Hill J

Federal Court

Judgment date: Judgment handed down 23 December 1992

Hill J

Before the Court are appeals brought by the applicant, Mr Jean Pierre Allard, against objection decisions made by the Commissioner of Taxation in relation to six years of income, being the years of income 30 June 1982 to 1987 inclusive.

The assessments for the years ended 30 June 1982 to 1987 inclusive were made on 9 December 1987. The 1986 and 1987 assessments were subsequently amended, the former in an immaterial way, the latter in circumstances to which I will return. Mr Allard had, at the date these original assessments were made, never lodged an income tax return since his arrival in Australia in 1958. He came to the attention of the Commissioner in November 1987, as a result of representations made by the Director of Public Prosecutions. Mr Allard had been twice arrested on narcotic offences in 1985. The first occasion was on 22 August in that year and the second on 8 October in that year. He was committed for trial on each of these offences and at the time the assessments were issued he was on bail awaiting trial. It seems that the Commissioner was advised, by the Director of Public Prosecutions, that Mr Allard derived income from the operation of brothels and was suspected also of deriving income from narcotics. It was feared that Mr Allard was in the course of realising his assets and that he would seek to dissipate the proceeds. In those circumstances, the Commissioner formed the view that full enquiries could not be made into Mr Allard's income without alerting him to the fact that he was under investigation and perhaps provoking him into dissipating his assets. Accordingly, the Commissioner sought to estimate the taxable income of Mr Allard for each of the years.

It should be noted here that Mr Allard had relevantly two major rent producing assets. The first was a property at 398-402 Moore Park Road, Paddington, comprising three adjoining terraces, built at the turn of the century and which had been converted into 30 bedsitters. The Paddington property was purchased by Mr Allard on 20 May 1978, the purchase being funded from borrowings. In addition, Mr Allard and two other persons owned the freehold of the Holyrood Hotel, a building near the corner of William and Palmer Streets in the city. The purchase of that hotel had also been funded by mortgages. On the premises Mr Allard operated what one might describe as a boarding house and it was not in dispute by him that the total income and outgoings of the Holyrood Hotel were to his account and were not derived by or the responsibility of his co-owners.

The ground floor of the Holyrood Hotel comprised a lounge/office, a kitchen and an

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amenity room consisting of two shower rooms and a toilet, and seven bedrooms approximately two metres width and three metres in length. The remaining three floors were of similar configuration, with a staircase, ten bedrooms on each floor, each bedroom being of the same dimensions as those on the ground floor, and an amenities block. In addition, there was a roof terrace where there was a small apartment which had been occupied by caretakers in the previous ownership. Initially, the Holyrood Hotel had been an all male residential boarding house, but it was not in dispute that from about the beginning of 1985 and at least continuing until 8 October in that year, the ground floor was used by prostitutes. What was in dispute was the nature of the arrangement between Mr Allard and the prostitutes.

The Commissioner, from the information in his possession, took the view that Mr Allard had derived income from renting out the Moore Park Road property. He made an assessment of the rents derived in the relevant years based upon information concerning rentals of a neighbouring property. The Commissioner also took the view that the Holyrood Hotel had been used by Mr Allard for the purpose of conducting a business of prostitution. By reference to information in his files, the Commissioner sought to determine what the return from prostitution would be for the Holyrood Hotel in the 1987 tax year, on the assumption that Mr Allard paid outgoings and half of the income from prostitution was paid by him to the girls who were thought to work for him. The further premise upon which the calculation was made was that 30 of the rooms in the Holyrood Hotel were occupied by prostitutes for one shift each night. The figure arrived at for the 1987 year was then discounted by 10 percent per annum to determine the income both from prostitution and rental in preceding years. As the Holyrood Hotel had been resumed by the Department of Main Roads and possession taken of it during the 1987 year, the income for that year from prostitution was reduced to allow for the resumption. No attempt was made to include in any estimate any income from the sale of narcotics. In the result, a calculation was arrived at of Mr Allard's taxable income as follows:

|           |    1982  |    1983  |    1984  |    1985  |    1986  |    1987 |
|           |     ($)  |     ($)  |     ($)  |     ($)  |     ($)  |     ($) |
| Rent      |    21,154|    23,504|    26,116|    29,018|    32,242|   35,825|
| Prostitu- |          |          |          |          |          |         |
| tion      |   242,100|   269,001|   298,890|    32,100|   369,000|  205,000|
| Totals    |   263,254|   292,505|   325,006|   361,118|   401,242|  240,825|

Assessments were raised accordingly, with additional tax at the rate of 50 percent. These assessments then supported notices issued by the Commissioner under s. 218 of Income Tax Assessment Act 1936 (``the Act'') to Mr Allard's bankers, and to the Department of Main Roads in respect of the moneys due to Mr Allard for compensation for the resumption of the Holyrood Hotel, as well as instructions to the Australian Government Solicitor to obtain a Mareva injunction against Mr Allard.

In the meantime Mr Allard had instructed his accountant to prepare income tax returns to take advantage of an amnesty from penalty which had been announced by the Commissioner of Taxation. The returns as lodged for the years in question showed the following results:

|           |    1982  |    1983  |    1984  |    1985  |    1986  |    1987 |
|           |     ($)  |     ($)  |     ($)  |     ($)  |     ($)  |     ($) |
| Income    |          |          |          |          |          |         |
| Returned  | 88,700.31| 98,823.95|114,077.18|132,656.99|123,224.90|31,614.77|


|Expenditure| 75,074.41| 99,968.39| 98,305.78|116,137.23|117,414.85|63,101.09|
| Taxable   |          |          |          |          |          |         |
| Income    | 13,625.90|(1,144.44)| 15,771.40| 16,519.76|  5,810.05|(31,486.32)|
| Returned  |          |          |          |          |          |         |

On 3 February 1988, Mr Allard's accountant purported to object to the assessments for the years 1983-1987 inclusive, on the basis that the assessments bore no relation to the income actually received by his client. In the objection it was pointed out that the Holyrood Hotel had been resumed by the Department of Main Roads on or about 25 April 1986, (it was actually 26 April 1986) with the consequence that there could have been no income from prostitution from that building as and from that date as the building had been bulldozed. The letter suggested that Mr Allard had merely drawn in cash, for his living expenses, small amounts in the years in question being as follows:

    |   1982    |   1983   |   1984   |   1985   |  1986  |   1987  |
    |    ($)    |    ($)   |    ($)   |    ($)   |   ($)  |    ($)  |
    |  7,540    |  8,164   |  8,900   |  9,700   |  3,500 | 11,700  |

On learning that the Holyrood Hotel had been bulldozed, the Commissioner reconsidered the position for the 1987 year and ultimately amended the taxable income by excising the prostitution income, and calculating that in that year Mr Allard had received, from the Paddington property, rent of $30,499 plus professional fees as an architectural designer of $40,000, leaving him with an amended taxable income of $70,499. Assessments issued accordingly.

The issues between the parties accordingly were:

  • (1) Whether there had been assessments made for the years of income in question or whether the figures shown in what purported to be the assessments were mere guesses made in purported but not actual exercise of the power to assess.
  • (2) Whether Mr Allard derived rental income of the Moore Park property of the amounts determined by the Commissioner, or if not, what amounts were in fact derived.
  • (3) Whether Mr Allard carried on a business of prostitution and if so whether he derived income of the magnitude assessed by the Commissioner from the Holyrood Hotel, or if not what income he did derive from that source.
  • (4) Whether Mr Allard derived in the relevant income tax years income from the sale of narcotics.
  • (5) Whether in the 1987 year Mr Allard derived income from the exercise of his profession as an architectural designer.

The validity of the assessments

It was submitted for Mr Allard that each of the assessments in dispute was made pursuant to a purported exercise of the power to assess conferred by ss. 166 and 167 of the Act, in that the Commissioner had merely made a guess or proceeded upon no intelligible basis so that in truth no assessment had been made at all. Mr Allard relied upon what had been said by Latham CJ in
Trautwein v FC of T (No 1) (1936) 4 ATD 48 at 63; (1936) 56 CLR 63 at 88 where his Honour had said, referring to the then s. 39 of the Income Tax Assessment Act 1922 (the equivalent of s. 177(1) of the present Act):

``The application, s. 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right - and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say `as a general rule' because, conceivably, there might be a case where it appeared that the assessment had

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been made upon no intelligible basis even as an approximation, and the Court would then set aside the assessment and remit it to the Commissioner for further consideration.''

