Federal Commissioner of Taxation v. Raptis

Gummow J

Federal Court

Judgment date: Judgment handed down 21 September 1989.

Gummow J.

This matter is an appeal pursuant to sec. 44 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'') from a decision of the Administrative Appeals Tribunal (``the Tribunal''). For the year ended 30 June 1983, the respondent (``the taxpayer'') lodged a return of income showing a net taxable income of $14,764. He was assessed to income tax on that amount. However, on 15 October 1986, the applicant (``the Commissioner'') issued an amended assessment under the Income Tax Assessment Act 1936 (``the Tax Act'') by which the taxable income was increased by $380,000 and additional tax was charged, together with penalties, amounting to $336,790. The taxpayer unsuccessfully objected to the amended assessment.

However, by decision given 7 March 1989, the Tribunal set aside the decision of the Commissioner upon that objection, and reduced to nil the amended assessment. In the circumstances, the Tribunal did not find it necessary to consider whether or not the penalties included in the amended assessment were appropriate. The whole of the amended assessment was set aside. Both parties were represented before the Tribunal by senior counsel.

The ``appeal''from the Tribunal to this Court must be solely ``on a question of law'': AAT Act, subsec. 44(1). There is no error of law simply in making a wrong finding of fact:
Waterford v. The Commonwealth (1987) 163 C.L.R. 54 at p. 77 per Brennan J. But the Tribunal will have made an error of law if there was no evidence to support a conclusion of fact, if the only true conclusion which the Tribunal, properly instructed as to law, could have reached is contrary to that it did reach, or if its decision otherwise was perverse:
Lombardo v. F.C. of T. 79 ATC 4542 at p.4544; (1979) 40 F.L.R. 208 at p. 210;
Ditchfield v. Sharp (1983) 3 All E.R. 681 at p. 685;
F.C. of T. v. Dunn 89 ATC 4141 at p. 4144.

In his Amended Notice of Appeal, the Commissioner states the questions of law raised on the appeal to be:

``1. Whether in the circumstances the amount of $380,000 constituted assessable income of the respondent under section 25(1) of the Income Tax Assessment Act 1936 (`the Act').

2. Whether there was any or sufficient evidence before the Tribunal from which the conclusion could properly be drawn that the amount of $380,000 was not income of the respondent in terms of section 25(1) of the Act.

3. Whether it was open to the Tribunal on the evidence before it to decide that the respondent had established the amended assessment was excessive.''

Counsel for the taxpayer objected to the competency of the proceeding framed in this way. He submitted that, at best, of the three questions stated above, only the second might possibly be considered to raise a question of law; further, he submitted, the second question would raise a question of law only if it was re-drawn so as to assert there was no evidence before the Tribunal from which the conclusion in question might properly be drawn.

In the course of his submissions, counsel for the Commissioner referred to sec. 190 of the Tax Act, and to the subject of onus of proof. In that regard, I should refer to what was said by Gibbs J. in
McCormack v. F.C. of T. 79 ATC 4111 at p. 4121; (1979) 143 C.L.R. 284 at p. 303. That was a case involving what was then sec. 26(a) of the Tax Act. His Honour said:

``The taxpayer bears the burden of proving that the assessment was excessive. To discharge that burden in a case such as the present he must prove affirmatively, on the balance of probabilities, that the property was not acquired for the purpose of profit-making by sale. The burden may be discharged by drawing inferences from the evidence... 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.''

In some of the submissions for the Commissioner to this Court, in which criticisms were directed as to the decision of the Tribunal on matters of fact, there was an insufficient appreciation that the burden of the taxpayer might be discharged by drawing proper inferences from the evidence accepted by the Tribunal.

It became apparent, as the argument proceeded, that the objection by the taxpayer as

ATC 4997

to the competency of the proceedings in this Court could be determined satisfactorily only by a degree of examination of the materials approximating to the examination which would be required if the proceeding was to be treated as competent and to be finally determined. Accordingly, I indicated that I would proceed to deal with the whole of the matter and deliver appropriate reasons for judgment.

The taxpayer gave evidence before the Tribunal and was cross-examined. Crucial to the decision of the Tribunal was its finding as to the credit of the taxpayer. That finding was not challenged before me. Paragraph 22 of the Tribunal's reasons for decision is in the following terms:

``22. Attacks were made on [the taxpayer's] credit. Even on his own account of events, he caused his company to conceal assets from its secured creditor while it was in default. He caused a series of bank accounts to be opened in fictitious names. He arranged for payment of trade creditors without regard to insolvency rules. I was invited to infer from this commercially reprehensible conduct that [the taxpayer's] word could therefore not be accepted on any relevant matter. I declined to draw that inference. Having observed [the taxpayer], I am prepared to accept his version of events as the truth, as he sees it. He gave his evidence freely and frankly. No attempt was made to deny the improprieties of his conduct. His responses were open and straight forward. Indeed, his evidence was not really challenged at all. No oral evidence was called by [the Commissioner]. There is no reason, in my view, why his account of the facts should not be accepted.''

