The impact of this case on ATO policy is discussed in Decision Impact Statement: Applicant and Commissioner of Taxation (Published 16 March 2012).

CASE 1/2012

Members:
E Fice SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2012] AATA 20

Decision date: 16 January 2012

Egon Fice, (Senior Member)

1. Following a personal services income audit conducted by the Commissioner of Taxation (the Commissioner), the Commissioner issued amended Notices of Assessment to the applicant for the income years 2004 and 2005. By notice dated 5 June 2008 the applicant's solicitors lodged notices of objection against the amended assessments for both years in question. While much of those notices of objection dealt with the issue relating to personal service income of the applicant, for the purposes of this application to the Tribunal, the applicant is only concerned with deductions which were disallowed to the applicant in respect of software licence fees in the amount of A$155,420 in 2004 income year and A$150,273 in the 2005 income year.

2. In a letter dated 25 September 2008 the Commissioner disallowed the applicant's objection in respect of those claimed deductions. In his reasons for disallowing the objection, the Commissioner stated that the software said to have been acquired by the applicant's company, Knowledge Resources International Pty Ltd (KRI), was not necessary for the company or the applicant to perform the services which he performed under a contract whereby project management services were provided to a large telecommunications company through an agreement with a company which was a service provider to the telecommunications company.

3. After receiving further information from the applicant, on 22 September 2009 the Commissioner set out the position he intended

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to adopt in the matters which were raised in the applicant's objection for the purposes of this proceeding. As far as the licence fees were concerned, the Commissioner said that if the applicant could establish at the hearing that the licence fee expenses were incurred by KRI, provided the evidence did not reveal a further basis for denying the claimed deductions, they would be allowed against his personal services income in the respective income years.

4. The parties agreed that the only issue for determination by the Tribunal was whether in fact the software licence fees were incurred by the applicant in the income years in question. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 97) provides:

"8-1 General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) It is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income."

The meaning of incurred in the context of the Income Tax Assessment Act 1997 and its predecessor section 51(1) of the Income Tax Assessment Act 1936

5. Mr G Halperin, a solicitor, who appeared on behalf of the applicant, submitted that the provisions of s 8-1 of ITAA 97 and s 51(1) of Income Tax Assessment Act 1936 (ITAA 36), both of which refer to outgoings being incurred, set a low threshold in that the word incurred does not mean that monies in fact need to be paid. Mr Halperin referred to a number of cases in which the High Court has dealt with the expression losses and outgoings actually incurred.

6. The earliest of the cases referred to by Mr Halperin was
New Zealand Flax Investments Limited v The Federal Commissioner of Taxation (1938) 61 CLR 179. That case involved the interpretation of the expression as it was then found in s 23(1)(a) the Income Tax Assessment Act 1922-1934 which referred to losses and outgoings actually incurred. The issue in that case was whether interest payable on bonds which were purchasable by subscribers over a period of two and half years in the future could be deducted from the bonds in fact sold, whether paid for or not. The Court held that the income of the company should include only bond monies received in the relevant accounting period and that against that income should be deducted claims for future interest and deferred commission which were referrable to the accounting period. Dixon J said, at 206-207:

"… But, generally speaking, the gross receipts on account of revenue must be taken into the assessable income and therefrom the deductions allowed by the Act must be made and no others. For the purpose in hand I think that sec. 23 (1) (a) must be the source in which the company must seek authority for the deductions. To come within that provision there must be a loss or outgoing actually incurred. 'Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected."

7. Section 51(1) of the ITAA 36 states:

"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

8. In the context of s 51(1) of the ITAA 36, the High Court (Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ) in
Federal Commissioner of Taxation v James Flood Proprietary Limited (1953) 88 CLR 492 at 506 said:

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"For under our law the facts must satisfy the expression 'losses and outgoings incurred'. These words perhaps are but little more precise than the word 'established' or the expression used above 'definitively committed'. But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible. But it is certainly true that it is not a matter depending upon 'proper commercial and accountancy practice rather than jurisprudence'. …"

9. The Court referred to New Zealand Flax Investments and to
W. Neville & Co. Ltd. v Federal Commissioner of Taxation (1937) 56 CLR 290 and said, at 507:

"Nothing that was decided in [Neville] was intended to imply that a liability to pay an ascertained sum is never incurred until the sum becomes due and payable. The question in that case was whether a sum which a company had agreed to pay one of two joint managing directors to induce him to retire was an outgoing on account of capital or was deductible. … But whatever be the rationale of the decision of the point, clearly enough it is not based on a view that no outgoing could be incurred until actual payment was made. It is one thing, however, to say that it is not necessary, for the purposes of s. 51 (1), that an actual disbursement should have taken place. It is another thing to say that in the present case the taxpayer had incurred a loss or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in the ensuing accounting period by employees whose service had not as yet qualified them for annual leave."

10. In
Nilsen Development Laboratories Pty Ltd v The Federal Commissioner of Taxation of the Commonwealth of Australia 81 ATC 4031; (1981) 144 CLR 616, Barwick CJ, while accepting that James Flood's case provided useful guidance in the general area, was disinclined to take too much from the Court's decision in that case. He said, at 623:

"… I would think it better not to regard the case as authority of a kind which could be said to resolve the question arising in the present case. In particular, I do not feel confident myself that the use of the word 'accrual' in the reasons for judgment in that case was so accurate that its use could be translated into the present circumstances. To my mind, the Court in truth in that case could have reached its conclusion directly on the ground that, in the case of award provisions such as were thus in question, only actual payment for leave being taken could support a claim for deduction under s. 51 (1). …"

11. Barwick CJ went on to say:

"In my opinion, the language of Dixon J. in
New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (29) needs to be carefully perused and applied. Granted that exhaustive definition of what may be denoted by the word "incurred" in s. 51 (1) may not be possible, there can be no warrant for treating a liability which has not "come home" in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. …"

12. Gibbs J in Nilsen's case said that the principle to be applied in deciding whether a loss or outgoing was incurred was clear enough. He said it was not necessary that there should have been any actual disbursement and he referred to the New Zealand Flax case and James Flood's case. He also said, at 627:

"Indeed, it was suggested in
Federal Commissioner of Taxation v. James Flood Pty. Ltd. that it is not necessary that there should be an immediate obligation enforceable at law whether payable presently or at a future time, or that the obligation should be indefeasible. It is not now necessary to consider whether those suggestions should be accepted as correct. But what is clearly necessary is that there should be a presently existing liability."

13.

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More recently, the High Court in
Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia (1993) 176 CLR 640 reviewed the authorities to which I have referred above. The plurality, Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ, referred to Flood's case and said, at 661-662:

"In Flood, the Court pointed out that, for a deduction to fall within s. 51(1), a taxpayer need not have 'come under an immediate obligation enforceable at law whether payable presently or at a future time'. But this statement must be understood in the light of the decision in that case. The Court held that the employees' annual holiday leave was not a deductible expense. … The event on which the entitlement of the employees depended had not occurred. Flood therefore stands as authority for the proposition that a liability must presently be existing in order to be "incurred" within the meaning of s. 51(1)."

14. The plurality also said that this proposition was accepted in Nilsen's case. They then referred to the fact that the Courts in Flood and Nilsen took up and applied the statement made by Dixon J in New Zealand Flax Investments and said, at 663:

"But it is not enough to establish the existence of a loss or outgoing actually incurred. It must be a loss or outgoing of a revenue character and it must be properly referable to the year of income in question 2. So it was that in New Zealand Flax the taxpayer was not entitled to deduct all payments of interest in future years notwithstanding that it had incurred a liability to pay them in the accounting period under assessment."

15. In accordance with the authorities I have referred to above, to determine whether outgoings in the form of licence fees were incurred in the relevant income years requires a careful examination of the software licence agreement entered into between KRI and Mr Michael Kirkpatrick (trading as WSDM Consulting), who claimed to have the right to sub-licence the software known as Worldwide Integrated Solution Design & Delivery Methodology (WISDDM).

The software licence agreement

16. There was much controversy about the Software Licence [and Services] Agreement (the software licence agreement) between KRI and WSDM Consulting (said to be domiciled in Cape Town, South Africa). I had in evidence a copy of that agreement. WSDM Consulting is not an incorporated body but appears to be the business name for a business conducted by Mr Kirkpatrick. Putting aside for the moment the many controversial aspects of the software licence agreement, its recitals state that WSDM Consulting offers to licence the software and, if requested by KRI, to supply the services set out in the agreement; and that KRI accepts a licence and the provisions of the services on the terms and conditions set out in the agreement. The agreement was signed by the applicant and Mr Kirkpatrick. It is dated 20 April 2001. Furthermore, Schedule 1 of the agreement states that the commencement date of the agreement is 20 April 2001 and that the agreement or the licence expires on 30 June 2007 unless terminated earlier in accordance with the terms of the agreement. There is also provision for the licence to be renewed at KRI's discretion for a further three year period.

17. The licence fees payable by KRI are set out in Schedule 3 of the agreement. A number of annual payments are required to be made on or before 30 June in each year, commencing in 2001 and ending in 2007. The total licence fee over the six year period amounts to US$710,000. The payments due in each year while the agreement remains on foot are as follows:

• US$150,000 on or before 30 June 2001
• US$50,000 on or before 30 June 2002
• US$60,000 on or before 30 June 2003
• US$120,000 on or before 30 June 2004
• US$110,000 on or before 30 June 2005
• US$110,000 on or before 30 June 2006
• US$110,000 on or before 30 June 2007

18. An amount is also stated to be payable as a support fee. While the amount is listed as A$66,000, the payment terms are stated: to be negotiated.

19. If I were to disregard the controversy surrounding the formation of the software licence agreement, application of the law as

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explained by the cases I have referred to above would result in my finding that an outgoing of a revenue character was incurred at the time the parties reached agreement in accordance with the software licence agreement. However, those outgoings in the form of licence fees, although incurred at the time the licence was entered into, would only be deductable in the income year in which they became payable. Therefore, the liability for the income year ended 2004 would be US$120,000 and for the income year ended 2005 US$110,000. There was no dispute between the parties that the US dollar amounts for the years in question resulted in claimed outgoings of A$155,420 for the 2004 income year and A$150,273 in the 2005 income year. Furthermore, while those liabilities were in fact incurred by KRI, the Commissioner has accepted that if the claimed deductions are allowed, they should be deducted from the applicant's personal services income.

