OPTIMISE GROUP PTY LTD v FC of T
Members:SA Forgie DP
Tribunal:
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
[2010] AATA 782
SA Forgie (Deputy President)
1. In each of its returns for the years of income ending 30 June 2001, 2002, 2003 and 2004, the Optimise Group (TOG) disclosed a nil taxable income. The Commissioner of Taxation (Commissioner) ascertained its taxable income to be $163,423 (2002), $2,308,526 (2003), $361,865 (2004) and $95,207 (2005) and issued assessments of income tax dated 13 November 2008 on those amounts. He went on to impose administrative penalties when he issued further notices of assessment dated 13 November 2008. Penalties were imposed on the basis of a 75% base penalty amount under Item 1 of s 284-90 of Schedule 1 to the Taxation Administration Act 1953 (TA Act). The Commissioner increased the base penalty by 20% under s 284-220(1)(a) of Schedule 1 to the TA Act on the basis that steps were taken to prevent or obstruct the Commissioner from finding out about the shortfall amounts.[1]
2. TOG objected to the Commissioner's assessments on the basis that, apart from the sum of £3,134, the amounts assessed as taxable income were loans to it. The sum of £3,134 belonged to Technology Plus Pty Ltd. TOG objected to the assessments for the 2002 and 2003 years of income on the basis that the Commissioner had made them after 31 October 2008 and they were invalid. The Commissioner disallowed its objections. TOG now applies to this Tribunal for review of the Commissioner's objection decisions.
3. I have decided that I have power to consider whether the Commissioner issued the assessments for the 2002 and 2003 years of income within the time permitted by s 171A(1) of the Income Tax Assessment Act 1936 (ITAA36). That power lies in my power to decide whether TOG has discharged its burden to prove that the Commissioner's decision is excessive. I have decided that TOG has not otherwise discharged its burden to establish that the assessments for all or any of the four years are excessive on any other grounds and have affirmed the objection decisions dated 3 July 2009.
TOG's grounds of objection
4. TOG objected to the Commissioner's assessments of income tax payable on the three grounds:
- (1) in relation to the assessments for the 2002 and 2003 years, the assessments were not validly made as they were not made by 31 October 2008;
- (2) in relation to the assessments for all four years:
- (a) apart from the sum of £3,134, which TOG asserts is the property of Technology Plus Pty Ltd, the remaining amounts in dispute were loans; and
- (b) amounts of interest it had received were properly accounted for in its taxation returns.
TOG objected to the Commissioner's assessment imposing penalties on the basis that they were not properly imposed.
Background
5. There was no dispute between the parties about events preceding the four years of income in question. I find that Mr Donald McKellar and his wife, Mrs Suzanne McKellar, were the sole shareholders in TOG. They were also the sole shareholders of the shares issued in Technology Plus Pty Ltd (TPP). TPP held 21.25% of the shares in each of two companies incorporated in the United Kingdom: Optimise Information (UK) Limited (OIUK), established in 1994, and Applied Technologies Direct Limited (ATD), established in 1996. OIUK and ATD sold technology reports and ATD also sold computer software packages.
6. Mr McKellar was a director of TOG from 23 April 1991 until 5 May 1998 and was reappointed from 28 January 2003. His son, Mr Matthew McKellar, was a director from 16 April 1992. Mr McKellar was also a director of TPP from 11 July 1980 until 15 September 1997 and has been again since 28 January 2003.
7. Elstron Ltd (Elstron) is a company limited by guarantee and was established on 3 March 1994 on the Isle of Man. On 30 April 1997 and 12 June 1997, TPP transferred the shares it held in OIUK and ATD to Elstron. At that time, Mr McKellar and Mr Matthew McKellar were the sole directors of both TOG and TPP.
8. Butler Direct Limited (Butler), which is an information technology and telemarketing business, was established in the United Kingdom in 1997. On 20 July 1997, Butler allotted 10,625 cumulative preference shares and 10,625 ordinary shares to Elstron. That represented a 10.625% shareholding in Butler. Butler paid dividends to Elstron during the financial years ending 30 June 1999 and 2000.
9. Mr Rist was TOG's and Mr and Mrs McKellar's accountant. He was a director of TPP from 15 September 1997 until 16 November 2002 and a director of TOG from 15 May 1998 until his death, after an extended illness, on 16 November 2002. His period of directorship commenced a month after Mr McKellar was declared bankrupt on 15 April 1998 and had to relinquish his directorship. Mr Rist became the sole shareholder of TOG at some point and his shares passed to his widow after his death. She is now the sole shareholder.
10. On 6 April 2001, Elstron sold all of its shares in Butler to a holding company named Butler Research Group Limited (BRG) as part of a management buy back. Dibb Lupton Alsopp (DLA) were solicitors engaged in facilitating the sale of shares in Butler to BRG. The Commissioner understands Elstron to have received £1,020,000, or approximately $2,800,000, for its shares. TOG disputes that amount.
11. On 11 April 2001, TOG received the sum of $217,668 (£75,000) from Elstron. It was forwarded by DLA and received in TOG's cheque account in Australian dollars. TOG received two further sums from Elstron. The first was an amount of $2,286,368 (£800,000) received on 27 July 2001 and the second was an amount of $278,940 (£100,000) received on 6 December 2002. Both those amounts were received in TOG's GBP account.[2]
12. During this period, Mr McKellar suffered his first heart attack. It was on 22 June 2001. On 28 January 2003, Mr McKellar was re-appointed as a director of both TOG and of TPP but suffered a further heart attack on 22 December 2009. Mr Matthew McKellar continued as a director as before.
Factual basis of TOG's objections
13. TOG objected to all four assessments on the basis that, apart from the sum of £3,134, the amounts assessed as taxable income were loans to it. The sum of £3,134 belonged to Technology Plus Pty Ltd. Mr McKellar said that TOG's arrangements had been:
"On 11 April 2001 the $A equivalent to GBP 75,000 ($A 217,668) was deposited by Dibb Lupton Alsopp (DLA) into the TOG business cheque account.
On 23 July 2001, at the direction of the Board of TOG, GBP and $US foreign currency accounts were opened in the name of TOG. Signatories to the accounts were Matthew McKellar who was a current Director of TOG and Donald McKellar who was not a current Director of TOG.
On 26 July 2001 Elstron Limited deposited GBP 800,000 into the TOG GBP currency account.
On 6 September 2001 GBP 750,000 was converted to $A ($A 2,094,972) and deposited into the TOG business cheque account.
On 29 September 2001 GBP 50,000 was converted to $A ($A 150,240) and deposited into the TOG business cheque account.
On 14 February 2002 Applied Technologies Direct Limited deposited GBP 3,134.15 into the TOG GBP currency account.
On 20 November 2002 TOG entered into a bills discount facility. Securities with a face value of $A 1,500,000 were sold to TOG for $A 1,494,203.31.
On 5 December 2002 Elstron Limited deposited GBP 100,000 into the TOG GBP currency account."[3]
TOG’s Statement of Facts and Contentions
14. TOG's position, as put by Mr McKellar, is that it has not made any repayments to Elstron because none is required until 30 June 2011. TOG has not provided any security for the loan and is not aware that any is required of it or of its directors. The loan is shown as a liability in the Balance Sheets of TOG's General Ledger for the years of income ending 30 June 2001 to 2004 if the funds had been converted to Australian dollars.
Review in the tribunal
15. This is a case in which much turns upon the evidence, or lack of evidence, supporting TOG's objections. I will begin by setting out the task that faces the Tribunal and the way in which it approaches its task because it was apparent to me during the hearing that Mr McKellar, who appeared on behalf of TOG and who is not a lawyer, had difficulty in understanding the need for it to support its contentions with evidentiary material.
A. The Commissioner's power to make certain decisions and a taxpayer's right to object
16. The Commissioner is required to assess the amount of taxable income, or that there is no taxable income, and the tax payable on that taxable income on the basis of the return lodged by a taxpayer or from any other information he possesses.[4]
17. Part 4-25 of Schedule 1 of the Taxation Administration Act 1953 (TA Act) provides for the imposition of charges and penalties. Charges take two forms. One is a shortfall interest charge and the other is a general interest charge (GIC).
18. Shortfall interest charges are applied to shortfalls of various taxes, including income tax, that are revealed when the Commissioner amends an assessment. When income tax is involved, a person is liable to pay shortfall interest charge on an additional amount of income tax that the person is liable to pay because the Commissioner has amended the assessment for an income year. Generally, liability to pay the shortfall interest charge begins from the day on which income tax was due to be paid, or would have been due to be paid if there had been any, under the first assessment. It ends the day before the Commissioner gave notice of the amended assessment.[7]
19. The Commissioner may remit a shortfall interest charge under s 280-160 of the TA Act. Provided that amount of the shortfall interest charge that was not remitted is more than 20% of the additional amount of income tax, a person may object to the Commissioner's decision not to remit an amount of shortfall interest charge.[9]
20. A person who fails to pay an amount to the Commissioner is liable to pay a GIC if a provision of an Act imposes that liability.[10]
21. Penalties may be administrative penalties or civil penalties. Civil penalties are imposed by a court.[12]
22. A taxpayer objects to an assessment, be it of an amount of tax payable, a decision not to remit an amount of shortfall interest charge or an assessment of administrative penalty, in accordance with Division 3 of Part IVC of the TA Act. Among the requirements is that the person "making a taxation objection must … state in it, fully and in detail, the grounds that the person relies on."[14]
B. A taxpayer's right to seek review
23. A person who is dissatisfied with the Commissioner's objection decision may apply to the Tribunal for its review provided it is a "reviewable objection decision". A reviewable objection decision is "… an objection decision that is not an ineligible income tax remission decision".[18]
C. Some general principles relating to review of administrative decisions
24. Generally, the conduct of a review in the Tribunal is governed by the Administrative Appeals Tribunal Act 1975 (AAT Act) but the provisions of that legislation may be modified, added to or excluded in relation to its review of particular administrative decisions.[19]
"The question for the determination of the Tribunal is not whether the decision which the decision-maker made was the correct or preferable one on the material before him. The question for the determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal."[21]
(1979) 24 ALR 577; 46 FLR 409; 2 ALD 60 at 589; 419; 68
25. The description of the Tribunal's task implicitly recognises that neither the applicant seeking review nor the decision-maker whose decision is being reviewed has a duty to prove that the decision is the correct or preferable decision or that it is not. It recognises that the Tribunal is not limited to the material that was before the decision-maker although there are limitations upon the nature of that material. At the same time, it recognises that the decision-maker has a duty to assist the Tribunal. It must do that by producing all material that is relevant to the review of the decision and that is in its possession or under its control and by using its best endeavours to assist the Tribunal to make its decision.
26. The basis on which the Tribunal determines whether the decision was the correct or preferable decision on the material before it was not elaborated upon in Drake. A consideration of that basis begins with s 33(1)(c) of the AAT Act, which provides that, in a proceeding before it, the Tribunal "… is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate." It has not been modified by the TA Act in relation to the Tribunal's review of objection decisions.
27. Although, on its face, s 33(1)(c) appears to have no boundaries, there is an implicit boundary in the provision that it may inform itself "as it thinks appropriate". What it thinks "appropriate" must be shaped by what is "suitable or proper"[22]
28. What has been meant by provisions similar to s 33(1)(c) has been considered in cases such as R v War Pensions Entitlement Appeal Tribunal; ex parte Bott[24]
"… it should be recognised that such provisions do not render the Rules of Evidence irrelevant. They should still be applied, unless, for sound reason, their application is dispensed with."[27]
(1996) 132 FLR 172 at 177
In Lillywhite, the Queensland Court of Appeal found his Honour's interpretation to impose a procedural limitation that was not found in, and was inconsistent with, a different but similar legislative provision. It declined to follow him.
