Zhang and Commissioner of Taxation (Taxation)

[2020] AATA 3008

Zhang and Commissioner of Taxation (Taxation) [2020] AATA 3008 (10 July 2020)

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL              )               Nos: 2019/1533-1534;

)Nos: 2019/1599-1603;

SMALL BUSINESS TAXATION DIVISION              )               Nos: 2019/1645

Re: Lea Zhang
Applicant

Re: Banksia Import & Export Pty Ltd
Applicant

Re: Harry Huang
Applicant

And: Commissioner of Taxation
Respondent

DIRECTION

TRIBUNAL:  Deputy President Bernard J McCabe
  Member D Mitchell

DATE OF CORRIGENDUM: 27 July 2020

PLACE:           Sydney

The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975, to alter the text of the decision in this application such that:

1.In paragraph 53:

a.the amount of $112,734 is replaced with $ 106,173;

b.the amount of $27,286.08 is replaced with $24,827.29;

c.the amount of $102,548 is replaced with $97,658;

d.the amount of $16,332.80 is replaced with $14,425.70;

e.the amount of $65,365 is replaced with $62,238; and

f.the amount of $9,858.59 is replaced with $8,733.24.

2.In paragraph 74, the amount of $78,785 is replaced with $40,560.

.............................[sgd]..............................

Bernard J McCabe, Deputy President

Division:SMALL BUSINESS TAXATION DIVISION

File Number(s):      2019/1533, 2019/1534,   2019/1599, 2019/1600, 2019/1601, 2019/1602, 2019/1603, 2019/1645

Re:Lea Zhang

APPLICANT

AndCommissioner of Taxation

RESPONDENT

File Number(s):      2019/1599 - 1603

Re:Banksia Import and Export Pty Ltd

APPLICANT

AndCommissioner of Taxation

RESPONDENT

File Number(s):      2019/1645

Re:Harry Huang

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe
Member D Mitchell

Date:10 July 2020

Place:Sydney

1.The objection decision as it relates to the amended assessments for the 2015 and 2016 years of income for Banksia Pty Ltd is affirmed.

2.The objection decisions relating to:

(a)Banksia’s amended Goods and Services Tax assessments for the period 1 July 2014 to 30 June 2017;

(b)Ms Zhang’s amended assessments for the 2015 and 2016 years of income;

(c)Mr Huang’s amended assessment for the 2016 year of income; and

(d)The quantum of associated penalties

are varied to amend the double counting error and are otherwise affirmed.

3.The objection decisions to impose and not remit administrative penalties are affirmed.

....................................[sgd]....................................

Deputy President Bernard J McCabe

CATCHWORDS

TAXATION – Goods and Services Tax – taxable supplies – what is the taxable supply – whether the applicants operated a brothel or sex-on-premises venue – unable to identify the supply – onus under section 14ZZK on the taxpayer to provide a more accurate explanation of the correct amount – onus not discharged – issues with double counting – decision varied to the extent of the double counting

TAXATION – company’s income tax – nil assessment – whether the Tribunal’s finding on the supply question should lead to the income tax decision to be remitted – whether the monies received should be taxable in the hands of Banksia – onus under section 14ZZK – onus not discharged – decision affirmed
TAXATION – individuals’ income tax – whether the amounts deposited by the individual applicants and held in cash was income – whether the amounts were gifts from family and friends – evidence of money exchange – records of dates of transfers – evidence insufficient to establish the amounts were loans – onus under section 14ZZK – onus not discharged – issues with double counting – decision varied to the extent of the double counting

TAXATION – penalties – whether the penalties were properly applied - whether the penalties should be remitted – whether shortfalls resulted from misunderstanding or recklessness and intentional disregard – insufficient evidence to disturb Commissioner’s findings in relation to rate of penalty or remission – issues with double counting – decision varied to the extent of the double counting

LEGISLATION

A New Tax System (Goods and Services) Act 1999

Income Tax Assessment Act 1936

Taxation Administration Act 1953

CASES

ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33

BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164
Hart v Commissioner of Taxation (2003) 131 FCR 203
HKYB and the Commissioner of Taxation [2018] AATA 4770

Ma v Federal Commissioner of Taxation (1992) 37 FCR 225

SECONDARY MATERIALS

Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard

REASONS FOR DECISION

Deputy President Bernard J McCabe
Member D Mitchell

10 July 2020

1. Well-run brothels are structured and operated like many other businesses dealing in more conventional goods and services. Brothels undertake marketing activities, engage staff, and make sales. They also have tax issues. But not all brothels are well-run. Some of them are not even brothels.

2. Banksia Import and Export Pty Ltd (Banksia) operates a brothel in Sydney. Or does it? That is the first question that needs to be resolved in this dispute over the tax affairs of Banksia, its director, Ms Lea Zhang, and her husband, Mr Harry Huang. Mr Huang is an employee of Banksia. The Commissioner of Taxation assumes Banksia was operating a brothel at all material times. The Commissioner says Banksia is liable to pay Goods and Services Tax (GST) on the full amount clients paid in connection with the supply of sexual services at the premises during the quarterly periods from 1 July 2014 through 30 June 2017. Banksia says it was only providing a venue for the supply of sexual services by independent contractors. It denies it is liable for GST on the component of the services supplied by others. At the hearing, Ms Zhang and Mr Huang argued Banksia was really conducting what amounts to a ‘sex-on-premises venue’ where like-minded individuals gathered for acts of sexual congress they had independently arranged.

3. The Commissioner also concluded Banksia did not correctly account for its income in the years ended 30 June 2015 and 30 June 2016. It says Banksia derived most if not all of the income from sales of sexual services occurring at its premises. The Commissioner assumes amounts were distributed to Ms Zhang in particular in the form of wages, dividends or director’s fees, or to Mr Huang as wages. The Commissioner made assumptions about amounts that should be deducted from what it concluded was Banksia’s income which resulted in nil assessments for the relevant periods. Ms Zhang and Mr Huang argue the objection decisions in relation to Banksia’s income tax assessments should be remitted for reconsideration depending on the findings we make regarding Banksia’s GST liability.

4. The Commissioner also audited both Ms Zhang and Mr Huang. He concluded their affairs did not add up. He issued amended assessments to Ms Zhang with respect to the 2015 and 2016 years of income and Mr Huang with respect to the 2016 year of income. Both Ms Zhang and Mr Huang say significant amounts of cash and cash transactions are the result of gifts from relatives and friends in China or perhaps from gambling. The Commissioner assumes the cash came from Banksia, and that it is in any event assessable in the hands of Ms Zhang and Mr Huang as income.

5. The argument in relation to Banksia’s GST affairs inevitably referred to the Tribunal’s decision in HKYB and the Commissioner of Taxation [2018] AATA 4770. That case dealt with a brothel operator’s liability to GST in connection with the provision of sexual services. The Tribunal in HKYB had the benefit of reasonably clear evidence about the way in which the business was conducted. That made it easier to identify and characterise the supplies that were made. In this case, the factual matrix is unclear because the evidence points in different directions. That makes it harder to isolate and identify the service or services which are being supplied at the premises. That is a problem for Banksia because it bears the onus of establishing what is the correct (or more nearly correct) amount for which it should be assessed.

