Chang v Commissioner of Taxation

[2013] AATA 661

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(Decision by: Deputy President S E Frost)

Chang
v Commissioner of Taxation

Tribunal:

Member:
Deputy President S E Frost

Subject References:
amended assessments for four income years
Commissioner's opinion that there was evasion in three of those years
administrative penalty imposed at 50 per cent for recklessness
taxpayer's burden of proof
Tribunal satisfied no evasion in the three income years
objection decisions set aside and objections allowed in full
taxpayer establishes excessiveness of fourth amended assessment
objection allowed in part
administrative penalty remitted in full

Legislative References:
Taxation Administration Act 1953 - s 14ZZK; s 284-75; s 284-90; s 298-20
Income Tax Assessment Act 1936 - s 170

Case References:
Gauci v Federal Commissioner of Taxation - [1975] HCA 54; 135 CLR 81
Federal Commissioner of Taxation v Dalco - [1990] HCA 3; 168 CLR 614
Danmark Pty Ltd v Federal Commissioner of Taxation; Forestwood Pty Ltd v Federal Commissioner of Taxation - (1944) 7 ATD 333
Nguyen and Commissioner of Taxation - [2011] AATA 544
Commissioner of Taxation v SNF (Australia) Pty Ltd - [2011] FCAFC 74
Davis v Federal Commissioner of Taxation - [2000] FCA 44
Imperial Bottleshops Pty Ltd v Federal Commissioner of Taxation - 91 ATC 4546
McCormack v Commissioner of Taxation - (1979) 143 CLR 284
Miro v Fu Pty Limited - [2003] NSWSC 1009

Hearing date: 24-28 September and 2-3 October 2012
Decision date: 29 August 2013

Sydney

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Decision by:
Deputy President S E Frost

REASONS FOR DECISION

INTRODUCTION

1. 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:

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High Trade Company Pty Ltd (High Trade Company);

•

High Trade Constructions Pty Ltd (Constructions);

•

Resort Hunter Valley Pty Ltd (RHV).

2. This particular applicant, Song Chang, was an employee of the High Trade group. The other taxpayers are Li Zhang, who was a director and, it seems, the controlling mind of the companies in the group; his brother, Lian Zhang; and Tao Bai, who was married to Li Zhang.

3. 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 taxpayers. The taxpayers objected against the amended assessments. While in some cases the Commissioner allowed their objections in part, the amended assessments were largely upheld. The taxpayers have sought review of the objection decisions in this Tribunal.

4. 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. The last of those spreadsheets were provided to the Tribunal in April 2013. They provide a degree of assistance in unravelling the complexities of these applications.

THE ISSUES

5. The main question for the Tribunal is whether Mr Chang 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.

BACKGROUND

6. Mr Chang was employed by the High Trade group from 1998 to June 2006. He worked as an employee of High Trade Company from 1998 until May or June 2005, and RHV from July 2005 to June 2006. He described his duties as "budget control and accounting" ^[1] . He also said he was responsible for wages, some payments and most of the international transfers for High Trade Company.

7. He claims to have worked in excess of 12 hours a day, which, he says, rendered it impossible for him to have an additional job or to earn additional income.

8. Mr Chang's tax returns, as lodged for the years involved in this dispute, disclose the following:

9. Notices of assessment issued, in respect of each of those years, in accordance with the returns as lodged.

10. However, after the Commissioner's audit, Mr Chang's taxable income was re-assessed to the following amounts:

•

For the 2003 year - $109,499 ^[6] ;

•

For the 2004 year - $144,865 ^[7] ;

•

For the 2005 year - $217,172 ^[8] ;

•

For the 2006 year - $402,242 ^[9] .

11. Notices of amended assessment issued on 8 April 2009 to reflect those amounts of taxable income. The total further tax sought from Mr Chang on the basis of the amended assessments was almost $400,000 ^[10] . Administrative penalty was also imposed, at the rate of 50 per cent for recklessness ^[11] .

12. The amended assessments for each of the 2003, 2004 and 2005 years would have been out of time, unless the Commissioner was of the opinion that there had been fraud or evasion: s 170 of the Income Tax Assessment Act 1936 (ITAA 1936).

13. It seems that, by April 2009, when the amended assessments were made, the Commissioner suspected that evasion was involved, but he had formed such an opinion, in a formal sense, only in relation to the 2003 and 2005 years, and not in relation to the 2004 year ^[12] . On that basis the amended assessment for 2004 could not be sustained, and Mr Chang's objection against it was eventually allowed in full (as was the objection against penalty for the 2004 year) ^[13] . Notice of a second amended assessment for 2004 was issued on 16 November 2009 ^[14] , with that assessment reinstating the taxable income of $32,397, as originally declared in Mr Chang's tax return. However, on 19 November 2009, the Commissioner formed a further, formal opinion that evasion was involved in the 2004 year ^[15] , and a third amended assessment was made. Mr Chang was served with notice of that third amended assessment on 13 January 2010, with the taxable income specified as $144,865 ^[16] .

