• The impact of this case on ATO policy is discussed in Decision Impact Statement: Ng and Commissioner of Taxation (Published 2 November 2011).

NG v FC of T

Members:
Redfern J SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2011] AATA 399

Decision date: 9 June 2011

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Redfern J (Senior Member)

Background

1. Evergold Pty Ltd (Evergold) was registered on 4 June 2003 and operated a Chinese restaurant in Chatswood shortly after this date until at least 30 June 2007. Mr Edward Ng worked in the restaurant but was not a director or shareholder of Evergold. Mr Ng is married to Ms Rosetta Oi Lee, who is, and was at all material times, a director and shareholder of Evergold.

2. On 13 February 2006, the Australian Taxation Office (ATO) commenced an audit of Mr Ng for each of the income years ended 30 June 2003 to 30 June 2006. The audit was completed on 11 June 2008 and amended assessments were issued by the Commissioner of Taxation (the Commissioner) for each year, raising additional income tax of $24,258.54 for 2003/4, $5,058.37 for 2004/5 and $6,273.80 for 2005/6. Administrative penalties were imposed based on 75 per cent of the shortfall, with an increase of 20 per cent on the penalty for the 2004, 2005 and 2006 income years. Mr Ng objected to the amended assessments and penalties, but they were subsequently confirmed and Mr Ng was notified of the objection decision by letter dated 9 November 2009.

3. The amended assessments were based on cash flow spreadsheets for Evergold for the relevant period, which recorded "drawings" made by Mr Ng from Evergold. These amounts were not declared as income by Mr Ng. He contends the drawings were not income and have been improperly categorised as such by the Commissioner. Mr Ng seeks a review of the objection decision.

4. The dispute in relation to the year 30 June 2003 has been resolved and the matters before the Tribunal are confined to each of the years ended 30 June 2004 to 30 June 2006.

Issues

5. The Commissioner contends that, subject to some adjustments, the cash flow spreadsheets for Evergold for the relevant period are the most reliable evidence of Mr Ng's dealings with the company. Those records, as amended, show that Mr Ng was paid the following amounts by Evergold as "drawings":

2004	$46,432
2005	$10,705
2006	$15,241

6. The Commissioner argues that Mr Ng deliberately and intentionally under-declared his income by failing to include these drawings and, as such, an administrative penalty of 75 per cent was properly imposed. However, the Commissioner agrees that the additional 20 per cent penalty should be set aside.

7. Mr Ng contends the assessments are excessive because the Commissioner did not take into account any amounts deposited by Mr Ng into the Evergold business during the relevant period. Mr Ng argues there was a "running account" between him and Evergold, and the drawings recorded in the cash flow spreadsheets were in fact repayment of loans made by him to Evergold, as evidenced by the "deposits" also recorded in the cash flow spreadsheets. The Commissioner objects on the basis this is a new ground raised by Mr Ng and he should be limited to the grounds stated in the taxation objection to which the decision relates. Mr Ng's original objection was to the effect that the drawings recorded in the cash flow spreadsheets represent repayments of loans made by him to Evergold. When asked to provide further detail about the objection, Mr Ng's accountants attached a schedule summarising payments "in" and "out", which was said to be a record of transactions between Mr Ng and Evergold. They referred to the payments "in" as repayments made by Mr Ng to Evergold.

8. Mr Ng did not have legal representation and as a consequence there is some confusion about the basis of his objection. His accountants have raised two different arguments which are, on their face, inconsistent. On one argument, the drawings referred to in the cash flow spreadsheets were repayments by Evergold of loans made by Mr Ng. On the other argument, the drawings were loans made by Evergold to Mr Ng that he repaid through deposits. In his statement of facts and contentions, Mr Ng alleges there was a "running account" between him and Evergold, and the amounts referred to as drawings were repayments of advances made by Mr Ng to Evergold. Notwithstanding this confusion, it is not in dispute that the amounts recorded in the cash flow spreadsheets for Evergold as "deposits" by Mr Ng exceed those recorded as "drawings".