6. As it turns out, we are not satisfied Banksia has discharged its onus. The amended GST assessments for the relevant period are therefore affirmed, subject to minor variations. We also affirm the objection decision in relation to administrative penalties. For good measure, we accept the taxable income for Banksia in 2015 and 2016 was nil.

7. We have difficulties with the explanations offered by Ms Zhang and Mr Huang for the cash flowing through their accounts in the relevant years of income. We are unable to say for sure where the money comes from in each case, but we are not satisfied with the explanations they provided. In those circumstances, the objection decisions as to primary tax liabilities for Ms Zhang and Mr Huang must stand (albeit with minor variations) because neither individual has discharged their onus. We also affirm the objection decisions with respect to administrative penalties.

8. We explain the reasons for all this below. We begin with a brief discussion of the onus the applicants bear in making out their case. We will then discuss Banksia’s case, including the relevant law, before moving on to address the affairs of Ms Zhang and Mr Huang. We will conclude with a discussion of penalties.

   THE ONUS OF PROOF

9. Section 14ZZK(b)(i) of the Taxation Administration Act 1953 (the Administration Act) says a taxpayer bears the onus of proving an “assessment is excessive or otherwise incorrect and what the assessment should have been” (emphasis added). That section makes clear it is not enough for a taxpayer to establish the Commissioner’s assessment is wrong. The Commissioner is often mistaken in the details of an assessment because he is almost always guessing about a taxpayer’s affairs. He typically makes his assessment by drawing inferences or through a process of reconstruction. The taxpayer must go further. The taxpayer must establish what the correct (or more nearly correct) assessment should be.

10. As a practical matter, the taxpayer bears the onus of proof in these proceedings. While talk of onus or the burden of proof is out of place in most cases coming before this Tribunal, applications for review under Part IVC of the Administration Act are different. The statute recognises the Commissioner’s information disadvantage. Taxpayers are presumably better informed about their own affairs, so it makes sense for them to bear the onus of proof.

11. In these proceedings, we are required to make findings of fact about the way in which Banksia was conducting its business so we can isolate and identify the supplies it was making. To that end, we must examine a range of evidence including:

    ·explanations provided by Ms Zhang and Mr Huang and a witness who had worked in Banksia’s premises;

    ·the website which promotes the business; and

    ·books and records of the business.

12. As it happens, the oral evidence provided by Ms Zhang, Mr Huang and the other witness is difficult to reconcile with some of the objective contemporaneous evidence – such as the information contained on the website and in the accounts. We also have concerns about the evidence provided by Ms Zhang in particular. We will deal with those evidentiary challenges below.

13. We must also make findings of fact about the affairs of Ms Zhang and Mr Huang. That requires us to take account of explanations they provided in their written statements and at the hearing. We also reviewed the documentary records, including banking records. The documentary records do not always support the explanations offered by Ms Zhang and Mr Huang.

14. We will make further observations about the implications of section 14ZZK(b) of the Administration Act for our fact-finding as we deal with the evidence.

    Banksia’s operation: an introduction

15. Banksia has been registered for GST since 2006. It operated from premises in the Sydney suburb of Lidcombe during the entirety of the period under review. It filed business activity statements at the end of each quarter, and it filed company tax returns in respect of the years ending 30 June 2015 and 30 June 2016. It did not include in those returns any of the fees paid by clients to individual sex workers operating from the premises. Banksia only recorded monies received in connection with what it said was the ‘room hire fee’ component of services provided, together with sundries. It denied receiving payment for the balance of the sexual services. Banksia says those services were provided by independent contractors who dealt separately with their own clients. Banksia did not provide the balance of the services or keep any monies paid in connection with those extra services, although there was evidence it processed a large number of payments for the individual workers. On that basis, it says it was not obliged to record any monies it may have incidentally handled in respect of the balance of the services in its assessable income, and it was not required to pay GST on the whole amount it received in respect of each transaction. It also denied any part of the monies it handled and remitted to the providers of sexual services was assessable income in Banksia’s hands. The Commissioner accepted Banksia’s assessable income in the relevant years was nil after assuming amounts shared with the workers and other payments were deductible in Banksia’s hands.

    The GST legislation as it applies to Banksia

16. GST is levied on taxable supplies of goods and services. The expression taxable supply is defined in section 9-5 of the A New Tax System (Goods and Services) Act 1999 (the GST Act) as follows:

    You make a taxable supply if:

    (a)you make the supply for consideration; and

    (b)the supply is made in the course or furtherance of an enterprise that you carry on; and

    (c)the supply is connected with the indirect tax zone; and

    (d)you are registered, or required to be registered.

    However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

17. GST is included in the price of goods and services in a taxable supply but the amount of the GST is collected and remitted by the person making the supply.[1] Where the goods or services are acquired for the purposes of resupply, the person making the acquisition may be able to claim input tax credits equal to the amount of GST it collected provided the acquisition qualifies as a creditable acquisition. Creditable acquisitions are dealt with in Division 11 of the GST Act. The creditable acquisition provisions permit the burden of the GST to be passed down to the ultimate consumer of the goods and services. As it happens, there is no need to discuss creditable acquisitions in detail in this case. Banksia insists it was not acquiring services from the individual sex workers – but even if it were, the individuals were not registered for GST. It follows those sex workers could not make taxable supplies to Banksia. If the suppliers were not making taxable supplies, Banksia could not claim they resulted in creditable acquisitions because it would be unable to satisfy the requirements in section 11-5 of the GST Act.

    [1] GST Act, section 9-40.

18. Section 31-5 of the GST Act obliges an entity registered for GST to provide a business activity statement (the BAS) reporting on liability for each tax period. The net amount of the GST is worked out in accordance with section 17-5 of the GST Act. The net amount for a particular period is determined by subtracting the entitlement to input tax credits from the sum of the GST for which the taxpayer is liable on the taxable supplies attributable to that period. If the liability for GST exceeds the amount of input tax credits, the taxpayer must remit the difference to the Commissioner when the BAS is lodged.

19. All of this is well-understood in business circles. The challenge for Banksia in these proceedings (at least insofar as its liability to GST is concerned) is to determine precisely what taxable supplies the company was making during the period in question. That requires us to make findings of fact about what goods and services were being supplied, and how (and by whom) they were supplied.

20. The fact-finding process is more difficult in cases where goods and services provided by different suppliers are bundled together or supplied in conjunction with each other. It is as well to remember in such a case that the word ‘supply’ is defined broadly in section 9-10(1) of the GST Act to include “any form of supply whatsoever”. That means decision-makers must stand back and observe the “commercial or practical reality” of the supply rather than being “handcuffed” to the text of the contract or contracts through which a particular supply may be effected.[2] That is not to say the terms of a contract are irrelevant, of course. Those terms form part of the circumstances which must be taken into account. The terms may even be decisive in a particular case, but much will depend on what is really going on.

