YPQF and Commissioner of Taxation (Taxation)

[2019] AATA 518

YPQF and Commissioner of Taxation (Taxation) [2019] AATA 518 (21 March 2019)

Division:TAXATION & COMMERCIAL DIVISION

File Number(s):      2016/5583; 2016/5584; 2016/5585;

Re:YPQF

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe

Date:21 March 2019

Place:Sydney

The objection decision with respect to the 2011 and 2012 years of income is affirmed. The objection decision with respect to the 2013 year of income is varied so that the $10,000 repayment received from the subsidiary company should not be treated as assessable income; the objection decision with respect to that financial year should otherwise be affirmed. The objection decision with respect to penalties is also affirmed.

.............................[SGD]...........................................

Deputy President Bernard J McCabe

Catchwords

INCOME TAX – assessment of payments said to be loans – whether payments were borrowed money or proceeds from disposal of assets from China – fraud or evasion – decision affirmed for 2011 and 2012 years of income – decision varied for 2013 year of income

LEGISLATION

Taxation Administration Act 1953 s 14ZZK, Schedule 1

CASES

Commissioner of Taxation v Radilo Radio Enterprises Pty Ltd (1997) 72 FCR 300

Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753

Vu v Commissioner of Taxation [2006] FCA 889

REASONS FOR DECISION

Deputy President Bernard J McCabe

21 March 2019

1. The applicant in these proceedings is a Chinese businesswoman who has been living in Australia since 2006. She received large payments from China in the 2011, 2012 and 2013 years of income. The Commissioner of Taxation says those payments should have been declared as assessable income. He says the payments appear to be a distribution of profits from family companies in China. The applicant says the inflow of money – most of which came at first instance from her daughter in China – was actually borrowed money that was ultimately obtained through intermediaries from Chinese banks. The money was used in Australia to fund (unsuccessful) property investments by companies controlled by the applicant. The Commissioner issued amended assessments in respect of the 2011 and 2012 financial years which included the disputed amounts in the applicant’s assessable income. The Commissioner also issued a default assessment in respect of the 2013 year of income and imposed administrative penalties in all three years.

2. The applicant has the burden of establishing that the Commissioner’s objection decisions are wrong – but she must also establish what the correct assessments should be:

   
   

   s 14ZZK(b) of the Taxation Administration Act 1953. As a practical matter, she must persuade me:

   ·a total of over $16 million in payments she received from her daughter over the three year period; and

   ·a total of $1.1 million received in the 2013 year of income from an acquaintance;

   should be properly characterised as loans in her hands. There was also a $10,000 transaction in the form of a repurchased bank cheque that the applicant says amounts to a repayment to her of a loan she had made to somebody else.

3. I should add the applicant must also satisfy me the Commissioner should not have found there was fraud or evasion in relation to the 2011 year of income. The Commissioner was not entitled to issue amended assessments with respect to that year of income in the absence of fraud or evasion given the amount of time that had elapsed following the original assessment. As it happens, the applicant has not established the finding of fraud or evasion should not have been made.

4. The applicant has not persuaded me that the Commissioner’s objection decision in relation to the 2011 and 2012 years of income was wrong although I would vary the decision in relation to the 2013 year of income. I have also decided to affirm the imposition of administrative penalties and decline to remit any part of that penalty. I explain my reasons below.

   BACKGROUND

5. The applicant was born in China. She and her husband controlled two successful companies in that country. Those companies were involved in manufacturing and processing businesses.

6. While the applicant’s businesses in China prospered, she said she was concerned about the stability of the Chinese economy, and about the political scene. She said she wanted to do business in Australia where she anticipated there were opportunities to make money. She came to this country in 2006 and received a visa permitting her to stay in May 2008: exhibit two at [5] and [13]. (The applicant’s statement confirms she had trouble convincing the Australian immigration authorities she met the criteria for the business owners’ visas that she was seeking. She was finally granted a subclass 890 visa in May 2015 following Ministerial intervention. Nothing appears to turn on that history.) The applicant’s husband and daughter remained behind in China. The applicant’s husband continued to operate the family businesses. The applicant said her daughter was also involved in the companies which conducted the businesses (exhibit two at [38]) although the applicant agreed her daughter had no formal role in the family companies.

