FAVARO v FC of T
Judges:Branson J
Court:
Federal Court
Branson J
By application dated 22 April 1994 the applicants, who are husband and wife, appeal to the Court against:-
- (1) the decisions of the respondent to disallow in full the applicants' objections to the amended assessments made by the respondent of their respective taxable incomes for the years of income ended 30 June 1986, 30 June 1987 and 30 June 1988; and
- (2) the decision of the respondent to disallow in part the applicants' objections to the assessment and amended assessments made by the respondent of the respective taxable incomes of the applicants for the year of income ended 30 June 1989.
The right of appeal thus exercised by the applicants is that created by s 14ZZ of the Taxation Administration Act 1953 (Cth) (``the Administration Act''). The decisions of the respondent on the applicants' objections are ``objection decisions'' (s 14ZY of the Administration Act) which are ``appealable objection decisions'' within the meaning of s 14ZZ of the Administration Act (s 14ZQ of the Administration Act).
Section 14ZZO of the Administration Act is concerned with grounds of objection and burden of proof on appeals under s 14ZZ of the Administration Act. So far as is here relevant, it provides as follows:-
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``In proceedings on an appeal under section 14ZZ to the Federal Court against an appealable objection decision:
- (a) the appellant is, unless the Court orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
- (b) the appellant has the burden of proving that:
- (i) if the taxation decision concerned is an assessment... - the assessment is excessive; or
- (ii) (not here relevant); or
- (iii) (not here relevant).''
In
FC of T v Dalco 90 ATC 4088 at 4091; (1989-1990) 168 CLR 614 at 621 Brennan J, with whom Mason CJ, Dawson, Gaudron and McHugh agreed and Deane J was ``in general agreement'', said, in the context of the then statutory equivalent of s 14ZZO of the Administration Act:-
``... Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.''
The onus of proof required to be met by the taxpayer is, of course, that of the balance of probabilities. As Burchett J pointed out in
Ma v FC of T 92 ATC 4373 at 4377; (1992) 37 FCR 225 at 230:-
``... if a taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spends his time, and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved. Any other view would introduce a degree of arbitrariness into liability for tax.''
Background facts
The following background facts are taken from the applicants' statement of facts issues and contentions. The accuracy of the facts here set out is admitted by the respondent.
The first applicant lodged income tax returns with the respondent for the years of income from the year ending 30 June 1986 to the year ending 30 June 1989 (``the years of income'') returning the taxable income shown below:-
Year of income Taxable income
ended 30 June returned
1986 $33,490
1987 $35,285
1988 $16,468
1989 $11,384
The second applicant lodged income tax returns with the respondent for the years of income returning the taxable income shown below:-
Year of income Taxable income
ended 30 June returned
1986 $33,000
1987 $35,285
1988 $16,199
1989 $ 5,660
In about January 1990 the respondent commenced a taxation audit of the taxation affairs of the applicants. Upon the completion of the audit the respondent issued amended assessments to each of the applicants in respect of his or her respective taxable incomes for each of the years of income.
As a result of the taxation audit the respondent adjusted the assessable income of the first applicant for each of the years of income by adding to the taxable income previously returned by him the amounts of additional assessable income shown below so as to increase such taxable income as is also shown below.
Year of income Additional Adjusted
ended 30 June assessable income taxable income
1986 $ 13,573 $ 47,063
1987 $151,915 $187,200
1988 $ 5,572 $ 22,040
1989 $ 23,382 $ 34,766
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On 15 May 1991 notices of amended assessment were issued to the first applicant on the basis of the above adjusted taxable income figures.
Also as a result of the taxation audit, the respondent adjusted the assessable income of the second applicant for each of the years of income by adding to the taxable income previously returned by her the amounts of additional assessable income shown below so as to increase such taxable income as is also shown below.
Year of income Additional Adjusted
ended 30 June assessable income taxable income
1986 $ 12,103 $ 45,103
1987 $148,253 $183,538
1988 $ 2,046 $ 18,245
1989 $ 22,654 $ 28,314
On 16 May 1991 the respondent issued to the second applicant notices of amended assessment in respect of the years of income ended 30 June 1986-30 June 1988 and a notice of assessment in respect of the year ended 30 June 1989 on the basis of the above adjusted taxable income figures.
The amounts of additional assessable income added by the respondent to the taxable incomes previously returned by the applicants were estimates made by the respondent. Section 167 of the Income Tax Assessment Act 1936 (Cth) (``the ITAA'') relevantly provides that ``[i]f... the Commissioner is not satisfied with the return furnished by any person... the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166''. Section 166 of the ITAA provides for the making by the Commissioner of ``an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon''.
The above estimates of additional assessable income made by the respondent include an estimate that the applicants had each received the following additional assessable income by way of net rents from certain properties:-
Year of income First applicant Second applicant
ended 30 June
1986 $1,938 $ 468
1987 $5,534 $1,872
1988 $3,746 $ 220
1989 $ 728 -
The applicants did not, as at the date of the hearing of this matter, challenge the inclusion in their respective assessable incomes of the amounts of rent referred to above.
The respondent's estimate of the additional assessable income of each applicant in each of the years of income was arrived at, other than in respect of the rent referred to above, by a process of estimation based upon what are known as ``T''-accounts. The respondent has not sought to identify the source of such additional assessable income.
