Wood and Commissioner of Taxation
[2007] AATA 1802
•25 September 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1802
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NT2006/2614
TAXATION APPEALS DIVISION ) Re SUZANNE WOOD Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr Julian Block, Deputy President Date25 September 2007
PlaceSydney
Decision The decision under review is affirmed.
...................[sgd]...........................
Mr Julian Block
Deputy President
CATCHWORDS
TAXATION - derivation of income – consideration of evidence as to error in return – meaning of “derive” or “derivation” – money not derived because no consent or agreement – credit allegedly made erroneously - discharge of onus of proof - decision under review affirmed
LEGISLATION
Taxation Administration Act 1953 – section14ZZK
Income Tax Assessment Act 1936 - section 19
Income Tax Assessment Act 1997 – section 6-5(4)
CASELAW
Commissioner of Taxation v Hart (2004) 217 CLR 216
Jones v Dunkel (1959) 101 CLR 298
Temples Flowers Supplies Pty Ltd v Commissioner of Taxation (1991) 29 FCR 93
Brent v Federal Commissioner of Taxation (1971) 125 CLR 418
York Street Mezzanine Pty Ltd (in liq) [2007] FCA 922
REASONS FOR DECISION
25 September 2007 Mr Julian Block, Deputy President PART A: introduction and background
1. The objection decision under review in this matter is the disallowance by the respondent of an objection by the applicant against an amended assessment dated 12 December 2003 in respect of the year ending 30 June 1998 ("the Relevant Year").
2. The applicant was represented by Mr D. Jarrett of counsel instructed by Moore and Moore, accountants. The respondent was represented by Ms K. Deards of counsel instructed by Mr E. Chiaw of the Australian Taxation Office (“ATO”) Legal Services.
3. The Tribunal had before it the T-Documents, supplementary T-Documents and further supplementary T-Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. Since all three sets of documents are numbered sequentially, it is not necessary to distinguish between them, and so that a simple reference to the relevant page, preceded by the letter “T”, will suffice. The Tribunal also accepted into evidence the following exhibits:
Exhibit A1:A diagram entitled "Cash Flow of Income", which was prepared by the applicant's husband, Mr Brian Wood (and who is referred to as "Mr Wood" or as "her husband" or as "the applicant's husband"). The diagram indicates that Australasian Management Consultants Pty Limited ("AMC") derived income from three sources, described as property sales, finance commission and wattle commission. The directors of AMC were Mr Bob Cooper and Mr Wood. Exhibit A1 records specifically that AMC was managed by Mr Wood. AMC in turn paid all of its net earnings, after expenses, to Cooper Nominees Pty Limited and BMW Consulting Pty Limited ("BMW”) as to one half each. In respect of the Relevant Year, the directors of BMW were the applicant and Mr Wood. Exhibit A1 also indicates that Mr Wood received directors’ fees, while the applicant received a salary from BMW. (The evidence established that this last statement, at least in respect of the Relevant Year, was incorrect.)
Exhibit A2:A letter by Mr John Moore of Moore and Moore Finance and Tax Solutions, to Mr Chiaw, Senior Litigator, ATO, dated 17 May 2007. The second paragraph reads as follows:
…
In relation to category 1 of documents sought there are no documents to produce as the statutory record keeping period under both Tax law and Corporations law being 5 and 7 years respectively has expired. In this regard also refer to the response from Suncorp Banking stating that they also do not keep such records beyond the statutory 7 year period.
…
Exhibit A3:A document entitled "Income: Question 1 Salary or Wages”. This exhibit proved to be of no relevance.
Exhibit A4:An affidavit by Mr Wood dated 17 July 2007 (but headed 18 July 2007).
Exhibit A5:An affidavit by Mr Wood dated 23 August 2007.
Exhibit A6:A letter by Gall Standfield and Smith, solicitors, addressed to the Tribunal, dated 31 May 2007, inclusive of a number of documents sent under cover of that letter in answer to a summons.
Exhibit R1:A letter by the respondent to Mr Wood, dated 13 January 2006, in which the respondent advised Mr Wood that it was not prepared to grant him an extension of time within which to lodge an objection against an amended assessment issued against him on 25 November 2003, in respect of the Relevant Year.
Exhibit R2:A letter dated 8 February 2006, by the respondent to Mr Wood, disallowing his objections dated 6 February 2004 against amended assessment for the Relevant Year and two other tax years.
Exhibit R3:A letter dated 15 April 2004, by the respondent to Mr Wood, disallowing his objection dated 4 December 2000 against his amended assessment for the year ended 30 June 1997.
Exhibit R4:A letter dated 14 October 2005, by the respondent to Mr Wood, disallowing his objection dated 17 January 2003 against assessments for the Relevant Year and one other year.
Exhibit R5:A document entitled "Reasons for Decision" referable to an objection by Mr Wood in respect of the Relevant Year.
Exhibit R6:A letter dated 16 June 2007 from Mr Moore to Mr Chiaw. The second paragraph of the letter reads as follows:
…
In relation to category 1 of documents sought there are no documents to produce as the statutory record keeping period, under both Tax law and Corporations law being 5 and 7 years respectively, has expired.
…
PART B: an overview – what this case is all about
4. The applicant's tax return for the Relevant Year appears at T19 to T31. It was signed by her as true and correct. The return was prepared by Cash and Co, and it reflects inter alia that the applicant:
(a)derived directors’ fees from BMW of $507,900;
(b)sustained a primary production loss of $1,027,185;
(c)derived $50,000 by way of salary from BMW;
(d)derived trust income amounting to $242,499; and
(e)had tax instalments of $15,000 deducted.
5. Overall, the applicant sustained a loss in respect of the Relevant Year, and received a refund of $15,000, being the amount referred to in clause 4(e).