29. I considered the meaning of s 33(1)(c) at some length in Re General Merchandise & Apparel Group PL and Chief Executive Officer of Customs[28]
"…Taken together, s 39 and the rules of procedural fairness are focused on the parties' having an opportunity to ascertain the relevant issues that will be considered by the Tribunal, inspect documents to which it proposes to have regard and present their cases. Fairness in an evidentiary sense is focused on the Tribunal's relying on material that '…tends logically to show the existence or non-existence of facts relevant to the issue to be determined'.[29]
As Deane J, with whom Evatt J agreed, said: Minister for Immigration and Ethnic Affairs vPochi [1980] FCA 85 ;(1980) 4 ALD 139 at 160 per Deane J, with whom Evatt J agreed'… the requirement that findings of material fact of a statutory tribunal must ordinarily be based on logically probative material and the requirement that the actual decision of such a tribunal must, when relevant questions of fact are in issue, ordinarily be based upon such findings of material fact and not on mere suspicion or speculation. Those requirements, like all the ordinarily applicable rules of natural justice, may be modified or abolished by the express words or intendment of the legislation establishing the tribunal or conferring jurisdiction upon it …'[30]
,[31] Minister for Immigration and Ethnic Affairs vPochi [1980] FCA 85 ;(1980) 4 ALD 139 at 160[2009] AATA 988; (2009) 51 AAR 1 at [137]; 50–51
30. I adopt my conclusion in General Merchandise:
- "138. Much of what tends logically to show the existence or non-existence of facts relevant to the issue, and so is logically probative or safe to rely upon, has been the subject of the rules of evidence and I will use one of them to illustrate the point. Although there are exceptions, the general rule is that evidence given by one person of what another person said, and so hearsay, is not admissible if it is put forward to prove the truth of what was said by that other person rather than to prove the fact that the person said the words. The reason for its not being admissible is that it is unreliable and so unsafe to rely upon because:
'… Without the maker of the statement in court, it may be impossible to inquire into that person's perception, memory, narration or sincerity. The statement itself may not be accurately recorded. Mistakes, exaggerations or deliberate falsehoods may go undetected and lead to unjust verdicts. Hence, the rule against hearsay is intended to enhance the accuracy of the court's findings of fact, not impede its truth-seeking function.'[32]
R vKhelawon [2006] 2 SCR 787 ;(2006) 274 DLR (4th) 385 ;215 CCC (3d) 161 (SCC) at 793;388–389; 165 [2] per Charron J- 139. Just as the courts have tested hearsay and found it, for most purposes, to be too unsafe to rely upon to establish a fact in issue, the Tribunal must go through a similar process with each piece of material to which it may decide to have regard. Although not bound by the rules of evidence, those rules provide a tried and tested means of assessing what material is safe to rely upon. If the material does not meet those rules, careful thought of the sort given in the context of hearsay must be given to the material. That is to say, its reliability and whether it is logically probative of a fact in issue must be carefully considered before regard may be had to it. Material that is speculative or mere suspicion does not meet the required standard."[33]
[2009] AATA 988; (2010) 51 AAR 1 at [138]-[139]; 51
31. This is consistent, I respectfully suggest, with the following passage from the judgment of Evatt J in Bott when considering a requirement that the War Pensions Entitlement Appeal Tribunal (WPEAT) act "according to substantial justice":
"… Some stress has been laid by the present respondents upon the provision that the Tribunal is not, in the hearing of appeals, 'bound by any rules of evidence.' Neither it is. But this does not mean that all rules of evidence may be ignored as of no account. After all, they represent the attempt made, through many generations, to evolve a method of inquiry best calculated to prevent error and elicit truth. No tribunal can, without grave danger of injustice, set them on one side and resort to methods of inquiry which necessarily advantage one party and necessarily disadvantage the opposing party. In other words, although rules of evidence, as such, do not bind, every attempt must be made to administer 'substantial justice."[34]
[1933] HCA 30; (1933) 50 CLR 228 at 256
His Honour was in dissent in that case but this passage from his judgment was cited with approval by Brennan J, as President of the Tribunal, in Re Pochi and Minister for Immigration and Ethnic Affairs.[35]
32. For all practical purposes, there is often little difference between the task of a court bound by the rules of evidence and that of the Tribunal in assessing the relevance and probity of material. Each must assess the weight that it gives to the pieces of evidence or other material that it has. Each must also consider the weight, if any, to be given to the failure of a person to produce evidence or material in its control or to call a witness who might be expected to have relevant evidence. When considering omission, the principles in Jones v Dunkel[36]
33. As TOG omitted to call evidence regarding the loan, I will examine the principles. Although described in various ways by the members of the High Court, the principles were best explained for the purposes of this case by Windeyer J, who formulated the principle by adopting:
"the general principles as stated in Wigmore on Evidence 3rd ed. (1940) vol. 2, s. 285, p. 162 as follows: 'The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted.'"[37]
Jones vDunkel [1959] HCA 8 ;(1959) 101 CLR 298 ;32 ALJR 395 at 320-321; 403
34. The principles in Jones v Dunkel have been extended to apply in a case where a party fails to ask pertinent questions of its own witnesses. Handley JA, with whom Kirby P agreed, said in Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd and Another:[38]
"There appears to be no Australian authority which extends the principles of Jones v Dunkel to a case where a party fails to ask questions of a witness in chief. However I can see no reason why those principles should not apply when a party by failing to examine a witness in chief on some topic, indicates 'as the most natural inference that the party fears to do so'. This fear then is 'some evidence' that such examination in chief 'would have exposed facts unfavourable to the party': see Jones v Dunkel (at 320-321) per Windeyer J. Moreover, in
Ex parte Harper; Re Rosenfeld [1964-5] NSWR 58 at 62 Asprey J, citing
Marks v Thompson 1 NYS 2d 215 (1937) at 218, held that inferences could not be drawn in favour of a party that called a witness who could have given direct evidence when that party refrained from asking the crucial questions."[39](1991) 22 NSWLR 389 at 418 and see Kirby P at 398–399 The High Court dismissed an appeal from the judgment of the New South Wales Court of Appeal and did not consider the evidential aspects of the case: (1993) 176 CLR 332; 67 ALJR 264; 111 ALR 339
35. Whether the rule in Jones v Dunkel applies in the Tribunal is not entirely clear. I considered the issue in Re Kumar and Minister for Immigration and Citizenship[40]
36. First, I reviewed authorities such as Green v Minister for Immigration and Citizenship and Another,[42]
37. Should it be thought that the proper characterisation of the Tribunal's proceedings is relevant to the issue, I considered the applicability of the rule in Jones v Dunkel on both bases i.e. that its proceedings are adversarial and that they are inquisitorial. I reached the same conclusion whatever the proper characterisation. If they are adversarial, the rule will apply as it does in the adversarial proceedings of the courts where the rule was developed. If the Tribunal is regarded as having inquisitorial powers of a sort that go beyond that described by the Full Court in Grant v Repatriation Commission[43]
38. Where the task of the Tribunal differs significantly from that facing a court is in the role of the burden of proof. Unless Parliament dictates otherwise, the burden of proof has no place in the Tribunal. In contrast, it has a very significant place in a court. The burden, or onus, of proof:
"… 'As applied in judicial proceedings … has two distinct and frequently confused meanings: (1) the burden of proof as a matter of law and pleading - the burden, as it has been called, of establishing a case , whether by preponderance of evidence, or beyond a reasonable doubt; and (2) the burden of proof in the sense of introducing evidence' (Phipson on Evidence, 10th ed. (1963) par. 92). … The position is, we think, correctly stated by the learned author of the work to which we have referred when he says: 'the burden of proof in the first sense is always stable, the burden of proof in the second sense may shift constantly, according as one scale of evidence or the other preponderates.' …"[45]
Purkess vCrittenden [1965] HCA 34 ;(1965) 114 CLR 164 ;39 ALJR 123 at [4];167–168; 124 per Barwick CJ, Kitto and Taylor JJ
39. This means that a court decides whether the plaintiff or applicant, as the case might be, has proved its case according to the case it has pleaded. Therefore, the outcome can be influenced by the way in which the parties had chosen to plead their cases. It is not for the court to determine what decision is the correct decision per se. Its task is to determine the decision on the basis of the issues as defined by the parties and after considering the evidence chosen by the parties.[46]
40. The party that does not carry the onus need do nothing. Unless required to do so by subpoena or otherwise, it has no obligation to produce evidence or material relevant to establishing the correctness or otherwise of the plaintiff or applicant's case. It may choose to produce evidentiary material but, regardless of whether it does or not, will succeed if the plaintiff or applicant cannot discharge its burden.
41. In the Tribunal, the position is quite different. As Woodward J emphasised in McDonald v Director-General of Social Security:[47]
"… There is certainly no legal onus of proof arising from the fact that this is an 'appeals' tribunal, because the AAT is required, in effect, by s 43 of the AAT Act, to put itself in the position of the administrator in carrying out its review and, in the light of the material before the AAT (not the material before the administrator,
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 at 589) make its own decision in place of the administrator's. …".[48][1984] FCA 57; (1984) 1 FCR 354; 6 ALD 6 at 357; 10
That may be modified by the provisions of a particular enactment as his Honour went on to noted:
"It is possible to imagine a case where the Act which the administrator is applying places a requirement or onus on one or other of the parties to an issue to establish a particular state of facts on which the administrator's decision would be based. If that were so, the same requirement or onus would apply before the AAT. …"[49]
[1984] FCA 57; (1984) 1 FCR 354; 6 ALD 6 at 357–8; 10
42. There was no such requirement, Woodward J decided, in the Social Security Act 1947 in relation to the granting of an invalid pension or in reviewing it from time to time.[50]
"… must act in good faith on the information available to him, but no question of onus arises.
In my view, the answer is the same when the AAT seeks put itself in the position of the Director-General. It must act on the material which is before it but, as I have already pointed out, it is not bound by rules of evidence and may inform itself on any matter in such manner as it thinks appropriate.
It is true that facts may be peculiarly within the knowledge of a party to an issue, and a failure by that party to produce evidence as to those facts may lead to an unfavourable inference being drawn - but it is not helpful to categorize this common sense approach to evidence as an example of an evidential onus of proof. The same may be said of a case where a good deal of evidence pointing in one direction is before the Tribunal, and any intelligent observer could see that unless contrary material comes to light that is the way that the decision is likely to go. Putting such cases to one side there can be no evidential onus of proof in proceedings before the AAT unless the relevant legislation provides for it…"[51]
(1984) 6 ALD 6 at 11
43. The principle to be drawn from this case is that, unless a particular Act provides otherwise, neither party has a legal onus or an evidentiary onus of proof. The Tribunal may have regard to all material that is relevant to, and probative of, the issues that must be decided in order to come to its final decision. The outcome is not determined by reference to the issues selected by the parties and on the basis of the evidence or material they choose to present but on all relevant evidence and material. The decision-maker is required to submit material of that sort in its possession at the time it complies with s 37 of the AAT Act and the directions generally made by the Tribunal at its conferences and directions hearings are intended to elicit the remainder.