20. On its face, it appears that the applicant has incurred outgoings of a revenue character referrable to the two income years in question as he has incurred a liability to make the payments stated in 2004 and 2005 respectively. However, Mr E F Wheelahan of counsel, who appeared on behalf of the Commissioner, submitted that taking into account the evidence of the circumstances in which the agreement was struck, including the number of discrepancies in the written agreement itself; the means by which payment for the licencing fees was to and did in fact take place; and the failure to obtain evidence from parties involved in this transaction who are resident in South Africa, should result in my finding that the applicant's evidence is inherently unbelievable and ought to be rejected. Mr Wheelahan also submitted that the applicant bears the onus of proving, on the balance of probabilities, having regard to all the circumstances in which the software licence agreement was entered into, that the licence fees were in fact incurred in the income years in question. He said the applicant failed to discharge that onus.

Burden of proof

21. Mr Wheelahan submitted that the onus rests upon the applicant to satisfy the Tribunal that licence fees were incurred. In support of that submission, Mr Wheelahan relied on the High Court decision in
Danmark Pty Ltd v Federal Commissioner of Taxation;
Forestwood Pty Ltd v Federal Commissioner of Taxation (1943) 7 ATD 333. This case was concerned with s 39 of the Income Tax Assessment Act 1922 - 1934 which provided that any notice of assessment made by the Commissioner was conclusive evidence of the due making of the assessment and that the amount and all particulars of the assessment were correct. At first instance, McTiernan J was not satisfied by the evidence of the taxpayer and therefore found for the Commissioner. On Appeal to the High Court, Latham CJ said, at 337:

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

22. Section 14ZZK of the Taxation Administration Act 1953 (Administration Act), which was the current legislation at the time of the Commissioner's amended assessments in this case, provides that the applicant has the burden of proving, where the taxation decision concerns an assessment, that the assessment was excessive. In any other case, under s 14ZZK(b)(iii) the applicant has the burden of proving that the taxation decision concerned should not have been made or should have been made differently.

23. Mr Halperin submitted that this was not a case where the applicant was required to prove that the assessments were excessive. He referred to the decision of Brennan J in
The Commissioner of Taxation for the Commonwealth of Australia v Dalco 90 ATC 4088; (1990) 168 CLR 614 where his Honour said, at 624:

"… The assessments being valid, the burden was on the taxpayer to prove that the amounts assessed were excessive.

The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. …"

24.

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In this case, I accept that the applicant bears the onus of proving that the decision of the Commissioner to refuse the deduction claimed for software licence fees for the income years 2004 and 2005 should have been differently made on the basis that those licence fees were incurred in the income years stated.

25. The Commissioner also contended that it was up to the applicant to establish, on the balance of probabilities, that the licence fees were paid. However, and with respect to Mr Wheelahan, that would only become necessary if I were to find that there was no presently existing legal liability to pay the software licence fees in the amounts stated on 30 June 2004 and 30 June 2005. As I understood Mr Halperin's submissions, if those licence fees were in fact paid before 30 June in each of those income years, then it must be said that outgoing was incurred in the year in which the fee was paid.

26. Mr Wheelahan also directed my attention to the principles described by Dixon J in
Briginshaw v Briginshaw (1938) 60 CLR 336 where his Honour said, at 362:

"But reasonable satisfaction [equivalent to on the balance of probabilities] 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. …"

27. In this case, the Commissioner contended that the facts sought to be proved by the applicant are inherently unlikely. The Commissioner relied on the inadequacy of the evidence provided by the applicant. The Commissioner referred to the statement made by Latham CJ in
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 where his Honour said, at 87:

"The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof."

28. Mr Wheelahan also relied on Dalco's case for the proposition that the Commissioner is entitled to rely upon any deficiency in proof. The Commissioner contended that the applicant's evidence may be deficient if:

(a) it is deliberately false;
(b) it is unreliable, although not dishonest; and/or
(c) others, whose evidence might have thrown light upon very relevant matters, are not called and no explanation is given for their absence.

The Commissioner contended that the High Court decisions in
Macmine Pty Ltd v Federal Commissioner of Taxation 79 ATC 4133; (1979) 24 ALR 217 and
Steinberg v The Commissioner of Taxation of the Commonwealth of Australia (1975) 134 CLR 640 supported those contentions.

29. In Macmine's case, Stephen J made it clear, at 236 and 237, that it was not for the Commissioner to prove affirmatively the existence of facts which would support the liability of the taxpayer to which an assessment referred. He said it was for the taxpayer positively to show, on the balance of probabilities, that the state of facts which the Commissioner asserts as the basis of his assessments has not been made out. His Honour referred to a witness, Mr McMahon, who gave unconvincing evidence. He said, at 237:

"In the present case the failure of Mr McMahon to carry conviction when giving his evidence denying the existence of a profit-making scheme should have proved fatal to the taxpayer's case. That failure left unexplained a series of transactions only the bare outlines of which were known to the court. Had a full picture of those transactions been before the court, fleshed out by acceptable evidence from the actors involved in them, it might well have shown the existence of a profit-making scheme."

Stephen J made it clear that the primary judge in that case did not regard Mr

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McMahon's evidence as deliberately false but, rather, unreliable.

30. In Steinberg's case, Gibbs J said, at 694:

"The fact that a witness is disbelieved does not prove the opposite of what he asserted:
Scott Fell v Lloyd (33)
Hobbs v Tinling (C.T.) and Co. Ltd (34). It has sometimes been said that where the story of a witness is disbelieved, the result is simply that there is no evidence on the subject (
Jack v Smail (35);
Malzy v Eichholz (36); Exparte Bear; Re Jones (37)) but although this is no doubt true in many cases it is not correct as a universal proposition. There may be circumstances in which an inference can be drawn from the fact that the witness has told a false story, for example, that the truth would be harmful to him; and it is no doubt for this reason that false statements by an accused person may sometimes be regarded as corroboration of other evidence given in a criminal case:
Eade v The King (38);
Tripodi v The Queen (39). Moreover, if the truth must lie between two alternative states of fact, disbelief in evidence that one of the state of facts exists may support the existence of the alternative state of facts:
Lee v Russell (40)."

31. The Commissioner also contended that if the evidence relied on by the applicant in this case is rejected, his application must fail. He contended that in the absence of evidence, the Tribunal is not able to infer facts in favour of taxpayers and he relied on the High Court decision in
MacCormack v The Commissioner of Taxation of the Commonwealth of Australia 79 ATC 4111; (1979) 143 CLR 284. In that case, Gibbs J said, at 303:

"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 purposes of profit-making by sale. The burden may be discharged by drawing inferences from the evidence. In some cases in which all 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. … 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."

32. Murphy J in MacCormack's case, although dissenting, had this to say about the burden of proof at 323:

"A taxpayer might discharge the burden of proof placed on him by s 190(b) in any of several ways. He may prove all relevant circumstances and from these establish that an inference should be drawn that the property (from the sale of which by the taxpayer a profit arose) was not acquired by him for the purpose of profit-making by sale. Or he may prove by direct evidence that such a purpose did not exist. The burden might also be discharged by a combination of direct evidence and inference from other circumstances. …"

33. I am aware that caution needs to be exercised when drawing inferences from the evidence. Although not frequently cited, this passage by Dixon CJ in
Jones v Dunkel and Another (1959) 101 CLR 298 at 304-305 is instructive:

"It is possible of course to say that if you have an empty diesel truck coming down a winding road on the outside at thirty-five miles per hour and an International truck going up the road on the inside at twenty-five miles per hour, the former is more likely than the latter to be over the centre line of the road on its wrong side. But that is only to say that of two guesses one is more probable than another. It may be remarked that these are not the only two guesses open as to the cause of the accident. But in any case we are not concerned with a choice among rival conjectures.

In an action of negligence for death or personal injuries the plaintiff must fail unless he offers evidence supporting some positive inference implying negligence and it must be an inference which arises as an affirmative conclusion from the circumstances proved in evidence and one which they establish to the reasonable satisfaction of a judicial mind. It is true that

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"you need only circumstances raising a more probable inference in favour of what is alleged". But "they must do more than give rise to conflicting inferences of equal degree of probability so that the choice between them is mere matter of conjecture". These phrases are taken from an unreported judgment of this Court in
Bradshaw v. McEwans Pty. Ltd. (1) which is referred to in
Holloway v. McFeeters (2), by Williams, Webb and Taylor JJ. The passage continues: "All that is necessary is that according to the course of common experience the more probable inference from the circumstances that sufficiently appear by evidence or admission, left unexplained, should be that the injury arose from the defendant's negligence. By more probable is meant no more than that upon a balance of probabilities such an inference might reasonably be considered to have some greater degree of likelihood." (3) But the law which this passage attempts to explain does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied."

34. I am also mindful of the decision of the Full Court of the Federal Court (Greenwood, Tracey and Buchanan JJ) in
Tisdall v Webber (2011) 122 ALD 49. His Honour Buchanan J said, at 84-85:

" [128] It is important to bear in mind also that the inferential process is not one where speculation, guesswork or mere assumption is accommodated. So far as the work of courts is concerned, where the application of a judicial method is expected, the process of drawing an inference from available facts is not to be equated with conjecture, surmise or guesswork. The arbitrary selection of one possibility over others from an available number of possibilities by such a method is not merely lacking in logic; it fails to conform to the necessity that inferences be drawn as matters of legitimate deduction, based on probative values.

[129]
In Bell IXL Investments Ltd v Life Therapeutics Ltd (2008) 68 ACSR 154; [2008] FCA 1457 Middleton J said (at [14]):

In considering the material before the Court, the trier of fact must be careful to distinguish between inference and conjecture. A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding. Whilst sometimes it may be difficult to distinguish between conjecture and inference, nevertheless the distinction is an important one.

[130] His Honour's observations, with respect, state a fundamental principle which is authoritatively established but which is not always observed (see also
Luxton v Vines (1952) 85 CLR 352 at 358, quoting
Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1)."

35. Although Mr Halperin referred me to the case
Evans v Federal Commissioner of Taxation (1988) 88 ATC 4771 where his Honour, Fisher J, found that the taxpayer discharged the onus of proving that interest in borrowings had been incurred pursuant to s 51(1) of ITAA 36, even though there was no document evidencing the loan and its terms; no oral evidence to the effect that interest had been paid or the rate of interest payable; a director of the company failed to give evidence about the loan and its terms; and shortcuts had been made when implementing the arrangements, that case must be understood in light of its particular facts. While I do not for one moment want to appear to be suggesting that inferences should not be drawn from the evidentiary material where it is proper to do so, it seems to me that care must be taken in each case, depending on its particular circumstances. As Middleton J said in the Bell IXL Investments case, care must be taken to distinguish between inference and conjecture. Even though conjecture may appear plausible, it remains a mere guess.