7. The applicant said she wanted to invest in real estate and undertake property development in this country. She started to identify suitable projects after she arrived here. She set up Australian companies for this purpose. She was appointed director of those entities and established other business relationships. But she needed access to capital. She said she did not have access to cash in Australia. Whatever money she required to launch her Australian ventures would have to come from China.

8. Getting money out of China at the time was not an easy task. The Chinese authorities apparently frowned on individuals attempting to transfer large amounts of money overseas. The applicant explained in her statement that the payments she received in China were transmitted in smaller amounts so as not to attract attention (exhibit two at [17] – [19]). It follows there was an element of subterfuge involved in the transfer of funds. But that was just part of the problem.

9. The Commissioner’s real concern was the source of the money. I was invited to conclude the applicant was effectively liquidating assets owned by family companies in China in the course of perpetrating what amounts to a bank fraud. The Commissioner surmises it happened like this. The applicant’s daughter arranged loans to the companies from Chinese banks. (That is odd, because her daughter did not have any formal role in the family companies.) The banks were told the money was to be used as working capital in the Chinese businesses, and the advances were somehow secured against the assets of the family companies there. But the money provided by the banks was subsequently advanced by those companies to the applicant’s daughter. The monies were then transferred in small amounts to the applicant in Australia. The Commissioner said the amounts ultimately transferred to Australia were about equal to the family’s total equity in the family companies’ businesses – which is consistent with a plan to loot those companies of value at the expense of the banks.

10. The applicant proceeded to loan the monies that she obtained to the various companies she controlled in Australia. Most of the money was subsequently expended on property development projects that the companies were conducting here (although the applicant also had an interest in a fish and chip shop that I infer was acquired to satisfy the requirements of one of the visas that the applicant had sought). Those development projects have been unsuccessful and the applicant has effectively lost the money she put up. She has been involved in litigation with some of her former business associates and she is now in difficult financial circumstances.

11. The applicant also obtained money that she said was borrowed from a Chinese friend. I was told that advance was secured against the applicant’s home in China.

12. The applicant’s companies in China have since been placed under a form of external administration. It seems the applicant’s husband has been prevented from leaving China as he Assists Authorities With Their Enquiries. His daughter says her father is also experiencing serious health problems: exhibit six at [5]. The applicant’s daughter might also be under scrutiny as a consequence of the transactions involving the banks. In the meantime, the applicant has experienced serious health problems. She complains that she is now marooned here. She cannot leave Australia so she can be with her husband until the taxation dispute is resolved.

    THE EVIDENCE ABOUT THE ADVANCES FROM THE CHINESE BANKS

13. I have already explained the applicant’s daughter remained involved with the family businesses in China in the relevant years of income. The applicant said her daughter was not an employee or officer or shareholder and was not involved in the management of the companies, which is surprising if she had the authority to arrange borrowings on the companies’ behalf.

14. In her statement, the applicant’s daughter explained how she came to borrow money that was advanced by Chinese banks that had relationships with the family companies. The background to the transactions was summarised in a conversation she had with her mother in 2006 which the applicant’s daughter recalled as follows in her statement (at [6]):

    Mum: I need to obtain funds from China to invest in Australia to secure a visa in Australia. My advisers tell me that there are opportunities in the Australian property market to make good profits. I need you to organise for the companies your father and I control in China to borrow funds from banks, and then loan those funds to you, and then for you to loan those funds to me. Each of the loans will be at the same rate as the bank loan to the companies so that when I repay you, you can repay the companies and they can repay the banks. I promise I will repay you. My advisors say that there are good profits to be made here.

    Me: Okay. I will make the arrangements with the accountant.

15. This account is consistent with the evidence provided by the group financial controller of the applicant’s family companies. That individual provided a statement in which she said the applicant had contacted her and instructed her to assist in arranging advances to the company that would then be on-lent to the applicant’s daughter: exhibit eight at [5]-[6].