6. Mr Wood’s tax return for the Relevant Year appears at T175 to T180. It too was signed by him as true and correct. It indicates inter alia that:
(a)he derived a salary from BMW of $50,000;
(b)he derived directors’ fees from BMW amounting to $622,680;
(c)he sustained a primary production loss of $1,030,525;
(d)his return was prepared by Mr Graham Kevin Cash (who is referred to in these reasons as "Mr Cash"); and
(e)$15,000 was deducted by way of tax instalments.
7. In the result, Mr Wood also sustained a loss overall for the Relevant Year, and received a refund of $15,000, referred to in clause 6(e).
8. It may be noted that Mr Cash prepared the Relevant Year returns for the applicant, her husband and BMW.
9. BMW was managed by Mr Wood; however, the applicant rendered secretarial services on a part-time or casual basis. Each of them received a salary from BMW of $50,000. (Exhibit A1, insofar as it describes Mr Wood as having been in receipt of directors’ fees only, and the applicant as having been in receipt of a salary only, is not, at least in respect of the Relevant Year, accurate.) BMW received one half of the net earnings of AMC, which, as set out previously, was managed by Mr Wood.
10. The applicant was a director of BMW from 1994 until April 1998. Mr Wood, in his evidence, explained that prior to her retirement as a director, a company, as a matter of company law, required two directors. For a time, the two directors of BMW were Mr Wood and Mr Moore. However, the applicant was appointed in place of Mr Moore when the Wood family moved to Queensland.
11. Each of the applicant and her husband claimed a large primary production loss (in excess of $1 million) in the Relevant Year. Each of them had become involved in mass-marketed tax-advantaged agricultural schemes including, inter alia, schemes referable to tomatoes and mushrooms. In addition, the applicant invested in a wattle scheme, which apparently involved the derivation of interest which might or might not be reinvested. Details in respect of those schemes (collectively “the agricultural schemes”) were not made available to the Tribunal, and indeed, it may not have been necessary for such details to be provided. So far as can be gathered from the evidence, the agricultural schemes involved non-recourse or limited recourse loans. Mr Wood was clearly heavily involved in the wattle scheme or schemes. He subsequently pleaded guilty to 21 charges of marketing prescribed interests (referable, according to his evidence, to wattle schemes) without a prospectus. He described the offences as “technical”, and their seriousness was apparently not appreciated by him, notwithstanding the fact that in consequence he had received a banning order by the Australian Securities and Investments Commission (“ASIC”), and could no longer act as a director of either BMW or AMC. (His statutory declarations, to the extent that they refer to his being a director of those companies at the time when they were sworn, were plainly, in this regard, erroneous.)
12. Mr Wood became embroiled in serious difficulties arising, in particular, from the wattle schemes. At one time he was one of several defendants in an action launched by numerous investors who had lost substantial amounts. He was made bankrupt a few months prior to this hearing, and at the time of the hearing, he was an undischarged bankrupt. His indebtedness, inclusive of penalties and interest, to the respondent is very large indeed, and it seems clear that there is no prospect of recovery of any amount by the respondent of the amount owing.
13. The applicant, in her evidence, said that BMW had both an accountant and a bookkeeper. Mr Wood, whose evidence on this aspect is likely to be more accurate, said that a Mr Russell Cross (referred to in these reasons as "Mr Cross") acted as bookkeeper to both AMC and BMW, and that although he was remunerated by AMC only, he rendered accounting and similar services to both AMC and BMW. According to Mr Wood, the reference by the applicant to an accountant related to Mr Cash, who was the tax agent who prepared the Relevant Year returns for BMW, the applicant and Mr Wood himself.
14. The evidence of the applicant, although far from impressive, can be accepted in one respect; Mr Wood managed BMW and he described it as his own company. She was guided by her husband, and perhaps "directed" is a more apposite description, in all respects relating to her financial affairs.
15. The manner in which BMW dealt with its earnings in relation to the applicant and her husband, while not in all respects the same as related by each of them, is likely to be more accurate as described by Mr Wood. BMW received one half of the net earnings of AMC. The applicant and her husband conducted a joint banking account on which each could, and indeed did, draw. Although the applicant referred to two joint banking accounts, the evidence of Mr Wood indicated that it was in reality a split account, connected with a mortgage and perhaps akin to the account described in Commissioner of Taxation v Hart (2004) 217 CLR 216. During any given year, and on a periodic basis, payments referable to household and other expenses of the applicant and Mr Wood were made in two ways. On many occasions, payments were made into the joint banking account from which each could, and did, draw. On other occasions, payments were made directly to the creditors entitled to payment. This was so, in particular in relation to motor lease payments. In all cases, the payments were treated in the books of BMW as debits to a loan account, maintained by BMW in the joint names of the applicant and her husband. At the end of each year, BMW's available profits were paid by way of directors’ fees, and credited to that joint loan account in their joint names. Put in other words, there was a running joint loan account in the name of the applicant and her husband which was debited with monies paid to them or on their behalf, and was credited at the end of each year with directors’ fees, which were broadly equivalent to BMW’s net income.
16. It is relevant to note that the applicant could not produce any accounts or banking records for the joint loan account referred to in the preceding clause. The Tribunal was advised that ASIC seized all of the books and records. A letter by the applicant to the respondent dated 19 February 2007, which appears at T145, reads as follows:
Australian Taxation Office
To Whom It May Concern,
This letter is to support the attached Wattle Document submitted as additional evidence relating to my appeal.
The Australian Security Commission took all documents in our possession relating to the Wattle Group in 1998. Approx. one year ago they returned the documents and they were stored in Queensland. The documents were bundled together and out of the files they were taken in, which made it impossible to sort through. Over the Christmas break the documents were sorted and the attached Wattle Agreement was found.
