WPMS and COMMISSIONER OF TAXATION

[2010] AATA 441

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL          N° 2008/0440-0443

TAXATIONAPPEALS       DIVISION

Re:WPMS

Applicant

And:COMMISSIONER OF TAXATION

Respondent

CORRIGENDUM

Tribunal:       Mr B H Pascoe, Senior Member

Date:23 June 2010

Place:Melbourne

Senior Member Pascoe made a Decision under s 43 of the Administrative Appeals Tribunal Act1975 (the Act) on 11 June 2010.

The respondent’s solicitor advised the Tribunal on 21 June 2010 that there is an error in paragraph 17, line 12 and paragraph 19, line 4.

In accordance with s 43AA(1) of the Act, the Tribunal directs that:

1.at paragraph 17, line 12 the Registrar delete ownershi0p and replace it with ownership; and

2.at paragraph 19, line 4 the Registrar amend However, it is necessary for the respondent to provide such evidence to However, it is not necessary for the respondent to provide such evidence.

(sgd) B H Pascoe
  Senior Member

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 441

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2008/0440-0443

TAXATION         APPEALS        DIVISION		)
Re		WPMS

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B H Pascoe, Senior Member  

Date11 June 2010

PlaceMelbourne

Decision The Tribunal affirms the decisions under review. 

B H Pascoe

Senior Member

INCOME TAX - non-resident – cash deposits to Australian Bank account – sale of assets in Iran – alleged exchange for Australian dollars – cash brought to Australia onus of proof

Income Tax Assessment Act 1997

Taxation Administration Act 1953

Ma v Federal Commissioner of Taxation 92 ATC 4373

REASONS FOR DECISION

11 June 2010 Mr B H Pascoe, Senior Member  

1.      These applications are for the review of decisions of the respondent to disallow objections to assessments of income tax for the years ended 30 June 2001, 2002, 2003 and 2004.  The assessments were issued in October 2006 to include as assessable income cash deposited to an Australian bank account in the name of the applicant.

2.      At the hearing, the applicant was represented by Mr D McInerney of counsel and the respondent by Mr P Solomon of counsel.  Evidence was given by the applicant through an interpreter and by the applicant’s daughter.

3.      The applicant is a resident of Iran.  The daughter is a resident of Australia having arrived in this country in 1989.  The income in dispute represented cash deposited to an account with the National Australia Bank in the personal name of the applicant and showing an address of the daughter’s residence.  The amounts assessed were:-

Year ended 30 June 2001	$ 429,262
Year ended 30 June 2002	$ 127,150
Year ended 30 June 2003	$ 551,078
Year ended 30 June 2004	$ 256,950

In addition penalties at the rate of 75 per cent of the income tax liability were imposed for failure to lodge an income tax return pursuant to s 284-75(3) of Schedule 1 to the Taxation Administration Act 1953 (Administration Act).

4.      The applicant gave evidence that her late husband, who died in March 2001, was a Colonel in the Iranian army and had associations with the regime of the Shah of Iran before it was overthrown.  She said that they were well off financially and had received large inheritances from her and her husband’s fathers.  After the overthrow of the Shah there was fear that the family assets, primarily in real estate, would be confiscated by the new regime.  The applicant said that to protect the assets properties were sold and converted to cash between 1990 and 1995.  The applicant had not retained any record of the details of any sales.  She said that proceeds of sale were not put into any bank account but retained in cash at home.  It was said that the Iranian cash was progressively exchanged on the black market to Australian dollars.  Until her husband died both visited money changers and, after his death, she personally continued to exchange cash for Australian dollars.  She said that the normal amount of cash transaction was A$1,000 to $1,500 with the largest transaction being A$3-4,000.

5.      The applicant said that her eldest daughter, one of six children, had obtained permanent residency after the daughter’s husband died in 1990.  That son-in-law had been wealthy, owned real estate in Iran and had associations with the family of the Shah.  She said that, after his death, she was given control of his real estate, together with his two brothers.  Some of this real estate was sold also and the cash proceeds converted to Australian dollars.  Again, the applicant had no record of the dates and amounts.