9. I am not satisfied the argument about a "running account" is a new ground. The effect of the argument raised by Mr Ng during the objection process was that, from time to time, there was a relationship of debtor and creditor between Mr Ng and Evergold, and any payments to Mr Ng were not income but rather should be properly categorised as repayments of loans by Evergold to him or, alternatively, loans to him by Evergold that were subsequently repaid. The phrase "running account" is used by Mr Ng to describe this arrangement but does not, of itself, prove payments were made by him to Evergold. In any event, the Commissioner was on notice of this argument and addressed the ground during the hearing. There was no identified prejudice and, as such, the argument should be allowed.

10. The issue for determination is whether the amended assessments and the administrative penalties are excessive. Mr Ng does not dispute he received payments from Evergold, being those amounts identified as "drawings" in the cash flow spreadsheets of Evergold. The key issue in dispute is whether Mr Ng can establish that these payments were repayments of advances made by him pursuant to a "running account", or some other informal arrangement, between him and Evergold. The Commissioner contends Mr Ng must not only establish that the advances or "deposits" were paid by him but were not otherwise derived from taxable income. Mr Ng contends the cash flow spreadsheets relied on by the Commissioner evidences the advances and he disputes the need to establish an alternative source for the deposits.

Legislative framework

11. The Commissioner may amend an assessment for a year of income within four years after the date on which he or she gives notice of the assessment to the taxpayer: Item 4 of subs 170(1) of the Income Tax Assessment Act 1936 (the ITA Act). An amended assessment is an assessment for the purposes of the ITA Act as noted at s 173. A taxpayer who is dissatisfied with an assessment may object in the manner set out in Pt IVC of the Taxation Administration Act 1953 (the TA Act): s 175A.

12. Part IVC of the TA Act deals with taxation objections, reviews and appeals. Where a taxation objection is lodged with the Commissioner within the required time, the Commissioner must make an objection decision: s 14ZY. If a person is dissatisfied with the Commissioner's objection decision and the decision is a reviewable objection decision, the person may apply to the Tribunal for review: subs 14ZZ(a)(i). The assessment, determination, notice or decision against which a taxation objection may be, or has been, made is a "taxation decision": s 14ZQ. Division 4 of Pt IVC modifies various provisions of the Administrative Appeals Act 1975 (the AAT Act) in relation to the review of reviewable objection decisions. Of particular importance is subs 14ZZK(b), which provides,

• "(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) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or
  • (iii) in any other case - the taxation decision concerned should not have been made or should have been made differently."

13. Division 284 of Schedule 1 to the TA Act deals with liability for administrative penalties. Division 298 deals with the machinery provisions for the imposition and remission of penalties.

14. A taxpayer is liable for an administrative penalty under s 284-75 of the TA Act if the taxpayer, or their agent, makes a false or misleading statement and the statement results in a "shortfall amount". Relevantly, there is a shortfall amount under subs 284-80(1) if:

"a tax-related liability ... worked out on the basis of the statement is less than it would be if the statement is not false or misleading".

15. Subsection 284-90(1) provides for a base penalty depending on the basis on which the tax shortfall resulted. If the shortfall, or part of it, resulted from a failure by the taxpayer to take "reasonable care", the penalty is 25 per cent of the shortfall amount. If the shortfall resulted from "recklessness" the penalty is 50 per cent of the shortfall amount and if the shortfall resulted from "intentional disregard" the penalty is 75 per cent of the shortfall amount.

16. The Commissioner may remit penalty under subs 298-20(1) of the TA Act and has issued guidelines, as set out in Practice Statement Law Administration (PS LA) 2006/2, as to when this discretion may be exercised. PS LA 2006/2 provides at [137]:

"A major objective of the penalty regime is to promote consistent treatment in respect of the rates of penalty imposed. The objective would be compromised if the penalties imposed at the specific rates were remitted without just cause, arbitrarily or as a matter of course."