This document was signed by me in 1996 to action a change in my Wattle Investment from a monthly payment to a compounded payment. The document was forwarded to ANSCOR as the Wattle Administrator to action the change and have the Wattle Group process the loan in accordance with my instruction.
Yours Faithfully
(signed)
Suzanne Wood
17. It will be noted that the letter quoted at clause 16 stated that ASIC returned the books and records it had seized. Mr Wood's evidence was that ASIC returned some only of the relevant books and records, and was confined to those referable to wattle customers. There was no suggestion or evidence as to why ASIC would have wanted to retain any of the books and records seized. Exhibits A2 and R6 indicate that, according to Mr Moore, financial records need not be retained after the expiry of a statutory period of seven years, which in relation to the Relevant Year, occurred in 2005. Indeed, and in Exhibit R6, Mr Moore referred to documents being “discarded”.
18. Some documents were produced in answer to a summons by Gall Standfield and Smith, solicitors, who were, according to Mr Wood, solicitors representing the investors, and not him or the applicant: see Exhibit A6.
19. Put in summary form then, the applicant and her husband could not produce any accounts or financial records, other than those which appeared in the T-Documents.
20. In respect of the Relevant Year, and in accordance with their respective tax returns, the applicant and Mr Wood reflected directors’ fees of $507,900 and $622,680 respectively, derived from BMW. Mr Wood, in his evidence, said that while he signed his own return, and directed the applicant to sign her return, he did so after reading them in a cursory fashion, and after satisfying himself that each of them would not be liable for any amount of tax in respect of the Relevant Year.
21. T204 is a resolution of the Board of Directors of BMW in respect of the Relevant Year. It records that the applicant was present by invitation. Mr Wood said that the applicant had resigned from the Board, but agreed that that had occurred towards the end of the Relevant Year. T204 reads as follows:
MINUTES OF A MEETING OF THE DIRECTORS
OF B.M.W. CONSULTING GROUP PTY. LIMITED
A.C.N. 003 738 789
HELD AT BUNDALL
ON 29th DECEMBER 1998 AT 10.00AM
CHAIRMAN: MR BM WOOD
was elected to chair the meeting.
PRESENT: MR B WOOD
AND, BY INVITATION, MRS S WOOD
MINUTES OF The chairman reported that the minutes of the previous
PREVIOUS meeting had been signed as a true record of that
MEETING: meeting.
ACCOUNTS: It was RESOLVED with respect to the company’s accounts for the financial year ended 30th June 1998 tabled at the meeting, that in the opinion of the Directors:
(a)the profit and loss statement is drawn up so as to give a true and fair view of the results of the company for the financial year; and
(b)the balance sheet is drawn up so as to give a true and fair view of the state of affairs of the company as at the end of the financial year; and
(c)at the date of this statement there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due; and
(d)the company has kept such accounting records as correctly record and explain its transactions and financial position; and
(e)the company’s accounting records have been kept in such a manner as would enable true and fair accounts to be prepared from time to time; and
(f)the company’s accounting records are in a form that would enable its accounts to be conveniently and properly audited in accordance with the Corporations Law; and
(g)the company’s accounts have been properly prepared by a competent person; and
(h)the company’s accounts have been made out in accordance with statements of Accounting Concepts and applicable Accounting Standards;
and, it was further RESOLVED that a statement to the effect of the above resolution be signed by two directors and attached to the accounts.
22. The applicant had no recollection of the resolution referred to in the preceding clause, and indeed it must be said that she had almost no recollection of anything else in relation to the affairs of BMW. Mr Wood said, and repeated, that he knew nothing of the resolution, or of the meeting to which it referred, and described it as a standard form document. A consideration of its content indicates that it would certainly form part of the financial records of BMW.
23. T59 is a document headed “BMW Pty Limited 1998”.
24. T59 is replicated on the left-hand side of one landscape page at Attachment A. It will be noted that T59 contains some handwritten notes and alterations. On the right-hand side of Attachment A is a transcript (made by the ATO) of the handwritten notes. The handwritten notes on the right-hand side of T59 are darker than those on the left hand side. Mr Wood agreed that the notes at the foot of the page commencing, "Yes. Re provision consulting …" were made by him. He said that he did not know who made the other handwritten notes, and categorically denied any knowledge whatever of the content under the head of "directors’ fees", which relate to an allocation (in respect of directors’ fees) of $600,000 (altered in handwriting to $620,650) for Mr Wood, and $507,900 for the applicant. Given that T59, on his own admission, contains a note in Mr Wood’s handwriting, it is unlikely that he was not aware of its contents.
25. T60 is much the same as T59, except that it does not contain the notes in darker ink on the right-hand side of the page.
26. T62 is a trial balance in respect of BMW for the Relevant Year, and is annexed to these reasons marked Attachment B.
27. The trial balance referred to in clause 26 indicates, under the head of “Expenses” in account 1625, a debit of directors’ fees amounting to $1,128,580, and includes a handwritten note apportioning $620,680 (originally $600,000) to Mr Wood, and $507,900 to the applicant. Mr Wood denied that he had ever seen T62.
28. It is to be noted then, that the T-Documents do include a number of references to the fact that the directors’ fees would be allocated between the applicant and her husband. Repeatedly in cross-examination, Mr Wood said that Mr Cash would have acted in accordance with information furnished by the bookkeeper, but of which he, Mr Wood, had no knowledge whatever. Given that Mr Wood referred (almost certainly accurately) to BMW as his own company, it must be doubted whether the bookkeeper or the accountant would have made so important a decision unilaterally, and without the consent, approval and indeed direction of Mr Wood. The evidence of Mr Wood on this point (and many others), cannot, therefore, be accepted as truthful.
29. Mr Wood was asked whether Mr Cross would be giving evidence. He said that he did not know where Mr Cross was. He also said also that he had made no effort to contact him.