14. Mr Chang objected against the assessments. Unfortunately there was some ambiguity in the objections, which led to uncertainty as to which of the assessments were being disputed. The Commissioner ultimately formed the view (with which I agree) that Mr Chang's objection dated 12 February 2010 ^[17] related to:

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the amended assessments for 2003, 2005 and 2006 (see [10] above);

•

the first amended assessment for 2004 (see [10] above); and

•

the assessments of penalty for each of the years 2003, 2004, 2005 and 2006.

15. The objections against the 2003, 2005 and 2006 amended assessments were allowed in part.

16. The objection against the first amended assessment for 2004 was allowed in full, since the requisite opinion as to evasion had not been formed by the time the amended assessment was made (see [13] above).

17. The objection decisions in relation to penalty reflected the decisions in relation to the primary tax: the objections were allowed in part for 2003, 2005 and 2006, and allowed in full for 2004.

18. Mr Chang lodged a later objection against the third amended assessment for 2004. That objection was allowed in part.

19. Mr Chang remains dissatisfied with that overall outcome. He has made two applications to the Tribunal for review of the objection decisions. His applications are dated 28 September 2010 (the First AAT Application) and 11 March 2011 (the Second AAT Application).

20. The First AAT Application seeks review of the objection decisions summarised at [15] and [17] of these reasons. It has the following Tribunal file numbers:

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2010/4195 - relating to the 2003 year;

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2010/4196 - relating to the 2004 year;

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2010/4197 - relating to the 2005 year; and

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2010/4198 - relating to the 2006 year.

21. The Second AAT Application seeks review of the objection decision summarised at [18]. It has Tribunal file number 2011/0902.

22. It is clear that file number 2010/4196 was created in error, since there is nothing in the Commissioner's objection decision (allowing in full the objection against the first amended assessment for 2004 and the assessment of penalty for 2004) with which Mr Chang could possibly be dissatisfied. In reality, the "live" applications in the Tribunal are 2010/4195, 2010/4197, 2010/4198 and 2011/0902.

WHY DOES MR CHANG SAY THE AMENDED ASSESSMENTS ARE EXCESSIVE?

23. Paragraph 24 of Mr Chang's affidavit, affirmed on 2 April 2012 ^[18] , encapsulates his case:

The grounds of my objection are that, apart from wages and rental income, which I had already declared in my tax returns, none of the other deposits to my accounts were income, but were transfers between my accounts, repayments of expenses or repayment of loans which I had made to others. ...

24. Later in his affidavit he said:

...

[39] I used my personal credit facilities like credit cards and home loan to finance and support my employer from time to time. I did not and do not have any other extra source of income apart from the ones just mentioned, the income from which was declared.

[40] I worked with Mr Li Zhang, who was director of High Trade Company Pty Ltd. I had worked for Mr Zhang since 1995 in China. I always consider Mr Zhang is a very respectable business man and hard working person. Over the years, we built up a friendship. Loyalty, honesty and dignity are important to our nation. When the company expanded its business in Australia, all employees were working together and most of them sacrificed a lot personal resources including personal credit facilities (such as personal credit card and personal loan) to the company in order to make the business successful. I often withdrew cash from my credit card and savings account to meet expenses of the Company or to otherwise lend to the Company in order to assist the Company's tight cash flow from time to time. There were no written agreements. The loans were for short periods, months or up to about a year for temporary use. The amounts were small and I was confident that the employer would return my loan whenever the company's cash flow was available.

[41] I often got my loan back from my employer, by way of re-imbursement from High Trade Company or its associated companies such as Hightrade (sic) Construction Pty Ltd, also a building company, or even from Mr Li Zhang personally upon my request and when the Company was not in position to repay me. The basic agreement was that the Company would pay any associated financial expenses for the money I loaned to the Company in addition to the principal amount. For example, if I withdrew cash from my personal credit card, I High Trade Company or its nominated company would pay the bank fees and interest charges for the cash I withdrew. I did not request any margin for the cash I loaned to the company as I was proud of and happy to support Mr Zhang's business and took the opportunity as an honour to myself. To my best knowledge, the companies including High Trade Company normally recorded any individual loan as a director loan only in the accounting book. I was not aware exactly how Mr Zhang or the company recorded the director loan transaction.