On 25 June 1991 the applicants lodged objections with the respondent to all of the amended assessments referred to above and to the assessment issued to the second respondent in respect of the year ended 30 June 1989.
By letter dated 2 March 1994 the respondent:-
- (a) disallowed in full the applicants' objections to the amended assessments for each of the years of income ended 30 June 1986-30 June 1988; and
- (b) allowed in part the applicants' objections to the amended assessment for the first
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applicant and the assessment for the second applicant in respect of the year of income ended 30 June 1989 by adjusting the estimated assessable incomes of each of the applicants for that year of income by $11,454. The adjustment in respect of the second applicant was described as having been arrived at ``by including the following amounts as funds available to the taxpayer and her husband... as part of the T-Account reconstruction for that year:-- (a) the net proceeds of the settlement of a property located at Unit 11/538 South Road Kurralta Park. This amounted to $8,408.30
- (b) a further amount of $14,500 representing a loan repaid to the taxpayer by Lynette Favaro.''
On 15 March 1994 the respondent issued a notice of amended assessment to each of the applicants in respect of the year of income ended 30 June 1989 to take account of the upholding of the applicant's objections to the amended assessment and assessment for that year.
Witnesses
The principal witness called on behalf of the applicants was the applicant Gerald Antonio Favaro (``Mr Favaro''). I formed an adverse view of Mr Favaro's credibility. He gave evidence at trial inconsistent with statements earlier made by him on the same topics to taxation authorities and on occasions to his own accountant. When confronted with documentary evidence inconsistent with his oral evidence he declined to admit error when to do so appeared contrary to his interests. He gave oral evidence which was in conflict with his affidavit evidence, and, on occasions, in conflict with evidence, the truth of which I accept, given by other witnesses called in his interest. One such instance, which I give simply as an example, is the conflicting evidence given by Mr Favaro and his son Geraldo (``Mr Favaro Jnr'') as to whether they discussed the management of a residential unit purchased in the name of Mr Favaro Jnr. On the evidence before me it is plain that Mr Favaro has involved himself in attempts to conceal rental income, at the least of his son, from the respondent. It is further plain that Mr Favaro was prepared in affidavits sworn by him to swear to the truth of certain matters without taking appropriate, or perhaps any, steps to verify the truth of such matters.
I do not regard Mr Favaro's evidence on any significant issue as worthy of belief unless it is confirmed or corroborated by other evidence, or is evidence adverse to the interests of the applicants.
Evidence was also called on behalf of the applicants from Vita Favaro, (``Mrs Favaro''), the second applicant, and other members of the Favaro family - in which expression I include a former daughter-in-law of the applicants. Mrs Favaro gave evidence, which I accept, that her husband managed their financial affairs and that she has only a general, and not a detailed, understanding of such affairs. It appears that some members of this group of witnesses may have been invited to read the affidavit evidence of Mr Favaro before their own proofs of evidence were taken by the solicitors for the applicants. If the evidence of any witness called on behalf of the applicants was obtained in this way such evidence would be open to the same criticism as to weight as evidence given by a witness who has sat in court and listened to the evidence which his or her evidence, given later in time, is designed to confirm. Having regard to the cross-examinations of such witnesses, I do not find it necessary to determine whether their affidavit evidence was obtained in this way. They were each cross-examined on the important elements of their evidence. In some cases this resulted in some departure from the affidavit evidence. I did not form the impression that any such witness sought deliberately to mislead me in his or her oral evidence. Where there is inconsistency between the affidavit evidence of any such witness and his or her oral evidence on a particular issue, I am able to attach little weight to the evidence of such witness on that issue.
The evidence given by all other witnesses in this matter I accept without reservation.
The issues
The ultimate issue before me is that of whether the amounts assessed as the taxable incomes of the applicants respectively in the years of income are shown to be wrong.
It is accepted that the respondent has based his assessments on ``T''-accounts for the applicants prepared by his officers. ``T''- accounts are a technique used as an indirect method of ascertaining a taxpayer's taxable income. They compare cash available at the beginning of a period plus cash received during the period with cash expended during the period
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plus cash on hand at the end of the period. With full and accurate information, the two sides of the exercise should balance. On behalf of the applicants, rival ``T''-accounts prepared by the accountant, Brian Francis Harmer (``Mr Harmer''), were placed in evidence, as were asset betterment statements for the applicants prepared by Mr Harmer.The respondent did not seek positively to establish the accuracy of the ``T''-accounts prepared by his officers. He was not obliged to do so: the applicants carry the burden of proving that the respondent's assessments are excessive. The applicants place considerable weight on the ``T''-accounts and asset betterment statements prepared by Mr Harmer. At the end of the day I have obtained only limited assistance from Mr Harmer's work. His report was not received in evidence as proof of the matters of fact recited therein. Mr Harmer's work was, naturally, based upon his instructions. Mr Harmer's instructions were based, in large part, on information provided, directly or indirectly, by Mr Favaro. As I have mentioned above, I did not find Mr Favaro to be a witness of credit. I have not accepted his evidence on a number of important issues which impact directly on the accuracy of Mr Harmer's ``T'' accounts.
