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GASHI v FC of T

Judges:
Bennett J
Edmonds J
Gordon J

Court:
Full Federal Court, Melbourne

MEDIA NEUTRAL CITATION: [2013] FCAFC 30

Judgment date: 14 March 2013

Bennett, Edmonds and Gordon JJ

A. INTRODUCTION

1. Rasim Gashi and Manuela Gashi are married. The respondent, the Commissioner , commenced an audit of Mr and Mrs Gashi's tax affairs in August 2005. On audit, the Commissioner identified an increase in the assets of Mr and Mrs Gashi that was unexplained in each of the years ending 30 June 2000 to 30 June 2006 (the relevant years ). Mrs Gashi had not lodged a tax return in any of those years. Mr Gashi had lodged a return for the 2000, 2003, 2004 and 2005 years. Mr Gashi had not lodged a return for the 2001, 2002 or 2006 years.

2. The Commissioner assessed Mr and Mrs Gashi under s 167 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act ) in each relevant year using the "asset betterment" method (the March 2010 Assessments ). Mr and Mrs Gashi lodged objections. Before the objections were determined, Mr Gashi lodged a return for the 2002 year and Mrs Gashi lodged returns for the 2001 to 2006 years. Those returns generated notices of assessment. In August 2010, the Commissioner issued further notices of amended assessment to "restore" the March 2010 Assessments and shortfall penalty assessments (the August 2010 Assessments ). Mr and Mrs Gashi lodged objections against the August 2010 Assessments. The objections lodged in respect of the March 2010 Assessments and the August 2010 Assessments were disallowed. Mr and Mrs Gashi both commenced proceedings under Pt IVC of the Taxation Administration Act 1953 (Cth) (the TAA ). Before the trial judge, the task for both Mr and Mrs Gashi was to establish that the March and August 2010 Assessments were excessive: s 14ZZO of the TAA. At trial, Mr Gashi failed and he appeals against the orders made by the trial judge: VID 490 of 2012. Mrs Gashi, on the other hand, was held by the trial judge to have established that the assessments issued against her were excessive. The Commissioner appeals: VID 494 of 2012. Mrs Gashi also cross-appeals.

3. Both appeals raise questions about the Commissioner's use of the asset betterment method of assessment under s 167 of the 1936 Act. In relation to Mr Gashi's appeal in VID 490 of 2012, we would dismiss that appeal with costs. We would allow the Commissioner's appeal in relation to Mrs Gashi in VID 494 of 2012. We would dismiss Mrs Gashi's cross-appeal.

4. These reasons for judgment consider the procedural history of Mr and Mrs Gashi's dispute with the Commissioner, the findings of the trial judge, Mr Gashi's appeal grounds in VID 490 of 2012, the Commissioner's appeal grounds in VID 494 of 2012 (and Mrs Gashi's cross-appeal in VID 494 of 2012).

B. PROCEDURAL HISTORY

5. Numerous assessments were issued to Mr and Mrs Gashi. It is necessary to understand not only the date and amount of each assessment but also the subject matter of each assessment; whether each assessment imposed a fresh liability or increased an existing liability:
Trautwein v Federal Commissioner of Taxation (1936) 36 CLR 63 at 95.

6. Prior to the hearing of the appeal, the Commissioner provided a summary of the assessments and amended assessments issued to Mr and Mrs Gashi. Annexures A and B to these reasons for judgment are drawn from those summaries. The following procedural history refers to those Annexures.

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Mr Gashi

7. On 26 March 2010, following the audit, the Commissioner issued default original assessments and amended assessments under s 167 of the 1936 Act to Mr Gashi for the relevant years. The default assessments and amended assessments issued to Mr Gashi are Items 1, 2, 4, 10, 12, 14 and 16 in Annexure A.