44. The standard of proof is different from the burden of proof. It refers to "An objective measure for determining whether or not a fact or issue has been proved."[52]
45. Despite its different formulations, the standard of proof remains the same but it is not an absolute standard. Regard must be had to the principles set out by Dixon J in Briginshaw v Briginshaw:[57]
"… [R]easonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences. Everyone must feel that, when, for instance, the issue is on which of two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and prudent judgment if the question was whether some act had been done involving grave moral delinquency. …"[58]
(1938) 60 CLR 336; 12 ALJR 100 at 362; 100. The same principles have been considered and applied in numerous cases in the Tribunal including and Re Pochi vMinister for Immigration and Ethnic Affairs (1979) 26 ALR 247 at 255 (Brennan J). Hardcastle vCommissioner of Australian Federal Police & Anor (1984) 53 ALR 593 (Bowen CJ, Gallop and Lockhart JJ)
D. Modification of the AAT Act in the taxation jurisdiction: burden of proof and limited to grounds of objection unless Tribunal otherwise orders
46. Division 4 of Part IVC of the TA Act modifies various provisions of the AAT Act in relation to the review of reviewable objection decisions. Of particular importance is s 14ZZK which provides:
"On an application for review of a reviewable objection decision:
- (a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
- (b) the applicant has the burden of proving that:
- (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or
- (ii) …
- (iii) in any other case - the taxation decision concerned should not have been made or should have been made differently."
47. Section 14ZZK represents a significant modification of the Tribunal's approach in that it imposes a burden of proof when reviewing a decision of the sort described in s 14ZZK(b). It does not, however, alter the standard of proof that generally applies in the Tribunal. That means that a person who bears a burden of proof may meet it by producing to the Tribunal evidence and other material that is relevant and probative and that satisfies it of the existence or non-existence of relevant factual issues on the balance of probabilities rather than simply on the basis of possibilities. The Commissioner does not have an obligation to produce evidence or material just as a defendant or respondent in a civil proceeding does not have any obligation of that kind. Section 14ZZK(1)(b) does not alter the evidence or other material to which the Tribunal may have regard in deciding whether the person has discharged the burden of proof. It does not alter the Tribunal's obligation to act with procedural fairness in carrying out its task.
48. The Tribunal's task in reviewing an objection decision was explained by Foster J in Eldridge v Federal Commissioner of Taxation.[59]
"It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the court than of the office desk.
It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer's objections. Although it is not bound by the rules of evidence (s 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it. …"[60]
(1990) 90 ATC 4907 at 4,921 per Foster J
49. The Tribunal's task was explained more fully in Federal Commissioner of Taxation v Dalco[61]
"… It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed … unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment."[64]
[1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; (1990) 20 ATR 1370; (1990) 64 ALJR 166; 90 ATC 4088 at 621; 344; 1373; 168; 4091
50. Also in Dalco, Toohey J[65]
"… A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment."[66]
[1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; (1990) 20 ATR 1370; (1990) 64 ALJR 166; 90 ATC 4088 at 631; 351-352; 1379; 173; 4097 per Toohey J
51. As Mr Broadfoot submitted, the principles in these cases are equally applicable whether the objection decision reviewed by the Tribunal relates to the assessment of the amount of tax payable, a decision not to remit an amount of shortfall interest charge or an assessment of administrative penalty. The case of McCormack v Federal Commissioner of Taxation,[67]
"… The taxpayer bears the burden of proving that the assessment was excessive. To discharge that burden in a case such as the present he must prove affirmatively, on the balance of probabilities, that the property was not acquired for the purpose of profit-making by sale. The burden may be discharged by drawing inferences from the evidence. In some cases in which all the relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose. But it is not enough, even when all the facts are known, that there is no material upon which it may be concluded that the property was acquired for the purpose mentioned in s 26(a). If a taxpayer can succeed, simply because there is no evidence from which it can be concluded that the relevant purpose existed, that must mean that the burden of proving the existence of that purpose lies on the Commissioner. That in my respectful opinion would be to invert the onus of proof. The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail."[68]
[1979] HCA 18; (1979) 143 CLR 284; 23 ALR 583; 9 ATR 610; 53 ALJR 436; 79 ATC 4111 at [11]; 303; 597; 443; 622; 4,121
52. Merely establishing on the balance of probabilities that the Commissioner has made an error cannot satisfy the taxpayer's burden of proof under s 14ZZK(b)(i) in relation to an assessment for the burden is to prove that "the assessment is excessive". The point was made in Dalco:
"… A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. …"[69]
[1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; (1990) 20 ATR 1370; (1990) 64 ALJR 166; 90 ATC 4088 at 625; 347; 1375-6; 170; 4094 per Brennan J
If all of the material facts were known and the amount of a taxpayer's taxation liability turned on the application of the law to those facts, the taxpayer would discharge the burden of proof by establishing that the Commissioner had erroneously included in the assessed taxable income an amount that should not have been included.[70]
53. It is open to the taxpayer to attack the Commissioner's power to make an assessment[71]
"… mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment …, the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous. …"[72]
Federal Commissioner of Taxation vDalco [1990] HCA 3 ;(1990) 168 CLR 614 ;90 ALR 341 ;(1990) 20 ATR 1370 ;(1990) 64 ALJR 166 ;90 ATC 4088 at 623; 345; 1374; 169; 4092 per Brennan J
54. An example of the application of the principles is found in Richard Walter Pty Ltd v Commissioner of Taxation[73]
"These principles work out in the present case in the following way. The Commissioner alleges that the payments made from Morlea to Richard Walter are income. In order to show that the assessment is excessive Richard Walter must thus show on the balance of probabilities that the payments are not income. It seeks to do that in the present case by making a case that the payments were loans. If this is case is accepted, Richard Walter will, but subject to the s 260 issue, be entitled to succeed. In the present case it sought to show the amounts in question were loans through the evidence of Mr Holden who swore that they were and that the accounts reflecting them were correct. His Honour did not believe Mr Holden, finding that there was no intention that the loans would be repaid. This being the case, the payments in question were not loans. Whether they had some other character may have relevance to the question of sham, but that can for the moment be put to one side. It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income. If the taxpayer does not do this it will not have satisfied the onus of showing that the assessment is excessive.
Even if it had been necessary to determine whether the so-called loan transactions were shams, the onus could not have been on the Commissioner to show what the real transaction was, of which the payments formed part. Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise:
Coppleson v Commissioner of Taxation (Cth) (1981) 52 FLR 95. But as that case itself illustrates, that is in the overall context of the statutory imposition of the burden of proof on the taxpayer and does not place upon the Commissioner an onus of satisfying the Court that there was a sham.The onus not being upon the Commissioner to show a sham, so too the onus cannot be on the Commissioner to show what the genuine transaction was which is said to have been obscured by that sham.
As I have already sought to demonstrate, it was not necessary for his Honour to determine the matter by reference to sham in the sense of holding that the so-called loans were but a disguise for some other transaction. It was sufficient for his Honour to hold that the payments to Richard Walter were not loans. Once that finding had been made the question would then arise whether Richard Walter had satisfied the onus upon it of showing that the payments were not income."[74]
(1996) 67 FCR 243; ; 33 ATR 97 at 259; 4563; 111-112 and see also 245-246; 4552; 100 per Lockhart J 96 ATC 4550
E. Application of principles in Jones v Dunkel in Tribunal's taxation jurisdiction
55. The rule in Jones v Dunkel has been applied by the Federal Court in reviewing objection decisions. In Richard Walter, Lockhart J decided that the trial Judge had correctly drawn an inference adverse to the taxpayer's case by its failure to call witnesses whom the taxpayer might have been expected to call. On appeal, Lockhart and Hill JJ agreed that the trial Judge had been correct. Hill J examined whether the evidence of various people, if called, would have been relevant to the issues to be decided by the court. The rule in Jones v Dunkel could not apply if the evidence were not relevant. Hill J said of the taxpayer's failure to call certain witnesses:
"It may be said that the failure to call the legal and accounting advisers would hardly have much relevance to the question whether Morlea, when it made payments to Richard Walter, intended that the moneys so paid would be repaid or whether, for its part, Richard Walter intended to repay them. The tax lawyers and accountants were not parties to these transactions, and it is not suggested that they advised upon them. The same cannot, however, be said of Doctor Wenkart. He was the guiding mind of the relevant companies and, at the least, it can be said his failure to come forward and give evidence leads to the conclusion that his evidence would not assist the case of Richard Walter. To the extent that his Honour's conclusion that the payments by way of loan were not in truth intended to be repaid was based on matters of inference, the failure to call Doctor Wenkhart would allow that inference more readily to be drawn:
Jones v Dunkel (1959) 101 CLR 298 at 308."[75](1996) 67 FCR 243; ; 33 ATR 97 at 256–257; 4561; 109 96 ATC 4550
Objection to the assessments for 2002 and 2003 on the basis the commissioner did not make them within time
56. On the basis of Mr McKellar's evidence, I am satisfied that TOG received the Commissioner's notices of assessment for the 2002 and 2003 years. On the basis of the Notices of Assessment for those years, I find that their "Issue Date" was 29 October 2008 but that they also bore the date of 21 November 2008. That later date had been added manually with a date stamp. I accept Mr McKellar's evidence that the Notices of Assessment were received by TOG on 24 November 2010.
The Commissioner's duty
57. On 24 February 2003, TOG lodged its return for the year of income ending 30 June 2002[76]
"From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon."[80]
This is quite apart from the power that the Commissioner is given under s 169: “Where under this Act any person is liable to pay tax, the Commissioner may make an assessment of the amount of such tax. ”
58. As the years of income with which I am concerned came after the 2000-01 year of income, the deemed assessment provisions of s 166A of ITAA36 do not apply. They do not apply because, although TOG is a relevant entity within the meaning of Division 1B of Part VI of ITAA36,[81]
59. An "assessment" that the Commissioner is required to make has several meanings. In the context of this case and in relation to the years of income before 2004-05, it meant:
- "(a) the ascertainment of:
- (i) the amount of taxable income; or
- (ii)-(iv) …;
and of the tax payable on that taxable income or net income;
- (aa) the ascertainment of the amount of interest payable under section 102AAM; or
- (b) the ascertainment of the amount of additional tax payable under a provision of Part VII."[84]
ITAA36, s 6(1)
60. When TOG lodged its returns of income, s 169A(1) provided that:
"… the Commissioner may, for the purposes of making an assessment in relation to the taxpayer under this Act, accept, either in whole or in part, a statement in the return of the assessable income derived by the taxpayer and of any allowable deductions or rebates to which it is claimed that the taxpayer is entitled and any other statement in the return or otherwise made by or on behalf of the taxpayer."
61. Once the Commissioner has made an assessment, he is required to "… serve notice thereof in writing by post or otherwise upon the person liable to pay the tax."[85]
Did the Commissioner make the assessments within time?
62. As the ITAA36 applied to the 2002 and 2003 years of income when TOG lodged its returns, there were no time limits imposed upon the Commissioner to make an assessment. Where a taxpayer had "… furnished to the Commissioner a return of income, or of profits or gains of a capital nature, and no notice of assessment in respect thereof has been served within 12 months thereafter, he may in writing by registered post request the Commissioner to make an assessment.".[87]
63. Amended assessments were the subject of s 170. Under s 170, the Commissioner had power to "… amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment."[89]
64. What is meant by the expression "make an assessment" was considered by the High Court in Batagol v Commissioner of Taxation[90]
65. A year after the conclusion of the third year of income, the Commissioner sent Mr Batagol a notice of assessment for each year stating an amount of taxable income and tax payable in respect of the income he had derived. At the time, s 170(3) provided that, where a taxpayer had made a full and true disclosure of all material facts necessary for the Commissioner's assessment, and an assessment is made after that disclosure, no amendment increasing the taxpayer's liability might be made except to correct an error in calculation or mistake of fact. Mr Batagol was such a taxpayer and the Commissioner's error had been one of law and not of fact. Therefore, Mr Batagol submitted, the Commissioner could not amend the assessment. The Commissioner submitted that he had never made an assessment in the first place and the three notices of assessment that he had issued as assessments were just that and not notices of amended assessments.