[42] I remember that on one occasion, I cannot remember the exact date, time and transaction details, I requested the repayment of my loan because I needed funding. The account staff of the Company looked up the Director Loan ledger and gave it to Mr Li Zhang and clarified my loan amount before returning the loan to me. I had a conversation with Mr Li Zhang in words to the effect as follows:-

[43] Zhang looked at the Director Loan and said: "Oh, this was the loan you were referring to, that's OK; I will arrange you get reimbursed, no problem."

[44] Zhang further said to me: "All individual loans are recorded as Company's Director loans and the accounting record did not reflect the individual person's loan. I have to prepare a separate record for each individual loan, otherwise, and it gets too messy in the company account."

...

25. He claims to have been hampered in establishing his case by the fact that documents (mostly, it seems, the business records of the High Trade group) which he would like to rely on were seized by the Australian Federal Police when search warrants were executed at various premises, including his own place of residence, in April 2009, a matter of days after the issue of the notices of amended assessment referred to in [11] above. Nevertheless, his affidavit deals extensively with the deposits identified by the Commissioner and seeks to explain the great bulk of them, either individually or in categories.

RESOLVING THE DISPUTE

26. It is neither feasible nor necessary for me to refer to every single deposit to determine the dispute between Mr Chang and the Commissioner, although I note that Mr Chang attempted to provide an explanation for virtually every deposit taken into account by the Commissioner. Instead, I will start by providing detailed reasoning in relation to a restricted number of deposits for the earlier years (2003, 2004 and 2005) where evasion has been alleged by the Commissioner. From that position it will become clear whether the amended assessments for the 2003, 2004 and 2005 years can be sustained and, if so, to what extent. I will then deal with the deposits for the 2006 year.

27. No doubt for pragmatic reasons, the Commissioner's counsel, Mr Kasep, questioned Mr Chang only on a limited number of particular deposits. That was done on the basis, as Mr Kasep put it, that he had identified those particular deposits as "in many respects, indicative of the range of deposits that are in issue" ^[19] .

THE EVIDENCE

28. Mr Chang had affirmed an earlier affidavit on 8 March 2010 ^[20] which was provided to the Commissioner in support of his objection against the various amended assessments. The position that he took at that time, and the explanations he gave for the many deposits to his bank accounts, are materially the same as those in his affidavit of 2 April 2012.

29. To the extent that Mr Chang's objection was disallowed, it was in many cases because of his failure to satisfy the Commissioner, on the balance of probabilities, that his assertions as to the sources of and the reasons for the deposits should be accepted. A significant factor was the perceived inadequacy of the High Trade business records. For example, the Commissioner's position was that, if Mr Chang's claims about having made loans to the High Trade companies were truthful, then the Commissioner would have expected to see ledger entries in the company records to reflect the loans. But entries of that kind were entirely, or almost entirely, non-existent, with the result that Mr Chang's claims remained largely uncorroborated.

30. The first example that Mr Kasep focused on was a deposit of $9,726.69 on 10 October 2002, included in the amended assessment for 2003 ^[21] . Mr Chang's explanation was that the deposit represented the repayment of money that he had lent to Li Zhang, for the use of High Trade Company, on 12 September 2002.

31. Mr Kasep pointed out to Mr Chang that there is no entry in the High Trade ledgers to reflect what he says is the loan he made to the company, and asked him if he could explain why that was so. He replied ^[22] :

Like I said, Mr Zhang kept a separate ledger for the loan he borrowed from individual, and he give the instruction how to record the loan in the High Trade Company book. That's my understanding. How the High Trade Company exactly detailed transaction I'm not - because just one account is called direct loan. [The external accountant] kept a separate meeting with Mr Zhang each month that Mr Zhang review the ledger, but I'm not that part - I never attend those. So how they record the direct loan in High Trade or other company's book I'm not know - I don't know exactly what happened. But as far as I concern, I got request from Mr Zhang. He said, "Do this one for me for the company," and I did as he instruct, then I record this one is a loan to High Trade Company and Mr Zhang. Because in our culture, normally we deal with the person. Mr Zhang was the director of the High Trade Company and he represent High Trade Company, so we lend money to Mr Zhang, that mean we lend money to the company. That's how our - how we define that transaction.

32. Mr Kasep explored further ^[23] :

Well, you say that this was a loan to the High Trade Company, so put to one side loans made to any individual. If a loan was made to the High Trade Company, why would not one ordinarily expect to see an entry in the general ledger recording that loan?---That part I don't - I do not know because, I stated before, Li Zhang kept a separate ledger, and also he had the reconciliation with the accounts separately, which I didn't not participate in. I don't know how they record in the company book, but definitely I had the record between me and Li Zhang.

