CASE 4/2012

Members:
E Fice SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2012] AATA 178

Decision date: 23 March 2012

E Fice (Senior Member)

1. The applicant in this proceeding is a private company in its capacity as the Trustee of a family trust. The applicant has sought review of a number of decisions made by the Commissioner of Taxation (the Commissioner) for the income years 1993 - 2003 inclusive. There are three objection decisions which I am required to review being:

(a) 1993 - 1997 income years - objection decision made on 6 September 2007;
(b) 1998 - 2002 income years - objection decision made on 20 August 2007; and
(c) 2003 income year - objection decision made on 7 July 2010.

2. The family trust, the subject of this dispute, was a trading trust which operated an independent supermarket. On 1 September 2005, the Commissioner made a written finding that the applicant was involved in tax evasion. Therefore, the Commissioner applied s 170(2) of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that the Commissioner may amend an assessment at any time if he or she is of the opinion that there has been fraud or evasion.

3. The Commissioner conducted an audit of the family trust for the period 1 July 1992 to 30 June 2003. On 10 February 2005 the Commissioner notified the applicant that he had found understatements of income and it was proposed that original and amended assessments be issued for the income years 1993 - 2003. The Commissioner issued amended assessments for the income years 1993 - 1997 on 10 April 2007. Those amended assessments simply reduced the interest payable by the applicant but did not affect the taxable income or the primary tax said, by the Commissioner, to be payable. The Commissioner issued assessments in respect of those years on 14 November 2005, as follows:

Year Ending 30 June	Taxable Income on Assessment	Penalty on Assessment
1993	$126,948	$45,939.30
1994	$150,344	$54,574.86
1995	$87,215	$31,659.04
1996	$137,173	$49,896.67
1997	$323,872	$118,294.24

4. For the income years 1998 - 2003, the Commissioner issued assessments to the applicant on 23 November 2005 for the 1998 - 2000 years; on 28 November 2005 for the 2001 income year; on 24 November 2005 in respect of taxable income for the 2002 income year; on 29 November 2005 in respect of the penalty for the 2002 income year; and on 12 December 2005 (amended assessment) in respect of the taxable income for the 2003 income year, as follows:

Year Ending 30 June	Taxable Income on Assessment	Penalty on Assessment
1998	$122,617.00	$27,850.09
1999	$139,587.00	$32,381.26
2000	$214,833.00	$52,341.31
2001	$184,484.00	Nil
2002	$465,028.00	$104,631.30
2003	$370,864.00	Nil
	(NOTE: Original assessment was $375,499 - the objection was allowed in part and the taxable income reduced to $370,864)

5. The applicant lodged objections against all of the assessments and amended assessments referred to above.

6. On 6 September 2007 the Commissioner issued to the applicant a notice of decision on objection (the objection decision) in respect of the 1993 - 1997 income years. The Commissioner held that the taxable income on assessment which I have referred to in the first table above was the amount by which the taxable income exceeded the trust income returned by the applicant for the relevant years. The Commissioner found that the applicant should be taxed under s 99A of the ITAA 1936. The Commissioner also held that the applicant was liable for administrative penalties (penalty tax) and interest and that the penalties should not be remitted.

7. In an objection decision dated 20 August 2007 the Commissioner disallowed the applicant's objection against the taxable income assessment for the income years 1998 - 2002. However, the Commissioner also found that the applicant, which was a beneficiary of the family trust, was presently entitled to 100 per cent of the income of the family trust for the years 1998 - 2002. The Commissioner therefore assessed the applicant under s 97 of the ITAA 1936. The Commissioner held that the amounts I have referred to in the second table above represented the additional net income available for distribution by the family trust in the years stated. The Commissioner also found that the applicant was liable for penalty tax and interest and that there should be no remission.

8. The final objection decision was issued by the Commissioner on 7 July 2010 in respect of the 2003 income year. The Commissioner allowed the applicant's objection to the extent of $4,635. The applicant's taxable income for the 2003 year was reduced to $370,864. The Commissioner held that the applicant should be assessed under s 97 of the ITAA 1936. No penalty tax was imposed on the applicant for the 2003 income year.

9. Broadly stated, the issues which I must determine in this matter are whether:

(a) there was understated income for the income years 1993 - 2000 including:
- (i) net profit from supermarket business;
- (ii) rental income (1998 - 2000);
- (iii) goods own use (1993 - 2000) and
- (iv) unexplained income (loans to related entities);
(b) deductions were correctly disallowed for the income years 2001 - 2003 including:
- (i) superannuation contributions on behalf of employees;
- (ii) various other deductions;
(c) there was an understatement of income for the years 2001 - 2002 due to a failure to correctly record goods own use;
(d) the applicant was properly assessed under s 99A of the ITAA 1936, for the income years 1993 - 1997 and under s 97(1) of the ITAA 1936, for the income years 1998 - 2003;
(e) the applicant failed to lodge returns for the income years 1993 and 1994; 1996 and 1997; and 1999 and 2000; and whether subsequent assessments were made outside the time limitations set out in ITAA 1936;
(f) the applicant was liable to administrative penalties and, if so, whether those penalties were correctly assessed at 75 per cent; and
(g) the penalties should be remitted.

Onus of proof

10. The Commissioner made it clear in his statement of facts and contentions lodged with the Tribunal and in closing submissions made on his behalf by Dr P Bender of counsel, that he relied on s 14ZZK of the Taxation Administration Act 1953 (the Administration Act). Section 14ZZK provides:

" 14ZZK Grounds of objection and burden of proof

On an application for review of a reviewable objection decision:

(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and

(b) the applicant has the burden of proving that:

(i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or

(ii) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or

(iii) in any other case - the taxation decision concerned should not have been made or should have been made differently."

11. While accepting that the applicant bears the onus of establishing that the assessments were excessive, Mr A T Broadfoot of counsel, who appeared on behalf of the applicant, referred to the decision of Brennan J in
Federal Commissioner of Taxation v Dalco 90 ATC 4088; (1990) 168 CLR 614 at 621 where he said:

"… It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. …"

12. Brennan J also referred to the manner in which a taxpayer can discharge the burden of proof. He said that it varies with the circumstances. His Honour said that if the Commissioner and taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it is sufficient for the taxpayer to show he is entitled to succeed on that point. However, in the absence of an agreement confining the issues for determination, his Honour said, at 624 - 625:

"Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In
Gauci v. Federal Commissioner of Taxation (44), 75 ATC 4257 Mason J. said:

The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail."

That view, expressed in a dissenting judgment, now prevails:
Macmine Pty. Ltd. v. Commissioner of Taxation (45); McCormack's Case (46).

13. Section 190(b) of the Income Tax Assessment Act 1936 - 1969, to which Mason J referred in
Gauci v Federal Commissioner of Taxation 75 ATC 4257; (1975) 135 CLR 81, is similar to the burden of proof provisions now set out in s 14ZZK of the Administration Act.

14. Dr Bender submitted that the applicant must go further than showing that the assessments are wrong. He said it must show what the correct assessment should be, and what corrections should be made in order to make the assessments right or nearly right. In Dalco's case, Toohey J referred to the finding by Yeldham J at first instance where he referred to the taxpayer having had control and benefit of the monies included by the Commissioner in his assessable income. Toohey J said, at 633-634:

"Although such 'control and benefit' may not be conclusive proof of the taxpayer's liability, it does entail that the taxpayer do more than show that the Commissioner's assessment was made on a wrong basis.

That is not to say that, in such circumstances, the Commissioner's assessment is completely at large or that particulars of an assessment will not be ordered. If the Commissioner has simply plucked a figure 'out of the air' (
Reg. v. Deputy Commissioner of Taxation (W.A.); Ex parte Briggs (74)) or has proceeded 'upon no intelligible basis' (
Trautwein v. Federal Commissioner of Taxation (75)), the Commissioner may be in breach of his statutory duty to make an assessment from the information in his possession: see Bloemen (76). I express no view on that matter for this is not such a case; the assessments were reached after a long and detailed investigation into the taxpayer's affairs."

15. Dr Bender also submitted that evidence produced by or on behalf of the applicant was essential because, in the absence of evidence, the Tribunal could not infer facts in favour of the taxpayer. Mr Broadfoot appeared to agree with that submission and said that where there is no evidence, the application will need to be dismissed and the decision on review affirmed. However, Mr Broadfoot said it was not necessary for a taxpayer to prove every conceivably relevant fact in a case where all of the facts were known and it was sufficient if the taxpayer could point to evidence that enables the Court or Tribunal to infer that the taxable income assessed is excessive. Mr Broadfoot referred to the decision of Gibbs J in
McCormack v Federal Commissioner of Taxation 79 ATC 4111; (1979) 143 CLR 284. His Honour 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 purpose 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."

16. Murphy J in McCormack'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. …"

17. I am aware that caution needs to be exercised when drawing inferences from the evidence. I am particularly 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)."

18. Dr Bender finally submitted that there was no onus placed on the Commissioner to show that the assessments were correctly made. I have referred to the decision of Mason J in Gauci's case.

19. The onus of proof in this case is a significant issue because of the nature of the oral evidence given and the documents admitted into evidence. In fact, the Commissioner contended that the applicant did not lodge income tax returns for the years 1993, 1994, 1996, 1997, 1999 and 2000. The applicant, on the other hand, claimed it had lodged returns for those years and although no documentary evidence of lodgement was produced by the applicant, a number of persons gave oral evidence in support of the applicant's claim. I have more to say about that below. Furthermore, the evidence discloses that the applicant produced at least two sets of financial documents and two versions of tax returns, some headed bank copy and the others headed tax copy or return. The oral evidence given on behalf of the applicant was that the documents provided to various banks were incorrect, deliberately falsified and inflated for the purpose of obtaining bank loans. On the other hand, those documents described as tax copy, were in fact correct. As the Commissioner relied upon the bank copy documents and also documents seized under warrant from various sources, the applicant contended that if I should find that the bank copy documents are in fact incorrect, then I should also find that the income attributed to the applicant was not properly attributable.

20. With respect to Mr Broadfoot's submissions about the applicant's onus of proof, I cannot accept that if I find the so called bank copy documents are inflated, that necessarily results in the applicant proving that the amounts shown in the various notices of assessment are excessive. That is because, as was said in Gauci's case, there is no onus on the Commissioner to show that the assessments were correctly made. What the applicant was required to do in this case was to demonstrate, by evidence, that the records described as tax copy were in fact correct and, therefore, the assessments were excessive.

21. Mr Broadfoot also submitted that it might have been expected that the Commissioner would call evidence regarding matters such as the financial performance of comparable businesses; reliable industry statistics; or other economic data in support of his claim that the bank financial statements should form the basis of the assessments in question. Mr Broadfoot then submitted that I should infer from his failure to do so that such evidence would not have been of assistance (see
Jones v Dunkel (1959) 101 CLR 298 at 320-321). On the other hand, Dr Bender submitted that the applicant has not called any objective witnesses to support its claims. Dr Bender submitted that personnel from the applicant's financiers, including the Commonwealth Bank of Australia (CBA) and the business relationship manager for the supermarket at the Independent Grocers Association (IGA), were not called to give evidence nor was an accountant working on the applicant's accounts during the disputed period called as a witness. Dr Bender submitted that I should draw an adverse inference from the applicant's failure to call those witnesses.

22. With respect to both counsel, it is my opinion that a careful reading of what was said by Windeyer J in Jones and Dunkel, discloses the inappropriateness of its application in this case.

23. Jones and Dunkel was a negligence case, where two trucks collided which caused the death of one of the drivers. The plaintiff was the wife of the driver killed in the accident and she brought an action in negligence against the driver who survived. The defendant driver was not called to give evidence and the Trial Judge gave directions to the Jury about the failure of the defendant to give evidence. The plurality found that the directions given by the Trial Judge were incomplete and Windeyer J, at 320, said that the Trial Judge should have given directions in accordance with the general principles stated in Wigmore on Evidence (3^rd ed. (1940)) Volume 2, s.285, p.162 as follows:

"The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which made some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted."

Windeyer J, at 321, then referred to the decision of
R. v Burdett (1820) 4 B. & Ald. 95 [106 E.R. 873] where Abbott CJ said:

"No person is to be required to explain or contradict, until enough has been proved to warrant a reasonable and just conclusion against him, in the absence of explanation or contradiction; but when such proof has been given, and the nature of the case is such as to admit of explanation or contradiction, if the conclusion to which the proof tends be untrue, and the accused offers no explanation or contradiction; can human reason do otherwise than adopt the conclusion to which the proof tends? The premises may lead more or less strongly to the conclusion, and care must be taken not to draw the conclusion hastily; but in matters that regard the conduct of men, the certainty of mathematical demonstration cannot be required or expected." (2) And Best J. said: "Nor is it necessary that the fact not proved should be established by irrefragable inference. It is enough, if its existence be highly probable, particularly if the opposite party has it in his power to rebut it by evidence, and yet offers none; for then we have something like an admission that the presumption is just."

24. The first thing to note is that there must be sufficient evidence adduced by the party which has the onus of proving its case to warrant a reasonable inference being drawn from that evidence in the absence of any explanation or contradiction. Where there is sufficient evidence to draw a reasonable inference from the party which bears the onus of proving its case, and the other party has in its power to rebut that inference or conclusion being drawn by evidence but chooses not to lead that evidence despite the witness being available to give evidence, if no explanation is provided for failure to call that witness, then a rational inference may be drawn that the evidence would not help that party's case.

25. When the principle is properly applied to this case, it should be immediately apparent that unless the evidence adduced by the applicant was enough to warrant a reasonable and just conclusion that the Commissioner's assessments were wrong, no reasonable inference could be drawn that the Commissioner's assessments were incorrect. In fact the evidence was contradicted by the Commissioner who referred to objective documentary evidence tending to refute the applicant's claim. That evidence by itself would prevent any reasonable inference from being drawn in favour of the applicant. This, unlike the
Jones v Dunkel case, is not a case where the evidence of the applicant remained uncontradicted. Furthermore, it cannot be suggested that the Commissioner or any of the persons referred to by the applicant had any knowledge which would throw light upon the applicant's claim. In any event, it was open to the applicant to call any witnesses it chose, there being no property in any witness. I do not accept Mr Broadfoot's submissions regarding the application of the so called rule in
Jones v Dunkel.

26. As far as Dr Bender's submission is concerned, he relied on the applicant's failure to call any objective witnesses to support its claims. With respect to Dr Bender, the rule in Jones and Dunkel does not rely on the distinction which he apparently makes in his submission. The fact is that a number of witnesses gave evidence about the applicant's financial statements and tax returns. While it is entirely possible that the other witnesses referred to by Dr Bender could have been called and may have been able to offer objective evidence about those documents, it does not follow that the applicant's failure to call those witnesses calls for the application of the so called rule in Jones and Dunkel. To be fair to Dr Bender, he did not refer to Jones and Dunkel but simply submitted that the Tribunal should draw an adverse inference from the applicant's failure to call any objective witnesses. In any event, there was no explanation given by the applicant for not calling the persons Dr Bender suggested should have been called, nor was there any evidence about their availability. Any reasons for their absence are merely conjecture. Their absence should not be the subject of an adverse inference.

Failure to lodge tax returns

27. In making the assessments issued by the Commissioner on 14 November 2005 in respect of the 1993 - 1997 income years, the Commissioner claimed that the applicant failed to lodge tax returns for the five income years stated above as well as the 1999 and 2000 income years. The applicant denied that to be the case.

28. The Commissioner conducted a special audit of the applicant which included an interview with the applicant's sole director and secretary (the Director) on 24 March 2004. In a Section 264 notice dated 7 May 2004 addressed to the applicant's accountants, the Commissioner sought the returns for the 1993, 1994, 1996, 1997, 1999 and 2000 income years. The Commissioner stated he had no record of those returns being lodged by the family trust. On 7 July 2004 the solicitor for the accountants wrote to the Commissioner stating that the accountants had lodged returns for those years and also indicated that the accountants recorded a validation reference for the 1999 income year. The Commissioner subsequently requested that the accountants provide electronic lodgement system (ELS) transmission and validation reports. The accountants wrote to the Commissioner on 2 September 2004 stating that they could not obtain information regarding the lodgement of the returns in question because:

"…our computer hard disk has been corrupted and we cannot download or obtain any information for these periods."

29. The accountants nevertheless said that in their opinion, the returns were posted directly to the Dandenong office of the Commissioner or were lodged by ELS.

