Zhang and Commissioner of Taxation (Taxation)
[2016] AATA 117
•2 March 2016
Zhang and Commissioner of Taxation (Taxation) [2016] AATA 117 (2 March 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2011/1548-1552
Re
Li Zhang
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 2 March 2016 Place Sydney 1. Set aside the objection decisions with respect to primary tax, and remit the matters for reconsideration, with a direction that the reconsideration have regard both to the Commissioner’s concessions already made, and to the Tribunal’s conclusions and reasons.
2. Affirm the rate of penalty imposed, but adjust the quantum to reflect (1) above; no remission.
.............................[sgd]...........................................
Deputy President S E Frost
CATCHWORDS
TAXATION – income tax – amended assessments for five income years – whether Commissioners amendments excessive – whether assessments amended within statutory time limit – whether evasion – amended assessments not out of time – objection decisions set aside and remitted – administrative penalty – penalty affirmed – no remission
LEGISLATION
Taxation Administration Act 1953 s 14ZZK
REASONS FOR DECISION
Deputy President S E Frost
2 March 2016
INTRODUCTION
The applicant in this case is one of four taxpayers who are, or were, connected in some way with one or more companies in the High Trade group, including:
·High Trade Company Pty Ltd (High Trade Company);
·High Trade Constructions Pty Ltd;
·Brightfull International Pty Ltd;
·Auschintle Pty Ltd;
·Resort Hunter Valley Pty Ltd.
This particular applicant, Li Zhang, was a director and, it seems, the controlling mind of the companies in the High Trade group. The other taxpayers are Lian Zhang, who is the brother of Li Zhang; Tao Bai, who was married to Li Zhang; and Song Chang, who was an employee of the High Trade group.
Following tax audits that commenced in 2007, the Commissioner formed the view that the taxpayers had understated their income over a period of years. He made a number of amended assessments in relation to each of the applicants. The applicants objected against the amended assessments. While in some cases the Commissioner allowed their objections in part, the amended assessments were largely upheld. The applicants then sought review of the objection decisions in this Tribunal.
The applications were heard consecutively over a period of seven days in September and October 2012. After the hearings, the Commissioner engaged in the time-consuming task of preparing spreadsheets seeking to summarise the adjustments made by the Commissioner in the amended assessments. Those spreadsheets allowed the Tribunal to determine Ms Bai’s and Mr Chang’s applications but not the applications of the other two taxpayers.
In Mr Li Zhang’s case, and following a request from the Tribunal, the Commissioner’s officers undertook a detailed review of the spreadsheet. The officers then engaged with the taxpayer’s representative in an attempt to narrow the items in dispute between the parties. Eventually, when it became clear that the dispute could not be narrowed any further, the parties were invited to make further submissions on their respective positions. Written submissions were provided and then the hearing was resumed on 16 October 2015 so that each party could make oral submissions.
The following reasons set out the Tribunal’s findings and determinations in relation to the areas of dispute that the parties were unable to resolve.
THE ISSUES
The main question for the Tribunal is whether Mr Zhang has shown that the amended assessments are excessive. This is the burden that he bears under s 14ZZK of the Taxation Administration Act 1953 (TAA). A subsidiary question, which will arise if his case falls short to any extent, is whether he is liable to administrative penalties.
The excessiveness of the amended assessments now boils down to a consideration of whether any, and if so which, of 216 identified amounts in the most recent spreadsheet are not properly treated as income in Mr Zhang’s hands. The Commissioner says they are all income, or at least Mr Zhang has not demonstrated on the balance of probabilities that they are not.
Each of the 216 amounts is either:
·an amount deposited to one of Mr Zhang’s bank accounts; or
·an amount included as a reduction in a director’s loan account in Mr Zhang’s name, in the records of High Trade Company, but in excess of the total amount accepted by the Commissioner as having been lent by Mr Zhang to High Trade Company in the first place.
The 216 amounts have been separated into six distinct categories identified by Mr Zhang’s solicitor, Ms Luk. I will deal with each category in turn.
CATEGORY A – TRANSFERS BETWEEN BANK ACCOUNTS
There are now only two amounts in this category and the total amount in dispute is $730. There were additional amounts but they have since fallen away because the Commissioner was able to trace corresponding debit amounts in other bank accounts. For these remaining two amounts Mr Zhang has been unable to produce any documentary evidence to support his claim. As a result I have only his assertion that the money came from other bank accounts in his name. That is not a satisfactory basis on which to make a finding in his favour and I decline to do so.
CATEGORY B – THIRD PARTY PAYMENT: LOAN REPAYMENT TO THIRD PARTY
The amounts in this category represent, according to Mr Zhang, payments that were made, during the 2003 income year, to third parties (but for his benefit) as repayments of amounts that he, Mr Zhang, had previously lent to the High Trade group.