33. Mr Chang explained that the "record" that he himself kept comprised his own bank statements and credit card statements ^[24] . He could track what he had withdrawn, and that represented a loan that he had taken from the bank. As he said ^[25] :

Until this loan clear - until this credit card clear, that mean High Trade Company owe me that money.

34. What is clear from the bank statements is that Mr Chang took a cash advance of $5,000 on his ANZ credit card on 12 September 2002, and the bank charged him a $75 cash advance fee on that day, and a "credit charge - cash" of $61.64 on 6 October 2002 ^[26] . Also on 12 September 2002, he took a cash advance of $4,480.99 on his Westpac credit card, and the bank charged him a $50 cash advance fee on that day, and "interest charges - cash" of $59.06 on 27 September 2002 ^[27] . The deposit of $9,726.69 on 10 October 2002 to his CBA savings account equals - exactly - the sum of all those amounts.

35. True it is that Mr Chang has not been able to show entries in High Trade's accounts to reflect what he says are loans that he advanced to the company. But that is a shortcoming in the company's record-keeping, not his.

36. There are some company records in relation to this amount, but they are confusing. There is a High Trade Company document labelled "Recipient Created Tax Invoice", dated 9 October 2002, and which contains the words "Exp. remibursement" (sic) with the following details ^[28] :

37. Those amounts total $9,726.69. The amount of GST shown on the so-called "Recipient Created Tax Invoice" is $0.00.

38. There is no rational explanation for the generation of a "Recipient Created Tax Invoice" in circumstances such as these. But it appears to be a document designed to reflect a monetary outflow from the company - in this case, on Mr Chang's version, a reimbursement or repayment to him. (Mr Chang explained that the accounting program MYOB printed the information onto a "Recipient Created Tax Invoice" template even though that is not, strictly speaking, the proper type of document to reflect what happened. ^[29] ) The first two entries in the document equal the sum of the two cash advances that Mr Chang took on 12 September (with the High Trade document suggesting, as Mr Chang confirmed in his oral evidence ^[30] , that he made an overseas transfer of the money he withdrew). His explanation that he lent money to his employer, and that the employer paid him back the amount that he lent, plus the charges that the bank imposed on him, is not only plausible, but is also not inconsistent with the documents he has been able to provide. I accept his explanation.

39. I also accept his explanation for a deposit of $1,200 to his CBA savings account on 13 November 2002 ^[31] . This, he said, was reimbursement of a payment that he made on behalf of High Trade Company to a person he described as a union representative and a consultant to Constructions. Mr Chang said this person "could be very aggressive and unreasonable from time to time" ^[32] . Apparently drunk and in a pub in Wollongong, this gentleman called High Trade's financial manager, Mr De Vito, seeking early payment of an invoice, with implied threats of violence if payment was not made. Mr De Vito called Mr Chang, who called Mr Li Zhang. Mr Zhang instructed Mr Chang to make the payment immediately. Mr Chang withdrew $600 cash from each of two bank accounts and travelled to Wollongong with Mr De Vito to hand over the money. The company reimbursed him later the same day.

40. Mr Kasep noted that this union representative had not been called to give evidence in support of Mr Chang's version of events. Mr Chang replied that he did not know where the man could be located - "maybe in the prison", he said, and "he went to the prison before. He involved with drug dealing. That's what I heard." ^[33] As for Mr De Vito's failure to give evidence, Mr Chang explained ^[34] :

Since the company collapse, all the employees investigate by the ATO. Everybody was scared. I tried to some of them, but nobody willing to testify for us, because they afraid ATO will looking for trouble for them.

MR KASEP: Well, what would have prevented you from having a summons issued to Mr De Vito to come and give some evidence?---I thought this was enough for me, at that stage, so I didn't think that way. Because, from what I reading, I can provide the source of fun[ds] and the record of company payment, I thought that would be enough to demonstrate that's a reimbursement from the company and that was not my income. So I thought that was enough.

41. I am satisfied with that explanation.

42. Next there is a deposit of $40,000 to Mr Chang's CBA cheque account on 5 July 2002 ^[35] . Mr Chang's explanation is ^[36] :

The purpose of the deposit in the sum of $40,000 was to transfer the sum of US$22,100 (which was equivalent to AU$39,817.24) to Asian Union Development Pty Ltd. As I already stated in my affidavit sworn on 8 March 2010 in page 9 (T10-210), the $40,000 was given to me by High Trade Company for me to transfer the sum of US$22,100 overseas and the balance of $182.76 was used as petty cash for the company.

