actual payments of dividends made to the Applicant in these years, rather a setting of a “nominal” declared dividend against the Applicant’s obligation to make the minimum yearly repayment. The Commissioner argues that the ability of Company #1 to declare these dividends was questionable considering:
(i)Section 254T of the Corporations Act 2001 (Cth) which provides that a company shall not pay a dividend unless:
(1) the company’s assets exceed its liabilities;
(2)the payment of the dividend is fair and reasonable to the shareholders as a whole;
(3)the payment of the dividend does not materially prejudice the company’s ability to pay creditors; and
(4)assets and liabilities are calculated in accordance with accounting standards in force.
(ii)
The loan to the Applicant was Company #1’s most substantial asset

(R2 T11/118) and Company #1’s only regular source of income was dividends for Company #2 and that ceased at the end of 2010. Company #2 paid a $412,000 dividend to Company #1 in the year ended 30 June 2010 notwithstanding Company #2 made a $428,483 loss in that year

(R2 T17/190).
(iii)The Commissioner argues that an inference can reasonably be drawn that Company #1 delayed in lodging its income tax return for the year ended 2010 until April 2014 because it was unable to meet its tax liability from its own resources. Returns for 2010, 2011 and 2012 were not lodged until April 2014 and Company #1 and the company went into liquidation shortly thereafter.
(b)The Applicant lent the money borrowed from Company #1 to Company #2 because Company #2 was in financial difficulty. This is evidenced by the fact that the Applicant as a director of Company #2 wrote to the Commissioner in December 2010 advising that Company #2 was in financial difficulties and would not be able to meet the agreed arrangements for payment of its outstanding tax liabilities (R2 T39).
(c)The Applicant’s previous source of income was Company #1 which was not carrying on business and its main source of income, dividends from Company #2 were in doubt because, on the Applicant’s own admission Company #2 was in financial difficulty. Further Company #1 was only able to maintain its system of declaring dividends in favour of the Applicant (based on capital gain it derived in 2010 and the interest receivable form the Applicant on the loan) and offsetting the loan repayments against that dividend and not paying its tax liabilities.
The Applicant answers these points by arguing that the events identified by the Commissioner are “well after the ‘Critical Date’” and therefore have no relevance to the Applicant’s capacity to repay the loan. The Tribunal disagrees. While some of the events referred to by the Commissioner may have been after 30 June 2010, the circumstances and financial environment that caused those subsequent events were extant, or at least reasonably predictable, at the time of the loan. The Applicant’s evidence was that by

30 June 2010:
So as I say, getting back to this critical time of 30 June 2010, the [Company #2] was still operational. We had several projects completed and on the market for sale and we were at the same time, still looking at other potential future opportunities in the marketplace as I’ve evidenced by way of an annexure and whilst it was a difficult time, we – myself, my co-director fully believed in the company. We had a staff of eight or 10 people at that stage, all of whom were still on board and doing their things and what eventually evolved was that the impact of the global financial crisis grinded on and as a result, the sale of our inventory which is shown in the 2010 accounts proved more difficult than we hoped and sadly Westpac decided that they would not support us anymore and that they therefore appointed receivers in April 2012.
(Transcript at 13)
The phrase used by the Applicant in his evidence was that the impact of the GFC “grinded on” which resulted in the appointment of receivers over Company #2 within two years.