36. The Commissioner submitted that the applicant's evidence was inherently

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unbelievable and therefore should be rejected. However, there is one aspect of the evidence which cannot be refuted. The applicant did acquire the WISDDM software. The first day in evidence was taken up by the applicant demonstrating the operation of the WISDDM software and explaining how he used that software to assist him in proving project management services to clients. It was clear from the applicant's evidence and the questions he answered in relation to that software that he was competent in its use and he demonstrated how the software assisted him in the specific tasks he was required to undertake as a project manager for a large telecommunications company. Therefore, whatever may be said about the circumstances of his acquisition of that software, I find that the applicant did acquire WISDDM software and he has used it in the course of his employment as a project manager. While I accept that this finding on its own does not lead invariably to the conclusion that the applicant incurred outgoings in respect of the acquisition of the software, it does put aside any notion that the applicant's claimed deductions have no basis whatsoever. Therefore, it is only what is described by the Commissioner as improbable or unbelievable circumstances regarding the acquisition of the software which is in issue.

Controversial evidence regarding the acquisition of the WISDDM software

37. In essence, the Commissioner submitted that the applicant has not, by the evidence before me in this matter, discharged the burden of proof set out in s 14ZZK of the Administration Act. In particular, as I understood Mr Wheelahan, contrary to the test set out in Briginshaw's case, the applicant produced inexact proofs, indefinite testimony and sought to draw indirect inferences from the material presented in evidence. I did not understand the Commissioner to contend that the applicant's evidence in this case was deliberately false or that he had been dishonest in any way but rather, simply that he had not established, on the balance of probabilities, that the claimed expenditure had been incurred in the income years in question. The controversial evidence related to:

(a) the software licence agreement;
(b) evidence regarding WSDM Consulting;
(c) evidence regarding the WISDDM software;
(d) accumulation of foreign currency (travellers cheques);
(e) payment for the software by travellers cheques;
(f) the commerciality of the licence agreement;
(g) inconsistency in the movement of funds between South Africa and Australia;
(h) failure to produce relevant documents in response to a summons; and
(i) failure to call key witnesses.

The software licence agreement

38. Mr Wheelahan submitted that the applicant's response to questions in cross-examination would suggest that the software licence agreement is not what it purports to be. The thrust of this submission was that despite the applicant's evidence that he was provided with the software licence agreement by Mr Kirkpatrick, and that the applicant amended that agreement by inserting provisions referring to Australian law, the document is in fact an Australian source document.

39. In cross-examination, the applicant agreed that Mr Kirkpatrick gave him a standard form software licence agreement to which he made a number of amendments. Mr Kirkpatrick provided the Tribunal with a witness statement dated 12 January 2010 (the second witness statement) which the applicant sought to tender in evidence. Correspondence had been lodged with the Tribunal indicating the Mr Kirkpatrick would not be giving evidence by telephone as previously arranged and therefore would not be available to be cross-examined on his statement. The reasons given for Mr Kirkpatrick's refusal to give evidence were that the Commissioner's representatives had undertaken investigations in conjunction with the South African Revenue Service (SARS) regarding the personal tax affairs of Mr Kirkpatrick.

40. In an email from Mr Halperin to Mr Kirkpatrick dated 19 May 2011, which was in evidence, it is clear that Mr Halperin asked Mr Kirkpatrick to confirm that he no longer wished to testify. In an email response dated 20 May

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2011, Mr Kirkpatrick stated that to be correct and said he would not be responding to anything personal to the Australian authorities regarding his tax affairs. He maintained that he intended, at the time that he made the second witness statement, to testify at the hearing of this matter.

41. I also had in evidence correspondence from Mr Halperin to the Commissioner regarding the investigation being conducted by the SARS into the tax affairs of Mr Kirkpatrick. This caused Mr Halperin to raise questions about the appropriateness of the Commissioner's conduct in this proceeding. I have something further to say about that below.

42. As far as Mr Kirkpatrick's evidence is concerned, I nevertheless allowed his second witness statement to be admitted into evidence because Mr Wheelahan said he wished to put questions to the applicant about Mr Kirkpatrick's statement. He did not object to the statement going into evidence, but submitted it should be given very little weight due to Mr Kirkpatrick being unavailable for cross-examination. There was also a brief statement made by Mr Kirkpatrick included in the s 37 documents which is dated 28 July 2009 (the first witness statement) which I consider was in evidence.

43. In his second witness statement Mr Kirkpatrick said, at paragraph eight:

The negotiations were protracted because KRI wanted modifications to WSDM's standard right-to-use agreement which was designed for software licences granted by WSDM to its usual customers, being corporations with in-house IT departments.

Mr Kirkpatrick also deposed that he signed the software licence agreement with KRI on 20 April 2001.

44. Attached to Mr Kirkpatrick's second witness statement are a series of emails between himself and the applicant regarding the software licence agreement. In an email dated 21 January 2001 Mr Kirkpatrick stated that he had attached the latest draft of the agreement for the applicant to mark-up changes he required to be made. In an email dated 11 March 2001 the applicant stated he had taken the liberty of marking-up the agreement to reflect his requirements and that agreement was attached to the email. The matters discussed by the applicant in that email mainly go to KRI's rights to use the software anywhere in Australia or New Zealand and also rights to market and sell the software in particular territories. As it has turned out, KRI has not taken advantage of the right to market and sub-licence the software in related territories. Regardless, the emails and the statement of Mr Kirkpatrick appear to support what the applicant said about the origin of the software licence agreement.

45. In cross-examination the applicant said that all of the amendments to the standard agreement sent by Mr Kirkpatrick were made by him and Mr Kirkpatrick. The applicant also said that Mr Kirkpatrick was reluctant to make any wholesale changes to the agreement as he wanted it left as intact as possible. In any event, there can be no question that the software licence agreement contains many anomalies. However, that should come as no surprise to the Commissioner given that the applicant's evidence was that no lawyers were involved in making amendments to the original document, whatever its source.

46. Furthermore, while the amendments said to have been made by the applicant, or, as he indicated in his cross-examination, made under his instigation, have possibly resulted in some clauses being unenforceable, they would not, in my opinion, cause the entire agreement to be unenforceable. In fact, I have little doubt that the equitable principles concerning rectification would apply where one or more of the parties were minded to have the agreement rectified (see
Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 710-711 per Campbell JA). That remedy is also available where contracts contain absurdities or inconsistencies, or where they are simply badly drafted (see Chitty on Contracts (13^th ed, Sweet & Maxwell 2008) Volume 1 at 12-055 and 12-056).

47. While Mr Wheelahan was careful to submit that the identified problems with the software licence agreement should not be considered to be an elaborate fraud attempted by the applicant, but rather that it simply went to the burden of proof issue, I have difficulty with that submission. That is because it goes to the very heart of the applicant's credibility and

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the shadow it casts over the remainder of his evidence. It seems to me that either the agreement is a sham, and therefore the applicant's claim must be discredited entirely, or, which is more likely, the agreement is simply very badly drafted and that can be accounted for by the fact that no lawyers were used in drafting the amendments. The problems identified by Mr Wheelahan were as follows:

(a) the definitions section of the software licence agreement contains a definition of Companies Act which is said to mean the Companies Act 1973 (South Africa);
(b) the definitions section of the software licence agreement contains a definition of insolvency event and reference is made to section 459F(1) of the Companies Act, despite the fact that there is no such section in the South African Companies Act although section 459F of the Corporations Act 2001 (Cth) in fact deals with failure to comply with a statutory demand;
(c) although the applicant said he was not familiar with Australian law dealing with GST, the ITAA 36, the Copyright Act 1968 (Cth) or the Privacy Act 1988 (Cth):
- (i) clause 13 of the software licence agreement deals with GST and withholding tax and there is specific reference to A New Tax System (Goods and Services Tax) Act 1999 (Cth) [sic], and specifically Division 83;
- (ii) clause 13 of the software licence agreement also specifically makes reference to Division 4, Part VI of Income Tax Assessment Act 1936 (Cth) in respect of withholding tax and the requirement to provide WSDM with receipts issued from the Australian Taxation Office (the ATO);
- (iii) in the clause dealing with the grant of the licence, reference is made to the Copyright Act and Schedule 12 refers to the Privacy Act; and
(d) schedule 13 dealing with dispute resolution refers to an independent expert being a nominee of the Computer Society of South Africa and the mediation is to be conducted in accordance with the Commission for Conciliation Mediation and Arbitration of South Africa's mediation guidelines, although the schedule subsequently states that mediation will terminate in accordance with ACDC mediation guidelines, which Mr Wheelahan submitted was a reference to the Australian Commercial Disputes Centre.

48. In cross-examination the applicant said that he was responsible for making amendments to the software licence agreement to ensure that the agreement operated correctly in Australia. Despite that, the applicant admitted that he did not examine any of the provisions of the Companies Act at the time that he inserted the reference to s 459F(1). He was not aware that the Australian Corporations Act 2001 at s 459F dealt with statutory demands and insolvency. The applicant said the standard agreement contained a GST clause or, a VAT (value added tax) clause as he thought it was called in South Africa, although he was not sure of that. The applicant also said that he inserted A New Tax System (Goods and Services Tax) Act 1999 (Cth) [sic] in the definition of GST Act and that he inserted the Commonwealth Copyright Act and the Commonwealth Privacy Act. When asked about the reference to s 6EA of the Privacy Act, the applicant said he was not familiar with it. In fact, the applicant said that he could not really be said to have drafted the additional clauses but that he found the information on the internet and inserted what he thought was relevant.