Some doubt may be thought to have been cast upon the ``general rule'' postulated by Latham CJ by what was said in
FJ Bloemen Pty Ltd v FC of T 81 ATC 4280; (1980-1981) 147 CLR 360 in the joint judgment of Mason and Wilson JJ with which Stephen J agreed, (especially at ATC 4286-4287; CLR 373-375) where their Honours, although agreeing with Taylor J in
McAndrew v FC of T (1956) 11 ATD 131 at 140; (1956) 98 CLR 263 at 282 that an assessment ``made in purported but not justifiable exercise of a statutory power'' could properly be described as excessive reiterated that in an appeal to the court the taxpayer must ultimately show the extent to which he is liable to pay tax. Indeed, their Honours state the effect of s. 177(1) (at ATC 4289; CLR 377) in quite absolute terms, where their Honours say:

``Although the subsection is evidentiary and begins to operate when an appropriate document is produced in a court or board of review, and not before, its effect is to put the making of an assessment beyond challenge.''

Subsequently, (at ATC 4289; CLR 378) their Honours said, after referring to Trautwein:

``In our opinion, it must follow that a notice in proper form of an assessment necessarily compels the conclusion that there was an assessment made in fact.''

Notwithstanding these comments, the Full Court of this Court, whose decision of course is binding upon me, held in
R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 that a purported assessment made by the Commissioner without any attempt to ascertain the taxpayer's taxable income, nor intended to undertake any relevant process of calculation, was not an assessment and did not attract the evidentiary protection of s. 177(1). The Court distinguished FJ Bloemen Pty Ltd on the basis that in that case there was nothing to indicate that the notice of assessment tendered was anything different from that which on its face it purported to be (see at 308). Briggs' Case proceeded before the Full Court on the basis of an agreed statement of facts. As is well known, when the facts were investigated by Sheppard J, subsequently, it was found that the Commissioner had indeed made a genuine estimate of Mr Briggs' taxable income for each year and accordingly that in each year there was, in fact, an assessment. As Sheppard J said (
R v DFC of T (WA); Ex parte Briggs (1987) 14 FCR 249 at 270):

``The fact that it may have been able to be better done than it was will not make it a nullity if in truth the process of assessment, however unsatisfactorily, or even erroneously, it may have been done, was carried out. What is involved is a judgmental exercise to determine whether what Mr Gill did constituted an assessment or was an exercise unrelated to the prosecutor's circumstances... In my opinion, the evidence establishes that Mr Gill made a genuine estimate of the prosecutor's taxable incomes for each of the years. What he did, although quite inexact and perhaps incorrect, was in each case to make an assessment.''

The subsequent decision of the High Court in
FC of T v Dalco 90 ATC 4088; (1990) 168 CLR 614, might perhaps be thought to have left open the general issue. Thus, Brennan J, after referring to what had been said in Trautwein said (at ATC 4093; CLR 624):

``His Honour evidently had in mind an error which not only affected the correctness of the amount assessed but vitiated the purported exercise of the power to assess conferred by sec. 166 and 167. Such a case would be exceptional, and a court must be careful to maintain the distinction between an error in exercising the power to make an assessment and an error which deprives a purported assessment of validity... If there could conceivably be such a case as Latham C.J. had in mind, this is not it.''

In the same case Toohey J said (at ATC 4098; CLR 633-634):

``If the Commissioner has simply plucked a figure `out of the air' (
Briggs v. D.F.C. of T. (W.A.); Ex parte Briggs 87 ATC 4278 at p. 4293; (1987) 14 F.C.R. 249 at p. 269) or has proceeded `upon no intelligible basis' [Trautwein], the Commissioner may be in breach of his statutory duty to make an assessment from the information in his possession: see Bloemen... I express no view on that matter for this is not such a case...''

In my view, the present is also not such a case. Mr Allard had not lodged any taxation

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returns to assist in any way the Commissioner to calculate the taxable income. The Commissioner had made certain investigations (admittedly not a thorough investigation of every aspect of the taxpayer's affairs) and had undertaken a process of calculation based on evidence as to comparable rentals, the fact that the taxpayer was conducting a business of prostitution and comparable income from prostitution. In these circumstances, it cannot be said that the assessment was made upon no intelligible basis or was merely a guess. The fact that the method of calculation can be shown to be wrong, once the circumstances are fully investigated, does not bring about the conclusion that there was no exercise by the Commissioner of the power to assess.

In these circumstances, as is made clear by the High Court in Dalco, it is for the taxpayer, once the assessments in question are tendered, to show not only that the figure shown in the assessments as the taxable income is wrong, but also what his taxable income was on which tax ought to have been levied. If he fails to do this he will fail in his appeal. As Brennan J said (at ATC 4094; CLR 625):

``A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. If it were not for sec. 190(b), the process of assessment might have to be repeated whenever on appeal an error affecting the amount assessed were found. But sec. 190(b), coupled with sec. 200, brings to finality the ascertainment of the taxpayer's liability in respect of the income period to which the assessment relates. Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.''

See too, per Toohey J at ATC 4098; CLR 634.

This would not necessarily mean in a particular case that the taxpayer will need to show with mathematical precision and to the precise dollar the assessable income which he has derived and the allowable deductions to which he is entitled. As Brennan J said in Dalco (at ATC 4093; CLR 624):

``The manner in which a taxpayer can discharge [the] burden [of proof] varies with the circumstances.''

Ma v FC of T 92 ATC 4373 at 4379, Burchett J pointed out that there will be cases where the court would be justified in making estimates based upon inexact evidence which would justify finding an assessment to be excessive, and the extent to which it is, without a precise figure being determined. His Honour pointed to a decision of Walsh J in
Krew v FC of T 71 ATC 4213 as an example. In that case his Honour accepted that substantial sums of money represented the proceeds of gambling and without seeking to arrive at a precise result came to a figure which, as his Honour acknowledged, involved ``a somewhat arbitrary decision''.

I accordingly turn to the substantive issues in dispute between the parties.

The rent of the Paddington property

Mr Allard's evidence was that when contracts were exchanged for the purchase of the Paddington property he took over a rent book which had been maintained by the preceding manager of the premises, a Mr Walker. Mr Allard began writing up the rent book himself as and from 8 June 1979 and there were tendered in evidence four account books covering (except for a gap of 8 months in 1985) the period to the end of the 1989 year of income. According to Mr Allard's evidence, the books were written up each day as moneys were received from tenants, although tenants did not pay their rent on a particular regular day each week. I will analyse these books in more detail later in the judgment. Mr Allard said that he banked all of the moneys he received from the premises in his bank account, other than an amount which he retained for living expenses, and there are tendered bank records for the period in question.

According to his evidence, rents ranged from about $30 per week in 1978/79 to $60 for the dearest and were marginally increased as the years went on, although the increase did not approximate the rate of inflation or the general increase in the cost of living. Mr Allard supplied to tenants electricity and gas.

There was evidence also from a Mr Brown who had resided at the premises from 1978 until he vacated them according to the rent book on 20 September 1981. Mr Brown did handyman

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jobs and odd jobs for Mr Allard from time to time and indeed became friendly with Mr Allard and, as will later be seen, associated with him in a business venture. Mr Brown gave evidence that in a period while Mr Allard was sailing in northern Queensland, there had been no one to look after the rent at Moore Park Road and that he had looked after it in that period. His duty had been to collect the rent, particularly the rent from tenants who were in arrears, and write up the rent book during the period. He was able to identify his handwriting recording the rent for the week ending 3 April 1982 and through to 29 May 1982. A perusal of the rental entries made at that time and a comparison with the rental entries before and afterwards corroborates Mr Allard's evidence that the rental books are accurate.

Mr Brown was called for another reason. He was a computer specialist. He had made an analysis based upon the rental books, the bankings by Mr Allard and invoices and accounts of expenditure. The method upon which he proceeded was to assume that all income from both the Paddington premises and the Holyrood Hotel had been banked in the bank account. There was then subtracted the rent shown in the books for the Paddington premises to arrive at a figure which was said to be the income from the Holyrood Hotel, not taking into account money that Mr Allard may have spent on living expenses. Mr Brown then analysed all invoice dockets, cheque butts and the like to arrive at a figure for outgoings. These figures, as prepared by Mr Brown, apparently formed the basis of the taxation returns, save that the accountant who actually prepared the returns added in amounts for living expenses that had been paid from the cash takings before banking.