On behalf of the applicants a number of sources for funds expended by them is advanced. Such sources fall broadly into the categories of loans and gifts, cash on hand at 30 June 1985 and the proceeds of sale of land in Italy. In addition the applicants challenged the estimate made by the respondent of their living and personal expenses.
Living expenses
The applicants claim that they lived in the relevant years more frugally than the hypothetical average individual, the creation, as I understand it, of the Australian Bureau of Statistics, whose living and personal expenses form the basis of the respondent's estimate of the applicants' living and personal expenses. The applicants were not able to produce any records to assist in the calculation of their living and personal expenses in the relevant years. It is not challenged that they lived, for at least most of the relevant time, in a house of approximately 720 square metres built over two allotments. Their tastes were not, it seems, universally frugal. I am not satisfied that the respondent has acted on a wrong basis so far as his estimates of the applicants' living and personal expenses are concerned.
Loans and Gifts
The applicants assert that on about 19 June 1985 Mr Favaro received the sum of $50,000 from Mr Favaro Jnr.
Mr Favaro Jnr. gave affidavit evidence that, following the sale of a residential unit owned by him, he opened an account with the Co- operative Building Society, and paid into that account on 8 May 1985 the sum of $73,000 being the proceeds of the sale. He further gave affidavit evidence that he drew a cheque dated 19 July 1985 on that account in favour of his father in the sum of $50,000. He agreed in oral evidence that in fact the cheque which he drew was dated 19 June 1985. A copy of a cheque for $50,000 dated 19 June 1985 drawn on the Co- operative Building Society was received in evidence as was a letter from an officer of The Co-operative Group, of which the Co-operative Building Society is a member, confirming the opening of an account on 8 May 1985 for the sum of $73,000 and the withdrawal in favour of G A Favaro of the sum of $50,000 from that account on 19 June 1985. Mr Favaro Jnr confirmed evidence given by his father that he gave his father the sum of $50,000 at his father's insistence to hold for the purpose of the building of a pasta factory.
I am satisfied that Mr Favaro Jnr did give his father a cheque dated 19 June 1985 for the sum of $50,000, and that such sum came from the proceeds of sale of the unit earlier owned by Mr Favaro Jnr. I deal later in these reasons with the manner in which Mr Favaro dealt with the $50,000.
I give consideration below to an amount of $117,725.68 which Mr Favaro asserts that he had in cash at his home, some expenditures aside, from November 1984 until November 1986. It is appropriate to record here that I am satisfied, on the balance of probabilities, that this amount was borrowed by the applicants from the Favaro Family Trust in November 1984. It was not, I think, contended by the respondent to the contrary.
Considerable attention was paid during the course of the evidence to the issue of a loan (I accept, for present purposes, the parties' description of the transaction) by Antoinette Favaro, now Antoinette Gamma (``Ms Gamma''), to Mr Favaro. At the hearing it was
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not disputed by the respondent that this loan had been made: what was in issue was when it was made. Ms Gamma gave evidence, by reference to a Commonwealth Savings Bank of Australia savings investment account pass book, that she lent to Mr Favaro the sum of $14,569 on 30 May 1988. The purpose of this loan, she said, was to allow Mr Favaro to invest the money on her behalf in SGIC where he could obtain an interest rate higher than she could. Ms Gamma was at this time married to Mr Favaro Jnr and known as Lynette Favaro. Mr Favaro's evidence was that the sum of $14,569 was lent to him by Lynette Favaro in late 1987. I accept the evidence of Ms Gamma that she gave the sum of $14,569 to Mr Favaro after withdrawing money from her savings investment account with the Commonwealth Savings Bank of Australia on 30 May 1988. It is not contested that Mr Favaro caused a cheque in the amount of $15,000 to be paid to Ms Gamma's parents in repayment of the loan from Mrs Gamma on or about 10 May 1989.Mr Favaro's bank account with the State Bank of South Australia shows a credit entry of $10,500 on 31 May 1988. Mr Favaro rejected the suggestion put to him in cross-examination that the source of these funds was the loan from Ms Gamma. He asserted that the sum of $10,500 represented his inheritance from his mother. I am not able positively to find that the source of the credit of $10,500 was the loan from Ms Gamma. I record, however, that I am not satisfied on the balance of probabilities that the credit represents the deposit by Mr Favaro of his inheritance from his mother.
In evidence before me Mr Favaro asserted that the credit entry for $10,500 against the date 31 May 1988 on his bank statement definitely reflected his banking of his inheritance from his mother. He used the words, ``I remember distinctly and I'll never forget that as long as I live. That was part of the inheritance money from my mother and I had no intentions of putting it in the bank any earlier than that and I'll never forget that.'' In his affidavit evidence Mr Favaro asserted, not that $10,500 was part of his inheritance from his mother, but that it was the total value of his inheritance taking into account the sale of certain furniture, cash in hand and cash at bank. Under cross- examination Mr Favaro agreed that by January 1988 he had collected the cash from his mother's bank account and her cash on hand and the proceeds of the sale of her furniture. Mr Favaro's explanation for not having banked such money earlier was that he let it sit so as not to feel like a vulture. He did not explain why the banking rather than the collecting of his inheritance would have resulted in his feeling like a vulture. I do not accept this explanation.