16. The applicant’s daughter said she trusted her mother because the applicant was a successful businesswoman. The daughter said she had no doubt her mother would repay the loans and that the Australian ventures would be a success. The daughter explained in her statement:

    8I organised for the companies to borrow funds from the banks. The borrowings were commonly for a short period (for example, 1 year). On several occasions I was involved in arranging for the companies to refinance the borrowings that the companies then lent to me and I then lent to my mother, all at the same interest rate.

17. The applicant and her daughter did not create loan documents or formally record the terms of the loans by the daughter to the applicant. They both explained during the oral evidence at the hearing that formal loan documentation was not thought to be necessary as the loan was between mother and daughter. Interestingly, the applicant asked her daughter to execute formal documentation recording the terms of the loans between daughter and mother after the applicant became aware of the Commissioner’s interest in 2015: exhibit six at [10].

18. The applicant was cross-examined in detail about her understanding of the bank transactions. She said the family companies had no trouble raising money from Chinese banks because the companies were unencumbered. The companies were regarded as a good credit risk. She suggested the banks were very keen to lend, and that the bankers avoided asking searching questions about the companies’ intentions with respect to the money.

19. The loan documents signed by the companies and the Chinese banks tell a different story, at least in one respect. The loan documents, which have been translated into English, suggest the monies were advanced for specific purposes. One loan document says the monies were advanced for the purpose of purchasing raw materials for use in that company’s business and for no other purpose: see exhibit one at p 694 Another of the loan agreements provided for credit for the purpose of ‘project funding’, and for that purpose alone: exhibit one at p 673. It appears the companies were acting in breach of the terms of their credit facilities by on-lending the money to the applicant’s daughter. The applicant acknowledged the breach but said, first, that Chinese banks do not really care about those limitations and, second, any breach of the loan agreements was a matter for the banks and potentially the authorities in China. She insisted the monies were ultimately loaned to her by her daughter and that all the essential elements of a loan arrangement were in place. She said she expected to make quick profits on the Australian developments and that she would then repay the monies to her daughter, who would repay the companies and the banks. She apparently figured the banks would not object even if they did find out what happened so long as they were repaid. 

20. The applicant’s claim about the likelihood of the banks being indifferent to the purpose of the loan because of lax lending practices is inconsistent with the evidence in her statement. She recalled expressly telling her daughter to avoid telling the banks the true purpose of the loan: exhibit three at [20]. The applicant instructed her daughter to say the monies were being used for working capital or for the general purposes of the family companies in China. The fact the applicant was prepared to engage in outright fraud reflects poorly on her credit.

21. I have not been provided with evidence that would enable me to make reliable findings about the lending practices of the Chinese banks in question – although I acknowledge there are news reports referring to exceptionally lax lending practices in China following the global financial crisis towards the end of the last decade. For the purposes of the exercise, I will assume in the applicant’s favour that the Chinese bankers were eager to lend and that they did not ordinarily scrutinise loan applications closely.

22. There are other problems with the applicant’s account which, taken together, leave me unpersuaded by her case. To begin with, the applicant was unable to satisfactorily explain why she needed to insert her daughter into the process. The applicant made no effort to conceal or disguise what she intended when she spoke with the group financial controller. That individual’s statement makes it clear she was aware of what was being planned. Having become knowingly involved in what appears at this distance to be a fraud on the banks, it is unclear why the financial controller was not in a position to effect the transfers direct to the applicant in Australia. Given the financial controller did not appear to be troubled by what the applicant proposed, it is unclear why she would have any difficulty finding ways to forward the money that did not attract too much attention. The applicant’s claim in cross-examination that she had to involve her daughter because she trusted her is not especially convincing. 