43. In his 8 March 2010 affidavit he had said ^[37] :

My specific instruction from the company was to hold the sum of $40,000 on Friday 5 July 2002 and organising the telegraph transfer of USD22,100 to Hong Kong Asian Union Development Ltd on the following Friday, 12 July 2002. ...

44. The reason for this, he said, was that on the day appointed for the overseas transfer, 12 July 2002, the signatories to the High Trade bank accounts would all be out of the country. If any problem arose with the bank at the time of requesting the transfer, no-one of authority would be available in Australia to resolve the problem. But if Mr Chang were the account holder, and any problem arose, he would be able to resolve it on the spot, and the transfer would go through on the specified day. This, he said, had been discussed with Mr Li Zhang just before the transfer of the $40,000 into Mr Chang's account.

45. In his affidavit ^[38] , and then again in cross-examination ^[39] , Mr Chang denied any relationship with the Asian Union Development company. I accept his evidence. That means that I reject the logical alternative to his version - namely, a payment to him in the nature of income, followed by a transfer of that amount overseas, for his benefit.

46. Next Mr Kasep asked Mr Chang about a deposit of $26,000 to his CBA cheque account on 18 December 2002 ^[40] . This, he said, was a repayment of money that he had lent to Mr Lian Zhang - $15,000 in 2000 and $10,000 in 2001 - plus $1,000 as partial compensation for the bank fees that he incurred in the interim. He explained in his affidavit ^[41] :

He asked me for the loans. I knew him since 1995 or 1996 in China, we had worked together for over 6 years, we shared the same rental apartment for 4 years when I arrived in Australia and also I was the employee of his brother, Mr Li Zhang. He paid me back $1,000 more in respect of fees and interest from my credit card withdrawal. The amount of $1,000 did not cover my cost of credit card withdrawal, but I accept that fact as I believe this is worth the friendship. I'm happy to see his success in his business as he worked very hard in a foreign country since he came to Australia.

47. Some may find this loyalty, this willingness to help a friend, unusual - particularly in circumstances where the helper appears to be less well off than the helped. Mr Kasep sought more information ^[42] :

What motivated you to then withdraw this money from your own credit card and provide it to Mr Zhang?---We were new to this country, and we came here with hope to do something more exciting and try to get better life than back in China. We all excited, and we will do anything to make our more success than in China. Friends support each other. That's how the culture is, especially - we live together - share the accommodation, sorry, and we talked about - looks like every day English country is brand new for us. It's very exciting, and we - if he already had found the way to do the business, and I'm happy to support him, and I'm sure he will pay me back, not only the money if he is success, he will pay me many, many thing - many other ways. That's how this culture made me - - -

MR KASEP: You said that he would repay you in many other ways. I'm asking how?---How, such as he can - for example, he can employ me, give me job, or he say, "We can be a partner. We do the business together," or he can say, "You do the subcontract for me. I give you all my job if I success." That's many, many [... indecipherable ...] on the new immigrant to this country. It's normal. If I success in another way, I will look after him. If I run the business - run the construction company, I will give him more job. If I do the development, they will help me do this job. That's called repayment. We're not the - just a physically - I loan you $10, you must pay me $15. It's fine. I give you $10. You pay me $10. That's no problem. But he will remember, when he in the difficult situation, I gave him support by $10. He will repay me by other means more than $10 to me. That's the Chinese culture.

48. It is not my task to judge whether Mr Chang's approach is a wise one. My task is to make findings as to whether the factual scenarios that Mr Chang has painted are the ones that existed. In other words, did he, in the circumstances that I have detailed, lend money to the Zhang brothers, which was later repaid to him? Did he pay the $1,200 to the "union representative" and then have it reimbursed by one of the High Trade entities? Did he accept a deposit from High Trade into his bank account so that an overseas transfer to Hong Kong could proceed smoothly? Before answering those questions, I should say something about the taxpayer's burden of proof.

THE TAXPAYER'S BURDEN OF PROOF<

49. Under s 14ZZK of the TAA a taxpayer has the burden of proving that an assessment is excessive.

50. The Commissioner provided very detailed and helpful written submissions on this issue. Those submissions correctly point out that there is no obligation imposed on the Commissioner to show that an assessment can be sustained or supported by evidence: Gauci v Federal Commissioner of Taxation [1975] HCA 54; 135 CLR 81. It is also the case that the Commissioner is entitled to "rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment": Federal Commissioner of Taxation v Dalco [1990] HCA 3; 168 CLR 614 at 624 per Brennan J.

51. In Danmark Pty Ltd v Federal Commissioner of Taxation; Forestwood Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333, Latham CJ said at 337:

... upon an appeal the onus rests upon the taxpayer of establishing the facts upon which he relies and if it is necessary for him to establish a particular fact in order to displace the assessment he must satisfy the Court with respect to that fact.