66. Kitto J, with whom Menzies J agreed, examined the provisions to which I have referred. He concluded that:
"… nothing done in the Commissioner's office can amount to more than steps which will form part of an assessment if, but only if, they lead to and are followed by the service of a notice of assessment."[91]
[1963] HCA 51; (1963) 109 CLR 243; 13 ATD 202; 37 ALJR 235 at [5]; 252; 204; 236
His Honour referred to the Commissioner's power to amend assessments that is conferred by s 170. He said that the power to amend is:
"… a concept which pre-supposes that an assessment is something creating a legal obligation, so that any amendment of it must depend upon a positive grant of power to alter that obligation. Throughout the section an assessment is referred to as a specific, identifiable thing, which, unless amended, (or of course affected on review or appeal), will stand as decisive of liability. To speak, as does sub-s. (1), of tax being paid in respect of the assessment, or to speak, as do sub-ss. (2)(b), (3), (4), (5) and (6), of tax having become due and payable under the assessment, would be impossible unless 'assessment' meant the whole process which comes to a head in the service of a notice of assessment and thereby becomes, as a whole, an act in the law. If this be correct, it follows that until a notice of assessment has been served on the taxpayer the Commissioner and his officers neither need statutory authority to go back over any or all of the steps that have been taken in the office, and correct anything they consider to be erroneous, nor are disabled from doing so by anything in s 170."[92]
[1963] HCA 51; (1963) 109 CLR 243; 13 ATD 202; 37 ALJR 235 at [8]; 253; 205; 236
67. Owen J, with whom Menzies J also agreed, reached the same conclusions on a similar basis to Kitto J. His judgment emphasised that:
"… the assessment of which s. 170(1) to (6) speak is something more than the completion inside the Taxation Department of the routines and processes necessary for the purpose of deciding whether or not in a particular case there is a taxable income and tax payable thereon. It includes the taking of all such further steps as are necessary to create a liability to pay the tax so calculated.
… In the case of the year ending 30th June 1954, the 'refund advice' sent to the appellant contained a statement that no tax was payable in respect of that year. But this was not a notice of assessment: it was merely to explain why it was that that the whole of the tax deductions made during the year was being refunded. Here again I think the taxpayer's objection fails since, for the reasons stated above, what occurred did not create any liability to pay tax."[93]
[1963] HCA 51; (1963) 109 CLR 243; 13 ATD 202; 37 ALJR 235 at [3]–[4]; 256; 206–7; 238
68. In FJ Bloeman Pty Ltd v Federal Commissioner of Taxation[94]
"… held that nothing done in the Commissioner's office can amount to more than steps which will form part of an assessment if, but only if, they lead to and are followed by service of a notice of assessment."[95]
[1981] HCA 27; (1981) 147 CLR 360; 35 ALR 104; 55 ALJR 451; 11 ATR 914; at [22]; 372; 110; 455; 920; 4286 81 ATC 4280
69. At the time Batagol and Bloeman were decided, s 6(1) of ITAA36 defined the word "assessment" to mean:
"… the ascertainment of the amount of taxable income and of the tax payable thereon."
70. The majority of the High Court in Federal Commissioner of Taxation v Prestige Motors Pty Ltd[96]
"… Service of the notice on the taxpayer brings the process of assessment to an end in the sense that, in conformity with s 174(1), the notice, which necessarily reflects the requisite elements of the calculation that has been made, is served after the making of that assessment."[98]
1994] HCA 39; (1994) 181 CLR 1; 123 ALR 306; 28 ATR 336; ; 68 ALJR 634 at [18]; 13; 311; 340; 4573; 637 94 ATC 4570
They were concerned with the years of income from that ending on 30 June 1979 to that ending on 30 June 1990. During those years, the definition of "assessment" was amended twice from that which had been considered in Batagol. With effect from 14 December 1984, the definition was amended to read:
"'assessment' means -
- (a) the ascertainment of the amount of taxable income and of the tax payable thereon; or
- (b) the ascertainment of the amount of additional tax payable under a provision of Part VII;[99]
Taxation Laws Amendment Act 1984 , No. 123 of 1984, s 2(3) and 92(a)
With the omission of paragraph (aa) of the definition, it was further amended with effect from 17 January 1990 to its modern form.[100]
71. A similar point arose much more recently in Commissioner of Taxation v Ryan[102]
72. By this time, s 170(3) had been amended to provide that, where a taxpayer had made a full and true disclosure of all material facts necessary for the Commissioner's assessment, and an assessment is made after that disclosure, no amendment increasing the taxpayer's liability might be made "after the expiration of 3 years from the date upon which the tax became due and payable under that assessment." On appeal, the High Court applied the principles it had earlier established in Bagatol. In their joint judgment, Gleeson CJ, Gummow and Hayne JJ focused on the preclusion in s 170(3) from increasing the taxpayer's liability and on whether three years had passed since "the tax became due and payable under that assessment":
"At the very least, language is strained by saying that tax becomes 'due and payable' on a particular date in circumstances where the Commissioner has issued a document informing the taxpayer that the Commissioner has determined that the taxpayer owes no amount for tax. No amount of teasing of the words of s 170(3), or of the words of s 204 [which provides for the time at which tax is payable], can reduce, let alone eliminate, that strain. Whatever may be the elasticity of the expression 'the date upon which the tax became due and payable', it does not, and cannot, accommodate the case where no tax is due and payable. Nor do the words of s 204, when read and understood in their context, enable any such accommodation."[103]
[2000] HCA 4; (2000) 201 CLR 109; (2000) 168 ALR 704; (2000) 74 ALJR 471; (2000) 43 ATR 694; at [15]; 122; 708; 474–475; 698; 4083 2000 ATC 4079
73. When in 2003 and 2004 TOG lodged its returns for the 2002 and 2003 years of income and showed that it had a nil taxable income, the effect of these authorities is that any notice or notice of assessment that the Commissioner might have issued was not an assessment for the purposes of ITAA36. The Commissioner had not determined that there was any tax liability on the taxable income returned by TOG and so there was no assessment. As there was no time limit within which he might make an assessment imposed by s 166 of ITAA36 or otherwise, the Commissioner could make an assessment at any time in the future. As it was not an amended assessment, the time limits and other qualifications on the Commissioner's power in s 170 did not apply.
74. During 2005, that changed and the Commissioner's power to make an assessment (an original assessment) at any time after a taxpayer had lodged a return showing a nil taxable income was curtailed. Section 171A was inserted with effect from 19 December 2005.[104]
"If the circumstances set out in column 2 of the following table apply to a taxpayer in relation to the 2003-2004 year of income (a nil year ) or an earlier year of income (also a nil year ), the Commissioner cannot make an original assessment for that taxpayer for that year in the circumstances set out in column 3:
Making assessments Column 1 Column 2 Column 3 Item In this case: the position is: 1 The taxpayer's return of income for a nil year disclosed, or the Commissioner has given the taxpayer a notice for a nil year that stated, either of the following:
(a) the taxpayer had an amount of taxable income, and that no tax was payable:
(b) the taxpayer had no taxable income because the taxpayer's deductions equalled the taxpayer's assessable income;
and the taxpayer did not deduct a tax loss in the nil year.The Commissioner cannot make an original assessment for the taxpayer for the nil year after the later of the following:
(a) 31 October 2008;
(b) the period of 4 years beginning on the day on which the taxpayer lodged the taxpayer's return of income for the nil year.2 The taxpayer's return of income for a nil year disclosed, or the Commissioner has given the taxpayer a notice for a nil year that stated, either of the following:
(a) the taxpayer had an amount of taxable income, and that no tax was payable;
(b) the taxpayer had no taxable income because the taxpayer's deductions equalled the taxpayer's assessable income;
and the taxpayer did deduct a tax loss in the nil year.The Commissioner cannot make an original assessment for the taxpayer for the nil year after the period of 6 years beginning on the later of the following:
(a) the day on which the taxpayer lodged the taxpayer's return of income for the 2004-05 year of income or, if the taxpayer is a member of a consolidated group at the end of that year of income, the day on which head company's return of income is lodged;
(b) the day on which the taxpayer lodged the taxpayer's return of income for the nil year.3 … … 4 … …"[105] ITAA36, s 171A(1)
The time limits imposed by s 171A(1) do not apply in relation to a nil year if the Commissioner is of the opinion that there has been fraud or evasion.[106]
75. Mr McKellar submitted that item 1 of the Table in s 171A(1) applied and that the Commissioner had only until 31 October 2008 in which to make the original assessment. I do not accept his submission for TOG did not meet either criterion specified in item 1. It did not do so because, in order to meet them, it had to be the case that it had not deducted a tax loss in the nil year. In the returns for each of the years 2002 and 2003, it deducted a tax loss in order to return a nil taxable income. As TOG did not meet the criteria in item 1, the position in Column 3 of the Table does not apply. In particular, the time limit imposed upon the Commissioner to make an original assessment by 31 October 2008 did not apply.[107]
76. TOG had no taxable income in 2002 and 2003 because it had deducted tax losses. This brought it within (b) of item 2 of the Table in s 171A(1). As I do not have any evidence that TOG is a member of a consolidated group, the Commissioner had at least until 30 June 2011 in which to make an original assessment. I arrive at that date because it must be the later of the dates in Column 3 of item 2. It is a date six years after the earliest date on which TOG could have lodged its return for the year of income 2004-05 i.e. 1 July 2005. That is a date later than six years after it lodged its returns for the 2002 and 2003 years of income (i.e. 29 June 2009 and 8 April 2010 respectively) and so the date by which the Commissioner was required to make any original assessment.
77. Their receipt by TOG was not necessary before 30 June 2011; only that the Commissioner "make" them before that date. Whether the Commissioner served them before or after 31 October 2008, he was well within the time limit permitted by s 171A(1) in making them as he had until at least 30 June 2011 to do so.
The making of an assessment and its service: different or incorporated?
78. I note that Mr Broadfoot submitted that the making of the assessment and the service of notice of the assessment were two different things. Section 174(1) provides:
"As soon as conveniently may be after any assessment is made, the Commissioner shall serve notice thereof in writing by post or otherwise upon the person liable to pay the tax."
Mr Broadfoot submitted that s 174(1) makes it clear that there is a distinction between the making of an assessment by the Commissioner and its service by him on the taxpayer.
79. In order to consider this submission, I have looked first to the manner in which a notice may be served. As there is no provision for it in ITAA36, I have turned to s 28A of the Acts Interpretation Act 1901 (AI Act). It provides that, unless a contrary intention is apparent, a document may be served in the ways specified in s 28A(1)(a) and (b). One deals with service on a natural person and the other on a body corporate. A document may be delivered to the person personally or left at the registered office of the body corporate. In either case, it may be sent by pre-paid post to addresses specified in the provision.
80. The time at which service is effected is important for s 204 of ITAA36 uses the date on which "a notice of assessment is given to the taxpayer" as one of the dates that triggers when tax payable by a taxpayer becomes due and payable. The effect of s 29 of the AI Act is that, when the expression "give" is used and there is no contrary intention shown in the legislation concerned, service by pre-paid post is authorised. Furthermore, service is deemed to have been effected at the time at which the letter would be delivered in the ordinary course of post unless the contrary is proved to be the case. Again in the absence of any evidence to the contrary, s 160 of the Evidence Act 1995 (Evidence Act) presumes that it will be delivered on the fourth working day after it was posted: AI Act, s 29. Unless evidence is produced to raise a doubt about its application, a letter from a Commonwealth agency is presumed to have been sent by prepaid post to a specific address on the fifth business day after the date on which it was prepared: Evidence Act, s 163.
