ZFPR and Commissioner of Taxation (Taxation and business)
[2025] ARTA 572
•8 May 2025
ZFPR and Commissioner of Taxation (Taxation and business) [2025] ARTA 572 (8 May 2025)
Applicant/s: ZFPR
Respondent: Commissioner of Taxation
Tribunal Number: 2022/5298 – 2022/5304
Tribunal:Deputy President Thompson SC
Place:Perth
Date:8 May 2025
Decision:The assessments, including penalty assessments for the 2014 and 2015 year are remitted for recalculation in accordance with the concessions made by the Commissioner. Otherwise, the decisions under review are affirmed.
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Statement made on 08 May 2025 at 9:51pm.........................................................
Deputy President
CATCHWORDS
TAXATION – application for review of an objection decision – s 67 default assessments – amended assessment – onus of proof not discharged – Applicant claims deposits were repayments of loan – deposits from family and friends – no independent evidence that deposits were loans – Applicant’s representation changed during cross-examination – Applicant’s evidence not sufficiently reliable – English is not Applicant’s native language - potential witnesses not called – Tribunal infers the evidence would not have assisted the Applicant - extraordinary lack of documentary evidence – no evidence indicating whether deposits were gits, loans, or investment funds – no evidence of shareholder instructions – no evidence of loan agreements – no records supporting annual income – Tribunal finds the assessments are not excessive – penalty assessments – intentional disregard – engaging tax agent insufficient to demonstrate reasonable care – Tribunal finds the Applicant’s statements were known to be false – shortfall interest charge – Tribunal has found fraud or evasion – Tribunal does not have the power to remit the shortfall interest charge
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) s 2A
Administrative Review Tribunal Act 2024 (Cth) ss 9, 56(1)
Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth), Schedule 16 Part 5 s 24
Corporations Act 2001 (Cth) s 1305
Income Tax Assessment Act 1936 (Cth) ss 109N, 167, 168, 170(1), 320, 322
Income Tax Assessment Act 1997 (Cth) s 6-5
Income Tax Assessment (1936 Act) Regulation 2015 (Cth) reg 19(f)
Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 (Cth)
Taxation Administration Act 1953 (Cth) s 14ZZK, Sch 1, Division 280, s 280-100(1), 280-170, Division 284, s 284-75, 284-90, 284-225, 298-20(1)
CASES
Bosanac v Federal Commissioner of Taxation [2019] HCA 41, (2019) 93 ALJR 1327, (2019) 374 ALR 425
Carnaby v R [2021] NSWCCA 275
Commissioner of Taxation v Cassaniti [2018] FCAFC 212, (2018) 266 FCR 385, (2018) 109 ATR 119
Commissioner of Taxation v Dalco (1990) 168 CLR 614, (1990) 64 ALJR 166, (1990) 20 ATR 1370, (1990) 90 ALR 341, (1990) 90 ATC 4088, [1990] HCA 3
Commissioner of Taxation v Liang [2025] FCAFC 4
Commissioner of Taxation v Ross (2021) 174 ALD 77, [2021] FCA 766, (2021) 85 AAR 194
FLLH and Commissioner of Taxation [2024] ARTA 216
Gashi v Commissioner of Taxation [2013] FCAFC 30, (2013) 209 FCR 301, (2013) 91 ATR 1, (2013) 296 ALR 497, 2013 ATC 20-377
George v Commissioner of Taxation (1952) 86 CLR 183
Hamod v NSW [2011] NSWCA 375
Jones v Dunkel (1959) 101 CLR 298, (1959) 32 ALJR 395, (1959) 76 WN (NSW) 278, [1959] ALR 367, [1959] HCA 8
Liu v Option Funds Management [2024] FCA 444
McPartland v Commissioner of Taxation [2025] FCAFC 23
Motorola Solutions, Inc. v Hytera Communications Corporation Ltd [2020] FCA 539
R v Handlen (2010) 247 FLR 261, (2010) 207 A Crim R 50, [2010] QCA 371
R v Osborne (2002) 133 A Crim R 519, [2002] VSCA 156
R v Sandford (1994) 33 NSWLR 172, (1994) 72 A Crim R 160
Trautwein and Federal Commissioner of Taxation (1936) 56 CLR 196, (1936) 4 ATD 81, 10 ALJ 251, [1936] HCA 46
Wong v R (2001) 159 FLR 328, [2001] WASCA 32
SECONDARY MATERIALS
Australian Taxation Office, Administration of the false or misleading statement penalty – where there is a shortfall amount (PS LA 2012/5, 23 August 2012)
Australian Taxation Office, Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard (MT 2008/1, 12 November 2008)
Australian Taxation Office, Remission of shortfall interest charge and general interest charge for shortfall periods (PS LA 2006/8, 5 May 2008)
Statement of Reasons
INTRODUCTION
The Applicant is a Chinese-born businessman who has lived in Perth since about 2004, when he moved here for study purposes, aged 23. Despite not completing his studies, he has established a number of businesses in Australia, predominantly in the mining and shipping industries. His business interests have been sufficiently successful for him to live what appears to be a comfortable lifestyle in one of the premier beachside suburbs of Perth, build a house worth several million dollars, and send his three children to two of the more prestigious private schools in the Western Suburbs.
Having audited the Applicant’s income tax returns for the years ended 30 June 2008 to 30 June 2017 (audit period), the Respondent (Commissioner) issued default Income Tax Assessments (Assessments) for the income years ended 30 June 2008, 2010 to 2012 inclusive, and 2014 to 2016 inclusive (years in issue), increased his assessable income, and imposed shortfall interest charge (SIC) and administrative penalties.[1] In this application, the Applicant seeks to review the Commissioner’s objection decision dated 28 April 2022 (Objection Decision),[2] in which the Commissioner disallowed the Applicant’s objections to each of the Assessments for each of the years in issue.
[1] Exhibit R2, T10 – T23.
[2] Exhibit R2, T2.
Given the complexities of the evidence and the fact that the names of people and entities are anonymised, I have included as Attachment A to these reasons a table setting out the aliases and roles of the people and entities I refer to.
With the exception of the amendments which are required as a result of concessions made by the Commissioner in these proceedings, the Commissioner’s decision is affirmed.
BACKGROUND
Procedural History
The application was filed with the Tribunal[3] on 24 June 2022. Between June 2022 and May 2024 there were numerous directions hearings, 3 conciliations, directions for the filing of evidence and amendments to the Applicant’s Statement of Facts Issues and Contentions (SFIC). The matter was initially listed for hearing on 28 and 29 May 2024. On 23 May 2024 that hearing was vacated as a result of the Applicant having recently filed a further SFIC, and otherwise not being ready for hearing. Directions were made for the filing of further SFICs, further evidence and submissions, along with a direction in the following terms:
If the Applicant fails to comply with any of these directions, the application will be dismissed.
[3] The Applicant lodged his application for review with the Administrative Appeals Tribunal (AAT). On 14 October 2024 the Administrative Review Tribunal (ART) replaced the AAT and all matters which were before the AAT were transferred to the ART: Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth) (ART Act), Schedule 16 Part 5 section 24. References to the Tribunal in this decision refer to the AAT prior to 14 October 2024, and the ART from that date.
The matter was subsequently relisted for hearing on 9 - 11 September 2024. At a directions hearing on 19 August 2024, the parties advised the Tribunal the matter would only require 2 days and that it could proceed in person in Sydney. At this time the only change in the Applicant’s representation from the filing of the application was the addition of Senior Counsel, shortly prior to the 19 August 2024 directions hearing.
At the 19 August 2024 directions hearing I advised the parties that I had once acted for the Commissioner in proceedings regarding Mr P’s personal income tax affairs, and asked if there was any objection to my hearing the matter. At that time, Mr P was the Applicant’s tax advisor and representative in these proceedings. Senior Counsel who appeared for the Applicant at the directions hearing,[4] and the Commissioner’s counsel, both said there was no objection to my hearing the matter.
[4] Along with her junior, instructed by Mr P.
Adjournment after commencement of the hearing
It became clear during the Applicant’s cross-examination on the first day that the hearing would not finish within the 2 days. The Commissioner’s counsel alerted the Tribunal to this shortly after the lunch adjournment, and all counsel indicated they would be available for a third day of hearing on Friday 13 September 2024. Senior Counsel was given explicit leave to discuss the question of a Friday hearing with her client overnight.
On the second day of the hearing, the Applicant’s Junior Counsel did not appear. Senior Counsel advised the Tribunal that her brief had been withdrawn, and that her instructions were to make an adjournment application. The Applicant was present.
The Applicant sought an adjournment of a month to enable him to engage Chinese-speaking lawyers. Given the application was a surprise to the Commissioner, and the Applicant was mid-cross-examination, it was adjourned to Friday 13 September 2024 with a direction that the Applicant file and serve a formal application including the grounds, supported by an affidavit, by 4 pm on Wednesday 11 September 2024.
The filed application bore no more than a passing resemblance to that articulated by Senior Counsel in her oral application, and no supporting affidavit was filed. A witness statement of Mr B was filed, which was of little relevance. A witness statement of a Mr M was also filed giving evidence that the Applicant was in meetings in Perth on Friday 13 September 2024, and thereby only available for cross-examination for a short period by video.
The adjournment application which was filed was premised on the incorrect basis that the Applicant’s cross-examination had been listed for continuation on 13 September 2024. Whilst there was a possibility of cross-examination continuing on that date, the primary issue the oral adjournment application had raised was whether an adjournment should be granted of the substantive proceedings to enable the Applicant to obtain Chinese-speaking lawyers, having chosen to dismiss his extant legal counsel, and the attendant issue of the preservation of the integrity of the process, at a point when the Applicant was mid cross-examination and faced, on the Commissioner’s estimation, two further days of cross-examination. The adjournment sought by the filed application was until after 20 September 2024. Unfortunately, the Applicant’s submissions filed in support of the adjournment application were based on the false premise.[5]
[5] This was not the fault of counsel briefed to appear on 13 September 2024.
The Commissioner opposed an adjournment. The gravamen of the Commissioner’s argument was that the Applicant should not be permitted to dictate the hearing process by electing to dismiss his counsel in the course of his cross-examination. This was particularly so given counsel had not returned their briefs for ethical reasons, and both were experienced counsel in taxation matters. Counsel referred to a series of cases in criminal jurisdictions[6] in which accused persons had made similar mid-trial applications against the backdrop of not, or no longer, having counsel.[7] In each of these cases the application was refused. The general principle found in these cases is that if an accused dismisses his or her counsel mid-trial seeking an adjournment so as to obtain new counsel, the application will not be granted lightly and the accused will be put to an election of whether to continue with his or her previously retained counsel, or representing themselves. Particular emphasis in this matter was, rightly, placed on the necessity to preserve the integrity of the evidence in light of the stage of the hearing when the adjournment was sought.
