Case Q70

Judges:
HP Stevens Ch
BR Pape M
TJ McCarthy M

Court:
No. 1 Board of Review

Judgment date: 5 August 1983.

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H.P. Stevens (Chairman)

This reference relates to a net loss of $748,671 incurred by a partnership (to the extent of $747,500 by virtue of prepayment of interest), a claim by a partner for a deduction in respect of his share of the net loss of the partnership, the disallowance of that claim and the imposition of additional tax in terms of sec. 226(2) by the Commissioner.

2. A return of income for the year ended 30 June 1978 dated 25 August 1978 was lodged on behalf of the partnership and there was attached thereto copy documents which purported to be copies of:

• (a) deed of partnership of 26 January 1978 (no partner signed individually but all via an attorney);
• (b) loan agreement for $1m (again signed for all parties by an attorney);
• (c) deed of trust (seemingly dated 20 April 1978);
• (d) letter 28 January 1978 requiring payment of sixty-five months' interest;
• (e) offer to assign principal sum of $1m for $320,000 dated 30 January 1978;
• (f) acknowledgement of debt of $747,000 (on 31 January 1978 to pay interest) dated 1 February 1978.

The income and expenditure statement showed a net loss of $748,671 but an adjustment sheet adjusted the net income to nil.

3. The taxpayer in his return for the 1978 year dated 23 February 1979 claimed a deduction in respect of his share of the net loss, viz. $31,669 but on assessment, this was disallowed and additional tax of 50% imposed (i.e. statutory 200% remitted by 75%). An objection of some 153 grounds followed claiming, inter alia, that the $31,669 was allowable and that, in any event, there was no authority for the imposition of the additional tax and that, alternatively, the additional tax should be further remitted. Upon disallowance of the objection a request for reference followed and the Commissioner's statement in terms of reg. 35(1) which accompanied the papers referred to the Board was, inter alia, in the following terms:

• (a)... the net loss of $748,671... was correctly adjusted to nil in that -
  • (i) the amount of $18,634... is not income in terms of sec. 25(1); and
  • (ii) claims for deductions totalling $767,305 are not allowable under sec. 51(1) because -

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    ATC 355

    • • the outgoings were not incurred in gaining or producing assessable income nor necessarily incurred in the course of carrying on a business for that purpose;
    • • alternatively, the outgoings were in the nature of outgoings of capital;
    • • alternatively, having regard to the purpose and commercial effect of the transactions giving rise to the claims, the relevant transactions are, for fiscal purposes, a nullity with the consequence that no deductions are allowable;
    • • alternatively, the arrangements giving effect to the claims did not have, and were not intended to have, the legal consequences apparent from the face of the documents with the result that those arrangements amounted to a sham;
    • • alternatively, one or more of the transactions giving rise to the claims for deductions was void as against the Commissioner having regard to the operation of sec. 260.
• (b) That, as a consequence, the loss of $31,669 claimed by the taxpayer as his individual interest in the net loss returned by the above-mentioned partnership for the year ended 30 June 1978 was correctly adjusted to nil being his individual interest in the net income of the partnership for that year of income in accordance with the provisions of sec. 92.
• (c) The taxpayer claimed a deduction for his individual interest in a partnership loss under sec. 92(2). As that loss was caused by claims for deductions in respect of expenditure incurred of amounts in excess of expenditure actually incurred by the partnership, the taxpayer therefore became liable to pay as additional tax, in terms of sec. 226(2), an amount equal to double the difference between the tax properly payable and the tax payable on the basis of the return furnished. The Commissioner remitted three-quarters of the additional tax under sec. 226(3) and the circumstances do not warrant any further remission.

4. At the hearing of the reference no oral evidence was called. Counsel for the taxpayer tendered the formal papers referred to the Board - containing the copies of purported documents - took the Board through the papers and, in closing his evidence said:

``... it is only in relation to the question of penalty tax that the taxpayer desires to make any submissions.

I should make it clear however that this does not mean that the taxpayer abandons his claim in respect of the partnership loss, but no submissions will be made or evidence adduced other than the Commissioner's file in relation to it, and the claim is therefore in the hands of the Board.''

No evidence was called on behalf of the Commissioner.

5. In address counsel for the taxpayer said it was obvious that:

``so far as the claim for a deduction for the partnership loss is concerned, the taxpayer's advisers must have concluded... that the taxpayer's prospects of success were minimal and that the cost of adducing evidence... would not be warranted by the prospects of success.''

Also in view of the decisions in Case P120, 82 ATC 604 and Case P121, 82 ATC 611:

``it was reasonable for the taxpayer's advisers to be fairly confident about his prospects in relation to the question of penalty without adducing any evidence... and without adducing any evidence as part of the evidence which might be led in support of the submission that the tax should have been further remitted.''

Thus the reason for the failure was purely an economic one and counsel asked ``the Board not to draw the adverse inferences which it might otherwise have drawn from the failure to call the witnesses and the additional evidence.''

6. Counsel in address also referred to the fact ``that no attempt has been made by the Commissioner's representative to impugn so much of the arrangement as may be inferred from the returns lodged by the taxpayer and the partnership''. Whilst appreciating that the taxpayer had the burden of proof he submitted:

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ATC 356

``that where the material on the Commissioner's file is not shown to be inaccurate or otherwise attacked by the Commissioner, that this is a burden which may be satisfied merely from the statements which appear in the relevant returns and the necessary inferences which may be drawn from them.''

7. I am unable to accept the submission relating to the burden of proof and, in relation to the claim for the partnership loss (I will deal with the additional tax issue separately), I am of the clear view that the taxpayer has not discharged the onus placed on him by sec. 190(b). There is no evidence before the Board establishing the validity of the documents forwarded to the Commissioner (and subsequently part of the Commissioner's file before the Board), nor the circumstances giving rise thereto, or to establish that what was purported to have occurred ever did in fact occur. The taxpayer had been put on notice by the Commissioner's reg. 35(1) statement that he considered, inter alia, that a ``sham'' was involved and there was no necessity for the Commissioner to lead evidence to impugn what was shown in the documents in the Commissioner's file. No ``evidentiary'' onus ever arose for the Commissioner to displace (or attempt to displace).

8. Turning to the additional tax question I am prepared to accept that the papers before the Board establish that there was a claim for a share of a partnership loss, the disallowance of such claim and the imposition of additional tax in relation to such claim and to deal with the question on that basis.

9. In relation to the issue of whether sec. 226(2) applies I am not able to yield to the supplication of senior counsel for the Commissioner that I should repent and reject the views expressed by me in Cases P120 and P121. It is sufficient to indicate that I adhere to the view set out therein and would, therefore, allow the taxpayer's objection on this issue.

10. On the issue of whether, if I be wrong in the above view, I would further remit the additional tax imposed by sec. 226(2), the submissions advanced on behalf of the taxpayer were basically the same as those set out in Case P121, p. 616, para. 17 (substituting prepaid interest or Ilbery for Curran ) and I can see no reason to depart from what I said in para. 18 of my reasons in that case. I should add that in that case the taxpayer did give evidence whereas here he did not and, to that extent, I would regard this as a stronger case in which to be unable to conclude that any further remission should be granted.

11. For the above reasons I would allow the taxpayer's objection in relation to the imposition of additional tax in terms of sec. 226(2) but would otherwise confirm his assessment for the year ended 30 June 1978.