6.      The applicant said that the Australian cash in $100 and $50 notes was progressively brought to Australia concealed in luggage.  She said that she had special suitcases made to carry the money.  She said that the dates of her visits to Australia and approximate amounts of cash brought in were:-

March 1991	$150,000
October 1996	$400,000
October 1998	$800,000
October 1999	$800,000
July 2003	$200,000

In addition, she said that a friend of her late son-in-law and, on one occasion, his brother brought the following approximate amounts into Australia:

1994	$300,000
1996	$300,000
1998	$300,000
1999	$300,000
2000	$300,000
2001	$300,000
2004	$300,000

The applicant said that her husband had kept a note-book recording the amounts transferred to Australia but it had been thrown away.  She acknowledged that the dates and amounts of cash moved to Australia have been provided to her for the purposes of her witness statement by her son.  No evidence was provided as to how the son obtained this information.

7.      The applicant said that, in the early 1990s, her daughter introduced her to a man she called Charlie.  He was known to the daughter after being her landlord and a builder who completed renovations to the daughter’s home.  The applicant said that Charlie was described as a good honest man who would teach them what to do with the money.  She said that Charlie arranged the opening of the bank account and explained that deposits should be less than $10,000 on each occasion.  She said that the cash brought to Australia was left with her daughter who, in turn, gave the money to Charlie to bank.  In May 1996 she gave a Power of Attorney to her daughter and Charlie.

8.      The evidence of the applicant’s daughter was in very similar vein to the applicant’s evidence although it was clear that the evidence relating to the source of the funds was as told to her by her mother.  The daughter said that she trusted Charlie although not sure why.  She said that she had not had contact with Charlie for two years as he was just going to use me.  The daughter said that she could not recall any suitcase used to carry the money and assumed that her mother had returned with the suitcase.  She said that, in addition to the cash from Iran, she had deposited some rental income into the bank account together with proceeds of the sale of shares.  The funds in the account had been used to purchase a home and for living expenses.  On the advice of Charlie, amounts from the bank account had been transferred to deposits in Singapore on the grounds that interest would not be subject to tax in that country.  The daughter confirmed that the cash from Iran was left with her.

9.      After Mr McInerney stated that the applicant and her daughter were the only witnesses to give evidence at the hearing, the Tribunal asked whether Charlie was to be called to give evidence.  In response, Mr McInerney tendered documents provided by the respondent in relation to questions and responses to and from Charlie between December 2003 and February 2004.  These confirmed the introduction to the applicant in the early 1990s.  His understanding of the origins of the Australian cash agreed with that stated in the applicant’s evidence although it was clear that he had no direct personal knowledge.  He said that Iranian custom was for women not to be involved in business and financial transactions so he had been asked to handle the funds in Australia.  Where Charlie’s statements to the respondent differed from the evidence of the applicant and her daughter was that he said that, from time to time, he would receive a telephone call followed by funds being delivered to him by different persons, predominately male 40-50 years of age.  He was not aware of their names and they were not aware where the money was going.  The cash was normally delivered in used $100 notes.  He stated that the daughter had no knowledge of the cash handling arrangements.  He stated that he kept the funds at home and handed them to the applicant and her daughter when needed.

10.     On behalf of the applicant a statement was tendered from Dr Abbas Valadkhani, Associate Professor, School of Economics, University of Wollongong.  Attached to the statement was a copy of a paper prepared by Dr Valadkhani in 2003 titled An Empirical Analysis of the Black Market Exchange Rate in Iran.  The respondent did not seek to have Dr Valadkhani appear for cross-examination.  This paper was primarily on economic theory discussion in relation to exchange rates in Iran and the difference in exchange rates over the years between the official rate and the black market rate.  The paper confirms the existence of a substantial black market in the exchange of foreign currency.  It said:

… This market forms a very important Iranian institution that operates in specific streets of Tehran and other large cities and in varied shops!  One set of actors in this market may be overseas visitors, Iranians returning from trips abroad, Iranians now resident in other countries and visiting family and friends, etc. who have various quantities of a most valuable commodity, viz. other countries’ currencies.  Another set of actors comprise what can be termed “the real buyers’ of these scarce commodities.  This set includes businesspersons involved in international trade, particularly importers, Iranians about to travel overseas for any purposes, e.g. business trips, provision of medical services, visiting relatives resident abroad, etc.

However, these “real buyers” will not physically undertake transactions with suppliers of other currencies on the streets.  This market is characterised by middlepersons or agents, who close the link between buyers and sellers.  These agents will be typically unemployed or underemployed Iranians who may well be frontpersons for wealthy opportunistic entrepreneurs who have recognised that a government policy for the price of other countries’ currencies is a non-market clearing price.  As the difference between the market price and the government-determined price for these commodities increased in 1995, a third set of actors, the police, entered the stage!

