WYVW and Commissioner of Taxation (Taxation)
[2023] AATA 4242
•21 December 2023
WYVW and Commissioner of Taxation (Taxation) [2023] AATA 4242 (21 December 2023)
Division: TAXATION & COMMERCIAL DIVISION
File Number: 2021/1400
Re:WYVW
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member D K Grigg
Date:21 December 2023
Place:BRISBANE
The decision under review with respect to the 2009 Year is set aside. The Commissioner had no jurisdiction to the amend the NOA.
In relation to the 2010 Year:
·the Penalty Decision is varied such that administrative penalties are remitted to 50%.
·the Objection Decision is varied to the extent that the SIC component is remitted to nil for the 38-month period during which the Commissioner was (on appearances) inactive; and
·the Objection Decision is otherwise affirmed;
In relation to the 2011, 2012 and 2013 Years:
·the Penalty Decision is varied such that administrative penalties are remitted to 50%.
·the Objection Decision is varied to the extent that the SIC component is remitted to nil for the 38-month period during which the Commissioner was inactive; and
·the Objection Decision is otherwise affirmed.
.............................[SGD]...........................
Senior Member D K Grigg
CATCHWORDS
TAX – review under Part IVC of the Taxation Administration Act 1953 (Cth) – default assessments – whether “all or nothing” approach applies – whether deposits income, proceeds of loan or capital payments – whether interest expenses deductible – onus of proof – Jones v Dunkel inferences – whether fraud or evasion – whether intentional disregard, recklessness or lack of reasonable care – whether base penalty uplift applies – whether penalties should be remitted – shortfall interest charge – decisions varied
LEGISLATION
Acts Interpretation Act 1901 (Cth)
Administrative Appeals Tribunal Act 1975 (Cth)
Corporations Act 2001 (Cth)
Evidence Act 1955 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Partnership Act 1892 (NSW)
Taxation Administration Act 1953 (Cth)
Trustee Act 1925 (NSW)
Trusts Act 1975 (NSW)
CASES
Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) [2011] FCA 1090; 196 FCR 457
Allied Mills Industries Pty Ltd v Commissioner of Taxation [1989] FCA 135; 20 FCR 288
Allied Pastoral Holdings Proprietary Limited v Commissioner of Taxation [1983] 1 NSWLR 1
Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971
Bosanac v Commissioner of Taxation [2018] FCA 946
Bosanac v Commissioner of Taxation [2019] FCAFC 116; 267 FCR 169
Buzadzic and Commissioner of Taxation (Taxation) [2021] AATA 4820
Buzadzic v Commissioner of Taxation [2023] FCA 954
Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; 284 FCR 294
Commissioner of Taxation v Cassaniti (2018) 266 FCR 385; [2018] FCAFC 212
Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753; ATC ¶2–333
Commissioner of Taxation v Rawson Finances Pty Ltd [2023] FCA 617
Condon v Commissioner of Taxation [2023] FCA 561
David Cassaniti v Commissioner of Taxation [2010] FCA 641; 186 FCR 480
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) [1949] HCA 25; 79 CLR 296
Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC 49; 192 FCR 325
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Whiting [1943] HCA 45; 68 CLR 199
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81
Guardian Ait Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619; 114 ATR 136
Haritos v Commissioner of Taxation [2015] FCAFC 92; 233 FCR 315
Harmer v Federal Commissioner of Taxation [1991] HCA 51; 173 CLR 264
John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Re Hillsea Pty Ltd [2019] NSWSC 1152
Ma v Commissioner of Taxation [1992] FCA 530; 37 FCR 225
Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972
National Australia Bank Ltd v Rusu [1999] NSWSC 539; 47 NSWLR 309
Re Imperial Bottleshops Pty Ltd and William John King Egerton v Commissioner of Taxation [1991] FCA 276
Richard Walter Pty Ltd v Commissioner of Taxation [1996] FCA 454; 67 FCR 243
Sacks v. Gridiger (1990) 22 NSWLR 502
Scott v. FC of T (1966) 117 CLR 514
Stevens v Kabushiki Kaisha Sony Computer Entertainment [2005] HCA 58; 224 CLR 193
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362
Taylor v Federal Commissioner of Taxation [1970] HCA 10; 119 CLR 444
The Commission of Taxation of the Commonwealth of Australia v Harris, G.O [1980] FCA 74; 30 ALR 10
Temples Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation [1991] FCA 185; 29 FCR 93
Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63
Ure v Federal Commissioner of Taxation [1981] FCA 5; 34 ALR 237
Watson v Foxman (1995) 49 NSWLR 315
Wilson v Chambers & Co Pty Ltd [1926] HCA 15; 38 CLR 131
SECONDARY MATERIALS
Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (no. 2) 2000 (Cth)
MT 2008/1 - Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
Practice Statement Law Administration PS LA 2012/5: Administration of penalties for making false or misleading statements that result in shortfall amounts
Practice Statement Law Administration PS LA 2008/6: Fraud or evasion
Practice Statement Law Administration PS LA 2006/8: Remission of shortfall interest charge and general interest charge for shortfall periods
Taxation Determination 2008/D16: Income tax: is interest on a loan fully deductible under section 8-1 of the Income Tax Assessment Act 1997 when the borrowed moneys are settled by the borrower on trust to benefit the borrower and others?
REASONS FOR DECISION
Senior Member D K Grigg
December 2023
Contents
INTRODUCTION
ISSUES FOR THE TRIBUNAL
LEGISLATIVE BACKGROUND
Notice of Amended Assessments
Unexplained income
Deductibles
Objections to Assessments
Burden of Proof
All or nothing
Practical Burden
Jones v Dunkel inferences
What income is assessable income?
Beneficiary of a trust estate
Capital Gains
Loans vs Income
Limited Partnership
Administrative Penalties
Shortfall Amount
Base penalty amount
False and Misleading Statements
Intentional Disregard
Recklessness
Lack of reasonable care
Evasion
Remission of Penalty/SIC
Shortfall Interest Charge
Corporations Act 2001 (Cth)
Trusts
Employment of Agents
THE GROUP
THE APPLICANT
Applicant’s Usual Account Keeping Practice
Group’s Real Property Investments
Transactions – Applicant’s Summary
Group Restructure
Other Interests
Actual Income
Lodgement of Income Tax Returns for the Relevant years
FACTS IN DISPUTE - overview
2009 Year
Interest Charges and Fees
2010
Interest Charges and Fees
2011
Interest Charges and Fees
2012
Interest Charges and Fees
2013
Interest Charges and Fees
APPLICANT’S CONTENTIONS SUMMARY
Are the Amended Assessment Excessive?
2009
2010 - 2013
COMMISSIONER’S CONTENTIONS
CONSIDERATION - 2009
The Total Amount Of $303,000 Described As “Proceeds Of Loan” Deposited By TLP
What is a loan?
Amount Described As A Deposit Made In Error Of $20,075
Amounts Described As Payment Of Unpaid Present Entitlements (UPE) From The LST Trust: $163,676
CONSIDERATION - 2010
Amounts Described As Proceeds Of Loan From TLP Totalling $78,000
Amounts Described As Proceeds Of Loan Of $41,000 From TAT Trust
Amounts Described As Distribution From The LST Trust Totalling $160,000 (Comprised Of Current Year Entitlement And Unpaid Entitlements)
Amount Described As Payment Of UPE Of $68,869 Sourced From The MZA #1 Trust
CONSIDERATION - 2011
Amounts Described As Proceeds Of Loan Totalling $233,500 Sourced From The TLP
An Amount Of $180,000 Described As Distribution Arising From A Capital Gain Derived By The MAZ #1 Trust
Amount Described As Interest On Term Deposit: $5,888.00
Amount Described As Proceeds From The Sale Of The Beneficial Interest In The TLP To WYVW Settlement Unit Trust (SUT) Of $750,000 But An Amount Of $1,000,000 Was Incorrectly Deposited Into Your Bank Account (Overpaid By $250,000)
“Sale of interest in TLP to SUT” of $1,000,000
Amount Described As “Distribution From The TAT Arising From The Sale Of The TAT Trust’s Shares In SMS Of $1,250,000” But Only $1,000,000 Was Deposited Into Your Bank Account (Underpaid By $250,000)
An Amount Of $464,000 Described As Proceeds From The Redemption Of Units In The MZA #1 Trust
An Amount Of $645,000 Described As Proceeds From The Redemption Of Units In The LST Trust
CONSIDERATION - 2012
The Total Amount Of $152,270 Described As Drawings From Loan Account Of SS
CONSIDERATION - 2013
The Total Amount Of $522,912 Described As A Distribution Of A Capital Gain & The Proceeds Of The Redemption Of Units In The LST
An Amount Of $79,631 Described As Payment Of UPE From The MZA Trust
The Total Amount Of $222,226 Described As Proceeds Of Loan From The TAT Trust
An Amount Of $281,000 Described As A Repayment Of A Loan To The Applicant And Interest On A Loan Previously Advanced To The SUT
An Amount Of $1,795 Described As Interest On The Term Deposit Account #29FCFH
An Amount Of $3,116,000 Described As Proceeds From The Redemption Of Units Of MZA #2 Trust
An Amount Of $63,807 Described As Repayment Of Loan From SUT
An Amount Of $456,761 Described As Redemption Of Units In MZA Trust
CONCLUSION - DEPOSITS
INTEREST EXPENSES
$2,000,000 Westpac commercial bill
$1,025,000 Westpac commercial bill
$492,000 Westpac commercial bill
$3,116,000 Westpac commercial bill
Applicant’s Submissions on Interest
Commissioner’s Submissions on Interest
Consideration
The deductibility of interest charged on the $2,000,000 Westpac commercial bill
The deductibility of interest charged on the $1,025,000 Westpac commercial bill
CONCLUSION - INTEREST
CAPITAL GAINS
2009 YEAR
PENALTIES – 2010 to 2013
Legislation
Applicant’s Contentions
Fraud or Evasion
Does section 285-75(6) of Schedule 1 of the TAA (“safe harbour”) apply in each of the 2010 to 2013 income years in which there was a shortfall amount with the result that the Applicant is not liable to an administrative penalty in that income year?
What is the “base penalty” amount in each year where there is a shortfall amount and the safe harbour provision does not apply worked out under section 284-90 of Schedule 1 of the TAA?
Should the base penalty amount in the 2010 to 2013 income years respectively be increased under section 284-220 of Schedule 1 of the TAA?
Should the amount of any penalty be remitted in whole or in part under section 298-20 of Schedule 1 of the TAA
Did the applicant take “reasonable care”?
Does the “safe harbour” apply in 2010 – 2013 income years
What should the base penalty amount be?
Uplift of 20%
Remission of penalties
Commissioner’s Contentions
Consideration - Penalties
What is the appropriate penalty?
Does the exclusion in section 284-75(6) apply?