Mr Brown freely acknowledged that the figures he had prepared depended for their validity upon the assumption that all moneys not spent for personal living expenses were in fact banked. He agreed that if that assumption failed so too did his calculations. Of course the ultimate validity of this approach depends also upon accepting that the figures taken into account by the accountant as living costs were also correct. No evidence was adduced from Mr Allard as to his living expenses. The only evidence on this matter was from Mr Allard's accountant, Mr Ward, who said that he made the calculations of living expenses following discussions with Mr Allard. The parties were in agreement that the items of expenditure determined by Mr Brown and to be allowed as deductions were in fact correct.

Mr Brown's credit was attacked in cross- examination. Given the fact that his calculations were somewhat mechanical, it could not be assumed that the attack on his credit related to his calculations. Mr Brown had purchased one of two issued shares in a company called Liffar Pty Ltd from Mr Allard for one dollar. It was suggested that the net value of the assets of that company at the time of purchase was approximately $300,000 or indeed more. The explanation for the transaction was said, by Mr Brown, to be that Liffar Pty Ltd might not have been able to meet its interest bill in respect of a mortgage on property which it owned and in this event Mr Brown would have been able to assist. The idea was that units owned by the company would be converted to strata title and sold and that a profit would be made.

Mr Brown had a singular lack of knowledge of the affairs of Liffar Pty Ltd. These were apparently directed by a Mr Mezzina, a financial adviser to Mr Allard who has since died. It may well have been that Mr Brown's involvement in the transaction related to an injunction being obtained by the Commissioner against Mr Allard restraining him from dealing with his assets. Mr Brown denied that he knew of such an injunction at the time he became involved in the affairs of Liffar Pty Ltd. Apparently there had been some plan that that company would buy out Mr Allard's interest in the Paddington property, and applications for finance for this purpose had been made. Counsel for the Commissioner suggested that this arrangement should lead me to the conclusion that I would not necessarily be able to accept Mr Brown's evidence that he made an effort to honestly record the full income from Moore Park Road.

I need make no findings about the matter which was the subject of cross-examination. So far as Mr Brown's evidence of writing up the rental books of the Paddington premises is concerned, I accept it. In my view, Mr Brown was telling the truth about that. I accept also that he made the mathematical calculation, which he said he made, as accurately as possible. Indeed at the end of the day no submission was made contrary to that.

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At the heart of the Commissioner's case, not only in respect of the Paddington premises but also in respect of the Holyrood Hotel, lies the credit of Mr Allard. It is convenient to defer a consideration of Mr Allard's credit until the consideration of the income of the Holyrood Hotel. Suffice it to say here that apart from the file of Beneficial Finance Corporation Limited (``Beneficial Finance''), to which I will return, the only evidence which would cast doubt upon the veracity of the rental books for the Paddington property was to be found in a letter from Toswill, Ward and Associates on letterhead emanating from what was said to be that firms Eastwood office dated 24 March 1987, signed ``pp TA Ward''. The signature in question was in fact not that of Mr Ward. According to Mr Ward, this letter was forwarded from an ``associated office'' at Eastwood which was managed by a Mr Fuggle. The precise relationship between Mr Fuggle, who apparently ordinarily operated under the name of ``Pennant - Jim Fuggle & Associates Pty Ltd'' and Toswill, Ward and Associates was left somewhat unclear, save that apparently Mr Fuggle had access to Mr Ward's letterhead. The letter, which appears to have been prepared for the purposes of an application for finance made to Beneficial Finance, purported to be addressed to Mr Allard and read as follows:

``We refer to your instructions to inspect your various books of account and other records, as supplied, in connection with the trading operation for the period 1.7.86 to 28.2.87 in respect of the Moore Park Rd, Paddington property, and report as follows:-

The subject property is located at 400 Moore Park Rd, Paddington and is a large residential property sub-divided into 30 self contained units which are fully let (with a waiting list) at a total rental income of $1,800 per week or $93,600 per annum gross. These rentals are subject to PCI and accordingly steady and, in some cases substantial, increases will be shown especially in the present tight rent market. All indications are that this market will become even more restricted in the foreseeable future particularly in the eastern suburbs.

On present figures extracted, outgoings are at the level of $13,000 per annum, leaving an anticipated profit (net) of $80,000 for year ended 30.6.87. We are also requested to confirm that you have also been contracting as an Architectural Designer during the period from 1.7.86 and that income from this source (net) to 28.2.87 was $28,000. From contracts in hand there should be no difficulty in escalating this figure to around $40,000 by 30.6.87. We trust this information meets your present requirements and would be happy to confirm same to any properly authorised party. All enquiries in this regard should be made of our Eastwood office.''

Mr Fuggle was not called by either side to give evidence in the matter. I shall return to that matter later.

The letter is, to say the least, peculiar. It is clear that on no view of the matter was the rent for the Paddington premises linked to ``PCI'' which I infer was an incorrect way of describing ``CPI''. Nothing in the evidence suggests that there was a waiting list for the premises. The information in the letter concerning architectural design fees was vehemently denied by Mr Allard and was said by him to be incorrect. According to his evidence he had done no architectural design work in any of the years in question, although he had on first coming to Australia been involved in restaurant design work in Melbourne and Sydney and as a marine architect in designing racing and cruising yachts for some period commencing in 1973.

The admissibility of the Beneficial Finance documents

Counsel for the Commissioner sought to tender in evidence, from records subpoenaed from Beneficial Finance, a file of papers concerning an application for finance to that company made on behalf of Mr Allard and relating to the purchase of units at Cabramatta and a refinancing of the Moore Park Road property. Much of the file appears to be in the handwriting of an officer of Beneficial Finance and on its face the source of the material in the file is shown to be Mr Garside. Counsel for Mr Allard objected to the tender, save as to certain matters which were subsequently detailed.

Much of the material is irrelevant to the present case. That, however, was not the substantial basis of the objection made to the tender. What was objected to in essence was so much of the material as disclosed information inferentially conveyed to the maker of the notes

ATC 4905

by Mr Garside as related to stated rents from the Paddington property. The file appears to have come into existence in or about April 1987.

Counsel for the Commissioner relied upon Part IIIA of the Evidence Act 1905 (Cth) relating to the admissibility of business records to support the admission of the documentary material into evidence. Counsel for Mr Allard submitted that Part IIIA did not allow information received from third parties to be properly received as part of business records. In support of this submission he referred me to the decision of Needham J in
Re Marra Developments Ltd and the Companies Act [1979] 2 NSWLR 193 and to that of Beaumont J in
Trade Practices Commission v Arnotts Ltd & Ors (1990) ATPR ¶41-010(7).

Section 7B(1) of the Evidence Act provides, so far as is relevant:

``Subject to this Part, where, in any proceeding, evidence of a fact is admissible, a statement of the fact in a document is admissible as evidence of the fact if:

  • (a) the document containing the statement forms part of a record of a business...
  • (b) the statement was made in the course of, or for the purposes of, the business; and
  • (c) the statement was made by a qualified person or reproduces, or was derived from, either of both of the following descriptions of information:
    • (i) information in one or more statements, each made by a qualified person in the course of, or for the purposes of, the business;
    • (ii)...

(2) This section makes a statement admissible notwithstanding:

(a) the rules against hearsay...''

In the former case Needham J, speaking of the comparable provisions of Part IIC of the Evidence Act 1898 (NSW) said (at 198):

``... Pt. IIC makes admissible statements in documents, and not documents themselves. Accordingly, the presence of an admissible statement in a document does not make the balance of the document admissible, if it is otherwise inadmissible. I also agree with his submission that, if a statement contained in a document appears to have been made to the maker of the document, that is, it contains hearsay material, the statement is evidence of the facts asserted in the statement only if it appears to have been made by another qualified person, leaving aside the application of s. 14CE(6)(b)(ii), who must make the statement in the course of, and for the purposes of, the business, and I emphasize the words `the business'.''