Mr Mann's evidence was that, during the course of the taxation audit of the applicants' financial affairs, he had asked Mr Favaro the source of various deposits to his bank account and that the absence of a notation by him beside the credit entry of $10,500 indicated that Mr Favaro had not been able to explain it to him. I accept this evidence. In the absence of any suggestion that Mr Favaro may not have wished to be frank with his accountant, such evidence is inconsistent with Mr Favaro's evidence before me of a clear memory that such deposit represented his inheritance from his mother. Moreover, Mr Favaro gave an explanation inconsistent with the source of the credit being an inheritance from his mother as a possible explanation for the credit entry to officers of the respondent during an interview in February 1995.
I do not understand it to have been seriously challenged that Mr Favaro did receive approximately $10,500, partly in cash and partly as the proceeds of the sale of furniture, from his mother's estate. I am not satisfied, however, that the credit entry appearing in Mr Favaro's bank statement as at 31 May 1988 represents such inheritance. Indeed, I am not satisfied that Mr Favaro ever banked such inheritance as a lump sum.
A further issue explored in evidence was that of whether Mr Favaro's mother provided $15,000 towards the purchase of a residential unit at Penfold Road, Magill, purchased in the names of the applicants. In his affidavit evidence Mr Favaro stated that his mother gave him the sum of $15,000 in cash prior to the settlement of the purchase of the unit on 6 August 1986. In oral evidence Mr Favaro said that he had no memory of his mother giving him $15,000 in cash. It appears that shortly before being cross-examined on this topic Mr Favaro had discovered a bank withdrawal slip in a deposit/withdrawal book said to have been in his mother's possession at the date of her death. Such bank withdrawal slip evidences a withdrawal on 6 August 1986 of the sum of
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$15,000. The deposit/withdrawal book does not identify the name of the account to which it relates, although the bank branch by which it was issued appears as the Elizabeth City Centre branch of the State Bank of South Australia. Frank Antonio Favaro, (``Mr Frank Favaro''), Mr Favaro's brother, identified the writing on the withdrawal slip as being his. He stated that he did not have an account at the Elizabeth City Centre branch of the State Bank of South Australia. He gave evidence of occasions when he accompanied his mother to the Elizabeth City Centre to assist her with banking. He said that his mother was about 84 years of age at the time. Other evidence suggests that this estimate may be too high but that Mrs Favaro Snr was certainly over 80 years old in August 1986. Mrs Favaro Snr had been a pensioner since the age of 65 years. Mr Frank Favaro said that he had only a ``vague memory'' of having accompanied his mother to the bank on 6 August 1986. He was not able to give evidence of what happened to the $15,000 presumably withdrawn by his mother on that day.I am satisfied on the balance of probabilities that Mrs Favaro Snr did withdraw $15,000 on 6 August 1986 from a bank account at the Elizabeth City Centre branch of the State Bank of South Australia which she was able to operate.
The evidence as a whole suggests that the bank account at the Elizabeth City Centre branch of the State Bank of South Australia from which the $15,000 was withdrawn was an account named ``FA and GA Favaro''. It was not suggested that Mrs Favaro Snr's initials were either ``FA'' or ``GA''. I note that in speaking of his mother's cash in bank as at the date of her death, Mr Favaro spoke of ``her'' bank account. He agreed that by January 1988 he would have collected the cash from her bank account. In doing so he presumably learnt the name in which her account was held. If he had learnt at this, or indeed at any time, that his mother used as her own a bank account named ``FA and GA Favaro'' he could have been expected to have given evidence to this effect. He did not.
I note that the timing of the withdrawal by Mrs Favaro Snr on 6 August 1996 does not fit easily with Mr Favaro's evidence that he had the $15,000 in cash ``prior to settlement on 6 August 1986''. Even if such evidence is to be understood as meaning that he received it on the very day of settlement, reliance on the withdrawal slip would seem to require a finding that either Mr Favaro collected the money from his mother on that day, or that Mr Frank Favaro, who was apparently with Mrs Favaro Snr on that day, gave it to Mr Favaro, on his mother's behalf, on that day. Neither Mr Favaro nor Mr Frank Favaro gave evidence in support of either of these scenarios.
Nonetheless, having regard to the coincidence of the date of the withdrawal slip and the date of the settlement of the purchase of the Penfold Road unit, I am satisfied on the balance of probabilities that the $15,000 apparently withdrawn by Mrs Favaro Snr from a bank account on 6 August 1986 constituted part of the settlement monies for the purchase of the unit on Penfold Road, Magill.
However, I am not satisfied that Mrs Favaro Snr was the beneficial owner of the funds in the account from which the $15,000 was withdrawn. I find that the $15,000 was not a gift to the applicants from Mrs Favaro Snr. I consider it to be more likely than not that either the applicants, or Mr Favaro alone, were or was the beneficial owners or owner of the funds in the relevant bank account.
Cash on hand/Proceeds of sale of Italian land
It is not possible to separate out the evidence as to the applicants' cash on hand and the evidence as to the sale by them of land in Italy.