Uplift
Should the penalties be remitted in whole or part having regard to the taxpayer’s particular circumstances?
SHORTFALL INTEREST CHARGE
Applicant’s Submissions
Commissioner’s Submissions
Consideration - SIC
Decision
Orders
INTRODUCTION
1. This matter concerns default assessments of the Applicant’s income tax issued by the Commissioner of Taxation (Commissioner) for the financial years ended 30 June 2009, 2010, 2011, 2012, and 2013 (Relevant Years).
2. The Commissioner conducted an audit of the Applicant’s financial affairs for the Relevant Years by examining the Applicant’s bank accounts and deductions claimed in her income tax returns (ITRs) for the Relevant Years.
3. The Commissioner was not satisfied with the ITRs filed by the Applicant.
4. The Commissioner does not accept the characterisation of some deposits received by the Applicant from a number of companies and trusts forming part of a complex family group.
5. The deposits in dispute were not declared by the Applicant in her ITRs for the Relevant Years. The Commissioner says they should have been.
6. Following the audit, on 3 June 2015, the Commissioner issued amended notices of assessment (Amended NOA) for the Relevant Years pursuant to section 167 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).[1]
[1] Exhibit 1, T Documents, T25: Notices of Amended Assessment for the income years ended 30 June 2009, 2010, 2011, 2012 and 2013 dated 3 June 2015.
7. The Commissioner added the total of additional “unexplained amounts” identified by the Commissioner to the amounts of income the Applicant had reported in her ITRs and disallowed some expenses the Applicant had claimed as deductions in the Relevant Years.
8. Administrative penalties were imposed on the shortfall amounts under section 284-75(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA) at the base rate of 75% for the Relevant Years.[2] The base penalty amount was then increased by 20% for the 2010 income year and each subsequent income year.
[2] Exhibit 1, T Documents, T26: Notices of Amended Assessment of shortfall penalty for the income years ended 30 June 2009, 2010, 2011, 2012 and 2013 dated 3 June 2015.
9. Shortfall interest charges (SIC) were also issued.
10. The Commissioner found that the Applicant’s conduct amounted to evasion. As a result, the Commissioner says he was entitled to amend the Applicant’s 2009 ITR at any time pursuant to item 5 in the table in section 170(1) of the ITAA 1936.
11. On 11 June 2015, the Applicant lodged an objection to the Amended NOA and Penalty Assessment.[3]
[3] Exhibit 1, T Documents, T27: Applicant's objections for the income years ended 30 June 2009, 2010, 2011, 2012 and 2013 dated 11 June 2015; T28: Applicant's objections for shortfall penalty for the income years ended 30 June 2009, 2010, 2011, 2012 and 2013 dated 11 June 2015.
12. On 12 January 2021 the Commissioner:[4]
12.1.disallowed the Applicant’s objections in part (Objection Decision); and
12.2.disallowed the Applicant’s objections against the Penalty Assessments in full (Penalty Decision).
[4] Exhibit 1, T Documents, T2: Reasons for Decision dated 12 January 2021, pages 7-79.
13. The SIC was adjusted to reflect the amended assessable income. The Commissioner refused to exercise his discretion under section 298-20 of Schedule 1 of the TAA to remit any part of the penalty imposed and refused to exercise his discretion to remit any part of the SIC under Division 280 of Schedule 1 to the TAA for the 2009 and 2010 Years.
14. The following table (set out in the Objection Decision) details the taxable income as declared by the Applicant in the original ITRs, the amended taxable income as a result of the audit, the amended taxable income at objection, and shortfall penalty:[5]
[5] Exhibit 1, T Documents, T2: Reasons for Decision dated 12 January 2021, page 61.
15. At objection the Commissioner allowed the Applicant to deduct some interest expenses incurred in relation to the commercial bills used to acquire units in some trusts.[6]
[6] Namely $492,000 she took out to acquire units in the ART on 22 April 2008 and $3,116,000 she took out to acquire units in MZA #2 on 12 October 2012: Exhibit 1, T Documents, T2, page 10.
16. The Commissioner held that the Applicant had demonstrated an intentional disregard for the law and imposed administrative penalties.
17. Further Amended NOAs were then issued by the Commissioner to reflect the Objection Decision.
18. On 9 March 2021 the Applicant filed an application for a review in the Tribunal of the Objection Decisions and Penalty Decisions.[7]
[7] Exhibit 1, T Documents, T1: Application for review dated 9 March 2021, pages 1-8.
19. It is not in dispute that the Tribunal has jurisdiction to review the Decisions pursuant to section 25 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) and Part IVC of the TAA.[8]
[8] Section 14ZZ(1)(a)(i) Taxation Administration Act 1953 (Cth).
20. To overcome the Commissioner’s assessments, the Applicant must establish on the balance of probabilities that the deposits in question are not properly classified as income, and therefore not assessable.
ISSUES FOR THE TRIBUNAL
21. The issue for determination by the Tribunal is whether the Applicant has discharged the burden of proof that the Amended NOA assessment issued in the Relevant Years were excessive by showing what the taxable income should be.
22. The Tribunal also has to consider whether the administrative penalty was incorrectly imposed and if so, whether the penalty should be remitted.
23. These questions involve a consideration of whether:
23.1.the Applicant engaged in conduct amounting to fraud or evasion for the purposes of section 170(1) (Table, item 5) of the ITAA 1936 in respect of the 2009 Year;
23.2.the amounts added to the Applicant’s declared assessable income are “assessable income”;[9]
[9] The amounts are identified in paragraph [6] of the Reasons for Decision (other than the amounts in bold).
23.3.interest expenses incurred, and claimed as a deduction, by the Applicant at the time of lodging her ITRs for the Relevant Years (other than the interest expenses identified in paragraph 10 of the Reasons for Decision) are deducible under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997);
23.4.there is a shortfall amount for the purpose of section 284-80(1) of Schedule 1 of the TAA for any of the Relevant Years;
23.5.if there is a shortfall amount in any of the Relevant Years, the Applicant is liable to an administrative penalty under section 284-75(1) of Schedule 1 of the TAA. This involves a consideration of:
1.whether section 284-215 of Schedule 1 of the TAA applies in respect of the penalty assessment for the 2009 income year to reduce the shortfall amount;
2.whether section 284-76(6) of Schedule 1 of the TAA applies in each of the 2010 to 2013 income years in which there was a shortfall amount with the result that the Applicant is not liable to an administrative penalty;
3.what is the base penalty amount worked out in accordance with section 284-90(1) of Schedule 1 of the TAA;
4.whether the base penalty amount should be increased by 20% for any of the 2010 to 2013 income years pursuant to section 284-220 of Schedule 1 of the TAA; and
5.whether all or part of the administrative penalties should be remitted pursuant to section 298-20 of Schedule 1 of the TAA; and
23.6.If there is a shortfall amount in any of the Relevant Years, should the SIC be remitted in whole, or in part, pursuant to section 280-160 of Schedule 1 of the TAA.
LEGISLATIVE BACKGROUND
Notice of Amended Assessments
24. Pursuant to section 166 of the ITAA 1936 the Commissioner must make an assessment of the taxable income of a person, the tax payable thereon, and any tax offset refunds, from ITRs and/or from any other information in the Commissioner's possession.
25. Section 167 of the ITAA 1936 provides that the Commissioner may issue a default assessment of the amount upon which income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166 in the following circumstances:
25.1.where a person makes default in furnishing a return;
25.2.where the Commissioner is not satisfied with the return furnished by any person; or
25.3.where the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income.
Unexplained income
26. Practice Statement Law Administration PS LA 2007/24 Making default assessments: section 167 of the Income Tax Assessment Act 1936 outlines the Commissioner’s practice regarding the authority to issue assessments under section 167 of ITAA 1936.
Deductibles
27. Certain losses or outgoings can be deducted from assessable income. Section 8-1 explains what “general deductions” can be claimed:
8-1 General deductions
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12-5.
(3) A loss or outgoing that you can deduct under this section is called a general deduction.
Objections to Assessments
28. Section 175A of the ITAA 1936 sets out when a taxpayer can object to an assessment. It provides:
(1)A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.
(2)A taxpayer cannot object under subsection (1) against an assessment ascertaining that:
(a) the taxpayer has no taxable income; or
(b) the taxpayer has an amount of taxable income and no tax is payable.
(3) Subsection (2) does not prevent the taxpayer from objecting against an assessment if the taxpayer is seeking an increase in:
(a) the taxpayer's liability; or
(b) the total of the taxpayer's tax offset refunds.
Burden of Proof
29. Section 14ZZK(b)(i) of the TAA provides that the Applicant has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been. The reason for this, as was explained by Logan J in Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971 (Anglo American), at [115], is that “the Commissioner, unlike a participant, is a stranger to transactions forming the taxable facts”.
30. The standard of proof is the civil standard on balance of probabilities.[10]
[10] Guardian Ait Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619; 114 ATR 136 at [3]; See also section 140, Evidence Act 1995 (Cth).
31. In Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 Latham CJ found that, as a general rule:
[2] “…the taxpayer must… show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right.”
32. The Commissioner is under no obligation to tender evidence in support of its assessments; Mason J explained this in Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81:
[6] “The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence.”
33. In Guardian Ait Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619; 114 ATR 136 Logan J referred to the obligation on an applicant in taxation appeals noting that the balance of proof does not require proof of facts to demonstration.[11]
[11] The appeal from this decision was dismissed: Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3; 115 ATR 316.
All or nothing
34. The High Court in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 (Dalco) explained that where the Commissioner and taxpayer have not agreed on the assessment:[12]
“… the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment … unless the [taxpayer] shows by evidence that the assessment is incorrect, [the default assessment] will prevail.”
[12] (1990) 168 CLR 614, at [624], citing Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at [44].
35. The approach in Dalco has become known as the “all or nothing” approach.[13]
[13] See Condon v Commissioner of Taxation [2023] FCA 561, at [29].
36. The Applicant referred to Haritos v Commissioner of Taxation [2015] FCAFC 92; 233 FCR 315 (Haritos) where the Full Federal Court discussed the onus of proof issue under 14ZZK of the TAA. The appellant in that case contended that the section did not require exact proof of the amount by which the assessment was excessive, and referred to Ma v Commissioner of Taxation [1992] FCA 530; 37 FCR 225 (Ma) where Burchett J, said (at 233):
“…the making of estimates upon inexact evidence, which is so much a feature of both judicial and administrative decision-making, cannot be uniquely excluded from appeals against asset betterment assessments in that case. To refuse to consider the credit, not only of the Applicant, but also of his independent and unchallenged witnesses, simply because the effect of the evidence was to support generalisations rather than to hit upon a precise figure, was to fall into error law.”
37. The Full bench in Haritos accepted that the proposition arising from Ma, that “the Tribunal may be required to make an estimate upon inexact evidence, and it cannot avoid its responsibility to make findings by relying on the burden of proof section”.[14]
[14] Haritos at [234].