49. While I accept the submissions made by Mr Wheelahan regarding the discrepancies in the software licence agreement, I do not accept that those discrepancies disclose that the document necessarily has an Australian source. At best, it points to that possibility. However, there are other factors which also point to the possibility of the document having a South African source. For example, the reference in the document to the Companies Act, which is a reference to the Companies Act 1973 (South Africa), seems to have been overlooked when s 459F was inserted. There has not been a Companies Act, as such, in Australia since the late 1980s. In 1989, the Commonwealth introduced the Corporations Act 1989, although the High Court in 1990 ruled that the Commonwealth lacked power to make laws about the incorporation of companies generally. In 1991, Australia adopted a co-operative

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scheme which was referred to as the Corporations Law. Finally, all states agreed to refer corporations and related matters to the Commonwealth which enabled the Commonwealth to enact the Corporations Act 2001 which has operated from 15 July 2001 (see R P Austin & I M Ramsay, Ford's Principles of Corporations Law (14^th ed, LexisNexis Butterworths 2010), 44-46. Therefore, either the software licence agreement is a very old standard agreement document relating back to the 1980s or, in fact, it is a South African document.

50. Also, consistent with the definition section which refers to the Companies Act, the software licence agreement contains a number of other references to the Companies Act rather than the Corporations Law or the Corporations Act after 2001. Therefore, it is entirely possible that the document is a South African source document.

51. I have already referred to emails from Mr Kirkpatrick to the applicant where Mr Kirkpatrick claims to have attached the latest draft of the agreement in an email sent to the applicant. Although Mr Wheelahan submitted that the emails attached to Mr Kirkpatrick's statement appear to have been cut and pasted and assembled in a particular way, there was no suggestion from Mr Wheelahan or from the documents that the text of any of those emails had been altered. There are also responding emails from the applicant to Mr Kirkpatrick indicating that he had marked-up the draft agreements sent to him in order to reflect the negotiations the two men had conducted regarding the licence agreement.

52. Accordingly, while it is not possible for me to find that the software licence agreement had an Australian source; I am also unable to find that it had a South African source. In my view, the evidence is equivocal on this point. It is equally possible that its source was South Africa or Australia.

WSDM consulting

53. As I understood Mr Wheelahan's submissions about WSDM Consulting, they appear to be directed at the veracity of Mr Kirkpatrick's evidence set out in the two witness statements lodged with the Tribunal. In his first witness statement Mr Kirkpatrick stated that WSDM Consulting was established in 1993. He also said that the business of WSDM Consulting was to sell project management software and associated methodologies. In his second witness statement Mr Kirkpatrick said that WSDM was the business name under which he personally traded. Mr Kirkpatrick also said that the software licence agreement was a standard right-to-use agreement designed for software licences granted by WSDM to its usual customers, being corporations with in-house IT departments.

54. In the course of his cross-examination the applicant conceded that, in his experience, having dealt with a number of software licence agreements in his time as an IT consultant, the software licence agreement was targeted at large corporate entities. The applicant also said that if Mr Kirkpatrick was suggesting that he had customers for that software in South Africa, he was unaware of any such customers. The applicant in fact agreed that it was unlikely that Mr Kirkpatrick was selling the software to what was described as Tier 1 corporate entities with large in-house IT departments. The software licence agreement purports to provide for 24 hour seven day emergency assistance and it claims 95 per cent of calls would be answered within 25 seconds or less. The agreement also provides for supplier personnel and extensive reporting and requirements. According to Mr Wheelahan, a Google map search of WSDM Consulting's address reveals what appears to be a private residence. A photograph of that residence was provided to the Tribunal.

55. Although Mr Wheelahan submitted that I should make something of the fact that the SARS had no record of WSDM Consulting, given that it is merely a business name, there is nothing unusual in that. The SARS did however state that Mr Kirkpatrick was known to SARS to the extent that he was registered for income tax purposes. Mr Kirkpatrick registered with SARS from the 2006 tax year and had submitted returns up to 2009. Although there was no evidence about the types of entities required to register for income tax purposes in South Africa, the Australian experience would indicate that a business trading name is not liable to taxation and therefore it may not be something necessarily recorded by the taxation authority.

56.

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Mr Wheelahan was also critical of the business invoices and receipts issued by WSDM Consulting in respect of the software licence fees for the 2004 and 2005 income years. He submitted that the invoices and receipts issued by WSDM Consulting are unsophisticated, having regard to the amount of monies involved. He said there are no reference numbers on any of the documents and they refer to WSDM range of software and method sets as if they were owned by WSDM Consulting rather than WISDDM owned by IBM (International Business Machines Corporation).

57. While I accept Mr Wheelahan's submissions regarding the nature of the software licence agreement and the overstatement by Mr Kirkpatrick of the business dealings WSDM Consulting conducted with respect to the software, I do not accept that the receipts issued by WSDM Consulting are evidence of WSDM Consulting purporting to own the software and method sets. The reference in the receipts is simply to WSDM range of software and method sets. In fact, in his second witness statement Mr Kirkpatrick stated that the business of WSDM was to sell and licence the use of project management software and associated methodologies. There is no reference to ownership whatsoever.

58. In any event, overstatements made by Mr Kirkpatrick should not be treated as impugning the integrity or credibility of the applicant. In fact, the applicant acknowledged that Mr Kirkpatrick quite likely had overstated the significance of WSDM Consulting's business.

59. Although Mr Wheelahan submitted that there was no evidence of WSDM Consulting's existence other than what Mr Kirkpatrick said in his witness statements, that does not cause me any concern. A business name is merely that, it is not an entity of any kind. Individuals and incorporated bodies trade under business names, some registered and some not. Furthermore, the applicant's oral evidence was that Mr Kirkpatrick had never indicated that he owned the software or that he was involved in the development of that product. Mr Kirkpatrick apparently told the applicant that he had rights to market and licence the product.

60. As for the support services provided for in the software licence agreement, the applicant said that as he did not choose to avail himself of those services, he was not concerned with those provisions. In fact, the software licence agreement at Clause 7 states that it is optional. The supplier is required to supply the services set out in Clause 7 in accordance with the agreement only if indicated in Table 1 of Schedule 1 or a purchase order.

61. At Schedule 3 which deals with fees, the support fee is stated to be negotiated. The applicant pointed out that he had not at that time agreed to pay the support fee and negotiations were left open. He considered that the service agreement did not apply to him under the software licence agreement. With respect to Mr Wheelahan, that seems to be the case. While it is undoubtedly correct to say that Table 1 of Schedule 1 indicates that support services will be provided, it is plain that the support fee for the support services set out in Schedule 3 had not been agreed. It would indeed be surprising to find the supplier providing support services if the support fee had not been paid. There was no evidence of any such payment and in fact the applicant's evidence was that he had not agreed to pay for those services.

62. In summary, there is nothing either stated by Mr Kirkpatrick or by the applicant in relation to WSDM Consulting which would cause me to find that the applicant's evidence was unbelievable and should be rejected.

WISDDM software

63. Mr Wheelahan submitted that although proceedings before this Tribunal had been on foot for more than two years, the WISDDM software which KRI claimed to have acquired was not produced by the applicant until approximately two weeks prior to the scheduled hearing. As I understood Mr Wheelahan's submission, this factor is said to make the applicant's evidence inherently unbelievable.

64. However, and with respect to Mr Wheelahan, my searches of the documents produced by the Commissioner do not disclose any request made to the applicant to produce the WISDDM software. In fact, because the initial issues raised by the Commissioner concerned personal services income, and the Commissioner had in any event disallowed the expenditure the applicant said he incurred in

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acquiring the WISDDM software, the issue about the existence and nature of the software did not arise until much later. This is despite the fact that the applicant's former tax accountant, Lowenstein Sharp Pty Ltd, provided the Commissioner with the software licence agreement under the cover of a letter dated 13 November 2006 which described the WISDDM software and its capabilities. In a record of interview conducted on 20 September 2007, the issue of the software licence agreement was raised but no request made to produce the software.

65. The Commissioner's Personal Services Income Audit Report dated 13 February 2008 also referred to the licence fees but the existence of the software, once again, was not raised. This was apparently because the applicant had confirmed that he could perform the duties he was required to perform for the telecommunications company in question without the WISDDM software, although not as efficiently. The report stated that from the information available, the Commissioner considered the applicant would have sufficient access to IT facilities at the telecommunications company to perform his duties without the need for the extra software package. The Commissioner considered that the licence fee expenditure was not tax deductable.

66. Furthermore, under the cover of a letter dated 16 April 2010, the Commissioner requested the Tribunal issue a summons to produce documents to the applicant, which it did on 18 May 2010. There is no reference in the summons to the WISDDM software. Nevertheless, some two weeks prior to the hearing of this matter commencing on 20 May 2011, the software was provided to the Commissioner on a without prejudice basis. In those circumstances, I cannot attach much weight to the submission made by Mr Wheelahan regarding the late production of the WISDDM software.

67. Mr Wheelahan also submitted that the WISDDM software was an IBM product, first released on 15 March 1996. It was designed for use by IBM practitioners. The applicant failed to disclose this to the Commissioner and it was first raised by the Commissioner after the demonstration of its operation given by the applicant on the first day of the hearing of this matter. Mr Wheelahan noted that the applicant did not mention any of this during the course of the demonstration and that the Commissioner then found it necessary to lodge evidence with the Tribunal to establish the fact that this was IBM software. It was only after that evidence was produced that the applicant incorporated, what Mr Wheelahan described as an important fact, into his third witness statement lodged with the Tribunal on 8 June 2011. This witness statement followed the witness statement provided by Mr Harry Ioannou on 31 May 2011 which had attached to it a number of screen shots from the software which discloses it is an IBM product, Version 1.2.1 released on 15 March 1996.

68. In his witness statement dated 7 June 2011 (the third witness statement) the applicant said he had conducted his own due diligence investigation regarding the WISDDM software prior to entering into the agreement with Mr Kirkpatrick. According to the applicant, Mr Kirkpatrick told him that the WISDDM software was not a product which IBM actively marketed and sold to the corporate market. He described it as a niche product consisting of an assortment of technologies loosely integrated by IBM. The applicant said he searched the internet but found little useful information. He also could not find anything about the WISDDM software on the IBM website and therefore he contacted a former client of his in South Africa, Mr Coert Vorster, who had worked as an executive with IBM Global Services in South Africa.

69. Attached to the applicant's third witness statement is a series three emails between the applicant and Mr Vorster. In his first email dated 15 June 2000, the applicant stated he had discussions with Mr Kirkpatrick who claimed he had the marketing and distribution rights, including the right to sub-license an IBM product called WISDDM. The applicant said Mr Kirkpatrick had demonstrated the product to him on a couple of occasions and he liked it. The applicant asked Mr Vorster to tell him about the WISDDM software and noted that his main concern was whether Mr Kirkpatrick or WSDM Consulting held marketing/distribution rights for the WISDDM software.