81. It follows that, when determining whether tax is due and payable, service is a different thing from the assessment that s 169 of ITAA36 authorises the Commissioner to make of the amount of the tax that a person is liable to pay. Actual receipt of a notice of assessment by a taxpayer is not necessary in determining whether the tax is due and payable for, unless the taxpayer can produce evidence sufficient to raise a doubt about its receipt (and so its delivery in the ordinary course of post), receipt is deemed. That deemed date becomes the day that is used in determining the date on which tax becomes due and payable under s 204 because it becomes the date on which a notice of assessment is "given" to a taxpayer.
82. At the time the High Court considered Batagol and Ryan, s 204 was different but it still worked out the date on which tax is due and payable from a date that took as its basis the date of the "service of the notice".[108]
83. In Batagol in particular, the High Court emphasised that an assessment had two features. One was the completion of the routines and processes necessary for deciding whether or not there was a taxable income and tax payable on it. The second was the creation of the liability to pay the tax so calculated. As the liability was not created until the notice of assessment was served on the taxpayer, the "assessment" incorporates the whole of the process that begins with the Commissioner's consideration of the adequacy of the return lodged by the taxpayer and concludes with service. Batagol is a case whose principles have been endorsed by the High Court in cases such as Bloeman, Prestige Motors and Ryan. They have done so in the course of s 170(3) and so in the context of whether or not the Commissioner may issue an original assessment but it is difficult to see why the principles in those cases should not apply equally to the interpretation of s 171A(1).
84. Both s 170(3), in the form in which it was considered by the High Court, and s 171A(1) refer to the making of an assessment. In the case of s 170(3), the reference is to the situation in which "an assessment is made" after a full and true disclosure of all material facts to the Commissioner. In s 171A(1), the Commissioner "cannot make an original assessment" in certain circumstances. Those circumstances are described by reference to time. There are no differences of substance in the definition of "assessment" in its various guises over the years. There are no relevant differences in the drafting of s 204 affecting when tax becomes due and payable. Items 1 and 2 of s 171A(1) draw a distinction between making an original assessment and the Commissioner's having "given the taxpayer a notice for a nil year" stating certain things and the making, or not making, of an original assessment. This is not inconsistent with the principles established in Batagol, Bloeman, Prestige Motors and Ryan for they were decided in a context in which a similar distinction was drawn.
85. There is, therefore, no basis on which I can find that these principles should not apply equally to the interpretation of s 171A(1) as they do to the interpretation of the former s 170(3). The making of an assessment incorporates its service. Until the Commissioner serves that notice, the steps that he has taken in ascertaining the taxable income and the tax payable on it, have no legal significance and the process of assessment is incomplete. Only when it has been served, and so either given to the taxpayer or sent to the taxpayer by pre-paid post, is the assessment complete and so made. For the reasons I gave earlier, service is different from receipt of a notice of assessment by the taxpayer. Service is the giving or sending of the notice by the Commissioner and has nothing to do with its receipt. That explains why Kitto J said in Batagol that "… until a notice of assessment has been served on the taxpayer the Commissioner and his officers neither need statutory authority to go back over any or all of the steps that have been taken in the office, and correct anything they consider to be erroneous …".[109]
Does the Tribunal have power to consider this issue in any event?
86. Mr Broadfoot submitted that, in any event, I do not have power to consider whether the Commissioner had made the assessments within time or not. He relied on s 177(1), which provides:
"The production of a notice of assessment, or of a document under the hand of the Commissioner, a second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all of the particulars of the assessment are correct."
87. Mr Broadfoot submitted that s 177(1) enables TOG to challenge the excessiveness of the assessments issued in respect of the 2002 and 2003 years by illustrating that the amount or the particulars of ascertaining the amount of taxable income were incorrect. It is impermissible to challenge the validity of the assessments once the Notices of Assessment have been produced. He referred me to the judgment of the Full Court of the Federal Court in Kennedy v Administrative Appeals Tribunal,[110]
"Mr Kennedy's challenge in the Tribunal to the validity of the Commissioner's assessments, based on the contentions that they were made in bad faith or the Commissioner's view as to fraud and evasion was incorrect, must fail. The Tribunal has jurisdiction to hear and determine the present review under Part IVC of the TAA because each assessment purports to have been made in exercise of powers conferred by that enactment. Whether or not the assessments were, as a matter of law, validly made does not attenuate this finding. There is a long line of authorities which supports this proposition, starting with
Collector of Customs (NSW) v Brian Lawlor Automotive Pty Ltd [1979] FCA 21; (1979) 24 ALR 307. More recently, in
Minister for Immigration v Ahmed [2005] FCAFC 58; (2005) 143 FCR 314 at 323, the Full Federal Court observed that the judgment as to the validity of a Minister's actions is for the courts, not for an administrative body such as a Tribunal: see also
Zubair v Minister for Immigration and Multicultural and Indigenous Affairs [2004] FCAFC 248; (2004) 139 FCR 344.Accordingly, if the Tribunal in this case were to make an administrative ruling that the Commissioner's assessments were valid, this would not take effect as a binding determination of law, and the Commissioner would remain entitled to collect tax pursuant to the assessments subject to any determination by a court that those assessments were not valid. In this case, Mr Kennedy has elected to have the objection decisions referred to the Tribunal, yet he complains that the Tribunal cannot decide whether the assessments were correctly and validly made and does not have the jurisdiction which he has invoked. In these circumstances, the Court would lean against finding that the jurisdiction can be challenged: see
Kim v Minister for Immigration and Citizenship [2008] FCAFC 73 at [21]-[29] (per Tamberlin J) and [37]-[39] (per Gyles J)."[111][2008] FCAFC 124; (2008) 168 FCR 566; 249 ALR 87; 103 ALD 238; ; 73 ATR 276; 48 AAR 500 at [22]–[23]; 573; 94; 245; 8,478; 282–3; 507 [2008] ATC 20-037
88. These are principles that are applicable across the Tribunal's various jurisdictions. If I am meant to understand TOG to be suggesting that the Commissioner made the assessments after 31 October 2008 but backdated them, I do not consider it a relevant factor. The assessments have been made and it is the assessments, of which notice has been served, that grounds the Tribunal's jurisdiction. The path taken by the decision-maker to reach a decision that is reviewable by the Tribunal (including an assessment by the Commissioner) and the decision-maker's state of mind or motives in making the decision are of no concern to the Tribunal. Its obligation is to take the correct path and to make the decision that is correct according to law and on the evidence and other relevant material and, if more than one decision meets that description, to choose that which is preferable.
89. At one level, s 177(1) of ITAA36 is merely a reflection of what is already the general rule in proceedings in the Tribunal. The path that led the Commissioner to make the assessments cannot be challenged once he has produced a Notice of Assessment for that Notice is "conclusive evidence of the due making of the assessment". Mr Broadfoot would have me take it further so that I could not have regard to Mr McKellar's submission that the Commissioner had made the assessments beyond the time permitted by s 171A. I do not think that the authorities permit me to take it that far but I will begin from a pragmatic position. If I were to assume that the Commissioner had been outside the time limits - and he was not, in my view - and TOG did not establish that the assessments were otherwise excessive, Mr Broadfoot's submission would require me to affirm the Commissioner's objection decision even though the Commissioner clearly had no power to make them in the first place. That does not seem to me to be fair but I am aware that it is thought that "… Appeals to general notions of 'fairness' or 'justice' do no more than attempt to mask the absence of any foundation in the legislation for which the conclusion is asserted."[112]
90. I have, therefore, looked to s 177(1) itself and the way in which it has been interpreted by the High Court. It seems to me that s 177(1) does not lead to the conclusion for which Mr Broadfoot contends. Starting with McAndrew v Federal Commissioner of Taxation[113]
"… Unless they are matters covered by s 177(1) clearly enough they might be put in issue but if they are covered by s. 177(1) then it seems to us that considerations arise which show fairly clearly that the burden cannot be upon the commissioner of establishing on appeal that there was a failure to disclose and avoidance of tax. That they are so covered appears to us to be shown by the words of s. 177(1) themselves, viz. 'conclusive evidence of the due making and (except etc.) that the amount and all the particulars of the assessment are correct'. If the existence of the conditions on which the power to amend arises is not part of the due making, it certainly is a matter on which the amount of the assessment must depend. It would not be difficult to regard it as part of the due making of the assessment but the consequence of that would be to deprive the taxpayer of any remedy to enforce the protection which s 170(2) seems designed to give him. In George v Federal Commissioner of Taxation …[114]
(1952) 86 CLR 183 the Court said: 'The clear policy of s. 177 is to distinguish between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer. The former involves the due making of the assessment.'…[115](1952) 86 CLR 183 at 206–107 . Section 177(2) and (3) [sic] impose certain conditional time bars which in this dichotomy seem evidently to belong to substantive liability. From this it follows that fulfilment of the conditions which bring a case within s 170(2) is part of the matter governed by the words of exception in s 177(1), viz. 'except in proceedings on appeal against the assessment'. An appeal, however, is a proceeding given by statute to a taxpayer for the purpose of impugning an assessment otherwise conclusively imposing liability upon him. …… [S]ection 190(b) expressly places upon the taxpayer the burden of proving that the assessment is excessive. 'Excessive' is the word chosen to correspond with the word 'amount' in s 177(1). The 'amount' no doubt reflects the 'particulars'. It is perhaps not a good choice. … But bearing in mind that the word 'excessive' relates to the amount of the substantive liability it is not difficult to see that it will extend over the area in which the conditions mentioned in s 170(2) find a place. For the fulfilment of those conditions goes to the power of the commissioner to impose the liability by amendment. If he cannot amend consistently with s. 170(2) and so increase the amount of the assessment then it must be excessive."[116]
[1956] HCA 62; (1956) 98 CLR 263; 11 ATD 131 at 270–271; 134
91. Applying this principle to this case, if the Commissioner did not have power to issue original assessments in relation to the 2002 and 2003 years of income but issued them all the same, the assessments would be excessive. Whether they are excessive is the matter that the applicant has the burden of proving. Therefore, I had power to consider whether the Commissioner had power to make the assessments.
TOG's objection to all four assessments
Moneys received by TOG from Elstron
92. Mr McKellar has been TOG's Public Officer throughout these years. Under s 252 of ITAA36, every company carrying on business in Australia or deriving in Australia income from property must be represented by a public officer unless exempted from doing so by the Commissioner.[117]
"… be answerable for the doing of all such things as are required to be done by the company under this Act or the regulations, and in case of default shall be liable to the same penalties."[119]
ITAA36, s 252(1)(f)
93. I find that Mr McKellar has been very mindful of what he understands his duties as Public Officer to be. He understands his duties to extend to his ensuring that TOG's books of accounts accurately reflected TOG's view of events. As he had not been a director of TOG at the time and as he could not consult Mr Rist, who had been unwell, he felt that it was his:
"… duty to act with particular care in certifying matters relative to TOG … To this end, I met with Mr David Pope, a Director of Elstron Limited ('Pope') in London on 9 May 2002 to confirm the terms of the loan between Elstron Limited and TOG. This was done before the TOG 2001 Income Tax Return was lodged on 12 July 2002 and before the final tranche of the loan (GBP 100,000) was received on 6 December 2002."[120]
Exhibit A at [41]
94. By this time the Commissioner had commenced an audit in 2005 and it continued into 2006, Mr McKellar said he:
"… felt it prudent that a loan agreement was in place that had been signed by the then current Directors of TOG and Elstron Limited. To this end, I met with Pope and Mr Peter Evans, a current Director of Elstron Limited in London on 9 November 2006. They were agreeable to signing an agreement but the Taxation Office was not, so no further action was taken at this time."[121]
Exhibit A at [42]
95. In his evidence, Mr McKellar confirmed that he had completed an Audit Preliminary Questionnaire for the period 1 July 2000 to 30 June 2004. He had ticked the box marked "No" when asked whether TOG held any assets or liabilities outside Australia. Mr McKellar said that was true because the loan was in Australia.