38. Haritos, unlike this matter, involved a section 167 asset betterment assessment, where the Commissioner had reduced the scope of the dispute to a number of particular deposits. Here, there has been no such agreement reached with the Commissioner to narrow the issues.[15] This means that a failure to prove any disputed item for a particular income year will mean that the Applicant will have failed to discharge her onus of proof.
[15] Exhibit 12: Respondent’s Closing Submissions, page 6 at [35].
39. In Commissioner of Taxation v Ross [2021] FCA 766 (Ross) Derrington J set out (at [48]) a summary of the principles concerning the onus from the authorities in relation to challenges made to a default assessment founded upon the “asset betterment method”. Derrington J pointed out that:
[10] “There may be cases where the amount of taxable income depends upon the legal complexion of known facts or upon specific factual questions. In such a case, a taxpayer may successfully discharge the onus by establishing that the Commissioner included in their taxable income amounts which ought not to have been included: Dalco at [624]. However, such a situation would only arise where the Commissioner agrees to a process which is different to that described above by confining the scope of the dispute between him and the taxpayer to certain enumerated amounts. One might expect some clear expression of that agreement, involving as it does an abandonment of the advantages accorded to the Commissioner in s 167 in respect of defaulting taxpayers.”
(emphasis added)
40. Derrington J in Ross did not accept that Haritos had rejected the “all or nothing approach”. He said:
[55]”…the Full Court was not there rejecting the established principles in relation to the application of s 14ZZK(b)(i) or, indeed, its clearly expressed elements, but merely rejecting that the submission had any relevance in the case before it.”
41. See also the recent decision of Moshinsky J in Buzadzic v Commissioner of Taxation [2023] FCA 954 (at [126]-[129]), where he noted that Haritos does not apply in circumstances where the taxpayer and the Commissioner have not agreed to limit the scope of the issues in dispute.
42. In Wang and Commissioner of Taxation (Taxation) [2023] AATA 2962 Senior Member G Lazanas explained:
[51] “It is well established, and unequivocally reaffirmed recently in Ross, that in order to establish an assessment under s 167 is excessive, a taxpayer must positively prove their actual taxable income: per Derrington J at [48], [63], [66], [68] - [69]. See also Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301 (Gashi) at [63]; Trautwein v Commissioner of Taxation (Cth) (1936) 56 CLR 63 at 88; Ma v Federal Commissioner of Taxation (1992) 37 FCR 225 per Burchett J at 230.”
43. As Senior Member G Lazanas identified, the onus cannot be discharged by seeking to provide particular items are incorrect or should not have been included.[16] She noted:
[53] “It is the very approach which Derrington J made definitively clear in Ross and Condon is inadequate in the context of discharging the onus of proof with respect to default assessments issued under s 167.”
[16] Referring to Ross per Derrington J at [48], citing Gashi at [63]-[67], Rigoli v Federal Commissioner of Taxation [2014] FCAFC 29 at [12], [25]. See also Dalco at [624]-[625].
44. Nettle J summarised the position succinctly in Bosanac v Commissioner of Taxation [2019] HCA 41; 93 ALJR 1327:
[30] “… although the Commissioner and a taxpayer may agree to confine an appeal to a specific point of law or fact – and where that occurs, the taxpayer might succeed in the appeal by demonstrating that he or she is entitled to succeed on that point – in the absence of such an arrangement, the Commissioner is entitled to rely on any deficiency in the taxpayer's proof of the excessiveness of the amount assessed in order to uphold the assessment. Equally, if all the facts are known, and the amount of taxable income in dispute depends only on the legal complexion of the established facts, the taxpayer may succeed by demonstrating on the balance of probabilities that the amount in question does not bear that legal complexion. But where, as here, an appeal proceeds on the basis that not all of the material facts are known, either because the taxpayer has been less than forthcoming in making disclosures to the Commissioner or for some other reason, the taxpayer cannot succeed by showing only that the basis of the Commissioner's assessment was in some respect erroneous; since for all that can be told, unless and until the taxpayer proves to the contrary, there may be other income of which the Commissioner was not aware and which the Commissioner has not taken into account. In order to succeed in such a case, the taxpayer must discharge the burden of demonstrating on the balance of probabilities the true amount of the taxpayer's taxable income and thus that the amount determined by the objection decision is excessive. Here, that required the kind of wide survey and exact scrutiny of the plaintiff's business activities to which the primary judge referred and which was conspicuously absent from the plaintiff's presentation.”
Practical Burden
45. In Re Imperial Bottleshops Pty Ltd and William John King Egerton v Commissioner of Taxation [1991] FCA 276, Hill J pointed out the difficulties a taxpayer has when they do not have substantiating records but also noted:
[31] “…It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as ‘prima facie unacceptable’, cf McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1978-9) 143 CLR 284 at 302 per Gibbs J.”
46. In Bosanac v Commissioner of Taxation [2018] FCA 946 Stewart J highlighted the difficulty a taxpayer will have in demonstrating excessiveness without records, or a reconstruction of those records. He said:[17]
[9] “The onus is on the taxpayer to prove on the balance of probabilities the extent to which an impugned assessment is excessive. Where a taxpayer fails to retain records which evidence the course of a business, or fails to create such documents, he or she may well face a great difficulty in demonstrating excessiveness. This was the very problem which the Applicant faced here.”
[17] Upheld on appeal: Bosanac v Commissioner of Taxation [2019] FCAFC 116; 267 FCR 169; Bosanac v Commissioner of Taxation (21 November 2019) [2019] HCA 41; 93 ALJR 1327; 374 ALR 425 (Nettle J), at [10].
47. Counsel for the Applicant explained that in this matter:
“there are contemporaneous records of transactions going back to the mid-1990s. This is a matter in which there are accounting records prepared by qualified accountants that were relied upon by my client. This is a case in which there is significant contemporaneous evidence and …it has been gone to, to explain the circumstances in which the disputed transactions occurred, and importantly, to calculate the taxpayer’s assessable income… and the usual issues that arise with the effluxion of time and the difficulties in locating records, and the fact that the accountant has retired, are all matters that the Tribunal ought to give weight to in determining, and making an estimate of, the proper taxable income.[18]
…in effect there were capital gains that were omitted and my client has gone through and calculated the amount of the assessable income.
Since the amended assessments were made the Applicant had, as at the date of the hearing, paid the ATO $800,000 pursuant to agreed payment arrangements.”[19]
[18] Transcript, page 9.
[19] Transcript, page 10.
48. The onus of proof was recently addressed by Derrington J in Condon v Commissioner of Taxation [2023] FCA 561 (Condon). This decision was handed down after this matter had been reserved. The decision in Condon, like Haritos, was in relation to a section 167 default assessment based on the asset betterment method.
49. Derrington J explained:
[57]…"there is no stipulation as to how the standard can be met. That will no doubt vary with the circumstances of each case.”
50. In Condon, Derrington J reiterated that it is not a legal requirement for the applicant taxpayer to prove matters only by reference to contemporaneous records. He also reiterated that not being able to “adduce every piece of evidence available in relation to each issue”.[20]
[57] “A taxpayer is not required to prove matters by reference to contemporaneous primary documentation: cf Commissioner of Taxation v Clark (2011) 190 FCR 206 at 225[64] – [66] per Edmonds and Gordon JJ. Nor are they required to adduce every piece of evidence available in relation to each issue: Commissioner of Taxation v Cassaniti (2018) 266 FCR 385 (Cassaniti) at 409[88] per Steward J (with whom Greenwood and Logan JJ agreed).”
(emphasis added)
[20] Citing Commissioner of Taxation v Cassaniti (2018) 266 FCR 385; [2018] FCAFC 212 (Cassaniti) at 409 [88] per Steward J (with whom Greenwood and Logan JJ agreed).
51. Derrington J referred to Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; (1983) 44 ALR 607 (Allied Pastoral Holdings) at [10]-[11], where Hunt J (as his Honour then was) considered that:
“… it is not obligatory for a taxpayer, before he can discharge his burden of proof, to call all the material witnesses and to produce all the material documents which support his evidence … It is certainly wiser for the taxpayer to do so in most cases so as to ensure that his own evidence is accepted, but even where he does not do so the Tribunal of fact may nevertheless be sufficiently impressed with the taxpayer as a witness that his evidence is accepted without such corroboration or without the whole of such corroboration.”
(emphasis added)
52. Derrington J then addressed the extent to which a taxpayer’s own evidence can be relied upon and the necessary precision in satisfying the civil standard of proof:
[59] “Although a decision-maker will, in the evaluation of the evidence, be cautious of a taxpayer’s self-serving statements, they are not ‘prima facie unacceptable’: McCormack v Federal Commissioner of Taxation at 302: and the arbiter of fact is entitled to accept them where the taxpayer is regarded as truthful. Moreover, the taxpayer is not required to corroborate each piece of evidence that is adduced before it can be accepted: Cassaniti at 409 [88].”
53. The Applicant submitted that simply looking at what business records are available may not, and does not in this instance, explain everything. The records need to be explained in context. Counsel for the Applicant referred to the decision of National Australia Bank Ltd v Rusu [1999] NSWSC 539; 47 NSWLR 309 (Rusu) which considered the admissibility of documents as business records. Unlike in Rusu, the AAT is not bound by the usual rules of evidence and may “inform itself on any matter in such manner as it thinks appropriate” (section 33(1)(c), AAT Act). Despite this, in Commissioner of Taxation v Rawson Finances Pty Ltd [2023] FCA 617 (Rawson Finances), Perry J confirmed that while the Tribunal is not bound by the rules of evidence, this “does not mean that the common law rules of evidence may not guide an administrative Tribunal in making findings of fact based upon material which is logically probative, bearing in mind that the rules of evidence are generally founded upon principles of common sense and fairness: Sullivan at [82]-[97] (Flick and Perry JJ).”
54. Rusu provides guidance in relation to how such evidence should be approached in order to test the veracity of the documents and their contents, such as who is best placed to give evidence about such records. In Rusu Bryson J said this:
[17] “Before a business record or any other document is admitted in evidence it is obviously necessary that there should be an evidentiary basis for finding that it is what it purports to be. Documents are not ordinarily taken to prove themselves or accepted as what they purport to be; there are exceptions under the Common Law and under statutes for public registers and for many kinds of documents when certified in various ways: and see the method of proof provided in some cases by ss 170 and 171 of the Evidence Act 1995. At the simplest, the authenticity of a document may be proved by the evidence of the person who made it or one of the persons who made it, or a person who was present when it was made, or in the case of a business record, a person who participates in the conduct of the business and compiled the document, or found it among the business’s records, or can recognise it as one of the records of the business.
…….