With respect, I would agree with his Honour. It is quite clear that the Evidence Act distinguishes between the statement in the document and the document itself in s. 7B(1)(a); the statement, not the document, is made admissible where the section applies. Further, it is clear that the relevant statement must have been made in the course of, or for the purposes of, the business. Thus an entry in a diary record by a Finance Officer that a customer attended upon him, or that the customer had made an application for finance, would be admissible. On the other hand, a statement in the same diary record which reproduces only what someone else, say a customer, had said to the Finance Officer, could not be tendered as evidence of the truth of the statement made by the customer, unless the statement sought to be tendered itself reproduced or was derived from some other statement itself made by the customer (being a qualified person) for the purpose of the customer's business. Such a view reads down to some extent the provisions of s. 7B(2), however, that sub-section merely removes an impediment to admissibility of that which has been made admissible by sub-sec. (1); it has no other work to do.

It follows, therefore, that statements in the file which purport to set out matters not within the knowledge of the author of the document, but communicated by a third party to the author of the document, will not be admissible to prove the truth of those matters. However, I see no impediment to these statements being admitted for a more limited, but still relevant, purpose in the present case. In the present case the statements objected to can be taken as statements that Mr Garside communicated to the officer in Beneficial Finance information concerning the financial affairs of Mr Allard. They are not tendered for the purpose of proving the correctness of that financial information, but rather for the purpose of

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proving that they were made. This being so, they are, in my opinion, admissible unless, having regard to s. 7M(1)(c), it would be unfair to accept the tender.

I do not think in the present case that s. 7M(1)(c) requires the material to be rejected. First, it must be said that the material in the file in fact adds little to other material already in evidence. Indeed, it would seem to be based upon the letter prepared by Mr Fuggle to which reference has already been made. Secondly, it was open to Mr Allard to call evidence from Mr Garside. There was no explanation proffered as to the failure so to do.

It follows that the statements in the Beneficial Finance file, (i) to the effect that a Mr Garside advised Beneficial Finance that the net rental for Paddington for the ensuing period of six months would be $67,391, (ii) that the thirty self-contained residential flats were let out at an actual rental of $1,860 per week, and (iii) that the rents from the property were $45 to $60 (actual) per week until October 1986 when they were increased to $55 to $70 (actual) per week, can be admitted in evidence for the limited purpose of showing that this is what Mr Garside said to Benefial Finance in connection with the financing application, a matter going to Mr Allard's credit, but not to show that the figures in question were in fact the true rental figures. To the extent that Mr Garside is to be accepted as Mr Allard's agent in negotiating the finance, it may also be argued that the statements may be admissible as an admission by Mr Allard made against interest. However, I do not need to consider that possibility.

There was tendered, to explain the failure to call Mr Fuggle, a letter on the letterhead of Jim Fuggle & Associates Pty Ltd addressed to Mr Allard's solicitor and signed presumably by Mr Fuggle. In it reference is made to the fact that Mr Allard owed the firm a substantial amount of money in connection with the preparation of the returns. It is said that Mr Ward, whose testimony is ``intrinsic to the case'', would not be prepared to give evidence unless an assurance was given that costs would be paid. It is indeed further said that Mr Ward would, in the event of being subpoenaed, ``avoid same''.

Whether Mr Ward participated in this refusal to give evidence is not clear. He was subpoenaed by the Commissioner and indeed did give evidence in the proceedings without attempting to avoid doing so. All the letter demonstrates, at the end of the day, is that Mr Fuggle was presumably antagonistic to Mr Allard as a result of his fees not having been paid. Although I would regard the comments made in the letter, so far as they suggest that the Court's order would be disobeyed, as grossly unprofessional on the part of Mr Fuggle, I do not think that the letter suffices to explain the failure to call him. It may be accepted that Mr Fuggle might not have been enthusiastic in giving evidence in the circumstances, but it would not follow that he would, when actually served with an order of the Court requiring him to attend, fail to do so or indeed give false evidence.

In the circumstances, I would infer from the failure of Mr Allard to call Mr Fuggle that his evidence would not have assisted Mr Allard's case. Having said that, however, and even accepting that the failure to call Mr Fuggle would enable an inference more safely to be drawn that Mr Allard had indeed instructed Mr Fuggle to put the figures in the letter to Beneficial Finance, it does not, at the end of the day, follow that I must disbelieve Mr Allard's evidence on the rents derived from the Paddington property.

There was no suggestion by the Commissioner that the rental books were written up for the purposes of the trial. Indeed, the evidence of Mr Brown clearly showed that that could not have been the case. I accept Mr Allard's evidence that the rental books properly reflect the income which he collected from the Paddington property in the years in question. The figures in the books are not inherently improbable. While Mr Allard's involvement, if any, in the giving of false information to Beneficial Finance can hardly be said to be creditable, at the end of the day I accept that before me, on the matter of the Paddington rents, he has told the truth.

The Holyrood Hotel income

It was the Commissioner's submission that Mr Allard was carrying on a business of prostitution at the Holyrood Hotel and not, as Mr Allard asserted, merely letting rooms in that hotel. The evidence relied upon by the Commissioner to support this submission may be shortly summarised.

First, the Commissioner pointed to correspondence which came into being in connection with the claim by Mr Allard for compensation for the resumption of the freehold

ATC 4907

of the Holyrood Hotel by the Department of Main Roads. The application for compensation, dated 20 March 1987, some 11 months after the demolition of the building, claimed $700,000 for the freehold and $300,000 as ``compensation for loss of business''. It may incidentally be noted that proceedings commenced in the Land and Environment Court for compensation resulted ultimately in the claim being settled for a total sum of $435,000 plus statutory interest. Mr Allard's share, after discharging mortgages on the property, was in due course paid to the Commissioner pursuant to the s. 218 notices to which I have earlier referred.

Included in the correspondence with the Department of Main Roads was a letter on the letterhead of Toswill, Ward & Associates showing that it emanated from the Eastwood office of that firm addressed to Mr Crichton- Browne, a copy of which was on Mr Crichton- Browne's file. This letter was in the following terms:

"We act as Accountants for the abovenamed who has requested we advise you information as to trading profits derived from premises formerly located at 140 Palmer Street, Darlinghurst for the final year of trading, viz. 12 months ended 25th April 1986. As you are aware the subject premises being a private hotel were resumed by the Department of Main Roads on that date.

From information supplied by client the position is as follows: -

Total rental receipts
26.4.85 to 25.4.86                      $201,850
Less expenditure                         $34,052
Net profit -- before                    --------
provision for taxation                  $167,798

We trust this information is sufficient for your requirements, however please contact writer at our Eastwood address should we be able to assist further.

The above information is supplied from the books and records for Mr J.P. Allard and other information provided by him."

This letter appears to have emanated from Mr Fuggle. The circumstances in which it came to be prepared remain largely a mystery. It is clear that not all of the information in the letter is correct. The expenditure is shown for a period of 12 months from April 1985 to April 1986 and so cannot be correlated with the expenditure claimed by Mr Allard in his tax returns, which is capable of verification from invoices and receipts and which expenditure also includes outgoings related to the Paddington property. However, it seems clear that the expenditure was likely to be greater than the amount shown in the letter. It was suggested that on the basis that an appropriate formula for goodwill of such premises was 18 months' takings, the sum of $300,000 shown as being goodwill of the business in the claim for compensation should be seen as verifying the sum of $201,850 shown in the letter.

Also relied upon was a letter signed by Mr Postiglione, a gentleman presently in gaol but who had, from time to time, acted as manager of the hotel. The letter was probably typed on Mr Crichton-Browne's typewriter and lodged with the Department of Main Roads in connection with the compensation matter. In the letter Mr Postiglione sought settlement of the claim for a net amount of $675,000. The letter said in part:

" This figure is supported by the fact that the premises realise a total weekly income of $3,710. This weekly rental income is achieved as follows:-

    12 rooms X $40 per night       $3,360
    10 rooms (pension units)
    at a nominal rental
    of $35 per week                   350

At the time this letter was written, Mr Allard was detained in gaol as a result of his conviction on a drug offence.

Also relied upon by the Commissioner was a statement said to have been made by Mr Allard at the time he was arrested on 8 October 1985. Evidence was called from Detective Sergeant Irwin and Detective Sergeant Nield, both of whom swore under oath that Mr Allard, when shown a plastic bag containing heroin and asked what it was, had made the following statement:

``It's heroin. I sell a bit to girls who work for me so they don't get bad stuff and get sick.''

Also relied upon by the Commissioner, in the same context, is the statement said to have been made by Mr Allard at the police station in the presence of Detective Sergeant Irwin, when shown a book which figured prominently in the

ATC 4908

cross-examination and which was referred to as the ``Frenchies and Tissues Book''. When asked what it related to Mr Allard is said to have said: ``they are all for French letters for the girls that work for me''.