In other words, the financial issues which existed as at 30 June 2010 did not get any better. The ability of the Applicant to get money out of Company #2’s developments to repay the loan to Company #1 appears to have been based on the Applicant’s, and his partner’s “belief” and “hope” that the market would improve and that Company #2’s inventory could be cleared. That turned out not to be the case.
What it means, however, is that rather than circumstances changing, they simply did not get better. As the Applicant put it, the effect of the GFC and its effect on the property market, which had already had significant negative effects on the Applicant’s companies’ businesses leading up to 30 June 2010, “grinded on” with the eventual result of both companies going into receivership and then liquidation and providing no income to the Applicant to repay the loan. It is not, as the Applicant argues, that the Commissioner looks at what occurred to the companies on which the Applicant relied for income “with the benefit of hindsight” (Applicant’s submissions para. 45(a)), but rather looking at whether what happened to those companies was caused by changes in the circumstances that those companies confronted as at 30 June 2010. The circumstances did not change to reduce the Applicant’s ability to make the minimum yearly repayment, rather the adverse financial circumstances that confronted the companies and the Applicant as at 30 June 2010 persisted and the property market failed to improve.
Subsection 109Q(2)(a) is, by its nature, forward looking. In requiring an assessment of the taxpayer’s capacity to repay the loan, or more accurately in this case, to make the minimum yearly repayment, the subsection is requiring the Commissioner (or the Tribunal in the shoes of the Commissioner) to assess the taxpayer’s capacity to meet his future obligations. The question therefore is whether, at the time of the loan, effectively 30 June 2010, the Applicant, as a matter of fact, had in place arrangements or sources of funds that would enable those future payments to be made. A mere belief or hope that he would be able to meet those liabilities is not sufficient. As a minimum there would have had to have been reasonable grounds to believe that the financial position that the Applicant and the companies that he relied on for income as well as his asset position would mean that in each of the following financial years the Applicant would have access to funds sufficient to meet the minimum yearly repayment and eventually be able to repay the full amount of the loan.
Was the Applicant in that position as at 30 June 2010? In the Tribunal’s view, the answer to that question is – probably not if the Applicant, and the companies on which he was going to rely to meet their financial obligations including their obligations to meet their tax liabilities. By 30 June 2010 the financial position of the Applicant and the Applicant’s companies was obviously severely distressed. The circumstances that had given rise to that financial stress, in particular the depressed property market, did not improve as the Applicant had hoped and believed.
(b) did circumstances reduce the Applicant’s capacity to repay the loan?
In the present case, many of the considerations set out in looking at subsection 109Q(2)(a) apply to subsection (b). For the reasons that the Tribunal sets out under subsection (a) above, the circumstances that ensued after 30 June 2010 did not change to reduce the Applicant’s capacity to meet the repayment obligations, including the obligation to make the minimum yearly repayment for 2015. The circumstances that the Applicant says caused him not to be able to make the minimum yearly repayment in 2015 were, in effect, the same circumstances that applied at the time that the loan was made in 2010.
In any event, for the reasons set out earlier in this decision (see [55] to [61] above), the Tribunal is not satisfied that the Applicant was not able to make the minimum yearly repayment for 2015. In the 12-15 months leading up to 30 June 2015 when the minimum yearly repayment of $149,698 should have been paid the Applicant had received some $694,000 from his superannuation account. Even taking into account the two $100,000 payments that the Applicant chose to make and taking into account the expenses that he disclosed in his applications for release for payment of tax debts (R2 T62 and T64), there was ample surplus for the amounts received from his superannuation fund to pay the minimum yearly repayment.
The Applicant’s ability to make the 2015 minimum yearly repayment is further supported by the assets that the Applicant had. Although he seems to have omitted it from some of his statements of assets and liabilities, the fact is that the Applicant had at the time, and still has, a property in Greece worth, according to the Applicant, around $700,000 with a mortgage on that property of around $200,000. While the Applicant at the hearing claimed that he had been trying to sell that property, without success, there was no evidence to support that claim nor is there any evidence of the Applicant seeking to use that property to secure a loan or some facility which could be used to pay the minimum yearly repayment. Although not disclosed to the liquidator of Company #1, the Applicant had the financial capacity and credit standing to borrow over $1 million to buy a development.
(c) did the Applicant not take reasonable steps to pay part of the minimum in the relevant year?; and
(d) did the Applicant not pay part of the minimum in later periods?
It is not disputed that the Applicant failed to make any payment towards the minimum yearly repayment. The only “repayments” made by the Applicant in respect of the loan from Company #1 were the set-offs against the dividends that he declared for himself which, in any event, may have been in contravention of s 254T of the Corporations Act 2001 (see [56(a)(i)] above).
Did the Applicant not pay because of circumstances beyond his control (s 109Q (1) ITAA)?
The Commissioner referred to a number of cases as having considered similarly worded tests to that in s 109Q (1)(b)(i) of “circumstances beyond the entity’s control”. In Honest Reveira v Registrar of Trade Marks [2018] FCA 1122 at [55] (Honest), Moshinsky J adopted Jenkinson J’s following statement (at [2016]) in Atomic Skifabrik Alois Rohrmoser v Registrar of Trade Marks (1987) 13 FCR 199:
In the context in which it is found, the expression “circumstances beyond the control of the person concerned” does in my opinion designate — and designates only — occurrences which neither the person concerned nor any person acting on his behalf to do the act or take the step could prevent. The operations of nature and the activities of strangers may result in such occurrences.
In Ullah and Secretary, Department of Education and Training [2018] AATA 2159 and in the case of Magliano and Secretary, Department of Education and Workplace Relations [2012] AATA 43, the Tribunal was considering the phrase “beyond the person’s control” as used in the Higher Education Support Act 2003. The Tribunal was assisted in that consideration by guidelines issued under that act which defined that phrase as follows:
3.5.1 A higher education provider will be satisfied that a person’s circumstances are beyond that person’s control if a situation occurs which a reasonable person would consider is not due to the person’s action or inaction, either direct or indirect, and for which the person is not responsible.
The other cases referred to by the Commissioner, however, consider phrases which, in the Tribunal’s view, are not particularly analogous to the words used in s 109Q(1)(b)(i) or are considering similar phrases in a different context. The Applicant, in effect, argues that the GFC caused him to be unable to pay the minimum yearly repayment. That, however, oversimplifies the issue and seeks to relieve the Applicant from the consequences of the choices that he made. In the Tribunal’s view, if a person chooses to put himself into a position where he must meet certain financial obligations, if the operation of inevitable or foreseeable circumstances or the foreseeable financial environment, cause the Applicant not to be able to meet those financial obligations, that cannot be considered to be beyond his control. The Applicant chose to expose himself to the consequences of reasonably foreseeable, in fact predictable, financial circumstances. The consequences that he suffers are therefore within his control. That analysis of the phrase “circumstances beyond the entity’s control” is consistent with the mandatory considerations set out in subsection 109Q(2).
In any event, even if the Tribunal is not correct in that analysis, for reasons set out earlier in this decision, the Tribunal finds that the Applicant did in fact have the capacity to make the minimum yearly repayment, however, prioritised other payments over payment of the minimum yearly repayment. In that sense the choice not to make the repayment was within the Applicant’s control.
The Commissioner contends (para. 51 of his submissions made after the hearing) that it is apparent from the records for his superannuation fund, his concessions on the unencumbered value of his property in Greece, the amounts that he was expending on home mortgage repayments and possibly the results of the development of the North Perth property, that the Applicant has now and always had sufficient financial capacity to repay to Company #1 the minimum yearly repayment required and simply did not do that in the relevant year (2015) or shortly thereafter, or at all. The GFC or its ongoing effects or the circumstances of Company #1 and Company #2 are not something which the Applicant could not have done something about or not prevented (in the way discussed in Honest above). Instead they were events that the Applicant knew of at the time he made relevant decisions and he factored in that knowledge in making his decisions and in that sense did something about them. The real difficulty, the Applicant conceded in his evidence, is that he was more optimistic about the sale of property than was warranted. His financial position is not the result of circumstances beyond his control rather it is a result of his control of his circumstances. It can be inferred that the Applicant had a choice as to whether to make the minimum yearly repayments or to use his available funds in other ways and that his failure to make those repayments was the result of the exercise of that choice.
The Tribunal agrees with the Commissioner’s contention set out in [70].
Will the Applicant suffer undue hardship?
The second element of s 109Q(1)(b) is subsection (ii). The Commissioner must be satisfied that the Applicant would suffer undue hardship if the dividend was taken to be paid under s 109E. The mandatory considerations set out in subsection 109Q(2) must be taken into account in determining whether the Commissioner is so satisfied.
In Re Wilson and Minister for Territories (1985) 7 ALO 225 at 229, Deputy President Hall discussed the meaning of “undue hardship”, in the context of exercise of the statutory discretion of the Minister to discharge a liability for payment of rates on the ground of “undue hardship”. Deputy President Hall said the meaning connoted something more severe than substantial hardship. In Deputy President Hall’s view undue hardship means “hardship that is excessive in the circumstances”, and that “foreseeability and control” constitute “relevant considerations” to the determination of hardship. “Undue hardship” was not susceptible to “precise quantification”.
In what the Commissioner submits is the analogous circumstances of s 340-5(3) of the TAA, first, the decision-maker must decide whether the settlement of the liability will result in serious hardship. That is, whether it is the imposition of the taxation (and not other circumstances) that will cause the difficulty. If that decision is favourable to the Applicant, the discretion offered by s 340-5(3) then falls for consideration. In reaching the decision to release in whole or part, the question to be addressed is whether, in all the circumstances, it is just and proper to provide the requested relief. Relevant to whether relief is just and proper are matters pertaining to the incidence and consequence of the imposition and the effect of its exaction upon the affairs of the person.
The Commissioner refers to the superannuation receipts, the concessions made by the Applicant about his property in Greece and the proceeds of the sale of the subdivided North Perth property and the uncertainty surrounding the use of the loan funds.
The Commissioner also refers to the circumstance that during the 2015 year the Applicant was expending $2,818 per fortnight on home mortgage payments on a house in Subiaco (R2 T62) and then sold that residence and purchased a new home in Claremont for $1,250,000 on 10 June 2015 and began paying $3,911 per fortnight (R2 T64).
The Tribunal finds that the Applicant has a capacity to meet the consequences of taking the dividend as paid because he has the financial resources to make the payment of the taxation obligation that arises. The Commissioner calculates that if the dividend representing the unpaid minimum yearly repayment, as adjusted under s 109Y of the ITAA, were taken to be paid, the Applicant’s tax liability would be $39,297.79, exclusive of interest charges. While there may be some hardship in that the Applicant may have to sell assets or rearrange his affairs, that is not unreasonable and it is not an undue hardship. The Applicant has structured his affairs over an extended period which has resulted in him receiving significant benefits through those structures, in particular receiving hundreds of thousands of dollars through his superannuation fund while neither he nor the entities through which that income has been generated have met their tax obligations.
CONCLUSION
In these circumstances the Applicant’s failure to make the minimum yearly repayment in the relevant year pursuant to s 109E of the ITAA was not due to circumstances beyond his control for the purposes of s 109Q(1)(b) of the ITAA. Taking the dividend as paid (and the imposition of the taxation obligation) will not cause an undue hardship to the Applicant.
The Commissioner concedes an amendment is required to the assessment to align that part of the assessment referrable to the dividend in the assessment to that required by calculation in accordance with ss 109E and 109Y of the ITAA which reduces the amount of the dividend taken to be paid to $149,698 with the result that the Applicant’s taxable income be reduced to $129,678.