52. In assessing the evidence of a taxpayer, the Tribunal must acknowledge, as Senior Member O'Loughlin did in Nguyen and Commissioner of Taxation [2011] AATA 544 at [7], that the evidence of witnesses who have interests that turn on whether that evidence is accepted needs to be approached critically, and will necessarily be the subject of careful scrutiny. The Senior Member referred to Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74 and Davis v Federal Commissioner of Taxation [2000] FCA 44 in support of those propositions. But that is not to say that evidence that may be described as "self-serving" should necessarily be disbelieved (Imperial Bottleshops Pty Ltd v Federal Commissioner of Taxation 91 ATC 4546 at 4552, per Hill J) or should be regarded as "prima facie unacceptable" (McCormack v Commissioner of Taxation (1979) 143 CLR 284 at 302, per Gibbs J).

Fraud or evasion

53. A taxpayer who asserts the absence of fraud or evasion ^[43] also bears the burden of proving that absence. In that respect it is helpful to recall Gleeson CJ's explanation in R v Meares (1997) 37 ATR 321 at 323:

Although on occasion, it suits people for argumentative purposes, to blur the difference, or pretend that there is no difference, between tax avoidance and tax evasion, the difference between the two is simple and clear. Tax avoidance involves using, or attempting to use, lawful means to reduce tax obligations. Tax evasion involves using unlawful means to escape payment of tax. Tax avoidance is lawful and tax evasion is unlawful. Although some people may feel entitled to disregard that difference, no lawyer can treat it as unimportant or irrelevant. It is sometimes said that the difference may be difficult to recognise in practice. I would suggest that in most cases there is a simple practical test that can be applied. If the parties to a scheme believe that its possibility of success is entirely dependent upon the revenue authorities never finding out the true facts, it is likely to be a scheme of tax evasion, not tax avoidance.

54. To the extent that Mr Chang relies on his contention that the Commissioner was out of time to make the amended assessments, he must satisfy me that there had been no evasion in the relevant years.

ANALYSIS

55. My task of assessing Mr Chang's evidence was significantly assisted by the opportunity to observe him for almost three days in the witness box. Mr Kasep's questioning was forceful and persistent. Mr Kasep was, understandably, sceptical of many of Mr Chang's explanations, and he vigorously probed many of the answers Mr Chang gave. I, too, was initially surprised by some of the explanations Mr Chang offered, and on several occasions I asked him to elaborate.

56. Ultimately I gained the impression that Mr Chang was an honest and straightforward witness. Indeed, to the extent that documents were available to throw light on the facts, those documents tended to support, or at least not to contradict, Mr Chang's assertions.

57. One particular factor that weighs in Mr Chang's favour is that he was open enough to acknowledge that, of the almost 150 deposits on which the Commissioner had based the amended assessments, he could offer no specific explanation for eleven of them ^[44] . He had addressed most of the deposits in detail and had provided explanations when he could. But he did not embellish his case by fabricating explanations when he had none.

58. Given my assessment of Mr Chang's evidence, I can now answer the representative questions I posed for myself in [48] of these reasons. The response to each question is "Yes".

59. Furthermore, I am satisfied that there has been no evasion in this case. Common examples of evasion are the deliberate non-disclosure or understatement of a person's income, or the disguising of a person's income as something other than income. In Mr Chang's case there is nothing even remotely approaching evasion present. Plainly, there were significant deposits to his bank accounts, at levels that did not reconcile with the amounts of income Mr Chang had declared in his tax returns. It is not surprising that the Commissioner, having asked questions but received no adequate responses to them, took the view that the deposits could only be explained on the basis that they represented Mr Chang's undeclared income. That is a reasonable foundation for the forming of an opinion that there had been evasion. But I am satisfied that the explanations Mr Chang has now given undermine the foundation.

60. As a result the amended assessments for the 2003, 2004 and 2005 years are excessive, since they cannot be supported by s 170 of the ITAA 1936. The objection decisions in respect of those years will be set aside, and I will substitute in each case a decision that the objection is allowed in full.

61. But the amended assessment for 2006 is in a different category. To satisfy me that there is no evasion present is not equivalent to proving that the assessment is excessive. Rather, Mr Chang must establish not only that the assessment is wrong, but also how it can be made right: in practical terms, which of the bank deposits do not form part of his assessable income? It is convenient to deal with them by category; I will use the category headings employed by the Commissioner in his spreadsheet.