8. The basis for, and result of, the Commissioner's calculation in each relevant year was explained by the trial judge at [9]-[10] as follows:

…

  1999 2000 2001 2002 2003 2004 2005 2006
Assets 230000 230512 897185 1760957 2065420 2636933 2606153 3061447
Liabilities (112482) (112482) 0 (177893) 0 (154845) (159500) (445347)
Net assets 117518 118030 897185 1583064 2065420 2482088 2446653 2616100
Increase   512 779155 685879 482356 416668 (35435) 169447
[Non assessable receipts]   0 0 (81167) (7300) (63900) (6500) 0
[Expenditure/Subsistence]   58663 327143 373424 610851 1150546 1253533 817791
Income   59175 1106298 978136 1085907 1503314 1211598 987238
Disclosed   (17466) 0 0 (25975) (22980) (49545) 0
Undisclosed   41709 1106298 978136 1059932 1480334 1162053 987238

The figures for 1999 were to provide a base line only, the applicants' income in that year not being the subject of any assessment which is presently relevant.

As shown in the table, the Commissioner first took a snapshot of the total assets and liabilities of the applicants as at 30 June in each year from 1999 to 2006. That yielded a figure for the net assets of the applicants at each such year-end. In the row labelled "Increase" in the table, the Commissioner calculated the extent to which the net asset figure in a particular year exceeded the net asset figure for the previous year. The Commissioner then subtracted the applicants' non assessable receipts over the course of the year in question, and added back items of specific expenditure, and outlays for subsistence, of which he was aware. That yielded an income figure for the year by reference to which the applicants were assessed for tax. As shown in the table, the Commissioner was also able to calculate the extent to which the applicants' income, calculated as explained here, had not been disclosed. Finally, the Commissioner "distributed" the total undisclosed income in each year 50/50 as between Mr and Mrs Gashi.

(Emphasis added.)

9. A letter accompanying the assessments explained to Mr Gashi that the assessments included understated income quantified in an Asset Betterment Statement. The Asset Betterment Statement was enclosed with the letter. The Asset Betterment Statement comprised two distinct parts. The first part took the form of a balance sheet. It identified assets on hand as at 30 June 1999 and then assessed the change in identified assets and liabilities from year to year. The assets listed included numerous bank accounts in Australia and overseas, motor vehicles and real property. The liabilities included home loans. A net asset position was then recorded for each year. After calculating the net asset position, the Commissioner then addressed what might generally be described as a cash flow statement. The Commissioner identified non-assessable receipts (in the form of loan repayments and capital profits on the sale of a principal residence) which were available to fund Mr and Mrs Gashi's expenditure (and possibly, the increased assets). The Commissioner then

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identified expenditure by Mr and Mrs Gashi in each of the relevant years.

10. In each year, the increase in net assets was added to the amount identified as specific expenditure less the amount identified as non-assessable receipts. The Commissioner then deducted the taxable income disclosed in that year to calculate the amount that was, in his judgment, undisclosed income. In other words, the Commissioner identified the amount required to fund the increased assets and to fund the identified expenditure which was unable to be funded by the amounts disclosed. The understated amount was split equally between Mr and Mrs Gashi and formed the basis of the default assessments and amended assessments issued to Mr Gashi as 1, 2, 4, 10, 12, 14 and 16 in Annexure A.

11. The Asset Betterment Statement had 11 attachments which provided details of the calculations for specific items in the Asset Betterment Statement. So, for example, in Attachment B the Commissioner identified a bank account in Luxembourg with a closing balance of $241,498 as at 30 June 2001. The attachment identified the balance at year end for the relevant period, the withdrawals from that account and the basis on which the Commissioner had calculated interest on the year end balances. Attachment C was the Commissioner's analysis of the expenditure by Mr and Mrs Gashi recorded on their credit cards. Attachment D was an analysis for the interest expenses incurred in relation to various home loans. Attachment E was an analysis of funds sent overseas. It listed each transfer by date and amount. The amounts were obtained from a review of Austrac records. Attachment F was a list of asset purchases by Mr and Mrs Gashi. Attachments G and H were analyses of their bank accounts. Attachment I was an explanation of the Commissioner's calculation of Mr and Mrs Gashi's personal living expenses. Attachment J analysed Mr and Mrs Gashi's overseas travel. Attachment K recorded the Commissioner's analysis of Mr Gashi's gambling losses. It will be necessary to refer to some of these attachments later in these reasons for judgment. For present purposes, it is sufficient to note that the Commissioner's assessment of Mr and Mrs Gashi's undisclosed income was not a figure plucked out of the air. It was an amount judged by the Commissioner to reflect the increase in their wealth which was not able to be explained by their level of disclosed income.