[34] If the Court is to find a significant fact on which a large liability may depend, there is a need for the Court to have some measure of confidence in the source of the Court’s belief that the fact exists. The Court acts almost always on narrations which must have a human origin; not usually on the Court’s own knowledge or on states of fact which are taken to be incontestable. The balance of probabilities is not a demanding standard, as the possibility that the less probable state of fact may be the true one is very obvious, and makes civil justice very vulnerable to error. For the Court to feel confident that it should act on any narration it is very important to have a human witness who has pledged, by oath or affirmation, that the narration is true: someone who is responsible for it. Business records may be incomplete; they often are. They record what there is perceived to be a business need to record, and that may be a small part or an oblique aspect of the objective event.”
(emphasis added)
Jones v Dunkel inferences
55. A contention made by the Commissioner in this matter concerns what inferences can be drawn by the fact that certain persons have not been called to give evidence: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 (Jones v Dunkel).
56. That issue arose in the Full Federal Court decision of Cassaniti where the Court considered the issue of burden of proof and how a court or Tribunal should determine whether that burden of proof has been discharged. One of the submissions made by the Commissioner in Cassaniti was that the taxpayer’s evidence “was insufficient” because she had failed to call any witnesses to corroborate her claims. Steward J found (at [88]) that:
“Contending that evidence was “insufficient” in the face of three sworn affidavits of the Commissioner, together with the exhibits attached thereto, and her answers in cross examination, may suggest that a taxpayer bears a special burden of proof. However, other than the necessity to scrutinise evidence given by the taxpayer him or herself with care, no such special burden exists.”
57. Steward J then set out five propositions which he derived from Allied Pastoral Holdings Proprietary Limited v Commissioner of Taxation [1983] 1 NSWLR 1:
[88] “…
(1)first, where the onus is on the taxpayer (whether pursuant to s 14ZZO of the TAA or otherwise) the degree or standard of proof required is that which ordinarily applies in civil proceedings. The direction given to a jury in civil cases aptly describes that onus by reference to a pair of scales and to the arguments of each party being placed at each end. As Hunt J said in Allied Pastoral:
…if the plaintiff succeeds… in weighing down those scales ever so slightly in his favour then he has discharged the burden he carries…
(2)secondly, for that purpose it is not obligatory for a taxpayer, in order to discharge his burden of proof, to call all material witnesses and to produce all material documents which support her or his or its position;
(3)fourthly, there is no requirement that evidence can only be accepted as admissible and probative if it is corroborated;
(4)fifthly, the Tribunal of fact is free to accept the evidence of the taxpayer alone if it finds the taxpayer to be truthful;
(5)finally, it would usually be prudent to corroborate the evidence of a taxpayer. It is also prudent to adduce contemporaneous objective evidence. But prudence should not be confused with the requirements of the law.”
58. Even if there are no records available, the evidence provided orally still must be scrutinised: Cassaniti, at [88].
59. The matters under consideration date back some ten to fourteen years. It is understandable that perhaps not all records are able to be located or that memories have faded, or at least every detail may not be able to be recalled.
60. In Re Hillsea Pty Ltd [2019] NSWSC 1152 Black J noted (at [16]) one should have regard to “the fallibility of human memory” when assessing affidavit and oral evidence. Black J quoted from Watson v Foxman (1995) 49 NSWLR 315 (at [319]), where McLelland CJ in Eq observed that:
“… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”
(emphasis added)
61. In Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 (at 129), Gleeson CJ, Gummow and Kirby JJ (at [31]) observed that:
”…in recent years, judges have become more aware of scientific research that has cast doubt on the ability of judges (or anyone else) to tell truth from falsehood accurately on the basis of such appearances. Considerations such as these have encouraged judges, both at trial and on appeal, to limit their reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events. This does not eliminate the established principles about witness credibility; but it tends to reduce the occasions where those principles are seen as critical.”
(emphasis added)
62. As will be seen, the Applicant was not responsible for the bulk of the records being scrutinised. This was the responsibility of the then accountants. These are relevant factors, to take into account in determining whether the Applicant has sufficiently demonstrated her actual income, keeping in mind the comments in Rusu.[21] These matters may also be relevant in assessing a person’s conduct to determine whether there has been carelessness, intentional disregard, or evasion, which is relevant to the remission of penalties.
[21] Transcript, 9.
63. Counsel for the Commissioner acknowledged that criticisms levelled at questions being asked of the Applicant regarding what occurred many years ago “were in part justified”.[22]
[22] Transcript, 308.
64. The question of any Jones v Dunkel inference that can be drawn is addressed later in this decision.
What income is assessable income?
65. Assessable income, as defined in Division 995 of the ITAA 1997, has the meaning given by sections 6-5, 6-10, 6-15, 17-10 and 17-30 of the ITAA 1997.
66. Section 6-5 of the ITAA 1997 provides:
Income according to ordinary concepts (ordinary income)
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .
Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.
(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
(3) If you are a foreign resident, your assessable income includes:
(a)the ordinary income you derived directly or indirectly from all Australian sources during the income year; and
(b)other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.
(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.
67. Section 6-10 of the ITAA 1997 provides:
Other assessable income (statutory income)
(1)Your assessable income also includes some amounts that are not ordinary income.
Note: These are included by provisions about assessable income.
For a summary list of these provisions, see section 10-5.
(2)Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.
Note 1: Although an amount is statutory income because it has been included in assessable income under a provision of this Act, it may be made exempt income or non-assessable non-exempt income under another provision: see sections 6-20 and 6-23.
Note 2: Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.
(3)If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.
(4)If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.
(5)If you are a foreign resident, your assessable income includes:
(a) your statutory income from all Australian sources; and
(b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source.
68. Section 6-15 of the ITAA 1997 sets out what is not assessable income:
What is not assessable income
(1) If an amount is not ordinary income, and is not statutory income, it is not assessable income(so you do not have to pay income tax on it).
(2) If an amount is exemptincome, it is not assessable income.
Note: If an amount is exempt income, there are other consequences besides it being exempt from income tax. For example:
· the amount may be taken into account in working out the amount of a tax loss (see section 36-10);
· you cannot deduct as a general deduction a loss or outgoing incurred in deriving the amount (see Division 8);
· capital gains and losses on assetsused solely to produce exempt income are disregarded (see section 118- 12).
(3) If an amount is non-assessable non-exempt income, it is not assessable income.
Note 1: You cannot deduct as a general deduction a loss or outgoing incurred in deriving an amount of non-assessable non-exempt income (see Division 8).
Note 2: Capital gains and losses on assetsused to produce some types of non-assessable non-exempt income are disregarded (see section 118-12).
Beneficiary of a trust estate
69. In the case of a beneficiary of a trust, the assessable income of a beneficiary also includes their share of the trust’s income that they are “presently entitled” to: section 97, ITAA 1936.
70. What does “presently entitled” mean? The phrase is not defined in the statute and therefore should be given its ordinary meaning “in light of its context and purpose”.[23]
[23] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381 [69]; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue[2009] HCA 41; (2009) 239 CLR 27 at 31 [4], 46-47 [47]; Federal Commissioner of Taxation v Consolidated Media Holdings Ltd[2012] HCA 55; (2012).250 CLR 503 at 519 [39]; SZTAL v Minister for Immigration and Border Protection[2017] HCA 34; (2017) 262 CLR 362 at 368 [14].
71. In Federal Commissioner of Taxation v Whiting [1943] HCA 45; 68 CLR 199 (Whiting) Latham CJ, and Williams J, in a joint judgment, said at [215]-[216]:
"The words ‘presently entitled to a share of the income’ refer to a right to income ‘presently’ existing - i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee, or that, within the meaning of s.19 of the Act, the trustee may properly reinvest, accumulate, capitalize, carry to any reserve, sinking fund or insurance fund however designated or otherwise deal with it as he directs or on his behalf.”
72. In Taylor v Federal Commissioner of Taxation [1970] HCA 10; 119 CLR 444 (Taylor) (at [449]-[452]), Kitto J considered Whiting and held:
"the tenor of the judgments is, I think, that ‘presently entitled’ refers to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he were not under a disability. Kitto J's reference to ‘legally ready for distribution’ was, as is made clear both by his decision in the case and subsequently in his judgment, to income that was available for distribution regardless of whether the accounts necessary to enable its precise ascertainment had been completed at the end of the income year or whether it was actually held in a form ready for immediate payment.”
73. The High Court, confirming Whiting and Taylor, considered what was meant by “presently entitled” in section 97(1) of the ITAA 1935 in Harmer v Federal Commissioner of Taxation [1991] HCA 51; 173 CLR 264.[24] The High Court said:
[8] “The parties are agreed that the cases, see, in particular, Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199, at pp 215-216, 219-220; Taylor v. Federal Commissioner of Taxation (1970) 119 CLR 444, at pp 450-452; establish that a beneficiary is "presently entitled" to a share of the income of a trust estate if, but only if:
(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and
(b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.”
[24] Followed in Commissioner of Taxation v Carter [2022] HCA 10; 274 CLR 304 at [3].
Capital Gains
74. Assessable income also includes any net capital gain: section 102-5 of the ITAA 1997. The net capital gain is worked out by reducing capital gains made during the income year by the capital losses (if any) made during the same income year.
75. A CGT event occurs if you dispose of a CGT asset (section 104-10).
76. A capital gain arises if capital proceeds from the disposal of the CGT asset are greater than the asset’s cost base (section 104-10(4))
77. A “CGT asset” is defined in section 108-5 and includes shares in a company and units in a unit trust (section 108-5(2)).
78. CGT concessions may be available to some small business entities in certain circumstances. Division 152 of the ITAA 1997 provides some relief to small business in relation to capital gains. Section 152-1 explains what the division is about:
To help small business, if the basic conditions for relief are satisfied, capital gains can be reduced by the various concessions in this Division. Those basic conditions are in Subdivision 152-A.
Some of the concessions have additional, specific conditions that must also be satisfied.
The 4 available small business concessions are:
(a) the 15-year exemption (in Subdivision 152-B);
(b) the 50% reduction (in Subdivision 152-C);
(c) the retirement concession (in Subdivision 152-D);
(d) the roll-over (in Subdivision 152-E).
A capital gain that qualifies for the 15-year exemption is disregarded entirely and is not taken into account under the method statement in section 102-5(1). By contrast, the other concessions are only activated by step 4 of that method statement. This means that you must apply all available capital losses against your capital gains (under steps 1 and 2) before you can reduce them using those 3 concessions.
Loans vs Income
79. Section 6-5 provides “ordinary income”, which is income according to ordinary concepts, forms part of a person’s assessable income.
80. “Ordinary income” includes things like wages, salaries, commissions, and other payments made for services rendered, from personal exertion.
81. The concept has been discussed in numerous cases.[25]
[25] Including by the High Court in Federal Commissioner of Taxation v Dixon [1952] HCA 65; 86 CLR 540 and Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 (Scott).
82. In Scott the High Court referred to the assessment of whether an amount constituted income depended upon the nature of the transaction. Windeyer J said:
[22] “Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income.”