After discussing the link between the black market and government policy and the government objective of unifying multiple exchange rate regime into a single equilibrium rate, Dr Valadkhani said:

Therefore, in late 1995 the Iranian authorities once again decided to administer, or implement, the existing regulations relating to the fixed exchange rate system and “cracked down” on the participants in the black market.  The Iranian police, with powers to arrest both buyers and sellers, began to be active in trying to prevent transactions in this market.

In his statement Dr Valadkhani said:

The size of the Black Market in foreign currencies and in particular Australian Dollars would allow for the exchange of two to three million Australian dollars over a period of two to four years by a person in Iran.

The statement does not set out any basis on which Dr Valadkhani arrived at such an estimate nor whether such estimate is at the current time or valid for any or all of the earlier years in issue in this matter.

11.     Also tendered on behalf of the applicant were copies of Property Ownership Certificates showing six properties in the name of the applicant registered between 1972 and 1994 and eleven properties in the name of her land son-in-law registered between 1972 and 1995.  No details of sales, dates or proceeds were provided.  For the applicant was tendered a statement by Dr M Kalantari, who is familiar with the Iranian system of property registration and land ownership.  He noted that:

… land registration system of Iran is not open to the public and access is only open to the recognized authorities upon their request.

He said also that:

there are two principal partners for any property transaction in Iran, Real Estate Agents and Notaries which are overseen by the Deeds and Property Organisation [with] notaries fulfil the signing and execution of the final deed.

In her evidence, the applicant said that a notary was not used in relation to the sale of any property other than her house.  She had not retained copies of any contract and could not access the land records held by the government agency.  While the difficulty of such access is accepted it is surprising that the applicant provided no details of properties and no details, even estimates, of sale proceeds.

12.     Pursuant to s 14ZZK of the Administration Act an applicant in seeking review of a reviewable objection decision has the burden of proving that an assessment is excessive.  Here it is necessary for the applicant to establish to the reasonable satisfaction of the Tribunal the provenance of the cash deposits to the Australian bank account in her name during the relevant period and to establish that such deposits did not constitute Australian assessable income.  In Ma v Federal Commissioner of Taxation 92 ATC 4373, Burchett J said at page 4377:

… if a taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spends his time, and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved.  Any other view would introduce a degree of arbitrariness into liability for tax.

Here the case is essentially one of fact and the decision turns on the credibility and reliability of the witnesses and evidence presented to the Tribunal viewed in the light of the circumstance and probabilities.

13.     It was submitted on behalf of the applicant that she was an elderly lady who was a non-resident of Australia, in Australia for only four months in the 2000 year of income and four months in the 2003 year of income, has never worked, operated a business or owed income producing assets in Australia and has provided a credible and unchallenged explanation of the source of funds from Iran.  It was said that the only scepticism that should arise is at the respondent’s contention that the applicant could have derived assessable income in excess of $1.3 million during her short visit to Australia.  Mr McInerney argued that it was reasonable to accept that no records of property sales had been maintained given that they were sold some 15 years ago with an intervening death of the applicant’s husband.  He noted that the applicant had volunteered evidence that some $4,450,000 had been brought into Australia between 1991 and 2004 which was well in excess of the amount assessed.

14.     For the respondent it was primarily submitted that the applicant had not discharged the onus of proof.  It was said that, while it appeared likely that properties were held by the applicant in Iran there was simply no evidence of the date of any sales nor the quantum of proceeds from any sales.  It was argued that the Tribunal should doubt the evidence of exchanging Iranian currency for Australian dollars given the large number of individual transactions required.  Mr Solomon submitted the Dr Valadkhani was not required for cross-examination in that his statement did not demonstrate any expertise in the practical operation of the black market in foreign exchange in Iran and his evidence should not be relied upon.  It was said that the evidence of the alleged method of bringing cash to Australia was vague and unclear as was the method of getting cash to the bank account.  Mr Solomon submitted that the absence of any documentary evidence, even diaries, raised questions of how the applicant arrived at the figures stated in her witness statement.  If they were provided by the son, from where did he obtain the figures?

15.     While it is reasonable to accept the applicant’s evidence of owning property in Iran and having concern at retaining assets and wealth after the overthrow of the Shah, the balance of the evidence causes some concerns.  The first of these is the complete absence of any documentary evidence of sales of property and amounts realised.  The next is the apparent lack of any separation of alleged proceeds of sales of the applicant’s property and of the property of the son-in-law.  Thirdly is the evidence of exchanging Iranian cash into Australian Dollars.  Finally is the alleged method of bringing the cash to Australia and how it got to the bank account.