[6] No relevant authority on the topic could be identified either in the Tribunal or the various civil jurisdictions of the State or Federal Courts.
[7] Hamod v NSW [2011] NSWCA 375, [131]; Wong v R [2001] WASCA 32, [58]; R v Osborne (2002) 133 A Crim R 519, 527-529, [2002] VSCA 156; R v Sandford (1994) 33 NSWLR 172, 186, (1994) 72 A Crim R 160; Carnaby v R [2021] NSWCCA 275, [139] and [144]; R v Handlen [2010] QCA 371, [110].
Counsel for the Applicant distinguished the cases relied on by the Commissioner on various bases arising from each of their unique facts. This included that this Applicant had cultural and linguistic barriers to obtaining a fair hearing which suggested the adjournment was the preferrable option. Having been put to the election, the Applicant said he would continue his cross-examination unrepresented, if an adjournment was not granted.
The Tribunal’s objectives were set out in section 2A of the Administrative Appeals Tribunal Act 1975 (AAT Act):[8]
In carrying out its functions, the Tribunal must pursue the objective of providing a mechanism of review that:
(a) is accessible; and
(b) is fair, just, economical, informal and quick; and
(c) is proportionate to the importance and complexity of the matter; and
(d) promotes public trust and confidence in the decision-making of the Tribunal.
[8] Now section 9 of the ART Act.
On balance, I concluded that the Tribunal’s objectives, particularly those in section 2A sub sections (a), (b) and (d), were best served by granting the adjournment for a short time to enable the Applicant to engage new legal representation. The significant factors were:
(a)the cultural and linguistic barriers the Applicant faced;
(b)the fact that the matter would be part-heard irrespective of the outcome of the adjournment application;
(c)the likely short time frame of the adjournment;
(d)the ability to make directions to ameliorate potential damage to the integrity of the evidence;
(e)possible prejudice to the Applicant of proceeding with 2 hours of cross-examination on Friday 13 September 2024, whilst the Applicant was unrepresented, and resuming for its conclusion at a later date;
(f)the fact that any cross-examination on Friday 13 September 2024 would have to be by video, with the interpreter and cross-examiner in Sydney, and the Applicant in Perth; and
(g)the logistical barriers faced by both the Applicant and the Commissioner’s counsel in continuing cross-examination by video when no arrangements had been made to do so given no notice was given to the Tribunal that the Applicant would not be available in person on that day.
It would have been of considerable assistance if the Applicant had advised of his lack of availability on Friday 13 September 2024, in advance or at the time of the adjournment application being made on the Tuesday morning.
The matter resumed on 1 October 2024, following the Applicant’s engagement of new counsel and a firm of instructing solicitors replacing his former representatives.
Material before the Tribunal
In addition to the evidence which I deal with below, the parties filed SFICs and both opening and closing submissions. The materials which I have had regard to are:
(a)Applicant’s Further Revised Statement of Facts Issues and Contentions, dated 19 June 2024 (ASFIC);[9]
(b)Applicant’s Submissions, dated 19 June 2024 (Applicant’s opening submissions);
(c)Applicant’s Reply Submissions, dated 29 August 2024 (Reply);
(d)Applicant’s Closing Submissions, dated 15 November 2024 (A written closing);
(e)Applicant’s Submissions on Liang, dated 21 February 2025;
(f)Respondent’s Amended Statement of Facts, Issues and Contentions, dated 12 July 2024 (Commissioner’s SFIC);
(g)Respondent’s outline of Submissions, dated 12 July 2024 (Commissioner’s outline);
(h)Respondent’s Closing Submissions, dated 26 November 2024 (R written closing); and
(i)Respondent’s Submissions on Liang, dated 20 February 2025.
[9] This document was of limited utility as it was framed as a reply to a SFIC filed earlier in the proceedings by the Commissioner which was replaced in July 2024.
Factual background
The matters I set out below are largely drawn from the Commissioner’s SFIC.[10]
[10] Whilst I have had regard to the “facts” set out in Part 3 of the ASFIC, much of that material was dependent on evidence to be led at the hearing which was either unreliable, as to which see the discussion below regarding the Applicant’s evidence, or not led at all.
Personal information
The Applicant is an experienced company director and investor, having been involved with several dozen companies as a director, shareholder, or both, throughout the years in issue.[11] He is an Australian taxpayer[12] and at the time of the hearing was aged 44, having been born in China in December 1979.[13] He is married with three children. He came to Australia in 2003 and attended university for 2 years, undertaking a business course. He did not graduate from university in Australia, rather opting to move into a business career in commodities trading, which he had commenced whilst studying in Perth.[14]
[11] Exhibit R2, T153 which consists of the results of an Orbis search. The Orbis search undertaken on 21 July 2021 extends for 11 pages containing details of 45 current roles in 28 companies and 32 previous roles in 28 companies, as at that date.
[12] Exhibit R2, T24 – T27.
[13] Exhibit A3 at [2].
[14] Exhibit A3 at [6]; Exhibit R3, ST24, 1751 –1752.
The Applicant and his family currently reside at D House, owned by the Applicant and his wife Ms J, where they have lived since at least June 2015.[15] They had lived at K House until at least early 2013,[16] a property owned by Z Company, having been purchased in late 2007 or early 2008.[17] Between 2009 and 2014, the Applicant and his wife built O House, using D Group as the builders. [18]
[15] Exhibit R2, T28; Exhibit A3; Exhibit R3, ST15.
[16] Exhibit A2.
[17] Exhibit R2, T2 at [110]; Exhibit R3, ST27, 1783 at [25].
[18] Exhibit R2, T2 at [78], [79]; Exhibit A4 at [10].
Each of D House, O House and K House are in a sought-after, prestigious beachside suburb in the Western Suburbs of Perth. D House was purchased in mid-2012, for nearly $5.4 million.[19] O House was bought in late 2007 by the Applicant and Ms J for $1.7 million, sold in late 2016 for $2.5 million, and both the Applicant and Ms J claimed a capital loss on the sale.[20] At the time it was sold O House was incomplete, the building works having progressed only to lock-up stage.[21]
[19] Exhibit R2, T2 at [62].
[20] Exhibit R2, T78 at [11].
[21] Exhibit R3, ST16, 1629 – 1630.
The Applicant’s three children have all attended well-regarded private schools in Perth. His son is continuing his secondary education at an exclusive boys school, and his daughters have both completed their secondary education at an equally exclusive girls school. The elder daughter was at university at the time of the hearing.[22]
[22] Ts 2 October 2024, 150 - 151.
Bank accounts
During the years in issue, the Applicant operated a number of personal bank accounts with the same bank. These are:
Account number[23] Holder Referred to as 1236 Applicant Sole account 3479 Applicant and Ms J Joint account 2880 Applicant Credit card 258 Applicant and Ms J Home loan 1 113 Applicant and Ms J Home loan 2 [23] Part numbers only.
The Sole account and the Joint account were largely used to fund personal expenses including household utilities, purchase of a car, personal credit card payments, school fees, and holidays.[24]
[24] Exhibit R2, T126 – T140 are the bank statements for these two accounts.
Business interests
Of the Applicant’s many and varied domestic and international business interests, several are of particular relevance to this matter.
L Company was incorporated in Australia in May 2005. The Applicant has been a director and the company secretary of L Company since its incorporation.[25] The shareholders in L Company, at December 2017, were Mr S as to 80 percent, Mr Z as to 12 percent, and the Applicant as to 8 percent. Mr S and Mr Z acquired their shareholdings in about April 2010.[26] While Mr S and Mr Z were previously directors of L Company at various points, the Applicant is now the sole director.[27]
[25] Exhibit R2, T150, 1406.
[26] Exhibit R2, T150, 1408 – 1410.
[27] Exhibit R2, T150, 1406 – 1408; Ts 9 September 2024, 79 Ln 16.
The Applicant is an employee of L Company. The primary source of his reported income in the years in issue, other than the 2008 year, is salary paid to him by L Company.[28] In his capacity as an employee of L Company, he provides management services and some share trading, on behalf of L Company to M Company, for which L Company is paid fees.[29]
[28] Exhibit R2, T63 at [23].
[29] Exhibit R2, T35, 288, 290.
M Company was incorporated in the British Virgin Islands in May 2008. The Applicant became a director in June 2008, and remained so throughout the audit period. The Applicant was initially the sole shareholder of M Company.[30] In October 2010 the Applicant transferred his share to his sister, Ms X, and a second share was apparently issued to F Company, at which time Mr S, an associate of F Company,[31] became a director of M Company.[32] M Company is an investment vehicle used by some China-based family and friends of the Applicant.[33]
[30] Exhibit R2, T146.
[31] Mr S’s precise relationship with F Company is unclear.
[32] Exhibit R2, T35, 290; Exhibit R2, T149.
[33] Exhibit R2, T35, 289 – 290.
S Company is a Singaporean-registered company of which the Applicant was a director[34] and shareholder.[35] Along with one other director of S Company, the Applicant was named as the person authorised to operate a share trading account held with a stockbroking firm, Argonaut Securities. M Company, of which the Applicant is a director and former shareholder, was a shareholder in S Company.[36]
[34] Exhibit R3, ST7, 1596 (as at June 2010).
[35] Exhibit R3, ST6, 1589 – 1590.
[36] Exhibit R3, ST24, 1732.
G Company is private company registered in the United Kingdom, with its registered office in Cardiff. Its company details for the period ended 19 January 2009 record the two directors as being the Applicant and Mr Z.[37] There were 500,000 shares on issue in G Company as at January 2009, of which the Applicant held 200,000, and Mr Z 300,000. G Company’s principal place of business was listed as Hong Kong.
[37] Exhibit R2, T154. Curiously, the Applicant’s address is recorded as the O House, despite what I have noted above at [23] of this decision.
Audit of income tax returns
The Applicant’s tax returns for the audit period[38] were filed by his accountants, Mr W, Mr V and Mr P, and disclose the following total income amounts:[39]
[38] Exhibit R2, T24 – T30; Exhibit R3, ST17 – ST19.
[39] Adapted from Exhibit R2, T2 at [56].
Year Source Salary Other income[40] 2008 - - - 2009 L Company 80,000 2010 L Company 50,000 A Company 24,112 2011 L Company 150,000 2012 L Company 150,000 K Company 40,000 2013 L Company 200,000 2014 L Company 200,000 2015 L Company 200,000 2016 L Company 60,000 2017 L Company 60,000 [40] Comprises allowances, earnings, tips, directors’ fees.