The claim of the applicants that Mr Favaro kept significant sums of money in cash can be considered under two broad headings - what was called during the hearing the ``pasta factory cash'' and other, or ``sundry cash''.
In his affidavit evidence Mr Favaro stated that ``[p]rior to about 1994 I always kept about $3,000 to $5,000 in cash at hand''. In his oral evidence he agreed that he had no memory of how much cash he had at hand at the end of each financial year, but that he kept cash for his own personal use and that of his wife. So much was not seriously challenged by the respondent. I find that Mr Favaro did keep cash at hand over the relevant period for the personal use of himself and his wife. I find that such amount probably fluctuated between approximately $3,000-$5,000. On the balance of probabilities I find that the amount of sundry cash that Mr Favaro had on hand at the end of each of the years of income was $4,000.
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As to the holding of other sums of money in cash, Mr Favaro's affidavit evidence is as follows. First he states that after the completion of the building of his family home in the Adelaide suburb of Auldana he had surplus funds of $34,000 as at 30 June 1984 and that he is unable to recall whether this sum was held in cash or was in a bank account. I am unable to be satisfied that such funds were in fact held by Mr Favaro in cash as at 30 June 1984.
Mr Favaro's affidavit further states that on 17 November 1984 settlement of two residential units owned by the company Banhinia Development Corporation Pty Limited (``Banhinia'') as trustee of the Favaro Family Trust occurred. It goes on to state that he cashed the bank cheques in favour of Banhinia received at settlement and took home in cash the sum of $117,725.68 which he placed in a steel ammunition box. The reason which Mr Favaro gave for holding such a large amount of cash was that he expected to be using it in the near future in connection with the development of a pasta factory.
Mr Favaro's evidence is that he put with the $117,725.68 in cash in the ammunition box, the sum of $50,000 which he obtained by cashing the cheque dated 19 June 1995 for $50,000 given to him by Mr Favaro Jnr.
Mr Favaro's evidence is that in about mid-1985 he lent Mr Favaro Jnr the sum of $12,500 from the cash which he held in the ammunition box and that in November 1985 such amount was repaid. His oral evidence was that the repayment moneys went into the ammunition box.
Mr Favaro's evidence is that a large amount of Italian currency was added to the Australian currency in the ammunition box in the following circumstances. He stated that whilst on a trip to Italy in May 1986 he closed an Italian bank account in his name consequent upon a withdrawal in cash of the total amount in the account, namely L144,067,534. The ultimate source of such funds is not now seriously in issue: the applicants sold land in Italy in about August 1981 and the proceeds of such sale remained invested in Italy. Mr Favaro's evidence is that he received the money which he withdrew from the Italian bank account in bundles of new and used notes and placed them in a travel bag which he then carried with him on the plane back to Australia as hand luggage. No evidence was led that suggested that any official notification of this currency movement was given. I was not addressed on the legality in the circumstances of such currency movement. Mr Favaro's evidence is that following his arrival home on 24 May 1986, he placed the Italian currency on top of the other cash already in the ammunition box.
Mr Favaro's evidence is that on 4 July 1986 he spent $3,000 of the money in the ammunition box to pay a deposit on the residential unit at Penfold Road, Magill referred to earlier, and that in the same month he put $7,300 of such money towards the purchase of a motor car.
It is further his evidence that in about June or July he spoke with Giovanni Melino (``Mr Melino''), a friend who was a travel agent, seeking assistance in identifying persons travelling to Italy who might wish to buy some of his Italian currency. Mr Favaro's evidence is that he sold some of his Italian currency to clients of Mr Melino and that in about September or October 1986 he exchanged the balance of the Italian currency in his possession, approximately L80,000,000, at an office of Thomas Cook.
Mr Favaro's evidence does not make clear what happened to the money which he says that he obtained from Mr Melino's clients. He asserts, however, that the money received from Thomas Cook went into the ammunition box.
Mr Favaro's evidence is that on 6 August 1986 he used $84,064.33 taken from the ammunition box to settle the purchase of the residential unit at Penfold Road, Magill and that thereafter the amount held in cash in the ammunition box was in the order of $245,000. He identifies this cash as the source of funds invested in the name of the Taurus Trust with Partnership Pacific Limited by four separate deposits in early November 1986.
There is no evidence independent of that of Mr Favaro which provides support for his evidence that he kept significant sums in Australian currency in an ammunition box at his home. Other evidence suggests that he is unlikely to have done so. He is, and was at the relevant time, an experienced investor. He agreed in cross-examination that he moved funds between financial institutions to obtain improved interest rates, and, on occasions, closed accounts and opened new accounts within the one financial institution to obtain a
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better interest rate. At the time relevant to these proceedings, interest rates in Australia were high. Mr Favaro acknowledges that he sought to have his invested funds ``working'' for him. His explanation for his having brought more than L144,000,000 into Australia in Italian currency is that he believed that he could obtain a better exchange rate in Australia than that available to him in Italy. Mr Favaro did not strike me as the sort of man who would allow large sums of money to lie idle, or who would lightly allow an opportunity to make money pass.I am not satisfied that Mr Favaro kept the sum of $117,725.68, the proceeds of the sale of two residential units owned by Banhinia, in cash at his home for any significant period. His explanations that he kept it because he wanted to keep it, and because it was intended to fund the building of a pasta factory, I find unconvincing. Nor do I accept that any depression that he may have suffered following a car accident in August 1982 has any relevance to this issue.