70.

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Mr Vorster responded by email on 20 June 2000 and stated that he did not know Mr Kirkpatrick but said he may well have a distribution agreement, particularly if he entered into it during the time IBM withdrew from South Africa. Mr Vorster said that an entity, which he described as ISM, entered into many marketing/sales arrangements with third parties and they were not exclusively limited to IBM products. He did not recall WISDDM software being used in South Africa and he was certain that it was not a product IBM marketed there at that time. On that information, the applicant concluded that Mr Kirkpatrick had an agreement with IBM to market and distribute the WISDDM software. Nevertheless, the applicant said in his third witness statement that he insisted the software licence agreement incorporate robust warranty and indemnity obligations from WSDM Consulting. He referred to Clauses 14 and 15 of the software licence agreement.

71. Mr Wheelahan submitted that the applicant's evidence regarding the amendments he made to the software licence agreement to protect himself from breach of copyright were unsatisfactory. He also complained about the fact that this was the first occasion on which the applicant raised the warranty and indemnity obligations. With respect to Mr Wheelahan, this issue only arose for the first time following the demonstration of the WISDDM software on the first day of the hearing. I can find no evidence of this being an issue prior to that time. The fact that it was not an issue at an earlier stage, quite likely also explains why the applicant made no mention of it when demonstrating the software.

72. Mr Wheelahan was also critical of the applicant's responses to questions regarding amendments to the software licence agreement which were put to him under cross-examination. He submitted they were inconsistent and unsatisfactory. That cross-examination dealt with the drafting of the various provisions set out in Clause 15. When the applicant was asked whether he inserted Clause 15.4 or whether he modified that clause, he answered he did not believe that he did and said that it doesn't ring any bells, no. When he was asked why he said in his third witness statement that he had inserted that clause or modified it; the applicant was unable to answer specifically but said that he had made substantial amendments to the sections dealing with intellectual property rights. A careful reading of the applicant's third witness statement does not support the submission made by Mr Wheelahan. Paragraph 9 of that witness statement states:

"Because my due diligence investigations had revealed very little information about WISDDM, I insisted that the licence agreement incorporate robust warranty and indemnity obligations from WSDM Consulting. This resulted in Clauses 14.2, 14.3, 14.4, 15.1, 15.2, 15.3 and 15.4 of the Licence Agreement being included in the form they are in. They are in this form as a consequence of negotiations between me and Mike in relation to the warranty and indemnity obligations I wanted for KRI's protection."

73. In his third witness statement, the applicant has clearly said that amendments to the clauses to which he referred resulted from negotiations between himself and Mr Kirkpatrick, rather than him inserting particular clauses or modifying them himself. Mr Wheelahan also took issue with the fact that in his evidence-in-chief, the applicant was referred to Clause 18(c) of the software licence agreement which limits liability of the parties although those limitations do not apply to the indemnities in Clause 15. While this part of the applicant's examination-in-chief was conducted by asking leading questions and Mr Wheelahan was, quite properly in my opinion, critical of the way in which this evidence was led, the cross-examination simply highlighted the problems which may arise when leading questions are put to a witness in the course of examination-in-chief. In cross-examination, the applicant was unable to answer why no mention of that amendment was made in his third witness statement. In his examination-in-chief the applicant merely answered in the affirmative the question which was put to him that Clause 18(c) of the software licence agreement was in the agreement to ensure there was no limitation of liability in relation to intellectual property. I do not place much weight on any of the answers given to leading questions. Furthermore, given that the software

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licence agreement was executed some ten years prior to the hearing, I would not expect the applicant to recall with any precision the amendments he made to a standard draft form contract.

74. In his witness statement dated 16 May 2011 (the second witness statement) the applicant stated that he did not agree, until July 2009, to acquire updates to the WISDDM software or further support services from WSDM Consulting as he was not persuaded that he needed updates, new releases or other support services. The applicant said that is why Schedule 3 of the software licence agreement indicates that the support fee is to be negotiated.

75. In his third witness statement the applicant said that the WISDDM software was stored on 22 compact discs (CDs). Four of the files on CD 1 were modified in July 2009 and of the other 21 CDs:

(a) files on 7 of the CDs where last modified between 23 and 26 July 2009; and
(b) files on 14 of the CDs where last modified on 15 March 2001 in advance of signing the software licence agreement on 20 April 2001.

76. Mr Wheelahan submitted that despite the applicant's claim that the software had been updated, its licensing information continued to show it as a Version 1.2.1 dated 1996. He also submitted that the software appears to be designed for use on an out dated version of Microsoft Windows. Be that as it may, Exhibit HI01 to the witness statement of Mr Ioannou, which is a screen shot of installation disc number 1, discloses four files which were modified on 23, 24 and 25 July 2009. This evidence seems to accord with what the applicant said in evidence about acquiring updates in 2009. The screen shot of installation disc number 2 also indicates a file which was modified on 23 July 2009.

77. In addition to the above, the applicant's evidence was that he paid ZAR$500,000 (approximately A$80,000) to Mr Kirkpatrick on 21 July 2009 by telegraphic transfer, being the agreed amount for the updated software. The applicant annexed a copy of a telegraphic transfer application to his first witness statement. The telegraphic transfer application is for the transfer of A$79,712.80 to Mr Kirkpatrick and it sets out Mr Kirkpatrick's bank account number. That bank account number corresponds with a bank account number provided to the Commissioner by the SARS on an income tax return lodged in South Africa by Mr Kirkpatrick. Accordingly, I find that the applicant did make the payment of A$79,712.80 on 21 July 2009 to Mr Kirkpatrick for updates to the WISDDM software. It necessarily follows that I do not accept Mr Wheelahan's submission that the evidence regarding the WISDDM software is inherently unbelievable and ought to be rejected.

Accumulation of foreign currency

78. The applicant's evidence was that between 1979 and 1998 he accumulated travellers cheques worth something in excess of A$1,000,000. He said he did this by purchasing cheques up to the maximum amount allowed by South African authorities on each occasion he travelled overseas. During that period of time, strict exchange controls were in place in South Africa. Those exchange controls included serious limitations on the acquisition of foreign currency, which includes travellers cheques, for purposes other than what is stated in an application for such currency (see Exchange Control Regulations 1961 (South Africa) Regulation 1 and 2(4)). Furthermore, where a person has lawfully obtained foreign currency and no longer requires all or any part of that foreign currency for the purpose stated in the application made for its issue, they are required to forthwith offer for sale to the Treasury or an authorised dealer the foreign currency which was not required (Regulation 2(5)).

79. In his witness statement dated 13 January 2010 (the first witness statement) the applicant stated that when he lived in South Africa prior to migrating to Australia in 1998, he regularly travelled overseas on business and for holidays. When he travelled overseas, he purchased travellers cheques up to the maximum amount allowed for any one trip. The applicant's evidence-in-chief was that the regulations in South Africa regarding foreign currency remain and a South African citizen is not permitted to hold foreign currency while in South Africa. Foreign currency is for use exclusively while overseas and upon return to

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South Africa, the citizen is required to return the foreign currency and receive South African currency (the Rand) in exchange.

80. The applicant said that at a point in his life quite early on, he decided he would be leaving South Africa and, given the declining value of the South African Rand, he built up a store of foreign currency, primarily US Dollars. His oral evidence was that when he went overseas, he used his credit card to pay for goods and services and when he returned to South Africa he retained the travellers cheques. He said he did that from about 1980 until he left South Africa in 1998. The applicant said he had accumulated in excess of US$800,000. When he left South Africa to come to Australia, he left those travellers cheques in the care of his sister-in-law. He had already countersigned all of those travellers cheques.

81. The applicant said he brought some travellers cheques with him to Australia in 1998 and copies of those cheques were accepted into evidence, the originals being subsequently returned to the applicant. Those travellers cheques were in US Dollars and in English Pounds. All of the cheques had been countersigned and the US cheques were dated 28 November 1998. The English Pounds travellers cheques were not dated.

82. The applicant was cross-examined extensively regarding the accumulation of the travellers cheques. He accepted that in order to have accumulated some US$800,000 in travellers cheques between 1979 and 1998, he would have needed to have accumulated, on average, US$40,000 per year. The applicant was then taken to a table which was provided by the Commissioner dealing with travel and study allowance limits in South Africa between 1964 and 2003. For travel on business to countries other than neighbouring countries, the limits ranged from ZAR$5,000 to ZAR$120,000 in 1999.

83. I was also provided with currency conversion rates during that period of time and by my calculation, the maximum per year which was allowed to be taken out of South Africa by an adult on a business trip to a country other than a neighbouring country varied from about US$2,000 to about US$17,000 per annum. Quite plainly, if the applicant had in fact been restricted to the maximum allowable per annum, he could not have accumulated US$800,000 over the period of time which he claimed to have done so.

84. In cross-examination the applicant said that the limits were merely guidelines for the average person on an overseas holiday. However, he said where businessmen travelled frequently, they could apply for foreign currency and the request would generally be granted. The applicant insisted that if a South African businessman had a genuine reason for exceeding the limit, then that was permitted. I had no other evidence before me which either supports or contradicts that statement. The applicant said he had not kept any documents which related to his acquisition of the travellers cheques. He insisted that if the maximum limit had already been exceeded and he required further travellers cheques for business travel, he simply had to fill out a form justifying the need for the excess above the permissible maximum amount. The applicant agreed that if he purchased some US$40,000 in travellers cheques per year, particularly in the 1980s, he would have exceeded the maximum limit allowable by a significant amount.

85. Nevertheless, the applicant insisted he was permitted to take such excessive sums out of South Africa in travellers cheques. He maintained he travelled extensively during that period and said he travelled to the United Kingdom almost on a monthly basis. The applicant also said in evidence that his memory was that the South African Rand was significantly stronger in the 1980s. He believed it was above parity in the early 1980s. Mr Wheelahan then put to him that even if that were the case, the maximum limit in US Dollars was about $15,000. That remained way short of the US$40,000 average required to establish an accumulation of US$800,000 over 20 years.

86. The applicant was also cross-examined about his income during that period and whether he earned sufficient to set aside US$40,000 in those years. The applicant said he was earning well above the average from the time he went into the workforce. He did not provide any indication of what he might have earned during that period of time. He nevertheless insisted that he was able to save

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the equivalent of US$800,000 over the 20 year period.