96. Mr McKellar said that he had managed to get TOG's records back from its accountants but said that there were no records of the loan. He had not been involved in the negotiations for the loan as they had been undertaken by the late Mr Rist. He agreed that his son, Mr Matthew McKellar had been a director of TOG at the time. Mr Rist had prepared the financial statements. Mr McKellar denied that his son had given Mr Rist instructions on which he prepared the financial statements. He could not offer any explanation how the Balance Sheets for 30 June 2001[122]
97. That other loan was from TPP. It had made loans, Mr McKellar said, to TOG before 2001. He did not know whether it had done so as the trustee of a McKellar Family Trust or in its own right. He had not been a director of TPP at the time. The purpose of the loan was to ensure that TOG maintained a cash flow as it operated without bank loans at the time. Mr McKellar could not say what rate of interest TPP had charged TOG but knew that it was not a fixed rate. Interest, in fact, has not been paid in the years of income from 2001 to 2004 and there is no formal loan agreement. He believed that the loan had been repaid by payments made in approximately 2001 and 2002. He could not say if any part of the loan had been outstanding in the 2002-03 year of income. Mr McKellar was unable to produce TPP's financial records saying that they had been archived. He was not aware that, between 1996 and 2004 and beyond, TPP had lodged with the Commissioner a notice that it was not required to lodge a return.[124]
98. The McKellar Family Trust has lodged a return. Mr McKellar could not explain why he had signed a return for the 2002-03 year of income that showed its main business activity as "cleaning service"[125]
99. The Balance Sheet as at 30 June 2003 showed a reduction in unsecured loans to $199,769[126]
100. Mr McKellar agreed that TOG's Profit and Loss Statement for the year ending 30 June 2001 showed that it had incurred a loss of $50,387 in that year and, having regard to the previous year, had an accumulated loss of $5,398.[127]
101. Mr McKellar described the documents such as TOG's Profit and Loss Statements and its returns as presenting the "high level picture". The documents TOG had submitted to its accountants had included the whole picture. He referred to documents such as ledgers and Balance Sheets and relied on them to establish that the loans were made. The problem that I have with documents such as these is that they are records. They record what has happened, or what is claimed to have happened, and characterise what has happened, or claimed to have happened, according to recognised accounting concepts. They are no more than records. A record made contemporaneously with, or shortly after, the occurrence of an event and recording it may be evidence that supports a claim that the event occurred. A receipt of a payment is such a document. It records the event being the payment. A document that is an integral part of an event is direct evidence of its occurrence. A contract is such a document. A financial record such as a ledger is a step removed from documents such as receipts or contracts in that they simply record their contents or their existence. Financial records may be accepted as evidence of what they record but, when what they record is called into question, it is not enough to point to them as proof of the occurrence of the events. There must be something more.
102. The "something more" may be established by the fact that what is recorded is self evident or at least a logical part of the pattern of past and continuing events. Payments which are regular and continuing may fall into that category if at least some of the payments and their characterisation are supported by other evidence and they are of a sort that are likely to be regular and continuing. A loan of the amounts said to have been lent by Elstron to TOG does not fall into that category. Its mere size puts it outside the category for a start. So too does the fact that it is an undocumented interest free loan made without Elstron's requiring any form of security for its repayment which is to take place several years later. TOG's own financial profile at the relevant times as a company that is operating at a loss when Elstron agreed to make the loans also takes it way outside the sorts of payments that might be accepted without supporting evidence beyond its mention in a company's financial records.
103. Even at their "higher level", I should be able to see in the Balance Sheets some indication of a loan of the size said to have been made by Elstron. The non-current liabilities recorded in TOGs' Balance Sheets for the financial years ending 30 June 2001 to 2003 are $269,021,[130]
104. These matters lead me to question whether the loan was ever made. When neither Mr McKellar, who was a Director when TOG is claimed to have negotiated the agreement, nor a representative from Elstron was called to give evidence about the agreement to make the loan and its terms, my questions become more insistent. They lead me to draw an inference that, had they been called, they would not have supported the claim that Elstron had made a loan to TOG. That inference is not dispelled by Mr McKellar's evidence that he had gone to London and discussed the matter with Mr Pope, who had been a Director of Elstron in 2002, and later in 2006 both Mr Pope and Mr Evans, who is currently a Director. Mr McKellar's role as TOG's Public Officer does not mean that his satisfaction that a certain event occurred establishes that it did or that it is even evidence of that event. At my request, Mr McKellar attempted to telephone Mr Pope during an overnight adjournment regarding the contract but Mr Pope was not available to give evidence. The reason was not clear to me but, if it was a matter of logistics, I note that Mr McKellar, and through him TOG, has been on notice that the existence of the contract has been questioned and doubted by the Commissioner since at least 2006.
105. In view of these matters, I am not satisfied that, on the balance of probabilities, Elstron made a loan to TOG of the amounts it has claimed it has made or of any amount at all.
Moneys forwarded to TOG by ATD
106. Mr McKellar's submission was that the amount of £ 3,134 credited to the TOG GBP currency account and received from ATD was not included in TOG's tax return because it was the property of TPP. He said that a cheque was drawn on TOG's cheque account for an amount in Australian currency that was equivalent to £ 3,134 i.e. $8,642.33. That amount was paid into TPP's cheque account on 8 July 2002.
107. On the evidence that is available to me, I am not satisfied that the amount belonged to TPP. Mr McKellar said that the money related to work he had undertaken as a director of TPP in its winding up. There is a question whether it is Mr McKellar's money. As for its being TPP's money, I do not understand why Elstron would be paying anything towards the winding up of TPP. Any association TPP had with Elstron was at arm's length and ended with its transferring, on 30 April 1997 and 12 June 1997, the shares it held in OIUK and ATD to Elstron.
Interest received on TOG's GBP account
108. As I understand Mr McKellar's submission, he had two reasons why the interest paid on the amounts in the GBP accounts did not need to be returned. The first was that the interest had not been converted to Australian dollars. Therefore, it did not have to be shown in TOG's returns as it was not legal tender. It could not be spent without converting it and the GBP accounts were not actually located in Australia. The second was that it could not be income because TOG did not deal with it at all.
109. As to Mr McKellar's first submission, I note that s 6-5(2) of the Income Tax Assessment Act 1997 (ITAA97) provides:
"If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year."
110. An "Australian resident" means a person who is a resident of Australia for the purposes of ITAA36.[133]
"… a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are resident in Australia."[134]
ITAA36, s 6(1)
111. Mr McKellar has not given me any material that suggests that TOG does not come within the definition of an Australian resident. Therefore, its assessable income will include interest payments for they are ordinary income according to ordinary concepts.[135]
"The Income Tax Assessment Act makes subject to taxation the income of every Australian resident, whatever may be the source of the income. In the present case the taxpayer's income receipt in London should be taxed upon its value at the time of receipt. …"[136]
and affirmed on appeal in the Privy Council on the further point that the taxpayer’s assessable income must be expressed in Australian currency regardless of the currency in which it was received; Payne vFederal Commissioner of Taxation [1934] HCA 7 ;(1934) 51 CLR 197 at 206 per Gavan Duffy CJ, Evatt and McTiernan JJPayne vFederal Commissioner of Taxation [1936] HCA 30 ;(1936) 55 CLR 158 at 163–164, 165;[1936] AC 497 at 508–509, 510
It does not matter that TOG never used the interest it received for, as the majority of the High Court said in Payne v Federal Commissioner of Taxation:
"… What a taxpayer chooses to do with income derived outside Australia after its receipt is, of course, of no significance to the Commissioner …"[137]
[1934] HCA 7; (1934) 51 CLR 197 at 206 per Gavan Duffy CJ, Evatt and McTiernan JJ
112. Mr McKellar submitted that the all the amounts of interest said not to have been returned by TOG were those listed at AD38 to AD41 annexed to his statement.[138]
113. Apart from the odd entry, I cannot find any significant degree of correlation between the Bank Statements and the General Ledger entries. There is, for example, a record of $5,000 on 16 October 2002 against an entry of "2 Manual Cheques (non compu TECHNOLOGY PLUS P/L" that may have some reference to the withdrawal, by means of a cheque, for $5,000 recorded for that day in the Bank Statement.[139]
114. Mr McKellar has not challenged the rates at which the interest was converted from pounds sterling to Australian dollars and I cannot take that matter any further. It follows that I am not satisfied that Mr McKellar has proved that the Commissioner has incorrectly included amounts of interest as taxable income.
Conclusion
115. It also follows from the findings that I have made on each of the issues, that I am not satisfied that TOG has met its burden of proof to establish that the Commissioner's assessments are excessive. Therefore, I affirm the Commissioner's objection decision in so far as it relates to the assessment of TOG's taxable income and the tax payable thereon.
Penalties
116. A taxpayer is liable to an administrative penalty if any of the four circumstances set out in s 284-75 applies. Only those in s 284-75(1) and (2) may be relevant in this case. They apply if a taxpayer makes:
- "(a) … a statement to the Commissioner …; and
- (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it."[140]
TA Act, Schedule 1, s 284-75(1)(a)
- "(a) … a statement to the Commissioner …; and
- (b) in the statement, you treated an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable; and
- (d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you."[141]
TA Act, Schedule 1, s 284-75(2)(b)
117. The Commissioner has taken the view that TOG made a statement that was false or misleading in a material particular and so is liable to an administrative penalty. On behalf of TOG, Mr McKellar submitted that TOG revealed everything to its accountants who prepared the returns. He maintained that everything that had been revealed to the Commissioner was correct.
118. In view of the findings I have made, I find that TOG's omission of the interest payments is an untrue statement because the omission of the interest payments means that TOG's taxable income is understated. i.e. they are false statements within the meaning of s 284-75(1). They are also misleading in the meaning of s 284-75(1) in the sense that have caused the Commissioner "… to have a false impression or belief …"[142]
119. What is meant by the expression "false or misleading
in a material particular
" (emphasis added) was considered by the Full Court of the Federal Court in Minister for Immigration v Dela Cruz[143]
"… The term 'material' requires no more and no less than that; the false particular must be of moment or of significance, not merely trivial or inconsequential.
… In the context of s 20(1), a statement will be false or misleading in a material particular if it is relevant to the purpose for which it is made …. A statement will be relevant to that purpose if it may - not only if it must or if it will - be taken into account in making a decision under the Act as to the grant of the visa or entry permit in respect of which the statement is made.
For present purposes, it is sufficient to say that a statement made to an immigration official by a person seeking to enter Australia, which conveys a false or misleading impression of the person or of his or her circumstances, would be a false or misleading in a material particular. Immigration officials are entitled to seek and to be told the truth about a person applying to enter Australia, so that they may be in a position to evaluate the application made to them. They may consider it desirable to ask further questions about the subject matter of the statement made to them and, with answers to further questions, the statement may be more useful. But it does not follow that, without further questions, the statement is not material in the sense in which the word is used in s 20(1)."[144]
1992] FCA 71; (1992) 34 FCR 348 (1992) 110 ALR 367 (1992) 26 ALD 663 at [14]; 352; 371; 666
120. The principles established in Dela Cruz seem equally applicable in this. A statement, or an omission from a statement, that conveys a false impression of the amount of taxable income is misleading in a material particular. A taxpayer's taxable income is at the heart of a taxpayer's obligation under the ITAA36 and ITAA97 to pay tax and so the base line from which the Commissioner carries out his functions under that legislation. A statement about the amount of that taxable income is material and so a statement that is false or misleading about that subject is false or misleading in a material particular.