The Commissioner has accepted that Mr Zhang lent $793,939.35 to the High Trade group over a period of time. There was some generosity involved in that acceptance since it is not entirely clear that the money was actually the subject of a loan arrangement between the parties rather than some other kind of arrangement. Nevertheless, that amount has been accepted – but the Commissioner says that no higher amount can be justified. I agree. Although Mr Zhang asserts that he has actually lent almost $4 million to the High Trade group, the documents that he points to in support of the assertion do not support his case. Some of the additional amounts that he refers to were not actually lent by him but by his wife, Ms Bai, or her company, Brightfull Pty Ltd. Other amounts were lent to Mr Zhang by other individuals but there is no connection that I can find between those amounts and the amounts that, on Mr Zhang’s version, were lent by him to the High Trade group.
Furthermore, Mr Zhang asserts that five amounts dated 28 March 2003, and totalling $1.058 million, were not his income despite the fact that they were recorded in the High Trade general journal as reductions in his director’s loan account. He says that they are payments to High Trade’s solicitor, as repayments of loans made by her. For a solicitor to lend over $1 million to her client with (apparently) no written loan agreement seems extraordinary. And if, as Mr Zhang seems to assert, she had lent the money to the company, why is the claimed repayment to her represented in the company’s records as a reduction in the amount Mr Zhang is owed by the company? I agree with the Commissioner: it makes no sense.
To accept that Mr Zhang lent High Trade any amount greater than the amount accepted by the Commissioner would be to engage in speculation. It is not supported by any of the extensive documentation before the Tribunal. I reject Mr Zhang’s claim. It follows that he has failed to establish that the assessment for 2003 should be reduced by any of the amounts in category B of the spreadsheet.
CATEGORY C – TAXPAYER PAID EXPENSES ON CREDIT CARD AND COMPANY PAID CREDIT CARD BILL
There are 17 amounts in this category. Mr Zhang could make good his case by showing (a) that a supplier issued an invoice to a High Trade company for goods or services; (b) that Mr Zhang paid for the invoice on his credit card; and (c) that the company paid Mr Zhang’s credit card bill, or at least paid the amount charged on the supplier’s invoice.
The evidence falls far short of establishing those facts.
Sometimes the company only paid the minimum monthly payment amount required by the card issuer, supplemented many months later by large amounts such as $10,000, $50,000 and $16,000 (spreadsheet lines 39, 40 and 41). That in itself would not present a problem, provided that Mr Zhang could demonstrate that the debits on his credit card were always for company expenditure. If not that, then an accurate breakdown between company expenditure and private expenditure would help. But in either case there would need to be some reliable documentation supporting his claim that specified amounts did indeed represent company expenditure. On the odd occasion there are statements from suppliers, but in the absence of invoices it remains unclear what is being paid for.
The evidence does not satisfy me that the amounts in this category are what Mr Zhang says they are. It follows that Mr Zhang has failed to establish that the assessments should be reduced by any of the amounts in category C of the spreadsheet.
CATEGORY D – CASH ADVANCES FOR COMPANY EXPENSES, WHERE CREDIT CARD BILL PAID BY COMPANY
There are 92 amounts in this category.
The category description itself is confusing. Furthermore, the description conflicts with the way Mr Zhang explained these types of amounts, or at least some of them, to the Commissioner in his notice of objection in May 2010 (T11).
For example, the Commissioner’s counsel Mr Kasep took me to spreadsheet line items 43 and 44, for $38,500 and $40,133.70 respectively. Mr Zhang’s explanation, at T11-281/2, is that the first amount is a part reimbursement of an amount of $40,000 he claims to have transferred to a High Trade account in May 2003, and the second amount is a part reimbursement of an amount of $42,000 he claims to have transferred to a High Trade account in September 2003.
The problem is that, although these are large amounts of money (many of them several tens of thousands of dollars), there is nothing to corroborate Mr Zhang’s assertions. There are no journal entries to support the amounts he says he transferred. Whatever material has been provided by Mr Zhang really takes the matter no further than the arguments he put to the Commissioner at the objection stage, now almost six years ago. There is just no link between any of the amounts transferred either to or from High Trade and any particular transactions that might explain them. I find myself unable to agree that the amounts in this category are what Mr Zhang says they are. There is no reliable basis on which I could accept that these amounts should not be included as Mr Zhang’s income.
CATEGORY E – REPAYMENT TO TAXPAYER OF PREVIOUS LOANS MADE BY TAXPAYER TO THE COMPANY
There are 80 entries in this category, including regular (roughly monthly) payments of $5,500 during some periods, and some very large one-off amounts.