30. As to Mr Cash, who prepared the relevant tax returns, Mr Wood said that he had retired, that he had sold his practice, and that he might also have left the country. He also said that he had made no effort to contact Mr Cash. (On this point, it may be noted that Mr Cash was apparently only one of the members of the firm who constituted Cash and Co; even if Mr Cash were not available, the necessary documentation might have been available from one of the others in the firm.) The fact that this evidence (and the evidence referred to in the preceding clause) was not produced, and that no attempt was made to procure it, must give rise to a Jones v Dunkel inference that the evidence would not have assisted the applicant: Jones v Dunkel (1959) 101 CLR 298.
31. When the hearing first commenced, Mr Moore was present in the hearing room. He became the tax agent to the applicant and her husband at some point in time (never specified with any certainty) after the Relevant Year. It is he, according to Mr Wood, who conducted a review of the tax affairs of the applicant and her husband after the losses claimed were disallowed, and it was he who advised that this application for review be brought. Mr Moore was asked to leave the hearing room because it was then contemplated that he might be called to give evidence. As to the fact that he had not furnished a witness statement, Mr Jarrett said that one could be prepared if necessary. In the result, Mr Moore was not called to give evidence.
32. The timing of this review application is significant. After receiving an amended assessment and pursuant to which the losses claimed were disallowed, the applicant made an application for an extension of time within which to seek review (and some considerable time after the statutory time period had expired); that application was granted. Mr Wood was asked in cross-examination whether he had sought an extension of time within which to seek a review of his own return, and so as to correct it. He answered that he had not done so because he was awaiting the result of this application by the applicant, and that his own actions would turn on whether the applicant was successful. The exhibits reveal that he did in fact seek to object, and that he did indeed seek an extension of time (also some considerable period after the relevant statutory period had expired), but that he did not seek review of the respondent’s refusal of an extension of time.
33. Some of the evidence given by Mr Wood, in particular, has been dealt with in this Part B. His evidence, in general, will be dealt with more particularly later in the reasons.
PART C - the evidence of the applicant
34. The applicant said that her statutory declaration, dated 16 August 2006 at T54, was true and correct. Because it constituted, for the most part, her evidence in chief, it is included in these reasons as follows:
I Suzanne Ellen Wood of … do solemnly and sincerely declare that
1.Following amounts were declared as interest received from Geoffrey Dexter, Trading as ‘The Wattle Group’ in my tax returns for the financial years ending 30th of June 1996, 1997 and 1998.
Year Amount of Interest from Wattle Group
1996 $7,500
1997 $49,500
1998 $139,126
Total $196,136
2.To best of my recollection all interest earned during the financial year ending 30/06/1996 was paid to me and the interest earned during the financial years ending 30/06/1997 and 30/07/1998 was re-lent to The wattle Group at the same conditions as the original investment. Therefore to the best of my recollection $7,500 was paid to me and $188,626 was re-lent to The Wattle Group.
3.All documentation that was in my possession relating to the above transactions was seized by the Australian Securities and Investment Commission (ASIC) for their investigation on The Wattle Group. Subsequent to the investigations ASIC had ruled what the Wattle Group was operating was a PONZII scheme and the amounts paid back as interest was really capital returned. I lost in excess of $400,000 in my investments in Wattle Group.
And I make this solemn declaration …
35. The applicant furnished another statutory declaration, dated 16 August 2006 which appears at T55, and it reads as follows:
I Suzanne Ellen Wood of … do solemnly and sincerely declare that
1.I was a director of BMW Consulting Pty Ltd from 1990 to 1998. I resigned as a director on 22/04/1998 and my resignation was accepted by the members of the company.
2.I was a non working Director of the company and was not entitled and did not receive Directors fee from the company at any time. I was not a signatory to the company bank accounts nor did I play any role in the running of the company.
3.Only work performed by me for BMW consulting Pty Ltd was administrative and secretarial tasks as a casual employee. I was paid wages of $50,000 by BMW Consulting Pty Ltd in the financial year ending 30/06/1998 for my services. I was issued a group certificate for this. I did not receive any director’s fee from the BMW Consulting Pty Ltd during the financial year ending 30/06/1998.
4.My tax return of the year ending 30/06/1998 was prepared in error by my previous tax accountant who included $507,900 as Director’s fee from BMW Consulting Pty Ltd. I signed the return without properly checking it since the tax payable for that year at the time of preparing the return was nil. It could be seen from my tax returns that I was not paid director’s fee before or after 1998. The accountant who prepared my tax return arbitrarily attributed the director’s fee to me. I am unable supply [sic] any documentation from BMW Consulting Group Pty Ltd, other than the previous accountant’s work papers allocating the director’s fee since all their documentation has been seized by ASIC.
5.I did not have an independent bank account during 1998 into which the director’s fee could have been paid nor have I ever had an independent bank account. All my personal bills were paid by my husband.
6.This discrepancy was brought to my attention only when my current tax accountant reviewed my previous tax returns in 2005 at which time amendments were lodged with the ATO.
And I make this solemn declaration …
36. In cross-examination, the applicant’s answers were to a very large extent confined to, "I don't recall" or “I don't know" or "I did what my husband told me to do". It has to be said that many of those answers were probably true, but this is not so in respect of all of them. It must be remembered that the applicant was employed by BMW, and it is inconceivable that she was as ignorant of its affairs as she claimed. It can be said that in general terms, her evidence was of virtually no probative value in relation to the onus on her pursuant to section 14ZZK of the Taxation Administration Act 1953 (“the 1953 Act”)
37. In the remainder of this Part C, I intend to refer to those aspects of her evidence which cannot be categorised purely as blank denials, in the manner referred to in the preceding clause.