17. According to PS LA 2006/2 penalty should be remitted where there would be "unintended or unjust results" but notes such cases would be "exceptional".

The evidence

18. Ms Rosetta Lee gave evidence for Mr Ng. She told the Tribunal that Evergold carried on the business of a Chinese restaurant, and she had been a director and company secretary for Evergold since it was incorporated in June 2003. She "was responsible for all aspects of the financial management of the company".

19. Ms Lee told the Tribunal she recorded cash transactions for the business in hand written cashbooks maintained by her. She instructed the company's book keeper to prepare cash flow spreadsheets based on these cashbooks. The cash flow spreadsheets recorded money paid to and from Evergold, the source and/or recipient of the payment and cash on hand. Relevantly, the cash flow spreadsheets recorded "Deposits from Edward" and "Drawings Edward", representing amounts received by and amounts paid to her husband, Mr Edward Ng. The cash flow spreadsheets also record other transactions, including takings and wages.

20. During the hearing, there were adjustments agreed between the parties in relation to the amounts recorded in the cash flow spread sheets based on the handwritten cashbooks. Based on these adjustments, it is agreed that the following represents the total cash transactions recorded between Mr Ng and Evergold for the relevant periods:

Period	Deposits	Drawings
1/07/04-30/06/04	$74,955.55	$46,432
1/07/04-30/06/05	0	$10,705
1/07/05-30/06/06	0	$15,241

21. Ms Lee gave evidence that when the restaurant did not have sufficient funds, Mr Ng would make advances to Evergold. These advances were generally recorded in the cashbook and the cash flow spreadsheets as "deposits". The records show that all of the deposits claimed for the relevant period were made in the year ended 30 June 2004. The cash flow spreadsheets did not refer to the payments by Mr Ng as "loans" but Ms Lee said this is what they were - the label given to the transaction by the company book keeper was not determinative of the true nature of the payment or receipt.

22. Ms Lee was cross-examined about the accuracy of some of the entries in the cash flow spreadsheets, and a schedule prepared by her summarising the deposits and withdrawals for each of the relevant years between 2003 and 2006. Apart from some adjustments that were subsequently agreed between the parties as referred to above, Ms Lee gave evidence that the cash flow spreadsheets were accurate.

23. Extracts from Ms Lee's handwritten cashbook were tendered and Ms Lee was cross-examined on the entries recorded as "IOU" for July 2003. These entries were recorded as "drawings" in the cash flow spreadsheets, and Ms Lee agreed these entries recorded payments made to Mr Ng where he owed money to Evergold, rather than where Evergold owed money to Mr Ng. Ms Lee gave evidence that before Evergold started trading, the business needed cash flow but her evidence is not clear on the amounts loaned, the source of the loans made to the company at this time and how it was recorded, as demonstrated by the following evidence (at T116/43 to T117/8 of the transcript):

"MS LEE: Well, before the company starts, we have to put in cash flow as well, but it isn't recorded in this financial year.

MS MCCARTHY: Who put in money?

MS LEE: We - like, you know, before we start a company we should have some cash flow on our hand to start off a company. You can't go into a company with nothing. There might be money that I've put in the company before 1 July 2003 which I didn't record it on the cash book or cash spreadsheet - cash spreadsheet, or even RL1. But to start off a business someone should have cash on hand to help the company.

MS MCCARTHY: So Edward is being paid these moneys. Who's keeping track of where the balance lies?

MS LEE: Previously?

MS MCCARTHY: No, on 10 July?

MS LEE: Another bookkeeper, not me."

24. Ms Lee was cross examined about the source of the funds for the deposits into Evergold and gave the following evidence, which suggests certain funds came from sources other than Mr Ng. The transcript (at T77/5 to 45) reads:

"MS LEE: I am the one to put in the money to lend the EVG Evergold Australia - Evergold Australia.

MS MCCARTHY: What on earth do you mean by that?