High Trade’s records do not support Mr Zhang’s explanation. There are no journal entries consistent with Mr Zhang’s characterisation of these amounts. Furthermore, when payments of over $400,000 were made in February and March 2006 (spreadsheet line items 200 and 201) there was not enough money in Mr Zhang’s director’s loan account to cover those payments.
Mr Zhang’s inability to establish that he had lent to High Trade anything like the amount he claims (see also [13] of these reasons) undermines any prospect of success with respect to the amounts in this category. Once again, there is no reliable basis on which I could accept that these amounts should not be included as Mr Zhang’s income.
CATEGORY F – PERSONAL LOANS FROM TWO INDIVIDUALS
One of the alleged lenders is Song Chang; the other is Sunny Wu.
Mr Chang has made a statutory declaration dated 23 March 2015 confirming that he lent Mr Zhang $10,000 in March 2003. Mr Kasep objected to my accepting that statutory declaration into evidence because it was tendered so late, but I accepted the tender. I also accept what Mr Chang says in the statutory declaration. As a result I am satisfied that Mr Zhang’s assessable income amount for the 2003 income year should be reduced by $10,000. However, I am not satisfied that the remaining $14,400 is a loan to Mr Zhang. In the absence of a satisfactory explanation there should be no further reduction in respect of category F.
SPREADSHEET LINE ITEMS 215 AND 216
These two line items were dealt with during the resumed hearing, at pages 60-64 of the transcript. In summary, Ms Luk submitted, and the Commissioner agreed, that the position outlined in the objection officer’s reasoning at paragraph 265 (T2-79) and paragraph 326 (T2-91) is correct. Where the parties diverge is that Ms Luk thinks that the objection officer’s conclusions have not been properly taken into account in the amended assessments; Mr Kasep thinks they have.
It is not appropriate for the Tribunal to descend into the level of detail required to determine whether or not the Commissioner has given effect to the objection officer’s conclusions. It is sufficient for me to record that I accept those conclusions as correct. I encourage the Commissioner’s officers to review again whether the conclusions have been reflected in the amended assessments and to make appropriate adjustments to Mr Zhang’s assessments for 2006 and 2007 if they have not.
FINAL ISSUE – ARE THE AMENDED ASSESSMENTS OUT OF TIME?
The amended assessments for 2003, 2004 and 2005 would have been out of time but for the Commissioner’s opinion that there was evasion in each of those years: T4 for 2003 and 2005, and T7 for 2004. The relevant requirements are:
·For the 2003 and 2004 years – that “there has been an avoidance of tax” and “the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion”: the then s 170(2) of the Income Tax Assessment Act 1936 (the 1936 Act); and
·For the 2005 year – that the Commissioner “is of the opinion there has been fraud or evasion”: item 5 in the table in the current s 170(1) of the 1936 Act.
If Mr Zhang satisfied me, on the balance of probabilities, that evasion was not present in any of those years, then the amended assessments would be excessive for that reason.
As I have tried to explain in these reasons, the state of the evidence has left me unpersuaded as to the reliability of Mr Zhang’s explanations of virtually every entry on the spreadsheet. I am not satisfied, on the balance of probabilities, that evasion was not present in those years. The amended assessments are therefore not out of time.
CONCLUSION
Of the items remaining in dispute at the time of the resumed hearing in October 2015, I accept Mr Zhang’s explanation with respect to $10,000 out of the total of $24,400 at line item 214. In all other respects Mr Zhang has failed to satisfy me that the amounts should be removed from the calculation of his taxable income.
DECISION
Because the Commissioner has conceded some amounts since the objection decisions were made, it is necessary to set aside those objection decisions because they no longer represent the correct outcome. I will remit the matters for reconsideration, with a direction that the reconsideration have regard both to the Commissioner’s concessions already made, and to the Tribunal’s conclusions and reasons.
As far as penalty is concerned, the quantum of penalty will fall as a consequence of any reductions in primary tax. Beyond that, however, there will be no further adjustment: the rate of penalty imposed is affirmed. Mr Zhang has provided no grounds for remission and I find that there are none.
I certify that the preceding 36 (thirty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost..............................[sgd]..........................................
Associate
Dated 2 March 2016
Date(s) of hearing 24 September 2012 - 3 October 2012, 16 October 2015 Date final submissions received 21 October 2015 Solicitors for the Applicant Ms R Luk, Luk & Associates Solicitors Counsel for the Respondent Mr B Kasep Solicitors for the Respondent ATO Review and Dispute Resolution
Key Legal Topics
Areas of Law
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Tax Law
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Administrative Law
Legal Concepts
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Appeal
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Remedies
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Penalty
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Statutory Construction
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