38. The applicant was asked whether she prepared her statutory declaration at T55. Her answer was that she could not recall. She said that she had virtually no recollection of any of the affairs of BMW. It became clear that T55 was certainly not prepared by her, and it was also not, in all respects, accurate. She said in clause 15 that she did not have an independent bank account and that all of her personal bills were paid by her husband. Mr Wood said that monies were paid into the joint banking account, and that she had, and used, signing powers.
39. When taken to T219 to T223 (a report as to the affairs in respect of BMW in liquidation) the applicant said that the handwriting was not hers, but that she signed it because her husband told her to do so. She specifically acknowledged her signature at T224.
40. The applicant claimed that although Mr Cash was her accountant in the Relevant Year, she had no discussions with him and gave him no instructions. She signed her tax return for the Relevant Year, so she said, because her husband told her to do so.
41. Taken to T119 and T121 (which relate to a wattle scheme), the applicant said that she might have seen T119 previously, and agreed that T121 does bear her signature. However, when asked whether she agreed with the content of T121, she said that she did not; she did not explain why not.
42. When asked if anything in the statutory declarations at T54 and T55 might be inaccurate, she said that she could not recall.
43. The applicant was next referred to T53, a letter by her to the respondent dated 16 August 2006, in which she said that she was including, inter alia:
5Working papers of the accountant who arbitrarily allocated the directors fee to me.
44. When asked whether she could point to any such working papers, she said she could not.
45. Cross-examined as to the statement of facts and contentions filed on her behalf, the applicant agreed that it was not prepared on her instructions, and she would have no knowledge as to its content.
46. When asked about the joint banking account (and she referred to two joint banking accounts), the applicant said that both she and her husband had made withdrawals.
47. The applicant said that she did not know when she became aware of the alleged error in her Relevant Year return (in respect of the directors’ fees from BMW). However, when she was referred to T36, she agreed that this occurred in August 2005, as stated on that page (being her request for an extension of time within which to seek review of the disallowance of her objection). The applicant was again referred to T145, the content of which is set out in these reasons in clause 16. When asked when the documents were returned by ASIC, she said that she did not know. When it was pointed out to her that T145 stated that the documents had been returned in early 2006, she answered, "one could be right or one could be wrong”.
48. It is unnecessary to deal in any greater detail with the evidence of the applicant, except to say as previously mentioned, that the applicant demonstrated, or claimed, a nearly complete lack of knowledge of any relevant financial matters.
PART D: the evidence of mr wood
49. Mr Wood's evidence in chief consisted largely of his statements that Exhibits A4 (dated 17 July 2007, but headed 18 July 2007) and A5 (dated 23 August 2007) are true and correct. They are included in full in these reasons as follows:
On 17 July 2007, I, Brian Wood of …, financial consultant say on oath:
1.I am the husband of the Applicant.
2.This Affidavit is sworn in support of the Application.
3.I am a director of BMW Consulting Pty Ltd.
4.I am also one of the directors of Australian Management Consultants (“AMC”).
5.BMW Pty Ltd derives income wholly from consultancy services provided to AMC.
6.I am and have always been the only person who has done work for BMW in providing consultancy services to AMC.
7.In the year ended 30 June 1998, I was a director of BMW. As was my wife, Suzanne Wood. She ceased to become a director by resolution on 22 April 1998 when sole shareholder director companies became possible and her presence was no longer required for this formal purpose.
8.In respect of the $507,900 of directors’ fees that were erroneously credited for accounting purposes by way of journal entry by the then company bookkeeper, I had no knowledge that these amounts were credited to Suzanne Wood.
9.If I had been aware that such amount had been credited, I would have not approved such amount as I carry out all the work for which BMW derives income.
10.This was an entry made by the then bookkeeper of the company and was not made under direction from either myself or Suzanne as then directors.
11.The crediting of the director’s fees to her and in the inclusion in the 1998 tax return was unknown to me until a review was conducted by tax agent, John Moore. He was not the tax agent at the time that the return for Suzanne Wood for 30 June 1998 was prepared and lodged.
Wattle Group income
12.In respect of application 2006/2613 & 2614:
a.I have seen the supplementary “T” documents submitted by the ATO and see that amounts have been credited as interest income to Suzanne Wood in the year ended 30 June 1998;
b.I am of the view that of these amounts credited, some may not have been actually received, and others may have been re-invested upon receipt;
c.I have been unable to obtain any documentation for the year ended 30 June 1998 up until this time because of the seizure of documents by ASIC in relation to the proceedings they conducted and because the bank does not hold such bank statements, therefore I was unable to ascertain what amounts had actually been received in income from the Wattle Group and what amounts had been re-invested until I viewed the ATO supplementary “T” documents. As I cannot get access to all records from this time I am unable to construct a documentary background to prove the application.
Sworn at Sydney
…
On 23 August 2007, I, Brian Wood of … financial consultant say on oath:
1.This affidavit is sworn in response to issues arising from the Respondent’s Statement of Facts, Issues and Contentions dated 10 August 2007.
2.In relation to paragraph 13 and the unsigned Minute of Meeting of Directors of BMW on 29 December 1998, adopting the accounts of 30 June 1998 year, I did not see this minute at the time and never did sign this minute, nor did Suzanne Wood as she was not a director at the time.
3.In relation to paragraph 22 of the respondent’s facts at the time that Suzanne Wood lodged objections for the year ended 30 June 1998 (1 November 2005) in the form of an Amended Income Tax Return I had received legal advice in relation to the class action against various defendants including myself involving the activities of the Wattle group that the plaintiffs were highly unlikely to continue their case as they were unfunded and many of them were withdrawing.