87. Mr Wheelahan also put to the applicant that the Reserve Bank, when setting the maximum limit on foreign currency, took into account amounts spent on credit cards. That certainly appears to be the case from extracts I had in evidence of the exchange control manual issued by the Financial Surveillance Department of the South African Reserve Bank. The applicant said that in theory that was the case but in reality it did not happen. The applicant said he did not declare amounts of expenditure which he incurred on his credit card.

88. Mr Wheelahan submitted that the applicant had made a misleading statement on his tax returns for the 2004 and 2005 income years by answering no to the question whether he owned or had an interest in assets located outside Australia during the year with a total value of A$50,000 or more. The applicant's tax returns for those years were in evidence and he quite clearly did answer no to that question. When this was put to the applicant in cross-examination he agreed that the answer was incorrect. He said he did not have a discussion with his accountant about that but said that his understanding of the question was that it referred to interest bearing assets, the interest of course being taxable in Australia. He agreed that he held well in excess of A$50,000 in travellers cheques in South Africa in those years.

89. Overall, the evidence in relation to the acquisition of the travellers cheques was unsatisfactory. Although the applicant gave explanations as to how he was able to acquire and retain travellers cheques in excess of the maximum limits imposed by the Reserve Bank of South Africa regarding the acquisition of foreign currency, other than the applicant's self-serving statements, there was no other evidence to support his claim.

90. Mr Kirkpatrick of course said that he received the sum of US$120,000 by way of travellers cheques in May or early June 2004 and the sum of US$110,000 in either May or June of 2005. However, because Mr Kirkpatrick was not prepared to be cross-examined on his witness statements in evidence due to the intervention of the SARS, his evidence must be given little weight. I am also mindful of the fact that the evidence the applicant gave about the acquisition of the travellers cheques was based solely on a lawful acquisition. I do not discount the fact that travellers cheques may have been obtained by unlawful means. Quite plainly, the applicant was prepared to retain foreign currency in the form of travellers cheques after his return from overseas trips and that, in itself, was unlawful. In fact, in re-examination the applicant was asked if he wanted to say anything further about bringing money into South Africa and taking it out of South Africa. He said:

"… Well, look, yes, I think, yes. I was well aware that I was in breach of the regulations of the country. I don't know if I was in breach of the law of the country, I'm not sure about that. But you know, the reality was and is that South Africa, as we all know, was a very abnormal society for a long time. And I chose, that on this particular matter, that I was not going to obey the regulations of the country because it just - it did not make sense to me as an individual to do so. Now, I know that you will probably raise eyebrows about that and I can understand that. All I can say is that I think there are times where individuals have to make choices for themselves. I knew I was going to leave and it was a question of when and not if. And I chose to accumulate hard currency by the only means available to me. There was no other way to do it. And If I am - if that is going to count as a negative against me, so be it. I can't help that. … Regarding the travel in and out of South Africa, I acquired travellers cheques by the rules by applying to a bank and getting the - and converting Rands into US Dollars. What I didn't do is, yes, convert them back when I returned. So that is my testimony on that."

91. Given the scant evidence about the acquisition of the travellers cheques, it would be speculative of me to draw the inference that, due to the limits placed on the purchase of foreign currency, the applicant could not have acquired US$800,000 in the time stated. It remains a possibility. However, for the reasons

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I indicate below, I find, on the balance of probabilities, that the applicant did accumulate travellers cheques in sufficient quantity to pay Mr Kirkpatrick the amounts referred to in respect of the 2004 and 2005 income years. I also find that the applicant's incorrect statement on his tax returns in those years regarding assets located outside Australia was inadvertent. If he had thought about it for one moment when completing those tax returns, he would have realised that he may have been required to substantiate the software licence expenditures and that would have resulted in the error being made apparent to him.

92. Mr Wheelahan also submitted that it was inconceivable that the applicant would have the equivalent of in excess of A$1,000,000 sitting idle in a form equivalent to cash without earning interest or otherwise being able to generate income, particularly given the profit income disclosed from KRI's activities. While in the minds of some people, that may appear to be inconceivable, I have no doubt that in the minds of others, in the circumstances in which those monies were kept in South Africa, it might well be entirely plausible. With respect to Mr Wheelahan, that submission is speculative and does not take into account the fact that the accumulated travellers cheques, which were regarded as foreign currency in South Africa, were retained unlawfully.

Payment by way of travellers cheques

93. The Commissioner contended that the evidence regarding payment made by the applicant to Mr Kirkpatrick for the software licence agreement was inherently unbelievable and should be rejected. According to the applicant's first witness statement, the travellers cheques he left with his sister-in-law were paid to Mr Kirkpatrick to satisfy software licence fees for the years 2004 and 2005. In cross-examination the applicant agreed that Mr Kirkpatrick was not a close friend but a business acquaintance. In his first witness statement, Mr Kirkpatrick said he met the applicant at a conference on technical software issues held at Midrand (near Johannesburg) in South Africa in the early 1990s. Mr Kirkpatrick said he remained in loose contact with the applicant, speaking with him possibly three to four times in a year.

94. Given the relationship between the applicant and Mr Kirkpatrick, Mr Wheelahan submitted that Mr Kirkpatrick would not do personal favours or anything illegal for the applicant and this is supported by what the applicant said in cross-examination. In those circumstances, Mr Wheelahan submitted it was unlikely that Mr Kirkpatrick would accept travellers cheques for payment under the software licence agreement.

95. In his first witness statement, Mr Kirkpatrick said that he agreed to accept the licence fees by way of travellers cheques in US dollar currency. He said at first he was reluctant to accept payment by that means, but when the applicant explained to him that he could not get the money out of South Africa because of foreign exchange restrictions, he agreed to accept payment by that means. He said the travellers cheques he received were in denominations ranging from US$50 to US$1000. Mr Kirkpatrick said he collected the travellers cheques on trips to Johannesburg. They were given to him by the applicant's sister-in-law. There was no other evidence of the payment of the software licence fees to Mr Kirkpatrick by travellers cheques. Furthermore, the applicant's evidence was that payments for the 2006 and 2007 financial years were also made by travellers cheques. This is despite the fact that the applicant was under investigation by the ATO. No evidence was produced to the ATO regarding the subsequent payments.

96. Mr Wheelahan also noted that the tax return lodged with the SARS by Mr Kirkpatrick for the 2007 income year did not disclose receipt of any payments which appeared to be referrable to the software licence agreement. The tax return for the 2006 income year also disclosed it as being highly unlikely that Mr Kirkpatrick received such payments. In a letter from an officer from the SARS to the Commissioner dated 7 July 2010, the officer stated that Mr Kirkpatrick's bank account statements for the period 1 January 2004 to 31 December 2005 appeared not to reflect deposits related to the travellers cheques. Very few deposits were made of relatively small amounts.

97. However, that statement does not advance the Commissioner's contentions. Even the Commissioner conceded that numerous

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travellers cheques must have been involved in the payments given that they were in amounts of US$50 up to US$1000. Were those cheques deposited in Mr Kirkpatrick's accounts from time to time, it would not be evident that they represented the large payments for the software licence agreement or that the deposits were in fact travellers cheques. Furthermore, as the SARS letter states, SARS inquiries with the bank revealed that unless full details of a deposit, including the date and the amount, were given to the bank, it could not trace the deposit slips which might record the nature of those deposits. It appears no such request was made to the bank.

98. The absence of documents from Mr Kirkpatrick regarding the cashing of the traveller's cheques is hardly surprising given it appears Mr Kirkpatrick could not lawfully have dealt with the travellers cheques which had been signed and countersigned by the applicant. Nevertheless, it is conceivable that Mr Kirkpatrick dealt with those travellers cheques as if they were cash by giving them to any person that was prepared to receive payment by that means in any transactions conducted by Mr Kirkpatrick.

99. Travellers cheques are negotiable instruments and can be used for the purchase of goods or services. Ultimately, the issuer of the cheque becomes liable to pay out its face value. That would ordinarily occur when the person receiving a travellers cheque deposited it in a bank account and the bank subsequently settled with the issuer of the cheque. Because of the wide acceptance of travellers cheques, after their signing and countersigning, they are, effectively, cash. The only risks taken by a person accepting a travellers cheque is that the travellers cheque itself is a forgery; or that it has been stolen. Most persons accepting a travellers cheque would only accept it where the cheque is countersigned in their presence with the person tendering the cheque presenting some form of identification. However, while that would be the normal process, there is no reason why it must always be followed particularly where the parties know each other and the risk of theft or forgery is minimal or non-existent.

100. Therefore, there is nothing inherently unbelievable about the fact that Mr Kirkpatrick was paid in travellers cheques despite the fact that in the circumstances that existed in South Africa at the time, such a transaction was quite likely unlawful. Also, given that travellers cheques do not state on their face the country in which they were purchased, and they purport to be valid in all countries of the world unless the contrary is endorsed on them, were Mr Kirkpatrick simply to deposit them in a bank account or use them as cash and a third party deposited the cheques in a bank account, there is nothing on the cheque itself which would indicate that it was in fact purchased in South Africa and therefore subject to currency controls. On that basis alone, Mr Kirkpatrick could easily have disposed of the travellers cheques without the risk of being found to have contravened exchange control regulations. Therefore, although the applicant's evidence was that Mr Kirkpatrick would have enormous difficulty in disposing of the foreign currency, in my view, the problem may not have been anywhere near as acute as the applicant has indicated in his evidence.

101. The absence of documents evidencing the payment by travellers cheques may be explained by reason of the fact that the travellers cheques in question were purchased in South Africa and retained in contravention of the exchange control regulations. It is not difficult to accept that records of their acquisition were not kept. Furthermore, given the passage of time since they were acquired, it is also possible that they have since been lost.

102. Mr Wheelahan submitted that the applicant's evidence regarding the manner in which the cheques were handed over to Mr Kirkpatrick was inconsistent. In cross-examination the applicant was asked whether it was correct that his sister-in-law hand over travellers cheques to Mr Kirkpatrick by meeting him various restaurants and cafes. The applicant agreed with that statement. Mr Wheelahan then directed the applicant's attention to paragraph 11 of his first witness statement in which he said:

"11. The travellers cheque payments by my sister in law to Michael Kirkpatrick took place at restaurants and/or cafes in

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Johannesburg. I instructed my sister in law by telephone before each of 30 June 2004 and 30 June 2005 (in each case either in late May or early June) how much to pay Michael Kirkpatrick and he would subsequently visit her at home and collect the travellers cheques from her. …"

103. Quite plainly, paragraph 11 of the applicant's first witness statement contains an internal inconsistency. In my opinion, it is difficult to make much of that paragraph other than to speculate it is possibly a drafting error made by the solicitors preparing the applicant's statement for him.