83. In The Commission of Taxation of the Commonwealth of Australia v Harris, G.O [1980] FCA 74; 30 ALR 10, the Full Federal Court stated:
“It is clear that the whole of the circumstances must be considered…
Whether or not a particular receipt is income depends upon its quality in the hands of the recipient …
The regularity and periodicity of the payment will be a relevant though generally not decisive consideration …
A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by him …”
(citations omitted)
84. To determine whether an amount has the character of income, the Full Federal Court in Richard Walter Pty Ltd v Commissioner of Taxation [1996] FCA 454; 67 FCR 243 held that:
“…it is necessary to look at that amount and determine its character in the hands of the taxpayer.”
85. The fact that money is transferred from one party to another does not, absent an obligation to repay the money, classify the transaction as a loan.[26]
[26] Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753, at [20]; See also Normandy Finance Pty Ltd v Commissioner of Taxation [2015] FCA 1420; (2015) 333 ALR 339 at [67]-[68].
86. Traditionally a loan agreement is set out in a legal written document which specifies terms and conditions such as repayment amounts and time, whether any interest is payable and so on.
87. There needs to be some objective indicia that a loan exists – such as confirmation of the period of the loan, what interest in payable and some kind of documentation in the form of an agreement or similar to validate the loan. For example, if there are no formal documents, one would expect email or text exchanges may have occurred between the parties, particularly parties that had known one another for some time.
88. Each case ultimately turns on its facts. As noted by the Full Federal Court in Allied Mills Industries Pty Ltd v Commissioner of Taxation [1989] FCA 135; 20 FCR 288, where a payment is made pursuant to an agreement, the whole circumstances surrounding the agreement must be examined.[27]
[27] 1989] FCA 135; 20 FCR 288, at [19] citing Federal Coke Co. Pty. Limited v Federal Commissioner of Taxation (1977) 34 FLR 375 per Bowen CJ at [385].
89. In relation to contracts formed orally, Hammerschlag J said, inJohn Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [94]-[96]:
“… the conversation must be proved to the reasonable satisfaction of the court which means that the court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences …
…
[The plaintiff] has the onus of establishing the agreement for which it contends. This entails proving to the reasonable satisfaction of the court that the words said to give rise to the agreement were actually said, and that the alleged consensus was capable of forming a binding agreement and was intended by the parties to be legally binding.”
(emphasis added)
90. The issue of substantiation and proof in relation to purported loans arose in the recent decision of Logan J in Anglo American which was concerned, among other things, with whether a taxpayer failed to establish on the balance of probabilities that purported loans were made. It is the responsibility of the taxpayer to demonstrate on the balance of probabilities that there was a loan.[28]
[28] Anglo American at [117]
91. The evidence before Logan J was oral and affidavit evidence of the taxpayer. In some instances, there were no substantiating loan documents. In addition to a lack of documentation, there were also inconsistencies in the evidence given and the taxpayer’s recollection. Although Logan J noted (at [123]) that the “absence of a document”, such as a loan agreement, “evidencing, in this instance a legal relationship occasioning the indebtedness claimed … is not fatal”, it does become problematic in circumstances where there are inconsistencies in the evidence which does exist.
92. Whether, on the objective facts, a loan arrangement is inherently probable, is a matter that should be emphasised in circumstances where there is undocumented oral evidence.[29] It is also reasonable to take into account what a party stands to win or lose.[30]
[29] Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd(1999) 161 ALR 599 at [15].
[30] Helton v Allen [1940] HCA 20; 63 CLR 691, at [712].
Limited Partnership
93. A “limited partnership” is defined in section 995-1 of the ITAA 1997 to mean:
(a) an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited; or
(b) an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a VCLP, an ESVCLP, an AFOF or a VCMP and to carry on activities that are carried on by a body of that kind.
94. The Partnership Act 1892 (NSW) provides:
50A Limited partnership or incorporated limited partnership is formed on registration
(1) A limited partnership is formed by and on registration of the partnership under this Part as a limited partnership.
(2) An incorporated limited partnership is formed by and on registration of the partnership under this Part as an incorporated limited partnership.
60 Liability of limited partner limited to amount shown in Register
(1) The liability of a limited partner to contribute to the liabilities of the limited partnership is (subject to this Part) not to exceed the amount shown in relation to the limited partner in the Register as the extent to which the limited partner is liable to contribute.
(2) If a limited partner makes a contribution towards the liabilities of the limited partnership, the liability of the limited partner is reduced to such part of the amount shown in the Register as remains unpaid.
(3) If a partnership (the investing partnership) is a limited partner in a limited partnership (the principal partnership), a partner in the investing partnership has no separate liability to contribute to the liabilities of the principal partnership, but nothing in this subsection affects any liability of the investing partnership as a limited partner to contribute to those liabilities.
95. Pursuant to Division 5A — Income of certain limited partnerships of the ITAA 1936, certain limited partnerships are to be treated as companies for tax purposes (section 94A).
Administrative Penalties
96. Division 284 of Schedule 1 of the TAA sets out the circumstances in which administrative penalties apply for (section 284-5):
96.1.making false or misleading statements; and
96.2.taking a position that is not reasonably arguable; and
96.3.entering into schemes.
97. Division 284 also sets out the amounts of those penalties.
98. Section 284-75 sets out when a person is liable for a penalty in relation to a statement. Section 284-75(1) provides:
(1) You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law (other than the Excise Acts); and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
99. Section 284-75(6) provides for an exception:
Section 284-75
(6) You are not liable to an administrative penalty under subsection (1) or (4) if:
(a) you engage a registered tax agent or BAS agent; and
(b) you give the registered tax agent or BAS agent all relevant taxation information; and
(c) the registered tax agent or BAS agent makes the statement; and
(d) the false or misleading nature of the statement did not result from:
(i) intentional disregard by the registered tax agent or BAS agent of a taxation law; or
(ii) recklessness by the agent as to the operation of a taxation law.
(7) If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph (6)(b).
(emphasis added)
Shortfall Amount
100. Section 284-80 sets out when there is a shortfall amount:
284-80 Shortfall amounts
(1) You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Shortfall amounts
Item
You have a shortfall amount in this situation:
1
A tax-related liability of yours for an accounting period, or for a taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading
101. Section 284-215(2) provides:
(2) For the purposes of determining whether you are liable to an administrative penalty, you do not have a shortfall amount as a result of a statement that is false or misleading in a material particular to the extent that you and your agent (if any) took reasonable care in making the statement.
Base penalty amount
102. Base penalties are worked out in accordance with section 284-90. Base penalties may be imposed if the recklessness or failure to take reasonable care was due to the taxpayer or the taxpayer’s agent.
103. Section 284-90 relevantly provides:
284-90 Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table and subsections (1A) to (2), and section 284-224 if relevant:
Base penalty amount
Item
In this situation:
The base penalty amount is:
1
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a taxation law (other than the Excise Acts) by you or your agent
75% of your shortfall amount or part
2
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a taxation law (other than the Excise Acts)
50% of your shortfall amount or part
3
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a taxation law (other than the Excise Acts)
25% of your shortfall amount or part
7
You are liable to an administrative penalty under subsection 284-75(3)
75% of the tax-related liability concerned
104. The Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (no. 2) 2000 (Cth) (Explanatory Memorandum to the A New Tax System) introduced the current penalty regime. It provides the following explanation of the base penalty amount:
What is the base penalty amount?
1.57 Where there is a shortfall amount, the Commissioner identifies the cause of the shortfall amount, and applies the appropriate percentage to arrive at the base penalty amount. [Schedule 1, item 2, section 284-90]
1.58 Table 1.4 summarises the causes of the shortfall amount, and the percentage applied in each situation. The base penalty amount is the relevant percentage of the shortfall amount. [Schedule 1, item 2, section 284-90]
Table 1.4: Base penalty amount percentage
Shortfall amount
Base penalty amount
Shortfall amount caused by intentional disregard of a taxation law.
75%
Shortfall amount caused by recklessness.
50%
Shortfall amount caused by lack of reasonable care.
25%
Shortfall amount where an unarguable position is taken and threshold applies.
25%
Liability under subsection 284-75(3) for failing to provide a document to the Commissioner as required.
75%
Shortfall amount under subsection 284-75(4) where a private ruling is disregarded.
25%
If more than one shortfall section applies
1.59 It is possible that more than one shortfall section may apply in respect of a shortfall amount. For example, a taxpayer may be reckless in making a claim for a deduction, and so be liable for penalty under item 2 of subsection 284-90(1), and also be liable for penalty under item 4 of subsection 284-90 (1) for not having a reasonably arguable position in respect of the claim. In such a case the taxpayer is liable to pay only one of the penalties. If one penalty is higher than the other (e.g. if items 2 and 4 of subsection 284-90 (1) both apply), the taxpayer is liable to pay the higher base penalty amount. [Schedule 1, item 2, subsection 284-90(2)]
1.60 If the taxpayer is subject to 2 base penalty amounts of the same percentage on 2 different shortfall amounts, for example, items 3 and 4 of subsection 284-90(1) both apply, then that percentage will be applied to the total shortfall amount.
Intentional disregard of a taxation law
1.61 A taxpayer will be liable to pay a base penalty amount of 75% of a shortfall amount caused by the taxpayer or agent intentionally disregarding a taxation law. [Schedule 1, item 2, item 1 in subsection 284-90(1)]
1.62 For example, the base penalty amount of 75% would apply to the shortfall amount where a taxpayer or agent deliberately excludes from the taxpayer’s assessable income an amount knowing it to be assessable, or deliberately claims a deduction, rebate, credit or offset knowing that it is not allowable
105. The graduated base penalty scheme increases or decreases the penalty percentage based on the gravity of the taxpayer's conduct.
Increase in Base Penalty
106. The base penalty amount may be increased by 20% in the following circumstances:
284-220 Increase in base penalty amount
(1) The base penalty amount is increased by 20% if:
(a) you took steps to prevent or obstruct the Commissioner from finding out about a shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty amount was calculated; or
(b) you:
(i) became aware of such a shortfall amount after a statement had been made to the Commissioner about the relevant tax-related liability; or
(ii) became aware of the false or misleading nature of a statement made to the Commissioner or another entity after the statement had been made;
and you did not tell the Commissioner or other entity about it within a reasonable time; or
(c) the base penalty amount was worked out using item 1, 2 or 3 of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items previously; or
(ca) the base penalty amount was worked out using item 3A, 3B or 3C of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items previously; or
(d) the base penalty amount was worked out using item 4, 5 or 6 of that table and a base penalty amount for you was worked out under that item previously; or
(e) your liability to a penalty arises under subsection 284-75(3) and you were previously liable to a penalty under that subsection.