There are a number of matters to which attention was drawn in cross-examination by counsel for Mr Allard which cast some doubt upon the evidence of the two detectives. The statement alleged to have been given as admitting that the substance found on Mr Allard's person was heroin was never referred to in evidence at Mr Allard's trial, although one would have thought that its significance was obvious. This was sought to be explained, although the explanation was not particularly satisfactory. Another matter which concerned me was the fact that each of the policemen gave evidence in identical language, although one of them at least had made no note himself of the words but purported to still have a clear recollection of the events seven years earlier. I was unimpressed by their evidence. I am not prepared to find in these proceedings that the officers in question deliberately perjured themselves and indeed there would seem to have been no reason why they should have done so for the purposes of the present civil proceedings. However, I accept Mr Allard's evidence that he did not make the statements attributed to him.

Related to the latter of the so called admissions was the ``Frenchies and Tissues Book''. This was a notebook which, together with associated scraps of paper, had been found on a table in the office of the Holyrood Hotel at the time of the drug raid on those premises in October 1985, at which time Mr Allard was arrested.

Much of the writing in the book was acknowledged by Mr Allard to be his. Clearly, some entries in the book were made by other persons including a Mr Baker who gave evidence in Mr Allard's case. I shall return to Mr Baker's evidence later.

Many of the entries in the book related to condoms or tissues sold to the girls. Mr Allard admitted that he bought condoms and tissues which were then sold at cost to the girls for the purposes of their business. Thus, the book might note that a particular named girl had bought two packets of ``Frenchies'' or simply against the name of the girl in question would appear a figure $3.50, being the price apparently for a packet of condoms, or $2.00 being the price for tissues. Sometimes the notation was purely in the form of a ``T'' or an ``F'' as the case may be. Entries were crossed out, or otherwise noted as paid, when the girls had apparently paid for the items they had purchased.

The book also noted Visa and Bankcard numbers and merchant numbers. When cross- examined about these Mr Allard was inclined to the view that no Visa account had been established but conceded that at least a Bankcard account had been opened so that customers seeking the services of the girls, but lacking cash, could pay by credit card. It was said that this had not been a great success. Mr Allard said that it was a facility which he made available for the girls and that in essence he gave the girls money, adding on 10 percent to the amount charged to the customer on the credit card. Also contained in the book were various figures after the names of persons who were prostitutes, generally women but occasionally also men. On one page there was a column of ``Paid'' and another column ``Owe'' showing amounts against the names of prostitutes. Other pages indicated against the name of the respective prostitute figures ranging from $40 to $1,500. To the extent that these entries were in Mr Allard's handwriting, he was unable to give a definite interpretation as to their meaning. Some of the pages he thought related to moneys that had been deposited for safekeeping during the night by the girls and then later released to them. Others were said by him to relate to rent amounts of $30 multiplied by the number of nights. One page bearing the date Friday, 27/9/85 was clearly labelled ``Rent'' and indicated against the names of the various persons the rent in question, generally $30, and the room number. One of those named was ``Tina'' who gave evidence for Mr Allard later in the proceedings.

Counsel for the Commissioner sought to persuade me to draw an inference from the names and figures scrawled in the document that the figures were a notation of the earnings of the prostitutes to which Mr Allard was entitled, or alternatively the amounts owing to the prostitutes in respect of the services performed by them as employees of Mr Allard. Alternatively, counsel sought to persuade me to draw the inference that some of the amounts in

ATC 4909

question related to drug purchases, a matter to which I will return.

With respect to the submissions, I do not find the material in the book particularly illuminating. It is clear, and indeed was admitted by Mr Allard, that the ground floor of the premises was used for prostitution. Mr Allard conceded that the rooms on that floor were let out on a daily basis to prostitutes, mainly women, for use by them in their business. There was a pool of prostitutes who paid for the rooms, there being more prostitutes than there were rooms. Mr Allard conceded also that he had sold to the girls condoms and tissues, albeit at cost price. Evidence adduced in his case corroborated his explanation of some of the figures, although clearly not all.

Counsel for the Commissioner relied also upon an answer Mr Allard had given in the course of prosecution before Walsh J on one of the narcotics offences. In the course of that trial, Mr Allard had said:

``We had up to 14 girls on the books on any night of the week, there could have been up to 6 working.''

Mr Allard agreed that that was a true statement, but it did not follow, of course, that by saying ``on the books'' Mr Allard was conceding that the girls in question were employees.

Also relied upon by the Commissioner was an extract from a statement made by Mr Allard from the dock in the proceedings before Sinclair J. In this statement Mr Allard had said, relevantly:

``I had a fairly substantial cash flow operation, a series of boarding houses and mainly a private hotel in Darlinghurst.''

Mr Allard had said that it was his routine to go to Darlinghurst about three to four times a week to collect money from the manager. He said that on 22 August he had gone down to the hotel in the afternoon and had stayed there for an hour, or an hour and a half, taking care of some routine matters with the manager, and collected a couple of days' takings, being between $1,900 and $2,000. Subsequently, Mr Allard suggested that these figures may have been inflated.

In the proceedings before Walsh J, Mr Allard also said that he attended the Holyrood Hotel four or five times a week. When arrested at the hotel, following the raid in October 1985, he was found to be in possession of some $2,000. He had given evidence that when he went to the hotel he had $600 on him and that he had received $1,400 from the manager. Mr Allard denied that the moneys in question represented the day's takings. Subsequently he said that this amount was the takings for two or more days. His evidence was that the rooms upstairs were let for $35 per week and there were approximately 20-25 rooms in that position. He said that the ground floor rooms were rented for $30 per night and on most nights there would be four rooms running with seven at the weekend. On this basis, $1,400 would roughly represent a couple of days of general rent collection.

Mr Allard accepted that one of the pages in the ``Frenchies and Tissues Book'' may have recorded takings. The page consisted of a list of figures ranging from $1,170 to $3,000. Mr Allard said the figures could be weekly totals for the hotel. He said that $1,900 for a couple of days' takings would have been at the very top of the range. In later cross-examination as to the make up of the $300,000 claimed as compensation for the goodwill of the hotel, Mr Allard said that by May, June and July the total rent of the hotel had climbed to $2,000 or more per week.

Finally, the Commissioner pointed to the fact that Mr Allard had no records to sustain his contention that all he received was rents from letting out rooms in the hotel. It should perhaps be mentioned that Mr Allard's evidence was that rent receipts were issued and duplicates kept but that he was in gaol when the premises were resumed and demolished and that the rent receipts had disappeared during the demolition.

Mr Allard relied first upon two independent witnesses who gave evidence on his behalf: Mr Baker and Tina.

Mr Baker had been a tenant in premises known as ``The Aranui Lodge'' which Mr Allard had managed before becoming involved with the Holyrood Hotel. Mr Baker moved into the Holyrood Hotel in late 1983 and lived in Room 14 on the first floor for approximately 14 months until early 1985. He carried out managerial duties for Mr Allard, in lieu of paying rent, and wrote out rent receipts for tenants. Mr Baker's evidence was that when he first moved into the premises the rent for each room was $19.50. He said that subsequently the rent had increased to $22.00 by the time he left

ATC 4910

the hotel in early 1985, and that in this time the rent was a flat rate for all of the rooms in the hotel.

According to Mr Baker's evidence, until at least the beginning of 1985 all the tenants in the building were weekly tenants and most were elderly men on social security benefits. Although Mr Baker ceased to occupy the hotel, either at the end of December 1984 or the beginning of January 1985, he continued to visit the hotel on three or four nights a week and often played cards or talked to Mr Allard and other friends at the hotel. It was his evidence that it was only in early 1985 that prostitutes started renting rooms in the hotel. According to his evidence, Mr Allard charged $30-$40 rent per room per night on the ground floor, the figure of $40 being applicable for Friday and Saturday nights. This knowledge came to him from writing out rent receipt books for the girls. He did not visit the hotel after the police raid on 8 October 1985.

Mr Baker confirmed the sale of condoms and tissues to the girls and also that the girls would ask him to hold their money for them during the time they were working, and that he would receive money from them and put it in an envelope with a piece of paper with their name on it and put the envelope in a drawer. In due course the money was returned to the girls. His evidence was that he never saw Mr Allard pay any money to girls, nor, apart from rent, did he ever see the girls pay any money to Mr Allard.