In November 2017, the Commissioner commenced an audit of the Applicant’s tax returns. Extensive audit findings were issued in January 2021.[41] Prior to issuing the audit report, a position paper was produced in November 2019[42] and comments were provided on behalf of the Applicant, along with some financial statements.[43]
[41] Exhibit R2, T75.
[42] Exhibit R2, T63.
[43] Exhibit R2 T64; Exhibit R2 T65; Exhibit T66; Exhibit T77.
In January 2021 following completion of the audit, using the power in section 167 of the Income Tax Assessment Act1936 (Cth) (ITAA36), and in reliance on section 170(1) ITAA36, the Commissioner issued amended assessments to the Applicant for the years in issue.[44] Assessments for penalty were also issued.[45]
[44] Exhibit R2, T10 – T16.
[45] Exhibit R2, T17-T23.
The adjustments made to the Applicant’s income tax returns for the entire audit period are set out in the table below.[46]
[46] Adapted from Exhibit R2, T75, 619, Table 1, excluding the columns for penalties and interest as those amounts have been added to the total payable.
Year Disclosed income Audited income Tax shortfall Total payable 2008 10,840 98,342.46 27,911.90 72,895.20 2009 80,969 80,969.00 0.00 0.00 2010 72,150 1,022,150.00 433,572.50 1,088,995.45 2011 150,050 1,373,552.14 578,767.45 1,384,368.40 2012 189,731 1,013,731.00 399,639.97 915,008.67 2013 200,493 200,493.00 0.00 0.00 2014 205,479 446,951.00 112,540.30 241,854.70 2015 182,806 320,878.00 67,914.26 141,620.96 2016 59,707 253,907.00 83,067.47 168,568.12 $1,152,225 $4,810,973.6 $1,703,413.85 $4,013,311.5
The penalties and SIC imposed on the Applicant following the audit are set out in the following table.[47]
[47] Adapted from Exhibit R2, T75, 619, Table 1.
Year Penalties SIC Total payable 2008 20,993.90 24,049.40 72,895.20 2009 0 0 0.00 2010 390,215.20 265,207.75 1,088,995.45 2011 520,890.65 284,710.30 1,384,368.40 2012 359,675.70 155,693.00 915,008.67 2013 0 0 0.00 2014 101,286.25 28,028.15 241,854.70 2015 61,122.85 12,583.85 141,620.96 2016 74760.75 10,739.90 168,568.12 $1,528,945.30 $781,012.35 $4,013,311.50
The additional amounts of income included in the Applicant’s audited income consist of three categories of payments regarded by the Commissioner as ordinary income in the hands of the Applicant, being:[48]
(a)payments of $1,471,599 made by M Company to D Group for the benefit of the Applicant, being payments for the building of the O House, owned by the Applicant and his wife;
(b)payments of $288,887 made by M Company to the Applicant or other third parties, for the benefit of the Applicant, including school fees, utility bills, credit card bills, private telephone accounts and home loan repayments; and
(c)payments of $1,898,302.46 made by L Company to the Applicant.
[48] Commissioner’s SFIC at [65].
The audit identified an alternative basis of assessment for some of the payments, being that the M Company and L Company payments made to or for the benefit of the Applicant in the years 2008 to 2012 inclusive, comprised deemed dividends under Division 7A of the ITAA36.
Objection
In March 2021, the Applicant lodged an objection with the Commissioner.[49] His objection covered the amended assessments,[50] penalty assessments issued to him following the audit,[51] and the SIC imposed. Mr P, acting as the Applicant’s tax agent, filed the objection[52] and drafted correspondence and submissions in the review to the Commissioner.[53]
[49] Exhibit R2, T76.
[50] Exhibit R2, T10 – T16.
[51] Exhibit R2, T17 – T23.
[52] Exhibit R2, T76, 685.
[53] Exhibit R2, T77; Exhibit R2, T78; Exhibit R2, T78A.
Additional material was provided on behalf of the Applicant to the Commissioner, during the objection phase.[54]
[54] Exhibit R2, T77 – T93: Exhibit R2 T97 – T120.
Legal Framework
The legislative provisions relevant to these proceedings are contained in:
(a)the Income Tax Assessment Act 1997 (Cth) (ITAA97).
(b)the ITAA36;
(c)the Taxation Administration Act1953 (Cth) (TAA); and
(d)Schedule 1 to the TAA (Schedule 1);
Section 6-5 of the ITAA97 relevantly provides:
(1) Your assessable income includes income according to ordinary concepts, which is called 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.
Section 167 of the ITAA36 provides:
Default assessment
If:
(a)any person makes default in furnishing a return; or
(b)the Commissioner is not satisfied with the return furnished by any person; or
(c)the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.”
The table in section 170(1) of the ITAA provides:
The Commissioner may amend an assessment at any time if he or she is of the opinion there has been fraud or evasion.
Section 14ZZK of the TAA provides:
Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and(b)the applicant has the burden of proving:
(i)if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii)in any other case—that the taxation decision concerned should not have been made or should have been made differently.
The power of the Commissioner to impose SIC is contained in Division 280 of Schedule 1. Specifically in this matter, SIC is imposed by section 280-100(1) on the additional tax arising from the amendment of a taxpayer’s income tax assessment.
The law concerning administrative penalties is contained in Division 284 of Schedule 1. Section 284-75 provides, relevantly:
(2)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.
Section 284-90 of Schedule 1 provides relevantly:
(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
Section 284-225 of Schedule 1 provides for a reduction in base penalty.
Onus
The onus on a taxpayer under section 14ZZK of the TAA was most recently authoritatively considered by the Full Federal Court in McPartland v Commissioner of Taxation.[55] The Full Court said at [13] – [15]:
A taxpayer’s burden in challenging an assessment made pursuant to s 167 is to establish on the balance of probabilities their “actual taxable income” and, in so doing, show that the amount of money for which tax was levied exceeded their actual substantive liability: Gashi at [63], citing Commissioner of Taxation v Dalco(1990) 168 CLR 614 at 621, 623-625 (Dalco).
The taxpayer cannot discharge their burden only by showing that the Commissioner erred in the formation of his assessment for the purposes of s 167 of the ITAA: Dalco at 621; Gashi at [62]; Bosanac at [35], [47]-[48].
The taxpayer bears the onus on all issues, save where the Commissioner and taxpayer agree to confine the issues to a particular point of law or fact, in which case the taxpayer bears the onus in respect of those: Dalco at 624. No particular method by which the taxpayer must discharge their burden is defined or specified. The method will vary according to the circumstances of the case: Gashi at [63], citing Dalco at 624. [56]
[55] [2025] FCAFC 23.
[56] Emphasis added.
That is, taxpayers bear a burden in this Tribunal to prove to the civil standard, on the balance of probabilities, each of the two elements identified in section 14ZZK of the TAA, being that the assessment is excessive or otherwise incorrect, and what the assessment should have been.[57]
[57] See too George v Commissioner of Taxation (1952) 86 CLR 183.
It is not sufficient to merely point to some miscalculation by the Commissioner.[58] Nor is it permissible to merely assert that the matters which led the Commissioner in the course of the audit to be dissatisfied with the disclosed income of the Applicant are the issues in the Tribunal, so that the evidence is confined to these sources of funds alone.[59] Unless the Commissioner makes a formal concession or agrees to narrow the issues, the taxpayer must approach the case on the basis I have set out above.
[58] Commissioner of Taxation v Dalco(1990) 168 CLR 614, 621; Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301; [2013] FCAFC 30 at [62].
[59] The Applicant’s opening submissions to this effect are plainly wrong.
The Commissioner does not bear any onus in this matter. A respondent’s role in the Tribunal is set out in section 56(1) of the ART Act, and it is plain from the authorities that the Commissioner is not required to prove anything.[60]
[60] Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 196; McPartland.
It is erroneous to say, as the Applicant did here, that the ‘burden of proof in s 14ZZK is only effective in the absence of evidence’[61] and that ‘[t]he burden of proof falls away’[62] if the taxpayer leads evidence. The question is whether the evidence led by the taxpayer meets the onus so that the Tribunal is satisfied that it is more probable than not that the assessments were excessive, and what the assessments should have been.
[61] Applicant’s opening submissions at [23].
[62] Ibid.
In Commissioner of Taxation v Liang [2025] FCAFC 4,[63] the Full Court considered the onus, both in practical and legal terms, when a taxpayer was assessed on deposits of an unknown origin into a property trust. Relevantly, the Full Court said at [41]:
…it was for the taxpayers to disprove the basis of that assessment by establishing the relevant facts. It was not for the Commissioner to posit or prove a basis from which it might be inferred that the Deposits were income but for the taxpayers to place the relevant facts before the Tribunal.[64]
[63] I gave the parties leave to file additional submissions on this case in late January 2025, given the parallels between it and the present circumstances.
[64] Emphasis added.
In cases where, as here, the foundation of a taxpayer’s case is their own oral evidence rather than proper records retained in the course of their business, it is very difficult for the taxpayer to prove that the assessments are excessive and thereby discharge their onus.[65]
[65] Bosanac v Commissioner of Taxation [2019] HCA 41 at [10].
THE ISSUES
The issues for determination in these proceedings are set out below.
First, for each income year, are the Assessments excessive or otherwise incorrect? This requires proof of:
(a)the correct amount of taxable income in each year; and
(b)the tax payable on that income.
Secondly, in respect to the penalty assessments,[66]
(a)are they excessive or otherwise incorrect, having been made in each of the relevant years on the basis of 75% of the additional tax payable on the basis that the Applicant’s conduct constituted intentional disregard; and
(b)for the 2010, 2011, 2012, 2014, 2015 and 2016 income years, should the 20% uplift on base penalty amount not have been imposed?
[66] Exhibit R2, T17 - T23.
Thirdly, in respect to all penalties imposed, should they be remitted in whole or in part?
Fourthly, in respect to shortfall interest charges (SIC):
(a)should SIC be remitted for the 2008, 2010, 2011, 2012 and 2014 income years; and
(b)is the Tribunal empowered to remit SIC for the 2015 and 2016 years, and if so, should it?
There was an issue raised on the papers in respect to the Commissioner’s use of the power in section 170(1) ITAA36 to extend the period to amend assessments in circumstances where the Commissioner is satisfied that there has been fraud or evasion. During the course of his closing submissions, the Applicant conceded this aspect of the case so that there is no longer a challenge to the reliance on section 170(1) ITAA36 by the Commissioner. I therefore propose to say nothing further about it.
Concessions
The Full Court of the Federal Court of Australia recently considered the impact of a concession by the Commissioner in the context of a section 167 default assessment being reviewed in the Tribunal.[67] The case is useful in understanding what can go astray when a concession made by the Commissioner is read more broadly than it actually is.
[67] Liang.