It was put to me in the closing address on behalf of the applicants that, in the absence of any explanation as to what happened to the $117,725.68, I should find it to be improbable that it was not part of the November 1986 investments in Partnership Pacific Limited in the name of the Taurus Trust. No explanation has been put forward by the respondent as to what did happen to the $117,725.68, but no burden of proof lies on the respondent. I do not find it improbable that the $117,725.68 was invested, or otherwise spent, by Mr Favaro in some way not disclosed to me. As mentioned above, I am not satisfied that Mr Favaro was frank in his evidence to this Court. Nor am I satisfied that he has been frank with those persons who have provided him with accounting advice. I am left in a state of uncertainty as to many aspects of the applicants' financial affairs in the years of income. I am not satisfied, on the balance of probabilities, that the $117,725.68 referred to above formed part of the funds invested in November 1986 in Partnership Pacific Limited.
Nor do I accept that Mr Favaro retained at his house in cash the sum of $50,000 obtained by him from Mr Favaro Jnr. I note the evidence of Peter Rowan Mann (``Mr Mann''), Mr Favaro's accountant, that during the course of the taxation audit of the financial affairs of the applicants, Mr Favaro told him that his son Geraldo had given him the sum of $50,000 from the proceeds of the sale of his [i.e. Mr Favaro Jnr's] unit because he, Mr Favaro, by reason of his other investments, could get a better interest rate than Mr Favaro Jnr.
There is evidence, independent of that of Mr Favaro, which provides support for his evidence that he brought a large amount of Italian bank notes into Australia in May 1986. Mr Favaro Jnr was in Italy in May 1986 with his father. He gave affidavit evidence of being with his father when the Italian bank account was closed and of observing his father packing bank notes into a navy blue airline travel bag which his father carried with him as hand luggage on the flight to Australia. Mr Favaro Jnr's affidavit goes on to state that he helped his father pack away the Italian lire into metal ammunition boxes. I note that the affidavit of Mr Favaro mentions only a single ammunition box, being the box in which the proceeds of the sale of the two units owned by Banhinia were stored. It is significant, in my view, that Mr Favaro Jnr makes no mention in his affidavit of seeing any Australian currency whilst helping his father pack away the Italian lire.
Mr Frank Favaro gave affidavit evidence of visiting the applicants soon after Mr Favaro and Mr Favaro Jnr returned from their trip to Italy in May 1986. He states in his affidavit that on this visit he observed a pile of Italian lire on the kitchen table and further Italian lire in a blue airline bag. Francesca Alessandra Cavallaro (``Mrs Cavallaro''), the daughter of the applicants, also gave evidence of seeing a large amount of Italian lire in a small dark blue carry bag of her father's following his return from Italy in May 1986. By reason of the conflict between a statutory declaration sworn by her and her oral evidence on the topic, I do not accept that Mrs Cavallaro counted such money or observed her father counting it. Mr Melino also gave evidence of seeing Mr Favaro in mid-1986 and being shown a large amount of Italian lire in a small black bag.
Mr Melino gave evidence, which I accept, that in May, June or July 1986, Mr Favaro spoke to him seeking assistance in selling Italian currency. Mr Melino further gave evidence that he tried to assist Mr Favaro by putting him in contact with some of his clients but that he does not believe that any of them purchased Italian currency from Mr Favaro
ATC 4985
because the exchange rate which Mr Favaro wanted was too high.I accept that Mr Favaro closed a bank account in Italy in May 1986 and brought to Australia in the same month the sum of L144,067,534 in Italian lire. I am not satisfied that he exchanged any significant amount of this Italian currency for Australian currency in transactions with clients of Mr Melino. It seems probable that he exchanged most of such Italian currency with Thomas Cook. I am prepared to assume that some weeks passed from the date of his return to Australia before Mr Favaro concluded that he could not exchange the Italian currency which he had brought with him at the exchange rate that he sought to achieve by dealing with individuals. On that basis I conclude that Mr Favaro probably exchanged most of the Italian currency that he obtained in Italy with Thomas Cook in early to mid-July 1986. I do not accept that Mr Favaro held the Australian currency which he obtained from Thomas Cook in cash until early November 1986. For the reasons given above I consider that this would have been an unlikely course for him to have followed. To put the matter another way, no convincing reason has been advanced for such funds not having been invested promptly after Mr Favaro undertook the exchange transaction with Thomas Cook.
As to the $50,000 loan from Mr Favaro Jnr, the $117,725.68 from the Favaro Family Trust and the funds obtained by Mr Favaro from Thomas Cook, if such funds were withdrawn from an earlier investment for purpose of being invested with Partnership Pacific Limited in November 1986, I would have expected some evidence of this to be available. None was placed before me. Any such evidence would, of course, have been inconsistent with Mr Favaro's story of holding such funds in cash. Having rejected Mr Favaro's evidence that the funds were held in cash, I am unable to be satisfied that any part of the funds invested in Partnership Pacific Limited in November 1986 derived from the $50,000 loan from Mr Favaro Jnr, the $117,725.68 loan from the Favaro Family Trust or from the funds obtained from Thomas Cook in exchange for the Italian currency. I am simply unable, on the whole of the evidence, to form any view as to what ultimately happened to the proceeds of those two loans, or to the funds obtained by Mr Favaro from Thomas Cook in exchange for the Italian currency. I am also unable to be satisfied as to the source of the funds invested in Partnership Pacific Limited in early November 1986.