Before the Court, counsel for the taxpayer submitted that this was a clear finding as to the credit of the taxpayer, that the taxpayer's evidence as to what transpired was vital, and that from that evidence it was open to the Tribunal properly to conclude, as it did conclude, that the amount in question was not income of the taxpayer. It followed, in the submissions of counsel for the taxpayer, that what the Commissioner was endeavouring to do was to have the Court embark upon a challenge as to findings of fact and that there was disclosed no question of law, within the meaning of subsec. 44(1) of the AAT Act. I accept these submissions. I turn to give my reasons for so doing.

At all material times, the taxpayer was a principal shareholder in, a director of, and ``the chief executive officer'' of a number of companies engaged in the construction and sale of strata title home units in the Gold Coast area of the State of Queensland. In 1979, companies in the applicant's group were engaged in the construction and sale of two buildings each containing 90 home units. Before all these units had been sold, one member of the group, Calliandra Pty. Limited (``Calliandra''), embarked on a project for the erection of a third building, this to contain 125 home units. The cost of the land was approximately $5.5 million and the estimated building cost was between $12 and $14 million. This was the biggest project with which the taxpayer had been concerned up to that time. The first two projects had been financed by Seventeen Pty. Limited (``Seventeen'') a related company of Consolidated Press Holdings Limited.

There was a slow rate in the sale of the units in the first two projects and for some time there was some doubt as to whether the third project should proceed. However, finance was provided by Seventeen pursuant to an agreement dated 30 November 1981; there was to be a first mortgage over the real estate, and personal guarantees from the directors of Calliandra including the taxpayer. The building work was carried out by another company, Unit Trend Constructions Pty. Limited (``Unit Trend''). The new building project was to be known as ``Aegean''. Only one of the companies in the taxpayer's group of companies had a bank account, Raptis Developments Pty. Limited, and the banking for all members of the group was done by the medium of this account. Unit Trend was a creditor of Calliandra. It was also a creditor of the two other companies in the taxpayer's group, in respect of the two earlier projects. Unit Trend had no source to pay its sub-contractors for construction of the Aegean project, other than the funds it obtained from Calliandra or the financiers of Calliandra.

In the past, it had been the practice not to commence selling home units until the buildings in question were nearing completion. This meant that a purchaser was required to find the balance of purchase money within a fairly short time, and resulted in a clientele of

ATC 4998

long term investors or owner/occupiers. However, it was decided to start selling the Aegean project from plan some 12 to 15 months before the estimated time of completion. This marketing strategy attracted a different type of buyer and, in particular, was attractive to speculators who wished to pay only a proportion of the purchase price, and who would not be called on to pay the balance until some considerable time later. On this basis, sales occurred between January and March 1982. On a number of occasions, the taxpayer was approached by agents on behalf of the particular buyers who, for reasons of their own, wished to purchase home units at a stated price which was less than the list price; but so that the vendor would not be out of pocket, the purchasers were prepared to ``top up'' the difference between the contract price and the list price with a payment in cash. When the taxpayer had given his concurrence, the agent would arrange for the signing and exchange of contracts, payment of a deposit of 10% of the contract price, and the contracts would be brought to the taxpayer together with a sum of cash representing the ``top up''. On some occasions, the taxpayer also was approached personally with proposals of this nature.

The taxpayer was unable to remember how many parcels of cash he received, or from how many people he had received them. Nor could the taxpayer recall any particular occasion or the name of any particular agent or employee of an agent who had approached him. No receipt was issued for any parcel of cash paid to the taxpayer, and no contemporaneous entry was made in any of the books of Calliandra; nor was there any correspondence in relation to any of these parcels of cash. Nor was there any clear explanation, on the evidence, as to the manner of payment of the agent's commission.

In mid-1982, the market for home units on the Gold Coast took a turn for the worse, and it became more difficult to effect sales. Calliandra began to incur large trading losses and fell into default under its arrangements with Seventeen. There were meetings between the taxpayer and officers of Seventeen and related corporations. The taxpayer believed he was being treated unfairly because he regarded his position as that of a joint venturer, rather than a mere borrower. In addition to the pressure exerted from his financier, the taxpayer felt a responsibility for the tradesmen and sub-contractors of Unit Trend, who were being kept out of their money.

The taxpayer decided to conceal from Seventeen the sums of cash which he had received. At first, the moneys in question were kept in a safe in premises occupied by Calliandra; later, they were kept in a safe at the applicant's dwelling. By October 1982, the taxpayer had decided that the money was at risk, that his financier was likely to seize it, and that the trade creditors would continue to go unpaid. He decided to bank the moneys, but not on the Gold Coast. He travelled to Sydney where he handed the money to one of his brothers with instructions to open accounts in fictitious names and deposit the moneys. This was done. Further moneys were paid into these accounts and on 4 July 1983 they contained a total of $380,000 (the same amount as that in the amended assessment issued 15 October 1986, the subject of these proceedings).