False and Misleading Statements
107. The ordinary meaning of a word must be taken as its ordinary meaning within the context of the legislative scheme in which it is found. This is set out in section 15AB of the Acts Interpretation Act 1901 (Cth) (AIA) which provides relevantly that:
(1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act.
(emphasis added)
108. In Stevens v Kabushiki Kaisha Sony Computer Entertainment [2005] HCA 58; 224 CLR 193 at 230 McHugh J said at [124]:
“In determining issues of statutory construction, the text of the relevant statutory provision must be evaluated not only by reference to its literal meaning but also by reference to the purpose and context of the provision……For purposes of statutory construction, context includes the state of the law when the statute was enacted, its known or supposed defects at that time and the history of the relevant branch of the law, including the legislative history of the statute itself. It also includes in appropriate cases “extrinsic materials” such as reports of statutory bodies or commissions and parliamentary speeches – indeed any material that may throw light on the meaning that the enacting legislature intended to give to the provision. That is the process required by the modern approach of the common law to statutory construction. In many jurisdictions, the common law principles have been incorporated, extended or modified by statute. Section 15AA of the Acts Interpretation Act 1901 (Cth) requires a court construing federal legislation to have regard to its purpose. Section 15AB of that Act authorises the use of various forms of extrinsic material to determine the meaning of that legislation.”
109. See also the High Court decision in Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503, at 519 where the Court noted:
[39] “This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.”
(emphasis added)
110. That extrinsic materials may be used is reflected in section 15AA of the AIA which provides:
“In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.”
111. See also SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362 at [14] where Kiefel CJ, Nettle and Gordon JJ explained the starting point as follows:
“The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute, whilst at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, the meaning must be rejected.”
112. More recently in Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; 284 FCR 294, at [68] and [69] (Thawley J, with whom McKerracher J and Davies J agreed) said:
“… The end object of the process of statutory construction is to give the words of the particular statute the meaning which the legislature is taken to have intended them to have: Lacey v Attorney-General (Qld) (2011) 242 CLR 573 at [43]; Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 378 at [25]-[26]. The preferred construction is reached through common law and statutory rules of construction, the application of which involves the identification of a statutory purpose from any express statement in the statute, or by inference from the text and structure of the statute and by appropriate reference to extrinsic materials: Lacey at [44].”
113. Turning then to the extrinsic materials, the Explanatory Memorandum to the A New Tax System provides the following explanation of what is intended to constitute a “false and misleading” statement:
False or misleading statements
1.42 A statement is false or misleading in a material particular when something in the statement is false or misleading, or something is omitted from the statement. If something is included in, or left out of, a statement relating to a tax matter which, if known, would cause a taxation officer to determine a claim in another way, it will be a material particular. In short, if a matter is important enough to affect a decision relevant to determining a taxpayer’s tax liability, the matter is to be regarded as material and must be disclosed correctly. [Schedule 1, item 2, paragraph 284-75(1)(b)]
…
It is irrelevant whether the taxpayer knows that the statement is false or misleading or not. However, there are exclusions from the penalty where the taxpayer and the agent (if any) exercised reasonable care or followed the advice of the Commissioner (see paragraphs 1.108 to 1.112). The Commissioner may also remit the penalty under section 298-20 in Schedule 1 to the TAA.
114. A false or misleading statement is a statement that is objectively incorrect. It matters not the intention, or lack thereof, of the taxpayer in making the statement. Where a shortfall is found in the amount of assessable income, it inevitably means that a false or misleading statement has been made in the ITR lodged and declared by the taxpayer to be true and correct.
Intentional Disregard
115. The Explanatory Memorandum to the A New Tax System provides the following explanation of what is intended to constitute intentional disregard:
Intentional disregard of a taxation law
1.61 A taxpayer will be liable to pay a base penalty amount of 75% of a shortfall amount caused by the taxpayer or agent intentionally disregarding a taxation law. [Schedule 1, item 2, item 1 in subsection 284-90(1)]
1.62 For example, the base penalty amount of 75% would apply to the shortfall amount where a taxpayer or agent deliberately excludes from the taxpayer’s assessable income an amount knowing it to be assessable, or deliberately claims a deduction, rebate, credit or offset knowing that it is not allowable.
116. The MT 2008/1 Penalty relating to statements: meaning of reasonable, care, recklessness and intentional disregard (MT 2008/1) provides some guidance also. MT 2008/1 is a public ruling and an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. It sets out the Commissioner’s interpretation of the concepts ‘reasonable care’, ‘recklessness’ and ‘intentional disregard’ as used in Subdivision 284-B and ‘intentional disregard’ and ‘recklessness’ as used in section 286-75(1A)1A of Schedule 1 to the TAA. In relation to “intentional disregard” it provides:
Meaning of intentional disregard of a taxation law
[109] …. the penalty for intentional disregard is the most severe sanction in response to a serious failure to comply with tax obligations.
[110] The adjective ‘intentional’ means that something more than reckless disregard of or indifference to a taxation law is required.
[111] Unlike the objective test which applies to determine whether there has been a want of reasonable care or recklessness, the test for intentional disregard is purely subjective in nature. The actual intention of the entity is a critical element.
[112] Intentional disregard means that there must be actual knowledge that the statement made is false. To establish intentional disregard, the entity must understand the effect of the relevant legislation and how it operates in respect of the entity’s affairs and make a deliberate choice to ignore the law.
[113] Dishonesty is a requisite feature of behaviour that shows an intentional disregard for the operation of the law. This is another significant difference between this type of behaviour and behaviour that shows a want of reasonable care or recklessness where dishonesty is not an element.
[114] Evidence of intention must be found through direct evidence or by inference from all the surrounding circumstances, including the conduct of the entity.
[115] A mere failure to follow the Commissioner’s view contained in a private ruling is not evidence of intentional disregard. However, if an entity ignores an unfavourable private ruling on a matter where the law is clearly established, that may constitute intentional disregard
11G. Registered agents are not required to view all source documents, and it is often impractical for them to do so.
11H. An entity may provide some information to their registered agent in a summary and the registered agent may reasonably rely on that for preparation of the statement. However, a summary which is incorrect or omits material information will not meet the requirement to provide all relevant taxation information, even if reasonable care for a registered agent would have involved querying the information.
11I. The entity has the burden of proof to establish that they provided all relevant taxation information. The standard of proof required is 'on the balance of probability' or 'more likely than not'. If the probability either way is equal, then the standard is not satisfied.
11J. You would usually need to contact the registered agent if the entity is claiming the safe harbour exception to the penalty. Without doing so, it would be difficult to assess their actions and whether they exercised reasonable care or know what information they requested from their client.
663. For reasons already outlined, there is insufficient evidence before the Tribunal to enable it to determine whether the safe harbour provision applies.
664. The Applicant says the “errors” in the statements were “inadvertent oversights”. Without the evidence of the instructions given and/or hearing from Mr P, the Tribunal is unable to properly characterise whether this was the case.
Commissioner’s Contentions
665. The Commissioner contends that:
665.1.the Applicant has made false and misleading statements in her ITRs by failing to declare amounts which represented amounts of assessable income, the outcome of which has resulted in a shortfall as defined in section 284-80(1) of Schedule 1 to the TAA;
665.2.the Applicant’s behaviour amounts to an intentional disregard and that therefore the appropriate penalty amount is 75% in accordance with section 284-75(1) of Schedule 1 of the TAA.
666. The Commissioner submits the appropriate penalty amount is 75% because:[317]
[317] Exhibit 1, T Documents, T2: Reasons for Decision, page 59 at [360].
666.1.the Applicant did not disclose all income derived during the relevant years:
“For example: You received deposits from the trusts of which you were the beneficiary of these trusts. You contended that the monies drawn from the trusts were a repayment of UPEs, but in MYOB they were characterised as a loan and further you were not able to prove the existence of the UPEs or the alleged UPEs have not been extinguished. In addition, there were no contemporaneous documents to support the purchase and subsequent sale of the units.”
666.2.the Applicant and her husband are the controlling mind of the Group entities and:
“…there have been several instances where the monies advanced to you were characterised as a loan, later you assumed the liability of the entity you borrowed the monies from and subsequently the assumed liability was forgiven. The monies deposited into your bank account were characterised as a loan but there was no intention to physically paid the loan, the loan was set-off by book entries.”
666.3.the Applicant alleged some of the deposits constituted loans, but she was not able to provide any documentary evidence and/or other contemporaneous records in support;
666.4.the Applicant alleged the amount of $180,000 deposited into her bank account in the 2011 income year was a distribution arising from a capital gain derived by the MZA Trust and was distributed to her, but no CGT event and nil capital gain was reported in the 2011 ITR;
666.5.the Applicant contends that the $1,000,000 received on 14 February 2011 was proceeds from the sale of her beneficial interest in the TLP, however the valuation of the business was not conducted by a professional valuer. In addition, the Applicant stated that the net capital gain was reduced to nil due to the application of the small business CGT concession, but no documentary evidence was provided to evidence how you satisfied the basic conditions as required under section 152-10 of the ITAA 1997;
666.6.the way the Applicant characterised the purported loans, alleged redemption of units in the trust, purported trust distributions in the MYOB software was different from how they were characterised in the Handisoft General Ledger. No apparent attempts were made by the Applicant or the accountant to keep proper records to explain the adjustments made in Handisoft and to ensure proper characterisation in future income years.
666.7.in relation to the deductibility of the interest claimed in respect of the commercial bills, other than those conceded, the Applicant has not been able to show the initial/original commercial bills were related to the acquisition of units in the relevant trusts;
666.8.the Applicant has made no attempt to properly reconcile the interest deductions as declared in the ITRs and the interest charged as per the bank statements;
666.9.the Applicant’s tax agent had significant qualifications and more than 24 years of experience as a tax agent and accountant.[318] Mr P therefore would be reasonably expected to have knowledge of the correct tax treatment and implications of actions taken for the avoidance of tax;
666.10.The Applicant was the bookkeeper for these entities making the deposits into the bank account and therefore was fully aware how these transactions were characterised in the MYOB electronic accounting software.
666.11.there is a “very significant difference” between the Applicant’s taxable incomes for the Relevant Years as originally declared and the amounts now assessed. The Applicant must have known that the amounts declared were incorrect.
666.12.the quantum and the repetition of omitted income demonstrates these were not simple errors or inadvertent mistakes of accounting or record keeping and that the Applicant had systemic errors that show a clear disregard of the tax law regarding both the omitted assessable income and interest deductions.
666.13.due to the Applicant’s knowledge and experience she should understand the effect of the law. The Applicant also had access to advice which she did not seek. The Commissioner says this implies she made a deliberate choice to ignore the law.
[318] Exhibit 1, T Documents, T23: Letter of the Respondent dated 9 March 2015, page 269 at [274].