MS LEE: Sorry.

MS MCCARTHY: What do you mean by that? You're the one who puts in the money to lend to Evergold?

MS LEE: I'm the one to handle all the cash, so I know where the money comes from.

MS MCCARTHY; So you see the applicant come in with cash; is that right?

MS LEE: No.

MS MCCARTHY: Well, I don't understand what you mean, then?

MS LEE: Well, husband and wife - normally is the wife handling all the - well, from my family is I am the one to handle all the money in the family and the business as well. I sit in the front of my desk handling this business. When it's in short of cash, I will find ways to get cash back from other sources and then help the company whenever is needed. So I might get cash by myself or I might borrow from other source and then lend to company. But in words, this is only a label to say this money, it's a loan from our personal - or maybe - or Edward or I or even on behalf of the person lend the money - I will lend money from other source and then lend it to the companies all on behalf of myself as well, like, you know …

MS MCCARTHY: Ms Lee, the applicant's case is that he lent money to the company and he has been repaid by the company?

MS LEE: Yes.

MS MCCARTHY: And you understand that, when you get a repayment, that's because there's a debt. There's an obligation between the person who loaned the money - the borrower repays it. That's right, isn't it? That's what a loan is, isn't it?

MS LEE: Yes.

MS MCCARTHY: All right. Now, do you say that, on each of the days when there's a deposit from Edward, he was at the premises and gave you cash which you've recorded in the - or which Dennis has recorded or someone has recorded in the books as "a deposit". Is that what happened?

MS LEE: Can you say it again.

MS MCCARTHY: On each occasion when there is a deposit form Edward recorded in the cash flow statements, did Edward walk in - or perhaps he was already at the company premises - and hand you, or some officer of the company, cash in that amount?

MS LEE: Not true in most of the cases.

MS MCCARTHY: All right. So what happened in most of the cases?

MS LEE: In most of the cases is we, husband and wife - we had money. I just put him as a label. Sometimes the money is not - the money is not from - sometimes the money is not from him to get cash from other ways and then back into the office."

25. Her later evidence was more equivocal as to the source of the funds, the transcript (at T120/42 to T121/16) reads:

"MS MCCARTHY: Well, is your evidence now that some contributions are only from the applicant?

MS LEE: In most of the time it's joint.

MS MCCARTHY: Right?

MS LEE: Yes.

MS MCCARTHY: Well, I suggest to you that these are large deposits?

MS LEE: Yes.

MS MCCARTHY: And do you say you can't remember whether or not you contributed to these deposits?

MS LEE: Sometimes - well, I can't remember because I forgot if when the start of the business they need a little bit more cash flow for purchasing or for cash payments. We might ourselves borrow money from other people, our friends.

MS MCCARTHY: Cash from other people?

MS LEE: Yes. And I do have other business as well. I may borrow cash from other companies as well.

MS MCCARTHY: I'm not asking you what you might do. I mean, I'm really asking you …

MS LEE: So I can't remember.

MS MCCARTHY: Right, you can't remember?

MS LEE: I can't remember.

MS MCCARTHY: So just so I'm clear: you can't remember whether this is a joint loan and you can't remember if it is a joint loan where the money came from?

MS LEE: I can't remember. It's been ages ago."

26. Mr Ng declined to give evidence. Prior to the hearing, directions were made requiring the parties to file and serve the evidence on which they relied before the hearing. The only evidence relied on by Mr Ng was the evidence of Ms Lee, the cash flow spreadsheets and extracts from the handwritten cashbooks of Evergold. During the hearing, the matter was adjourned after the opening by the parties to give Mr Ng the opportunity to reconsider his position and, in particular, whether he wished to give evidence to support his case. Mr Ng declined and the significance of this is referred to later in this decision.

