WJBS and CBTG and Commissioner of Taxation
[2013] AATA 518
•23 July 2013
[2013] AATA 518
Division Taxation Appeals Division File Numbers
2012/0173
2013/1482
Re
WJBS and CBTG
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 23 July 2013 Place Brisbane The objection decisions under review are affirmed
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Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – Assessable income – Income according to ordinary concepts – Investment in business by the applicant – Reckless behaviour – Decisions under review affirmed – Penalty upheld
LEGISLATION
Income Tax Assessment Act 1997 (Cth) s 6-5
Income Tax Assessment Act 1936 (Cth) s 97, Div 7A
Taxation Administration Act 1953 (Cth) s 14ZZK, Schedule One s 284Property Law Act 1974 (Qld) Part 19
REASONS FOR DECISION
Senior Member Bernard J McCabe
The taxpayer said the monies she received from a company run by her (then) husband in the year ended 30 June 2008 year of income should not be treated as assessable income in her hands. The company appears to have generated the money through a fraudulent scheme that raised millions from hapless investors seeking fabulous returns. The taxpayer claimed the money was provided to her as part of a domestic arrangement under which she accessed her husband’s income, or perhaps as a consequence of a gift. In either event, she said she is not liable to pay tax on around $1.6 million paid by the company.
The Commissioner of Taxation disagreed with this. He said the money is assessable income in the taxpayer’s hands. The Commissioner said the taxpayer financed her husband into a business arrangement and she expected an income stream which should be taxed. The Commissioner raised an assessment and levied an administrative penalty at the rate of 50% on the basis the taxpayer was reckless. The taxpayer asked the Tribunal to review the assessment in respect of the shortfall. She lodged a separate application for review of the decision in respect of the administrative penalty.[1]
[1] The existence of two separate applications – one in respect of the taxation shortfall and the other in respect of the penalty – has resulted in the Tribunal’s information management system automatically generating two pseudonyms when in fact there is only one taxpayer.
The Commissioner said the payments are ordinary income or income according to ordinary concepts within the meaning of s 6-5 of the Income Tax Assessment Act 1997 (ITAA97).
I allowed the parties additional time to prepare written submissions following the hearing in relation to some alternative arguments. As it happens, I do not need to consider those arguments here in light of my conclusion that the payments are properly characterised as income according to ordinary concepts. I am not satisfied there is any basis to adjust the rate of the penalty or remit any part of it. The objection decisions must therefore be affirmed. I explain my reasons below.
QUESTIONS OF FACT
The taxpayer is a professional person. She said in her evidence that she met her future (now ex) husband – I shall refer to him in these reasons as Mr Smith – when she began attending her sister’s church in 2005 after a traumatic divorce. Mr Smith was a prominent member of the congregation. He was apparently living in premises belonging to the church. After a period of time, the taxpayer and Mr Smith began to see each other socially, then romantically.
Mr Smith worked for a company at the time. The taxpayer said in her evidence that she understood Mr Smith’s employer was a kind of finance company. He was an operations manager of some sort, she said. They decided to buy a home together, although she said they also entered into a binding financial agreement under Part 19 of the Property Law Act 1974 (Qld) that recorded their respective contributions to the relationship: exhibit 1.1 at p 17ff. The taxpayer said she was concerned to protect herself and her existing assets given her experience following the divorce from her first husband. The agreement with Mr Smith was dated 7 July 2006. She noted Mr Smith claimed to have money overseas that he would be able to access in due course.
Not long after agreeing to purchase the property, the taxpayer was contacted by her pastor at the church. The pastor asked her to attend a meeting with him and Mr Smith. At the meeting, the pastor disclosed Mr Smith was still married to someone else. The taxpayer was also told Mr Smith was an undischarged bankrupt. She said she was shocked and angered by this news. She said she ended her relationship with Mr Smith. But he came back. He asked for forgiveness. He pursued the taxpayer for six months, claiming he had changed. The taxpayer relented. She took Mr Smith back and they were married by the pastor in June 2007.
The taxpayer said she was under the impression Mr Smith was earning a lot of money from his work at the time. She recalled seeing a number of payslips that demonstrated he was doing well (exhibit 13). He apparently told the taxpayer the business he managed was very profitable for the shareholders in the company that owned it. He said he wanted to buy it from them – but he needed some help. She said Mr Smith asked her to back his investment in the company. Or was it their investment?
The taxpayer said she was provided with a profit and loss statement and perhaps some other financial documents that confirmed the business was profitable. She said she agreed she would finance her husband’s purchase of the shares. She explained in her evidence at the hearing her motivation was solely to support her husband in his attempts to acquire an investment that would enable him to provide for them in the future. He had said he ultimately wanted to earn enough to enable him to do pastoral work in their church on a full-time basis.