667. The Commissioner submits:
667.1.the Applicant’s conduct goes “beyond a mere failure to take reasonable care or even a reckless indifference to the result but are considered to be deliberate and calculated steps taken to mislead the Commissioner as to the true tax position of the related group of entities. These actions amount to an intentional disregard of the taxation law”; and
667.2.there is no basis for the penalties to be remitted.
668. In relation to the Applicant’s reliance on external advisers the Commissioner submitted:
“[43] Where an external accountant has been engaged to advise and assist, they would be expected to be called to give evidence about the content of the accounts, particularly if the director could not.
[44] Speaking of a director’s obligations under Corporations Act 2001) s 180, the plurality in Shafron v ASIC (2012) 245 CLR 465, 467 [18] said:
“But the responsibilities referred to in section 180(1) are not confined to statutory responsibility; they include whatever responsibilities the officer concerned had with the corporation, regardless of how or why those responsibilities came to be imposed on that officer.” (emphasis added)
[45] It is trite law that
“A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform” (Daniels v Anderson (1995) 37 NSWLR 438, 503;
cited in Deputy Commissioner of Taxation v Clark (2003) 57 NSW LR 113, 119 [102] (Spigelman CJ)) (emphasis added)
[46] Such a duty includes:
‘maintain[ing] familiarity with the financial status of the corporation by a regular review of financial statements. Indeed, he or she will be unable to avoid liability for insolvent trading by claiming that they had never learned to read financial statements: Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 125.’ (ASIC v Adler (2002) 168 FLR 248, 347-8 [372(8)(d) (Santow J)] (emphasis added)”
669. The Commissioner submits the exclusion in section 284-75(6) does not apply. The Commissioner says any reliance on others or delegation of her duties as director/trustee does not relieve her of her duties. The Commissioner submits no evidence of the delegation – including, possibly a retainer agreement, invoices for professional services rendered, record of the instructions given - has not been led by either the Applicant or the purported delegate.
Consideration - Penalties
670. There are shortfall amounts for the 2010-2013 Years: section 284-80(1), Schedule 1, TAA. Statements made by the Applicant are incorrect – they are false, through disclosure and omission from the ITRs.
671. Therefore, the Applicant is liable for administrative penalties for those income years.
Finding
672. The Tribunal finds penalties were appropriately imposed. The issue is the amount of penalty.
What is the appropriate penalty?
673. The Applicant explained that unless a transaction went through a bank account, she did not record it in MYOB. The Applicant told the Tribunal that she believed her accountant was going over everything correctly and that she “had no reason to accept that he wasn’t doing things correctly”.[319]
[319] Transcript, 152.
674. The Applicant told the Tribunal she kept records in relation to the entities and said:
“I believe I was keeping records. I was, in terms of administration, as I said, I kept daily MYOBs, I kept copies of every account, every cheque I paid, and in terms of taxation, I believe - and doing ledgers and journals, that was the responsibility of my accountant. I believe I did keep good paperwork. In all the paperwork that’s been submitted to - all these volumes is paperwork going back to the year 2000. I was able to produce that.[320]
…
I kept the records and the books that I thought that the work that I did, all the accounts and whatever, and it was my accountant’s job to do the journals and the ledgers and all the stuff that needs to be done at the end of the financial year. I’m not sure if that means I discharged it to him, but that’s why I employed him, to do that. That was his job.:”[321]
[320] Transcript, 153.
[321] Transcript,154.
675. In relation to records and obligations concerning the issue and redemption of units in LST and MZA #1, the Applicant told the Tribunal:
“I thought that was happening, because my understanding was my accountant was doing that. As I said before, I’d had many conversations with him about - and he talked to me constantly in that terminology. He would say, “We’re redeeming these units” or “that money will be subscriptions for units”; I had no reason to believe that that was not happening. So, yes, I do believe that I was aware of those obligations, and I believed that’s what my accountant was doing.[322]
I was aware that redemption and subscription of units needed to be documented, and I believed that was what my accountant was doing.”[323]
[322] Transcript, 155.
[323] Transcript, 156.
676. In relation to the distribution of income from the trusts the Applicant said she understood that in order to distribute income the trustee must reach certain decisions. As a trustee and director of TAT Trust, SUT, SDT, MZA #1 and LST the Applicant said:[324]
“…that was part of the meeting that I had with [the accountant] prior to the end of every financial year. He would sit down with us and work out allocations to various entities. That, I’m presuming, is part of what we did prior to the end of each financial year.
But the decision was that of the trustee, wasn’t it?‑‑‑Well, I - if I’m the trustee, I made that in consultation with my accountant at the end of each financial year.”
[324] Transcript, 157-158.
677. Regarding her usual dealings with her accountant the following exchange occurred during the hearing:[325]
[325] Transcript, 231-232.
MR STANLEY: Do you consider that as a director you had an obligation to keep proper books and records?---I kept MYOB records and my - I relied on my accountant to then keep records as well which he formulated from my MYOB records.
And did you consider that was enough to meet your director’s obligations?---I can’t answer that.
In the usual course of dealings with Mr P, can you recall how frequently he provided you with accounts which included all the accounting entries he had posted? To stop an objection I will explain that accounts, in my question, means ledgers?---Can I recall how frequently - - -
Mr P provided you with ledgers which included all the accounting entries that he had posted?---No.
And was it your usual practice to compare and reconcile the differences between the MYOB records that you kept and the accounting records that Mr P produced for you?---No.
Did you recall Mr P advising you that the accounting entries he had posted should also be posted into MYOB?---No.
And do you recall how frequently Mr P provided you with financial statements?---I think only annually.
Was it your usual practice to compare and reconcile the differences between the statements provided and your records?---No. My MYOB record?
Yes, I apologise?---No.
Yes?---no.
Did you consider that the accounts that were kept by Mr P for the WYVW Group entities met your financial record-keeping obligations as a director?---I had no reason to believe otherwise.
And did you consider that by engaging Mr P that you had met your financial record keeping obligations as a director?---He was a chartered accountant with a lot of experience. I had no reason to think anything otherwise.”
678. The Applicant’s description of her engagement and communications with Mr P is only in general terms. She does not descend into any detail. When pushed on a material particular she does not recall or only recalls in general terms.
679. She had no recollection of written engagement letters from Mr P in relation to herself or in relation to the Group. The Applicant says she did not usually provide written instructions. Even if that were the case, one would expect an accountant to have confirmed those instructions in writing.
680. The Applicant could not say whether the content of what was discussed at meetings was communicated by email, either by her, or by Mr P, or whether Mr P provided, prior to meetings, specific materials which he would discuss at the meetings.
681. The Applicant did not meet with Mr P after he had completed the accounting entries which allowed him to produce the financial statements for the Group entities.[326] The Applicant said she believed that she had received written copies of the financial statements from Mr P but could not recall any explanation of the statements being provided. The Applicant could not recall whether at the regular meetings with Mr P the current state of the unit registers for the unit trusts was discussed but noted that Mr P did not show the Applicant the unit registers at those meetings. The Applicant’s evidence was that from the commencement of the professional relationship with Mr P she had not seen the unit registers.[327]
[326] Transcript, 204.
[327] Transcript, 203:23.
682. As referred to earlier, the impression of the Tribunal is that the Applicant had limited financial literacy. Her involvement was really limited to making data entries into MYOB. Everything else was left to others to do, or not do as it turns out.
683. For example, the money taken out of the some of the entities has been described by the Applicant in the MYOB or general ledgers as drawings, advances or loans. The Applicant told the Tribunal her understanding of the word “drawings” to be:[328]
“…money that we were getting out of the partnership for services provided in anticipation of - and then at the end of the year there would be consolidation or rounding up. And the drawings were always part of income. For instance, they were my - they were income, treated as income.
So when the moneys were dispersed you did not have an obligation to repay them. Is that what you’re saying?‑‑‑I don’t know.
You don’t know?‑‑‑No.
But we have drawings or advances, and you say that they’re convenient descriptions that the accountants P and Co were familiar with?‑‑‑Yes.”
[328] Transcript, 164.
684. The Applicant was unable to provide an explanation of the difference between an advance and a drawing:
“Could you explain the difference between a drawing and an advance?‑‑‑Well, I always put them as drawings, but I know sometimes Mr P had them as advances. I really don’t know what the difference between the two is.
Would you understand an advance to require repayment to the person who advanced it?‑‑‑Maybe I have that in there as wrong because I rarely put it in as an advance. I usually always put it in as drawings. So maybe I shouldn’t have even put the word “advance” in there.
Is there any significance in using drawings that the moneys were paid to you or Mr WYVW?‑‑‑I don’t know.”
(emphasis added)
685. The Applicant was unable on some occasions to recall whether certain money was received, or the exact date of an event, or whether documents had been prepared and signed. This is understandable given the passage of time.
686. The Tribunal does not consider the Applicant’s “I do not recall” responses were a strategy deployed by her to avoid responsibility. However, some responsibility should be taken. The Applicant engaged in no independent evaluation, reconciliation or checks of any kind in relation to the accountant. This, it is inferred, is because these tasks were left primarily to her husband or someone else who has not been identified.
687. The Tribunal does not find that this leads to a conclusion of intentional disregard but does find that the Applicant was reckless. Despite the significant number of transactions and amounts involved over the course of many years, the Applicant apparently has made no attempt to find the tax consequences of those transactions. The Applicant’s conduct was of a standard below what a reasonable person would expect of someone involved in these sorts of transactions and from someone who undertook the role of director of companies and trusts. She should have made it her business to have more involvement and to gain a better understanding of the Group’s activities. She should have asked questions and not just “assumed”. It is incumbent on all taxpayers to take responsibility for ITRs lodged on their behalf by their accountants. Accountants can only advise, and act based on a client’s instructions. It is for the taxpayer to appropriately and fully inform and instruct their tax agents and to ask questions or seek clarity where something is misunderstood.
688. All too often a spouse is named as a director of a company that in fact is being operated by the other spouse. It is imperative that all involved in financial dealings increase their financial literacy so that they may not only accurately report relevant information to the Commissioner but so that they can undertake and perform their statutory obligations as director or trustee as the case may be.
689. There is no indication that the Applicant had any real appreciation of whether her ITRs were false and misleading. However, the Applicant admits that having devoted time herself, with new advisers, rather than simply relying on her previous accountants, mistakes have been made which she seeks to rectify. There is no evidence before the Tribunal from her previous accountant addressing whether reasonable care was taken in the preparation of the Applicant’s ITRs. The impression from the Applicant’s evidence is that she was reckless. The Applicant submitted that it was “beyond her skill and knowledge to ensure that the transactions undertaken by her and the entities in the Group were treated correctly for taxation purposes”.[329] In those circumstances a base penalty of 50% of the shortfall is appropriate (section 284-90, item 3).
[329] Exhibit 10, Applicant’s submissions at [264].
Does the exclusion in section 284-75(6) apply?
690. The Tribunal finds that the elements required have not been satisfied by the Applicant. The Tribunal accepts Mr P was engaged by the Applicant. That is apparent from the fact he lodged the Applicant’s ITRs.