At paragraphs [75] and [76] of the Commissioner’s SFIC concessions are made for each of the 2014 and 2015 income years. The concessions made are narrow and impact a relatively minor aspect of the overall calculations made of the Applicant’s taxable income, and the follow on consequences in the final amended assessments and penalty assessments, which flow through to the calculation of SIC.
The impact of the Commissioner’s concessions are set out in the table below.
Category 2014 2015 Taxable income - ITA 446,951[68] 320,878[69] Concession (21,472) (20,000) Adjusted taxable income 425,479 300,878 Tax shortfall - ITA 112,540.30[70] 67,914.26[71] Concession (9,984.50) (9,800) Adjusted tax shortfall 102,555.80 58,114.28 Penalty - assessed 101,286.25[72] 61,122.85[73] Concession (8,986.03) (8,820) Adjusted Penalty 92,300.22 52,302.85 SIC - Assessed 28,028.15[74] 12,583.85[75] Concession (2,486.65) (1,815.85) Adjusted SIC 25,541.50 10,768 [68] Exhibit R2, T14.
[69] Exhibit R2, T15.
[70] Exhibit R2, T14.
[71] Exhibit R2, T15.
[72] Exhibit R2, T21.
[73] Exhibit R2, T22.
[74] Exhibit R2, T14.
[75] Exhibit R2, T15.
Much is made of this concession in the ASFIC and opening submissions, including making the proposition that the Commissioner ‘confined his case’ to ascertaining whether either the L Company payments or the M Company payments were income in the hands of the Applicant.[76] I do not accept that the Commissioner confined his case, either by making the concession in [75] – [76] of his SFIC, or otherwise.
[76] ASFIC at [1(f)]; Applicant’s opening submissions at [9]. See too the ASFIC at [176] where the Applicant says ‘This is not a default assessment. Rather this is a dispute between the Applicant and the Respondent where two separately identifiable amounts should be included in the income of the Applicant.’
In opening the Applicant’s counsel conceded that insofar as payments made by M Company were loans to the Applicant, there is no agreement that satisfies the requirements of section 109N of Division 7A of the ITAA36.
In closing address, the Applicant’s counsel conceded certain matters with respect to the M Company aspect of the case. In doing so, he confirmed that:
(a)the Applicant could not make out his challenge to the use by the Commissioner of the fraud or evasion power in section 170 ITAA36 to go back in time and amend assessments which were otherwise outside the statutory time frame for amendment; and
(b)I was not asked to consider remission of penalty, or SIC.
As a result of these concessions, I do not deal with the fraud or evasion, remission of penalty, and SIC issues raised by the ASFIC.
THE EVIDENCE
Exhibits
The Applicant’s evidence comprised:
(a)Exhibit A1, an email dated 25 June 2024 from Mr W, an accountant, in response to a summons issued to his accounting firm;
(b)Exhibit A2, a copy of a mortgage registered at Landgate over the K House, dated 15 January 2013, securing the sum of $2,000,000;
(c)Exhibit A3, the Applicant’s witness statement, dated 19 June 2024;
(d)Exhibit A4, the Applicant’s second witness statement including annexures, dated 29 August 2024;
(e)Exhibit A5, the Applicant’s third witness statement and annexures, dated 5 September 2024;
(f)Exhibit A6, witness statement of Mr B, including a tender bundle[77] and attachments TB1 to TB7;[78]
(g)Exhibit A7, a second witness statement of Mr B dated 5 September 2024;
(h)Exhibit A8, a witness statement Mr V including attachments, dated 2 September 2024;
(i)Exhibit A9, an email chain between the Applicant and an employee of L Company and others, dated 11 August 2015; and
(j)Exhibit A10, an email chain between the Applicant and Ms R and others, dated 24 May 2016.
[77] This bundle largely replicated material in the T documents filed by the Commissioner, save for some unexplained handwriting, and comprises 543 pages including the index.
[78] Attachments TB1 – TB7 comprised 84 pages.
The Commissioner’s case comprised:
(a)Exhibit R1, the Commissioner’s SFIC dated 12 July 2024;
(b)Exhibit R2, the T documents comprising documents T1 – T159, and T78A[79], the annexure to the applicant’s objection dated 29 March 2021; and
(c)Exhibit R3, Supplementary T documents comprising documents ST1 – ST27.
The witnesses
[79] Handed up at the hearing.
The Applicant
The Applicant had made three statements which were admitted into evidence as set out at [71] above, and was extensively cross-examined.
Whilst the Applicant does speak, read and write English to what appears to be a good functional level, he suffered from the disadvantage of English not being his native language, and he was assisted by an interpreter in his native language, Mandarin. After the September adjournment he engaged an instructing solicitor who was a Mandarin speaker, which proved particularly helpful when there were some translation discrepancies on the 4th day of his evidence. On one earlier occasion the Applicant had corrected the interpreter’s English translation of what he had said. I have taken these interpretation issues into account in my assessment of the Applicant as a witness, and I accept that he suffered some disadvantage as a result of both the language barrier, and some issues arising in the translation from Mandarin to English and English to Mandarin. There were also a couple of instances where a word was used which neither the Applicant nor the interpreter were familiar with.[80]
[80] The word “contemporaneous” on 2 October 2024, Ts, 148; the phrase ‘I would be talking’ on 11 November 2024, Ts, 221; the meaning of evidence the Applicant had previously provided on 11 November 2024, Ts, 223 – 224.
Taking into account these issues, I found the Applicant’s evidence difficult to accept without corroboration as a result of the following issues:
(a)he sought to engage in debate or give elaborate contextual background rather than actually answering questions asked of him;
(b)he refused to answer some questions,[81] and on one occasion he plainly lied to the Tribunal;[82]
(c)his answers were often high level, vague, and lacking in detail;
(d)he sought to argue about the relevance of some of the questions he was asked;[83]
(e)in summary, his general approach to giving evidence was akin to the approach that a businessperson might take in negotiating a business deal.
[81] See Ts 9 September 2024, 42; Ts 9 September 2024, 45; Ts 9 September 2024, 68.
[82] Ts 9 September 2024, 67 – 68.
[83] Ts 4 October 2024, 192.
There were substantial inconsistencies between the written statements, the oral evidence, and other evidence before the Tribunal. For example:
(a)the Applicant gave cursory evidence in Exhibit A3[84] of Ms R as his in-house accountant, but made no mention of either Mr E or Mr K, both of whom he said worked for him prior to Ms R, so that the picture of how long he had an in-house bookkeeper or accountant was understated and misleading;[85]
(b)the Applicant insisted in cross-examination that he was never a shareholder or director of G Company. By contrast, in Exhibit A3 at [18] he gives evidence of his shareholding in G Company, and Exhibit R2, T154 is a company search which clearly shows him as a director and shareholder of G Company from January 2009;
(c)the Applicant described G Company in Exhibit A3 at [13] – [14] as a ‘conduit company’, said in cross-examination that he did not know whether it was profitable, and said he had no knowledge of its activities. By contrast, in his interview with the Australian Taxation Office in 2017,[86] he told the interviewer of the activities and profitability of G Company. When confronted with this in cross-examination, his evidence was that what he said in the ATO interview was merely his opinion.[87] Furthermore, it was not until re-examination that any explanation was proffered as to what was meant by a conduit entity.
[84] At [53].
[85] Ts 1 October 2024, 38.
[86] Exhibit R3, ST24.
[87] Ts 9 September 2024, 89 Ln 34.
Despite having signed his three witness statements and having affirmed their truth at the commencement of his evidence, on several occasions the Applicant demurred from the content of Exhibit A3. Some examples of that are set out above. Exhibit A3 discusses the AUSTRAC records at [28]. In oral evidence the Applicant said, in respect to Exhibit A3 at [28], that he did not know what AUSTRAC records were and had not seen them, that he was unable to explain the sources or uses of the funds set out in paragraph [28], and that he did not understand some of the words which were used in it.[88] The Applicant said that the statement was written by his lawyer and went on to explain that, despite his earlier evidence that he had reviewed and checked the statement, he had in fact only spent about 30 minutes looking at it with the lawyer who witnessed his signature, an in-house lawyer at the Applicant’s company. He further explained that he was ‘helped’ by his lawyer.[89] In addition to these issues, the statement is framed in the manner of submissions rather than a factual recounting of events that took place. Exhibit A3 was the primary evidence in chief of the Applicant. I cannot place any weight on Exhibit A3 given the evidence as to its drafting and the Applicant having disavowed both its content and accuracy during his cross-examination.
[88] Ts 9 September 2024, 90 – 91.
[89]Ts 9 September 2024, 90 Ln 35. This was not the in-house lawyer.
The Applicant’s evidence regarding the receipt of red packet money, known as hongbao in Mandarin, is also difficult to accept in this case. Whilst I accept that as a cultural practice money is frequently gifted in China, the difficulties in this case are:
(a)the sheer quantum of the funds involved;
(b)no mention of funds being provided to him as gifts from family, friends and associates in China was made at any time prior to his cross-examination;
(c)the fact that the first time this practice was explained in any way was in re-examination, with no evidence in chief in respect to it at all, and no more than a repeated insistence in cross-examination that money was provided as gifts, but without any detail;
(d)there were no records, or any other evidence, which indicated how much of the total amount of the funds received by the Applicant and his entities were gifts, loans or investment funds;
(e)no attempt was made in submissions to delineate between gifts, loans or investments, for example, by explaining how much of the funds which were transferred into Australia was in each category; and
(f)no other witness was called to assist in substantiating what were truly investments, loans or gifts.
I am left without any clear picture of whether funds the Applicant brought into Australia were all gifts arising from hongbao and therefore properly the Applicant’s personal money for his own use, or investment funds provided for his businesses by other people, or money that was from non-Australian business sources which the Applicant generated, or indeed a combination of these, or something else entirely. These evidentiary problems are the more surprising when on the Applicant’s case ‘the evidence of the Applicant is critical’ to, amongst other things, determining whether the L Company funds are loans advances or income in the hands of the Applicant.[90]
[90] ASFIC at [8].
A further difficulty arises from the fact that in each of his income tax returns for the Audit Period,[91] the Applicant had answered ‘no’ to each of the questions as to:
(a)holding a direct or indirect interest in a controlled foreign company;
(b)causing the transfer of property, including money or services, to a non-resident trust estate; and
(c)holding overseas assets with a total value of AUD$50,000 or more.
[91] Exhibit R2, T24, 127; Exhibit R2, T25, 148 – 49; Exhibit R2, T26, 169 – 170; Exhibit R2, T27, 191 – 192; Exhibit R2, T28, 213 – 214; Exhibit R2, T29, 238, 240; Exhibit R2, T30, 267 – 268.