    [2] See ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33 at [39] per Edmonds J

21. The Full Court’s decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33 illustrates the point. ATS was an Australian tour operator that assembled holiday packages that were then supplied to inbound tourists via offshore agents. A question arose over what the tour operator was supplying to the agencies dealing with the inbound tourists. While it charged a fee that included the entire consideration for the package, was the local operator merely supplying the booking service? On that analysis, the individual hotels and businesses providing each component of the package undertook separate supplies, the consideration for which was remitted through the operator. Alternatively, was the local operator making a taxable supply of the whole package upon which GST might be levied?

22. The Full Court concluded there was a single supply. While the supply was comprised of a bundle which included the facilitation service provided by ATS and other services (accommodation, transport etc) provided by third parties, all of the services were supplied as part of a coherent package promised by ATS for which there was a single indivisible consideration. Moreover, the third party services were regarded as ancillary and incidental to the “critical supply”, being the supply of the facilitation service.[3] Pagone J explained (at [72]):

    It is…not relevant that ATS might not itself provide the products which it may have arranged on behalf of the tourist through the non-resident travel agent. What is relevant, and determinative, is how it has arranged for the services to be provided. ATS has not simply provided a service whereby a non-resident travel agent, or a non-resident tourist, can contract directly with those ultimately providing the service in Australia. Its website describes itself as providing the products which are ultimately to be enjoyed by the tourist. Amongst its promotional materials ATS described its product as providing “a variety of packages including our popular self drive itineraries, map and information and images”.

    [3] ATS at [64] per Edmonds J

23. After acknowledging ATS dealt directly with the accommodation providers and others, Pagone J looked to the reality of what was going on. His Honour concluded it was always intended the incoming tourist would be the beneficiary of the individual contracts between ATS and the service providers. His Honour explained (at [72]):

    ATS is essentially the wholesaler of retail product whose fee to the non-resident travel agent was a composite sum undissected as between disbursement and profit margin.

1. The Tribunal adopted that practical, business-like approach to the supply of sexual services in a brothel in HKYB. The applicant in HKYB argued there was a split-fee arrangement between the individual workers (who were independent contractors) and the taxpayer. Under the arrangement, the brothel owner provided the venue and facilitated the interactions between workers and clients, but – at least in a strict contractual sense – no more. The evidence suggested there were good reasons for the demarcation. It made sense for the workers to be independent contractors who negotiated the precise terms of their engagement with the client in circumstances where it would be practically impossible for an employer to supervise the worker’s performance of a contract negotiated by the brothel. But the Tribunal concluded the brothel owner was supplying the entire bundle of services after considering all the evidence, and notwithstanding its analysis of the underlying contractual arrangements. The wider circumstances included a notice in the waiting room that instructed workers not to discuss the split fee arrangement with clients and the evidence as to how the brothel was promoted to clients.

2. In written submissions provided in this case, counsel for the applicants understandably focused on what he said were all the differences between HKYB and the operations of Banksia’s brothel. But we cannot sensibly comment on the significance of differences between the business model described in HKYB and Banksia’s operations until we make findings of fact about the supply.

   What is Banksia supplying?

3. The material provided in advance of the hearing created the impression Banksia was conducting a brothel along more or less conventional lines. Customers would come to the premises, meet a worker and make a payment in return for sexual services provided at those premises. The impression of a conventional brothel was certainly conveyed by the pages of the website that were ultimately tendered in evidence.[4] Written submissions filed by the applicants referred to differences in the way Banksia’s business was conducted that were intended to suggest this might not be HKYB redux.

   [4] Exhibit T18 – Screenshots of Banksia’s website, pp 342-344. (Page references for exhibits refer to the pages in the consolidated courtbook provided before the hearing.)

4. As the hearing unfolded, however, the oral evidence from Ms Zhang and Mr Huang suggested Banksia’s business was conceived on an entirely different basis to the one described in HKYB. Ms Zhang and Mr Huang described a business that was not so much a brothel using independent contractors as it was a sex-on-premises venue. As they explained it, Banksia merely provided the venue to workers and their clients. Banksia earned the vast bulk of its revenue by charging for rooms by the hour, or parts of an hour. (Banksia also claimed to make money out of supplying condoms to workers, but the sales were not included in the accounts.)

5. The evidence of Ms Zhang and Mr Huang about the operations of the brothel was corroborated to a limited extent by evidence from one of the workers who had used Banksia’s premises during the period under review and was a witness at the hearing. We pause to note the witness provided a statement in advance of the hearing in accordance with the case management directions but counsel for Banksia properly withdrew the written statement after it became clear the witness – who did not speak English – was unable to confirm she had read and understood what she signed. We permitted the witness to give oral evidence through a translator on the understanding the Commissioner might seek an adjournment if that was necessary to ensure procedural fairness. As it happens, an adjournment was not required, and the cross-examination proceeded.

6. The witness agreed she was a sex worker during the period under review. She agreed she had accompanied individuals to Banksia’s premises on six or seven occasions during 2016-2017 for the purposes of paid sexual interaction. She recalled the first visit was organised by her client, or perhaps by a mutual acquaintance. On subsequent visits, she indicated she made the call to arrange a room. She also paid the fee for room hire or directed the client to pay the room hire fee at reception. We were given to understand the venue was selected by the witness and her partners in each case because the room rates were cheap, and it was a convenient place for them to meet. Importantly, the witness said she and her clients did not meet or arrange the provision of sexual services through Banksia. All they required from Banksia was accommodation. The rest of the arrangement, we were told, was entirely between the witness and her client and the deal in each case was struck independently of the applicants.

7. We were not provided with a clear explanation of the relationship between the applicants and the worker who appeared as a witness. The witness said she was friendly with Ms Zhang and Mr Huang – certainly friendly enough to want to help them out in these proceedings, notwithstanding the obvious privacy concerns – but not especially close. While we remain confused by her motivation for giving evidence despite the risks to her privacy, we have no reason to disbelieve her evidence.[5]

   [5] We accept the evidence of this witness was such that it was appropriate to make a confidentiality order under s 35(3)(a)(i) of the Administrative Appeals Act 1975 that prohibits the publication of the witness’s identity to any person apart from the Tribunal, the parties and their legal representatives. The inherently confidential nature of the information disclosed in witness’s evidence has the potential to cause her significant embarrassment if her name were published. If the witness’s identity were disclosed, it would also be harder to convince witnesses in similar cases to come forward in the future.

8. The witness’ evidence is certainly consistent with the applicants’ claim that Banksia was providing nothing more than a sex-on-premises venue. But there were in excess of 8,000 taxable supplies recorded during the period under review. Evidence of what one worker did at Banksia’s premises on six or seven occasions with two clients does not inevitably tell us a great deal about what generally occurred there.

9. In an effort to bridge the gap, Ms Zhang pointed us to copies of four partial WeChat text message chains from prospective customers received during the period under review.[6] Ms Zhang said many customers contacted the brothel through this medium. In each case, an extract from the message chain was cited as evidence for the proposition that the prospective customer was interested in bringing his own worker to the premises. That evidence is consistent with the applicants’ case. Interestingly, in one of those exchanges, the prospective customer said he preferred to bring his own company rather than selecting a worker from those he understood were available at the premises. The extract reads:

   Prospective Client:   Thank you! I heard that the Chinese girls you have over there are very good! But I personally prefer other girls. My friend said I can bring my person to play, right?