The Applicant has not established that the assessments are otherwise excessive or incorrect.
DECISION
The Decision is set aside and in substitution for the Decision there be a decision that the Applicant’s objection be allowed to the extent of the Applicant’s taxable income for the year ended 30 June 2015 be reduced to $129,678.

I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of Deputy President Boyle

...........................[sgd].............................................
Associate
Dated: 23 May 2019

Date(s) of hearing: 8 March 2019

Applicant: In person

Counsel for the Respondent: Mr C Slater

Representative for the Respondent: Mr R McGrade

Interest	$7,971
Gross Rent	$9,770
Franked dividend (received from Company #2)	$412,000
Franking credits (from Company #2)	$176, 571
Net Capital Gain on disposal all real estate holdings	$1,061,542
$1,667,854
Less: Deductions	-$20,820
Taxable Income	$1,647,034

2010	2011	2012	2013	2014
Franked Dividends	$150,000	$380,000	$360,000	$297,000	$282,942
Franking Credit	$64,285	$162,857	$154,285	$127,285	$121,260

Year ended 30 June	2011	2012	2013	2014
Repayments of Principal	$300,000.00	$300,000.00	$280,000.00	$270,000.00
Interest	$92,822.41	$81,679.99	$59,817.54	$39,562.29

Year ended 30 June	Unpaid self-assessed income tax liability (after deduction of PAYG credit)
2010	$298,569
2011	$29,222
2012	$25,217
Total	$353,008

Date(s) of hearing:	8 March 2019
Applicant:	In person
Counsel for the Respondent:	Mr C Slater
Representative for the Respondent:	Mr R McGrade