30. At a meeting held on 16 March 2005, the Principal Accountant and an employee accountant from the applicant's accountants (the employee accountant) attended a meeting with officers from the Australian Taxation Office (ATO). When it was put to the Principal Accountant that there was no record of lodgement for the years in question, his response was simply: They could have been misplaced. An officer of the ATO explained that in the early 1990s, under self-assessment, there was no matching of individual beneficiaries' returns with the trust return. The Principal Accountant's response was he could not understand how the ATO could assess beneficiaries without the trust return being lodged. He could not answer why the trust returns had not been lodged for six years and he complained that no final notices were received. He then said: We've done our job, our duty [to the ATO] by lodging the beneficiaries' returns.

31. In a facsimile transmission to the ATO on 21 August 2005, the Director disagreed that income tax returns for the family trust had not been lodged in any particular year. He said that the employee accountant stated he had made arrangements to post the income tax returns to the ATO. He also repeated that the beneficiaries lodged their income tax returns in each year in question. He then said:

"We do not believe that we have done anything wrong and trust and beneficiaries' tax returns were correctly prepared and we therefore dispute that you should amend more than five years of assessments if any at all."

32. In cross-examination, the Director agreed that he did not prepare returns for the years in question, nor did he lodge any returns. However, he did say that he signed those returns.

33. The Director was then taken to returns which the Commissioner had obtained for the 1993, 1996, 1997, 1999 and 2000 income years and the Director agreed that none of those returns had been signed by him. The Director agreed that he did not do the lodgement but said he believed the employee accountant lodged those returns although he didn't know that to be the fact. In his witness statement dated 9 February 2009 the Director said:

"… I provided information to [the employee accountant] for the purpose of enabling him to prepare tax returns for the trust."

He said that:

"… [The] final returns were completed and lodged usually in or around March following the income year to which they related…"

The Director also said in his witness statement that at no time during the income years in question did the trust receive any final notices from the ATO regarding failure to lodge income tax returns.

34. In cross-examination, the Director repeated his evidence that he did not lodge the returns. When it was suggested to him that he didn't know whether those returns were actually lodged, he said that he did sign them for each of those years in question. When it was put to him that other than the 1994 return, which was signed by him, the remainder had not been signed, he answered: I don't - I don't know.

35. In his examination-in-chief the Principal Accountant was asked whether, to the best of his knowledge, the tax returns were lodged for each of the years in question. He answered that he did not believe any of the years in question were missed. He said that the basis of his belief was: It was on my agenda to make sure that the tax returns got lodged every year. In the course of his cross-examination, the Principal Accountant confirmed that he was a registered tax agent during the 1990s and early 2000s. He was asked whether he posted or lodged electronically any of those returns and answered that he did not. When asked whether he signed off on all of his clients' tax returns as the tax agent, the Principal Accountant answered that he did. Despite this, there were no tax returns amongst the documents in evidence which had been signed by this witness. Furthermore, in a letter dated 7 July 2004 from a solicitor acting on behalf of the Principal Accountant, it was stated that the Principal Accountant provided copies of tax returns for the years in question although, as I have already stated, these were not signed by that person. While the solicitor reported a lodgement date of 8 June 2000 for the 1999 return and provided a validation reference, no other comments were made in respect of the other returns in question. Neither the solicitor nor the Principal Accountant provided any ELS transmission or validation reports or other documentation supporting the applicant's claim that the returns for the years in question were lodged with the ATO despite being asked to do so in a further letter from the ATO dated 15 July 2004.

36. In his evidence-in-chief the employee accountant said the Principal Accountant was the person who signed off on the tax returns as tax agent. Despite that statement, there were no tax returns in evidence signed by the Principal Accountant. In cross-examination, the employee accountant maintained that the tax returns between years 1993 and 2003 were all reviewed by the Principal Accountant. He also stated that some of the tax returns were lodged electronically (1998, 1999 and 2000 income years) and that the earlier returns, which were paper returns, were posted to the ATO in Dandenong. However, in his witness statement dated 18 February 2009, the employee accountant said:

"I have been unable to locate validation numbers for returns prior to the 1999 return, which may have been lodged via post."

37. In a record of meeting with officers from the ATO on 16 March 2005, which was attended by the Principal Accountant and the employee accountant, both men were asked whether they had any document to verify that lodgement took place. The record of interview states that there was no reply to this question from either witness. Given the extent of materials which were in evidence before me, I am satisfied that there are no documents in the possession of either the Principal Accountant or the employee accountant which establish lodgement of tax returns in the income years 1993, 1994, 1996, 1997, 1999 and 2000.

38. The evidence given regarding the lodgement of tax returns by the employee accountant was unconvincing. In my opinion, it is remarkable that a firm of accountants completing tax returns for a business with a turnover of something in excess of $4,000,000 per annum did not make and keep copies of signed tax returns prior to either lodging them electronically or by post with the ATO. Furthermore, as Dr Bender submitted, the fact that the applicant received no final notices for lodgement is irrelevant. In a self-assessment system, the taxpayer is responsible to ensure tax returns are lodged within the permitted time. I find that the applicant has not discharged its onus of proof regarding the lodgement of tax returns for the years 1993, 1994, 1996, 1997, 1999 and 2000 income years.

39. In light of my findings regarding the lodgement of income tax returns, there can be no basis for the applicant's contention that the Commissioner's assessment made on 14 November 2005 was made out of time. Each of those assessments was made pursuant to s 167 of the ITAA 1936. It does not impose any time constraints on the Commissioner. The section provides:

" 167 Default assessment

If:

(a) any person makes default in furnishing a return; or

(b) the Commissioner is not satisfied with the return furnished by any person; or

(c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166."

40. Accordingly, I accept the Commissioner's submission that assessments for those years could be made by the Commissioner at any time, without the need to rely on a finding of fraud or evasion. The amended assessments made on 10 April 2007 were made within the time permitted by ITAA 1936. Those amendments did not affect taxable income or the primary tax. In any event, as the Commissioner provided an opinion in writing that the avoidance of tax in this case was due to evasion, it was open to the Commissioner at any time to amend the assessment by making such alterations in it or additions to it as the Commissioner believed necessary to correct the assessment (s 170(2)(a) ITAA 1936).

41. For the income years 1998 - 2003, the Commissioner assessed the applicant in its personal capacity as a beneficiary of the trust. For the years 1998, 1999, 2000 and 2002 the Commissioner issued nil assessments on 12 September 2002, 13 September 2002, 16 September 2002 and 9 June 2004, respectively. Dr Bender submitted that a nil assessment, including an assessment disclosing tax losses, is not an assessment for the purposes of Part IV of ITAA 1936. Dr Bender referred to a number of cases in support of that proposition, including the High Court decision in
Commissioner of Taxation of the Commonwealth of Australian v Ryan (2000) 201 CLR 109. Gleeson CJ, Gummow and Hayne JJ examined in some detail the operation of s 170(3) of ITAA 1936 dealing with the power of the Commissioner to issue amended assessments. The plurality examined the language of s 170(3) and its history and came to the following conclusion at 126:

"29 The construction of the Act for which the appellant contends strains the words of s 170(3) (and s 204) beyond any reasonable degree of elasticity that they might be said to have. If no tax is payable in respect of a year of income it cannot be said that there is a date (even a 'notional' date) by which it is due and payable.

30 For the reasons that we have given it follows that s 170(3) did not apply to bar the Commissioner from issuing the 1994 assessment."

42. As the original assessment for the 2001 income year issued on 28 November 2005, no issue arises regarding the time within which the Commissioner was required to issue an original assessment. The same of course applies to the 2003 income year, where the amended assessment was issued within two years of the original assessment.

Understatement of income

43. The Commissioner claimed that the applicant understated the net profit from the Trust's trading in the supermarket business for the income years 1993 - 2000. The Commissioner's investigations turned up financial statements and income tax returns for the 1994, 1995 and 1996 income years which were labelled bank and tax copy or return. According to the Commissioner, an inference should be drawn that the applicant prepared at least two sets of tax returns and possibly financial statements, one for its banks and one for the Commissioner. The financial statements and tax returns provided to the banks disclosed higher profit figures in order to support the applicant's ability to borrow from financiers. The Commissioner contended that the applicant prepared financial statements and tax returns disclosing lower figures which were intended for the Commissioner.

44. The applicant and the witnesses supporting the applicant's claim have provided a number of reasons for the different financial statements and prepared tax returns. In its amended statement of facts and contentions the applicant said:

"The financial information provided to the banks was calculated on a different accounting basis to that used to prepare the income tax returns referred to in paragraph 4 herein so as to provide the Applicant with a more favourable security and credit position (for example, using different valuation methodologies)."

45. In his witness statement the applicant's Director said that he provided financial information in the form of raw data to the employee accountant from time to time. He said that the provision of financial information to the employee accountant was progressive, enabling the preparation of working draft and interim profit/loss statements for the applicant and for the banks. He said that draft figures were used to provide statements to the banks but then explained that these were not 100% accurate. The Director stated that the applicant prepared its tax returns from accurate figures, which only became available well after the end of each income year. He said that final tax returns were completed and lodged usually in or around March the following income year although sometimes this happened earlier. The Director maintained that the tax returns contained in the documents lodged with the Tribunal and in particular the 1993, 1994, 1996, 1997, 1999 and 2000 income tax returns accurately reflected the financial performance of the applicant in those respective years. The Director also stated that the Commissioner assessed the applicant on the highest draft profit/loss statements it was able to locate even though, in some instances, there were two or three or more draft profit/loss statements prepared by the employee accountant during the course of a particular year.

46. By way of explanation for the variation in various financial statements and tax returns, the Director said in his witness statement that in some instances, the employee accountant prepared profit/loss statements and other documents required by the bank by estimating the figures for items such as stock, rent received, goods own use and, in some instances, sales, creditors, debtors, cash payments and cash expenses. He said those figures were estimated because they were too difficult or not possible to obtain at a time when profit/loss statements had to be prepared for the banks. The Director then explained why adjustments were required to draft or interim statements prepared during the course of a year and why those statements contained estimated figures.

47. In order to properly assess the claims made by the applicant, the contentious issues in each income year need to be examined and to be assessed in light of the documentary and oral evidence given in this proceeding.

48. There were no less than three versions of financial statements for the 1993 income year as well as a document prepared by the CBA. Two of those financial statements disclose a net profit of $137,821; the third financial statement and the document prepared by the CBA discloses a net profit of $86,424; and the income tax return prepared for the 1993 income year discloses a net profit of $24,606. Included in that net profit figure is rental income said to be $64,000 in two of the financial statements and $40,000 in the other documents for the 1993 income year. I should also point out that the closing inventory figure on two of the versions of financial statements was $284,157 and on the third version of the financial statements and on the prepared income tax return the closing inventory figure was $215,498. The significance of these closing and subsequent opening inventory figures will become apparent presently.

49. The CBA document does not contain opening or closing inventory figures. Nevertheless, it is clear that the CBA document contains figures which are identical to the third version of the financial statements prepared for the applicant which disclose a net profit of $86,424. That version of the financial statements has a closing inventory figure of $215,498. That same closing inventory figure is taken up in the next income year, 1994, on the tax return prepared for that year. It therefore seems reasonable to infer that the net profit figure disclosed in the third financial statement for the 1993 income year is accurate because, as the Director said, the income tax returns for each of the income years in question are correct. The Director was unable to explain why the first two financial statements contained a significantly higher net profit figure. In cross-examination, the Director said he did not believe the figure of $137,821 was the correct profit figure for the 1993 income year. He said he did not recall seeing financial statements disclosing the higher net profit figure.

50. The Director's attention was drawn to the 1993 income tax return where it is stated that trade creditors at the end of that income year amounted to $201,691. In his statement, the Director pointed out that the profit/loss statement used by the Commissioner for the purposes of assessment for the 1993 income year disclosed a figure for trade creditors of $135,491. The Director contended that because the closing creditors figure was used as the opening figure for the 1994 income year return, it must be correct. However, in cross-examination the Director agreed that he had no knowledge of what the figure was for trade creditors at the end of the 1993 income year. In fact, I cannot make sense of the statement made by the Director in his witness statement, as there is no such thing as an opening figure in the 1994 taxation return. The 1994 taxation return discloses trade creditors in the amount of $191,552. There is no relationship between the balance sheet item and the current liabilities from one year to the next.

51. The Director also complained that the Commissioner arrived at the net profit figure only after overstating the rental income derived by the applicant during the income year. In his witness statement the Director identified five properties (two of them being units at the one site) from which the applicant derived rental income. Two of those properties were occupied by beneficiaries of the Trust. The first two financial statements prepared by the applicant's accountants disclosed rental income received for the financial year in the sum of $64,000. In his witness statement the Director said that the employee accountant disclosed that rental income as an estimate in order to finalise an interim profit/loss statement for the bank. The Director then stated:

"After obtaining the rental statements from the real estate agents for Dandenong and [Berwick], sales were adjusted for the accurate rental income and the rent was shown separately to the sales of the business. Also, real estate agents were consulted to fix a fair rental for the two properties occupied by the beneficiaries and the correct rental total amount of $40,000 was included in the taxation return as rental income."

52. The problem with the above statement should be immediately apparent. The Director's belief about what the employee accountant disclosed as the rental income appears to have no basis. The Director also stated that he did not have rental figures for those properties but relying on his recollection, he stated that annual rental for the Lysterfield property and the Berwick property was approximately $18,000 in total for both properties. That amounted to some $173.00 per week for two properties. He then said that the total rental for the two units in Berwick was approximately $12,000 per annum and the total rent received from the Dandenong property was $10,000 per annum.

53. However, in the course of an interview conducted by officers of the ATO on 24 March 2004, when the Director was asked about rental payments and whether the rental was paid weekly or monthly, he answered I don't know. He was also asked whether he recalled the amount of rent paid by his brother, the Principal Accountant, and he said I honestly don't remember. The Director said that he lived in the Lysterfield property with his family and that his brother lived in the Berwick property. Although he maintained rent was paid on both of those properties, he said… there was rent paid, but not with cash. We - it was adjusted in our credit accounts, I believe, in those days. When asked what he meant by a credit account, the Director said he meant to say beneficiaries loan accounts. In other words, a liability was recorded in their loan accounts although no rental in fact was paid. Furthermore, the Director agreed that the properties from which rental income was derived were leased, mostly on yearlong leases. When it was put to him given that they were leased, he would have known the precise rental figure, the Director answered that he would have an approximate idea. When it was put to him that he would know the precise rental because there was a fixed rental in the lease agreement, he said:

"I never thought about it. I - if there was a lease for the three houses or four houses, whatever we were leasing, I would say I suppose I would know - I would have a fair idea. (page 55)"

54. The employee accountant's evidence was that he had prepared tax returns and other financial documents for the applicant since the early 1990s. He said in his witness statement he relied on information provided to him by the Director. He said that in the course of any given year, he prepared two, three or more drafts of the financial statements, in particular, balance sheets and profit/loss statements. He said that the draft documents were the subject of significant adjustments after receipt of more precise information. He claimed that draft statements were frequently required to be provided to the applicant's banks. However, and with respect to the employee accountant, there is no document amongst the voluminous documents in evidence which so much as suggests that the financial statements provided, particularly to the CBA, were drafts. Were they so, I would have expected any competent accountant to make that very clear on the document. That would be particularly so where the accountant understood that the purpose of providing financial statements was in support of loans or applications for loans. Therefore, to suggest, as the employee accountant does in his witness statement, that the figures in the statements were estimates, without disclosure to the bank that the statements contained estimated figures, is simply deceptive.

55. The employee accountant also said in his witness statement that after the end of each financial year and as early as the next calendar year, financial statements were completed by him. However, when one looks at the opening and closing inventory figures in the financial statements said to have been compiled on an estimated basis, no adjustment has been made from year to year to the opening and closing inventory figures. While the tax returns for some of the years in question contain substantially different opening and closing inventory figures, many do not. The financial statements are consistent in that the opening inventory figure for each year picks up the closing inventory figure for the previous income year. Therefore, the following figures appear on the financial statements:

YEAR	OPENING INVENTORY	CLOSING INVENTORY
1993	$278,158	$284,157
1994	$284,157	$273,149
1995	$273,149	$268,247
1996	$268,247	$255,613
1997	$255,613	$300,812
1998	$300,812	$269,550
1999	$269,550	$277,072
2000	$277,072	$281,449
2001	$281,449	$256,510
2002	$256,510	$258,432

56. It is immediately apparent, contrary to what the employee accountant said in evidence, that the figures on the financial documents and in particular those documents provided to CBA do not contain estimated figures for opening and closing stock because, if those figures had been adjusted in the following calendar year, one would expect to see variations in those figures in the following financial statements. That is clearly not the case. However, the tax returns prepared in some of those years have differing opening inventory and closing inventory figures. That of course has resulted in differing costs of sales figures for the 1993, 1994, 1995, 1999 and 2000 income years. The employee accountant said in his witness statement that the adjustments he made were often a revision of sales figures (upwards or downwards) and revised expenses figures. However, what is disclosed by the documents is a consistency in the financial statements, particularly those which were provided to the CBA, and income tax returns compiled essentially using different data, including different opening and closing inventory figures especially where those income tax returns were labelled tax copy. Those labelled bank are consistent with the financial statements provided to the bank. The income tax returns do contain sales figures and expense figures which are different to those in the financial statements.