A few of the entries in the ``Frenchies and Tissues Book'' were made by Mr Baker and related to condoms or tissues sold to girls.

Mr Baker gave his evidence honestly and I accept the veracity of what he said.

Also called was a witness whose name appears in the ``Frenchies and Tissues Book'' as ``Tina''. According to her evidence, she actually lived in Room 12 on the first floor of the Holyrood Hotel from March 1985 until about mid-December 1985. She said that in the time she lived in the hotel all the rooms above the first floor were occupied by single, elderly men. During the time she lived on the first floor, only two other girls occupied other rooms on that floor besides herself, one of them having moved out in July 1985 and that for the rest of the time that she had lived in the hotel the only occupants on the first floor were herself and one other girl.

She said that she had worked as a prostitute, while living at the hotel, approximately 2-3 nights per week. On the nights she worked, she usually paid rent in the sum of $30 or $40 to Mr Allard or whoever was acting as manager. She did not normally pay more than $60 or $80 per week, and kept all of the money she earned from working as a prostitute during the time she lived at the hotel. So far as she was aware, the girls who worked on the ground floor paid for rooms by the night and paid between $30 to $40 and that there had never been more than 5 or 6 girls working at any one time.

She confirmed that girls who worked in the hotel gave their earnings to the ``sitter'' in the manager's office on the ground floor although she did not do this as she had her own room. She was aware that condoms and tissues could be purchased from the manager's office, but so far as she was aware no drugs were sold on the premises. She says incidentally that she paid no rent in the period from October to December 1985, presumably after the police raid. Her evidence was that in the time she was living in the hotel, she never gave any money to Mr Allard (presumably other than rent). Although the name ``Tina'' appears in the ``Frenchies and Tissues Book'', she was not cross- examined on the entries after her name, presumably because she expressed the view in the course of cross-examination that her name would probably not have been in the book because she generally used to pay for tissues and condoms as she wanted them.

No attempt was made to impeach Tina's credit and in the circumstances I would accept her evidence. In the light of it, and also of the evidence of Mr Baker, it is impossible to accept that Mr Allard was carrying on a business of prostitution. It is also clear enough that the rent from prostitution did not commence until around the beginning of 1985 and carried on only until October 1985. In other words, it would affect only the figures in respect of the 1985 and 1986 taxation years. Otherwise, it must be accepted that the rents in the Holyrood Hotel were for rooms let out to pensioners for figures around $22.50 to $30.00 per week.

The most cogent additional corroborative circumstance supporting Mr Allard's case was that all the evidence suggested that he had been in financial hardship during his ownership of the hotel, and for that matter thereafter, and never was it suggested that he had any secret

ATC 4911

bank accounts or undisclosed assets. For example, all of the assets purchased by him had been purchased with virtually 100 percent finance. Mr Allard had been the recipient of Fire Safety Order Notices, which had required work to be carried out in the order of $60,000 to $80,000. Mr Allard's solicitor and a barrister had endeavoured to defer the requirement that work be carried out. Mr Allard was in default in his mortgage with Beneficial Finance Corporation and refinanced a mortgage with the Protective Commissioner. His cheques were being dishonoured in November 1982, and he was again in arrears in his mortgage over the Paddington property by mid-1983. Ultimately, there were three mortgages over the Paddington property, but even with a third mortgage and additional loan funds provided from it, Mr Allard fell into default and was the recipient of a notice under s. 57(2)(b) of the Conveyancing Act 1919 in respect of the Paddington property by 27 January 1984.

Mr Allard's financial position improved somewhat in the 1985 calendar year, presumably coincidentally with renting out rooms on the ground floor of the Holyrood Hotel to prostitutes on a daily or nightly basis.

The suggestion that Mr Allard derived the substantial amounts of income assessed by the Commissioner in the years of income in question, simply does not sit easily with the financial circumstances in which Mr Allard found himself.

There are, of course, only three logical possibilities. The first is that the income in question was not derived by Mr Allard. The second is that it was derived by him but spent. All the evidence pointed to a somewhat frugal lifestyle of Mr Allard, and although he conceded to having smoked heroin on a few occasions, it was never put to him that the money in question, which he had derived, had gone in the maintenance of a heroin habit. The third possibility is that the money in question had been used to buy assets or otherwise retained in ways which the Commissioner knew nothing about. While, of course, this is possible, it seems highly unlikely that Mr Allard would have been in the continuous default in financial matters that he was if substantial cash funds had been available to him. No questions were put to Mr Allard suggesting, or even enquiring about, the existence of hidden assets.

At the end of the day, there is to be weighed against the background of the evidence to which I have referred, the question of Mr Allard's credit. Counsel for the Commissioner pointed to Mr Allard's evidence as to the entries in the condoms and tissues book, his initial answers in identifying that book, the letters of Mr Postiglione and Mr Fuggle, the answers made to the police and statements in evidence before Walsh J and Sinclair J, as pointing to the conclusion that Mr Allard was not to be believed.

On the other hand, as I have already indicated, his evidence was substantially corroborated by two independent witnesses whose credit was not in issue. In my opinion, this independent evidence makes it clear that Mr Allard was not carrying on a business of prostitution, but that his sole source of income from the Holyrood Hotel, during the time it was used for prostitution (leaving aside the condoms and tissues), was rent, on a weekly basis for the upstairs and a daily basis for the rooms on the ground floor and two of the rooms on the first floor. Although, of course, technically, if Mr Allard was carrying on a business of selling tissues and condoms, the gross proceeds of sale would be income, these were matched, the items in question being sold at cost, by outgoings and did not affect the end taxable income.

Sale of narcotics

Mr Allard denied that he sold narcotics to the girls working in the premises. He denied also making the statement to the police, to which I have already referred. If I reject Mr Allard's evidence, there are, of course, two possibilities. Either heroin was sold to girls at a figure which brought a profit to Mr Allard, or, like the condoms and tissues, it was sold without a profit. There is just no evidence on this matter one way or the other. Because the girls were not in the premises until approximately the beginning of 1985 and ceased to operate from the premises in October 1985, the period in which there could have been drug sales was relatively limited. Detective Sergeant Irwin gave evidence of finding small paper bags when the premises were raided in October 1985, the inference being that the heroin was being repackaged in small bags and sold in small quantities. It was not put to Mr Allard that the bags were in fact used for heroin and, in any

ATC 4912

event, there is no reason why that inference should be drawn and I do not draw it.

The evidence of Mr Allard's drug trials was that he had been tried in respect of two matters. The first was a deemed supply matter which came before Walsh J in respect of which he was acquitted. The other matter was another charge of supply. In the initial trial of that matter the jury reached no conclusion. Eventually, Mr Allard was convicted before Sinclair J, although he maintained his innocence.

If Mr Allard did sell heroin, the extent of his activity could not have been great. Tina's evidence was that she had never purchased heroin at the hotel and that she was not aware that other girls did. It was never put to either Mr Allard or her that the figures in the condoms and tissues book referred to drug sales and I would not, in those circumstances, draw the inference that they did.

I would, accordingly, not find that Mr Allard made any real profit from the sale of heroin in the short time the prostitutes occupied the ground floor of the Holyrood Hotel, if, indeed, he sold heroin at all. It is, perhaps, not insignificant that at no time has the Commissioner sought to include any amount in his calculations for income from this source.

Income as an architectural designer

The sole basis of the submission that Mr Allard derived in the 1987 year income as an architectural designer was the letter written by Mr Fuggle to which I have already referred. However, as I have already indicated, I accept Mr Allard's evidence denying that he derived any such income. In my view, it was patently evident from the way this evidence was given that it was truthful.