4.In relation to paragraph 25 of the respondent’s facts that the Applicant signed a Form 507 entitled report as to affairs on 30 April 2007 on behalf of BMW, I say. This report was filed by Mr Hank De Jonge of De Jonge Read who was a specialist insolvency practitioner who acted as a consultant for the former directors in the winding up of BMW. This in the main involved liaising with the liquidator and filling out compliance forms including the report as to affairs. The reason that the Applicant signed this report was that she had previously been a director of BMW Pty Ltd. I was the sole remaining director of BMW Pty Ltd, at the time of a banning order from ASIC which was made in October 2003 due to my technical breach of the Corporations Law arising out of my involvement in the Wattle Group and therefore I could not sign in the capacity as a director. The person with the greatest authority was a former director and she was requested to sign the form by Mr De Jonge [Refer ST 17-224 and ST 17-225]
5.The unsecured creditors of BMW in the amount of $249,103.11 referred to in para 25(b) was amounts owing to B and S Wood for payments made in relation ongoing [sic] lease liabilities of BMW which B and S Wood paid as they were guarantors of those leases and a loan account was raised in the BMW in favour of B and S Wood for these amounts.
6.In relation to paragraph 26 of the respondent’s facts I presented a debtor’s petition on 24 May 2007 to the official receiver in bankruptcy because the litigation referred to in para 3 above was listed for hearing on May 27 2007 and I was not raising a defence and hence a judgment debt would take effect against me and this formed the basis of the petition.
7.I have examined the Mascot search of 26/3/2007 of BMW PL and say that it does not correctly record directorships of the company though I do agree Suzanne Wood was a director of BMWPL from January 1994 to April 1998.
Sworn at Sydney
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50. When referred to T59, Mr Wood said that he first saw it in 2004 or 2005.
51. Mr Wood said that Mr Cross was the administration manager of AMC and BMW and that he, Mr Cross, provided information for the purpose of the Relevant Year tax returns. When asked why Mr Cross was not called to give evidence, he said that he did not know where Mr Cross was.
52. Questioned at some length as to the handwritten notes or alterations included, in particular on T59 and T62, Mr Wood said that he recognised only the remark in his handwriting at the foot of T59.
53. As to T204, Mr Wood agreed that he recognised it as the minutes of a meeting, and he agreed that it appeared to relate to the accounts of BMW. However, he expressly denied any knowledge of the directors’ fees allocation contained in T62.
54. Mr Wood said, as indicated previously, that he and the applicant had a joint banking account (in their joint names) with Metway Bank, and that Cash and Co, as their accountants and tax agents, prepared their tax returns. He said that Mr Cash is no longer in the accounting business because he has retired.
55. Mr Wood again denied any knowledge of the handwritten notes in relation to the directors’ fee allocations in T62.
56. I do not think it necessary to deal in any detail with Mr Wood's evidence as to his various objections, and when they occurred. He said that in 2004, a Mr Colin Thomas was contemplating an objection to the amended assessment and that Mr Moore became involved. (Mr Thomas, according to Mr Wood, wrote a tax opinion on at least one of the agricultural tax-advantaged schemes referred to earlier in these reasons.)
57. Referred to the last sentence in paragraph 4 of T55, Mr Wood was asked how that statement could be reconciled with T145. His answer was that ASIC returned some only of the documents that had been seized.
58. The remainder of this Part D relates, in the main, to the cross-examination of Mr Wood.
59. When referred to Exhibit A4, Mr Wood said that he had been a director of BMW, but that he was no longer a director in consequence of the ASIC banning order. The banning order, referred to earlier in these reasons at clause 11, arose, as he said, from "technical breaches". Mr Wood also said that, "this was how it was regarded by the courts".
60. When referred to T60, Mr Wood was asked whether the wattle income constituted 10 to 15% of AMC's total income. He answered that this was so for the Relevant Year, but could not say "for sure" whether it was true for longer periods.
61. Mr Wood agreed that Exhibit A1 (prepared by him) was inaccurate insofar as it did not reflect his salary income from BMW.
62. Mr Wood agreed that BMW's practice was to lend monies, by way of debit, to the joint loan account operated by him and the applicant. When asked why the loan account procedure was utilised, he said that, “the loan account and the directors’ fees are the same thing”. He said that the loans were repaid or reduced through the credit of directors’ fees.
63. Mr Wood said that in 1998, BMW did not have a bookkeeper and that Mr Cash was the accountant who prepared the returns, based on information furnished by Mr Cross.
64. Mr Wood said that he first saw T60 in 2004 or 2005, and that Cash and Co had made an error based on information provided by Mr Cross.
65. Mr Wood was next asked about the trial balance at T62 (at Attachment B to these reasons). He said that he had not seen it prior to the hearing, and that it had only been brought to his attention by the applicant’s counsel on that hearing day (29 August 2007).
66. Asked about the working papers referred to in T53, Mr Wood answered that Mr Moore had prepared T53, but did not consult him about its content. When asked whether the trial balance at T62 would have been part of the working papers of BMW, he said that he did not recall the trial balance.
67. When referred to the notes at the foot of T59 (on the left-hand side) as to "cap expenses", he thought that they were written by an accountant employed by Mr Moore.
68. Ms Deards put it to Mr Wood that the notes as to legal fees, at the foot of T59, were made in 1998 when the accounts were prepared. His answer was that they were made in 2004 or 2005. When asked why the notes on the right-hand side of T59 were darker, he said that the notes were made using a pen with darker ink.
69. Mr Wood insisted that he did not notice that the applicant's tax return reflected a directors’ fee of $507,900. He said that the applicant had only a small income, and that he did not notice the error. When it was put to him that he had noticed the entry, he insisted that he had not noticed the entry, and that it was simply an error.
70. Mr Wood was then asked when he first thought that his own Relevant Year return was incorrect. He answered that this occurred in 2004 or 2005, after the review by Mr Moore. He agreed that the applicant applied for an extension of time within which to object, but that he did not do so because he intended to do the same thing only if the applicant was successful. As he put it, it would be necessary to do so only if she were successful because, "otherwise I am doubling up".