27. Correspondence was tendered by the Commissioner, without objection, being submissions provided to the Tribunal on behalf of Mr Ng dated 16 August 2010 and 21 December 2010. Ms Lee told the Tribunal she had assisted in the preparation of the submissions. They were tendered by the Commission to show inconsistencies in Mr Ng's argument about the source of the funds for the loans allegedly made to Evergold. One of the documents attached to the submission of 16 August 2010 was a letter dated 19 March 2003 from Church and Grace, Solicitors, which records that Mr Ng and Ms Lee remortgaged their home and $93,718 of the proceeds were paid to Ms Lee and Mr Ng. It is asserted in the submissions that these monies were used as a cash loan to Evergold. It is also asserted in the submissions of 21 December 2010 Mr Ng was able to source funds from another business operated by him and Ms Lee until about 2006 and these funds were the source for loans made to Evergold. There are documents attached to the submissions but none of these documents evidence moneys being paid to Evergold by Mr Ng in the relevant period. There is evidence of money paid to the administrator of Kam Fook (Chatswood) Pty Limited to purchase the restaurant in 2003, and there is evidence of a deposit into the bank account of Evergold of $50,000 on 16 November 2006. There is no evidence this deposit was a loan from Mr Ng and, in any event, the deposit is outside the relevant period. Neither Ms Lee nor Mr Ng gave evidence to support the submissions on the source or quantum of the loans alleged to have been made to Evergold.

28. When Mr Ng objected to the amended assessments by notice dated 28 November 2008, the ATO responded by letter dated 25 June 2009 requesting "copies of documents such as purchase invoices, payment receipts, details of goods or services purchased etc to support your objections". Mr Ng's accountants responded by letter dated 22 July 2009, and the only document provided was a spreadsheet summarising the payments alleged to be made by Mr Ng to Evergold, together with the drawings. The ATO disallowed the objection and the reason given was the failure of Mr Ng to provide supporting documents. This was also a problem at the hearing. The only documents produced to evidence loans said to have been made from Mr Ng to Evergold were the cash flow spreadsheets, extracts from the cashbook and the documents attached to the submissions of August and December 2010. Mr Ng did not produce any of his own records, such as bank statements, deposits slips or receipts, to substantiate his case.

Submissions of the parties and consideration

29. Mr Ng contends the Commissioner has relied on the cash flow spreadsheets to evidence the drawings but has failed to have regard to the deposits. This is said to be inconsistent, as the deposits represented advances by Mr Ng and they exceeded his drawings. Mr Ng contends there was no net benefit or income to him. The Commissioner contends the cash flow spreadsheets do not evidence a running account, and it cannot be inferred from the cash flow spreadsheets alone that that the drawings were repayments of advances made by Mr Ng to Evergold. The descriptions "deposits" and "drawings" should be given their ordinary meaning. If there had been a loan to Evergold by Mr Ng and a repayment of the loan, the cash flow spreadsheets should have referred to this. In any event, in the first month for the year ended the 30 June 2004, drawings exceeded deposits. Moreover, the position is complicated by the evidence from Ms Lee that money paid to Evergold was paid from other sources, including funds jointly held by her and Mr Ng.

30. Ultimately, the factual matters in dispute were narrow but significant. Mr Ng submits that the cash flow spreadsheets and the evidence of Ms Lee are sufficient to discharge his onus. The Commissioner disagrees. It is submitted that the cash flow spreadsheets do not establish that the drawings were repayments, Ms Lee's evidence is inconsistent and/or falls short and the failure of Mr Ng to give evidence in support of his case not only leaves the Tribunal with no evidence on a key issue in dispute but permits an inference that Mr Ng's evidence would not have assisted him (
Jones v Dunkel (1959) 101 CLR 298).

31. I am not satisfied on the evidence before me that the amended assessments for the years ended 30 June 2004 to 30 June 2006 are excessive, other than in respect of the amounts agreed by the parties as representing payments to Mr Ng for the income years 2004 and 2005. The Commissioner included drawings totalling $52,704 and $11,075 as income for Mr Ng for the years ended 30 June 2004 and 30 June 2005 respectively. It is now conceded by the Commissioner that these amounts should have been $46,432 and $10,705, being the amounts referred to in [20] of these reasons. Mr Ng also concedes these amounts were paid to him but does not agree they are properly assessed as income. I reject his contentions and my reasons follow.