   Banksia Rep:           You bring your own girl, right? No problem… Anyway, we only charge the room fee.

   Prospective Client:   Great! Please tell me the rate, my friends mentioned to me but I want to confirm it.

   [6] Exhibit C04 – Annexure A to Statutory Declaration of Lea Zhang dated 17 March 2020, p 1190.

10. That evidence complicates the picture the applicants sought to paint at the hearing. It suggests workers were routinely available at the premises, and that prospective customers could attend the premises and make an arrangement with whomever they met there.

11. This suggestion is also evident in a further exchange which we understand to be between a representative of Banksia, presumably Ms Zhang herself, and a prospective client which indicates a worker would be available at the premises so there was no need for the client to arrange company of their own. The exchange read as follows:[7]

    Banksia Rep:           You’re kidding me boss. Of course you need to pay for services outside the normal items. You pay $50 for our room and 90 to the girl. You can talk to them for additional services.

    Prospective Client:   Ok, I will come later after work.

    Banksia Rep:           Just opposite Lidcombe Railway Station, downstairs.

    Remember to let me know in advance, I will leave a room for you.

    [7] Ibid p 1192.

12. Ms Zhang, who managed the brothel on a day-to-day basis, denied in her oral evidence that workers generally waited about for ‘walk in’ customers who would turn up unannounced and strike an arrangement. She agreed there were occasions where a worker might be waiting at the premises for the arrival of a client with whom the worker had already made an arrangement, or where the worker might have an interval between appointments she had made. Where a worker was at a loose end, she might sit around in a lounge area that was accessible to prospective clients who were admitted through the secure entryway. In such cases, Ms Zhang explained, walk-in customers might be able to take advantage of the opportunity to meet a worker that happened to be available. But Ms Zhang insisted that was not the norm. She said Banksia did not maintain a roster of workers who were available to see clients. Mr Huang was not as definite in his evidence. He indicated a ‘walk-in’ was more likely to find a worker available at the premises, but he did not suggest there was a roster of regular workers, and he certainly did not suggest Banksia organised for workers to be available to meet customers. He explained Banksia had defaulted to a sex-on-premises model because it was not up to the more ambitious task of managing a brothel.

13. Counsel for the Commissioner suggested Ms Zhang had provided a number of different accounts of how monies were collected from clients and disbursed to workers. We acknowledge there are minor differences between those accounts[8] although counsel for the applicants argues the differences are neither significant or important. We noticed something else apart from the discrepancies. All of the written accounts refer to monies being kept for workers at reception in deposit-boxes or letter-boxes allocated to each worker. We were given to understand the payments were kept for safe-keeping until the service had been provided. That would make sense – in a brothel. It makes less sense (and might therefore be assumed to be less likely) in a business that operated along the lines of a sex-on-premises venue. In the business described by Ms Zhang in her oral evidence, the individual workers had a more casual and tenuous relationship with Banksia. Even allowing for the fact that some of those workers might have frequented the premises regularly, it seems unlikely that workers would want or need their monies held at reception until they had finished their business for the day.

    [8] The applicants initially explained that cash payments were paid in full to the reception where the room fee and service fee would then be split with the service fee being put into a letter box assigned to the worker: Exhibit T12 – Letter dated 16 November 2017 responding to Audit Position Paper, p 168; Exhibit T24 – Applicants’ Objection dated 2 May 2019, pp 387-388. If the cash payment was made directly to the worker, the worker would put her own portion into the letter box and hand the room fee to reception. Later in her evidence, Ms Zhang said when payments were made in cash, only the room hire fees would be paid to Banksia: Exhibit C01 – Affidavit of Lea Zhang dated 6 December 2019, [15]. When asked by the Tribunal, she said if the worker was paid the cash directly, only the room hire percentage would be paid to reception: Transcript at p 72:1-4. Later in her evidence, she clarified that sometimes the client would arrive before the worker and they would pay at reception. On other occasions, the money would be paid to the worker if they had arranged the service in advance or where the services were negotiated on premises: Transcript at pp 80:41-81:12.

14. There were other aspects of the applicants’ evidence that troubled us. The Commissioner set out in his outline of submissions a number of examples of where the daily data provided by Banksia showing what room fees were collected, and the EFTPOS transactions and reimbursements, did not accord with the submissions being made by the applicants that only the room hire amounts were being retained by Banksia.[9] Counsel for the Commissioner and the Tribunal took Ms Zhang to various lines on the daily data sheets and asked her to explain why the amounts recorded as total income did not accord with her evidence that (a) Banksia only retained the room hire fee and (b) the worker received 70% of the total fee paid. She was unable to provide a coherent explanation. When pressed to explain a particular discrepancy, she admitted “the spreadsheet was manufactured by an accountant” and she was unable to assist us to make sense of the figures.[10] That is a problem for the applicants in circumstances where they argue Banksia only collected and retained the room hire component for just over 8,000 interactions. It is not clear that the documented figures bear out that claim.[11]

    [9] Respondent’s Outline of Submissions at [51]-[66].

    [10] Transcript at p 84:7.

    [11] Exhibit T24 – Daily data table for December 2016 attached to Applicants’ Objection dated 2 May 2018, p 404.

15. We were also perplexed by the evidence about the website. The website communicated a clear picture of a brothel that operated on conventional lines. It advertised a menu of services available at the premises and invited prospective customers to contact the brothel or visit the premises. The website did refer to room hire and hourly rates but did not clearly differentiate between the accommodation and the services provided by the workers. To the contrary: the website announced: “Our ladies provide full service and massage” and referred to “our rates”, which suggests on its face the brothel was making a composite or bundled supply,[12] The website included a roster of workers that were available at the brothel on particular days. The webpage expressly invited prospective clients to call the brothel’s reception and arrange the services of a particular worker, or to visit the brothel unannounced whereupon the client could make the acquaintance of one of the ladies on the roster. It even provided links to the public transport options to facilitate access.

    [12] Exhibit T18 – Screenshot of Banksia’s website, p 344.

16. It is no accident that the website described a conventional brothel. Mr Huang, who created the website, admitted during his evidence that the content was essentially plagiarised from another brothel’s website. Ms Zhang and Mr Huang said Banksia’s website did not accurately describe its business or the services it provided. Ms Zhang said the pictures of workers used on the website were stock images, and the rosters were fake. We were told these representations were a form of bait advertising used to lure prospective clients to the premises. But to what end? If the business was principally operated as a sex-on-premises venue in circumstances where individual workers and clients generally struck their arrangements independently and agreed to meet at Banksia’s premises, what was the point of encouraging individuals to turn up at the brothel in the mistaken belief that workers would be available and waiting? Neither Ms Zhang nor Mr Huang were able to adequately explain how the website figured into the business, although Ms Zhang in particular insisted it was indispensable. As we understand her evidence, the website was important because all of the businesses in this sector had websites.[13] Ms Zhang agreed prospective clients might be upset if they arrived and nobody was available notwithstanding the representations on the website. She offered little more than a verbal shrug when asked to explain how that made sense as a marketing strategy.[14] She also agreed she and Mr Huang went to the trouble of updating the roster of (fictitious) workers on the website occasionally.[15] Why bother updating the roster – why bother dangling the bait – if there were no workers regularly available at the premises and therefore no substitutes to offer to many prospective clients upon arrival?