The Commissioner's position at the end of the trial

After the evidence had been given, and in the course of submissions, counsel for the Commissioner accepted that the assessments as raised could not be supported. It was the Commissioner's submission that the income from Moore Park Road should be determined by taking as a starting point the figure of $93,600, referred to in Mr Fuggle's letter. It was then suggested that this should be discounted back 10 percent per annum for each of the years in question to arrive at the gross rental from the Paddington property. So far as the Holyrood Hotel is concerned, it was agreed that in the year to 30 June 1987 no income at all was derived from this source and further that there was no possibility of prostitution being carried on, other than in respect of the 1985 and 1986 years, or for that matter no question of increased daily income from rooms from that source. In the result, the Commissioner contended that the assessments for the years 1982, 1983, 1984 and 1987 should be calculated as follows:

|                        |   1982   |   1983   |   1984   |   1987   |
|                        |     $    |     $    |     $    |     $    |
| Rent, Moore Park Road* |   55,269 |   61,410 |   68,234 |   93,600 |
|                        |          |          |          | No income|
|                        |          |          |          | from this|
| Rent, Holyrood Hotel   |   48,010 |   48,766 |   64,867 | source   |
| TOTAL                  |  103,279 |  110,176 |  133,101 |   93,600 |
| Expenses as per returns|   75,074 |   99,968 |   98,305 |   63,101 |
| Net Income             |   28,205 |   10,208 |   34,796 |   30,499 |
| (As Assessed)          |  263,254 |  292,505 |  325,006 |   70,499 |
| Rent included in above |          |          |          |          |
| expenses for taxpayer's|          |          |          |          |
| residence at 1B Moore  |          |          |          |          |
| Park Road              |    8,513 |    8,100 |    8,200 |     --   |


| Add back 50% of rent   |          |          |          |          |
| as private expenditure |    4,256 |    4,050 |    4,100 |     --   |
| Suggested Taxable      |  32,4611 |    4,258 |   38,896 |   30,499 |

* Figures derived from a 90% regression of $93,600

In respect of the 1985 and 1986 years, it was submitted that the figures should be calculated as follows:

| RENT                                |      1985     |     1986    |
| More Park Road                      |    $75,816    |   $84,240   |
| Holyrood Hotel                 A1   |    $200,000   |   $166,666  |
|                                A2   |    $300,000   |   $250,000  |
| Totals                         A1   |    $275,816   |   $250,906  |
|                                A2   |    $375,816   |   $334,240  |
| LESS expenses as per returns        |    $116,137   |   $117,414  |
| Totals                         A1   |    $159,679   |   $133,492  |
|                                A2   |    $259,679   |   $216,826  |
| ADD back 50% of rent as private     |               |             |
| expenditure                         |     $4,335    |    $2,545   |
| ADD 115 Woomera Avenue amount       |       --      |    $28,000  |
| SUGGESTED TAXABLE INCOME        A1  |    $164,014   |   $164,037  |
|                                 A2  |    $264,014   |   $247,371  |

    A1 = Alternative 1
    A2 = Alternative 2

By way of explanation of these figures, two additional comments should be noted. First, it was conceded for counsel for Mr Allard, that Mr Allard had claimed for expenditure rent in respect of a property, half of which was used for storage in connection with the Paddington property or the Holyrood Hotel, and the other half of which was used for his private purposes. On this basis it was appropriate to add back 50 percent of rent, and this is shown in the Commissioner's calculations.

The addition of the amount of $28,000 in the 1986 year in respect of the Woomera Avenue property is less clear.

According to Mr Allard's evidence, when he came out of gaol in 1986 he acquired a property at 115 Woomera Avenue, Darlinghurst, with the assistance of a loan from a friend, a Mr See. Mr See had been a tenant for the previous fourteen years there and was in a bad state of health. He was apparently considerably in arrears of rent when the property was offered for sale. He contributed the sum of $28,000 to the purchase price and Mr Allard looked after him until he subsequently died in 1988. Cross-examined on the $28,000, Mr Allard said that the amount was ``for the amount of rent and help that we provided for his tenancy''. The amount was apparently paid between October 1985 and 29 June 1986. No further explanation was given. In these circumstances it would seem that the amount in question was income and the only real question of difficulty was whether it was income in the 1986 year or in the 1988 year when the debt was forgiven, or whether it

ATC 4914

should have been spread over each of those years in some way. However, in the absence of any additional evidence, it seems to me appropriate to include it as income in the 1986 year as the Commissioner submits should be the case.


The rent books kept for the Moore Park Road premises comprised in total 6 books. The first three of these books cover the period June 1981 to January 1985 and I am satisfied that they correctly record the rental of the Paddington premises in the period to which they relate. On that basis, the rental from these premises, in the years 1982 to 1984, should be, respectively:


These figures should, accordingly, replace the figures $55,269, $61,410 and $68,234, contended for by the Commissioner and obtained, it will be recalled, by an annual regression of 90 percent from a starting point of $93,600 in 1987.

No record was kept, it would seem, of the Moore Park rental from February 1985 to October 1985. The rental for the seven months from July 1984 to January 1985, as set out in the rental receipt books to that date, was $23,864. This is an average of $3,409 per month. If the Commissioner were right in assuming an annual rental increase of 10%, presumably it would be appropriate to assume approximately a five percent increase over a six months period. On this basis, it could be predicated that the rental for each of the remaining five months of the year would be no more than $3,579.60. The total rent, therefore, for the year ending 30 June 1985, would be no more than $41,762.

There are two rental books covering the period from October 1985 to January 1987. These books are kept differently from the earlier books in that a number of the entries are duplicated. The evidence showed that some entries in these two books were made by a Mr Lobet (who apparently lives in New Zealand and was not called to give evidence) while Mr Allard was in custody. The fact that the books were kept in part by a person other than Mr Allard and those entries are consistent with entries made by Mr Allard, tends to confirm their accuracy. However, an analysis of these books produces the following results:

|                       MOORE PARK ROAD RENT                       |
|       YEAR         |         MONTH         |      AMOUNT ($)     |
|       1985         |         NOVEMBER      |       1,440.00      |
|                    |         DECEMBER      |         510.00      |
|       1986         |         JANUARY       |       2,794.00      |
|                    |         FEBRUARY      |       3,480.00      |
|                    |         MARCH         |       2,600.00      |
|                    |         APRIL         |       3,656.00      |
|                    |         MAY           |       5,392.00      |
|                    |         JUNE          |       4,091.00      |
|                    |                       |     ----------      |
|                    |                       |     $23,963.00      |
|                    |                       |     ==========      |
|                    |                       |                     |
|                    |                       |    (average per     |
|                    |                       |      month =        |
|                    |                       |    $2,995.38)       |


|       1986         |         JULY          |       1,931.00      |
|                    |         AUGUST        |       2,757.00      |
|                    |         SEPTEMBER     |       2,322.00      |
|                    |         OCTOBER       |       2,579.00      |
|                    |         NOVEMBER      |       2,712.00      |
|                    |         DECEMBER      |       1,765.00      |
|       1987         |         JANUARY       |       3,024.00      |
|                    |         FEBRUARY      |       3,194.00      |
|                    |         MARCH         |       2,328.00      |
|                    |         APRIL         |       3,034.00      |
|                    |         MAY           |       3,722.00      |
|                    |         JUNE          |       2,225.00      |
|                    |                       |       --------      |
|                    |                       |     $31,593.00      |
|                    |                       |                     |
|                    |                       |    (average per     |
|                    |                       |      month =        |
|                    |                       |    $2,632.75)       |

These figures appear somewhat low, having regard to the rentals payable in earlier years.

The applicant accepts that on a ``worst case'' basis I could assume that the rental from February 1985 to October 1985 was a figure representing the average monthly rental in the 1984 year. This figure was $4,096.00 per month. Adopting that figure, but accepting, as I do, the rental book figure to January 1985, this gives a rental for Moore Park Road, in the year ended 30 June 1985, of $44,344.00. I am satisfied, on the balance of probability, that the Moore Park Road rental in that year did not exceed $44,344.00.

The question that then requires explanation is why the rental figures in the years 1986 and 1987 from this source showed a significant deterioration. I am not assisted in reaching my conclusion by the failure of counsel for the Commissioner to cross-examine upon the rental books and this deterioration. From an examination of the rental books themselves and the evidence it appears that the explanation may include one or more of the following:

  • (1) Mr Allard was, during this period, in custody for approximately 8 months and the collection of rents by Mr Lobet may have been more desultory than if the rents had been collected by Mr Allard.
  • (2) The rent books for the periods covering the 1986 and 1987 years suggest an occupancy rate less than that prevailing in previous years. Thus, as pointed out by counsel for Mr Allard, in July 1986 there were 14 rooms vacant and the rent for two rooms was not paid, in August 1986 there were 15 rooms vacant and the rent for two rooms was not paid.
  • (3) One tenant, a Mr Quinn, was not recorded as paying rent for the room he occupied (Room 2 in 400 Moore Park Road) until June 1987.

I have given anxious consideration to the question whether this deterioration in income suggests that the rental books are incorrect. Such a finding would require me to infer that Mr Lobet (or Mr Allard or both) falsified the books. I should say that the failure to call Mr Lobet was explained and no inference should be drawn from that failure.