23. There is also a perplexing mismatch between the terms of the loans – the applicant and her daughter pointed out a number of the loans to the companies were short term facilities that had a term of one year – and the nature of the applicant’s intended investments in Australia. The applicant invited me to draw the inference that she thought she would be able to get away with the bank fraud in the sense that the monies which were advanced to her would be repaid before the banks discovered what had happened (assuming the banks ever found out). She said longer term loans from the bank would be harder to obtain. But the applicant was an experienced business-woman. She must have known she was unlikely to make a quick return on property development projects in Australia. While I accept she might have been unpleasantly surprised by the slow progress of the developments here, there is no reason to suppose she thought the projects would be turned around within the tight time frames contemplated by the short term finance arrangements the companies had with the Chinese banks. The loans she received from her daughter were mostly for periods of five years if one has regard to the loan agreements that were drawn up after the event, but that raises more questions than it answers. The mismatch between the duration of the loans the companies received from the Chinese banks and the duration of the loans the applicant’s daughter made to her makes no sense. While I acknowledge the applicant’s daughter suggested she might be able to refinance loans as they fell due, the anomaly is still troubling.

24. There is also no evidence that the applicant took any steps to repay the principal of the loans or any interest while she has been in Australia. She had some assets here. She claims that she would have called on those assets to pay her debts but the intervention of the Australian Taxation Office prevented her from realising assets at their proper value. But she also agreed in cross-examination that she still has assets in China. She had not liquidated those assets at the time of the hearing. That tends to suggest the applicant did not take seriously the obligation to repay her daughter and the banks. That finding, on its own, goes to the very heart of the characterisation of the transaction. A loan, by definition, is an advance which is accompanied by a mutual expectation that the advance will be repaid according to the terms of the advance: see, for example, Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 per Sackville and Lehane JJ; see also Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 at [20] per Edmonds J. It is not clear that the applicant and her daughter had the mutual expectation of repayment; the applicant, at least, has not behaved consistently with such an expectation.

25. The applicant insists that she loaned money from her daughter, whatever its source and whatever the issues about how it was obtained. But the evidence in relation to that loan is unconvincing. The loan agreement was not drawn up until 2015, after the applicant became aware of the Commissioner’s concerns. She explicitly told her daughter that the documentation was required to establish that the loan existed. A document created after the event is of limited use in the circumstances. I am either persuaded that the loan was given on the terms that were orally agreed, or I am not. If I am not persuaded that the loan was agreed when the monies were advanced, a document created subsequently does not prove anything.

26. I accept family members do not always record their financial dealings with the same formality and diligence that one would expect of persons dealing at arms’ length. I also accept a child may well be overawed by a parent and agree to arrangements they would not otherwise accept with somebody else. While it is reasonably clear the applicant’s daughter did indeed obtain monies through her parents’ companies that were ultimately sourced from a bank, it is less clear that the monies were transferred to the applicant in Australia pursuant to a genuine loan arrangement between the applicant’s daughter and the applicant.

27. The evidence of the group financial controller makes clear that the applicant regarded the companies’ assets and its credit as if they were entirely at her disposal. The applicant needed access to capital and she knew the companies could and would provide it as directed. She agreed in cross-examination that she had access to other monies in China. She did not need to resort to the companies’ banks to obtain capital for her Australian ventures – but she elected to use the companies to effect the fraud anyway, even though the banks would expect repayment in the short term and charge interest. She certainly did not need to involve her daughter in all this.

1. The Commissioner suggests the applicant was engaged in a fraudulent scheme to obtain loans equal to the value of her interest in the Chinese companies that she did not intend repaying. She involved her daughter to make sure the transaction was disguised. The Commissioner surmised the applicant had no plans to repay the loans and notes she has not in fact repaid anything. While it is unclear how the applicant expected her husband and daughter to remain in China once the fraud was exposed, it must be said that it is possible the early intervention of the Commissioner might have prevented her relatives from making good on an escape.

2. Maybe the Commissioner is right about all that. But the Commissioner is not obliged to prove his case: Vu v Commissioner of Taxation [2006] FCA 889 at [7] – [10]. The applicant must persuade me she has a satisfactory explanation for what occurred that leads to an outcome that is correct, or more nearly correct. She has fallen short, and in doing so she has also failed to demonstrate the finding of fraud or evasion in relation to the 2011 year of income should not have been made. The fact she was prepared to engage in what appears to be a fraud on Chinese bankers raises serious questions over her credit. She is a person who is, by her own admission, prepared to mislead when it suits her interests to do so. But there is a further problem with her credit. I have already mentioned the applicant was involved in litigation arising out of her property developments that went bad in Australia. I note that in his reasons for judgment, the trial judge recounted evidence from the applicant which suggested a different explanation as to how she raised the money to invest in the Australian projects. The applicant had apparently told the court that she had sold assets in China to fund the projects in Australia. The company financing arrangements were not mentioned in that evidence. When asked about that discrepancy at the hearing in this matter, the applicant – who was self-represented – suggested she did not understand the difference between selling assets and obtaining finance. Her response was unsatisfactory.