Mr Smith executed a share sale agreement dated 10 August 2007 under which he agreed to purchase the shares in the company: exhibit 1.1 at p 37. The taxpayer said in cross-examination she advanced her husband around $100,000 to finance the acquisition, although the evidence is inconsistent on the quantum of the advance: in her statement (exhibit 12), she estimated (at [34]) she advanced between $60,000 and $100,000. As it happens, the precise amount of the advance does not matter for the purposes of this exercise, as there is no dispute she financed the purchase. She borrowed the money (or most of it) from her bank. Interestingly, she told Westpac in her personal finance applications (exhibit 19) that she needed the money for investment purposes, and the money was subsequently paid from her to the company rather than to her husband.
The taxpayer said she had little to do with her husband’s business following the acquisition. She was very busy with her own professional practice at this point: she explained she was seeing many, many clients each week in 2007 and 2008, although she agreed in cross-examination that she was only working part-time during this period. She said she rarely visited her husband’s corporate offices. In her evidence at the hearing, she recalled going to the office on maybe four or five occasions and receiving a frosty reception each time. While she became aware the business seemed to be concerned with sports betting, she claimed she knew little of what was going on. She said she was not a director and did not recall ever becoming a shareholder. She also denied she was ever an employee. The taxpayer said she did not want to be an officer or member of the company; it was her husband’s affair. She said she preferred to concentrate on her own practice. On her evidence, she was behaving as a “good” wife who deployed the resources at her disposal in support of her husband. She insisted she did not see herself as an independent investor in her husband’s business.
In the meantime, the taxpayer said she and her husband purchased a number of properties, including the matrimonial home. She already owned several properties in her own name. She said the new properties were also acquired in her name because her husband had been a bankrupt (although it seems the taxpayer had also been bankrupted a number of years ago). The new properties were financed by loans. The locations of the new properties are set out in the taxpayer’s affidavit (exhibit 12 at [54]). There are eight in total.
The taxpayer began receiving payments into a joint account from her husband’s company after the shares were acquired. The records suggest the company paid $1,043,000 into a joint account held by the taxpayer and her husband between November 2007 and June 2008. The taxpayer insists the bulk of that money was used to service the mortgages on the properties she acquired with her husband although she also conceded she had told the police during a formal record of interview that the properties were largely paying for themselves out of rental income. A further $620,559.46 was paid by or at the direction of Mr Smith to third parties. Some of that money was spent on personal items for the taxpayer and her husband, but the taxpayer claimed most of it was spent in connection with their properties. The taxpayer’s explanation of her expenditure is contained in her statement (exhibit 12) and details of the amounts paid in respect of the properties are set out in exhibit 1.1 at pp 12-13.
In cross-examination, the taxpayer was asked to explain a number of expensive purchases she made in the aftermath of the acquisition of the business. Ms Ford, for the Commissioner, asked the taxpayer about a range of luxury items and clothing, travel and cosmetic surgical treatments that she consumed during this period. The purchases began soon after Mr Smith acquired control of the business. Ms Ford invited me to infer the taxpayer went on a spending spree in anticipation of the riches that would flow to her as a result of an investment she made. The taxpayer did not deny she acquired those goods and services but insisted it was irrelevant what she did with the money, as it was not income in her hands.
The taxpayer said she started to get phone-calls from people late in 2008 about her husband’s business. Uncomfortable questions were being asked. (That is unsurprising: early in 2009, the police raided the offices of the company and the taxpayer’s office in connection with the affairs of the company and Mr Smith.) It seems her relationship with her husband was also entering a troubling phase in 2008. On 10 October 2008 she wrote to her husband about the problems. A copy of the text of the note has been reproduced in exhibit 24. She complained about not being provided with information about the finances of the company. She also complained that payments were not being made into her accounts and their joint account. She said:
The statements come out Monthly and I have been asking for copies since December 2007. I gave you the $100,000 to become a director of the Company. I had decided to only be a Shareholder to protect our future. Why have you not been giving me copies of Statements when I have asked so many times for these? (Emphasis in original) [sic]
She concluded the note saying:
…I am part of [the company] and need to be more involved. I am five subjects of completing a Masters of Business degree but did not complete this degree. I have always worked in business. Why do you choose to behave like this? Why do you lie and deceive me? Why are you keeping so many secrets and stopping me from knowing more about the business? WHEN CAN I START TRUSTING YOU? [sic]
The reference to her being a shareholder in the business is interesting. There were other hints in the evidence that the taxpayer had a more active involvement in the affairs of the company than she suggested in her evidence-in-chief. She was a joint signatory on the company’s cheque account. She told her pastor in a letter (exhibit 11) that she had been a shareholder in the business which “we” had taken over. She is noted in ASIC’s records as having been a shareholder in the company (exhibit 31). I note she specifically denied when questioned by the police that she had an active role in the company: exhibit 26 at p 31.