"Reimbursements Only"

62. There are ten deposits on page 2 of the Commissioner's spreadsheet. Mr Chang deals with three of them in paragraph 198 of his affidavit of 2 April 2012, as follows:

I refer to T-documents T10-620, T10-630, and T10-644. I made payment on behalf of Resort Hunter Valley for $217 for the Parking for High Trade Company and also the Groceries of $115.35 for the Office. (T10-620) I got re-reimbursement on 1 September 05; I claimed $677.50 (T10-630) in total to Resort Huntervalley Pty Ltd on 1/11/05, and also I claimed Car Service expenses $478.69 (T10-644) to the company, I provided the invoices to the company when I claimed reimbursement. ATO carried out the search warrant and took all the original documents, and all the company record was in very good order and easy to find the year and invoice. The Commissioner disallowed all of those claims but saying I don't have the proper tax invoice to support the claim. It is impossible for me to have invoice as those invoice is in their possession. In any event, I did not keep the invoice and gave to the employer upon my claim. The only invoice in my possession after the search warrant, certain files were left at the company unattended and I was able to keep some, but those invoice requested by ATO, was not at the company, it was taken by ATO during the search warrant.

63. Some of the Tribunal documents that he refers to are identical in nature to the "Recipient Created Tax Invoice" described in [36] of these reasons. Despite the reservation expressed in [38] about the appropriateness of a Recipient Created Tax Invoice where employee expenses are reimbursed, I am satisfied that in these three cases the amount received by Mr Chang did indeed represent a reimbursement of company expenses that he paid for.

64. Deposits of $966.00 and $390.00, dealt with on pages 86 and 87 of Mr Chang's affidavit, are no different in principle. They do not form part of Mr Chang's assessable income.

65. As far as the deposit of $2,477.68 on 25 November 2005 is concerned, I accept Mr Chang's explanation at T10-274/275 that this amount represents partial repayment of loans to Constructions.

66. The remaining four deposits are explained at paragraphs 208, 214 and 225 of Mr Chang's affidavit. The clear pattern that emerges is that Mr Chang used his credit cards to meet expenses incurred by one or other of the High Trade companies and that, eventually, he received reimbursement of the amounts he had paid. I am satisfied that none of these deposits should be included in Mr Chang's assessable income.

"Telegraphic transfer only"

67. There is only one amount in this category ^[45] , and it is an amount that was not deposited into any of Mr Chang's accounts. I do not accept that Mr Chang derived any benefit from the cheque drawn on Constructions' bank account. I accept Mr Chang's explanation that it was probably an amount drawn to cover a telegraphic transfer to Hong Kong. It does not form part of Mr Chang's assessable income.

"Wages"

68. Of deposits totalling $15,200 ^[46] the Commissioner has accepted that $10,840 should not be included, or has already been included, in Mr Chang's assessable income. A further $3,462.56 (T10-269/270) represents expenses of RHV, paid for by Mr Chang and reimbursed. The remaining $897 is not accounted for. This needs to be included in Mr Chang's assessable income.

"No explanation"

69. The amount of $6,197 ^[47] is not accounted for. This needs to be included in Mr Chang's assessable income.

"Rebates on property purchases"

70. Mr Chang says that deposits of $80,000 and $110,000 to his bank accounts ^[48] represent rebates on the purchase price of two properties that he purchased from the High Trade group.

71. One of the properties is an apartment in a development in the suburb of Chippendale. The contract, dated 21 November 2005 ^[49] , shows a selling price to Mr Chang of $400,000. However, a letter addressed to Mr Chang from JKC Developments Pty Limited (apparently a company in the High Trade group), and dated 15 November 2005 ^[50] , is in the following terms (without correction):

As discussed, we are pleased to offer you discounted price for you to purchasing above unit in Hightown project, subject to the below terms and conditions.

We confirm the following:

•

The contract price will be set at face value of $400,000 to be exchanged;

•

The net settlement price is $320,000; Rebate is $80,000.

•

The purchaser agrees to settle the property by end of year 2005.

•

Both parties keep this agreement as confidential.

Other matters will follow the normal term & conditions set out in standard contract for the sale of land.

Thanks for your cooperation.

72. The other property is an apartment in a development in Sylvania. The contract, dated 9 September 2005 ^[51] , shows a selling price to Mr Chang and his wife of $1,100,000. A letter addressed to Mr Chang from HT & LI 2 Pty Ltd (a company in the High Trade group), and dated 30 August 2005 ^[52] , is in the following terms (without correction):

This is to confirm our offer we discussed recently.

The unit mentioned above was priced at $1,100,000 on the market. We appreciated your understanding that due to the recent market downturn and especially the development next our site went into liquidation sale; this caused huge impact to our development selling.

We hereby confirm that the vendor will happy to sell you the unit with $220,000 rebate on net price of $880,000 which including the stamp duty on the purchase providing that you settle the unit by Christmas holiday (23 December 2005).