12. Pursuant to ss 284-75(3) and 298-30 of Sch 1 to the TAA, the Commissioner also issued a notice of assessment and liability to pay penalty for the 2001 to 2006 income years to Mr Gashi on the basis of "intentional disregard". That assessment is listed as Items 3, 5, 11, 13, 15 and 17 in Annexure A.

13. On 30 April 2010, Mr Gashi lodged an objection against each assessment listed as Items 1 to 5 and 10 to 17 (inclusive) in Annexure A. For all years, apart from the 2002 income year, it is those assessments issued to Mr Gashi, and his objections to those assessments, which are in issue on this appeal.

14. The position in relation to the 2002 income year is different. On 23 July 2010, before Mr Gashi's objections to the March 2010 Assessments were determined, he lodged a return for the 2002 year in which he declared taxable income of $124,640. On 2 August 2010, a notice of assessment was issued pursuant to s 170(1) of the 1936 Act reducing Mr Gashi's tax liability as a consequence of the tax return lodged by him. It assessed Mr Gashi as having taxable income of $124,640 and assessed tax payable at $45.960.80: see Item 6 on Annexure A. Mr Gashi did not object to this assessment.

15. On 31 August 2010, the Commissioner issued a notice of amended assessment for the 2002 income year pursuant to s 170(1A) of the 1936 Act assessing Mr Gashi to amended taxable income of $611,706 with amended assessed tax payable of $274,881. This assessment increased Mr Gashi's liability in the 2002 income year to re-impose the taxable income identified following the audit and the asset betterment calculation on top of the income returned in the return lodged by Mr Gashi on 23 July 2010: Item 7 in Annexure A. On the same day, the Commissioner also issued a notice of assessment and liability to pay penalties of $216,987.90 imposed on the basis of intentional disregard: Item 8 in Annexure A. These are the August 2010 Assessments: see [2] above.

16. On 12 September 2010, Mr Gashi lodged an objection against the August 2010

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Assessments. The objection inadvertently referred to the notice of assessment and liability to pay penalty issued on 26 March 2010 instead of the notice issued on 31 August 2010. The Commissioner treated the objection lodged on 12 September 2010 as an objection to the notice of assessment and liability to pay penalties of $216,987.90 imposed on the basis of intentional disregard issued on 31 August 2010.

17. On 23 September 2010, the Commissioner issued two objection decisions. The first decision disallowed the objections lodged on 30 April 2010 to:

  • 1. the default assessments for the years ended 30 June 2001, 2002 and 2006 issued on 26 March 2010;
  • 2. the amended assessments for the years ended 30 June 2000, 2003, 2004 and 2005 issued on 26 March 2010;
  • 3. the notice of assessment and liability to pay penalty for the years ended 30 June 2001 to 2006 issued on 26 March 2010.

    The second decision disallowed the objections lodged on 12 September 2010.

18. On 14 October 2010, the Commissioner then issued an amended assessment for the 2002 year of income: Item 9 on Annexure A. It recorded amended taxable income of $489,068 and amended assessed tax payable of $217,241.96. It reduced Mr Gashi's liability by excising from his taxable income the income he had returned in the income tax return he lodged on 23 July 2010. He did not object to that assessment. That is unsurprising. He had no complaint about a reduction in his taxable income. His objection to the imposition by the Commissioner of the balance of the substantive liability which had been imposed by the August 2010 Assessments was still on foot and remained in issue in these proceedings and on appeal.

19. On 12 May 2010, Mr Gashi commenced proceedings under s 39B of the Judiciary Act 1903 (Cth) (the Judiciary Act ) challenging the validity of the March 2010 Assessments: VID 351 of 2010. Those proceedings were discontinued by consent on 3 November 2010.

20. On 15 November 2010, Mr Gashi lodged an appeal under Pt IVC of the TAA against the objection decisions of 23 September 2010.

Mrs Gashi

21. On 26 March 2010, the Commissioner issued default original notices of assessment to Mrs Gashi under s 167 of the 1936 Act: see Items 18, 19, 24, 29, 34, 39 and 44 of Annexure B. Again, the letter accompanying those assessments explained to Mrs Gashi that the assessments included understated income quantified in the Asset Betterment Statement: see [9] above. The basis of the default assessments and amended assessments issued to Mrs Gashi was 50% of the understated income identified by the Commissioner in the Asset Betterment Statement.