57. The employee accountant also said in his witness statement that he prepared the income tax returns for each income year from a final version of the financial statements which he also prepared. However, on the documents in evidence before me, the only financial statements which appear to have figures corresponding to those entered on the tax return are those prepared for the 1998, one of the 1999 statements, one of the 2000 statements, the 2001 and 2002 income years.

58. The employee accountant also said he recalled, during the 1990s, that the applicant was not profitable, or was only marginally profitable. However, in the course of cross-examination the Director was taken to a statement dated 17 September 1997 prepared by the CBA, which was a credit review conducted by the Relationship Manager. The Relationship Manager recorded that the businesses net profit after tax was good and that the net profit before tax over the previous four years had been reliable and consistently increased over the period. When it was put to the Director that up until September 1997, the supermarket had been profitable for a number of years, he said:

"Up to that point of time it was making modest profits, and then in the late '90s it started showing losses."

The Director was also taken to a letter he wrote on 30 May 2002 to the CBA attaching further information as a result of seeking further finance from the bank. On the second page of that letter, the Director wrote:

"Over the past 4 years our growth in takings and profits has been over 30%."

When asked if that was correct, the Director answered: That's what I say there, yes.

59. In the course of his cross-examination, the Principal Accountant confirmed that the Trust made contributions to two superannuation funds in 2001, 2002 and/or 2003. He was then asked whether the supermarket business was profitable during the years 2001, 2002 and 2003 and he answered: Yes, it was. In fact, he agreed that it was quite profitable during those years given the significant contributions that were made to the two superannuation funds.

60. The Commissioner also pointed to a letter dated 2 February 1999 from an IGA Regional Manager which set out projected sales and profits for the supermarket for the following three years. The Regional Manager noted that the figures were based on the store being redeveloped in April 1999 and again in 2000; the previous sales history; and the actual profit/loss figures provided for the year ending June 1998. The Regional Manager set out actual sales increases the supermarket had since August 1998. It shows monthly sales from August to December 1998 and percentage increases ranging from 5.66 per cent to 9.15 per cent. While the Regional Manager was careful to point out that the three year projected figures were guidelines only, he noted that the percentage gross profits were in accordance with industry standards. Dr Bender submitted that while the Commissioner did not rely on the report for the purpose of arriving at the assessments, the report was used as a guide. In fact, Dr Bender pointed out that the ATO had produced a report of net profit margins for comparable IGA supermarkets between 1993 and 2000. He said that those figures were in line with what the Regional Manager from IGA had projected for the supermarket operated by the Trust and also that the net profit margins as per the financials produced by the applicant were significantly less than the average net profit margins for other IGA supermarkets of the same type.

61. The employee accountant also testified that he had been told by the applicant's Director that it was meeting all loan repayments, interest and principal, and it had never defaulted on any obligations to the bank.

62. Given the documentary evidence, which is contrary to the evidence given by the employee accountant, I cannot accept that his evidence is an accurate statement of the profitability of the applicant during the period in question.

63. The employee accountant gave an entirely different explanation in the course of his cross-examination for the difference between the financial statements provided to the CBA and those which he claimed were used for the preparation of income tax returns. When pressed about whether the correct figures were sent to the CBA he said:

"It's the correct figure that we sent to the bank, yes. It was for the bank."

When asked was it correct, he responded that he was not sure what was meant by the question. Then, when further pressed by Dr Bender, he said:

"Well, we - financial statements were provided to the bank which showed a more variable position than I subsequently found when I finalised the tax returns."

When Dr Bender responded by stating that he did not follow the answer, the employee accountant said:

"So I inflated stock figures and inflated rentals for example."

The employee accountant then said:

"Well, I believe that, to the best of my knowledge and belief, that what's in the tax returns is true and correct and that these figures here [financials sent to the CBA] are false and deceptive and so that the [family trust] could get accommodation of loans from the bank."

When asked to confirm that he provided false and deceptive profit figures to the bank he said that he did.

64. Of course the admission made under cross-examination throws into serious doubt the explanation given by the employee accountant in his witness statement where he simply indicated that adjustments were made after the end of a financial year in order to finalise financial statements and tax returns. In his witness statement, the employee accountant said that he had made adjustments for goods taken from the supermarket by the families associated with its operation (goods own use); rental income; stock figures; expenses; sales and debtors; and reconciliation of purchases. Whatever the employee accountant did, which he described as adjustments without supporting documentation, given his admission under cross-examination, I have no means of ascertaining whether in fact adjustments were made after the end of the financial year to accurately reflect the supermarket's trading position for the year or whether the financials and tax returns subsequently prepared were also false and deceptive.

65. The employee accountant said in his witness statement that he had searched the accountant's records for final copies of the applicant's financial statements for the years 1993 to 2002 and was unable to locate such copies. Given that these documents were kept on computers, I have no confidence whatsoever in that statement.

66. There are other contradictions in the employee accountant's evidence which also disclose its unreliability. In his witness statement, the employee accountant, in attempting to explain the rental income recorded in the 1998 and 1999 tax returns, said that the figures appeared to be the same as those set out in financial statements which the Commissioner had obtained from third parties, which I understood to mean the banks and in particular the CBA. He said that in those years, he inadvertently transposed the rental income amounts from draft financial statements provided to third parties which were not finalised and were not accurate, into the tax return.

67. However, in the course of his cross-examination, Dr Bender pointed out to the employee accountant that he had given evidence that he prepared tax returns from the final financial statements. When asked whether that was incorrect, the employee accountant first disagreed, and then claimed it was correct. When pressed, he finally agreed that the statement was incorrect. The employee accountant also said in his witness statement that final financial statements were completed early in the following calendar year. He said he could not recall providing final copies of financial statements to the CBA or any other bank. Dr Bender directed the employee accountant to financial statements for the year ended 30 June 1994 which were clearly sent to the CBA on 10 February 1995, some seven and a half months after the end of the 1994 financial year. When asked whether the opening stock figure in the trading account was correct, the employee accountant simply stated that it was correct for the bank. He maintained that the figure had been inflated.

68. Despite the fact that the statement had been sent some seven and a half months after the end of the financial year, the employee accountant maintained that the stock figure was not correct. The employee accountant was also taken to a facsimile cover sheet enclosing financial statements for the year 2000. The coversheet indicated the facsimile transmission was sent to the CBA on 26 February 2001 and it was sent by the employee accountant. On that coversheet the following is stated: Final Financials Y/E 30/6/00. In cross-examination the employee accountant was asked whether the enclosed financial statements were final and correct for the 2000 income year. He answered: For the bank, yes. When Dr Bender pressed him, indicating that who they were sent to was irrelevant as he simply wanted to determine whether the statements were final and correct, the employee accountant responded: Yes, sir. They are final and correct. Dr Bender then pointed out to him that this appeared to contrary to the evidence he gave earlier in the day indicating that they were not final and correct financials given to the banks. The employee accountant then changed his answer and said: Yes or ----?--- No, no, no. They're not. He then claimed he was confused. Quite obviously, there was no confusion created by the question.

69. There are a number of other examples of financial statements being faxed to the bank long after the end of the financial year. Despite this, the employee accountant appeared to maintain that none of these documents was final and correct. In the course of his cross-examination, the employee accountant was referred to a printout of financial statements for the year ended 30 June 1998. Also included with those financial statements was a printout of the general journal which had a handwritten annotation on it indicating that it was a MYOB (Mind Your Own Business) account. Although the employee accountant said he could not recall the document, he accepted that it was a printout from the MYOB software package. When he was asked whether he was familiar with the format of that document, he said he was not. He also said that he had never used any document formatted in that manner. The employee accountant was then referred to an exhibit to his witness statement which was also a general ledger printout for the 2002 financial year. In his witness statement, the employee accountant referred to the exhibit as a copy of the MYOB ledger account for the purchases that he had entered. In his witness statement he said that he undertook a reconciliation of purchase expenses and amended the general ledger account accordingly. When shown the exhibit, Dr Bender put to him that it was in the same format as the general journal for the 1998 financial year to which he had been previously referred. He agreed it looked very similar. When Dr Bender suggested to him that it was in the same format, he said: It's totally different actually.

70. These examples of the evidence given by the employee accountant lead me to conclude that not only was his evidence wholly unreliable, he was less than candid when answering questions put to him in cross-examination.

71. In addition to a brief witness statement in which the Principal Accountant simply agreed with the material set out in the witness statement of his brother, the Director, he also gave oral evidence. He admitted to being involved in preparing tax returns for the applicant. More specifically, he said that he was responsible for directing the employee accountant and possibly another person to prepare profit/loss statements and balance sheets for the applicant, preparing resolutions and preparing the tax returns which he said he checked and signed. In his evidence-in-chief, he said that he ensured that each year tax returns were completed for the Trust and other taxpayers. He said he did not believe he had missed doing that in any tax year.

72. The Principal Accountant claimed he was not involved in the preparation of financial statements which were provided to the applicant's banks during the 1990s. However, he was aware that financial statements were provided to the banks. He also said that he was responsible for giving the Director advice about the fact that the banks would not lend him money if the tax returns did not show a profit or the ability of the applicant to repay the loans. He said that he later found out that there were some tax returns given to the banks which were called Draft Tax Returns. When asked if he knew who prepared them his answer was: I - [employee accountant] prepared them too. As I understood that answer, whether inadvertently or otherwise, the Principal Accountant appeared to be saying that he and the employee accountant were involved in their preparation. This answer appears to accord with what the Principal Accountant said in a meeting with officers of the ATO conducted on 16 March 2005 and recorded in a document described as a record of meeting which is dated 21 March 2005. While I accept there was some controversy about whether that record of meeting was a verbatim account of what was said, as it does not appear to be a transcript, the ATO officer who signed off on the record of meeting appears to have been present at the meeting solely for the purpose of recording what was said. I say that because that officer did not participate in any of the questioning. When the Principal Accountant was asked who prepared the financial accounts for the Trust, this was his recorded answer:

"I prepared the financial statements and adjusted for any errors found by journal entry. I took the raw data from source documents such as bank statements, cash register tapes, cheque butts, receipts & invoices."

73. As Dr Bender submitted, the credibility of the Principal Accountant regarding his evidence was clearly called into question. Despite advising his brother that the banks would not lend money unless the tax returns showed a profit and an ability to repay loans, and stating that his brother wanted him to provide tax returns and financial statements to the bank; and despite the fact that in examination-in-chief he seemed to indicate that he and the employee accountant were responsible for preparing those documents, I was expected to accept that he was not involved in any way in the preparation of deliberately falsified documents presented to the banks. Whatever might be the truth, the Principal Accountant nevertheless knew that the employee accountant had provided falsified documents to the banks, if his evidence is to be believed.

74. Furthermore, as Dr Bender submitted, a reading of the record of meeting discloses that the Principal Accountant had a far more active role in the recording of data in the financial statements of the applicant. For example, he said that he knew that goods own use was always added back along with other things such as petrol expenses. He said there were stock control measures in place and that goods taken were rung up on the cash register against sales. He then referred to the sales account for the 2000, 2001 and 2002 years. He said that in 2003, goods own use was shown as a separate item in sales. Regarding the 2003 goods own use entry, he said that he would check if a separate entry was necessary as good taken for own use were accounted for at the register. When queried about a number of other expense entries, the Principal Accountant said that he would check the ledger to see why certain entries were made or were not made.

75. The Principal Accountant was, at all relevant times, a registered tax agent during the 1990s and early 2000s. He said that he signed off on all of his clients tax returns and agreed that the applicant was a client of his accounting firm. Despite that, I did not have a signed tax return in evidence before me in respect of the years in question.

76. In addition to the above evidence, which essentially goes to the net profit from the supermarket business, there are three other aspects of understated income which need to be addressed. They were described as unexplained income, rental income and goods own use.

Unexplained income

77. In the 1997 income year the applicant repaid a loan to a related entity in the sum of $64,211 and it made an additional advance of $241,945 to another related entity. The Commissioner contended that the total of these payments, $306,156, exceeded the applicant's net profit for the 1997 income year by $170,278. The Commissioner treated this amount as unexplained assessable income because the applicant failed to substantiate the source of those funds.

78. Mr Broadfoot submitted that there was sufficient evidence before me to support an inference that the loan made to one related entity and the repayment of a loan to the other related entity was funded by loans the applicant obtained in 1997 from the CBA. Mr Broadfoot referred to a number of paragraphs in the Director's witness statement. There is a bare statement made by the Director to the effect that the CBA loan for $1,609,000 was used to pay out three prior lenders and other minor loans from Westpac and ANZ and to provide additional cash flow for the supermarket and to fund loans to the related entity.

79. With respect to Mr Broadfoot, I would have expected there to have been some documentary evidence to support what the Director said. However, although there were a number of CBA documents in evidence, including a credit review prepared by the Relationship Manager, there is nothing in those documents to suggest that the monies which the applicant sought to borrow from the CBA would be used to on-lend to related entities or for the repayment of debt owed to related entities. In fact, the credit review conducted by the CBA indicates that additional finance was required to overcome liquidity problems. The CBA recorded that the historic cash flow of the applicant's business was poor although the business internally generated sufficient cash to cover all operating expenses. There is no indication in those documents that the bank was aware that sum $306,156 was to be used in the way suggested by the Director.

80. In his witness statement, the Director said that the additional advance of $241,945 was made to the related entity which had purchased properties in East Ringwood. It required additional funds to finance the purchase of those properties and for their development. The Director also pointed to the fact that secured loans had increased from $1,346,815 to $1,623,215, an increase of $276,402 for the year ending 30 June 1997. The problem is that I cannot locate where the figure of $1,346,815 comes from. The balance sheet in evidence for the applicant as at 30 June 1996 discloses the following loans under current liabilities:

Bank Overdraft Account	$ 133,528.00
Challenge Bank	$ 28,075.00
Advance Bank	$ 930,000.00
RK & C Nominees Pty Ltd	$ 302,000.00
Citibank	$ 86,738.00
TOTAL	$ 1,480,341.00

By my calculation, the level of loans in 1997 had increased by $142,874. That is insufficient to explain the increased lending to the related entity in the sum of $241,945.

81. In any event, when the Director was taken to his witness statement where he said that the increase to one related entity and repayments to the other were not funded by income, and asked whether that was correct, he said: I believe it is, that's what I was told. When asked who told him, he said, the applicant's accountants. It appears the Director had no personal knowledge of any advances or repayment of advances made to the applicant during that period. In any event, as Dr Bender submitted, given the inconsistencies in the evidence given by all of the applicant's witnesses in this matter, it would clearly be unsafe for me to draw any inferences from the materials in evidence. In fact, it would be purely speculation. I find that a sum of $170,278 cannot be explained by any of the materials in evidence before me or from the explanations given by the witnesses. Accordingly, I find the Commissioner was correct to treat that amount as unexplained assessable income.

Rental income

82. The applicant contended that the rent received from rental properties was the amount stated in each of the tax returns for the years 1993 - 1997. The income years 1998 - 2000 are unaffected as the amounts assessed in those income years are the amounts the applicant has included in his tax returns. While the applicant disputed the Commissioner's assessment, the only evidence the applicant relied upon was that of the three witnesses, the Director, the Principal Accountant and the employee accountant. In any event, the applicant contended that for the 1993 - 1997 years, any adjustments to its net income should be limited to the difference between the rental amounts identified in the income tax returns in evidence for those income years and the income stated in financial statements provided to the CBA. The differences for those years result from the following:

YEAR	RENT ACCORDING TO INCOME TAX RETURNS	RENT ACCORDING TO FINANCIAL STATEMENTS	THE DIFFERENCE
1993	$ 40,000	$ 64,000	$ 24,000
1994	$ 20,000	$ 65,650	$ 45,650
1995	$ 10,800	$ 62,340	$ 51,540
1996	$ 18,200	$ 58,200	$ 40,000
1997	$ 18,201	$ 58,200	$ 39,999

83. According to the applicant, there was no difference in the years 1998 - 2000 as the figures in the income tax returns matched those in the financial statements and the figures used by the bank.