    [13] Transcript at p 77:31-32.

    [14] Transcript at p 75:37-38.

    [15] Transcript at p 69:33ff.

17. The website clearly describes a conventional brothel. Read in isolation, the language on the website (the references to “our ladies” and “our rates”) and the clear thrust of the messaging suggests clients could expect a taxable supply of sexual services from the brothel at its premises by a worker who was available there and engaged by the brothel for that purpose. The business described on the website is not consistent with the business described by the witnesses, even as Ms Zhang in particular insisted the website was an important (if admittedly misleading) marketing tool. It would be easier to dismiss the website as an anomaly if there were evidence of other marketing initiatives promoting Banksia’s premises as a sex-on-premises venue. But there was none of that, apart from references to WeChat communications and a loose mention of advertising in the accounts. There was no evidence of a Facebook page or other social media describing Banksia’s operation as a sex-on-premises venue. There was no evidence of the applicants posting notices on adult-oriented websites or in the classified sections of the newspapers or on notice boards. Even the lone worker who appeared at the hearing as a witness did not refer to promotional activities directed at workers. Mr Huang referred limply to marketing through ‘word-of-mouth’. It seems unlikely that such a passive approach to marketing would generate in excess of 8,000 individual visits over the relevant period. We take that view even if one accepts Mr Huang’s admission that the business was not marketed or run in a particularly sophisticated way.

18. Banksia’s case in relation to the GST invites us to make a distinction between the details of the supply of the service in HKYB and the supply or supplies that Banksia was making. But that presupposes we are able to make clear findings of fact about what Banksia was doing. Banksia bears the onus of establishing those facts to our satisfaction. It has not discharged that onus. The absence of a proper explanation for the figures, the unlikely explanation of the way the cash was handled within the reception and the evidence about Banksia’s marketing activities raise serious questions over the accounts Ms Zhang and Mr Huang gave about the way the business operated. Their description of what amounts to a sex-on-premises venue which made most of its money from providing accommodation is not supported by the objective evidence on the website in particular. While it is possible to explain that anomaly – perhaps by establishing the website was relatively unimportant when compared to other forms of marketing Banksia had undertaken – that explanation (or any other coherent explanation) was not forthcoming.

    CONCLUSION WITH RESPECT TO BANKSIA’S GST LIABILITY

19. Banksia needs to establish it did not make a taxable supply of all the services provided at the brothel – or, to put it differently, it needs to establish it made a taxable supply of room hire services while other individuals made separate (albeit not taxable) supplies of sexual services. Banksia sought to do that by pointing to details of the business and the way it interacted with clients and workers. But the applicants failed to explain the elephant in the room, being the website. The website tells a quite different story about the business. It suggests Banksia was running a conventional brothel that made a taxable supply of sexual services along with the accommodation. The applicants also failed to credibly explain some of the details of how payment was received for the services and how the payments were accounted for in the books. At a minimum, Banksia has not done enough to establish the correctness of its position. Its challenge to the objection decisions must therefore fail.

1. We note the Commissioner did acknowledge a double counting error in his amended statement of facts, issues and contentions. That resulted in minor changes to the revised net amounts in each BAS, which suggested Banksia has a GST shortfall over the review period of $134,470. The objection decision under review should be varied to that extent.

   BANKSIA’S INCOME TAX ASSESSMENTS

2. The Commissioner issued amended assessments to Banksia under section 167 of the Income Tax Assessment Act 1936 (ITAA36) for the 2015 and 2016 years of income. In the course of making those amended assessments, the Commissioner was informed by research into similar businesses. He also considered information contained in the material provided by the applicants – about the split in fees as between Banksia and the workers, for example, and about sales Banksia claims it made. In addition, he made estimates of payments made by Banksia to Ms Zhang and Mr Huang. After making all those assumptions about income and likely deductions, the Commissioner concluded Banksia should be issued with nil assessments.

3. Banksia says if we decide against it on the question of GST liability and find it derived all the income in respect of the taxable supplies of sexual services, the amended assessments for income tax should be remitted for reconsideration. The applicants argue our decision on the GST liability necessarily means Banksia derived income that should now be assessed in its hands. A remittal would permit those findings to be taken into account, which might also have implications for the assessment of administrative penalties. There was also a possibility that franking credits might be available. Banksia would presumably be able to revisit the questions over how its income was calculated and what deductions it might claim, which might also have implications for the tax liabilities of Ms Zhang and Mr Huang.

4. There is a flaw in Banksia’s argument. We did not make a positive finding that Banksia made taxable supplies of a bundle which included sexual services. We merely decided Banksia has not persuaded us the GST assessments were wrong - not because we positively accepted the Commissioner’s case, but because the evidence pointed in different directions. In those circumstances, we were not persuaded by the applicants’ explanation of what the GST assessments should be. It does not inevitably follow from our decision that Banksia was required to treat all of the consideration received for the supply of the bundled adult services as income in its hands. The objection decision with respect to GST assessments must stand because the evidence was in such a state that we were unable to say what was going on in Banksia’s business. Banksia did not persuade us on the evidence that it was appropriate to make findings of fact that pointed to a different, more accurate assessment of Banksia’s liability to GST.

5. If Banksia wants to displace the nil assessments for income tax, it must adduce cogent evidence that would enable us to identify what the correct (or more nearly correct) assessments should be. If we had been able to make a positive finding about Banksia’s taxable supplies, the company would presumably be entitled to rely on that finding and say it applied mutis mutandis to the income tax assessments. But our decision with respect to the GST liability does not go that far. Banksia must therefore make a positive case for a different outcome on its income tax assessments. That means it must refer us to cogent evidence about its income and expenses in the relevant years that would enable us to make a different determination of what the assessment should be.

6. The books and records provided to us are in an unsatisfactory state. It is impossible to be confident in the story they tell. A few examples illustrate the point. One of them concerns the sale of condoms. Ms Zhang said the company made some money selling condoms to workers. The sales of those items were not recorded in the books. While the sales were unlikely to be significant, it is odd that they were not properly recorded. It is less surprising once we learned more about the way Banksia prepared and kept its records.