Despite this, the Applicant’s oral evidence was that the funds which were transferred by G Company to him personally or to pay for his personal expenses, totalling some millions of dollars, was beneficially his money.[92] He also held at various times both direct and indirect holdings in three foreign companies, S Company, M Company and G Company.[93] G Company was registered in the United Kingdom, and is a controlled foreign company.[94]
[92] Ts 11 September 2024, 266.
[93] Exhibit R2, T146; Exhibit R2, T153, 1449.
[94] Sections 320, 332 ITAA36; reg 19(f) Income Tax Assessment (1936 Act) Regulation 2015 (Cth).
Mr B
Mr B commenced working for the taxation advisors engaged by the Applicant, O firm, in late 2018. He first met the Applicant sometime in 2019 or thereabouts when he started acting for the Applicant and his entities, taking over the responsibilities of Mr P who was the previous sole director of O firm. Mr B was not responsible for any of the tax returns which are the subject of this application.
I found Mr B to be a generally credible witness who gave his evidence in a clear manner and attempted to assist the Tribunal. He was frank about the shortcomings in the Applicant’s recordkeeping in the period under review, a matter he was not responsible for, but which plainly compromised his ability to give proper advice to his clients in this application.
Part of Mr B’s evidence was opinion evidence as to what I could ascertain from the metadata of certain documents produced to the Tribunal. Ultimately, neither party sought to rely on this portion of his evidence. Aside from the metadata evidence, which I do not rely on, and unless contradicted by a contemporaneous document, I accept Mr B’s evidence.
Mr V
Mr V was an accountant who looked after the accounting practice of Mr W during 2010, and who prepared the 2009 ITR for the Applicant when Mr W was away on extended leave. His evidence was of limited relevance as the 2009 year is not the subject of this review.
Mr V gave evidence by video and I found him to be a straightforward witness who gave honest evidence. Unsurprisingly, given the passage of time, he had very limited documentation and no recollection of any conversations he may have had, or documents he may have seen.
Potential witnesses not called
I accept as a general proposition that it is not necessary for a party to call all material witnesses and produce all material documents which support their position.[95] However, given the manner in which this matter developed, including the very clear attack on the believability of the Applicant’s explanations that was foreshadowed as far back as the Audit Position Paper,[96] and the fact that the further material provided by the Applicant was not accepted by the Commissioner as being sufficient to overturn the assessments at the objection stage,[97] it should have been obvious that corroboration of some key parts of the Applicant’s case was necessary.
[95] Commissioner of Taxation v Cassaniti [2018] FCAFC 212 at [88].
[96] Exhibit R2, T63, dated 7 November 2019, including the fact that the Commissioner made a fraud or evasion finding at [160] – [161].
[97] Exhibit R2, T2, and clearly flagged in the Commissioner’s SFIC.
There were a number of potential witnesses identified who were not called to give evidence, including:
(a)Mr Z, the Applicant’s co-shareholder in G Company;
(b)the Applicant’s parents who were said to have provided funds to the Applicant by way of gifts, loans or investments;
(c)Ms X, the Applicant’s sister, who was said to have provided funds to the Applicant by way of gifts, loans or investments, and who was one of the two shareholders in M Company;
(d)Mr S, the second shareholder in M Company;
(e)Mr G, someone who contributed to the funds transferred from G Company to L Company;
(f)Mr W, the accountant who prepared the Applicant’s 2008, 2010, 2012 and 2014 Tax returns;
(g)Mr P, the accountant who prepared the Applicant’s 2015 and 2016 Tax returns;
(h)Mr K, a bookkeeper/accountant who worked in-house for the Applicant from about 2010;
(i)Mr E, a bookkeeper/accountant who worked for the Applicant in about 2008 – 2009; and
(j)Ms R, a bookkeeper/accountant who works for the Applicant.
The Chinese witnesses
The potential witnesses listed at (a) – (e) above, all apparently reside outside Australia, in mainland China.
The Applicant sought in closing submissions to explain their absence on the basis that to call them via video evidence from China would require the permission of the government of China, as to do so would be an exercise of sovereignty by Australia within the boundaries of China.[98] By contrast, in Liu v Option Funds Management [2024] FCA 44, the Federal Court found that to take evidence by video from China would not be an exercise of sovereignty which was impermissible under Chinese law. It may well be that the position is different in the Tribunal, as compared to a court.[99] Irrespective of this issue, there is nothing to suggest the witnesses could not have come to Australia to give evidence and during the course of his evidence, when questioned about the fact that various of these potential witnesses were not giving evidence, the Applicant said, in effect, that they had not been asked to.[100] That is, it appears that their absence was a forensic decision made in the preparation of the matter for hearing.
[98] Motorola Solutions, Inc. v Hytera Communications Corporation Ltd [2020] FCA 539 at [2].
[99] FLLH and Commissioner of Taxation [2024] ARTA 216.
[100] See, for example, Ts 9 September 2024, 71 Ln 13 – 15.
Ms X and Mr S were the only two shareholders in M Company. Given the nature of the funds flowing between M Company and the Applicant, the Applicant’s evidence that he only undertook activities in respect to M Company on the explicit instructions of the shareholders,[101] the lack of records kept by the Applicant’s businesses regarding transactions recorded in the MYOB accounts, and the lack of any documents evidencing instructions passing between the Applicant and either or both of Ms X and Mr S, I am prepared to draw the inference that the evidence of each of Ms X and Mr S in respect to their interactions with him and the work undertaken by him for M Company would not have assisted the Applicant.
[101] Ts 1 October 2024, 22.
Mr Z was the other shareholder in G Company, the entity through which funds were transferred from China to Australia. Mr Z’s evidence would have been of helpful in explaining the role that the Applicant played in G Company, and the processes for transferring funds from G Company to L Company, both of which were contentious at the hearing as a result of the conflicts in the evidence the Applicant gave to the Commissioner, orally in the Tribunal, and in his witness statement Exhibit A3. Mr Z might also have been able to provide some evidence of the agreements which were said to have been arrived at in respect to providing funds to L Company. I am prepared to draw the inference that the evidence of Mr Z would not have assisted the Applicant.
Mr G was someone who was identified in the Applicant’s oral evidence as having provided money to the Applicant. I am not prepared to draw an adverse inference from his absence as it is entirely unclear from the Applicant’s evidence what the nature of the funds Mr G contributed were, being variously a gift to the Applicant, an investment in the Applicant’s businesses, or a loan made to the Applicant personally or to his businesses. The lack of clarity surrounding this is a failing of the Applicant, not of Mr G.
In the absence of identifying any specific evidence which the Applicant’s parents may have given on the issues, I do not draw any inference from their absence.
The Australian witnesses
Mr W was served with a summons by the Applicant to produce books and records in his possession, custody and control pertaining to the work he undertook for the Applicant in the years 2008, 2010, 2011, 2012 and 2014. Mr B gave evidence that he personally attended at Mr W’s business premises and served the summons, and in doing so he formed the impression that Mr W was present but hiding from view. Mr B also gave evidence, which I accept, that Mr W refused to take Mr B’s telephone calls, failed to respond to messages to call, and failed to respond to email queries regarding access to records and other information Mr W had in respect to the Applicant and his businesses. It is plain that Mr W was attempting to avoid having any contact with this matter. This is an explanation for his absence and I do not draw an adverse inference from his absence. However, his conduct in seeking to avoid being involved is suggestive of someone who was reluctant to subject his work to scrutiny. The parlous state of the financial statements and reports produced may well be the reason for that.
Mr P prepared the tax returns for the Applicant in the 2015 and 2016 years. He was responsible for assisting the Applicant throughout the audit, including answering the ATO’s queries on behalf of the Applicant. He attended an interview with the Applicant on 5 December 2017, provided documents and answers to the ATO on behalf of the Applicant, and was responsible for the filing of the objection and the application for review. He also appeared at numerous directions hearings in the matter taking the role of instructing the counsel then briefed for the Applicant, including at a directions hearing I convened on 19 August 2024. His firm, O Firm remained the representatives for the Applicant until at least 13 September 2024. During the course of the hearing it became clear that some of the answers he provided on behalf of the Applicant appear not to have been on direct instructions from the Applicant, raising questions as to their accuracy.[102] Mr B, who has taken over the practice of Mr P, said that Mr P was in Queensland at the time of Mr B’s evidence on 4 October 2024. This is not an explanation for his absence as a witness which would excuse his non-attendance. In the circumstances I draw the inference that Mr P’s evidence would not have assisted the Applicant.[103]
[102] Ts 1 October 2024, 53; Ts 11 November 2024, 243.
[103] Jones v Dunkel (1959) 101 CLR 298.
Ms R currently works for the Applicant and his group of companies. It appears that since at least 2014 she has been responsible for the in-house accounting work[104] which, amongst other things, produces the MYOB reports which form the foundation of the instructions provided to the Applicant’s external accountants for the purposes of preparation of his Tax returns and the L Company financial statements. Prior to 2014, Mr K and Mr E performed that role. There was no explanation for the failure to call any of these three witnesses and, unlike Mr W, there is no evidence of any attempt to locate either Mr K or Mr E, or to issue a summons to them. As Ms R currently works for the Applicant,[105] she should have been available to give evidence regarding the process for the recording of expenses and loans in the MYOB system operated by the Applicant’s companies, including any changes in those processes during the years in issue in these proceedings. Given the paucity of records, the Applicant’s evidence that the practice was for him to verbally tell his employees how to classify items in the MYOB accounts, and the fact that the Applicant did not himself enter records in the MYOB accounts, I draw the inference that the evidence of each of these witnesses would not have assisted the Applicant.
[104] Exhibit A3 at [52] – [53].
[105] Exhibit A3 at [53].
Documentary evidence
The Applicant’s case was substantially hindered by two key failings. First, his business practice was to retain no source records for transactions, nor to create and maintain other useful or necessary business records like loan agreements, salary records, or correspondence which would provide contemporaneous verification of the assertions made in support of his case. Secondly, as noted above, the Applicant gave evidence that he personally told his staff how to record items in the MYOB accounts, but failed to call those staff members to give corroborative evidence as to this practice.
The lack of documentary evidence was quite extraordinary. This is not a case where the Applicant failed to bring documents which were in his possession, rather it is a case where the Applicant frankly admits that the type of documents that are regular, commonplace occurrences in businesses, simply did not exist, were never created or made available to the staff, or to the extent that they were created, like the MYOB records, they relied largely on his oral instructions. The lack of records includes a lack of emails, notes, receipts, correspondence, screen shots of messages and so on. For example:
(a)there were no records created of the flow of ‘loans’ between M Company and the Applicant, or L Company and the Applicant, other than the MYOB documents which are themselves apparently based entirely on the Applicant’s oral instructions;[106]
(b)there were no records evidencing any instructions apparently given by the two shareholders of M Company to the Applicant, despite the Applicant’s evidence that he only ever acted on their instructions;[107]
(c)there are no records evidencing any of the activities the Applicant apparently undertook, via L Company, for M Company, including overseas travel, entertainment of visiting potential investors, or any other activity;[108]
(d)there were no records created supporting the Applicant’s annual income from L Company;[109]
(e)there were no records created which provide any line of sight on the flow of funds to L Company or M Company from G Company.[110]
[106] Ts 2 October 2024, 127; Ts 1 October 2024, 33, 37;
[107] Ts 1 October 2024, 22; Ts 1 October 2024, 26.