84. The Commissioner rejected the applicant's contentions regarding rental income for a variety of reasons. The applicant referred to the Director's witness statement where he said that the rental income had been overstated in the financial statements. The Director then expressed his belief that the employee accountant showed rental income which was simply an estimate which was provided to the CBA in order to finalise an interim profit/loss statement. Although the Director maintained that real estate agents were consulted to fix up their rental, and that the $40,000 shown in the 1993 income tax return was correct, there were no other documents in evidence to support that contention. The Director said he did not have rental figures going back some 15 years but to the best of his recollection, the annual rental for three of those properties was $18,000. His recollection was that the total rent for two units in Berwick was about $12,000 per annum and the total rent from the Dandenong property was $10,000 per annum.

85. For the remaining income years in question, the Director simply stated that the rental income was overstated in the financial statements relied on by the Commissioner. However, in cross-examination, when it was put to the Director that he would have known which properties were leased and what the rental was in any particular year, he answered: I would have an approximate idea. When Dr Bender put to the Director that he would have a definite idea from the lease agreement in respect of those properties, he answered: Yes I suppose, yes, I would have an approximate idea. Despite this each way bet answer, when pressed about there being fixed rental figures in the leases, the Director said: I never thought about it. Although pressed to say that if he knew there were leases, he would know what the rentals were, his answers were vague and unconvincing, stating, for example, I would have a fair idea.

86. When further cross-examined about rental figures set out in the income tax returns for rental properties during the 1990s, the Director said that he and the employee accountant produced figures in the financial statements by estimating the rental figures. When it was pointed out to the Director that in his interview by officers from the ATO in March 2004 he said he couldn't remember any of the details of the rental properties, he said he did not recall the conversation and that he was very nervous when interviewed by the tax officers. He also said in cross-examination that his brother, the Principal Accountant, assisted him in producing rental figures for the financial statements. However, in cross-examination, the Principal Accountant said that he did not provide the rental figures for the Director's witness statement and that they were obtained through the employee accountant. In cross-examination, when the employee accountant was asked whether the Director obtained any figures or rental payments received by the applicant he said: No, not that I can recall. When asked if he was aware that anybody else at the firm of accountants might have provided those rental figures, he again answered that he did not know.

87. In his witness statement, the employee accountant said that in the income years 1998, 1999 and 2000, the net rent figures recorded in the income tax returns were the same as those referred to in the financial statements obtained from third parties. He said that in those years, he inadvertently entered the rental income amounts recorded on the draft financial statements into the tax return, even though they had not been finalised nor were they accurate. When it was put to him in cross-examination that the statement he made in his witness statement was incorrect, the employee accountant agreed. He also agreed that he had not included the rental figures for one of the properties in question although he said that it was included in the sales figure for the applicant. He gave no explanation why that was the case. The Director also agreed that he had not mentioned rent from the East Ringwood property in his witness statement and claimed that he probably forgot about it. In his cross-examination the Director agreed that the East Ringwood property was leased out by the Trust and he believed it was held during the 1990s and early 2000s.

88. The employee accountant maintained that the correct rental income for 1998 should have been $18,200, the rents from the remaining properties being included in the sales figures; a total rental figure of $29,380 for 1999; and $29,380 for the 2000 year. There were no documents supporting these claims.

89. Given the lack of objective evidence in relation to rental income, and the contradictory, vague and unreliable answers given by witnesses, I find that the applicant has not discharged the onus of proving, on the balance of probabilities, that the rental included by the Commissioner in his assessments for the years in question was excessive. I accept Dr Bender's submissions that there are a number of matters which suggest that the rental figures in the financial statements were in fact correct. They include the fact that:

(a) comparative rental figures shown in the part-year financial statements are consistent with those in prior year financial statements;
(b) the figures produced by the CBA correspond with financial statements and tax returns provided to the bank and it is not credible that the CBA would have accepted estimated figures given the amount of the loan;
(c) the employee accountant admitted his figures did not include rent for the East Ringwood property;
(d) a diary note made on 4 May 1998 by the Manager at CBA stated that some of the residential premises were rented with current income of approximately $40,000 per annum;
(e) the rental figures in 1999 increased by some 60 per cent compared to the previous income year, even though the employee accountant said that rents received from other properties were included in the sales figures. There was no evidence of any rental figures being included in sales figures in any of the financial years in question;
(f) when the employee accountant was taken to a balance sheet for the year ended 30 June 1997, under the item fixed assets, he agreed that save for the three properties at Railway Avenue, the remaining properties would all have been rented out in the 1997 year; and
(g) the general ledgers for the 1998 and 1999 income years record rent received in the amount of $58,200 in each of those years and there was nothing to suggest that these figures had been adjusted.

Goods own use (disposal of trading stock)

90. The value of trading stock disposed of outside the ordinary course of business of a taxpayer is included in assessable income. A disposal of trading stock prior to 1 July 1997 was dealt with by s 36(1) of the ITAA 1936 as follows:

" SECTION 36 DISPOSAL OF TRADING STOCK

36 (1) Subject to this section, where:

(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale;

(b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and

(c) the disposal was not in the ordinary course of carrying on that business;

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value."

91. Disposal of trading stock after 1 July 1997 is dealt with under s 70-90 of ITAA 97 it provides:

" SECTION 70-90 Assessable income on disposal of trading stock outside the ordinary course of business

70-90 (1) If you dispose of an item of your *trading stock outside the ordinary course of a *business:

(a) that you are carrying on; and

(b) of which the item is an asset;

your assessable income includes the *market value of the item on the day of the disposal."

There was no dispute between the parties that between 1993 and 2002, goods were taken from the supermarket business for private use by three families which had interests in that business. The applicant declared $20,800 in the 2003 income year as the value of goods taken for private use by the three families. This figure was taken from the general ledger for 2003 income year. In calculating the value of goods own use over the 11 years in question, the Commissioner has taken $20,800 in the 2003 income year and discounted that figure by the increase in the consumer price index for each prior year to arrive at the value of goods own use figure. By that method, the goods own use figures for the relevant years are as follows:

YEARS	GOODS OWN USE
1993	$16,098.00
1994	$16,423.56
1995	$16,866.92
1996	$17,497.97
1997	$17,716.69
1998	$17,704.87
1999	$17,871.87
2000	$18,344.79
2001	$19,448.75
2002	$20,000.00
2003	$20,800.00

92. Although the ATO publishes determinations annually with recommended values for goods own use in different businesses, the Commissioner did not rely on those values in this matter because he considered they were too low given the 2003 figure shown in the general ledger; the low taxable incomes of two of the families involved; and because three families took goods from the supermarket.

93. The Director involved in the day to day operations of the supermarket said in his witness statement that adjustments to income should not have been made for goods own use. He said this was because in each year, goods taken from supermarket stock and used by him or supermarket staff for personal purposes were allowed for in the sales figures. He said he believed that the employee accountant would confirm this in his witness statement and explain the process. He made no attempt to provide an estimate of the value of goods taken from the supermarket for the use of his family or the supermarket staff to which he referred.

94. In his witness statement the employee accountant said that at the end of each year, adjustments were made to the accounts to allow for the cost of goods taken from the supermarket and used by staff or beneficiaries of the Trust. He said those adjustments were made by including in the sales figures, an amount for goods own use. He said the amounts he included in the sales figures were based on advice from the ATO of acceptable goods own use for supermarkets and liquor stores, as well as being based on estimates of what goods in fact were used. Despite that statement, in cross-examination the employee accountant said he could not recall what in fact was done between 1993 and 1996 but that in 1997 and 1998, the journals disclose the figures taken up by the applicant for goods own use. Attached as an exhibit to the employee accountant's witness statement was what was described as a batch listing for the family trust for 24 November 1997. Included in that listing are entries crediting the sales account in the sum of $5,000 for two of the families involved in the supermarket and corresponding debit entries, presumably to their loan accounts.

95. However, the Commissioner submitted, the two families were not the same size and it is highly unlikely that both took from the supermarket the same value of goods over the same period of time. To be fair, the employee accountant did not suggest those figures represented the actual value of goods used, but rather, he maintained that those figures were within the guidelines published by the ATO. In fact, the employee accountant said that the figures were calculated on that basis and a little bit extra. He said he couldn't remember exactly what the ATO figures were but he maintained that was the basis on which he made those entries.

96. For the 2001 income year, the Director said in his witness statement that the procedure adopted was different following the introduction of GST (Goods and Services Tax). He said that to ensure there was no dispute with any GST audit, all stock taken by the staff or beneficiaries was rung through the cash registers as sales and recorded as sales in the tax returns. However, there was no objective evidence disclosing that this was the procedure adopted by the applicant. In fact the Principal Accountant, in the course of the meeting with representatives of the ATO on 16 March 2005, said that no actual dockets could be found. Another employee from the applicant's accountants, who did not give evidence at the hearing of this matter, had apparently previously stated in an email that whilst specific figures could not be provided for the value of goods own use in earlier years, the values ranged from $10,000 to $20,000. These figures of course fall within the range used by the Commissioner to assess the value of goods own use.

97. Mr Broadfoot submitted that because the applicant disclosed journal entries for the 1997 and 1998 years regarding goods own use, that disclosure should be treated as corroborative evidence of the fact that allowances were made in every year. With respect to Mr Broadfoot, that cannot be correct. In fact, there remains a serious question about the accuracy of 1997 and 1998 year figures. I cannot accept Mr Broadfoot's submission that to make the assessments the way in which the Commissioner has, by looking backwards from the 2003 figure and discounting that figure by the increase in the consumer price index for all of the prior years, is double accounting. There was no objective evidence that even where amounts were recorded, they represented the true value of goods taken by any of the families involved in the supermarket. I cannot accept Mr Broadfoot's submission that in any event, the Commissioner's adjustments to the value of goods own use should be reduced by $10,000 in each year or the 1997 and 1998 years, given the allowance made for goods own use by the employee accountant. I am not satisfied that the two $5,000 figures used by the employee accountant in any way reflect the true value of the goods taken for personal use by the three families involved as well as supermarket staff.

Disallowed deductions

98. The Commissioner disallowed a number of deductions claimed by the applicant for the years in question. Perhaps the most significant of these in monetary terms were the claims made by the applicant in respect of contributions it made to eligible superannuation funds for its employees. The applicant claimed deductions for contributions made to the superannuation funds of the Principal Accountant, the widow of a business partner of the Director who is also the Director's sister, and the Principal Accountant's son. There were two superannuation funds, the Number One superannuation fund and the Number Two superannuation fund. Between 2001 and 2003, the following contributions made to the Number One and Number Two funds were disallowed by the Commissioner:

Contribution for	Superannuation Fund Number 1	Superannuation Fund Number 2
	2001	2002	2003	2002
Principal Accountant	$78,445		$87,141	$82,054
Director's sister	$19,217	$14,276	$87,141
Principal Accountant's son			$12,651
Total	$97,662	$14,276	$186,993	$82,054

In the years in question, the ITAA 1936 provided for deductions for contributions to eligible superannuation funds for employees. Section 82AAC provided:

" 82AAC Deduction for contributions to eligible superannuation fund for employees

82AAC(1) [Allowable deduction] Where:

(a) a taxpayer makes a contribution to a fund for the purpose of making provision for superannuation benefits payable for an eligible employee (whether or not the benefits are payable to a dependant of the eligible employee if the eligible employee dies before or after becoming entitled to receive the benefits); and

(b) the fund is an complying superannuation fund, within the meaning of Part IX, in relation to the year of income of the fund in which the contribution is made;

the amount of the contribution is an allowable deduction in respect of the year of income of the taxpayer in which the contribution is made.

Note 1: A deduction may be denied by section 85-25 of the Income Tax Assessment Act 1997 if the eligible employee is an associate of the taxpayer.

Note 2: Section 86-60 of the Income Tax Assessment Act 1997 (read together with section 86-75 of that Act) limits the extent to which superannuation contributions by personal service entities are allowable deductions.

Note 3: However, a deduction might be denied or reduced by section 26-80 of the Income Tax Assessment Act 1997 if the contribution is made more than 28 days after the month in which the eligible employee turns 70."

[Notes 1 and 2 were inserted by Act No 86 of 2000 with effect 30 June 2000 and note 3 was inserted by Act No 51 of 2002 commencing 29 June 2002 applicable in relation to assessments for the 2002-2003 year of income and later years of income.]

99. Age based limits applied to deductions claimed under s 82AAC. As I understood both parties' submissions, there was no issue about exceeding the age based limits.

100. The Commissioner disallowed the superannuation contributions on the ground that those persons for whose benefit the contributions were made were not eligible employees of the applicant. Section 82AAA contains definitions applicable to Subdivision AA dealing with contributions to superannuation funds for the benefit of employees. The relevant definitions for the purposes of this matter are:

"…

eligible employee , in relation to a taxpayer, means a person other than the taxpayer who is:

(a) in the case of a taxpayer whether a company or a person other than a company:

(i) an employee of the taxpayer;

(ii) an employee of a company in which the taxpayer has a controlling interest; or

(iii) an employee of a company in which the taxpayer is the beneficial owner of shares but in which the taxpayer does not have a controlling interest (not being an employee who is associated with the taxpayer or who, or a relative of whom, has set apart or paid, or entered into a contract, agreement or arrangement under which he is, or will or may be, required to set apart or pay, amounts as or to a fund for the purpose of providing superannuation benefits for, or for a relative of, the taxpayer); and …

employee means a person who is employed by a taxpayer and:

(a) is engaged in producing assessable income of the taxpayer; or

(b) is a resident of Australia and is engaged in the business of the Taxpayer."

Section 82AAA(2) provides:

"For the purposes of this Subdivision, a director of a company shall be taken to be employed by the company."

101. I also note that a deduction is not allowable under any provision of the ITAA 1936 other than under Subdivision AA in respect of an amount paid by a taxpayer as a contribution to a superannuation fund for the purpose of making provision for superannuation benefits for, amongst others, employees (s 82AAR(1)).

102. In essence, Dr Bender submitted that the three persons to whom I have referred above and for whom contributions were made to either the Number One or Number Two superannuation fund, were not in fact eligible employees of the applicant. Dr Bender submitted that whether a person is an employee of another person requires resort to Common Law concepts of employment. On the other hand, Mr Broadfoot submitted that it is not necessary for there to be a Common Law type of contract of service in place in order for a person to satisfy the definition of employee as that word is defined in s 82AAA of ITAA 1936. Alternatively, Mr Broadfoot submitted that the facts in this case illustrate that each of the fund members was employed by the applicant. Mr Broadfoot submitted, correctly, that the definition simply states that an employee means a person who is employed by a taxpayer. In order to be employed, he submitted that it was unnecessary for there to be a contract of employment or a contract of service as might be required for the purpose of distinguishing between an employee and an independent contractor. Mr Broadfoot submitted that a person is employed if a person's services are being used or they are kept busy or at work. He relied on the Macquarie Dictionary definition of the word employ and The New Shorter Oxford Dictionary. Chamber's 21^st Century Dictionary defines the adjective employed as: Having a job; working.

103. Mr Broadfoot also referred to the definition of employee used for the purposes of s 221A of ITAA 1936 as it was prior to 1 July 2000 where the word is defined as a person who receives, or is entitled to receive, salary or wages. That was amended from 1 July 2000 to a person who receives or is entitled to receive work and income support related withholding payments and benefits.

104. That is only one example of several where the words employee and employer are defined. For example, s 139GA of the ITAA 1936 also defines employee and employer and it refers simply to s 221A. Section 139GA is found in Part III, Division 13A which deals with the liability to taxation. As is explained in s 17 of ITAA 1936, Part III dealing with liability to taxation is about the levying and payment of income tax upon taxable income derived during a year of income by any person. Subdivision AA provides a deduction to a taxpayer where that taxpayer has made a contribution to an eligible superannuation fund for its employees. That of course ties in with the definition of employee under s 82AAA which requires a person not only to be employed by a taxpayer, but also to be engaged in producing assessable income of the taxpayer or be engaged in the business of the taxpayer.

105. Mr Broadfoot referred to the decision in
Federal Commissioner of Taxation v Bargwanna 2009 ATC ¶20-107; (2009) 72 ATR 963 at 972 where Edmonds J emphasised the need to construe legislation to promote Parliament's purpose and not so as to detract from that purpose. That statement is unexceptional given what has been said by the High Court regarding the interpretation of statutes and the so called modern approach to statutory interpretation in the often quoted passage from
CIC Insurance Ltd v Bankstown Football Club Limited (1997) 187 CLR 384 at 408.