Other matters
The applicants' statement of facts, issues and contentions identifies certain issues in addition to those to which I have given attention above. It identifies as issues, whether the respondent should have taken into account, or has properly taken into account:-
- (a) borrowings of $4,898 from the Favaro Family Trust during the year of income ended 30 June 1987;
- (b) borrowings of $33,431 from the Favaro Family Trust during the year of income ended 30 June 1988;
- (c) an amount of $5,500 received from Ernest Favaro during the year of income ended 30 June 1987.
As to the first two issues identified above, I have been unable to identify any evidence led on such issues. I assume that they do not remain live issues between the parties. As to the third, Mr Favaro gave affidavit evidence that his nephew, Mr Ernest Favaro repaid to him an interest free loan of $5,500 in about December 1987. Mr Ernest Favaro gave affidavit evidence that he repaid $5,500 to Mr Favaro in September 1987. Mr Ernest Favaro was not required to attend for cross-examination. I accept his evidence.
The applicants' statement of facts, issues and contentions also identifies as an issue ``[w]hether the Respondent has incorrectly taken into account in the T-account estimation process any amounts expended by the Applicants or incorrectly identified any amounts as having been expended by the Applicants''. As is mentioned above, the respondent did not seek to call evidence in support of the ``T'' accounts prepared by his officers. He places reliance, as he is entitled to do, on the burden of proof borne by the applicants. However, efforts were made during the hearing by the applicants and the respondent to seek to identify the amounts expended by the applicants in certain areas or on certain items.
As to the cost of the residential unit at Penfold Road, Magill, it is agreed between the parties that such cost was $87,064. It is further agreed that the written down value of plant at
ATC 4986
the unit was $3,790 at 30 June 1987 and $3,681 at 30 June 1988.As to building work undertaken at 19 Rawson Penfold Drive, Rosslyn Park (``Lot 69''), the parties are agreed that if all of the applicants' expenditure in such building work is recorded in:-
- (a) the first applicant's cheque butts;
- (b) the first applicant's bank statements; and
- (c) building invoices in the possession of the applicants;
then the applicant expended a total of $53,999 on building costs in relation to Lot 69 up to 30 June 1989. On behalf of the respondent it is contended that the actual amount expended in respect of Lot 69 up to 30 June 1989 may have been greater than the amount recorded in the above documents as Mr Favaro agreed that certain invoices could not be found. Mr Favaro may have suggested that the amount recorded in the above documents might be too large because of a risk of double counting. On the balance of probabilities I find that the agreed amount is the actual amount expended in respect of Lot 69 up to 30 June 1989.
There is a dispute as to the cost of building work undertaken at 17 and 19 Mary Penfold Drive, Rosslyn Park (``Lot 70''). The parties are agreed that if all of the applicants' expenditure on building costs at Lot 70 is recorded in:-
- (a) building invoices in the applicants' possession; and
- (b) such of the entries in an exercise book exhibited to an affidavit of Mr Favaro (``the exercise book'') as Mr Favaro considers represent building costs of Lot 70 for which the applicants have no invoices-
then the applicants expended:
- (i) a total of $96,719 on building costs for Lot 70 up to 30 June 1988,
- (ii) a total of $311,339 on building costs for Lot 70 up to 30 June 1989 (which includes the amount expended up to 30 June 1988).
The parties are further agreed that:-
- (a) the total of the amounts recorded in the exercise book for Lot 70 up to 30 June 1989 is $329,050; and
- (b) the exercise book contains no amount for furniture.
The respondent challenges certain adjustments which Mr Favaro asserted in evidence would be proper to be made to the total costs recorded in the exercise book. One such adjustment was with respect to the cost of the supply of bricks. I accept the submission made on behalf of the respondent that an examination of the bundle of invoices and statements from Hallett Bricks received into evidence makes it plain that such bundle is incomplete. I do not accept Mr Favaro's explanation for the asserted inaccuracy of the exercise book as to the cost of the supply of bricks to Lot 70. I find that on the balance of probabilities, the exercise book is accurate in this regard. Similarly I am not satisfied that the inability of Mr Favaro now to be able to find invoices, in addition to those received into evidence, from Strongmix Concrete demonstrates an inaccuracy in the exercise book as to the cost of concrete supplied by that supplier. As to amounts recorded in the exercise book as paid for ``material for plasterer'' and to Emmanuel & Sons, for ``hire form ply & timber'', Mr Favaro's evidence with respect to these entries does not cause me to doubt the accuracy of his contemporaneous records in the exercise book. I am satisfied on the balance of probabilities that the amounts of $3,450, and $2,000 must be added to $96,719 to achieve the total expenditure of the applicants on building costs for Lot 70 up to 30 June 1988, and that those amounts plus $6,360, $3,000 and $3,500 must be added to $311,339 to achieve the total expenditure of the applicants on building costs for Lot 70 up to 30 June 1989. Mr Favaro gave oral evidence, which was in conflict with his affidavit evidence, that $10,900 was spent by the applicants in the year ending 30 June 1989 on furnishings for the duplex residences constructed on Lot 70. I do not understand this figure to have been challenged. I accept that that amount was spent, and that it is an amount spent in respect of Lot 70 in addition to the amounts recorded in the exercise book.