32. In his submissions, Mr Ng takes issue with what he says is the "most draconian piece of law in the world" and, in particular the "presumption" of liability which is said to be created by subs 14ZZK(b)(i) of the TA Act. The section does not create a legal presumption, but once the Commissioner has issued an assessment, the onus falls to the taxpayer to establish the assessment is excessive. The effect of the provision (or its predecessors) has been considered by the High Court in a number of cases over the years, including
McCormack v FCT 79 ATC 4111; (1979) 143 CLR 284 and
FCT v Dalco 90 ATC 4088; (1990) 168 CLR 614, and most recently by Edmunds J in the Federal Court in
Hua-Aus Pty Ltd v Commissioner of Taxation [2010] FCA 341.

33. Mr Ng sought to rely on
McCormack v FCT to support his argument that "a natural inference" could be drawn from the cash flow spreadsheets about what Mr Ng alleges is the true nature of the drawings "unless there is evidence contradicting such an inference". The Commissioner says the facts of
McCormack V FCT do not support such an inference in the circumstances of this case. I agree.

34. In McCormack v FCT, the High Court considered an appeal concerning evidence given by the taxpayer about the purpose of an acquisition. Gibbs J stated at p 302:

"Of course the fact that the taxpayer did not give evidence, if unexplained, could be taken into account in deciding what inferences should be drawn from the evidence (Jones v Dunkel). And the fact that the taxpayer was disbelieved could, in appropriate circumstances, itself give rise to an inference adverse to the taxpayer's case (Steinberg v Federal Commissioner of Taxation). Nevertheless, if the proper inference to be drawn from the evidence is that the taxpayer bought the property for a purpose other than that of profit-making by sale, the appeal will succeed. An obvious example would be a case in which it clearly appeared that a taxpayer purchased a house and for many years thereafter occupied it as his own home. In those circumstances the natural inference, in the absence of evidence to the contrary, would be that the taxpayer had bought the house for the purpose of dwelling in it, and the fact that the taxpayer was not an honest witness would hardly matter. However, if the taxpayer's evidence of the purpose with which he acquired the property is not accepted, and it does not appear from the other evidence on the balance of probabilities that he did not acquire the property for the purpose of profit-making by sale, he will fail to discharge his onus of proof."

35. In this case, there is a record of deposits made by Mr Ng in the cash flow spreadsheets. However, there is no evidence about the source of the deposits and the evidence from Ms Lee on this issue is inconsistent and unclear.

36. Notwithstanding the cash flow spreadsheets, the evidentiary hurdle for Mr Ng is that he must prove, on the balance of probabilities that he did not derive from any source, taxable income to the amount of the assessments. He must go further than providing an explanation for the drawings, he must also explain the source of the deposits to show, for instance, they were not derived from other cash payments made to Mr Ng by Evergold that were not disclosed in the cash flow spreadsheets. This is illustrated by the decision of FCT v Dalco where Brennan J cited (at p 623) with approval, the following statement of Kitto J in
George v FCT (1952) 98 CLR 183 at p 39 about what was required by a taxpayer to discharge the onus:

"… in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment."

Deane J added at p 626 and 627 in FCT v Dalco:

"In a case where the only issue between a taxpayer and the Commissioner is whether a particular item of income which the Commissioner has treated as assessable income of the taxpayer was derived by the taxpayer or by someone else, the onus which the Act imposes upon the taxpayer will commonly be discharged if the taxpayer establishes, on the balance of probabilities, that the relevant income was derived by the other person. The present is not, however, such a case. Even if it be accepted that the respondent succeeded in proving that particular items of income were primarily derived by one or other of the companies associated with him, there remained in issue the question whether some or all of the relevant amounts had been subsequently derived by the respondent as payments in the nature of income made to him or on his behalf by that company. There also remained in issue the question of whether the respondent had derived other undisclosed income. The respondent's failure to discharge the onus which the Act placed upon him in respect of those remaining issues have the consequence that he failed to establish that the Commissioner's assessments of his assessable income were excessive."