At mean time, the contract price will be $1,100,000 to exchange to maintain the face value for the development and it will be helpful for you to arrange the mortgage on the purchase.

We will instruct settlement agent to precede the settlement with $880,000 for the settlement once the contract exchanged.

Please keep confidential on above agreement even you decide not to go ahead to purchase the unit. Again, We thanks your cooperation on this matter.

73. The letters quoted in [69] and [70], although unsigned, are consistent with Mr Chang's claim that the vendor (the relevant member of the High Trade group) was prepared to offer him a discount to purchase these two properties. That was achieved not by reducing the selling price as shown in the contract but by giving the appearance of selling the property for the full price and then providing a cheque to the purchaser representing the "discount" or "rebate" amount.

74. Using such a procedure tends to mislead lenders, and purchasers of other units in the development, as to the market value of the property. In Miro v Fu Pty Limited [2003] NSWSC 1009, Windeyer J in the Supreme Court of New South Wales noted that it is "quite improper" to incorporate in a contract a clause allowing a rebate from the purchase price while specifying an undiscounted price on the front page of the contract. Mr Kasep submitted, on the basis of Miro v Fu, that I should not lightly infer that conduct of that kind occurred here. But there is no suggestion that the type of conduct criticised by Windeyer J occurred here. What we have here is not, on the face of it, improper conduct on the part of solicitors in incorporating conflicting pricing provisions in the contract; there is no suggestion that the solicitors were in on the act. This conduct comprised the making of a side agreement, allowing a rebate against the purchase price of a property, where that rebate was not reflected in the contract for sale of the property. The conduct was undertaken by property developers. One hardly expects the conduct of property developers to reach the same high standards as that of solicitors. I accept Mr Chang's explanation that the vendor in each case provided him with an effective discount on the purchase price of the apartment, and that the deposits of $80,000 and $110,000 into his bank accounts represented the payment of those discounts (or half of the discount, in the case of the $110,000; the other half was presumably paid to Mr Chang's wife).

The remaining deposits

75. The deposit of $508.43 is the payment of the minimum monthly amount on Mr Chang's credit card for September 2005. The overall balance of $20,337.20 is made up of a $20,000 cash advance, a cash advance fee of $100, and an interest charge of $237.20. I accept that the $20,000 was a loan to one of the High Trade companies and that the payment of $508.43 was a repayment to Mr Chang in respect of that loan amount.

76. As for the deposit of $500 on 22 June 2006, Mr Chang explains as follows ^[53] :

Seagate Consultancy Pty Ltd was my company. I just incorporated the company at the time. I needed to purchase some office stationery, small furniture etc. I transferred $500 from the company cheque account as petty cash to my saving account for the daily purchase use, which I filed all purchase tax invoice with the company. It is not the taxable income.

77. That is a strange explanation. The amount was paid by Mr Chang's employer to him, for his benefit. In the absence of any evidence that it was provided to Mr Chang as a loan, or that it was repaid to the employer, there is no reason why that should not be treated as part of Mr Chang's assessable income.

PENALTY

78. Administrative penalty was imposed at 50 per cent of the shortfall amount for recklessness: s 284-75 and item 2 in the table in s 284-90(1) in Schedule 1 to the TAA.

79. I am satisfied that there was no recklessness involved.

80. There are three relatively small amounts that I have found should be included in Mr Chang's assessable income for the 2006 year, and which he did not declare when he lodged his tax return for that year. Those amounts have to be included because I am not satisfied that they should not be. At worst, this amounts to a failure on the part of Mr Chang to take reasonable care to comply with the tax law: item 3 in the table in s 284-90(1) in Schedule 1, attracting a penalty of 25 per cent of the shortfall.

81. In the circumstances, given the overwhelmingly satisfactory explanations that Mr Chang has been able to provide in relation to the claims in the amended assessments, even after such a long time, it is appropriate that any penalty that is capable of being imposed should be remitted under s 298-20 in Schedule 1.

DECISION

82. The Tribunal decides:

a.

in matter no. 2010/4195 (relating to the 2003 year) - to set aside the objection decision and to substitute a decision that the objection is allowed in full;

b.

in matter no. 2011/0902 (relating to the 2004 year) - to set aside the objection decision and to substitute a decision that the objection is allowed in full;

c.

in matter no. 2010/4197 (relating to the 2005 year) - to set aside the objection decision and to substitute a decision that the objection is allowed in full;

d.

in matter no. 2010/4198 (relating to the 2006 year) - to vary the objection decision so as to allow the objection in part, as detailed in these reasons;

e.

to remit administrative penalty in full.