Decision impact statement

Ma and Anor v Commissioner of Taxation

Venue: Administrative Appeals Tribunal
Venue Reference No: 2010/2657-62; 2010/2663-65
Judge Name: Ms J L Redfern, Senior Member
Judgment date: 31 January 2012
Appeals on foot: No
Decision Outcome: Partially Adverse Decision

Impacted Advice

Relevant Rulings/Determinations:

• None

Subject References:
Deemed dividends or ordinary income
Whether assessments were excessive
Payments to associated persons
Whether children and relatives were employees
Domestic or private arrangement
Documentary evidence
Wages not paid directly to children or relatives
Trusts
Burden of proof in taxation matters
Recklessness
Whether penalties should be remitted
Decisions under review varied

Précis

Outlines the ATO's response to this case which concerns whether deposits made by a private company into a joint bank account of the company's directors was income derived beneficially by the taxpayers and thus assessable in their hands.

Brief summary of facts

Mr and Mrs Ma were directors of a private company which carried on business as an importer and seller of bearings to the wholesale industry.

In January 2008, the ATO began an audit for the income years ended 30 June 2001 to 2006 inclusive. The audit revealed that amounts reported in the company's income tax returns as "payments to associated persons" had actually been paid into the taxpayers' joint bank account. The taxpayers did not return the amounts as income in their income tax returns during the relevant years.

The wife passed away in September 2008. Her husband was the executor of her Estate.

The taxpayer claimed, on behalf of himself and the Estate of his wife, that the payments represented wages paid to his three children and his nephew.

The Commissioner issued amended assessments to the taxpayer and the Estate of his wife for each of the years under audit on the ground that the amounts deposited in their account was ordinary income that they had beneficially derived. In respect of the taxpayer, an administrative penalty of 50% of the tax shortfall was imposed.

The Tribunal reviewed the amended assessments for the taxpayer for the 2005 and 2006 income years and the amended assessments for the 2004, 2005 and 2006 income years for the Estate of the wife.

Issues decided by the court

1. Whether the amended assessments were excessive?

The Tribunal found that the children had spent significant hours working for the company, but there was insufficient evidence to substantiate all the hours they claimed to have worked. Therefore, only a small proportion of the amounts deposited represented wages of the children.

In respect of the nephew, the Tribunal found he was expected to work, he would be paid for this work and that he did indeed perform the work. When money was paid by the company in the bank account as a wage paid to the nephew, that money was held on trust for the nephew.

In so far as the payments constituted wages of the children and the nephew, the amended assessments were excessive.

2. Whether the administrative penalties should be set aside?

The Tribunal found that the 50% penalty was appropriate. There was no basis for remitting the penalty. However, the objection decision in relation to administrative penalties was set aside to be recalculated having regard to the revised shortfall amount.

ATO view of Decision

The decision was based solely on the facts and will not have any impact on subsequent cases.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

N/A

Implications on Law Administration Practice Statements

N/A

Court citation:
[2012] AATA 47
2012 ATC 10-232
(2012) 87 ATR 265

Legislative References:
Income Tax Assessment Act 1997
s 6-5
s 6-10
s 6-25

Taxation Administration Act 1953
s 14ZY
s 14ZZ
s 14ZQ
s 14ZZK
Part IVC
Schedule 1 Division 284
Schedule 1 Division 298

Income Tax Assessment Act 1936
s 175A

Case References:
3D Scaffolding Pty Ltd v Federal Commissioner of Taxation
[2009] FCAFC 75
75 ATR 604
2009 ATC 20-111

Countess of Bective v Federal Commissioner of Taxation
[1932] HCA 22
47 CLR 417

Federal Commissioner of Taxation v Dalco
[1990] HCA 3
168 CLR 614
20 ATR 1370
90 ATC 4088

Federal Commissioner of Taxation v H
[2010] FCAFC 128
188 FCR 440
2010 ATC 20-218

Federal Commissioner of Taxation v Rozman
[2010] FCA 324
186 FCR 1
75 ATR 782
2010 ATC 20-171

Gauci v Federal Commissioner of Taxation
[1975] HCA 54
135 CLR 81
5 ATR 672
75 ATC 4257

Hart v Commissioner of Taxation
[2003] FCAFC 105
131 FLR 203
2003 ATC 4665
53 ATR 371

Jones v Dunkel
[1959] HCA 8
101 CLR 298

McCormack v Federal Commissioner of Taxation
[1979] HCA 18
143 CLR 284
9 ATR 610
79 ATC 4111

Trautwein v Federal Commissioner of Taxation
[1936] HCA 77
56 CLR 63

Uratoriu v Commissioner of Taxation
[2010] FCA 1157
2010 ATC 20-219
80 ATR 646