106. However, and with respect to Mr Broadfoot, those broad statements do not necessarily assist in the interpretation of the specific provisions dealing with deductions for contributions to superannuation funds for the benefit of employees. Gleeson CJ in
Carr v Western Australia (2007) 232 CLR 138 at 143, when referring to a general statement of purpose contained in the legislation, gave the following example:

"To take an example removed from the present case, it may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose."

107. The Full Court of the Federal Court in
Harris v Commissioner of Taxation 2002 ATC 4659; (2002) 125 FCR 46 at 59 was concerned specifically with the operation of s 82AAE. However, in the course of deciding that case, the Court set out the history of s 82AAA and referred to the Ligertwood Committee and an explanatory memorandum to the 1964 Bill. The Court explained that the purposes of that legislation, in addition to simply replacing two former sections in the Act, were:

"… first, to simplify the employer contribution provisions and, secondly, to prevent proprietors of private companies and their relatives from taking undue advantage of excessive deductions. Section 82AAD (as well as s 82AAB and par (a)(iii) of the definition of 'eligible employee' in s 82AAA(1)) concerned this latter matter. A further purpose of the definition of 'eligible employee' in s 82AAA was, however, to ensure, as a condition of deductibility, that there was a relationship of a certain kind between the contributor (whether an employer, or a shareholder having a controlling, or less than controlling interest, in the employer) and the employee: … As par (a)(iii) of the definition demonstrates, the legislature contemplated that an employee might qualify as an 'eligible employee' if the contributor were a shareholder with less than a controlling interest only if the employee and the contributor were at arm's length."

108. With respect to Mr Broadfoot, in my opinion, submissions made by Dr Bender should be preferred. There are a number of reasons why I find this to be the case. The first limb of the definition in s 82AAA which provides that an employee is a person who is employed by a taxpayer, says nothing about how one is to determine the relationship in any particular case between the taxpayer and the person who is said to be employed. In order to determine that question, one necessarily needs to refer to the Common Law in order to establish the correct legal meaning of the word in question. This was explained by O'Connor J in
Attorney-General (NSW) v Brewery Employes Union of New South Wales (1908) 6 CLR 469, where his Honour said, at 531:

"… Where words have been used which have acquired a legal meaning it will be taken, primâ facie, that the legislature has intended to use them with that meaning unless a contrary intention clearly appears from the context. To use the words of Denman J. in
R. v. Slator (1) :- "But it always requires the strong compulsion of other words in an Act to induce the Court to alter the ordinary meaning of a well-known legal term." …

109. In my opinion, the word employed as is used in the definition of employee in s 82AAA should be given its legal meaning in the context of the ITAA 1936. Although the ordinary meaning of the adjective employed is: having a job, working, when used in the context of the ITAA 1936 and particularly as it falls under Part III entitled Liability to Taxation, it seems to me that the expression is used in the form understood by the Common Law. In support of my opinion, I refer to the decision of Perram J in
ACE Insurance Limited v Trifunovski (2011) 284 ALR 489. Although that case was concerned with Employment Law and in particular, the Work Place Relations Act, his Honour explained the Common Law's role in establishing the fact of employment. He said, at 499:

" (d) Employment at common law

[25] The common law's interest in the question of employment is limited. In modern times it is largely confined to the question of whether one person should be vicariously liable for the torts of another. At earlier times the common law also fixed upon the master-servant relationship as an integer in some species of criminal liability. …

His Honour then said at 499:

" [26] It is true that many legislatures have used the common law's approach to employment as a factum by which other statutory rights and liabilities have been imposed. For example, most Australian States impose a tax on businesses which is referable to the wages paid by them to their employees (see, for example, ss 6 and 11 Payroll Tax Act 2007 (NSW)); persons who employ others are required by s 12-35 of Sch 1 to the Taxation Administration Act 1953 (Cth) to withhold from an employee's wages income tax; and, there is a corresponding obligation to make superannuation payments imposed by the Superannuation Guarantee (Administration) Act 1992 (Cth). …
[27] Although it is true that each of these Acts fixes upon, and uses, the common law's concept of what employment is, they do not have any impact upon the common law's content which remains concerned with, and focused upon, the imposition of vicarious liability. So much will be obvious from the conflicting nature of the statutes in question: a broad approach to the concept of employment might ensure that more persons have superannuation paid on their behalves; but it would also mean that tax would be withheld from their remuneration denying them the benefit of the use of that money pending its remittal at return time to the Commissioner."

110. Perram J then went on and identified the indicia of an employment relationship. He said at 500:

" [29] With that in mind one can at least say this: first, the distinction between an employee and an independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's, business, and a person who carries on a trade or business of his own' (
Hollis v Vabu Pty Ltd [2001] HCA 44; (2001) 207 CLR 21 at 39 [40] per Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ citing
Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210 at 217 per Windeyer J); secondly, the answers to that question are to be determined by reference to the 'totality' of the relationship (Hollis at 33 [24]); thirdly, a number of indicia have accreted over time in the authorities which are thought to throw light to varying degrees on the outcome without being determinative: the terms of the contract; the intention of the parties; whether tax is deducted; whether sub-contracting is permitted; whether uniforms are worn; whether tools are supplied; whether holidays permitted; the extent of control of, or the right to control, the putative employee whether actual or de jure; whether wages are paid or instead whether there exists a commission structure; what is disclosed in the tax returns; whether one party 'represents' the other; for the benefit of whom does the goodwill in the business inure; how 'business-like' is the alleged business of the putative employee - are there systems, manuals and invoices; and so on - the list is neither exhaustive nor short: see
Stevens v Brodribb Sawmilling Company Pty Ltd [1986] HCA 1; (1986) 160 CLR 16 at 24 per Mason J and 36-37 per Wilson and Dawson JJ; for application see Hollis at 42-45 [48]-[57] per Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ; Sweeney at 172-173 [30]-[33] per Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ. It will be necessary to refer to some of these factors later in these reasons and the authorities upon which they rest."

111. Dr Bender submitted that an employee is somebody who provides their work and skill under a contract service for another person. He referred specifically to the well-known High Court decision in
Stevens v Brodribb Sawmilling Company Proprietary Limited (1986) 160 CLR 16 where Mason J said, at 24:

"… A prominent factor in determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. …"

112. Mason J also went on to explain that the existence of control, while significant, was not the sole criterion by which to gauge whether a relationship was one of employment. He then referred to other relevant matters including, but not limited to:

(a) the mode of remuneration;
(b) the provision and maintenance of equipment;
(c) the obligation to work;
(d) the hours of work and provision for holidays;
(e) the deduction of income tax; and
(f) the delegation of work by the putative employee.

113. While a contract of service goes someway to establishing the relationship between two parties, there is no suggestion in any of the cases that the contract must be committed to writing or be in any formal format. I have no doubt that it may simply be oral. However, it is significant in establishing the relationship intended by the parties. That is particularly so where the parties are related or belong to the one family. Dr Bender referred to two cases which indicate that there is a rebuttable presumption that family arrangements are not intended to result in binding contractual arrangements. In the case of
Balfour v Balfour [1919] 2 K.B. 571, where Warrington LJ was required to determine whether there was a legal contract between a husband and wife or whether it was merely a domestic arrangement, he said, at 574:

"It may be, and I do not for a moment say that it is not, possible for such a contract as is alleged in the present case to be made between husband and wife. The question is whether such a contract was made. That can only be determined either by proving that it was made in express terms, or that there is a necessary implication from the circumstances of the parties, and the transaction generally, that such a contract was made. It is quite plain that no such contract was made in express terms, and there was no bargain on the part of the wife at all. …

These two people never intended to make a bargain which could be enforced in law. The husband expressed his intention to make this payment, and he promised to make it, and was bound in honour to continue it so long as he was in a position to do so. The wife on the other hand, so far as I can see, made no bargain at all. That is in my opinion sufficient to dispose of the case."

Duke LJ said at 577:

"It is impossible to say that where the relationship of husband and wife exists, and promises are exchanged, they must be deemed to be promises of a contractual nature. In order to establish a contract there ought to be something more than mere mutual promises having regard to the domestic relations of the parties."

Atkin LJ, after discussing that consideration may have been given by either party, said, at 578-579:

"That is a well-known definition, and it constantly happens, I think, that such arrangements made between husband and wife are arrangements in which there are mutual promises, or in which there is consideration in form within the definition that I have mentioned. Nevertheless they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences."

114. The Balfour case was referred to with approval by the Court of Appeal in
Jones v Padavatton [1969] 2 ALL E.R. 616. The contest in that case was between mother and daughter and the Court held that it was a case of a family arrangement which depended on the good faith of the promises made. It was not intended to be a binding agreement. Although agreeing with Danckwerts LJ, Salmon LJ said, at 621:

"There may, however, be circumstances in which this presumption, like all other presumptions of fact, can be rebutted."

115. Having considered the authorities, I believe my task is to examine the nature of the relationship between the applicant and the three beneficiaries under both superannuation funds, bearing in mind the indicia referred to by the Courts which might rebut the presumption that the arrangements between the three beneficiaries and the applicant resulted from private domestic arrangements.

116. The first beneficiary who received a contribution under both Number One and Number Two superannuation funds was the Principal Accountant. The Principal Accountant is the brother of the Director. He was a director of the applicant between 26 June 1977 and 18 October 1990; and again from 31 January 2003 to 23 June 2003. He was not a shareholder of the applicant. In his witness statement, the applicant's Director stated that his brother was an employee of the applicant company between 2001 and 2003. He said that his brother assisted in liquor, wine tastings, locking-up the premises at the end of the day and providing security and banking for the supermarket's takings. He was also responsible for obtaining the best possible deals on bulk purchases, particularly from wineries. The Director admitted that the applicant did not pay wages to any persons who were beneficiaries under the Trust and that it was agreed with each of those persons that the applicant would make superannuation contributions on their behalf as remuneration for the work they were doing.

117. In his oral evidence, the Principal Accountant said that he had been helping in the business of the applicant for a long, long time. He said he was still helping at the business. He said he did not take any wages but for the three years when the business was making a profit, in lieu of salary, he took superannuation. When asked if there were ever any arrangements, formal or informal for him to do that he said that there were and he claimed that in 1994, he had explained that he was going to gradually start taking out salary in the form of superannuation. He said he set up the superannuation funds hoping to gradually put superannuation into them. However, the business could not afford it. He said he did roll over some monies from a former superannuation fund.

118. In cross-examination, he was asked to confirm that he was assisting his brother, the Director and his sister who was then married to the other partner in the supermarket business. He said that he was. When asked what that entailed, he said:

"I locked up - sometimes I would lockup one or two days a week. That means by locking-up, I would go there late at night and close the shop for the other guys. Basically, it was more with the computer systems, making - putting in the computer systems, putting in credit card facilities. I was dealing with some of the winemakers, which - because I like my wines, and I use to go to the wineries. I organised wine tastings to build up the wine business."

119. When it was put to the Principal Accountant that purpose of making contributions to the superannuation funds was to take profits out of the supermarket business and to get a tax deduction in the process, the Principal Accountant answered:

"Yes, but against that the contributions were taxable in the super fund."

In re-examination, the Principal Accountant was asked whether there was any other reason why contributions were made to the superannuation funds and he said:

"Well, it's part of the employees' entitlements sir, and the work that the employees did for the Trust were remunerated via the superannuation contributions. That the major - that was the only reason, really, why the superannuation payments were made."

The Principal Accountant reaffirmed that the applicant did not have funds to pay superannuation contributions in prior years.

120. The problem with the answers given by the Principal Accountant is that, as I have already found, the supermarket understated its income in the years which are the subject of this proceeding, commencing in 1993. I have referred to many documents in which the Principal Accountant's view about the profitability of the supermarket has been objectively refuted. I therefore do not accept his explanation for the payments into the superannuation fund on his account. Furthermore, there was no question that family members worked in the business. When the Director was asked whether any of the persons who received payments in their superannuation accounts had employment contracts with the applicant, he said: No. I didn't either. We were a family business; we didn't have contracts between ourselves.

121. I also have problems with the extent of the work said to have been conducted by the Principal Accountant for the applicant. As the Principal Accountant's firm was responsible for keeping the accounts of the applicant, I have little doubt that at times when he was at the supermarket dealing with cash registers or computers, that had more to do with the accounts than any other business function within the supermarket. Although I had no evidence before me, it would be surprising if the firm of accountants was not remunerated for the work it did for the applicant. In fact, while I am unable to locate any expense item listed in the profit/loss statements under accountancy fees or the like, there is an entry from at least 1995 purporting to be expenses for consultancy fees. A general ledger printout of the account consulting fees indicates that the expenses included in that account were payments made to the employee accountant of the accountancy practice.

122. Amongst the documents in evidence were group tax reports for the 2001 and 2003 income years. Neither the name of the Principal Accountant nor any of the other members of the superannuation fund is listed amongst those names of employees for whom group tax was paid. Nor does the Principal Accountant's name or any of the other beneficiaries of superannuation payments appear on a list entitled Super Levy Report, 1 July 2002 - 30 June 2003. The 2001 and 2003 group tax reports disclose two other members of the families involved and recorded as employees. Payment of wages was certainly made to one of those employees. In fact, the Director said that employee was paid under the MGA Award (Master Grocers Association Award). The group tax report for the 2001 income year shows two family members being paid a salary.

123. There is no evidence at all that the three persons who were beneficiaries of the Number One and Number Two superannuation funds received compulsory superannuation payments under the Superannuation Guarantee (Administration) Act 1992 (Cth).

124. It is also of some significance that the Principal Accountant received superannuation payments at the top of the aged based limits set out in s 82AAC(2) and (2A). I accept Dr Bender's submission that the payments made to the Principal Accountant appear to be simply based on the maximum contributions allowable under that section of ITAA 1936. They are not based on an hourly rate or on the value of any work completed.

125. Mr Broadfoot submitted that in any event, the Principal Accountant is deemed to have been employed by the company in the 2003 year by reason of s 82AAA(2) of the ITAA 1936. Therefore, as I understood Mr Broadfoot's submission, the deduction for the Principal Accountant's contribution in 2003 should be allowed. The problem I have with that submission is that s 82AAA(2) deems a director of a company to be taken to be employed by the company for the purposes of Subdivision AA, only during the period of time when he was in fact a director of that company. Therefore, while I have no doubt that the Principal Accountant was employed by the applicant between 31 January 2003 and 23 June 2003, there was no evidence before me which disclosed when the 2003 payment was made to the Number One superannuation fund for the Principal Accountant.

126. In the documents filed by the Commissioner there was a file note dated 3 June 2004 which was made following the attendance of the Principal Accountant and his solicitor to the Commissioner's office to produce information under a Section 264 notice. The ATO officer has recorded that the Principal Accountant explained there were two superannuation fund registers and that the registers contained all of the documents and information relating to the superannuation funds but they could not be found at that time. Bearing in mind that this was less than 12 months after the end of the 2003 income year, that statement made by the Principal Accountant is simply incredible. Apparently the Principal Accountant said he believed a member of the fund may have the registers but he was not sure. He said that in any case once the registers were located they would be provided. I do not have any such documents in evidence before me. Therefore, there is no objective evidence about the date on which the superannuation payment was made for the Principal Accountant in 2003.

127. In the course of cross-examination, the Principal Accountant agreed that the contributions made to the Number One and Number Two superannuation funds during the three years in question were on-lent to another company of which the Principal Accountant was a director. While there was no dispute that the company was involved in property investments, the Principal Accountant answered not necessarily, to the question regarding whether the on-lent moneys were used in his property development activities. He suggested that there were only minor amounts going there but when asked how much, he suggested about $300,000. In my opinion, the contributions made to the Number One and Number Two superannuation funds on behalf of the Principal Accountant were made for the purpose of minimising the taxable income of the applicant.

128. In the three years in question, the sister of the Principal Accountant received a total of $120,634 into her Number One superannuation fund. In her witness statement, she said that she had duties regarding work at the supermarket and, among other things, introduced a florist department. She stated she was content not to receive wages for her work but rather to receive contributions into the superannuation fund. She said this was because it was more beneficial for her future retirement. In her evidence-in-chief, this witness said she did a little bit of book-keeping for the business as well. Other than her statement about that, there was no objective evidence of such work. In the course of her cross-examination, she was asked whether she had a job anywhere else and her answer was: No, not really. Well, I helped out with floristry within the supermarket. Later, in the course of her cross-examination, the witness said:

"I used to come in a do some floristry and help out with the supermarket if somebody was ill or do some filing of just the accounts payable. Things like that. I wasn't in all the time but whenever I was needed I was available to help, I suppose."