691. The burden is on the Applicant to prove she gave Mr P accountant “all relevant taxation information” (see paragraph [662] above).
692. The Applicant has not proven that she gave her accountant “all relevant taxation information” (see paragraphs ## above).
693. The Applicant’s evidence was general and vague and did not descend into any detail in relation to the engagement with Mr P.
694. Mr P did not give evidence. It cannot be known whether his conduct involved negligence, intentional disregard for a taxation law, or even if he failed to follow instructions. The extent of Mr P’s involvement in the Group’s and the Applicant’s activities is not known.
695. There is no evidence the Applicant relied on her advisers “after making an independent assessment of the information or advice, having regard to (her) director’s knowledge of the corporation and the complexity of the structure and operations of the corporation”.[330] In fact, her evidence was that she made no assessment of her adviser’s information or advice.
[330] Section 189(b)(ii), Corporations Act 2001.
Uplift
696. The base penalty amount may be increased by 20% in the following circumstances:
284-220 Increase in base penalty amount
(1) The base penalty amount is increased by 20% if:
…
(c) the base penalty amount was worked out using item 1, 2 or 3 of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items previously; or
…
(e) your liability to a penalty arises under subsection 284-75(3) and you were previously liable to a penalty under that subsection.
(emphasis added)
697. Given the finding in relation to the 2009 Year, there is no uplift of the base penalty pursuant to section 284-220(1)(c) for the 2010 Year.
698. Given there has been a penalty imposed using item 3 of the of the table in section 284‑90(1) for the 2011, 2012 and 2013 Years, the issue is whether an uplift is applicable.
699. The Federal Court in Bosanac v Commissioner of Taxation [2019] FCAFC 116; 267 FCR 169 (Bosanac FC) held (at [144]) that section 284-220(1)(c) is to be constructed as meaning that the additional penalty amount applies where the shortfall amount arose for a previous tax liability.
700. Derrington J confirmed in Ross (at [198]) (relying on Bosanac FC at [143], [149]) that the uplift applies automatically and is not a matter of discretion for the Commissioner.
Should the penalties be remitted in whole or part having regard to the taxpayer’s particular circumstances?[331]
[331] Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50; 212 FCR 483.
701. In considering whether to exercise the discretion to remit the penalties in whole or in part, the Tribunal notes the following relevant matters:
701.1.the Applicant co-operated throughout the audit process;
701.2.the Applicant identified what she thought were “errors” during that process and provided amended documentation (albeit misguidedly);
701.3.the Applicant engagement and reliance on experienced advisers to assist with her financial record and ITR preparation;
701.4.the Applicant’s lack of requisite expertise in the complexity of the matters engaged in; and
701.5.the extent of the undisclosed income.
702. In circumstances where:
702.1.the Applicant has only been made aware of the 20% uplift in relation to each year at the same time (following the audit);
702.2.the Tribunal has not found the Applicant has acted with intentional disregard; and
702.3.during the objection the Commissioner accepted the claims of deductible expenses in relation to two of the commercial bill facilities;
it is appropriate to remit the 20% uplift in relation to the 2010 to 2013 Years.[332]
[332] See example 12 in PS LA 2012/5.
703. As a result, the Tribunal:
703.1.sets aside the Penalty Decision in relation to the 2009 Year;
703.2.varies the Penalty Decision with respect to the 2010 to 2013 Years such that administrative penalties are remitted to 25%.
SHORTFALL INTEREST CHARGE
Applicant’s Submissions
704. The Applicant submits the Tribunal should exercise the discretion to remit any shortfall interest charge because:
704.1.of the significant delay (five and a half years) by the Commissioner in deciding the objection;
704.2.the Commissioner as the original decision maker decided that SIC should not be remitted because the shortfall had arisen due to fraud or evasion. In circumstances where there is no fraud or evasion, the entire SIC should be remitted to nil.
705. The Applicant submitted the SIC should be remitted to nil or some amount less than the amount calculated in accordance with section 280-105(1) of Schedule 1 of the TAA relying on the following circumstances:[333]
(a) she engaged experienced professional advisers to advise her,
(b) she co-operated with the conduct of the review and audit,[334]
(c) she has made and continues to make payments to the Commissioner in respect of the disputed tax debts, and
(d) there have been several lengthy delays occasioned by the Commissioner’s inaction in the 5.5 year / 66-month interval between her objections to the amended assessments and penalty assessments in 2015 and the Commissioner determining the objections in 2021.[335]
[333] Exhibit 10, Applicant’s Submissions at [275]-[278].
[334] Exhibit 1, T Documents, T23: Letter of the Respondent dated 9 March 2015, page 275 at [323].
[335] Exhibit 10, Applicant’s Submissions at [279]-[280].
706. The Applicant pointed out that unreasonable delay on behalf of the Commissioner is a factor relevant to considering whether to remit SIC.[336]
[336] Exhibit 10, Applicant’s Submissions at [275]-[278]; Per PS LA 2006/8 at [57].
707. In the circumstances the Applicant submits there was no fraud or evasion and therefore the correct and proper decision is to remit SIC to nil for the entire period, or in the alternative, remit SIC to nil for the 38-month period during which the Commissioner was inactive as outlined above.[337]
[337] Exhibit 10, Applicant’s Submissions at [277].
Commissioner’s Submissions
708. The Commissioner submits:
[321] “By TA Sch 1, s 280-170 the Applicant has no right to object to the Respondent’s decision not to remit the SIC imposed where the SIC levied for each Review Year was less than 20% of the additional amount. The Applicant’s right to object to the decision not to remit SIC is confined to the 2009 and 2010 Years because it is only in each of those Years that the SIC levied exceeded 20% of the additional amount.
[322] The Respondent’s decision not to remit does not form part of the objection decision for the 2011, 2012 and 2013 Years.
[323] The Tribunal has no authority to determine whether the Respondent should remit the SIC imposed for the 2011, 2012 and 2013 Years.
[324] The Respondent disputes the correctness of the measurement of the periods described in paragraph 277 of the Applicant’s submissions but does acknowledge the lengthy duration of Respondent’s audit of the Applicant for the Review Years and the making of the objection decisions to the Applicant’s objections for those Years.
[325] The lengthy duration was not due solely to the Respondent but was due, in part, to the failure of the Applicant promptly to respond the Respondent’s requests for further information and clarification of earlier provided information, and the need for the Respondent carefully to consider the accuracy of that information when compared to the statements previously made to the Respondent by the Applicant, her accountants and solicitors.”
Consideration - SIC
709. Section 280-170 of Schedule 1 to the TAA states that a taxpayer can only object to the decision not to remit SIC if the SIC amount was not remitted is more than 20% of the additional amount.
710. The 2009 Year is no longer under consideration.
711. Practice Statement PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods sets out circumstances in which the Commissioner should consider remitting interest charges that are imposed on shortfalls and accrue during the shortfall period.
712. Examples of when SIC should be remitted include:
11B. Providing the scope of the audit remains much the same throughout the course of the audit, you may remit shortfall interest charges to the base rate for the period the audit goes beyond the expected completion date.
11C. This will not apply, however, if the taxpayer has caused the delay unreasonably, or obstructs the progress of the audit, for example, by repeatedly failing to:
• keep appointments or supply information, or
• respond adequately to reasonable requests for information. This will include excessive or repeated delays in responding, not replying to the request for information, giving information that is not relevant or does not address all the issues in the request or supplying inadequate information.
12. Unreasonable delay by ATO
12A. Even if an audit is completed before the audit completion date, remission of interest charges might still be appropriate if there have been unreasonable delays or periods of inactivity during the audit that were outside the control of the taxpayer.
12B. As a general rule, where there has been no action on a case for 30 days or more and it was possible for the case to progress during that time, you should remit the shortfall interest charges for the period of unreasonable delay (the number of days exceeding 30 consecutive days).
14. Longer resolution times due to complexity of issues
14A. Where the issues underlying a shortfall are complex, it may naturally take the ATO longer to come to a view as to the proper operation of the law.
14B. Resolution of the issues, including through referral to specialists, does not in itself constitute a delay that would warrant remission of interest charges. The cycle timeframes for the audit generally factor in issues of complexity and the time taken for their resolution. 14C. However, you should consider remission to the base rate where the resolution of the issue took longer than would be reasonably expected and resulted in the case exceeding the expected audit completion date.
713. There is no reason to doubt that a considerable time was required to consider and respond to the matters at issue in this matter. The structure and transactions were complex and numerous, and the events took place some years ago. However, there is no explanation from the Commissioner as to why a five-year time period from date of lodgement of the objection to the date of decision was reasonable. The Tribunal notes the Commissioner’s acknowledgment of the length of time during the audit and objection process.
Finding
714. In the circumstances the Tribunal considers it preferrable to remit SIC for the 2010 Year to nil for the 38-month period during which the Commissioner was (on appearances) inactive.
715. For the 2011, 2012 and 2013 Years, the SIC amount is less than 20% of the tax shortfall amount and therefore cannot be objected to by the Applicant in this Tribunal as part of a Part IVC TAA review. Therefore, the Tribunal has no jurisdiction to consider the remittal of SIC for the 2011, 2012 and 2013 Years.
DECISION
716. In relation to the 2009 Year, there is no suggestion of any fraud. Therefore, the Amended NOA for the 2009 Year was issued by the Commissioner outside the limited amendment period provided for in section 170 of the ITAA 1936.
717. In relation to the 2010 to 2013 Years the Tribunal finds the Applicant has not discharged the burden of proof that the Amended NOAs were excessive.
Orders
718. The decision under review with respect to the 2009 Year is set aside. The Commissioner had no jurisdiction to the amend the NOA.
719. In relation to the 2010 Year:
719.1.the Penalty Decision is varied such that administrative penalties are remitted to 50%.
719.2.the Objection Decision is varied to the extent that the SIC component is remitted to nil for the 38-month period during which the Commissioner was (on appearances) inactive; and
719.3.the Objection Decision is otherwise affirmed;
720. In relation to the 2011, 2012 and 2013 Years:
720.1.the Penalty Decision is varied such that administrative penalties are remitted to 50%.
720.2.the Objection Decision is varied to the extent that the SIC component is remitted to nil for the 38-month period during which the Commissioner was inactive; and
720.3.the Objection Decision is otherwise affirmed.
I certify that the preceding 720 (seven hundred and twenty) paragraphs are a true copy of the reasons for the decision herein of Senior Member D K Grigg
..............................[SGD]............................
Associate
Dated:
Dates of hearing:
Date reserved:
7 November 2022 - 11 November 2022, 19 December 2022
30 January 2023
Counsel for the Applicant:
Mr C Peadon and Mr J Nixon
Solicitors for the Applicant:
Shearwater Legal
Counsel for the Commissioner:
Mr I Stanley
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