3. The Court’s finding as to the applicant’s credit counts against her in these proceedings given there are so many other questions about her account. Why was the applicant’s daughter introduced into the process? Why did the applicant choose to rely on borrowed funds accessed in this roundabout way when she had other sources of capital available to her in China? How did she expect to repay what were short term loans to the companies when the investment projects in Australia were never likely to yield profits in the short term? The applicant’s account – and her response to these questions in particular – is not satisfying.

   THE EVIDENCE ABOUT THE LOAN FROM THE APPLICANT’S FRIEND

4. The applicant claims she was loaned a total of $1.1 million by a friend in June 2013. She explained in her statement dated 6 February 2017 that she negotiated the loan with her friend over the phone. The friend is a Chinese businesswoman residing in the United States. The friend is a godparent of the applicant’s daughter. The applicant said she recalled asking the friend for $US1.1 million “for the purpose of investing in property developments in Australia”: exhibit two at [54]. She said the loan was meant to be for a short period – although it is unclear how she could have thought a short term loan was appropriate in relation to property developments that would occur over a number of years.

5. The applicant’s statement also claims the applicant offered the friend security over the applicant’s home in China. The applicant confirmed in cross-examination that the security has never been enforced, assuming it has been created.

6. I was provided with a translated copy of a letter of demand written by the friend dated 8 January 2018 (attachment “C” to exhibit three). The letter refers to a loan of $US1.1 million. (I note the Commissioner refers to a payment from the friend of only $A1.1 million in the 2013 year of income. The difference between the $USD and $AUD value of the payment is probably immaterial for present purposes.) The letter of demand does not refer to the claimed security interest over the applicant’s home. The letter confirms the principal has not been repaid, and that interest continues to accrue.

7. The letter of demand is inconsistent with the applicant’s account in one important respect. It suggests the loan was originally advanced to the applicant because the applicant had said she was engaged in a tax dispute with the Australian authorities, and that her accounts had been frozen.  

8. The discrepancy does not necessarily mean the monies were not advanced by way of loan. The discrepancy might have been adequately explained if the friend had been called to give evidence. Alas, that did not occur – perhaps because the applicant was self-represented after her lawyers had withdrawn. She may not have appreciated what was required to discharge her burden of proof under s 14ZZK(b) of the Taxation Administration Act 1953. 

9. What remains – apart from the applicant’s testimony, which I have already explained should be treated with caution – is the letter of demand (which tells a subtly different story to the one offered by the applicant) and an earlier letter from the friend which purports to record the terms of the loan. That letter is reproduced in exhibit one at p 1029. It is dated 29 April 2015. The document noted the amount of the advance that paid into the applicant’s account on 11 June 2013, the obligation to pay interest of 10% pa and the obligation to “repay at call within reasonable time”. The obvious difficulty with the letter is that it was prepared and signed nearly two years after the money was paid to the applicant, and after the dispute with the Commissioner had come to light.

10. It is possible the applicant and her friend made an oral agreement for a loan when the advance was made. It is obviously possible that the terms of the loan were not reduced to writing at the time. They were friends, after all, and it may be that oral agreements between them were the norm. The rate of interest imposed does not necessarily reflect a close personal relationship where the parties were inclined to do each other favours. But the timing of the letter raises the obvious question: was this characterisation of the payment a recent invention? The evidence as it stands does not enable me to be satisfied that the arrangement was, in fact, a loan. The documents certainly suggest that on their face, but given the timing issues and the discrepancies between the account offered by the applicant and the one attributed to her friend, I am not persuaded the applicant has discharged the obligation imposed on her pursuant to s 14ZZK(b) of the Taxation Administration Act 1953.