71. However, in subsequent (and lengthy) cross-examination, Mr Wood agreed that he had sought to object (albeit a long time after the statutory period had expired), but had not appealed the refusal of an extension of time. He said that, "Mr Moore was looking at that".
72. Mr Wood agreed that he had filed a number of objections, but said that he knew nothing of any educational services scheme. He did agree that he was out of time in respect of all of his objections.
73. When cross-examined as to the documentation seized by ASIC, Mr Wood insisted that ASIC took all of it, but returned some only. When asked whether he knew that the applicant wrote a letter stating that the documentation had been returned, he replied that he had not seen the letter.
PART E: analysis of the evidence
74. The evidence of the applicant was, as I have said, of little probative value. The evidence of Mr Wood was, in important respects, not truthful.
75. Mr Wood was, it is clear, extremely tax-aware. He was an investor in tax-advantaged mass-marketed schemes and through him, the applicant was similarly involved. A significant part of BMW's income was derived from the marketing of such schemes. He gave advice on, and recommended tax schemes of this nature (and BMW derived much of its income indirectly through this source) so much so that he became involved in expensive litigation. His own tax liability is such that bankruptcy became a very real probability, and in fact occurred about three months prior to this hearing.
76. If one analyses the position in 1998, it made good sense in economic terms to split the directors’ fees between the applicant and her husband. Had Mr Wood reflected all of the directors’ fees in his own tax return, he would have had a taxable income well in excess of $100,000. The applicant, by contrast, would have had a substantial carry-forward loss which might have taken a long time to recoup. Having regard to her limited earning capacity, it might have been difficult to utilise it in any realistic time frame.
77. From the bar table and during submissions, Mr Jarrett pointed to the fact that the applicant derived a significant amount of trust income in the Relevant Year. However, there was no evidence whatever as to the nature or source of that trust income, let alone the name and nature of the trust involved. It might have been a unit trust, and it might have been a family discretionary trust. The amount awarded might have been “one-off” in nature or, in the alternative, it might have been a regular annual distribution. However, even if the latter is correct, and there was no evidence to this effect, such a (notional) carry-forward tax loss would have taken a long time to recoup.
78. Mr Jarrett also pointed to the fact that the mass-marketed tax schemes in which the applicant invested might have resulted in returns, and indeed that they were marketed on this basis. That statement might have some merit were it not for the fact that there was altogether no evidence before the Tribunal to this effect, and in addition, subsequent events have established that schemes of this nature were almost invariably entered into in order to derive tax benefits, and that returns have been few and far between.
79. One of the most significant aspects of this case was the quite extraordinary lack of necessary evidence. It is hard, if not impossible, to conceive of Mr Cash and/or Mr Cross preparing tax returns involving such significant amounts, without instructions. But the evidence was that no attempt was made to contact either of them. Mr Moore investigated the matter and as a consequence, this application was belatedly brought. His evidence would have also been relevant, but it was not tendered. As is apparent from Exhibits A2 and R6, Mr Moore additionally relied on a right to delete or destroy relevant financial material after the expiry of a statutory period of seven years. It is hard to believe that he would have done so in respect of accounting records, if they had supported the applicant's case. The timing in this case is also significant.
80. Mr Moore’s investigations occurred only after the tax losses in excess of $1 million (for each of the applicant and her husband) were disallowed. The probabilities strongly favour the view that although it made good economic sense to split the directors’ fees if the losses were allowable, it became clear that the very reverse was so if the losses were not allowed. Even then, applications for leave to pursue review applications were made long after the statutory time limits had expired.
81. The applicant sought an extension of time. However, although Mr Wood did make such an application (despite his initial denial that he did so), it is equally explicable that he did not seek review of the refusal of his application, because no amount of tax can be recovered against him.
82. Mr Moore’s evidence was undoubtedly relevant, and indeed, as set out previously, it was at one stage contemplated that he would give evidence. The failure in the result to call him must also give rise to an adverse inference that it would not have been of assistance.
83. Mr Wood is a large man of commanding presence, and not uneducated. It is inconceivable that decisions of this nature, as to the split of directors' fees, would have been made without his approval and indeed, on the balance of probabilities, he must have directed that the split be made as directed by him. Put in other words, there was no error.
84. Mr. Wood does not appear to be burdened by any feeling of guilt as to the offences of which he was convicted, describing them as “technical”; but they were not. As I have noted, he described BMW as his “own company” and the evidence makes it clear that the applicant acted in accordance with his directions in financial matters. It is altogether inconceivable that decisions of this nature, as to the split of directors’ fees, would have been made without his approval; indeed, and on the balance of probabilities, that split must have been made in accordance with his express directions.
PART F: case law, relevant statute law and conclusions.
85. There are in fact two questions which require consideration. In the first instance, the applicant must demonstrate that the entry in respect of directors’ fees in her Relevant Year return was mistaken, and in this regard she bears the onus under section 14ZZK of the 1953 Act. I find on the evidence before me, and on the balance of probabilities, that the entry was deliberate and that it was not in any way mistaken. Putting it at its very highest for the applicant, she did not discharge the onus on her, and in fact made little attempt to do so. Her husband’s evidence in this regard was unacceptable.
86. The applicant contends that the matter does not end there in that she can be taxed in respect of the directors’ fees, only if she derived them within section 6-5(4) of the Income Tax Assessment Act 1997 (“the 1997 Act”) which reads as follows:
6‑5 Income according to ordinary concepts (ordinary income)
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(4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
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87. Mr Jarrett cited Temples Flowers Supplies Pty Ltd v Commissioner of Taxation (1991) 29 FCR 93 as authority for the proposition that a mere credit to a loan account in favour of a person cannot constitute a derivation without the consent or agreement of the recipient.