7. Banksia’s evidence about its sales was derived from a notebook in which Ms Zhang claims she made a handwritten record of each client booking made during the 2017 year of income. (Banksia did not provide copies of the notebook for the previous year, which is a matter of some concern.) The notebook entries recorded the length of each client interaction without identifying the nature of the interaction. Assuming for a moment that the notes were prepared diligently, the absence of detail is potentially significant because it leaves doubt as to the total value of sales each day. The uncertainty about total sales might come about in a variety of ways. For example, while the records indicated a standard room fee being charged depending on the time, Ms Zhang confirmed in her oral evidence that the room fee might be varied depending on the circumstances. She pointed out a client might have a favourite room; if the room were unavailable on a particular occasion, the client might receive a discount on the spot. Ms Zhang also confirmed she did not necessarily know how much the worker would charge the client on a given occasion.[16] The records certainly do not indicate the content of the service that was provided on every occasion, which would potentially impact on the price charged. There was also doubt over whether cash transactions were handled and recorded differently to EFTPOS transactions.

   [16] Transcript at p 81:37-40.

8. These gaps and anomalies in the primary records might explain the inconsistencies that appeared in the spreadsheets derived from those records. At the conclusion of the cross-examination, we questioned Ms Zhang about apparent anomalies in one of the spreadsheets recording daily sales. We focused on Exhibit T24 at p 408, which included the figures relating to 4 April 2017. When pressed to explain the figures, Ms Zhang said the spreadsheet was manufactured by an accountant.[17] We note she had difficulty answering other questions about the detail of the company’s financial affairs during cross-examination.[18] While Ms Zhang’s ability to interpret the spreadsheets on the spot might have been hampered by language issues, the fact remains that Banksia did not produce the information that was required to explain the data and answer questions in relation to other matters.

   [17] Ibid p 84:7-9.

   [18] See, for example, the exchanges in the Transcript at pp 54-55 in which Ms Zhang was asked to explain the figures recorded in the spreadsheets.

9. The hearing was Banksia’s opportunity to provide us with evidence that could establish what the assessments should have been. The question marks over the integrity and accuracy of Banksia’s records and the uncertain recollection of Ms Zhang undercut Banksia’s argument. In the circumstances, we are not satisfied Banksia has discharged its onus. The objection decision in relation to Banksia’s amended income tax returns must therefore be affirmed.

   THE OBJECTION DECISIONS IN RELATION TO THE INCOME TAX ASSESSMENTS OF MS ZHANG AND MR HUANG

10. The Commissioner issued amended assessments under section 167 of the ITAA36 for the 2015 and 2016 years of income to Ms Zhang and for the 2016 income year to Mr Huang. Those assessments were made following the audit and having regard to:

    ·information provided by Ms Zhang in a personal living expenditure questionnaire for the 2017 income year; and

    ·bank records

    together with what the Commissioner says were reasonable assumptions to estimate the joint personal expenditure of Ms Zhang and Mr Huang was at least $125,951 in the 2017 income year. The Commissioner argued his expenditure analysis of the 2017 year supports his thesis that surplus funds generated by Banksia were paid to Ms Zhang and Mr Huang as part of their personal income, most obviously in the form of director’s fees or wages.[19]

    [19] Respondent’s Outline of Submissions, p 24 [127]-[129].

11. The Commissioner acknowledges it would be appropriate to make minor adjustments to the assessments in light of double counting issues that also affected its assessment of the GST liability of Banksia. The Commissioner now says Ms Zhang had revised income of $106,173 and an income tax shortfall amount of $24,827.29 for the 2015 income year and revised income of $97,658 and an income tax shortfall amount of $14,425.70 for the 2016 income year. The Commissioner says Mr Huang had revised income of $62,238 and an income tax shortfall amount of $8,733.24 for the 2016 income year. The Commissioner accepts the objection decisions under review should be varied accordingly – but not otherwise.

12. We acknowledge the Commissioner’s working thesis appears to be that Ms Zhang and Mr Huang were somehow enriched through their association with Banksia. The Commissioner argues Banksia did not retain any surpluses within the company, so it stands to reason those amounts were distributed to Ms Zhang and Mr Huang. We note Ms Zhang agreed in cross-examination that Banksia did not have any cash on hand as at 30 June 2016.[20]

    [20] Transcript at pp 57-58.

13. We are not bound by the Commissioner’s reasoning, and it should not distract from the central task before us. Ms Zhang and Mr Huang had a good deal of money flowing through their hands that has not been declared as income. The Commissioner suspects the monies come from Banksia. Ms Zhang and Mr Huang claim the bulk of the monies came in the form of gifts from family and friends who were mainly located in China. The Commissioner does not have to prove he is right about the source of the monies, and the applicants do not succeed merely by proving the Commissioner wrong. The issue of the amended assessments calls the character of those transfers into question. As a practical matter, both Ms Zhang and Mr Huang must explain the transactions to our satisfaction.

14. Ms Zhang and Mr Huang both initially suggested some monies passing through their hands were the proceeds of gambling. They did not press that explanation at the hearing. The evidence focused instead on a large number of payments they claimed were received from overseas during the income years in question. It was apparent that payments were being made to Ms Zhang and Mr Huang over a much longer period. Some of the monies received in earlier periods might still have been sloshing through their bank accounts during the periods under review.

    Ms Zhang’s explanation

15. Ms Zhang provided a statutory declaration dated 15 May 2020[21] which included a spreadsheet recording the specific amounts she said were attributable to gifts from relatives. In the body of the statement, Ms Zhang explained that in 2006, she was finding it expensive to live in Australia, and she told members of her family that she was running short of money. She then set out a detailed record of all the payments she claimed to receive from her sister and her parents between 2006 and January 2017. During that period, she said she visited China on at least thirteen occasions and returned on each occasion with what she said were cash gifts from her family members. We note each individual amount was less than $10,000 which was under reporting thresholds. She claims she brought in excess of $110,000 into Australia in this way over that period.

    [21] Exhibit C05.

16. Ms Zhang also claimed she was visited by her parents on a number of occasions between 2007 and 2017. On each of those occasions, her father would exchange Chinese Yuan for Australian Dollars in China and bring the cash with him to this country. Where he brought larger amounts, his wife (Ms Zhang’s mother) would carry some of the cash so that neither of them carried more than $10,000 on each occasion. Over the course of four trips to Australia, the couple brought $72,000 in cash. Ms Zhang said those amounts were gifted to her.

17. Ms Zhang said her sister also made three visits to Australia over the same period. We were told Ms Zhang’s sister did not come empty handed. She carried cash in the amount of just less than $10,000 on each occasion. Ms Zhang said those amounts were all gifts.

18. In total, Ms Zhang said her family brought in $209,300 in cash gifts over the extended period. Ms Zhang said her sister also made three bank transfers to a joint account controlled by Ms Zhang and Mr Huang totalling $58,890 between January 2013 and June 2017. That brought the total amount of the gifts she claimed to receive over the extended period to $268,190.[22]

    [22] Exhibit C05 – Statutory Declaration of Lea Zhang dated 15 May 2020, p 1198 [79].

19. Ms Zhang said she would dip into the cash to pay expenses from time to time. She said she would take money every time she went grocery shopping.[23] She said the gifts were especially welcome during periods when Banksia was not trading profitably.[24]

    [23] Ibid p 1197 [61].

    [24] Ibid p 1198 [80].