    THE $10,000 CHEQUE

11. That leaves one other matter relating to the substantive tax liability. The applicant has disputed the characterisation of monies received from a subsidiary company she controlled in Australia. Her statement of 6 February 2017 [exhibit two] notes (at [28]) the financial accounts of that company reflect loans she had made to it. The Commissioner did not seriously contest the suggestion that the applicant had loaned monies to the company. On 6 December 2012, that company drew a cheque payable to the applicant in the amount of $10,000. The applicant says the amount was a part repayment of the funds she had loaned to the company.

12. The evidence in relation to this transaction is, well, thin. The applicant’s bare assertion of the purpose of the payment is of limited weight given the concerns I have already expressed. Having said that, it is difficult to know what additional evidence might be produced.

13. In the circumstances, given what I take to be uncontested evidence that the subsidiary company owed money to the applicant, I am inclined to accept what appears to be an obvious and logical explanation for the payment – namely, that the amount was paid in partial discharge of a loan.

    PENALTIES

    Imposition of penalties

14. The Commissioner concluded the applicant was liable to pay administrative penalties on the shortfall at the rate of 50% in the 2011 and 2012 years of income, with an uplift of 20% in the 2012 year of income. He also determined that a penalty of 75% be imposed in respect of the taxation liability in the 2013 year of income.

15. A penalty of 50% is imposed where the Commissioner concludes the taxpayer has made a false statement to the Commissioner which has resulted in a shortfall amount and that shortfall is the product of recklessness by the taxpayer or its agent as to the operation of taxation laws: s 284-90(1) of Schedule 1 to the Taxation Administration Act 1953.

16. Slightly different considerations apply in relation to the 2013 year of income. The applicant failed to lodge a tax return that year. The Commissioner issued a default assessment. He was entitled to impose a penalty at the rate of 75% in respect of the taxation liability he assessed: s 284-75(3), 284-90(1). I am satisfied that penalty was imposed appropriately.

17. I was not provided with extensive submissions from the applicant at the hearing about her liability to penalties. I am satisfied the rate of penalty imposed by the Commissioner in the 2011 and 2012 years of income should be affirmed in light of the following:

    ·the applicant is from a different cultural background and was, as a result, unfamiliar with local tax laws. But she had engaged apparently competent professional advisers. More is expected of a taxpayer who is assisted by professional advisers. If the taxpayer had kept the tax agent fully informed about the transactions, the alarm bells should have rung loud and clear;

    ·the applicant’s argument that she was naïve as to her obligations under the taxation laws must be balanced against the fact she was an experienced business woman. While that experience was mostly derived in China, she was a director of a string of Australian companies and she was dealing in significant amounts of money and negotiating with respect to large commercial projects. A higher degree of sophistication is expected of a person in these circumstances. Her evidence of her experience in China suggests she is, indeed, a commercially sophisticated individual;

    ·the applicant’s failure to substantiate the transactions suggests she had no interest in complying with the taxation laws – that is, she disregarded the legal obligation. 

    Should the penalties be remitted

18. The applicant gave evidence about suffering serious health problems. There was also some evidence that her husband, who remains in China (and may be prevented from leaving) is also experiencing significant ill health. I accept she feels frustrated by practical barriers to her leaving Australia after she has lost so much money and disappointed the expectations she had. But that does not explain why the penalty should be remitted in this particular case.

    CONCLUSION

19. The objection decision with respect to the 2011 and 2012 years of income is affirmed. The objection decision with respect to the 2013 year of income is varied so that the $10,000 repayment received from the subsidiary company should not be treated as assessable income; the objection decision with respect to that financial year should otherwise be affirmed. The objection decision with respect to penalties is also affirmed.

I certify that the preceding 46 (forty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe

..........................[SGD]..............................................

Associate

Dated: 21 March 2019

Date(s) of hearing:	11 and 12 July 2018
Applicant:	In person
Counsel for the Respondent:	Mr R Jedrzejczyk