KRI financial statements

104. Mr Wheelahan submitted that an examination of KRI's financial statements for the 2004 and 2005 income years makes it clear that payment of the software licencing fee was not commercially justifiable. In the 2004 income year, the software licence fee expense reduced KRI's net profit from $227,460.68 to $70,040.68. In the 2005 income year, the expense had the effect of reducing KRI's net profit from $178,681.17 to $28,407.95. When the applicant was cross-examined on this point, he said that he saw it as a capital investment made by KRI. Mr Wheelahan submitted that the explanation offered by the applicant was unconvincing.

105. The problem with Mr Wheelahan's submission is that it looks at only two years over a seven year payment period. Furthermore, with the updates the applicant claimed to have acquired in 2009, as I understood the applicant's evidence, the software continues to provide a substantial benefit to the applicant in the course of the consulting fees which he earns. Therefore, over the full lifecycle of the WISDDM software, the earnings/expense ratio may well be significantly different to the two years which happen to be in question. In fact, in cross-examination the applicant said he would justify the expenditure made to acquire the software licence on the basis that it was an investment which would contribute to future revenue streams.

106. Mr Wheelahan also referred to the applicant's evidence-in-chief where he said his earnings rates had doubled between 1999 and 2008. On that basis, Mr Wheelahan submitted that KRI earned significantly less in the years prior to 2004. That seems to me to be a reasonable conclusion to draw from that evidence. However, in his evidence-in-chief, the applicant also indicated that based on 230 working days in a year, he would earn some $1,400 per day. That amounts to $322,000 per year. Also, despite the fact that the applicant claimed his rate had doubled in the period I have referred to above, the profit and loss statement for 2003 financial year discloses consulting fees in the amount $268,625, some $60,000 more than the 2004 year. No doubt the consulting fees figure fluctuated according to the amount of work the applicant was able to obtain as a consultant through KRI. It does not, in my opinion, show that his evidence is inherently unbelievable and ought to be rejected.

Inconsistency regarding movement of funds

107. Mr Wheelahan referred to the applicant's evidence-in-chief where he said that when he left South Africa, he took out the maximum amount of foreign currency permissible at that time. He also said that his wife, who joined him at a later time, also brought out the maximum amount permissible and in fact his wife made a number of return trips to South Africa, each time bringing back the maximum allowed. The applicant's evidence indicated that this amount was brought out of South Africa in the form of travellers cheques.

108. Mr Wheelahan submitted that, inconsistent with the applicant's evidence that money in the form of travellers cheques was transferred from South Africa to Australia, on 3 July 2002 the applicant transferred the sum of A$20,000 to South Africa from Australia.

109. I had in evidence an extract from AUSTRAC indicating that the applicant carried the sum of A$20,000 cash out of Australia to South Africa on that date. Although the applicant said his recollection was that the A$20,000 was in travellers cheques, when confronted with the AUSTRAC report, he agreed he must have been mistaken. Although Mr Wheelahan submitted the applicant unsuccessfully attempted to explain away what he described as an inconsistency, that is, taking as much money out of South Africa as possible

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before coming to Australia and then subsequently returning to South Africa with A$20,000 in July 2002, the applicant did offer an explanation in his first witness statement. Although he referred to travellers cheques, he said that he used approximately US$20,000 to make gifts to his sister-in-law. While it is not entirely clear from the evidence that this is the same $20,000 referred to by the applicant in his oral evidence, particularly as the money transferred from Australia was in Australian currency and in cash; because the applicant was of the opinion that $20,000 had been taken back to South Africa in the form of travellers cheques, the discrepancy in his evidence can be explained by that confusion. In any event, I do not find that this evidence is so significant as to be inherently unbelievable and ought to be rejected.

Production of documents

110. At the request of the Commissioner, the Tribunal issued a summons to the applicant on 18 May 2010 seeking the following documents:

(a) the original software licence agreement executed between KRI and WSDM Consulting;
(b) the originals (or if not available, true copies) of the purchase records of all the travellers cheques in the amount of US$812,050 referred to in the applicant's first witness statement, including any completed foreign exchange forms and clearance notices from any financial institution;
(c) the original (or if not available, a true copy) of any record or list of the serial numbers of all of the travellers cheques; and
(d) the originals (or if not available, true copies) of all email correspondence or any other documents recording any communications between the applicant and Mr Kirkpatrick regarding the software licence agreement.

111. Putting aside the fact that a summons should not issue to a party to a proceeding before the Tribunal, as the matter can be properly dealt with under s 37(2) of Administrative Appeals Tribunal Act 1975 (AAT Act), I do not accept Mr Wheelahan's submission that no documents were produced in response to the summons. While the original software licence agreement was not produced, a copy was produced and it had been executed by the parties and dated. In the course of the hearing, the Commissioner did not submit that the original document was required in order to establish its authenticity.

112. Mr Wheelahan was also critical about the fact that the emails produced by the applicant had been altered from their original form. However, as I understood Mr Wheelahan's submission, there was no suggestion that those emails had been altered so as to change the substance of the correspondence. In the course of cross-examination, the applicant was asked whether he continued to hold original copies of the emails on his laptop and responded that he did. The applicant was not asked to produce his laptop to the Tribunal. In any event, as Mr Halperin pointed out in the course of the hearing, the emails between the applicant and Mr Kirkpatrick were attached to the second witness statement of Mr Kirkpatrick, some four months prior to the issue of the summons. While a number of the emails have been printed onto a single page, they do not appear to have been altered in any significant way. Although Mr Wheelahan also pointed to the applicant's evidence regarding emails with Mr Kirkpatrick and in particular whether there were any others in his possession which had not been produced, the applicant said:

"On this particular issue, I suspect I may have, yes. I don't know."

The most that can be made of the applicant's response is that he simply did not know whether there were other relevant emails which had not been disclosed. When it was put to him again in cross-examination that it appeared he did have other correspondence in his possession, the applicant simply answered: Yes. And it's the documents you have here. He was asked whether there were any more and he said: No.

113. Mr Wheelahan also submitted that the applicant failed to produce:

(a) user manuals and other documents referred to in the software licence agreement;
(b) any evidence of payments made in other years which were due under the software licence agreement;

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(c) any receipts for the purchase of the travellers cheques;
(d) any foreign exchange forms provided by the bank or notifications of clearance;
(e) further drafts of the software licence agreement; and
(f) bank statements showing the deposit of travellers cheques into WSDM Consulting's account.

114. With respect to Mr Wheelahan, production of user manuals or other documents and evidence of other payments due under the software licence agreement are not relevant to the only issue before me on the hearing of this matter. Whether or not payments were made in other years as required under the software licence agreement does not make it more or less probable that the outgoings as stated in the software licence agreement were incurred in the 2004 and 2005 income tax years. The applicant made it clear that he did not keep any receipts for the purchase of the travellers cheques nor any foreign currency forms which he was required to complete when acquiring them. As these documents would have come into existence some 30 years previously, the applicant's failure to produce them does not warrant criticism.

115. While it is correct to say, as does Mr Wheelahan, that the applicant indicated that there were a number of draft versions of the software licence agreement, and no further drafts were produced, I do not understand the significance of the applicant's failure to produce those drafts, if in fact that amounts to a failure. The applicant was not questioned about further drafts of the software licence agreement in his cross-examination.

116. As for bank statements disclosing the deposit of travellers cheques into WSDM Consulting's account, given the account would be Mr Kirkpatrick's personal bank account, I do not understand why the Commissioner would consider the applicant was able to obtain another person's private banking information. In fact the bank statements do not disclose the deposit of the travellers cheques in any event. Whether one could attribute deposits to payments for the software licence agreement from bank statements is highly speculative.

Failure to call witnesses

117. Mr Wheelahan was critical of the fact that neither Mr Kirkpatrick nor the applicant's sister-in-law was available to given oral evidence by telephone in the course of this hearing.

118. It is sufficiently clear that Mr Kirkpatrick intended to be available for cross-examination on his witness statement until such time as he became aware that the Commissioner had been in contact with the SARS regarding his financial affairs. I had in evidence emails between Mr Halperin and Mr Kirkpatrick which were sent in May and June 2011. Mr Kirkpatrick made it clear in those emails that he was no longer prepared to give oral evidence and that he was not prepared to make any statements about his personal affairs to the Australian authorities.

119. In his evidence-in-chief the applicant was asked whether he would ask his sister-in-law to provide a witness statement. He said he most certainly would not for the reason that she was a single mother, about 60 years of age, with a disabled son who lived with her. He said he was not prepared to put his sister-in-law in jeopardy with the South African authorities if she were to testify at this hearing about holding travellers cheques.

120. With respect to Mr Wheelahan, the explanations given for the non-attendance of Mr Kirkpatrick and the applicant's sister-in-law are perfectly reasonable, particularly following disclosure that the SARS had been notified and was examining the affairs of Mr Kirkpatrick. The letter from the SARS officer to the Commissioner dated 24 June 2010 makes it clear that the Commissioner requested information regarding Mr Kirkpatrick's affairs under Article 25 of the Double Taxation Agreement between Australia and South Africa. Quite plainly, the SARS was likely to make a request of the Commissioner regarding the evidence given at the hearing of this matter should Mr Kirkpatrick or the applicant's sister-in-law have given oral evidence. I believe there is little doubt that the activities of all parties concerned regarding the purchase and retention of travellers cheques in South Africa breach the exchange control regulations and potentially expose those parties to a penalty. For those

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reasons, I find that it is not appropriate to draw adverse inferences from the failure of Mr Kirkpatrick or the applicant's sister-in-law to give evidence in this matter. The reasons for not giving evidence are adequately explained (see
Jones v Dunkel at 321).

Witness credibility

121. It should be clear from the material I have referred to above that both parties placed some emphasis on the applicant's credibility when giving his oral evidence. No doubt in order to bolster the applicant's credibility, the applicant adduced evidence from a witness who was previously a Group General Manager reporting directly to senior management of the telecommunications company for whom the applicant carried out subcontracted work. As the Group General Manager, this witness supervised numerous staff and external contractors for the telecommunications company.