129. The witness said that after her husband passed away in 1998, she didn't do that much work. But she said that later she came in to the supermarket and whenever the florist needed flowers arranged, she would prepare flowers for the shop. She also added again that she would help out at different times if one of the employees was ill or extra work was required to be done. She agreed that she did not come in on a daily basis but rather only worked when needed. She said sometimes it might only be 20 hours a week and sometimes it might be more.

130. When she was asked whether she was a member of the superannuation fund Number One or Number Two or both, she thought it was only Number Two. The objective evidence indicates that to be incorrect as she was only a member of the Number One superannuation fund. When asked how much was put into those accounts, the witness said that in 2001 there was about $15,000 or $16,000 and in the following year it was double. Again, quite plainly, the witness was not aware of the amounts put into that account in those years. She then said she thought in the first three or four years it went up to about $100,000. Again that is inaccurate as payments were only made in three years. She had not kept any records of the hours she worked although she said she made a note of how many hours roughly she worked in week. Despite that, there was no document put into evidence regarding the hours that this witness worked. Her name does not appear on the group tax reports I have referred to above, nor did she receive any superannuation guarantee monies. The payment made to her in 2003 year again appears to be at the maximum level of the age based limits. In re-examination she was asked why she made a rough note of how many hours was worked each week and she said:

"Well, because we had to work out roughly what you were due, your contribution would be towards your super fund and everything."

131. Quite plainly, there is no relationship whatsoever between the hours worked and the amount paid into her superannuation fund by way of contributions from the applicant. When asked in re-examination whether she got any other benefits of a financial nature in return for working in the business in 2002 and 2003, she said that beneficiaries did get other benefits from having the supermarket and explained that she received groceries and a car. As Dr Bender submitted, that rather indicates her receiving payments into her superannuation fund as a family member, the monies having then been on-lent to an associated entity of the Principal Accountant for investment, rather than receiving payments as an employee. It does accord with and is consistent with what Dr Bender described as the private nature of the arrangements between the family members.

132. The third beneficiary to receive payments into the Number One superannuation fund was the son of the Principal Accountant. While he had made a very brief witness statement which was lodged with the Tribunal, that witness statement was not taken into evidence as the witness was not available to appear, being in the Philippines at the time of the hearing. Dr Bender objected to its admission and I upheld that objection. There was no objective evidence which might so much as suggest that the son of the Principal Accountant did anything other than assist the family when asked to do so. His name does not appear on group tax reports or on the superannuation levy report for the 2003 income year. Accordingly, I find that none of the persons mentioned as having received payments into Number One or Number Two superannuation fund were employed by the applicant. The evidence does not disturb the presumption that any work done in the supermarket business by those persons was done for family reasons, and not under any employment obligation owed to the applicant. It follows I must find the Commissioner's decisions to disallow the superannuation contribution deductions was correct.

Interest expenses

133. A MYOB extract from the general ledger which is dated 2 April 2004, discloses that on 1 March 2001 the amount of $6,764 was debited twice to that account.

134. In a letter dated 24 March 2005 the Principal Accountant wrote to the ATO stating:

" Other Expenses:

We accept that our office has made accounting errors for all expenses bar Consulting Fees and advertising expenses."

135. In cross-examination, when taken to his letter of 24 March 2005 and asked about what appeared to be a duplication of an interest expense, the Principal Accountant said:

"The - sorry, the interest expense, yes, there could have been an error at the time."

136. There being no other evidence regarding the apparent duplication of the debit entry in the sum of $6,764, I find that the applicant has failed to discharge its onus of proof regarding this disallowed deduction.

Fees

137. The MYOB general ledger extracted on 2 April 2004 also contains a debit for $10,000 made on 30 September 2000. It is simply recorded as Fees. The Commissioner disallowed this deduction because the expenses could not be substantiated by documents.

138. The record of meeting dated 16 March 2005 states that the employee accountant queried why the fees in the amount of $10,000 had been disallowed. The officer conducting the interview explained that the entry was not substantiated by documents. The Principal Accountant said that he would check the ledger and get back to the ATO officer. The Principal Accountant then said: I'll admit it's been incorrectly claimed.

139. In his witness statement of 9 February 2009 the Director stated he could not locate sufficient records to identify the nature of the claim. Quite plainly, the applicant has not discharged the onus of proof in respect of the $10,000 deduction claim said to be fees.

140. The Commissioner also refused a deduction for the amount $4,553.27 which was shown on a general ledger printout for the income year 2003. The description against that expense simply records ATO.

141. I had in evidence an email from a book keeper, who was engaged by the applicant's accountants. In her email dated 3 August 2004 to an officer of the ATO, she said that the amount $4,553.27, identified as ATO, was in fact a BAS (Business Activity Statement) payment. That being the case, I accept Dr Bender's submission that the payment was not deductable.

Motor vehicle expenses

142. The Commissioner disallowed a deduction of $5,305 for motor vehicle expenses in the 2003 income year because there was an error in the ledger accounts.

143. A printout of the general ledger taken on 1 June 2004 discloses an entry under Vehicle Expenses on 30 June 2003 described as to fix motor vec in the amount of $5,305. In a letter sent to the ATO on 24 March 2005, the Principal Accountant accepted that the accountants had made accounting errors for all expenses other than consulting fees and advertising expenses. In his second witness statement dated 18 December 2010 the Director stated that he could not locate sufficient records to identify that claim. When he was cross-examined about it and asked whether he accepted one of the errors referred to by the Principal Accountant included motor vehicle expenses, he said that: if an error was found, he would accept it. He then said:

"I think 2003 was prepared by [the book keeper], and she made - they made a lot of mistakes in that year. That's why we discontinued their - her services."

144. Given the above evidence, I find that the applicant has not discharged its onus of proof regarding this expense claim.

Consultant's fees

145. The Commissioner submitted that the applicant's general ledger for 2001 recorded consulting fees in the total amount of $8,269 while the profit/loss statement recorded consultant's fees of $49,231. The Commissioner disallowed the difference ($40,961) as a deduction on the basis it could not be substantiated.

146. The Director, in his witness statement of 9 February 2009, said he could not locate sufficient records to identify those expenses. In the record of interview dated 16 March 2005, the Principal Accountant, when it was explained to him why the $40,961 had been disallowed, said there should be another ledger which would explain it. He said he would get back to the ATO officer. In his letter to the ATO dated 24 March 2005, he stated that while accepting other accounting errors, did not accept that consulting fees and advertising expenses were in error. He asked the ATO to provide appropriate journal entries to enable verification. With respect to the Principal Accountant, I would have thought that his accounting firm would have held journals enabling fees to be identified. In any event, the entries in the consulting fees account quite clearly also includes fees paid to the employee accountant and also secretaries. Presumably, when posting from the general journal, the descriptions regarding these entries were recorded in the general ledger. There are other entries in that account which are wholly inappropriate and have nothing whatsoever to do with the provision of consultancy services. The accounts I have seen are in an appalling state.

147. In the course of re-examination the Director explained that in the 2001 year, consulting fees were paid to the development manager at IGA who, with his staff, organised renovations and extensions for supermarkets. He said that his memory was that the consultancy fees paid to the development manager was in the high $30,000s. Remarkably, despite this significant expense, it was not recorded in the general journals and yet somehow, rather mysteriously, it has appeared in the profit/loss statement for the 2001 income year. With respect to the Director, his vague statement regarding expenditure for the development of plans for renovating and extending the supermarket, unsupported by any entries in the general journal, simply cannot serve to discharge the onus of proof the applicant has in establishing this expense.

Advertising expenses

148. The general ledger contains an advertising account and there are five entries for the 2001 income year. The total expenses amount to $6,686.51. However, the profit/loss statement for that income year records advertising expenses of $12,686. The Commissioner denied a deduction for the difference ($5,999) because it could not be substantiated.

149. In his witness statement of 9 February 2009 the Director stated that he could not locate records which would identify additional expenses set out in the profit/loss statement. In the interview conducted on 16 March 2005, it appears that the employee accountant indicated that the MYOB system should automatically produce the profit/loss statement and he said that he would look it up and get back to the ATO. That appears not to have happened. There being no explanation for the difference in the figures between the general ledger and the profit/loss statement, I find that applicant has not discharged its onus of proof regarding this deduction.

Bank fees and telephone expenses

150. The Commissioner referred to two expense entries, one in the bank fees account and the other in the telephone account recorded in the general ledger for the 2003 income year. The amounts, $7,745, and the descriptions , periodical paym are identical. Both expenses were disallowed by the Commissioner.

151. The email from the book keeper to the ATO on 3 August 2004 states that the two payments of $7,745 were loan repayments to the Westpac Bank. In his second witness statement the Director said that he was unable to locate sufficient records to identify those expenses. When he was taken to the email from the book keeper, he agreed that both payments were loan repayments to the Westpac bank and suggested: They were obviously key operator mistakes/errors. It follows that this deduction should not be allowed.

Loan repayments

152. The general ledger account entitled Lease repayments (sic) was debited with $17,964.00 on 1 July 2002. The description of that entry clearly indicates that it was a loan repayment and not a lease payment. The Principal Accountant agreed it was an error. It follows that this deduction should not be allowed.

Purchase expenses

153. The general ledger for the 2001 income year in an account entitled Office Expenses contains an entry dated 30 September 2000, in the amount of $6,000.00. This deduction was disallowed on the basis that it could not be substantiated from the documents. The description accompanying that entry is simply: Purchase: Sundry Creditors. The record of interview done on 16 March 2005 states the employee accountant queried the $6,000.00 adjustment in the 2001 income year. The officer from the ATO indicated that the figure was extracted either from the general ledger provided by the book keeper or from documents seized under warrants. The Principal Accountant said that he would examine the 2001 ledger.

154. The Director, in his witness statement of 9 February 2009, stated that he had been unable to locate any records relating to that amount. The employee accountant has not made any reference to that claimed expense in his witness statement or in his evidence. Therefore, in the absence of any objective evidence to the contrary, I find that the applicant has not discharged its onus of proof regarding the purchase expense claimed as a deduction for the 2001 income year.

155. The Commissioner also reduced the deduction for the 2002 income year purchase expenses by $349,911.00, claiming that the expenses in the general ledger were overstated by that amount. The Commissioner determined that overstatement by reference to the general journal, and in particular two entries under the general journal entry number 58, both referred to as purchases, one for $170,408.87 and the other for $200,000.00. The Commissioner obtained from the book keeper a revised trade creditors list for the income year ended 30 June 2002 in the amount of $346,245.00. The difference between that figure and the trade creditors in fact brought to account at the end of that income year ($325,748.00) resulted in an increase in the purchases figure of $20,497.00. Allowing for that increase, the total of unsubstantiated purchases results in the figure of $349,911.00.

156. In his witness statement of 18 February 2009 the employee accountant stated that in January 2009, at the request of the Director, he undertook a reconciliation of purchase expenses referred to in the applicant's general ledger for the 2002 income year. He said he did this by examining the cheque book stubs he had in his possession and where cheque stubs were missing, he arranged with CBA for copies of the presented cheques to be provided. He then entered the purchase amounts shown on the cheque stubs of the presented cheques in the general ledger and cross-checked those amounts with the banks statements, copies of which were obtained from the CBA. By this means, he reconstructed the general ledger for the purchases account for the 2002 income year. That general ledger together with copies of the applicant's bank statements were exhibited to his witness statement.

157. The result of the employee accountant's reconciliation was that the total purchases for the 2002 income year amounted to $4,490,435.00. He then reconciled the purchases for the income year 2002 by adding to the cheque purchases figure, $241,059.00 being cash purchases which were accepted by the ATO; adding the closing balance of trade creditors as at 30 June 2002 in the amount $346,245.00; and subtracting the closing balance in the trade creditors account as at 30 June 2001 in the amount of $211,827.00. The resultant purchases amounted to $4,865,912.00. Therefore, according to the employee accountant, as the profit/loss statement and tax return for the 2002 income year returned $4,803,721.00 in purchases, the applicant's income should be reduced by the difference, namely $62,189.00 (correct figure $62,191.00).

158. However, as Dr Bender submitted, the employee accountant had not provided to the Tribunal any of the presented cheques or copies thereof retrieved from the CBA nor copies of chequebook stubs relied on to establish the level of purchases for the 2002 income year. Given that the employee accountant admitted to providing false and deceptive financial statements to the CBA, I cannot be reasonably satisfied that the cheques and the chequebook stubs to which the employee accountant has referred disclosed the payee of those cheques. Although the employee accountant also provided copies of bank statements, marking off the cheques he claimed were made out for purchases, that exercise, by itself, is unhelpful as the bank statements simply record cheque numbers and, in rare instances, the payee where there appears to have been a direct payment rather than payment by cheque. Dr Bender also pointed to the fact that the general ledger for the 2002 income year disclosed some $13,401.14 of credit to the purchaser's expense account, thereby reducing purchase expenses by that amount. This figure was not included in the reconciliation prepared by the employee accountant. In addition, the general journal entry number 76 which is an entry in account number 5-0850 entitled purchases, has a credit of $89,622.00. As Dr Bender submitted, this would also reduce the purchase expenses amount by that figure. These factors, coupled with the general problems I have already expressed with the accounts of the applicant and the evidence given by the employee accountant, make it unsafe for me to rely upon the reconciliation of purchases completed by the employee accountant for the 2002 income year. Accordingly, I find that the applicant has not discharged its onus of proof regarding the adjustment made by the Commissioner to the purchases expense figure for the 2002 income year.

159. The Commissioner also reduced the purchases expense deduction for the 2003 income year by $148,555.00. In his witness statement of 18 December 2010 the Director accepted that the adjustment in the amount of $148,555.00 was correct as this resulted from an accounting error. While the applicant's Director also submitted that this adjustment would have the effect of reducing the opening creditors figure for the 2004 income year, while that may or may not be correct, the 2004 income year is not the subject of any objection decision before me.

Assessment of trust income

Income years 1993 - 1997

160. The Commissioner assessed the additional Trust income he said had been derived by the applicant for the 1993 - 1997 income years under s 99A of ITAA 1936. In essence, that was because the Commissioner contended that the additional income for those income years had not been included in the assessable income of any beneficiary of the Trust. In other words, the assessments were made under s 99A because no beneficiaries were presently entitled to the income of the Trust in the 1993 - 1997 income years.

161. The applicant contended that there was evidence of distribution resolutions in each of the income years in question. Although the applicant contended there was no additional trust income during the years in question, nevertheless, it submitted that should I find there was additional income during those years, I should accept that distributions were made to the beneficiaries in the 1994 - 1996 income years and therefore the beneficiaries should be assessed under s 97 of ITAA 1936 in respect of that additional income.

162. In particular, the applicant relied on the evidence given by the Director and the fact that the profit/loss statements provided to the CBA for the income years 1994 and 1995 contained a statement about the distribution of the surplus for those years. Mr Broadfoot also submitted that the statement prepared by the CBA in 1997 disclosed distributions to beneficiaries for the income years 1993 - 1996. Furthermore, in the audit report prepared by officers' of the ATO on 1 September 2005, s 97 was said to be the basis for primary assessment.

163. However, it is clear from the audit report that the auditors were uncertain as to whether the four adult beneficiaries named in documents produced to the CBA should be assessed or whether the Trust should be assessed. The auditors recommended that duel assessments be issued to the Trustee and to the beneficiaries. The Commissioner would ultimately collect tax due only to one of the assessments after establishing who should bear the tax and penalties. In support of issuing duel assessments, the auditors relied on the High Court decision in
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 29 ATR 644 where the Court held that the Commissioner could exercise power to issue assessments against two different entities relating to the same amount in respect of the same income year. No significance should be attached to the use of the words primary assessment as opposed to alternative assessment used by the auditors. It is quite clear that the auditors were of the view at that time that each assessment could be correct and therefore they simply distinguished the two assessments by using the different descriptions. Therefore, for the 1997 year, the so called primary assessment was issued under s 99A whereas in the preceding income years, that assessment is described as the alternative assessment.

164. Alternatively, Mr Broadfoot submitted that distribution resolutions were made in each of the income years in question such that distribution should be made to the applicant in its own capacity, the company being a beneficiary of the Trust. Therefore, according to Mr Broadfoot, the applicant should be assessed under s 97 in its own right rather than under s 99A as Trustee of the Trust.