[108] Ts 1 October 2024, 26 - 29.
[109] Ts 1 October 2024, 31.
[110] Ts 9 September 2024, 85 – 86; Ts 1 October 2024, 51.
Furthermore, whilst MYOB records were tendered, through Mr B, these were never provided to the Commissioner during the audit or objection, having been located recently on an old laptop.[111] The MYOB records are clearly deficient, as is explained further below.
[111] Exhibit A6 at [12]; Exhibit A6 annexure 3; Ts 4 October 2024, 170.
This lack of documentation is all the more extraordinary when the Applicant is apparently a successful businessman, has undertaken education in business at a university in Australia, has employed internal bookkeeping and accounting assistance for many years,[112] and has engaged external professional accounting advisors since at least May 2006,[113] notably within the first full year after L Company was incorporated.[114]
[112] Ts 1 October 2024, 38.
[113] Exhibit A4, attachment 4.
[114] Exhibit R2, T150.
In seeking to cover this lacuna in the evidence, the Applicant’s opening submissions relied on section 1305 of the Corporations Act 2001 (Cth) and the Full Federal Court’s decision in Cassaniti. Section 1305 provides:
1305 Admissibility of books in evidence
(1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book
(2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).
It is clear that section 1305 is a facilitative provision to enable books and records to be tendered in evidence. The section provides that the books and records are prima facie evidence of the matters which are contained in them; it does not provide that the books are conclusive evidence.
I do not accept that the draft financial statements prepared for M Company are books and records within the meaning of section 1305 because they are merely drafts and were prepared, apparently, by Mr P on behalf of O Firm, for the purposes of provision to the ATO during the course of the audit, and Mr P was not called to give any evidence as to his preparation of them.[115] They cannot prove anything in the circumstances.
[115] Exhibit R2, T43.
I accept that financial statements for L Company prepared by Mr W and Mr P, and the MYOB accounts held by the Applicant’s office, are books and records for the purposes of section 1305 and so could be tendered in a court as prima facie evidence of the matters recorded in them. That of itself is not enough to prove the case.
The cross-examination directed at the Applicant’s lack of record keeping was aimed at challenging the reliability of the financial statements for L Company. The documents were tendered through Mr B[116] and were apparently constructed from the MYOB accounts kept at the Applicant’s offices by his in-house bookkeepers or accountants, Mr K, Mr E and Ms R. The cross-examination undermined the reliability of the MYOB accounts, and therefore the financial statements and the draft financial statements for L Company, because it demonstrated that there were effectively no source documents which had been used as the basis of the data being input into MYOB, but rather the electronic MYOB accounts were constructed in accordance with the Applicant’s oral instructions to his employees.[117]
[116] Exhibit A6.
[117] Ts 1 October 2024, 37 – 38; Ts 11 November 2024, 246 - 247.
An example of this is the loan account file for G Company attached at TB3 to Exhibit A6. This records a credit amount of over $5 million transferred to L Company from G Company in the period from December 2007 to March 2009. The Applicant, who in that period was one of the two directors and two shareholders of G Company, said he orally instructed for the money to be transferred but was unable to explain how the money was transferred. Whilst there are third party records identifying the funds coming into Australia and being in Australian bank accounts,[118] the recording of it in the MYOB account was done on an oral instruction from the Applicant. There is no recording of any terms for this loan.
[118] Exhibit R3, ST1.
Reliance on Cassaniti does not assist the Applicant. Unlike in Cassaniti, in this case the cross-examination entirely undermined the ability of the Tribunal to be confident that the books and records were a true reflection of the transactions they purported to record. Furthermore, in contrast to this case, the applicant in Cassaniti gave evidence in chief by sworn affidavit, and did not undermine it in her oral evidence.
In my view there is a sufficient basis to displace the prima facie position set out in section 1305(1) in respect to the L Company MYOB accounts and financial statements which were in evidence.
CONSIDERATION
The Additional Income
Over the period of the seven years in issue, the Commissioner assessed $3,658,748.60 in income to the Applicant in addition to the income he had disclosed in those years. The Additional Income broadly comprises:
(a)payments from M Company to D Group on behalf of the Applicant or for the Applicant’s benefit, totalling $1,471,559, which are payments to D Group to build the O House;
(b)net payments from M Company to the Applicant or third parties on behalf of or for the benefit of the Applicant, totalling $288,887; and
(c)net payments from L Company to the Applicant totalling $1,898,302.46.
The Commissioner says that in addressing the first issue identified above, the Applicant needs to establish the true nature of the additional $3,658,748.60 assessed as income in the hands of the Applicant in the years in issue.[119] This is correct. The Commissioner plainly and very clearly put the Applicant to proof of this foundational issue.
[119] Commissioner’s SFIC at [80].
When the Commissioner has identified during an audit large sums of money being used by a taxpayer to pay for what are obviously personal expenses, whilst having a relatively low taxable income, the taxpayer needs to provide a comprehensive, coherent, and understandable explanation of why those funds are not income according to ordinary concepts,[120] and therefore not assessable in the hands of the taxpayer. That is the start point for discharging the onus of proof in a matter of this nature.
[120] Section 6-5(1) ITAA97.
The money flow
Understanding the flow of funds is at the heart of the Applicant’s case. For some reason his initial advisors did not regard this as a necessary first step in discharging the onus. The ASFIC unhelpfully, and quite inappropriately, proceeded on the basis that the Commissioner needed to defend his decision, and that the matter was confined to the two issues of the nature of funds flowing from L Company to the Applicant and the nature of the funds flowing from M Company to the Applicant. As I discuss above, this was treated in the ASFIC as a concession of some sort by the Commissioner. It is not.
Whilst I accept that a person may be given gifts of money from family and friends when moving to Australia, and I accept that, in accordance with Chinese culture, gifts of money were given to the Applicant, both at the time of him starting his business endeavours in Australia, and on the birth of his son in about 2010 or 2011, that is not sufficient to discharge the onus on the Applicant.[121] What remains entirely unexplained is how gifts of money from family and friends, either on the startup of the Applicant’s business, or on the birth of a child, were transformed into funds in G Company and then transferred to either M Company or L Company, or both, and then transferred from M Company or L Company to the Applicant’s personal bank accounts as “loans” to the Applicant and his wife to pay for what are clearly personal expenses including home building costs, utility bills and private school fees.
[121] The Applicant’s evidence was that his son was going into year 8 at school, so I infer he was aged 13 at the time of the hearing.
In addition, funds were said to have been “loaned” by friends to assist with paying for renovations to the Applicant’s house. Those funds were apparently also channelled through M Company, and repaid once the renovations were complete via a bank loan secured by a mortgage to a bank. Whilst a mortgage was put into evidence as Exhibit A2, that mortgage is unconnected by any documentary or independent evidence with the apparent repayment of the loan from friends for the renovations of the Applicant’s home.
As to the wider patten of payments, there are several significant gaps in the evidence, including:
(a)whilst there was an explanation as to why financial gifts were channelled through G Company, there was no explanation as to why the funds were then channelled to L Company and M Company and not simply deposited into the Applicant’s various bank accounts by G Company. This is particularly stark when the Applicant says he beneficially owned the funds.
(b)why were funds styled as loans to the Applicant from associated companies when in fact the funds were, apparently, gifts made to him personally from family and friends?
(c)funds were variously described as gifts from family and friends, investment funds from both identified and unidentified investors, and loans from unidentified people to the Applicant, L Company and M Company, but no attempt was made to identify what amounts fell into which category.
Issue one – the Assessments
The Applicant must discharge the onus of demonstrating how the Amended Assessments are excessive and what the assessments should be. Picking off one aspect or another of the Commissioner’s audit report and seeking to prove how one or other amount the Commissioner has relied on is not income in the hands of the taxpayer is fraught with difficulties, as the cases on section 167 default assessments repeatedly demonstrate.[122] In this case the Applicant’s task was hampered by his lack of record keeping, his failure to call relevant witnesses and his failure to provide a cohesive narrative of how he came to have funds at his disposal.
[122] Gashi at [67].
Salary
As set out in paragraph [33] above, the Applicant returned various amounts of income in the years in issue. It can be seen from the table in that paragraph that the income amounts are modest in real terms given the nature of the Applicant’s role and the iron ore trading and shipping business undertaken by L Company. More significantly for the Commissioner’s purposes, the income declared is low relative to the known expenses of the Applicant, including the private school fees, credit card bills and the construction of the O House, in the period from 2009 to 2014.
During cross-examination it emerged that there were no source documents evidencing the decision-making around his salary, nor were there source documents evidencing the payment of his salary into his personal bank accounts. Given L Company is closely held, it is not of itself surprising that there were limited records regarding the setting of the Applicant’s salary. However, some basis for identifying and recording how much he was paid in each of the years in issue would be expected, for example, emails to the bookkeeper, or between the directors. There were no records of this nature.
The MYOB general ledgers for L Company, supplied by Mr B, record only the following entries as salaries and wages paid to the Applicant throughout the entire period for which records have been made available:[123]
[123] Exhibit A6, bundle 3.
Date Amount FY Total 11/01/2011 $10,000 24/01/2011 $100,000 $110,000 24/11/2011 $100,000 29/05/2012 $30,000 30/05/2012 $28,500 $158,500 17/04/2013 $11,115 $11,115 Total $279,615.00 $279,615.00
The full amount of the Applicant’s salary disclosed in his income tax returns for the period under review is not clearly identifiable in the records of L Company. In the 2011 year, the total amounts in the MYOB accounts are less than the amounts in the ITR.[124] Whilst there are a range of possible explanations as to why this is, some of which are benign, this illustrates the general unreliability of the MYOB accounts.
[124] Exhibit R2, T26, 159.
Furthermore, the bank records for the personal accounts of the Applicant do not show regular deposits as salary. Again, whilst there may be an entirely benign explanation for this, particularly in a closely held company, it adds to the general picture of unreliability of the source documents which have been provided to support the assertions made by the Applicant.
The impression I am left with in respect to the taxable income disclosed by the Applicant in light of the records produced, is that the identification of the amount of “salary” he claimed to be paid in each year was an accounting exercise undertaken at the end of the income period, for the purposes of filing his income tax return. If that is the way in which a taxpayer chooses to arrange his affairs so be it, but it is more credible in a dispute with the Commissioner if there is some reliable and defensible basis for the calculation of income, particularly when there are large personal expenses paid for by the employer and which far exceed the disclosed income in most years.