20. In cross-examination, Ms Zhang admitted she did not in fact recall the exact dates when she retrieved cash from China or the occasions when her visitors came bearing gifts, or the exact amounts she received on each occasion. She also agreed she did not keep a diary or have any other documents recording the details of the gifts.[25] She suggested in cross-examination that the dates referred to in the statements were provided by the family members in question[26] (although we accept she was presumably able to reconstruct her travel by examining movement records, and the records of her family travel from their passports). When asked whether she had any evidence that she received the money that was brought into the country in cash, she referred to bank statements belonging to the family members that show foreign currency transactions in which Chinese Yuan were converted into Australian Dollars. Counsel for the Commissioner pointed out the bank statements did not say anything about the destination of the money that was obtained in those exchanges, much less whether it should be characterised as a gift in Ms Zhang’s hands. Ms Zhang was unable to refer to any other documentary evidence that corroborated her claim that she actually received the monies brought into the country, or that any or all of it was a gift. While there are records of Ms Zhang receiving electronic transfers of some monies from her sister into a bank account, there is nothing which sheds light on the character of those payments.

    [25] Transcript at p 58.

    [26] Ibid.

21. The absence of corroborating evidence is not inevitably fatal to a taxpayer’s claim. A decision-maker may be satisfied with the uncorroborated word of a taxpayer.[27] Of course, much will depend on the circumstances. A taxpayer may have an obvious incentive to dissemble. The account he or she provides may be inherently unlikely or contrary to usual experience. The individual might have a track record of sharp practice, or untrustworthy behaviour. One must approach the evidence using common sense, and with an open mind.

    [27] Ma v Federal Commissioner of Taxation (1992) 37 FCR 225.

22. It is not inherently unlikely that an individual’s family living overseas would remit monies to support the individual as they establish a new life in Australia. But these payments were supposedly made over a long period and totalled a relatively large amount. A significant proportion of the monies came from Ms Zhang’s sister, rather than her parents; a generous sibling might raise more questions than indulgent parents. A large share of the total amount was carried into this country by Ms Zhang herself in the course of frequent visits to her family. The frequency of her visits home does not suggest a penurious lifestyle that required support. We note Ms Zhang’s family members did not provide any statements in support of her claims.

23. A family living in China might have a number of motivations for sending money to a relative in Australia. We do not need to speculate on what those other reasons might be. It is enough that we say we would expect a person in Ms Zhang’s circumstances to have some objective record of any amounts she received that identified those amounts – or most of them – as gifts, assuming she received all of them in the first place.

24. The circumstances are such that we are not satisfied Ms Zhang’s uncorroborated recollection of the discussions with her family are enough to persuade us we should accept her claim that the monies identified by the Commissioner were gifts, and not assessable income. It follows we are not satisfied Ms Zhang has discharged her onus of establishing the correct (or more nearly correct), assessment. While we accept the objection decision with respect to her income tax should be varied to correct the double counting error already discussed, the objection decision should otherwise be affirmed.

    Mr Huang’s explanation

25. In Mr Huang’s affidavit dated 15 May 2020,[28] he outlines – in some 186 paragraphs – how he received gifts from his family and friends starting in March 2006 and continuing until mid-2017. He said the total sum gifted (including cash and amounts received through electronic funds transfer) was $503,867.[29] He confirmed his evidence to that effect at the hearing. When asked how he remembered all of the dates and exact amounts of around 100 gifts, he said he did not remember the exact dates but insisted he has an excellent memory. In cross-examination, Mr Huang agreed the bank statements he provided for his cousin and uncle show that foreign exchanges occurred however those records do not establish the amounts exchanged were given to him or that they were gifts. He was asked why he did not clearly disclose the gifts during the audit or objection processes. He said he had disclosed he received gifts but – curiously – he was not specific about the amounts. He said he was not present at the audit interview anyway. When asked why Ms Zhang’s gifts were disclosed at objection but his were not, he said their gifts were separate and they must have not thought about it. That is surprising given the ‘gift’ explanation is central to his case.

    [28] Exhibit C06 – Statutory Declaration of Harry Huang dated 15 May 2020.

    [29] Ibid p 1312 [186].

26. Mr Huang’s affidavit says his cousin and uncle gifted him $368,900 in total which he brought back to Australia with him from his various trips to China. He says he deposited part of this amount into his bank account and kept the rest at home to support his daily expenses.[30] He explained he deposited $326,650 into three bank accounts.[31] Mr Huang also claimed he received $134,967 in bank transfers from his friends.[32] He said the total amount he received from family members and friends (including cash and electronic funds transfer) was $503,867.[33]

    [30] Ibid pp 1302-1308 [3]-[104].

    [31] Ibid pp 1308-1311 [113]-[178].

    [32] Ibid pp 1311-1312 [179]-[184].

    [33] Ibid p 1312 [186].

27. Interestingly, the outline of submissions provided on behalf of the applicants says Mr Huang received $830,517 throughout the relevant period, effectively counting the amounts he says he deposited into his bank accounts from the gifts he received from family twice.[34]

    [34] Applicants’ Outline of Submissions pp 4-5 [12]-[13].

28. Mr Huang’s evidence is ultimately susceptible to the same criticisms we made of Ms Zhang’s evidence. The evidence of this extraordinary largesse from friends and relatives is unusual, particularly in circumstances where it was not clearly established Mr Huang and his family were struggling. (If Ms Zhang was receiving large cash gifts from her family at the same time, it is hard to see how the couple were experiencing hardship.) The largesse was so unusual that we would expect to see some sort of records confirming the amounts were received and that they were, in fact, intended as gifts. We acknowledge Mr Huang gave evidence of friends who wanted to repay Mr Huang for his previous financial assistance in their time of need,[35] but that evidence was vague in circumstances where we would have expected more detail.

    [35] Exhibit C06 – Statutory Declaration of Harry Huang dated 15 May 2020, p 1302 [4]-[5].

1. Even allowing for cultural differences, Mr Huang’s friends and relatives appear to have been uncommonly generous in circumstances where it is not clear he needed their assistance. We accept some monies may have been transmitted from China to Mr Huang, but the character of those transfers remains an open question that is not adequately answered on the material before us.

2. Mr Huang has not discharged his onus of establishing the correct (or more nearly correct) assessments which should be substituted for those made by the Commissioner and considered in the objection decisions. While we accept the assessment is subject to minor variations to correct double counting issues elsewhere, the objection decision must otherwise stand.

   PENALTIES

   Banksia

3. We turn finally to the question of penalties. The Commissioner imposed administrative penalties on Banksia pursuant to section 284-75(1) of Schedule 1 to the Administration Act in respect of the GST shortfalls. (Banksia does not have a shortfall on its income tax given it received nil assessments in the two years under review.) The penalty on the GST shortfall was imposed at the base rate of 50% for the periods in the 2015 and 2016 years after concluding there was a false or misleading statement and the shortfall that followed was the result of “recklessness by you or your agent as to the operation of a taxation law”.[36]

   [36] Administration Act, Schedule 1 section 284-90(1).