165. Division 6 of ITAA 1936 deals with trust income. Section 95(1) defines the term net income in the following way:

" Division 6 - Trust Income

95 Interpretation [see Note 13]

(1) In this Division:

'…

net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 16C and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

A trust may be required to work out its net income in a special way by Division 266 or 267 of Schedule 2F.'"

166. Insofar as it is relevant for the purposes of this matter, s 97(1) of ITAA 1936 provides:

" 97 Beneficiary not under any legal disability

(1) Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and

(b) the exempt income of the beneficiary shall include:

(i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate."

The expression income of the Trust Estate has been the subject of considerable controversy in the Courts. This controversy was outlined briefly by Stone and Perram JJ in
Bamford v Commissioner of Taxation 2009 ATC ¶20-105; (2009) 176 FCR 250 at 265. The conclusion reached by the plurality in that case is consistent with what Emmett J said at 260:

"The phrase 'income of the trust estate' in the beginning of s 97(1) refers to distributable income. Distributable income is income ascertained by the trustee according to appropriate accounting principles and the relevant trust instrument and in accordance with the ordinary concept of income, which the 1936 Act adopts when it refers to 'income'. A beneficiary's 'share' is that beneficiary's share of the distributable income. Having identified the share of the distributable income to which a beneficiary is presently entitled, s 97(1) requires that 'that share of the net income of the trust estate' be ascertained. That share is then included in the beneficiary's assessable income."

167. The High Court in
Commissioner of Taxation v Bamford 2010 ATC ¶20-170; (2010) 240 CLR 481 did not disturb this statement regarding income of the trust estate.

168. As Dr Bender submitted, the Trust Deed in this case does not contain a definition of income. Clause 4(1) of the Trust Deed simply provides:

"4(1) THE trustees may at any time prior to the expiration of any Accounting Period which ends before or upon the Vesting Day determine with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period -

(a) …;

(b) to pay, apply or set aside the same for any one or more of the General Beneficiaries living or in existence at the time of the determination;

(c) to accumulate the same;

(2) The following provisions shall apply to any determination made pursuant to sub-clause (1) of this clause, namely:

(a) …;

(b) …;

(c) a determination to pay apply or set aside any sum to or for the benefit of any Beneficiary may be effectually made and satisfied by placing such amount to the credit of such beneficiary in the books of the Trust or by paying the same over to or for the benefit of such beneficiary in such manner as the trustee shall think fit;

(d) …;

(e) the Trustees shall have an absolute discretion as to the making of any determination and shall not be required to assign any reason therefor; …"

169. Although I am aware that a number of deeds have amended the original Trust Deed, they do not appear to alter provisions contained in the clauses above.

170. I have no doubt that the expression net income set out in Clause 4(1) of the Trust Deed, when referring to the net income of the Trust Fund, is not a reference to the definition of net income found in s 95 of ITAA 1936. The Tribunal in
Re Ryan v Commissioner of Taxation 2008 ATC ¶10-026; (2008) 72 ATR 498 dealt with precisely the same phrase in a Trust Deed. Like the Trust Deed in this case, it contained no definition of income. The Tribunal found that the expression net income should not be treated as a reference to income under s 95. Accordingly, it should be understood as income according to ordinary concepts and accounting principles. I agree.

171. Dr Bender also submitted that the additional assessable income found by the Commissioner for the 1993 - 1997 income years consisted, for the most part, of additional trading profits. I agree with that submission. It follows from my findings regarding the claimed assessable income of the Trust. Dr Bender submitted that the amounts constituted ordinary income of the Trust related to its business and I agree with that submission. I also agree that the additional income formed part of the income of the Trust for the purposes of s 97 of ITAA 1936.

172. The only matter which seemed to be in issue between the parties was whether the beneficiaries were presently entitled to a share of the income of the Trust Estate. The principle to be applied to the question whether a beneficiary is presently entitled to a share of trust income is well settled. A beneficiary is presently entitled to a share of the income of a trust only if:

(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and
(b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment (
Harmer v Federal Commissioner of Taxation 91 ATC 5000; (1991) 173 CLR 264 at 271).

173. The Trust in this case is plainly a discretionary trust. That is evident from the provisions in Clause 4(2)(e) of the Trust Deed. That being the case, s 101 of ITAA 1936 applies. It provides:

" 101 Discretionary trusts

For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion."

174. In accordance with s 101, it seems reasonably clear that in order for a present entitlement to arise, the Trustee merely needs to exercise his discretion to apply the income of a trust estate for the benefit of a specified beneficiary. Payment need not take place. In fact, the Trust Deed at Clause 4(2)(c) provides that the Trustee may make a determination and thereby exercise its discretion by placing an amount to the credit of a beneficiary in the books of the Trust without necessarily paying the sum of the benefit to the beneficiary.

175. Dr Bender referred me to the case
Clark v Inglis (2010) 79 ATR 447, a decision of the Supreme Court of New South Wales (Court of Appeal) (Allsop P, McColl and Macfarlan JJA). Although it does not appear that the Court was required to deal with express provisions in a Trust Deed providing for the making of determinations, counsel for the appellant submitted that acquiescence in the accounts was not a determination (in that case, to treat capital profit in each year's income or the accretion in value of property as income). Counsel submitted that the so called resolutions of the Trust dealing with income were drawn up after the event and were not operative. Allsop P, with whom McColl and Macfarlan JJA agreed, rejected those submissions. His Honour said that those acts were clearly acts of the company as Trustee determining that the increase in value of investments would be treated and held as income. As I understood Dr Bender, the recording of distributions in the Trust accounts should be regarded in the same way. While that is probably correct, the argument is even stronger in this case because the Trust Deed expressly provides that certain actions taken by the Trustee amount to a determination to pay, apply or set aside a sum for the benefit of beneficiaries.

176. Dr Bender also submitted that a present entitlement only exists within the meaning of s 97(1) when a beneficiary has an entitlement to trust income during the relevant tax year, that is, by the end of the income year. That seems to accord with what is set out at Clause 4(1) of the Trust Deed. In any event, Dr Bender submitted I should follow Stone J in
Colonial First State Investments v Federal Commissioner of Taxation (2011) 192 FCR 298 where she said, at 309:

"The difficulty for the applicant is that Harmer makes clear that for s 97(1) purposes, the applicant needs to be presently entitled 'at the time when the interest was derived that is to say, during the tax years'. I reject the respondent's submission that the beneficiary must be presently entitled 'at the time' the income to be distributed is received by the trustee. It is clear from Harmer that it is 'during the tax years' that the entitlement must arise."

177. As Dr Bender submitted, the Trust Deed does not contain a default beneficiary clause giving a beneficiary an entitlement to income in the event that the Trustee does not exercise its discretion under Clause 4(1). Therefore, it follows that the Trustee must make a determination in accordance with the Trust Deed at any time prior to the expiration of an accounting period. The applicant claimed that in the 1993, 1994 and 1995 income years, it made a resolution to distribute net income of the Trust as disclosed in the tax returns it claimed it had lodged. While the Commissioner accepted that the 1995 return was lodged, he did not accept that the other two income years' tax returns had been lodged. I have already found that the applicant has not discharged its onus of proof in establishing, on the balance of probabilities, that those other two returns had in fact been lodged. In any event, the Director's evidence in his witness statement was:

"I recall that prior to 30 June each year Trustee resolutions were passed for the distribution of income to the beneficiaries of the Trust and signed by me as Director of [the applicant]."

178. In his witness statement, the Director also said that at the time of preparing his witness statement, he had not been able to locate the minutes for each of the years in question. In fact, at the time of hearing, no such minutes were produced.

179. In the course of his interview with officers from the ATO on 24 March 2004, the Director was asked whether beneficiaries, and in particular the applicant in its own right, received trust distributions between July 1992 and the date of the interview. The Director first answered by saying: What do you mean by "trust distribution"? When explained that the question referred to the recipient of trust distributions, the Director responded: I don't know, sorry I couldn't tell you. He was then asked whether his brother, the Principal Accountant, ever advised him about a distribution in a particular year. He said he could have, although he did not remember. He said: He [the Principal Accountant] handled all that sought of stuff.

180. After further questioning, the Director was told that because the applicant acted as Trustee, there would have to be a meeting to make a resolution about certain matters relating to its business. At that point, the Director said: Do I have to be there. When it was explained that he did, and he was asked whether he was there, he answered: No. He explained that the Principal Accountant would have been there on behalf of the applicant because he acted for the applicant. He was then asked whether he signed any resolutions and he indicated that the Principal Accountant would often come to him and ask him to sign a document and he would do so. When asked how that occurred in respect of meetings which he did not attend, he was unable to answer. His evidence in respect of these matters was conflicting and obfuscatory. It was not at all convincing.

181. In his witness statement the Director said that the minutes (of Trustee resolutions) provided that if changes or adjustments were made to the net income, the additional income would be distributed to the applicant in its own right. He referred to sample minutes in the documents before the Tribunal. They were for the income years 1998, 1990, 2000, 2001, 2002 and 2003. When asked in cross-examination whether he had been told by the Principal Accountant or somebody else to say what was set out in his witness statement, the Director said he did not know who produced the minutes of meetings referred to in his witness statement.

182. Dr Bender submitted I should find that the evidence given by the Director was not credible and in any event, the financial statements created with so called final figures were not created until a significant period of time after the end of the a financial year. Therefore, according to Dr Bender, the income of the Trust available for distribution was unknown at the end of each year.

183. While I readily accept the first submission made by Dr Bender, I do not accept his submission regarding the financial statements produced significantly after the end of any income year. The resolutions made in the 1998 - 2003 income years simply allocate to the applicant in its own right 100 per cent of the Trust's net income. The resolutions also purport to distribute the balance of net income that may result from changes or adjustments, presumably to its accounts. Furthermore, the Trust Deed contemplates a determination being made prior to the expiration of any accounting period. It also provides that in the event that at the end of an accounting period the amounts of income in respect of which determinations have been made exceed the net income of the Trust for that period, then the excess is to be deducted from any income for such a period. Therefore, the fact that the actual amount of distribution determined by the Trustee to be made for any particular beneficiary was not precisely known at the end of any income year, the share of that beneficiary's distribution may nevertheless be properly determined. In the case of the 1998 - 2003 income years, the share was stated to be 100 per cent.

184. In the course of the interview conducted by the ATO on 16 March 2005 at which the Principal Accountant was present, the ATO officer indicated he had examined all of the documents but could not find any Trustee resolutions. The Principal Accountant responded: I can't find any minutes, trust deeds, etc that relate to the supermarket …. When it was explained to the Principal Accountant that the distributions of the Trust were shown in the 1993 tax return but not in the financial statements, the Principal Accountant simply answered: The financial statements are not right - they're draft copies only.

185. As Dr Bender pointed out in his submissions, there is other contradictory material in the evidence. The applicant's statement of facts issues and contentions refers to the fact that the applicant did not make a distribution resolution in the 1996 and 1997 income years because the Trust recorded a loss in both of those years. Furthermore, the income tax returns which the applicant claimed were lodged for 1996 and 1997 in any event disclosed no distributions made to beneficiaries.

186. Given the state of the evidence, I find that the applicant has not discharged its onus of proving that determinations were made by the applicant to distribute additional income in the 1993 - 1997 income years. Although two of the documents produced to the CBA and the CBA's subsequent summary of financials for the 1993 - 1997 income years disclosed distributions to beneficiaries, the evidence given regarding the accounts provided to the CBA, particularly by the employee accountant, make it abundantly clear that they should not be relied upon. However, that does not necessarily mean that the applicant has established that the accounts as recorded in tax returns said to have been prepared for the 1993 - 1997 income years must be correct. In fact the evidence discloses no reason, compelling or otherwise, why those tax returns should be accepted as being correct. It was clear to me that the oral evidence could not be relied upon, nor could any of the financial documents which were before me in evidence.

187. There is another reason why I should not accept the applicant's submissions regarding distribution of trust income. Despite the fact that the CBA summaries and two financial statements indicate distributions to beneficiaries, the applicant has maintained that there was distribution at the rate of 100 per cent to it in its own right. There are no documents which evidence any such determination being made by the Trustee.

188. Dr Bender also pointed out that some of the balance sheets of the Trust in evidence disclose undistributed income in one year, and then the following year's balance sheet disclosed that the undistributed income had been transferred to beneficiary loan accounts. However, as Dr Bender submitted, there was no evidence of any individual beneficiary having a present entitlement prior to the end of any income year by way of the loan accounts and the exercise of the Trustee's discretion. In fact, the Director said in cross-examination that the additional income alleged by the Commissioner was distributed to the applicant in its own right, and not the individual beneficiaries during the income years in question.

189. The applicant also claimed that the resolutions for the years in question provided that if any changes or adjustments were made to net income, the additional income would be distributed to the applicant in its own right. The Director referred to a less than convincing resolution dealing with an entirely different trust, the name of which had been crossed out, and the words Sample Only added.

190. There are a number of problems with this claim. The first is that there is no resolution in writing to the effect claimed by the applicant. The sample document is in any event dated 18 June 2004 and postdates the years in question. It is clearly a document which relates to an entirely different trust. While the document purports to distribute income in proportions, the names of individual beneficiaries and one corporate beneficiary are listed and the proportions are listed to be dollar amounts. It should be apparent that the words of the distribution clause are not followed in the subsequent list of beneficiaries and the dollar amount to be allocated to them. There is nothing in this evidence which could persuade me that any determinations regarding the distribution of Trust income were made in the 1993 - 1997 income years in accordance with the Trust Deed. I find that the applicant has not discharged its onus of proving that any beneficiary under the Trust Deed became presently entitled to a share of the income of the Trust estate in any of the 1993 - 1997 income years.

Income years 1998 - 2003

191. I had in evidence minutes of meetings whereby resolutions were made by the applicant and signed by the Director for each of the 1998 - 2003 income years indicating that the applicant, in its own right, was entitled to receive 100 per cent of the net income of the Trust Fund. The Commissioner accepts that the applicant in its own right, as a beneficiary under the Trust, was presently entitled to a share of the income of the Trust estate in each of the years in question. Therefore, it is assessable under s 97 of ITAA 1936.

192. Dr Bender pointed out that the Trust disclosed profits for the 1998 - 2000 years and therefore there was income which could be distributed in those years. The 2001 - 2003 year financial statements disclosed small net losses before the Commissioner made adjustments disallowing deductions. Dr Bender submitted there was a question as to whether the Trust had income in those years.

193. While Clause 4(2)(b) of the Trust Deed provides that if the net income from the Trust is insufficient to satisfy determinations to apply the net income for a general beneficiary, then to the extent of any deficiency, the Trustee is deemed to have applied the capital of the Trust, which of course is permitted under Clause 7(1) of the Trust Deed. However, that question does not arise in this case. The Commissioner disallowed a number of deductions for expenses in the 2001 - 2003 years because those expenses simply did not exist. That means the Trust should have had a positive net accounting income in those years. Therefore, as Dr Bender submitted, the applicant in its own right was presently entitled to the net accounting income for those years. I find that for the income years 1998 - 2003 inclusive, the applicant was correctly assessed on its additional income under s 97 of ITAA 1936.

Penalties

194. In the income years 1993 - 2000, the Commissioner imposed a penalty tax on the applicant under s 226J of ITAA 1936. Section 226J deals with penalties where a tax shortfall is caused by intentional disregard of the law. It provided:

"226J Penalty tax where shortfall caused by intentional disregard of law

Subject to this Part, if:

(a) a taxpayer has a tax shortfall for a year; and

(b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part."

195. The Commissioner also imposed penalties for the 2000 and 2001 income years pursuant to s 284-75(1) and Item 1 of s 284-90(1) of the Administration Act. Those sections provide:

" 284-75(1) You are liable to an administrative penalty if:

(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and

(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and

(c) you have a *shortfall amount as a result of the statement.

Note: Subsection 2(2) specifies laws that are not taxation laws for the purposes of this Subdivision.

and Item 1,

Base penalty amount
Item	In this situation:	The base penalty amount is:
1	Your shortfall amount or part of it resulted from intentional disregard of a taxation law by you or your agent	75% of your *shortfall amount or part"

196. Although Mr Broadfoot submitted that the Commissioner provided no particulars to support his finding of intentional disregard by the taxpayer or a registered tax agent, that submission is not entirely correct. At least insofar as the objection decisions for the income years 1993 - 1997 are concerned, the Commissioner first explained that he relied on paragraph 29 of Taxation Ruling TR2001/3 for determining that the Trustee should pay the penalty tax. He said that where there was an estate taxation statement causing an estate shortfall excess, and there had been culpable behaviour by a trustee, penalty tax was payable by the trustee. He then went on to say:

"In your circumstances, you knew the obligations under the ITAA but chose to intentionally disregard them by preparing two sets of income tax returns. The culpability penalty of 75% was a correct reflection of the behaviour of you as a trustee in this matter in accordance with paragraph 23, Taxation Ruling TR94/4."