37. Mr Ng also sought to rely on Hua-Aus Pty Ltd v Commissioner of Taxation and the decision of Burchett J in
Ma V Commissioner of Taxation 92 ATC 4373; (1992) 37 FCR 225 (which was referred to by Edmunds J at 46 in Hua-Aus Pty Ltd v Commissioner of Taxation) as follows at p 230:

"But if the taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spent his time, and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved. Any other view would introduce a degree of arbitrariness into liability for tax."

38. Neither case supports Mr Ng's argument. Mr Ng did not give evidence to deny any undisclosed source of income. Nor did he give evidence of the alleged deposits or provide a reasonable explanation of the source of the deposits.

39. The Commissioner contends, and I accept, that the person best placed to give evidence about the key issue in dispute was Mr Ng. Ms Lee gave evidence that monies deposited with Evergold were sourced from joint or other funds from time to time. In closing oral submissions Mr Ng attempted to explain the inconsistencies by suggesting Ms Lee may have been confused, but he did not himself give evidence on these matters. The Commissioner argues an inference can be drawn that Mr Ng's evidence would not have assisted him in establishing his case (Jones v Dunkel). I accept this and note that in the absence of evidence from Mr Ng, tested under cross examination, the Tribunal is left with the evidence of Ms Lee and the evidence from the cash flow spreadsheets and the handwritten cashbooks. These documents do not of themselves establish loans from Mr Ng or the source of the funds for the deposits. Indeed, the evidence of Ms Lee suggests the cash flow spreadsheets may not be reliable insofar as they record deposits paid by Mr Ng to Evergold.

Penalties

40. The Commissioner imposed administrative penalties on Mr Ng for "intentional disregard". Mr Ng did not make submissions on this issue and instead focused on his argument that the assessments were excessive and that there was no tax shortfall to attract penalty.

41. "Intentional disregard" involves deliberate conduct and an appreciation that the conduct would "flout" the tax legislation:
Price Street Professional Centre Pty Ltd v Commissioner of Taxation 2007 ATC 4320; (2007) 66 ATR 1. According to PS LA 2006/2, to establish intentional disregard the facts must show that the taxpayer "consciously decided to disregard clear obligations under a taxation law" at [109] of the PS LA.

42. It is not disputed Mr Ng lodged tax returns that excluded drawings paid to him from Evergold. He submits these amounts were properly excluded because they were not income and should be offset against the payments he claims he made to Evergold. Mr Ng failed to produce records or give evidence adequately explaining the payments and the source of those payments. The inference is that he did not maintain records and was unable to substantiate such a claim. However, there is no evidence as to whether this is because the records did not exist and the loans were not made (or were made from taxable sources) or whether Mr Ng was a poor record keeper and historian. Mr Ng asserts, wrongly in my view, that the cash flow spreadsheets are sufficient to evidence what he says were loans made by him to Evergold. He maintained this position in his dealings with the Commissioner at the time of the audit and throughout these proceedings. While I have formed a different view, there is some documentation to support his claims, and I am not satisfied there is evidence Mr Ng consciously disregarded his obligations. I am, therefore, not satisfied on the facts of this case that an administrative penalty based on intentional disregard is established.

43. The question arises as to what level of penalty should apply in these circumstances. At the very least, Mr Ng has failed to take reasonable care in relation to his tax returns for the relevant period. He should have considered whether his failure to declare the "drawings" from Evergold could be substantiated and, if necessary, taken advice. The more difficult question is whether the shortfall resulted from "recklessness" as to the operation of the law.