4. The penalty on the shortfalls occurring in 2017 was subject to differential treatment. Part of the shortfall was penalised at the rate of 50% but one component – an amount of $40,560 – was assessed at the higher rate of 75% which is applicable where there is a false or misleading statement and the shortfall results “from intentional disregard of a taxation law…by you or your agent”.[37]

   [37] Ibid.

5. The Commissioner said the higher rate of penalty was appropriate in relation to that component of the shortfall because it was the product of intentionally under-reporting sales. Whereas the Commissioner was satisfied the balance of the shortfall was attributable to Banksia’s (serious) misunderstanding of the rules about taxable supplies, he concluded in the objection decision that one component of the shortfall was a product of Banksia deliberately keeping incorrect records that were then produced to the Commissioner.

6. Both Banksia and the Commissioner discussed the difference between the ‘recklessness’ rate of 50% and the ‘intentional disregard’ rate of 75% in the course of written submissions. They referred us firstly to the well-known decision of the Full Federal Court in Hart v Commissioner of Taxation (2003) 131 FCR 203. In Hart, Hill and Hely JJ explained (at [43]):

   Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective.

7. Their Honours went on to quote from the judgment of Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164 where is his Honour opined (at [77]):

   Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.

8. Whereas the concept of ‘recklessness’ plainly contemplates behaviour leading to a shortfall which is more egregious than a simple want of reasonable care, the concept of ‘intentional disregard’ contemplates a taxpayer who flouts the law. The Commissioner points out that dishonesty is a feature of intentional disregard.[38]

   [38] Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard

9. It must be recalled that a taxpayer bears the onus of establishing the penalty assessment should have been made differently in each case. It follows the penalty assessments cannot be disturbed unless the taxpayer establishes to our reasonable satisfaction that the assessments were wrong and that a different outcome – most obviously a different rate of penalty – was appropriate.

10. As it happens, we do not think Banksia has established the shortfall penalties were imposed at the incorrect rate. In written submissions, Banksia’s counsel argued a lower rate of penalty was appropriate because - at worst - Banksia had simply misunderstood its obligations in the way it dealt with the taxable supplies it was making. Our findings on the GST question do not assist Banksia in making that argument. We concluded it was impossible to make a finding about precisely how Banksia was making taxable supplies in circumstances where the evidence about its business was in such an uncertain state. The evidence, such as it is, does not support a finding on penalties that Banksia merely failed to take reasonable care when it described and accounted for the taxable supplies. We are also unable to identify a basis for disputing the Commissioner’s conclusion that Banksia intentionally disregarded the law when it recorded and accounted for some sales in 2017.

11. The Commissioner also imposed a 20% uplift in the base penalty rate in the quarterly periods after the first period under review. Where a base penalty amount has been imposed in an earlier period, the uplift may be imposed in subsequent periods where the same error has been identified pursuant to section 284-220(1)(c) of Schedule 1 to the Administration Act. Where the taxpayer has taken steps to prevent or obstruct the Commissioner from finding out about the shortfall or the conduct which led to it, section 284-220(1)(a) of Schedule 1 to the Administration Act says the uplift may be imposed even if the base penalty had not previously been applied.

12. Banksia has not demonstrated why the uplift assessments were wrong and should have been made differently. We are also not satisfied Banksia has established it should receive a 20% reduction in penalty as a consequence of a voluntary disclosure.

13. Having expressed our view about the appropriate rates of the administrative penalties that apply to Banksia, it remains for us to consider whether any part of those penalties should be remitted pursuant to section 298-20 of Schedule 1 to the Administration Act. As it happens, the Commissioner decided on objection that he was content to remit the uplift on the shortfall penalties assessed at 50% (but not on the shortfall penalties assessed at 75%). The Commissioner referred to an administrative policy that looks more favourably on applicants who are the subject of multiple penalty assessments at the rate of 50% or less on the same day. We have no reason to reach a different view. We are not aware of any other good reason for remitting the balance of the penalties that were assessed against Banksia.

14. As a result of our decision in relation to varying Banksia’s GST shortfall amount to deal with a double counting error, we accept that this results in reduction of Banksia’s shortfall penalty for the relative periods to $68,709.80.

    Ms Zhang and Mr Huang

15. What of Ms Zhang and Mr Huang? In both cases, the Commissioner elected to impose a penalty at the rate of 75%. Ms Zhang was also subject to a 20% uplift in the 2016 year of income pursuant to section 284-220(1)(c) of Schedule 1 to the Administration Act.

16. Both Ms Zhang and Mr Huang argued substantial amounts of money passing through their accounts were properly characterised as gifts. On that basis, we were told, the monies were not assessable income. The Commissioner thinks the monies were sourced from Banksia. The Commissioner invited us to infer Ms Zhang and Mr Huang were being dishonest. Either the monies were genuinely the product of gifts from friends or family, or Ms Zhang and Mr Huang were intentionally misrepresenting what occurred. We were not persuaded by the explanations provided by Ms Zhang and Mr Huang. We did not need to go further and expressly conclude they were intentionally flouting the law, but we do not have any basis for saying the rate of penalty was wrong or inappropriate. We also have no reason for disturbing the Commissioner’s conclusion that Ms Zhang be subject to a 20% uplift in the 2016 year of income.

17. The applicants’ counsel suggested we should have regard to the backgrounds of Mr Huang and Ms Zhang when considering whether the administrative penalties, or some portion of them, should be remitted. While they both might have operated outside the mainstream of the business community and Ms Zhang in particular experienced a language barrier, we are not satisfied there is anything in their backgrounds or circumstances that suggest remittal would be appropriate.

18. As a result of our decision in relation to varying Ms Zhang and Mr Huang’s income tax shortfall amounts for the relevant periods to deal with the a double counting error, we accept that this results in a reduction of Ms Zhang’s penalties to $18,620.47 and $12,983.13 for the 2015 and 2016 income years respectively and Mr Huang’s penalty to $6,549.93 for the 2016 income year.

19. In those circumstances, while we accept the objection decisions with respect to the penalty assessments for all three applicants should be varied to allow for the correction of the double counting error already discusses, the objection decisions must otherwise be affirmed.

    DECISION

20. The objection decision as it relates to the amended assessments for the 2015 and 2016 years of income for Banksia is affirmed.

21. The objection decisions as they relate to:

    (b)Banksia’s amended Goods and Services Tax assessments for the period 1 July 2014 to 30 June 2017;

    (c)Ms Zhang’s amended assessments for the 2015 and 2016 years of income;

    (d)Mr Huang’s amended assessment for the 2016 year of income; and

    (e)the quantum of associated penalties;

    are varied to amend the double counting error and are otherwise affirmed.

22. The objection decisions to impose and not remit administrative penalties are affirmed.

I certify that the preceding 92 (ninety-two) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Member D Mitchell

....................................[sgd]....................................

Associate

Dated: 10 July 2020

Date(s) of hearing:	5 and 12 June 2020
Date final submissions received:	11 June 2020
Counsel for the Applicant:	Mr M Bennett
Solicitors for the Applicant:	Juris Cor Legal
Counsel for the Respondent:	Ms N Apkarian
Solicitors for the Respondent:	Australian Tax Office