There is also a curious reference to the taxpayer advising her husband to “skim off $10,000 or $20,000 a week to pay down the mortgages”: exhibit 23; and a statement (in a letter to her accountant – exhibit 27) that “I do operate within the Company behind the scenes”. She added in that note she had been told by the company’s book-keeper that the monies paid to her by the company were being recorded as loans. She told her accountant she was not happy with that arrangement. She said:
I told [the book-keeper] I do not want the monies paid as a Loan to me as should anything happen to the Company I would be responsible for paying these monies back to the Company. …
…I did ask [Mr Smith] when I was paid monies to purchase the homes that he put cash into my account so that the monies could not be traced back to the Company so as to keep separate from the Company to avoid risk. (Underlining in original) [sic]
I note the taxpayer was also provided with a group certificate from the company suggesting she was an employee. There is no other evidence to suggest she was employed by the company.
The taxpayer’s explanation in her oral and written evidence of her role in and relationship with Mr Smith’s company is not consistent with the documentary evidence. That other evidence – in particular exhibit 24 – suggests she was an independent investor in the company and expected to receive a flow of income as a return on her investment. While it is unclear whether she actually was a shareholder in the company, I am satisfied the evidence establishes she expected regular payments from the company (although it also suggested she was not fussed about how those payments were obtained or characterised, as long as they were not depicted as loans to her which might be recoverable) that would enable her to expand her property holdings and live a luxurious lifestyle. While I accept the evidence also suggests Mr Smith may have kept her in the dark about his activities and excluded her from the operations of the company, I am satisfied the taxpayer expected and did receive approximately $1.6 million from the company in connection with her investment. In any event, I am certainly not persuaded the taxpayer has discharged the responsibility imposed under s 14ZZK of the Taxation Administration Act 1953 (“the Administration Act”) to offer a better alternative explanation for what transpired.
THE LEGISLATION
The Commissioner said the $1.6 million recorded as being paid to the taxpayer should be regarded as income according to ordinary concepts pursuant to s 6-5 of ITAA97. I agree. My factual finding that the taxpayer was an investor who expected and received a return on the investment she made makes that conclusion inevitable. I do not accept she was acting as a supportive spouse who passively received benefits provided to her by her husband under a matrimonial arrangement. The documents suggest she approached her involvement with her husband and the company as a business decision that she expected would yield a profit in her hands. The bulk of that money was paid into an account to which she had access, while further amounts were paid at her direction (mostly, it seems, out of accounts on which she was a joint signatory). There is no question it is assessable income in her hands.
PENALTY
The Commissioner assessed the taxpayer as being liable to an administrative penalty on the amount of the shortfall. The penalty was imposed pursuant to s 284 of Schedule One of the Administration Act in light of a false or misleading statement that resulted in a taxation shortfall. The Commissioner determined the applicable base penalty was 50% because the taxpayer‘s shortfall resulted from recklessness: item 2 of s 284-90(1).
The Commissioner said a taxpayer is reckless where his or her behaviour falls well short of the standard of care expected of a reasonable taxpayer in the same position. Reckless behaviour is behaviour that is more serious than a mere want of reasonable care, which attracts a 25% penalty. Recklessness also assumes a degree of indifference to reasonably foreseeable risk that there would be a shortfall. I accept that is a fair explanation for the standard that should be applied, and I accept it describes the taxpayer’s behaviour in this case. Her statements to the Commissioner simply cannot be reconciled with the underlying facts as I have found them, and she must have been aware of that fact – and the implications, especially given she was a business woman with some experience. She also had professional advisers, which makes it even harder for her to argue her behaviour should be seen in a more benign light.
I am satisfied the base penalty imposed by the Commissioner was appropriate. That leaves only the question of remittal. The taxpayer said she has suffered a great deal as a result of her former husband’s bad behaviour. There has been a good deal of adverse media publicity and she has experienced a decline in her business (although evidence put to the taxpayer during cross-examination does not support that claim). I note (exhibit 25) the taxpayer appears to have voluntarily participated in some of that publicity by giving quotes and agreeing to be photographed in stories about her husband’s affairs. She argued it would be harsh in all the circumstances of the case for her to be penalised when she presented herself as a victim of a scoundrel.
I do not accept there was anything in what the taxpayer said about her circumstances which suggests it would be harsh to impose the penalty. I was not told anything which suggests the penalty should be remitted, either in whole or in part.
CONCLUSION
The objection decisions under review must be affirmed.
I certify that the preceding 26 (twenty six) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe .
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Associate
Dated 23 July 2013
Dates of hearing 9 and 10 April 2013 Date final submissions received 7 May 2013 Counsel for the Applicant Mr D Marks Solicitors for the Applicant Whitehead Gupta Lawyers Counsel for the Respondent Ms E Ford Solicitors for the Respondent ATO
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