In the end, it seems to me that I should accept the accuracy of all the rental books, subject to the qualifications I have set out above, and accordingly that I should accept the submission of counsel for Mr Allard that the income from rents from the Moore Park Road property in the years 1986 and 1987 was not greater than $40,437.00 and $31,593.00, respectively.

That takes me to the question of the income from the Holyrood Hotel. There is now no dispute between the parties as to the income from the Holyrood Hotel in the years 1982, 1983 and 1984. As no income was derived from this source in 1987, no dispute arises in that year. Accordingly, the only dispute between the parties on this item lies in the years 1985 and 1986 respectively.

Counsel for Mr Allard submits that I should derive a figure for the Holyrood Hotel in these years by commencing with Mr Allard's

ATC 4916

bankings, subtracting from this the figures representing rental from the Moore Park Road property and then adding on the living expenses which Mr Allard's accountant notified the Commissioner had come from cash drawings. I have difficulty with this approach. It assumes that all income after the cash drawings was banked and that the estimates made by the accountant of the cash drawings were correct. It is, perhaps, significant that Mr Allard gave no direct evidence of his living expenses and that the only evidence on the subject is that the accountant estimated the amounts and that they were taken into account in the preparation of Mr Allard's tax returns. He swore, too, as to the accuracy of the returns. This evidence has, in my view, little weight. It is also, in my view, now too late to permit Mr Allard to reopen his case.

I suggested that counsel for Mr Allard review the evidence of the rental history of the Holyrood Hotel in the period in dispute and make a calculation of what that evidence suggested as to the rental derived by Mr Allard making assumptions, where assumptions were necessary, that were adverse to Mr Allard. On this basis, I suggested it might be possible to demonstrate that Mr Allard's income from this source could not be greater than a specified figure. Counsel duly assayed this task.

On the evidence, there were between 30 and 40 rooms in the Holyrood Hotel. I accept Mr Allard's evidence that there were seven rooms for letting on the ground floor and that on each of the first, second and third floors, there were ten rooms and that, in addition, there was an apartment referred to as ``the penthouse'' occupied by the caretakers in the previous ownership.

According to Mr Baker's evidence, the prostitutes commenced working at the Holyrood Hotel in or about early 1985. The rental payable was $30 to $40 per room for one night on the ground floor. Other floors were occupied as they had been in previous years on a weekly tenancy basis. Mr Baker also swore that renovations to the ground floor were completed only in November 1984 so that it would be reasonable, on this evidence, to assume that the prostitutes commenced working no earlier than November 1984. Mr Allard's evidence suggested, however, that the renovations and remodelling occurred at the end of the summer of 1983/1984, ie around January or February 1984. He said, however, that there was virtually only one lady using the ground floor and that occupancy built up slowly.

The evidence of Tina, who worked as a prostitute while living on the first floor, was that the prostitutes paid $30 to $40 per room per night but that there were never more than five or six girls working at any one time. According to her evidence, while she lived in the hotel all of the floors above the first floor were occupied by single, elderly men, evidence which is corroborated by Mr Baker (speaking of his sojourn in 1983) and by Detective Irwin (speaking of the situation at the time of the police raid) who also said that one of the floors was less occupied than the others.

The evidence suggests that the weekly tenants on the upper floors paid between $30 and $40 per week rent in the relevant period, the rental having in earlier times (the 1983 year) been around $22 per week and escalated a couple of dollars each six or seven months thereafter. Mr Baker recollected that by 1985 the weekly rental was around $30.

The applicant submits that I should, on this evidence, reach the following conclusions:

  • (1) that prostitutes first came to the premises in December 1984. That at that time the first, second and third floors were fully occupied by tenants paying $30 per week. On the assumption adverse to Mr Allard that there were 33 rooms (including the penthouse) on these floors the rental for that month from permanent boarders would be $5,022.80, taking the rent for the penthouse at $100 per week;
  • (2) that initially the prostitutes paid $30.00 and that the higher amount of $40 per night commenced only later in July 1985;
  • (3) that initially (ie as at December 1984) the ground floor rooms were occupied on average by two prostitutes working one shift per night, that the number of prostitutes gradually increased to four in January 1985 and five to six by June 1985 and that two shifts were worked four nights per week rising to seven nights per week;
  • (4) that the weekly rentals gradually increased to $35 a room and $150 per week for the penthouse; and
  • (5) that no rent was collected after 8 October 1985 when Mr Allard was arrested.

    ATC 4917

This last assumption accorded with the evidence of Tina, which I accept. It may be implied that once Mr Allard was in custody the rent was not paid and ultimately, on the demolition of the building, would have been difficult to recover.

On this basis, it was submitted that I should conclude that the income of the Holyrood Hotel in the relevant period was no greater than:

|                       MOORE PARK ROAD RENT                       |
|       YEAR         |         MONTH         |      AMOUNT ($)     |
|       1984         |         JULY          |       5,406.35      |
|                    |         AUGUST        |       3,476.12      |
|                    |         SEPTEMBER     |       3,476.12      |
|                    |         OCTOBER       |       3,476.12      |
|                    |         NOVEMBER      |       3,476.12      |
|                    |         DECEMBER      |       5,802.00      |
|       1985         |         JANUARY       |       7,447.60      |
|                    |         FEBRUARY      |       9,179.60      |
|                    |         MARCH         |       9,179.60      |
|                    |         APRIL         |       9,179.60      |
|                    |         MAY           |      14,115.80      |
|                    |         JUNE          |      15,934.40      |
|       1985         |         JULY          |      22,472.70      |
|                    |         AUGUST        |      22,472.70      |
|                    |         SEPTEMBER     |      22,472.70      |
|                    |         OCTOBER       |       2,955.96      |

The figures in the period July 1984 to November 1984 seem out of line if checked against the sum obtained by subtracting from Mr Allard's bankings the amounts from Moore Park Road rent. This calculation produces an average for the five months of $4,494, an average which takes no account of cash living expenses representing additional cash earnings. Doing the best I can, it seems to me that it would be appropriate to take, as a maximum figure, each of the five months as producing income of $5,000 a month on average. On this basis, which I accept is somewhat arbitrary, I am satisfied that Mr Allard's income for the year ended 30 June 1985 from the Holyrood Hotel was no greater than $90,149.43. I am satisfied that, on the balance of probabilities, Mr Allard's income for the period July to October 1986 was no greater than $70,374.06, as submitted by counsel for Mr Allard.

Having arrived at these figures, I would conclude that, on the balance of probabilities, Mr Allard has shown that his taxable income was no greater than the following amounts:

|               | 1982  | 1983  |   1984  |  1985  |  1986  |  1987  |
|               |   $   |   $   |     $   |    $   |    $   |    $   |
| Rent,         |       |       |         |        |        |        |
| Moore Park    |       |       |         |        |        |        |
| Road          | 39,783| 50,111|   49,201|  44,344|  40,437|  31,593|
| Rent,         |       |       |         |        |        | Nil    |
| Holyrood Hotel| 48,010| 48,766|   64,867|  95,838|  70,374| Income |
| TOTAL         | 87,793| 98,877|  114,068| 140,182| 110,811|  31,593|


| LESS expenses |       |       |         |        |        |        |
| as per returns| 75,074| 99,968|   98,305| 116,137| 117,414|  63,101|
| TOTAL         | 12,719|(1,091)|   15,763|  24,045| (6,603)|(31,508)|
|ADD 50% of rent|       |       |         |        |        |        |
| at Moore Park |       |       |         |        |        |        |
| Rd as private |       |       |         |        |        |        |
| expenditure   |  4,256|  4,050|    4,100|   4,335|   2,545|   --   |
|ADD 115 Woomera|       |       |         |        |        |        |
| Ave           |       |       |         |        |        |        |
| amount        |   --  |   --  |    --   |   --   |  28,000|   --   |
| TAXABLE INCOME| 16,975|  2,959|   19,863|  28,380|  23,942|(31,508)|

The appeals should accordingly all be allowed and the assessments remitted to the Commissioner to be amended in accordance with law. The applicant has been substantially successful and should accordingly have his costs paid by the respondent.


1. The applications be allowed.

2. The income tax assessments be remitted to the Commissioner for reassessment in accordance with law.

3. The respondent to pay the applicant's costs.

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