121. Once it has been decided that a taxpayer is liable to an administrative penalty, the next step is to work out the amount of that penalty. It is worked out according to s 284-85 of the TA Act. The first step is to work out the base penalty amount under s 284-90.[145]
" Shortfall amounts Item You have a shortfall amount in this situation: 1 A tax-related liability of yours for an accounting period … worked out on the basis of the statement is less than it would be if the statement were not false or misleading. 2 An amount that the Commissioner must pay or credit to you under a taxation law for an accounting period … worked out on the basis of the statement is more than it would be if the statement were not false or misleading. 3 A tax-related liability of yours for an accounting period worked out on the basis of the statement is less than it would be if the statement did not treat an income tax law as applying in a way that was not reasonably arguable. 4 An amount that the Commissioner must pay or credit to you under a taxation law for an accounting period … worked out on the basis of the statement is more than it would be if the statement did not treat an income tax law as applying in a way that was not reasonably arguable."
I am satisfied that TOG had a tax-related liability during the years of income in question that would have been less than it would have been had it correctly stated its taxable income.[147]
122. The base penalty amount is worked out according to the table at s 284-90 of the TA Act. That section contains six situations and determines the base penalty amount for each. Only the first four are relevant in this case:
| Item | In this situation: | The base penalty amount is: |
| 1 | Your shortfall amount or part of it resulted from intentional disregard of a taxation law by you or your agent | 75% of your shortfall amount or part |
| 2 | Your shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a taxation law | 50% of your shortfall amount or part |
| 3 | Your shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a taxation law | 25% of your shortfall amount or part |
| 4 | Your shortfall amount or part of it resulted from you or your agent treating an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your income tax return. | 25% of your shortfall amount or part |
123. The Commissioner imposed a base penalty, and so an administrative penalty, of 75% of the shortfall amount. He did so on the basis that the shortfall amount had resulted from the intentional disregard of a taxation law by TOG or its agent. Mr Broadfoot supported the Commissioner's conclusion by referring to the passage from the judgment of Jessup J in Lawrence v Commissioner of Taxation:[148]
"… it is a normal and legitimate part of the fact-finding process to infer what was a person's subjective purpose from circumstances confronting him or her, and from things done by, and statements made by, him or her, in response to those circumstances. As I have held above, the circumstances surrounding the Applicant's undertaking of the schemes in the present case so strongly bespeak a purpose on his part of obtaining a tax benefit as to have called for a clear and detailed explanation, if he proposed, as he has done, to resist a conclusion of the kind to which s 284-145(1)(b)(i) refers. No such explanation was forthcoming."[149]
[2008] FCA 1497; (2008) 70 ATR 376 at [105]; 407
124. I have considered whether TOG's shortfall amount resulted from recklessness by TOG or its agent as to the operation of a taxation law within the meaning of item 2 of the table in s 284-90. In Mr Archibald Dixon ATF the Dixon Holdsworth Superannuation Fund and Commissioner of Taxation,[150]
- "24. The taxpayer is liable to pay the penalty in this case if either he or his agent was reckless. Recklessness is not defined in the TAA, but it is has been discussed in a number of cases. In
Reed (Albert E) and Co Ltd v London and Rochester Trading Co Ltd [1954] 2 Lloyds Rep 463, Devlin J said (at 475) recklessness 'means deliberately running an unjustifiable risk'. In
Shawinigan Ltd v Vokins and Co Ltd [1961] 3 All ER 396 at 403 , Megaw J said 'recklessness is gross carelessness' or 'a high degree of carelessness'. His Honour continued:The only test, in my view, is an objective one. Would a reasonable man, knowing all the facts and circumstances which the doer of the act knew or ought to have known, describe the act as ' reckless ' in the ordinary meaning of that word in ordinary speech?
- 25. That approach has been followed by the Tribunal in other cases. In
Jones and Commissioner of Taxation [2003] AATA 84, I suggested at paragraph 26: 'recklessness means more than mere carelessness. It incorporates an element of rashness or heedlessness': see also
Re Taxpayer and Commissioner of Taxation [2004] AATA 1304 at paragraph 94;
Arrow Pearl Co Pty Ltd and Commissioner of Taxation [2005] AATA 340 at paragraph 98. Recklessness falls short of a finding of intentional disregard, where the taxpayer or the agent presses a claim they know to be wrong. Similarly, a finding of recklessness does not imply the applicant or his agent were dishonest: see
Hart v Commissioner of Taxation (2003) 131 FCR 203 at 214 per Hill and Hely JJ."[151][2006] AATA 130; (2006) 62 ATR 1001; at 1006; 2096 2006 ATC 2092
125. In this case Mr McKellar's explanations and statements supporting his claims that TOG had received loans, rather than income, had declared all of the interest paid in foreign currency and that a relatively small amount belonged to TPP rather than TOG reveal little, if anything, of even a basic understanding of the taxation law. I have thought about whether his presentation at the hearing was an accurate representation of him and of his knowledge of events or whether it was part of a deliberate attempt to be disingenuous and to be a deliberate obfuscation of TOG's affairs.
126. I carefully listened to him for three days, read his statements and examined the course of his dealings with officers of the Australian Taxation Office (ATO). I listened to explanations that do not sit well with ordinary practices of sound business. A loan of a significant amount to a company that was incurring losses each financial year does not make sound business sense. It makes even less sense when the loan is unsecured and no interest is payable. I have listened to his statements that he is TOG's Public Officer and of his duty in that role to satisfy himself of the accuracy of statements made in TOG's financial records. The following exchange between Mr Broadfoot and Mr McKellar is illustrative of Mr McKellar's approach to the issues relating to TOG's financial and taxation affairs and of his reluctance to attribute any responsibility for its affairs to his son, Mr Matthew McKellar, who was one of its directors. The exchange took place in relation to TOG's Financial Report accompanying its return for the 2001 year of income:
"And what we now have in this document that I have given to you is the complete and original version of the financial report for the year ended 30 June 2001 of The Optimise Group, isn't it?-Yes, it is. Yes.
And you will see, if you turn over from the two pages from the trading profit and loss statement, there's a page titled Minutes of Director's Meeting?-Yes. Yes.
Held on 16 December 2001?-Mm.
And the signature at the bottom of the page is Matthew McKellar's signature, isn't it?-It is, yes.
And over the page is a - hold on - if you go back, Mr McKellar, just go back to the trading and profit and loss statement that we were referring to a moment ago. You have that?-Yes.
And turn back two pages previously. It's a page titled The Optimise Group Pty Limited Director's Declaration?-Yes.
And, again, that's Matthew McKellar's signature as a director on that page?-Yes, it is. Yes.
And he has made a declaration there, two declarations: the first declaration is that the financial statements and notes presents fairly the company's financial position as at 30 June 2001. You see that?-Yes.
And its performance for the year ended on that date in accordance with the accounting policies described in note one to the financial statements?-Yes.
Yes. And you have no basis to doubt the accuracy of that declaration, do you?-In terms of the solvency of the company, no.
No, in terms of whether the financial statement -?-Well, I don't think there's any point going through this over and over. I accept and have said all along that there will be a difference between - in terms of what is recorded on the balance sheets of the companies, which I don't understand the detail of; I do not have access to the detail. I have no doubts that the overall presentation is fine, but in terms of what has occurred in terms of the balance sheet items of the companies on the tax returns, I don't know.
Well, Matthew McKellar must have made some inquiries in order to make that declaration, I suggest, wouldn't he?-Well, the public officer makes the inquiries. You know, I can't state it any more times.
I see?-At the end of the day, we're discussing things that I don't know the answers to. And I have been up front in that ever since this started.
You don't know the answers?-No, I don't know the answers, no.
Well, I think we might be able to leave it at that, Mr McKellar?-Sorry?
Over the page - after this document is the tax return -?-Yes.
- signed by the public officer, dated 26 June 2002?-Well, that's been done in error.
Well -?-It should have been signed by me, but -
Is that your signature?-On that document?
On the tax return?-No, it's not, it's Matthew's.
I see. Well, leaving that aside, if you turn four pages into that document, we see the line item, the item J?-Yes.
164,620, you see that?-Yes, I do. Yes.
And it's your evidence that, when you're disclosing debt in the company's tax returns, you only disclose debt that doesn't bear interest. Is that what you say?-Well, that's my understanding of what label J reports.
Yes. Deputy President, can I tender the original financial report for the year ended 30 June 2001, and the tax return signed by Mr Matthew McKellar dated 26 June 2002?"[152]
Transcript at 96–97
127. The following passage from Mr McKellar's evidence is illustrative of the way in which he puts responsibility for TOG's affairs on the late Mr David Rist. In doing so, he sidesteps any responsibility that he had as its Public Officer during the relevant years and moves the focus from the specifics of his actions to the generalities of what he has done.
"With regard to penalties, I really don't have much to say. I do not believe that anything that we did was deceptive or misleading. We were in an extremely difficult situation in that the man who owned the company, who we relied on - and if I can say something about Mr Rist, he was a tremendous bloke. He was an extremely good accountant. He had something like 1500/1600 tax clients. He had lots of people that had worked for us over the years as clients and I was with him as an accountant for 20-plus years and I never heard of anybody being queried about anything.
I do know in relation to this discussion that I had - well, sorry, I had discussions with Mr Rist before he died, about this - well, sorry - principally about the changes of taxation coming about at the start of the 01/02 years and I understand that it was of, you know, a very complicated change but he had put a large amount of thought into how to appropriately handle the taxation issues of the company. We had always relied on him in terms of balance sheet issues for any company that I've ever dealt with, for his advice. We've always run the operational accounts of the company which principally record income and expenses and we're very particular about making sure that that subject was handled correctly in our tax returns.
The subject of balance sheet issues and taxation issues within a company, well, I've deferred to the expert in terms of what they do. Unfortunately, well, yes, very unfortunately - if Mr Rist was alive we wouldn't be having this conversation because it would never have got to this point. He would have had access to all of the information that anybody could ask about this and it would have been all over; one of the unfortunate things that occurred with the takeover of his practice over time as people left. And basically, you know, we left the practice to look after ourselves initially. And when we left the practice we just did not get anything from the practice in terms of our records and that was partly to do with us knowing some of the people that left and it was not - yes, well, I won't go too far on it but, you know, when we asked for our records, we basically got nothing.
So, you know, that's why I rely, you know - we've always been pretty precise about saving our records. That's why I showed you all the records that we have here. We are competent in terms of looking after our own operational accounts. The computer systems that you're looking at there, or the output, we wrote. We write financial systems for as part of our activities and we've done it for many years, that the actual software that produced all the operational figures is installed in some 3,000 or 4,000 sites worldwide. So, we're not ignorant of accounting issues and, you know, we don't think we've done anything wrong."[153]
Transcript at 199–200
128. Accepting that he does not know certain matters or does not have all of the relevant records, Mr McKellar did not choose to call his son or any of TOG's former accountants to give evidence. His choice is difficult to understand. In the case of the accountants, I understood his evidence to be that Mr Rist's widow was also an accountant in the firm. She became the sole shareholder in TOG after her husband's death and it may be that she had some insight into TOG's affairs. Mr Matthew McKellar would certainly be expected to have some insight in his position as one of its directors at the relevant time.
129. Statements made by Mr McKellar of the sort that TOG was only required to disclose debt that does not bear interest reveal either a lack of understanding of the law, a lack of understanding of an ordinary business term "liabilities" or an attempt to appear to lack understanding of those matters.