The Commissioner became aware of the existence of these moneys, and on 17 July 1983 issued purported assessments against two fictitious persons, being the account holders. The assessments purported to be made under sec. 167 of the Tax Act, and stated an undisclosed income of approximately $681,430; this sum yielded an assessment to income tax of $380,000, namely the amount in the accounts. Notices were then issued under sec. 218 of the Tax Act, and possession was taken of the moneys. Representations were made to the Commissioner, and on 15 August 1983 an amended assessment was issued against the taxpayer's brother. He objected to the amended assessments and what follows is outlined in a decision of the Tribunal dated 15 August 1986, reported as Case T67 in
86 ATC 1005.

It was agreed on the hearing of the present matter before the Tribunal that in so far as the findings of fact by the Tribunal in the earlier decision had a bearing on the circumstances of the present matter, those findings were accepted by both parties.

The 1986 decision was substantially in favour of the taxpayer's brother, although the Tribunal declined to reduce the assessment to nil. On 18 December 1986, the Commissioner issued an amended assessment to the brother of the taxpayer. This had the effect of reducing the income tax payable. Further, from the

ATC 4999

moneys which the Commissioner had seized, a refund of $105,302.40 was made, together with interest of $21,486. The sum of $380,000 was taken up and disclosed as an ``investment''(one might think of a special kind) in Calliandra's tax return for the year ended 30 June 1983. In the return for the 1985 tax year, the investment was shown as having been written off at some time between 1 July 1984 and 30 June 1985.

On 15 October 1986, the present amended assessment was issued to the taxpayer.

The differences with Seventeen eventually were settled; a final deed was entered into on 17 August 1983. No mention was made in the documentation of any of the sums of cash handed to the taxpayer in connection with the sale of home units by Calliandra. In his oral evidence before the Tribunal, the taxpayer agreed that the existence of those sums and of the bank accounts had not been disclosed to Seventeen. He said that there were two principal reasons for this. First, to ensure that the financier did not take possession of the cash and so remove it from ``the system'', and secondly to ensure that the money could be used in due course to pay tradesmen and sub-contractors who were not direct creditors of Calliandra. The taxpayer also agreed that it was possible that some of the moneys he had received had related to home units which were part of the first and second projects, although he doubted this. His recollection was that the money was received principally from the speculators who constituted the typical purchasers of units in the Aegean project.

The Tribunal accepted the evidence of the taxpayer that the moneys were handed to him as chief executive of Calliandra, and that at no time were they his own personal moneys. The taxpayer's case before the Tribunal was that title passed to Calliandra as soon as those moneys were received by the taxpayer. Therefore, the taxpayer submitted and the Tribunal accepted, no part of the $380,000 could be described as income derived by the taxpayer. It is in regard to this finding that the general finding as to the credit of the taxpayer is crucial. I have already set out the terms of para. 22 of the Tribunal's decision in which this finding as to credit is contained.

Counsel for the Commissioner submitted that if it had properly applied the onus required by sec. 190(b) of the Tax Act, the Tribunal could not have inferred that these moneys belonged at any relevant time to Calliandra. The reasons of the Tribunal (para. 28) show that it was well aware of the onus borne by the taxpayer. The Tribunal's decision, in terms, was that the taxpayer ``has clearly discharged that onus'' and that he had demonstrated, on the balance of probabilities, that he did not derive the amount in question as income. The Commissioner's first submission to the Court in essence is that the Tribunal made a wrong finding of fact when it accepted the evidence of the taxpayer as to the nature of the receipt of the moneys. That submission does not present a question of law.

The second submission for the Commissioner was that, assuming it was open to find that when the taxpayer received the moneys they were the moneys of Calliandra, the only inference open, properly applying the onus of proof, was that the taxpayer had treated the moneys as his funds which he might expend as he thought fit to meet the liabilities of members of his group of companies, not limited to the liabilities of Calliandra. From this it was said to follow that the taxpayer had not shown that the moneys in question were not appropriated by him, such as to render them his income.

This is not how the case was put before the Tribunal. There must be some difficulty in such circumstances in finding an ``error of law'' in the failure in the Tribunal to make a finding first urged in this Court. What was put to the Tribunal was the taxpayer had systematically defrauded Calliandra and Seventeen to his personal enrichment. This the taxpayer denied in his cross-examination.

Some of the moneys accumulated before the Commissioner's seizure of the $380,000 in July 1983, were used to pay debts owed by another company in the taxpayer's group of companies, Illesso Pty. Limited. It owed moneys to Unit Trend in respect of another project. But this activity is consistent with the moneys having been received initially as Calliandra's and disposed of in this way as Calliandra's, not the money of the taxpayer. The taxpayer was the chief executive officer of both companies.

In any event, (a) the contrary construction of events, that now contended for, was not put to the Tribunal, as appears from the summary of the Commissioner's submissions in para. 24-27

ATC 5000

of the Tribunal's reasons; (b) the submission, if otherwise open, is met by the Tribunal's acceptance of the taxpayer's evidence that the moneys were handed to him as chief executive of Calliandra and that at no time were they his personal moneys. The result was that the title to the moneys passed to Calliandra as soon as the taxpayer received it.

In my view, no error of law by the Tribunal has been demonstrated. I dismiss the appeal. The Commissioner is to pay the costs of the taxpayer.

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