Further issues raised by the respondent's amended statement of facts, issues and contentions are as follows:-
- (a) whether the interest earned by the applicants on funds invested in Italy was income exempt from Australian income tax; and
ATC 4987
- (b) whether the applicants became liable to pay capital gains tax upon the closure of the Italian bank account on 14 May 1986.
I consider first the issue of interest earned on funds in the Italian bank account and interest earned on the applicants' investment in Italian government bonds. It is plain that such interest was not exempt from income tax merely because it was derived out of Australia. Section 25(1)(a) of the ITAA includes in the assessable income of a taxpayer resident in Australia ``the gross income derived directly or indirectly from all sources whether in or out of Australia...''. The applicants did not contend that either amounts of interest were exempt from income by reason of s 23 of the ITAA or for any other reason. It was contended in written submissions made on their behalf that the interest on the government bonds should be apportioned over the life of the bonds rather than being regarded as income derived at the time that the bonds matured. I do not understand it to have been contended on behalf of the applicants that interest paid on funds in the Italian bank account should be regarded as having been derived at any time other than when such interest was paid.
The authorities seem clear that interest is derived as income when it is actually or constructively received, and not as and when it is accruing nor when it accrues due (
St Lucia Usines & Estates Co Ltd v Colonial Treasurer of St Lucia [1924] AC 508 esp. at 512-513;
Leigh v Inland Revenue Commissioners [1928] 1 KB 73 at 77;
Permanent Trustee Co v FC of T (1940) 6 ATD 5 esp. at 13 per Rich J). In my view, a similar approach is appropriate on interest paid on bonds held by a private investor (see Lehmann and Coleman; Taxation Law in Australia 3rd Ed. 1984 para 12.13; Parsons: Income Taxation in Australia 1985 para 11.248). I do not regard the decision of the High Court in
Coles Myer Finance Limited v FC of T 93 ATC 4341; (1993) 176 CLR 640, nor the decision of Hill J in
FC of T v Unilever Australia Securities Ltd 95 ATC 4117 as calling the above approach into question.
I conclude that income tax on the interest paid on the funds in the Italian bank account and on the interest paid on the investment in Italian government bonds was payable when such interest was received by the applicants.
The respondent did not press argument that the applicants became liable to pay capital gains tax upon the closure of the Italian bank account. He did, however, press an argument that capital gains tax was payable upon the disposition by Mr Favaro of the Italian currency. Section 160A of the ITAA provides that foreign currency is an ``asset'' within the meaning of Part IIIA of the ITAA. Part IIIA of the ITAA is concerned with capital gains and capital losses. It is contended on behalf of the applicants that the Italian currency which Mr Favaro obtained on the closure of the Italian bank account and brought to Australia was a ``non-listed personal use asset'' within the meaning of s 160B of the ITAA. In the circumstances of this case, before I am able to find that such currency was a ``non-listed personal use asset'' of the applicants, I must be satisfied that such currency was ``used or kept primarily for the personal use'' of the applicants (s 160B(1)(a) of the ITAA). I was not referred to any authority on the meaning of this expression. Nor have I been able to find any such authority. The evidence of Mr Favaro was that he kept the Italian currency for the purpose of its being exchanged for Australian currency at a favourable rate. It appears from his affidavit evidence that initially he may have proposed to use the Australian currency thus obtained to purchase machinery from Italy. Mr Favaro asserts that in fact such Australian currency was invested in Partnership Pacific Limited in November 1986. As is mentioned above, I am not satisfied that such Australian currency was invested in Partnership Pacific Limited in November 1986. Nonetheless I am satisfied that it, or a significant portion of it, was invested in some way which I am unable to identify. In my view the Italian currency was not ``used or kept primarily for the personal use'' of the applicants within the meaning of s 160B of the ITAA. I accept the submission made on behalf of the respondent that the expression ``personal use'' is used in s 160B of the ITAA in contradistinction to use for business or profit making purposes. I conclude that the exchange gain made by the applicants upon exchanging their Italian currency for Australian currency is an assessable capital gain under Part IIIA of the ITAA. In view of my finding as to the likely timing of such exchange, such capital gain was assessable in the year ending 30 June 1987.
A number of other issues was [sic] debated before me. My understanding is that by the end of the hearing they were no longer in dispute
ATC 4988
between the parties, relevant only to the credit of Mr Favaro, or acknowledged to be irrelevant to the determination of the issue before me.The respondent should bring in short minutes, on a date to be fixed, of orders appropriate to reflect these reasons. Counsel will have liberty to speak to such minutes.
THE COURT ORDERS THAT:
1. The respondent bring in short minutes, on a date to be fixed, of orders appropriate to reflect the reasons of the Court.
2. Counsel are at liberty to speak to minutes of order.
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