197. Taxation Ruling TR94/4 explained in some detail what the Commissioner understood intentional disregard to mean and how it should be applied to taxation cases. There can hardly be any controversy about the ordinary meaning of the word intentional. The Commissioner stated that what is involved in intentional behaviour is the directing of the mind, having a purpose or design, and he referred to the case
R v Willmot [1985] 2 Qd R 413. The Commissioner concluded that a person who acts intentionally designs to bring about a state of affairs which the person has a reasonable prospect of being able to bring about, by the person's own act of volition.

198. The Commissioner also stated that a person's intention is a question of fact and it may be proved by direct evidence of a person's state of mind, for example, by making an admission. He also indicated that intention may be inferred from the circumstances and conduct of the person. This is, undoubtedly, more controversial. The Commissioner relied on the case
Lloyds Bank Ltd v Marcan [1973] 2 All ER 359 and stated:

"…a person is normally presumed to intend the natural consequences of his or her own acts
Lloyds Bank Ltd v Marcan [1973] 2 All ER 359 although such presumption may be rebutted by other evidence."

199. The Taxation Ruling then goes on to explain how the above principle should be applied in the taxation context. The Commissioner accepted that it would be more likely to need to be inferred from surrounding circumstances and conduct rather than direct evidence from the taxpayer. The Commissioner said:

"A taxpayer who does not include in his or her assessable income an amount of interest income may be suspected of having done so intentionally, but in the absence of an admission from the taxpayer that the omission was deliberate or conduct which might imply deliberate evasion, it would be difficult to judge that the taxpayer had intentionally excluded the amount from assessable income resulting in a 75% penalty being payable. On the other hand, if the interest omitted was from a bank account which the taxpayer had opened in a false name, this would be a circumstance which would infer that the taxpayer had acted intentionally."

200. The Commissioner in his Taxation Ruling also noted that for a taxpayer to intentionally disregard the ITAA or the regulations requires the taxpayer to know what their obligations under the ITAA or regulations were, and to choose to disregard them. Accepting for the moment that what the Commissioner has said about intentional disregard is correct; the taxpayer's knowledge would not cause a difficulty in this case. That is because ss 226J and 284-75 include intentional disregard by the taxpayer or by a registered tax agent. Given that the Principal Accountant was a registered tax agent and acted on behalf of the applicant, whether the taxpayer knew its obligations under the ITAA and regulations cannot be in doubt.

201. Included in the earlier notices of assessment and by separate notice in some of the later income years, the Commissioner assessed the applicant to be liable for substantial penalties. Whether included in a notice of assessment or issued separately as an assessment on penalty, the Commissioner's objection decisions for each of the income years included a decision on the assessed penalties. Section 175A of ITAA 1936 provides that a taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object to it in the manner set out in Part IVC of the Administration Act. In the later income years, the Commissioner made a penalty assessment under s 284-75 of the Administration Act. The applicant objected to those penalty assessments and the Commissioner provided an objection decision regarding them. Therefore, s 14ZZK of the Administration Act applies to all of the penalty assessments made by the Commissioner in the income years in question. The applicant has the burden of proving, on the balance of probabilities, that the assessment in each of those years was excessive.

202. Therefore, the onus is on the applicant in this case to prove, on the balance of probabilities, that there was no intentional disregard of the tax legislation by the applicant, either in its capacity as Trustee of the family trust or in its own right, or by its registered tax agent.

203. Mr Broadfoot referred to paragraphs 130 and 131 of the Director's statement of 9 February 2009. The Director said that he was conscious at all times of the need to comply with income tax obligations and that the applicant's accountants advised him:

• to keep records in accordance with ATO requirements;
• during audits to tell the truth and co-operate with the authorities including the ATO;
• insure the tax returns and other documents were prepared correctly to the best of his ability and that copies of documents be kept; and
• that he should lodge all tax returns and other documentation required by the due dates and pay all taxes by the due dates.

He also said he believed that all the information provided by the applicant to the ATO in the tax returns was accurate, subject to some comments and clerical errors to which he had previously referred. He expressly rejected the contention that the applicant had intentionally disregarded any of its obligations arising under the income tax legislation.

204. Putting aside for the moment that the evidence does not disclose compliance in accordance with what the applicant was advised by its accountants, Mr Broadfoot submitted that as a matter of procedural fairness, and in particular the application of the principle enunciated in the case
Browne v Dunn [1894] 6 R 67, because it was not put to the Director that he had intentionally failed to lodged the Trust's tax returns for the 1993 - 1997, and 1999 and 2000 income years, the Director's statements should be accepted on the penalties question. Mr Broadfoot in particular relied on this passage by Lord Herschell L.C., at 70:

"Now, my Lords, I cannot help saying that it seems to me to be absolutely essential to the proper conduct of a cause, where it is intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made, and not to take his evidence and pass it by as a matter altogether unchallenged, and then, when it is impossible for him to explain, as perhaps he might have been able to do if such questions had been put to him, the circumstances which it is suggested indicate that the story he tells ought not be believed, to argue that he is a witness unworthy of credit."

205. The first thing to note about the context in which Lord Herschell made the comments I have quoted above is that Browne brought an action against Dunn, a solicitor, for a liable contained in a document which Dunn had drawn up for the purpose of obtaining the authority of a number of persons who signed the document to take proceedings against Browne. At the trial, a number of those persons who signed the document gave evidence that they had genuinely engaged the services of the defendant. They were not cross-examined about that at all. Browne was successful and Dunn appealed to the Court of Appeal. The Court of Appeal set aside the verdict and entered judgement for Dunn. Browne then appealed to the House of Lords and on his appeal, argued that the document was a sham. Lord Herschell pointed out that when the witnesses who said they had signed the document gave evidence, no suggestion was made to them in cross-examination that they in fact did not consult Dunn nor had they given him instructions which resulted in them signing the document. Therefore, it would not be fair to impugn their evidence at a later time, when they did not have the opportunity to refute the imputation made about their evidence.

206. It should be reasonably clear that the circumstances in a proceeding before this Tribunal bear no resemblance at all to a trial before a jury. Furthermore, while I accept, unhesitatingly, the proposition that the so called rule in Browne and Dunn is, in effect, a principle regarding procedural fairness, I do not accept that the so called rule can be applied in the circumstances of this case. That is because, for the income years 1993 - 1997, in the objection decisions relating to the assessments for those years, the Commissioner expressly stated that an administrative penalty at the rate 75 per cent under s 226J of ITAA 1936 would be applied for intentional disregard of taxation law. In the income years 1998 - 2002 the Commissioner, writing to the Director, said:

"In this circumstance, you, in the capacity of the corporate trustee, knew the obligations under the ITAA but chose to intentionally disregard them. You also prepared two sets of income tax returns. The culpability penalty of 75% was a correct reflexion of your behaviour as trustee in this matter."

207. Section 14ZZK of the Administration Act provides that the onus of proving that the assessment was excessive must be borne by the taxpayer. Therefore, having been made aware of precisely the grounds upon which the penalty assessments had been made, on review before this Tribunal, the applicant bears the onus of proving that it did not intentionally disregard any taxation law. The matters set out in paragraphs 130 and 131 of the applicant Director's statement simply state that the applicant was told what it should do in order to comply with taxation laws and that the Director believed that it did so. The problem is that even if the statements made by the applicant's Director were true, by themselves, they are insufficient to satisfy the requirements of discharging the onus of proving that the assessments were excessive. The statement by the taxpayer is simply an opinion and, furthermore, no basis is stated or provided for the opinion said to be held. As Deputy President S A Forgie said in
Re Kumar v Minister for Immigration and Citizenship (2009) 107 ALD 178, at 202:

"Relevance and probity limit the scope of evidentiary material. The rules of procedural fairness do not. They limit only the process that must be followed before relevant and probative material may be relied upon."

208. Mr Broadfoot also referred to the New South Wales Supreme Court decision in
Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation 83 ATC 4015; (1983) 44 ALR 607. Being a tax case, there was of course an onus on the taxpayer to prove that the assessment was excessive. The Court (Hunt J) dealt with the obligation to cross examine and the principle enunciated in Browne and Dunn. After explaining the decision of the House of Lords in some detail, his Honour pointed to this very important fact, at 624:

"His Lordship conceded that there was no obligation to raise such a matter in cross-examination in circumstances where it is 'perfectly clear that (the witness) has had full notice beforehand that there is an intention to impeach the credibility of the story which he is telling'. His speech continued (at 71): 'All I am saying is that it will not do to impeach the credibility of a witness upon a matter on which he has not had any opportunity of giving an explanation by reason of their having been no suggestion whatever in the course of the case that his story is not accepted.'"

209. I have already indicated that paragraphs 130 and 131 simply contain statements about what the applicant's Director was told by the accountants and his belief that the tax returns prepared by the applicant were correct, and that he rejected the allegation that the applicant had intentionally disregarded its obligations arising under the income tax legislation. No doubt the reason for making the statements in paragraph 131 was that the Director wished to refute the allegation of intentional disregard. Therefore, given the added overlay of an onus to prove that the assessment was excessive, the fact that the Commissioner disbelieved the statements the Director had made, in my opinion, makes it clear that it was unnecessary to cross-examine the Director specifically about the veracity of any statements which may have been relevant in paragraph 130 and 131 of his witness statement. Rather, the Director needed to discharge the onus in s 14ZZK of the Administration Act by providing objective evidence to support the opinions and belief set out in his witness statement. He was well and truly aware of the need to do so in order to discharge the onus of proof and yet, despite that, neither the Director, the Principal Accountant nor the employee accountant brought forward any fresh evidence which would cast a different light on the claims by the applicant that the tax returns prepared but not lodged with the Commissioner and not provided to the CBA, should simply be accepted as being true and correct. In this case, all of the documents ultimately relied on by the Commissioner were available to the applicant prior to commencement of the hearing. Therefore, the applicant has had ample opportunity to address any material which would support its claim that there was no intentional disregard of any taxation legislation. As Hunt J said in Allied Pastoral Holdings at 630:

"But at some stage during the course of the evidence, the witness must be given a proper opportunity to deal with the material to be relied upon for the challenge."

210. Dr Bender submitted that in this case, intentional disregard for the income tax legislation must necessarily be inferred from the facts and surrounding circumstances of this case. In particular, Dr Bender submitted that the Commissioner relied on these facts:

(a) the Director, his wife, and the sister of the Director managed and ran the supermarket business, were beneficiaries of the trust and therefore it should be inferred that they knew the trust had understated its income;
(b) the applicant understated its income by not returning trust distributions. The Director was a director and shareholder of the trustee and he signed the minutes of meetings for trust distributions for the 1998 to 2003 income years and therefore it should be inferred that he would have been aware of the understatements;
(c) the Director provided the letter to the CBA highlighting his awareness that the supermarket business was profitable;
(d) different versions of tax returns were prepared for the bank and the ATO. The tax returns sent to the CBA disclosed profits but the ATO versions showed losses for the trust;
(e) the trust's income was understated over the period in dispute. Deductions were also incorrectly or improperly claimed. The Principal Accountant, who was also a registered tax agent and the tax agent of the applicant falsely claimed deductions for superannuation contributions in respect of people who he knew were not employees of the trust; and
(f) false statements were made to the Commissioner that returns for the trust in some income years were lodged when in fact they were not.

211. I have found that each of these matters listed above relied on by the Commissioner to draw an inference that the applicant through its directors and agents intentionally disregarded the taxation laws is true. In fact, in the course of oral evidence, the employee accountant said that the materials sent to financial institutions, and in particular the CBA, were false and deceptive. As Dr Bender submitted, none of this was stated in any of the witness statements admitted in support of the applicant's claim. In fact, those statements sought to give the Tribunal quite a different impression.

212. In the course of oral evidence, the applicant's witnesses maintained that the financial statements and tax returns were not final or complete, despite the fact that on at least one of those documents the word final appeared in handwriting. Until the admissions were made about deliberately falsifying documents provided to the CBA, the evidence about those documents was simply that they were not final or complete and adjustments were required to be made. Of course the evidence altered significantly during cross-examination.

213. It should come as no surprise to the applicant that I find its evidence in relation to all of its financial statements and tax returns which were in evidence, whether lodged with the Commissioner or otherwise, simply cannot be relied upon to be accurate. There was no further objective evidence to support either the altered statements made by the witnesses in the course of the hearing or which would lead me to the conclusion that tax returns prepared for the purpose of lodging with the ATO were correct. The applicant has not discharged its onus of proof in that regard.

214. The consequence of the applicant bearing the onus of proof under s 14ZZK of the Administration Act is, as Stone J said in
Nozzi Pty Ltd v Federal Commissioner of Taxation (2003) 52 ATR 521 at 525:

"[12] One consequence of the applicants having the burden of proof is that, if they wish to show that the penalty under s 226J should not have been imposed, it is for them to prove that there was no intentional disregard of the ITAA 1936 and the regulations. It is not for the respondent to defend his decision. …"

215. Accordingly, I find that the penalties imposed by the Commissioner on the tax shortfall in each of the income years in question at the rate of 75 per cent were correct.

Remission

216. Dr Bender submitted that there was no basis for any remission of the penalty pursuant to s 227 of ITAA 1936 or s 298-20 of the Administration Act. As Emmett J said in
Brown v Federal Commissioner of Taxation 2001 ATC 4294; (2001) 47 ATR 178 at 180:

"(4) In order to waive or reduce further the penalty tax pursuant to the power of remission in s 227, the Commissioner needed to be satisfied that the taxpayer did not intend to deceive the Commissioner or did not intentionally make a false or misleading statement. Having found that the taxpayer's claim that the benefits were partnership income was untenable, it was open to the Commissioner to conclude that the taxpayer had intended to make a false statement."

217. Having found that the taxpayer intended to deceive the Commissioner and that either or both the applicant and its tax agent made false and misleading statements, there is no basis for any remission of the penalty tax assessments.

Conclusion

218. Although the applicant submitted I should find that it had not understated its income for the years 1993 - 2000, the objective evidence does not permit such a finding on the balance of probabilities. In fact, the documentary and oral evidence presented by the applicant in support of its contentions in this case was wholly unsatisfactory. It was contradictory, vague and at times, implausible. The families involved in the business of the Trustee took goods and received benefits from the business which were either not recorded in its accounts or not accurately recorded.

219. Although the applicant contended that I should accept the accuracy of financial statements and tax returns said to have been prepared for tax purposes, the objective evidence strongly pointed to the fact that I should not. That is because the employee accountant eventually admitted that the financial statements provided to banks were deliberately false and deceptive. This is despite the fact that prior to the hearing, the contentions of the applicant and witness statements lodged with the Tribunal stated that financial statements provided to the banks were incomplete and not final, needing adjustments. It was also stated that they had been prepared on a different basis. Given that evidence, it is simply impossible to determine which financial statements are correct and which are not. Although these records were made by an accounting firm which was a registered tax agent, the computer records of journal entries and the like were almost entirely absent.

220. The accountants also claimed that tax returns were lodged with the ATO for the income years 1993, 1994, 1996, 1997, 1999 and 2000 although the applicant was unable to prove that was the case. The Commissioner has no record of these returns being lodged. In the absence of objective evidence of lodgement, I have found the applicant failed to discharge the onus of proving lodgement.

221. The Commissioner disallowed a number of claimed deductions for the income years 2001 - 2003 relating to superannuation payments said to have been made to employees and various other expenses. I have found that the Commissioner was correct in disallowing those deductions. That is because I have found that the so called employees, who were all family members, were not employees for the purposes of s 82AAC of ITAA 1936. As for the other expenses, there were either obvious errors in the accounts or there was no evidence that the expenses were in fact incurred as claimed.

222. I have found that the applicant was correctly assessed under s 99A of the ITAA 1936 for the income years 1993 - 1997, and under s 97(1) of the ITAA 1936 for the income years 1998 - 2003. That is because I have found that no beneficiary was presently entitled to income of the trust in any of the first group of income years and that the applicant, in its own right as a beneficiary of the Trust, was so entitled in each of the second group of income years.

223. I have found that the applicant was liable for tax penalties at 75 per cent because there was an intentional disregard of the taxation laws. I am not able to find any sound reason why penalty tax should be remitted in this case.

224. I find that the objection decisions made by the Commissioner on 6 September 2007, 20 August 2007 and 7 July 2010 were correct and I affirm those decisions.

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