130. In the face of the evidence, I am not satisfied that TOG has met its burden of proof. I am not satisfied that its actions, undertaken by Mr McKellar on its behalf, were anything less than intentional. He is a man who has been in business for many years and who has referred to his need to possess knowledge of accounting issues in order to develop the software that has been at the heart of TOG's business. I do not accept that the false and misleading statements he made were as a result of recklessness in the sense of gross carelessness. They were intended to conceal taxable income. I have decided that, to the extent that the assessments imposed penalties at the rate of 75% of the shortfall amounts, they are not excessive.
131. The Commissioner has increased that base penalty amount by 20% under s 284-220 on the basis that TOG:
"… took steps to prevent or obstruct the Commissioner from finding out about a shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty was calculated."[154]
TA Act, Schedule 1, s 284-220(1)(a)
132. Mr McKellar has said that the ATO should have made allowances for the fact that the person who could have answered all of their questions was dead. It should have realised that the information it required was never held at TOG's business premises but at the premises of its accountants and, by the time it asked for the information, both the accountants and TOG had moved offices on at least two occasions. His statements cut across the obligations of a taxpayer to keep records and information as required by ITAA36.[155]
"… a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act."
The records to be kept under s 262A(1) include:
- "(a) any documents that are relevant for the purpose of ascertaining the person's income and expenditure; and
- (b) documents containing particulars of any election, choice, estimate, determination or calculation made by the person under this Act and, in the case of an estimate, determination or calculation, particulars showing the basis on which and method by which the estimate, determination or calculation was made."[156]
ITAA26, s 262A(2)
They must be kept to the latest of the following periods: five years after they were prepared or obtained; five years after the completion of the transactions or acts to which the records relate; and the end of any extension of the period during which the Commissioner may amend an assessment in respect of the person's year of income to which the records relate or in which the act or transaction to which the records relate was completed.[157]
133. Mr McKellar was very critical of the manner in which the ATO carried out its audit. The types of matters of which he is critical and which he detailed in his statement,[158]
"During the course of this audit there have been many allegations that TOG has failed to co-operate with the Taxation Office or to answer correspondence in a timely manner. I would point out that it was known from the outset of the audit that I was the Public Officer of TOG and that auditors were aware of my telephone number. There has never been any allegation that I neglected to answer any telephone call so I am at a loss to understand why none of the officers bothered to call prior to sending correspondence, to follow up on non-responses to correspondence or to notify TOG of changes to personnel assigned to the audit."
134. This paragraph suggests that Mr McKellar's understands an audit to be conducted at his pace and at his convenience. I understand that he has suffered two heart attacks but, on his own evidence, the audit did not commence until after September 2005 and so more than eighteen months after his second heart attack on 20 January 2004 and considerably longer after his first on 22 June 2001. Four more years were to pass before he was fitted with a pacemaker in October 2009.
135. On 29 September 2005, Mr Henry Sledziona, the ATO officer conducting the audit, issued Notices of Intention to Audit to Mr McKellar and TOG.[159]
136. Mr Sledziona interviewed Mr McKellar on 16 November 2005 and kept notes of the interview. At some time after 16 November 2005, he transcribed his notes.[161]
137. Mr McKellar ignored the letter and its request because he "… was absolutely livid … that it stated I had said at interview that I personally had received loans from Elstron Limited."[165]
138. Mr McKellar, I find, did not answer the letter. He and Mr Sledziona had a conversation on 1 September 2006. Mr McKellar and Mr Sledziona, I find, did not see eye to eye during that conversation. On his own admission, Mr Sledziona was terse and frustrated during it because of what he saw as Mr McKellar's failure, and that of TOG, to cooperate with the audit. Mr McKellar made no acknowledgement that he had made any contribution to the difficulties that I find undoubtedly attended their conversation. On the basis of Mr McKellar's own evidence that he had told Mr Slezdiona that he would not be answering his letter or attending at the ATO, I accept Mr Slezdiona's evidence that he did not pursue Mr McKellar for a response regarding the loan during their conversation. He understood that Mr McKellar would not be responding to him and chose instead to pursue the matter further in a letter addressed to Mr McKellar as TOGs' public officer. I accept that he was not satisfied with Mr McKellar's answers to him that the amounts were loans made to TOG by Elstron. The basis for his dissatisfaction was that they did not appear to correspond with any relevant entries in TOG's financial records. Mr Sledziona sent the letter on 28 September 2006.[167]
139. Mr Dimitrios Houridis took over the audit and issued notices under s 264 of ITAA36 requiring TOG to provide information and answer questions. They were enclosed in a letter dated 4 June 2007.[168]
"… I said surely as a director he would be aware of £ 800,000 in 2001 being received from Elstron. He said that may have been something his accountant at the time David Rist may have arranged. He said the coy had a legal dispute with Worforce Dynamic and David Rist organised a 'lifeline'.
I explained that I had discussed the matter of non compliance of the notice with our prosecutions area and that it would be in the interests of Optimise and the Public Officer to comply with the requirements before a summons is issued. He said he may wait and see. I said he could still be required to comply despite any inaction in the meantime."[170]
Exhibit A at AD010
140. On 5 July 2007, Mr Matthew McKellar spoke with Mr Houridis regarding the s 264 notices. He asked Mr Houridis for an electronic copy of the s 264 notices on the basis that TOG had not received them.[171]
141. On the basis of Mr McKellar's evidence, I find that Mr Houridis refused his request for an explanation why he had replaced Mr Sledziona as the person conducting the audit. I also accept that Mr McKellar thought Mr Houridis to be uncooperative and asked him for the names of his managers. Mr Houridis obliged by giving the names and telephone numbers of two managers.
142. I find that Mr McKellar's response to the s 264 notices was to do nothing. His reason for this course of action was that he:
"… took Houridis at his word that the matter was already with Prosecutions and did not follow up with a call to either of his managers to do any more in regard to answering the Section 264 notices at this time."[172]
Exhibit A at [20]
143. Mr McKellar addressed the allegation that TOG had taken steps to prevent or obstruct the Commissioner from finding out about a shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty was calculated. He referred to his always being available on the telephone and to his view that the auditors should have telephoned him before writing to him or to follow up unanswered correspondence.[173]
144. In his explanation, Mr McKellar chooses to focus on his readiness to answer telephone calls in his attempt to cast blame on officers of the ATO. He completely neglects to address his failure to respond to the correspondence those officers sent him. In so far as the letter of 7 December 2005 was concerned, his failure was as a result of a deliberate decision to ignore it rather than to respond to it and explain where he thought the ATO had made errors. I find that his later failure to follow up on the s 264 notices followed from his view that the matter was with the prosecutions area of the ATO. This was despite his being told that it was in TOG's and the Public Officer's best interests that he did so. Certainly, the Commissioner had initially reached a mistaken view that the money had been lent to Mr McKellar personally but this was a misunderstanding that he could have chosen to explain. I accept that Mr Sledziona might have been terse in one conversation but I also accept that the nature of Mr McKellar's responses, or lack of responses, justified that terseness.
145. In deciding to do nothing, Mr McKellar took steps to prevent or obstruct the Commissioner from finding out about TOG's affairs and, in particular, about the proper characterisation of the moneys received from Elstron. Both active and passive acts can amount to "steps". He maintained that the moneys were a loan and, I find, appeared to adopt the position that the ATO, and so the Commissioner, should accept that the moneys were a loan. His position was untenable on the evidence, or rather lack of evidence, that TOG had to support any argument that the moneys were indeed a loan.
146. I have considered whether Mr McKellar was simply overwhelmed by events and became incapable of functioning. He has not expressly stated that was so but his doing nothing could be a manifestation of it. Mr Rist had died and he had not only been TOG's accountant but also one of its directors from 15 May 1998 until his death on 16 November 2002. It appears that he played an important role in the management of TOG and might have been a primary source of knowledge about the company's affairs. If that is so, I can understand that Mr McKellar may feel lost without him but this case is not about him but about TOG and its liabilities and responsibilities. As its public officer, Mr McKellar was, under s 252(1)(f) of ITAA36, "answerable for the doing of all such things as are required to be done by the company under this Act or the regulations …". "Answerable" means "accountable"[174]
147. Sections 284-90 and 284-220(1)(a) of Schedule 1 to ITAA36 are expressed in terms of the taxpayer's being "liable to an administrative penalty". That could leave open a question whether the Commissioner has any discretion whether to impose the administrative penalty or to refrain from doing so. There are two things that persuade me that he does not have such a discretion. The first is the meaning of the word "liable" in this context. It is that of "legally bound or responsible"[176]
148. Section 298-20 does not set out any guidelines as governing the exercise of the discretion. Given the provisions relating to the imposition of penalties, there would clearly need to be circumstances that could be regarded as mitigating the taxpayer's behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of ITAA36 and TA Act in supporting that purpose. I am satisfied that there are no circumstances that mitigate those in which TOG finds itself. Mr McKellar has made allegations about the behaviour of ATO officers in relation to the audit. On the evidence, I am not satisfied that their actions are anything other than those of reasonable officers trying to do their jobs. Certainly, Mr Sledziona made a mistake in his letter dated 7 December 2005 when he suggested that the loan had been made to Mr McKellar but he readily acknowledged his mistake. A mistake of that sort did not justify Mr McKellar's refusal to respond to his letters. On the evidence that I have, I am satisfied that the behaviour of the ATO's officers has not impinged on their functions in carrying out the audit. I am also satisfied that their actions do not justify the actions of TOG and of its Public Officer in pursuing their claims for deductions or failing to disclose the full amount of its income. There are no grounds for remitting the penalties under s 298-20 of Schedule 1 of the TA Act.
149. For the reasons I have given, I affirm each of the objections decisions of the respondent dated 3 July 2009.
Footnotes
[1][2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18]
[19]
[20]
[21]
[22]
[23]
[24]
[25]
[26]
[27]
[28]
[29]
[30]
[31]
[32]
[33]
[34]
[35]
[36]
[37]
[38]
[39]
[40]
[41]
[42]
[43]
[44]
[45]
[46]
[47]
[48]
[49]
[50]
[51]
[52]
[53]
[54]
[55]
[56]
[57]
[58]
[59]
[60]
[61]
[62]
[63]
[64]
[65]
[66]
[67]
[68]
[69]
[70]
[71]
[72]
[73]
[74]
[75]
[76]
[77]
[78]
[79]
[80]
[81]
“relevant entity, in relation to a year of income, means:
(a) a company; or (b) any person in the capacity of a trustee of:
(i) a fund that is an eligible ADF in relation to that year of income; or (ii) a fund that is an eligible superannuation fund in relation to that year of income; or (iii) a unit trust that is a pooled superannuation trust in relation to that year of income. ”
[82]
[83]
[84]
[85]
[86]
[87]
[88]
[89]
[90]
[91]
[92]
[93]
[94]
[95]
[96]
[97]
[98]
[99]
[100]
[101]
[102]
[103]
[104]
[105]
[106]
[107]
[108]
[109]
[110]
[111]
[112]
[113]
[114]
[115]
[116]
[117]
[118]
[119]
[120]
[121]
[122]
[123]
[124]
[125]
[126]
[127]
[128]
[129]
[130]
[131]
[132]
[133]
[134]
[135]
[136]
[137]
[138]
[139]
[140]
[141]
[142]
[143]
[144]
[145]
[146]
[147]
[148]
[149]
[150]
[151]
[152]
[153]
[154]
[155]
[156]
[157]
[158]
[159]
[160]
[161]
[162]
[163]
[164]
[165]
[166]
[167]
[168]
[169]
[170]
[171]
[172]
[173]
[174]
[175]
[176]
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.