122. Although this witness said he was aware that the applicant used software which was not provided by the telecommunications company to perform his project management work, he was unaware of the precise nature of that software. Furthermore, while the witness spoke in glowing terms of the applicant's ability and professionalism in conducting his work, and he described him as a very honest man and a straight shooter, with respect to the witness, I prefer to rely on the evidentiary material presented to me in the course of hearing this matter to determine whether the evidence of the applicant should be accepted. It is only by testing the applicant's evidence against the documentary evidence that I can determine whether the applicant has discharged the onus of proof demanded by the Administration Act. I have not given much weight to this witness's evidence.

Contempt of tribunal

123. Mr Halperin also submitted that the Commissioner's actions in contacting the SARS should be interpreted as an attempt to apply improper pressure to a witness in a proceeding. Mr Halperin submitted that this interference with the witness constituted contempt of the Tribunal and was also a breach of the Commissioner's obligations to act as a model litigant. I do not accept that submission.

124. While s 63(5) of the AAT Act provides that persons must not do any act or thing that would, if the Tribunal were a court of record, constitute a contempt of court, the nature and functions of the Tribunal are significantly different to that of a court. This was clearly explained by Northrop J in
Saunders v Federal Commissioner of Taxation (1988) 88 ATC 4349. In that case the applicant had objected to a number of assessments made by the Commissioner which were disallowed. The applicant sought review of those decisions before the Administrative Appeals Tribunal (AAT). While that proceeding was on foot before the Tribunal, officers from the ATO attended the applicant's business premises seeking access under s 263 of the ITAA 36 to the records of various companies in order to inspect and copy those records. The applicant claimed that this amounted to the improper use of a coercive power to obtain material which would not otherwise be available to the Commissioner under normal court processes. The applicant claimed that the Commissioner's actions constituted contempt of the objection proceedings before the AAT and the Federal Court.

125. Northrop J distinguished the processes of the AAT from that of courts. His Honour pointed out that the Tribunal exercises administrative functions, and not the judicial power of the Commonwealth. He then said, at 4356:

"Viewed in this light, it is not surprising that the provisions of the Tribunal differ greatly from court proceedings. For example, there is no provision for the filing of pleadings nor for discovery or inspection of documents. Nor is the Tribunal bound by the rules of evidence. Provision is made for there to be "parties" to the proceedings (sec.30) but in a reference such as this the parties are not adversaries in the strict sense, and any argument they present constitutes material which assists the Tribunal in deciding what decision should be made. The decision of the Tribunal is not in the nature of a judgement for or against a particular party. Therefore it is, in my view, inappropriate to regard the Commissioner as having gained an unfair advantage as a

ATC 414
result of his use of the sec. 263 powers. The Tribunal is in the shoes of the Commissioner and may use any material put before it in reaching its decision. The applicant would be entitled to be informed of material so obtained. Therefore, it is quite permissible for the Commissioner to obtain material pursuant to its sec. 263 powers for the purpose of placing such material before the Tribunal, if indeed this was a purpose of obtaining the information. In so doing, he is not in contempt of the Tribunal."

126. In addressing the effect of s 63(d) of the then current AAT Act which is in terms similar to the current s 63(5), Northrop J said, at 4356:

"The effect of subsec. 63(d) is to treat the Tribunal as though it were a court of law for the purposes of determining what constitutes a contempt. The Tribunal has no power to punish for contempt. The section creates a criminal offence. However, it cannot be supposed that the section requires a court to ignore the nature and functions of the Tribunal when considering whether the actions of the Commissioner amount to a contempt. The Commissioner is entitled to rely upon the fact that the Tribunal is an administrative body standing, as it were, in his shoes, and is entitled to take advantage of the right conferred upon him by sec. 37(1)(b) of the Administrative Appeals Tribunal Act to lodge with the Tribunal every document in his possession or control that he considers to be relevant to the review of the decision by the Tribunal. Section 63(d), whatever its effect, does not remove or hamper that right."

127. The judgement of Northrop J in Saunder's case was followed by Heerey J in
Watson v Federal Commissioner of Taxation (1999) 99 ATC 5313. That case also involved proceedings before this Tribunal. In that case, a Mrs Mackey was a witness in the Tribunal proceedings and the Commissioner intended to call her to give evidence. The Commissioner issued a notice under s 236 which required the person receiving that notice to give certain information to the Commissioner and to attend and give evidence before the Commissioner. Heerey J cited with approval the decision of Northrop J in Saunder's case. His Honour said, at 5319:

"Thus proceedings before the AAT are fundamentally different from court proceedings. Unlike a court, the AAT is exercising powers of an inquisitorial nature to endeavour itself to ascertain the truth, or at any rate to arrive at the correct or preferable decision. The AAT does not proceed on any assumption of equality between adversarially opposed parties.

The AAT is not restricted to material that was before the Commissioner. In reality it is highly likely that there will be more information available at the Tribunal hearing than at the assessment stage. The more relevant information that is available, the more likely it is that the correct or preferable decision will be made. …. So I do not see the issue of the notice as interfering with or prejudicing the proper conduct of the AAT proceedings. …"

128. In my opinion, the enquiry made by the Commissioner with the SARS, which was lawfully made under Article 25 of the Double Taxation Agreement, does not constitute an improper interference with the witness, Mr Kirkpatrick. It was made for the purpose of obtaining corroborative evidence of the matters set out in Mr Kirkpatrick's witness statements. That, in the nature of the process before this Tribunal, is permissible as is explained in the two cases I have referred to above.

Conclusion

129. The only issue for me to determine is whether the applicant incurred outgoings in the form of software licence fees in the income years 2004 and 2005. An examination of court decisions dealing with the meaning of the word incurred as it is used in ITAA 36 and ITAA 97 makes it clear that payment need not take place in the income year in question. It must be an outgoing of a revenue character and properly referrable to the year of income in question.

130. While much of the evidence in this matter was taken up enquiring into whether payment in fact had taken place during the years in question, and the unusual way in which payment was said to have taken place, those matters are only some of the circumstances surrounding the transactions claimed by the

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applicant which lend weight to his claim that the claimed outgoings were incurred in the years stated. The Commissioner's concern was that all the circumstances giving rise to the claimed liability having been incurred and the evidence of those circumstances is so inherently unbelievable that it results in the applicant failing to discharge the onus of proving that the liabilities for the years in question were incurred.

131. Despite the fact that the applicant encountered a number of evidentiary problems in the course of attempting to discharge the onus of proving that he incurred the outgoings or liabilities in the 2004 and 2005 income years, there are significant matters which, in my view, were clear on the evidence before me.

132. The first is there can be no doubt that the applicant acquired the WISDDM software. He provided a very convincing demonstration of its operation and how he used that software in the course of his project management consultancy business. Secondly, I had in evidence a copy of a software licence agreement signed by KRI and Mr Kirkpatrick on behalf of WSDM Consulting which plainly stated KRI was liable for software licence fees in the amounts the applicant has claimed for the 2004 and 2005 income years. While there was some controversy about the provenance of the software licence agreement, I also had in evidence a number of emails between the applicant and Mr Kirkpatrick which clearly indicate that the applicant and Mr Kirkpatrick negotiated the terms and conditions set out in the software licence agreement. Furthermore, I also had in evidence emails between the applicant and Mr Vorster, an executive with IBM Global Services in South Africa. Those emails plainly disclose the applicant's concern about the provenance of the WISDDM software and an attempt by the applicant to confirm that it was an IBM product. The applicant also indicated that he liked that product.

133. The third significant factor in favour of the applicant's claim is that he sought an update to the WISDDM software in July 2009. A screen shot of installation disc number 1 and 2 disclosed that four files were modified in July 2009. Fourthly, I had in evidence a telegraphic transfer in the sum of A$79,712.80 made in favour of Mr Kirkpatrick and payable to his bank account, the number of which was stated on the telegraphic transfer. Subsequent investigations by the SARS confirmed that Mr Kirkpatrick held a bank account with the bank stated in the telegraphic transfer and with the corresponding bank account number. As a matter of logic, the applicant would not have paid that sum of money to Mr Kirkpatrick for updated files and Mr Kirkpatrick would not have supplied those files to the applicant if he had not in fact paid for the software in accordance with the software licence agreement.

134. The more controversial aspects of the applicant's evidence were those circumstances surrounding payment for the software by way of travellers cheques. While I accept that evidence regarding acquisition of the amount of travellers cheques required to pay for the seven instalments of licence fees was sparse, I do not find that it was impossible for the applicant to have done so. Also, as Mr Halperin submitted, the onus of proving that the outgoings were incurred does not necessarily require the applicant to prove that payments were made.

135. I do not place much weight on the submissions made on behalf of the Commissioner regarding the existence of WSDM Consulting. Mr Kirkpatrick made it clear that that was the business name under which he traded. It is not an incorporated entity or any other form of legal person. Therefore, the absence of records held by the SARS regarding WSDM Consulting does not tell against the applicant. Mr Kirkpatrick was registered with the SARS from 2006.

136. Similarly, the fact that the WISDDM software was IBM software and there was no evidence that Mr Kirkpatrick was authorised to either sell or licence that product, even if that were the case, it would not alter whether the applicant had incurred a liability regarding the claimed software licence.

137. I was also not troubled by the fact that KRI's financial statements for the two years in question might indicate a lack of commercial sense in obtaining software as expensive as WISDDM. In order to determine its commercial value, one would need to look properly over all of the years during which that software is

ATC 416

utilised. Simply selecting two of those years is, in my opinion, unsatisfactory.

138. I was not particularly troubled by the fact that Mr Kirkpatrick subsequently refused to be cross-examined on the evidence set out in his witness statements nor the fact that the applicant's sister-in-law was not to be called to give evidence. It is sufficiently clear from the material before me that it is highly likely that there were breaches of the Exchange Control Regulations in South Africa regarding the accumulation and retention of foreign currency and therefore the concerns about prosecution in South Africa, even at this date, are reasonable.

139. In light of the evidence I have referred to above, while there are controversial elements, those aspects which carry the greater weight favour the applicant. I find, on the balance of probabilities, that the applicant did incur outgoings in the 2004 and 2005 income years as claimed. It follows that the decision made by the Commissioner to reject the applicant's claims that those licence fees were incurred was incorrect. I set aside the Commissioner's decision and instead find that the applicant incurred software licence fees in the amounts of A$155,420 and A$150,273 for the income years 2004 and 2005 respectively.

140. This matter has terminated in a manner favourable to the applicant.

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