The record keeping in respect to the Applicant’s salary supports my conclusion that I cannot rely on the very limited records which have been provided by the Applicant to reach any level of satisfaction of the basic factual matters which underpin the Applicant’s case.
If I had reached the conclusion that the assessments were excessive,[125] the difficulties with this aspect of the Applicant’s case mean that I would not be in a position to find what the assessments should have been in each of the years in issue, so that even if the Applicant had discharged the first limb of his onus, he would have failed on the second.
[125] Other than in respect to the Commissioner’s concessions.
L Company
The starting premise of the Applicant’s case was that he had lent funds to L Company and that those funds were then repaid to him, apparently on demand as he required them. Proving the loan to L Company is therefore a critical first step in the chain of discharging the onus.
L Company apparently employed only the Applicant and various bookkeepers[126] between 2008 and 2016, and its main business activity was to advise M Company.[127] It also provided some ship-broking services to G Company, an entity associated with Mr Z but which the Applicant was a director of,[128] in the period of 2007 - 2008.[129]
[126] Ts 1 October 2024, 37 – 38.
[127] Ts 9 September 2024, 76 – 77.
[128] Exhibit R2, T154.
[129] Ts 9 September 2024, 80 – 81.
In a letter to the Commissioner as part of the objection phase,[130] the proposition is made that the $1,898,302 which the Commissioner had determined was income in the hands of the Applicant, was ‘the repayment of loans initially advanced to [L Company] dating back to FY08’.
[130] Exhibit R2, T78, 692.
Paragraphs [24] – [31] of Exhibit A3 comprise the Applicant’s own evidence of this, in which he explains how he provided a loan to L Company in 2008 of $1.8 million.
24. The method of advancing the $4.5 million loan funding was made through the conduit entity, [G Company], direct to [L Company].
25. These funds represented $1,800,000 (40%) loaned by me to [L Company] and $2,700,000 (60%) loaned by [Mr Z] to [L Company].
26. I had obtained the $1,800,000 that I loaned to [L Company] from my family and friends overseas for use in [L Company] investments in resource projects.
27. Together, the combined $4.5 million loaned by me and [Mr Z] was booked as a shareholder loan in [L Company].
28. I have been looking at the AUSTRAC records and am unable, given the effluxion of time, to point to specific AUSTRAC records of transfers of funds from [G Company] to [L Company] however I note the following transfers were made from [G Company] to [L Company] around this time (pursuant to AUSTRAC records):
a.$1,188,777.94 on 14 June 2007 [T1540].
b.$565,035.60 on 4 December 2007 [T1543].
c.$1,649,439.19 on 21 February 2008 [T1546].
d.$1,869,364.42 on 22 February 2008 [T1549].
29. At the time, I was around 28 years old.
30. When [Mr S] became a shareholder in [L Company] he was not required and did not loan any money to [L Company].
31. I firmly state that the $1,800,000 I loaned to [L Company] my own money I received from my family and friends from overseas and transferred to Australia and was not earned income.
I have set out above my reservations regarding Exhibit A3.[131] In particular, paragraph [28] was entirely discredited. The relevance of paragraph [29] is not apparent to me.
[131] See especially [77] above.
Notably, paragraphs [26] and [31] of Exhibit A3 do not serve to illuminate the murky picture of whether the funds said to have been brought into Australia were, in the Applicant’s hands, loans or gifts or money provided as investment capital.
Whilst the Applicant did say in cross-examination that he was lent funds by family and friends,[132] his evidence was very generalised, high level and lacking in any real detail. For example, he was unable or unwilling to provide any detail of the names of those people who are said to have provided funds to be invested, or gifts for his use.[133] In addition, there was shifting terminology whereby money was sometimes referred to as gifts, on other occasions it was said to be loans, and on other occasions it was described as an investment, without any specificity as to which type of funds were the subject of this initial “loan” said to have been made to L Company. The Applicant accepted in cross-examination that there are no written records showing the source of the funds.[134]
[132] Ts 9 September 2024, 86, 88.
[133] Ts 9 September 2024, 67 – 68.
[134] Ts 9 September 2024, 86 – 87.
The documents which were provided, and which should have been able to evidence the loan, do not support it.
(a)The MYOB accounts were tendered as part of Mr B’s statement.[135] There are numerous loan accounts in the Applicant’s name. Neither party took me to those accounts as a means of verifying what the Applicant had said, and no witness was called to explain the accounts. Mr B’s evidence did not go to explaining the accounts, merely to the fact that he was not aware of any documents demonstrating a loan agreement.[136] In any event, my review of the various loan accounts with numbers 2-2100 through to 2-181 for the 2008 year is that they do not add up to a loan balance in favour of L Company from the Applicant, of $1.8 million.
[135] Exhibit A6.
[136] Ts 4 October 2024, 166.
(b)No financial statements are provided for L Company for FY2008. The FY2009 financial statements[137] contain an amount of $6,278,514 as non-current liabilities, which the notes explain as follows.
Note 8: Financial Liabilities
Non-Current
Secured*:
Shareholders Loans 6,278,514
6,278,514
6,278,514
[137] Attachment to Exhibit A6. Unusually, no 2008 data is provided in the 2009 accounts.
* Total Current and Non-Current Secured Liabilities
Loans from other persons 6,278,514
6,278,514
It is unclear from this note whether the loans are shareholder loans, or loans from other persons. No evidence was led from Mr V, who prepared the tax returns for the 2008 and 2009 years to explain this notation, or even whether he was the person who prepared the accounts.
(c)By contrast with the 2009 financial statements, the 2007 financial statements[138] contain an amount of $167,208 as non-current liabilities, comprising shareholder loans of $5,164 from the Applicant and $162,044 from G Company, which is associated with Mr Z so might represent a loan from him. The figure of $5,164 is not apparent from my review of the loan accounts in the MYOB records.[139] By contrast the loan amount of $162,044 from G Company appears in account 2-900, as the opening balance for the 2008 year.
(d)It can be seen that the difference between the loans recorded in the 2007 financial statements, $167,208 and the 2009 financial statements, $6,278,514, is $6,116,470. This is greater than the combined total of the AUSTRAC records for the 2008 year, $5,272,617.50, and greater than the $4.5 million mentioned in Exhibit A3 at [25] and [27].
[138] Ibid.
[139] Exhibit A6, bundle 3.
In a letter to the Commissioner during the objection phase, on O Firm’s letterhead and under cover of an email from Mr P,[140] the then accountant for the Applicant, the position is explained as follows:
On the basis of the above, the Taxpayer contends that what was withdrawn from [L Company] – largely set out in Appendix E – was never in the form of income from [L Company] but rather the repayment of loans initially advanced to [L Company] dating back to FY08.
[140] Exhibit R2, T77; Exhibit R2, T78 at [10].
In his oral evidence the Applicant explained his instructions to Mr P in dealing on his behalf with the ATO during the course of the objection phase and audit:[141]
He was our accountant, so I told him he could answer whatever if he thinks that he could. He thought he could, and some questions probably he could confirm with me first. Because I trust him.
[141] Ts 11 November 2024, 243, ln 41 – 45.
Mr P could have provided evidence in respect to his letter, including regarding the assumptions and calculations underlying it, but he did not give evidence.
Even if I had been able to find the opening loan amount in the MYOB records and the financial statements, the Applicant’s frank admissions that he had no records to substantiate any loans other than reliance on the AUSTRAC records, MYOB accounts and financial statements,[142] and that he directed the bookkeepers how to record transactions in the MYOB accounts without the assistance of documents to substantiate his instructions,[143] completely undermines the reliability of the records which have been produced. I cannot be satisfied the MYOB accounts are an accurate reflection of the true position of the accounts of L Company.
[142] Ts 1 October 2024, 3 – 4, 10 – 11, 12 – 14.
[143] Ts 9 September 2024, 91 ln 43ff; Ts 9 September 2024, 92 ln 15-20; Ts 2 October 2024, 146 –149.
The documents produced, being the AUSTRAC records, MYOB records and financial statements, do not provide support for the proposition that there was a loan of $1.8 million from the Applicant to L Company in 2008, so that the only evidence on which the Applicant can rely is his own assertions, which I do not accept without substantiation for the reasons set out earlier. Therefore, I do not accept that the Applicant lent $1.8 million to L Company in the 2008 year.
What follows for the remaining years in issue is in a similarly unilluminating vein. Whilst the Applicant accepts that there were large amounts withdrawn from L Company and used to pay personal expenditure, this is all said to be repayments to him of funds he lent to L Company, but the evidence of him lending funds to L Company, other than his own oral evidence, is either non-existent or unreliable because of the matters which I canvassed earlier.
It follows that I am not satisfied that the funds the Applicant received from L Company in any of the years in issue were in fact repayments by L Company of loans made to it by the Applicant.
M Company
The Applicant told the ATO during its audit that M Company: [144]
·was ‘an investment company to bring Chinese investors (family and friends) in to invest in mainly resources project and trading opportunities’;
·its activities were ‘investing in resources project, finding trading opportunities’;
·that it ‘raised funds via issue of equity and invests in projects. Does not trade or earn income. Investments have so far been poor’; and
·his role was ‘Through [L Company] Manage [M Company] various investment in Australia’.
[144] Exhibit R2, T35, 289 - 290.
The questionnaire in which this information was provided included as an attachment a print out of share transaction data for publicly listed company trades which took place between December 2010 and April 2015.
In his oral evidence, the Applicant said:
·he had to consult with the shareholders for any major or significant decisions;[145]
·some but not all of the payments from M Company to him were loan advances;[146]
·other payments were reimbursement of expenses he incurred whilst undertaking business activities on behalf of M Company;[147]
·M Company did not issue shares;[148]
·he personally authorised M Company lending him funds to build the O House,[149] which he accepted had nothing to do with the commercial purposes of M Company,[150] and nor did any benefit accrue to M Company as a result of these loan transactions;[151] and
·there are no documents which evidence any discussions between him and the shareholders of M Company,[152] the investments made by M Company,[153] the expenses he incurred undertaking work for M Company,[154] payments made to L Company for his role in undertaking work for M Company,[155] loans made to M Company by the shareholders,[156] loans made to him personally by M Company,[157] or indeed any other transaction.[158]
[145] Ts 1 October 2024, 48.
[146] Ts 1 October 2024, 49.
[147] Ts 2 October 2024, 138.
[148] Ts 1 October 2024, 60.
[149] Ts 1 October 2024, 71.
[150] Ts 1 October 2024, 77; Ts 2 October 2024, 94.