44. In
Hart v FCT 2003 131 ATC 4665, the Full Federal Court (Spender, Hill and Hely JJ) stated at pp 4673 and 4674,

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

45. The Court approved the observations of Cooper J in
BRK (Bris) Pty Ltd v Cmr of Taxation 2001 ATC 4111; [2001] FCA 164 at [77] as follows:

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

46. In this case, Mr Ng has failed to discharge his onus in circumstances where he has not provided sufficient documentary records to prove his case, he has declined to give evidence, he did not have legal representation and it is unclear whether all the available evidence has been provided to the Tribunal. Notwithstanding this, I have found the assessments were not excessive and as a consequence there was a significant tax shortfall, which resulted from Mr Ng's failure to declare payments made by Evergold to him. The omission was intentional and there is no evidence from Mr Ng to explain what he considered when he lodged his returns. He bears the onus to establish the decision on penalty was wrong or should have been made differently. When he lodged his tax returns for the relevant years, Mr Ng made statements about his income, which he represented were true and correct. The failure to declare drawings as income when there was insufficient evidence that these were repayments of loans, or that they were made from sources other than taxable income, would raise in the mind of a reasonable person a "real risk" that the statements were incorrect. As such, I am satisfied that Mr Ng was reckless and a penalty of 50 per cent should be imposed on the tax shortfall.

47. The final issue to be considered on penalty, although Mr Ng made no submissions in this regard, is whether the penalty should be remitted. PS LA 2006/2 sets out guidelines as to how the discretion should be exercised at [136] to [164]. Relevantly the guidelines state [137]:

"The discretion to remit penalties should be administered in a fashion which ensures that the objectives of the penalty regime (for example, to effect improvements in future compliance by taxpayers and to provide certainty to those taxpayers) are achieved without causing unintended or unjust results."

48. The remission of penalty has been recently considered by the Federal Court in
Commissioner of Taxation v Paul Andrew Burness (As Trustee for the Property of Bottazzi, A Bankrupt) [2009] FCA 1021. In Burness, the Tribunal accepted that a base penalty of 75 per cent was properly imposed on the tax shortfall but remitted the penalty to 25 per cent, taking into account a number of considerations, including the fact Mr Bottazzi was not legally represented and that the findings against him were primarily based on his failure to discharge his onus. On appeal to the Federal Court, Gordon J found that consideration of these matters was not "extraneous to the power", and it was a matter for the Tribunal as to whether these factors should be taken into account in exercising the discretion.

49. Mr Ng did not urge me to take these matters into account in his case, even though Burness was referred to in the Commissioner's submissions, and it is the Commissioner, properly in my view, who raised the issue for the Tribunal's consideration.

50. Taking into account all of the circumstances of the case, I am not satisfied the penalty should be remitted. I have had regard to the fact that Mr Ng failed to discharge his onus, was not legally represented and may not have appreciated what was required to discharge his onus but have also had regard to the fact that Mr Ng was given several opportunities, both by the Tribunal and the Commissioner, to substantiate his claims. Mr Ng represented himself and was articulate. He was allowed to tender documents at the hearing, notwithstanding he had been directed to file and serve documents before the hearing, and was given a brief adjournment to consider his position about giving evidence. Mr Ng declined to give evidence, even after the significance was explained. I do not consider the imposition of the penalty is unjust or that the circumstances warrant remission, either in part or whole.

Conclusions

51. The objection decision in relation to the income assessments for Mr Ng for the years ended 30 June 2004 and 30 June 2005 are varied in accordance with the adjusted drawings referred to in paragraph 20 of these reasons but is otherwise affirmed.

52. The objection decision in relation to the income assessment for Mr Ng for 30 June 2006 is affirmed.

53. The objection decision in relation to administrative penalties for Mr Ng is varied and is reduced to 50 per cent to take into account the concession of the Commissioner and my findings under the heading of "Penalties" above, but is also varied as to quantum, having regard to the revised shortfall amount to be assessed by the Commissioner.