16.     The evidence of exchanging cash on the black market is of concern.  The applicant said the normal value of each transaction was $1,000-1,500.  According to her, some $4 million was transferred to Australia in the eight years from 1996 to 2004.  If this was obtained in the black market at $500,00 pa she would have need to visit that market on, possibly, four days every week of every year.  Even if that quantity of Australian dollars was available, and it is not clear on what basis Dr Valadkhani arrived at his estimate, it is difficult to believe that any elderly lady could escape the attention of police when in the market on such a regular basis. When this is coupled with the comment by Dr Valadkhani that the market is characterised by middle persons or agents with the real buyers not physically undertaking transactions and the understanding of Charlie that Iranian women were not involved in financial transactions, the applicant’s evidence becomes more difficult to accept.  In relation to this it is noted that the applicant did not have an Iranian bank account and her daughter has no Australian bank account, apparently using her mother’s account for living expenses etc.

17.     Concern about the evidence of the method used to bring the cash to Australia is on several grounds.  It is difficult to accept that an elderly Iranian lady, concerned at possible confiscation of assets by Iranian authorities, carries a suitcase full of Australian dollars obtained on the black market (on two occasions said to be $800,000) into an Iranian airport and onto an aeroplane and, further, risks possible confiscation at an Australian airport having brought in amounts well in excess of permissible amounts.  The evidence of the applicant and her daughter was that the cash, on arrival, was stored at the daughter’s house and progressively banked by Charlie or the daughter.  Charlie’s version given to the respondent was that the daughter had no direct involvement and the cash was delivered to him by unknown males.  The evidence of the applicant was that part of the money represented proceeds of sale of property owned by the son-in-law.  No apparent effort was made to separate the ownershi0p of the assets with all of the alleged proceeds finishing in a bank account of the applicant.  Given these concerns, I cannot be satisfied that the cash deposited in the Australian bank account arrived there in the way alleged by the applicant. 

18.     At the close of the hearing, the applicant was given leave to make further submissions in relation to the amounts included as assessable income and, particularly, whether rental income of the daughter banked to the applicant’s account but assessed as income of the daughter had been included.  A subsequent statement from the daughter was filed stating only that she had banked her rental income in her mother’s account during the relevant period.  There was no attempt to reconcile the credits to the account nor demonstrate that the rental income had been included in the amounts assessed to the applicant.  A perusal of the bank statements shows regular modest deposits of cheques.  In addition it appears clear that the amounts treated as assessable income of the applicant included only cash deposits, the bulk of which were in amounts of over $9,000.  As such it cannot be accepted that the applicant has demonstrated that the amounts assessed to her include rental income already assessed as income of the daughter.

19.     The evidence leaves me in a position that I cannot be satisfied that it demonstrates a reasonable explanation for the cash deposited in the Australian bank account.  It can be said that there is no evidence that the funds were derived from any income producing activity.  However, it is necessary for the respondent to provide such evidence.  It is for the applicant to prove, on the balance of probabilities, that the amounts are not income.  Prior to the hearing, the Tribunal was requested to issue a confidentiality order as the applicant was concerned for her well being and safety should information about this case become known in Iran.  It is recognised that, contrary to the evidence given, the applicant may have been involved in a more complex and illegal, in Iran, activity to transfer funds to Australia and is reluctant to divulge the detail.  It is difficult to believe that an elderly Iranian lady who has had a few short visits to Australia is deriving Australian source income at the level produced by the bank deposits.  On the other hand, it is possible that income is generated by relatives in Australia with the applicant’s bank account being used as a depository.  However, surmise and conjecture can be no substitute for the statutory requirement to satisfy the onus of proof.

20.     It must follow from the foregoing that the applicant has not been able to satisfy the onus of proving that the assessments are excessive.

21.     While the applicant formally objected to the imposition of penalties at the rate of 75 per cent of the income tax liability no evidence or submissions were made at the hearing in relation to these penalties.  Again, I am not satisfied that the applicant has discharged the onus of proving that such penalties were excessive.

22.     Given the finings of this Tribunal, the decisions under review should be affirmed.

I certify that the twenty-two [22] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B H Pascoe, Senior Member

Signed: Cassie Renfrew
  Clerk

Date/s of Hearing  17 and 19 May 2010
Date of Decision  11 June 2010
Counsel for the Applicant         Mr D McInerney
Solicitor for the Applicant          Mr G Kolliou, Logie-Smith Lanyon
Counsel for the Respondent     Mr P Solomon 

Solicitor for the Respondent     Ms A Moutafis, Australian Taxation Office,

Legal Branch