[151] Ts 2 October 2024, 97.
[152] Ts 1 October 2024, 78; Ts 2 October 2024, 92.
[153] Ts 1 October 2024, 51 – 52.
[154] Ts 1 October 2024, 70; Ts 2 October 2024, t04 – 107, 109 – 112.
[155] Ts 1 October 2024, 29, 31, 62.
[156] Ts 1 October 2024, 47.
[157] Ts 1 October 2024, 71, 73 – 75, 77.
[158] Ts 1 October 2024, 78; 2 October 2024, 92.
The problems which are encountered in accepting the Applicant’s case in respect to the L Company payments are magnified in respect to M Company. There are no documents at all which support any of the assertions made in the Applicant’s oral or written evidence.
I am not satisfied that the payments made by M Company to the Applicant, or to third parties for the benefit of the Applicant, were repayments of loans made by the Applicant to M Company.
The Applicant conceded in his closing submissions that if I was satisfied that the flow of funds from M Company to the Applicant or to his benefit were loans, then they constituted deemed dividends for the purposes of Division 7A of the ITAA36. This concession impacts the 2011, 2014 and 2015 years, so that the Applicant’s income tax returns which he submitted for those three years[159] are conceded to be wrong. Importantly, this concession contains within it, which was expressly affirmed by counsel, that the challenge to the Commissioner’s reliance on section 170(1) ITAA36 could not be sustained.
[159] Exhibit R2, T26, T28, T29.
Conclusion on the assessments
In light of the parlous state of the record keeping and documentary evidence, the unreliability of the Applicant’s own evidence, the failure to lead evidence in chief capable of discharging the Applicant’s onus, the failure to put on evidence from witnesses with actual knowledge of the transactions undertaken and the accounts which could have corroborated the Applicant’s evidence, and the concession made in respect to the M Company “loans” to the Applicant, I am not persuaded that the assessments are excessive.
Issue two – Penalty assessments
The Commissioner’s public ruling MT 2008/01[160] explains how the Commissioner will determine what level of penalty is imposed in a particular case, against the background of the penalty provisions in section 284-75 and 284-90 of Schedule 1.
[160] Australian Taxation Office, Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard (MT 2008/1, 12 November 2008).
The penalties in this matter were assessed under section 284-90 in the intentional disregard category at Item 1, which requires proof that the statements a taxpayer made were subjectively known to be untrue.[161]
[161] Ibid at [111].
In the Applicant’s opening submissions and the ASFIC the case put was that penalties should be reduced because the Applicant took reasonable care by engaging a tax agent, Mr W. Furthermore, it was said that it was clear that the Applicant did not subjectively believe he was intentionally disregarding the law.[162]
[162] Applicant’s opening submissions at [54].
In considering the submission regarding the use of a tax agent, I am mindful of the fact that there are no documents demonstrating any reliance was placed on either of the tax agents, in respect to the statements or indeed at all, neither tax agent gave evidence,[163] and the Applicant’s own evidence on this topic, which is both scant and high level, fails to mention Mr P, and does not address the falsity of the statements.[164] Furthermore, in Exhibit A3 at [55] the Applicant makes the assertion that ‘[t]he tax advice was brief because we were not “actually making money” [T1746, T1747]’, making reference to the transcript of his interview with the Commissioner. The context of the comments relied on by the Applicant does not support the evidence in [55] of Exhibit A3 and in the context of proceedings regarding his personal income tax assessments, this evidence is patently insufficient to ground the submission made.
[163] See [87] and [88] above.
[164] Exhibit A3 at [48] – [56].
As I recorded above at [80], the Applicant has answered ‘no’ to certain questions on each of his income tax returns. These answers are statements for the purposes of the penalty provisions of the TAA. The critical statements for present purposes are those where he answered ‘no’ to the holding of foreign assets of greater than $50,000, and ‘no’ to the question regarding holding an interest in a controlled foreign company. Both these statements are false.
The statements must have been made by the Applicant knowing them to be false. I draw the inference that the statements were made by the Applicant knowing them to be false because:
(a)despite the Commissioner’s SFIC clearly putting the Applicant on notice as to the falsity of these statements, there is no evidence directed to the issue;
(b)the Applicant was clear in his oral evidence that he ‘beneficially’ owned all the funds transferred to Australia from G Company, which totalled many millions of dollars;[165]
(c)the Applicant asserted throughout the hearing that the funds, or at least some part of them, were gifts from Chinese friends and family upon the occasion of the birth of his son;
(d)the Applicant was a shareholder of G Company according to the annual return for the period ending 19 January 2009,[166] and apparently remains a shareholder; and
(e)the Applicant explained in his oral evidence the circumstances of his interest in G Company.[167]
[165] Ts 9 September 2024, 65 – 66; Ts 11 November 2024, 266.
[166] Exhibit R2, T154.
[167] Ts 9 September 2024, 40 – 41.
Faced with this, it is not appropriate for me to conclude that the penalty more appropriately fits into the level of recklessness, 50%, or failure to take reasonable care, 25%.
Issue three – Remission of penalties
Section 298-20(1) of Schedule 1 provides the Commissioner with the discretion to remit all or part of a penalty.[168]
[168] Australian Taxation Office, Administration of the false or misleading statement penalty – where there is a shortfall amount (PS LA 2012/5, 23 August 2012).
In closing the Applicant properly conceded that he had no real basis to seek remission of the penalties. I agree.
It is plain from the evidence that whilst the Applicant had accountants who prepared his income tax returns and financial statements, and he had bookkeepers who did data entry into MYOB, and later XERO, of some expenses and income generated by the business activities which both L Company and, to a much lesser extent M Company, undertook, he is primarily responsible for the lack of records and poor compliance which has flowed from that. Whilst I have concerns regarding the activities of Mr W, and to a lesser extent Mr P in respect to his dealings on behalf of the Applicant with the ATO, the fact is that the Applicant totally failed to obtain proper advice and set up proper business systems in establishing himself and his businesses in Australia. That is not the fault of his accountants or his employees, the problem was one of his own making.
Issue four – Remission of SIC
In closing the Applicant did not press for the remission of SIC, accepting that in circumstances where there was an admitted underreporting of income, it was unlikely to attract the exercise of my discretion.
PS LA 2006/8 provides that the Commissioner will generally not remit SIC where fraud or evasion is found, as it was in this case.[169] Notably, the Applicant’s counsel conceded the fraud and evasion finding in closing submissions. In any event, there is nothing on which I could reasonably exercise the discretion to remit SIC and I decline to do so.
[169] Australian Taxation Office, Remission of shortfall interest charge and general interest charge for shortfall periods (PS LA 2006/8, 5 May 2008), at [16A].
Furthermore, as the Commissioner points out, section 280-170 of Schedule 1 only provides for an objection from SIC when the SIC ‘is more than 20% of the additional amount’ of income tax, so that there is no power to remit the SIC in the 2015 and 2016 income years as the additional amount of income assessed in each of those years is not more than 20%.[170] Consequently, I have no power to remit SIC for those two years.
[170] SIC for the 2015 income year was 18.5% of the additional amount of income tax payable and in the 2016 income year SIC was 12.9% of the additional amount of income tax payable: Exhibit R2, T75, 619 Table 1.
FINAL NOTE
I am acutely aware that given the fact that the Applicant’s legal team changed during the course of the hearing, his new team were hamstrung by the fact that they were unable to obtain instructions from him until after he had concluded his cross-examination, and nor were they responsible for the preparation of the matter including the forensic decisions made as to witnesses called and the documents produced. I wish to record my thanks to the new team of counsel and solicitors who did a thorough and very competent job in attempting to rescue a situation that was not of their making. This was done in the best traditions of the legal profession, and I greatly appreciated it.
DECISION
The assessments, including penalty assessments for the 2014 and 2015 year are remitted for recalculation in accordance with the concessions made by the Commissioner. Otherwise, the decisions under review are affirmed.
I certify that the preceding 162 (one hundred and sixty two) paragraphs are a true copy of the reasons for the decision herein of Deputy President Clare Thompson SC
............................[sgd]....................................
Associate
Dated: 8 May 2025
Date of hearing: 9, 10 & 13 September 2024;
1, 2 & 4 October 2024;
11 & 29 November 2024Counsel for the Applicant: Ms E Bishop SC (9 and 10 September 2024) and Mr J Fickling (9 September 2024); Ms L McGovern (13 September 2024); Mr D Diaz (1, 2 & 4 October, 11 & 29 November 2024)
Representatives for the Applicant: O Firm (until 1 October 2024); HWLE Lawyers (from 1 October 2024)
Counsel for the Respondent: Dr G O’Mahoney and Ms N Dubey Solicitors for the Respondent: ATO Legal Services ATTACHMENT A
Name
Role
D House
Residential property owned by the Applicant and his wife, purchased in 2015
K House
Property owned by Z Company, lived in by the Applicant and his family from about 2007 to 2014
O House
Residential property owned by the Applicant and his wife, constructed by D Group between 2009 and 2014, and sold in late 2016
A Company
A company from whom the Applicant received a salary in 2010
D Group
A group of companies who built residential and other properties in Perth
F Company
A shipping company associated with Mr S and based in Singapore
G Company
UK registered private company which operated out of Hong Kong and of which the Applicant was a director and shareholder
I Company
A private limited company registered in the British Virgin Islands, which sent funds to entities associated with the Applicant, including L Company and M Company
L Company
Company incorporated in Australia in 2005 of which the Applicant is a director and shareholder. Its primary business is commodities trading
M Company
A company incorporated in the British Virgin Islands in 2008; the Applicant was the sole shareholder between mid-2008 and October 2010
O Firm
The Applicant’s taxation advisors from 2014 and former representatives in this matter
S Company
A Singaporean registered company which the Applicant has been a director and shareholder of
Z Company
Company associated with Mr Z which purchased K House
Mr B
Accountant at O Firm
Mr E
A bookkeeper or accountant formerly employed in-house by the Applicant and his businesses
Mr G
A person who contributed to the $1.8 million which G Company transferred to L Company
Mr H
The Applicant’s friend who worked at F Company
Ms J
The Applicant’s wife
Mr K
A bookkeeper or accountant employed in-house by the Applicant and his businesses between approximately 2010 - 2014
Mr P
An accountant who prepared the Applicant’s income tax returns for the 2014 – 2017 years
Ms R
The bookkeeper or accountant employed in-house by the Applicant and his businesses from about 2014 to the date of the hearing
Mr S
One of two shareholders in M Company
Mr V
Accountant who prepared the Applicant’s 2009 income tax returns
Mr W
Accountant who prepared the Applicant’s 2006 – 2013 income tax returns
Ms X
The Applicant’s sister
Mr Z
The second director and shareholder in G Company; a Chinese citizen.
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