88. Mr Jarrett referred also to the judgment of Gibbs J in Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 which dealt with section 19 of the Income Tax Assessment Act 1936 (“the 1936 Act”) and which was cast in terms similar to the corresponding provision in the 1997 Act. Gibbs J stated at page 430 that:
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On the evidence I decline to hold that the company held the balance of the money pursuant to a request by the appellant not to pay it. However, even if the company had deferred payment at the request of the appellant, s. 19 would not have applied. Income is not "dealt with", under s. 19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower. …
89. Ms Deards drew attention to the fact that there is an important aspect of the judgment in Temples Flowers which must be taken into consideration, and which appears at page 103 as follows:
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For the avoidance of any possible misunderstanding, we reiterate that the case turns on the agreed statement of facts, which includes the addendum. That statement seems to have been agreed with the deliberate intention of testing the question whether a mere journal entry, unsupported by any agreement, is enough to constitute a payment of salary or wages for the purposes of s 221eaa. This appeal, therefore, is not the occasion for any discussion of the inferences that might be drawn in a case in which it was open to infer some form of agreement concerning the effect to be given to journal entries (emphasis added).
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90. The critical part of the paragraph at page 103 consists of the words "unsupported by any agreement" and in this case, there was such an agreement between BMW and the applicant. Ms Deards also cited York Street Mezzanine Pty Ltd (in liq) [2007] FCA 922. I do not think it necessary to deal with that decision in any detail, except to say that at paragraph 20, Finkelstein J ruled that, “All that is required is an actual agreement by the relevant parties that payment be made by means of entries in books of account.”
91. In this case, the evidence of Mr Wood was that BMW was his own company. There was an ongoing arrangement between BMW and Mr and Mrs Wood (and Mrs Wood was in this regard represented by her husband, who clearly had power to do so) whereby monies were paid out by BMW to or on behalf of Mr and Mrs Wood. The monies were debited to their joint loan account, and directors’ fees were credited to that joint loan account at the end of the year. Payments out were made either directly to creditors, or into the joint banking account of Mr and Mrs Wood, in respect of which each of Mr and Mrs Wood could, and did, draw. It is therefore clear that there was indeed an agreement, as referred to in Temples Flowers, sufficient to ensure that there was in fact derivation.
92. There is of course a simple reason why this application has been brought. This is set out in clause 34 of the respondent’s submissions, reading as follows:
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34.This position was altered in December 2003 when the respondent issued an assessment to the applicant disallowing the partnership loss. As a result of the disallowance of the loss the applicant’s taxable income was increased to $900,596 (Notice of assessment at T34). The applicant now claims that the director’s fee should be excluded from this amount.
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93. Mr Jarrett in his own submissions suggested that this matter could have been dealt with, and perhaps should have been dealt with, under Part IVA of the 1936 Act. That contention, if contention it was, can be disposed of summarily. Part IVA cannot apply, simply because there was no determination under Part IVA.
94. Clause 34 of the respondent’s submissions (referred to in clause 92 above) is in my view correct. If the applicant was successful, the tax debt referable to the disputed directors’ fees would be owing by Mr Wood, who is an undischarged bankrupt, and from whom nothing can be recovered. Such a result, as far as the applicant and her husband are concerned, is infinitely preferable to that liability being sheeted home to the solvent spouse who is the applicant.
95. The evidence before the Tribunal indicated in the clearest possible terms that BMW paid monies to, or for, the applicant and her husband, debiting their joint loan account with the monies so paid. Where the monies were paid in to the joint banking account, each of them could and did draw on that joint bank account. Where the monies were paid directly to the creditors concerned, they were related to household or other liabilities. At the end of each year, the available profits of BMW were credited to the joint loan account, thus reducing or perhaps eliminating the debit nature of their joint loan account. In matters of a financial nature the applicant, in accordance with the evidence, was accustomed to act in accordance with her husband’s directions. On this basis, it cannot be doubted that there was an agreement between BMW, the applicant and Mr Wood to this effect.
96. It must be remembered, that this case was conducted on behalf of the applicant on the basis that although she reflected an amount of $507,900 as directors’ fees in her tax return for the Relevant Year, that reflection was, so she contended, erroneous and made without her authority or that of her husband, whose decisions in matters of this nature were effectively her own. On this basis, it might be argued, and with some force, that the question of whether or not there was a derivation by her in the sense that the monies “had come home to her”, was not relevant. Put in other words, the applicant did not argue that the amount in question was in fact properly due to her, as her share of the directors’ fees, but that it was not derived by her because the credit to the joint loan account was made without her consent or agreement. She contended by contrast, that there was no proper credit at all because she was not entitled to that share of the directors’ fees. On this basis, the decisions in Temples Flowers and York Street may be of limited relevance.
97. I have come to the conclusion that the applicant cannot succeed. She cannot discharge the onus on her of establishing that the credit was, in effect, a nullity in that it was erroneous and unintended; on this basis, it may not in fact be relevant or necessary to enquire as to whether or not it can be said that there was a derivation within section 6-5(4) of the 1997 Act.
98. But, in the interests of completeness, and in case it can be asserted that the question of derivation is relevant, I note that a derivation argument (or more accurately that there was not in fact a derivation) could not in any event succeed, simply because the credit was made to the joint loan account in accordance with an agreement to which the applicant was party.
99. In these circumstances, the objection decision under review must be affirmed.
I certify that the 99 preceding paragraphs are a true copy of the reasons for the decision herein of Mr Julian Block, Deputy President
Signed: [sgd] .....................................................................................
AssociateDate/s of Hearing 28 and 29 August 2007
Date of Decision 25 September 2007
Counsel for the Applicant Ms K. Deards
Solicitor for the Applicant Mr E. Chiaw
Counsel for the Respondent Mr D. Jarrett
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