22. On 30 April 2010, Mrs Gashi lodged objections against those assessments.

23. On 12 May 2010, Mrs Gashi commenced proceedings under s 39B of the Judiciary Act challenging the validity of the 26 March assessments: VID 350 of 2010. Those proceedings were discontinued by consent on 3 November 2010.

24. On 2 June 2010, before her objections were determined by the Commissioner, Mrs Gashi lodged returns for the 2001 to 2006 income years which declared the following taxable incomes:

Income year Taxable income
2001 $1,911
2002 $2,002
2003 $1,963
2004 $33,183
2005 $33,570
2006 $0
TOTAL $74,629.00

Notices of assessment pursuant to s 170(1) of the 1936 Act were issued on 9 June 2010. Each assessment assessed Mrs Gashi as having taxable income consistent with the amount returned by her: see items 21, 26, 31, 36, 41 and 46 on Annexure B.

25. On 31 August 2010, the Commissioner issued amended assessments pursuant to s 170(1A) of the 1936 Act assessing Mrs Gashi to increased liability in each of the 2001 to 2006 income years to re-impose the taxable income identified following the audit and the asset betterment calculation on top of the income

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returned in the income tax returns lodged by Mrs Gashi on 2 June 2010: Item 22, 27, 32, 37, 42 and 47 in Annexure B. On the same day, the Commissioner also issued a notice of assessment of shortfall penalty pursuant to ss 284-75(1) and 298-30 of Sch 1 to the TAA: Item 23, 28, 33, 38, 43 and 48 in Annexure B. On 15 September 2010, Mrs Gashi objected to the amended assessments issued on 31 August 2010 and to the penalty assessments issued on 31 August 2010. On 23 September 2010, the Commissioner disallowed the objections.

26. On 15 November 2010, Mrs Gashi lodged an appeal under Pt IVC of the TAA against the objection decisions of 23 September 2010.

C. THE PROCEEDING BELOW

27. Mr and Mrs Gashi's appeals under Pt IVC of the TAA were heard together. The same counsel appeared for both Mr and Mrs Gashi. Evidence in one appeal was evidence in the other appeal.

28. Mr and Mrs Gashi both gave evidence. Mr and Mrs Gashi adopted a different approach in seeking to discharge the onus of establishing that the assessments issued to them were excessive. The trial judge explained Mr Gashi's approach in these terms (at [13], [14] and [33]):

Mr Gashi's evidentiary case did not purport to establish what his taxable income was in any of the years 2000-2006. To the extent that that case did have a systematic dimension, it was provided by the evidence of John Kelly, a chartered accountant and registered tax agent. To the extent that his report, dated 13 July 2011, dealt with the position of Mr Gashi, it confined itself to attacking, in accordance with instructions given by Mr Gashi, the Commissioner's asset betterment calculations. Mr Kelly accepted that, from an accounting perspective, he would not use the asset betterment method to calculate the actual income of a taxpayer. He tried to use a more conventional approach to calculate Mr Gashi's income, but the information he was given by Mr Gashi was "copious and confusing", so he resorted to the application of such instructions as he had to attack the task which had been undertaken by the Commissioner.

Mr Gashi's own evidence was likewise largely concerned to challenge the Commissioner's asset betterment calculations, or to explain them in ways which would be consistent with him (Mr Gashi) having derived substantial sums from non-income sources. … it was not of the character that would be necessary to found any, even approximate, conclusions as to the level of his taxable income in each of the years under examination.

…

A striking thing about Mr Gashi's evidence … is that it was not calculated to disclose the level of his income in any of the years in question, nor even to disclose particular transactions from which the generation of income should be inferred. …

Unsurprisingly, the trial judge found (at [40]) that Mr Gashi had fallen "well short" of establishing his assessable income in any of the relevant years and had failed to establish that the Commissioner's assessments were excessive under s 14ZZO of the TAA. Mr Gashi appeals.

29. Mrs Gashi's position and approach was different. It will be addressed in section G below. For present purposes, it is sufficient to state that the trial judge found (at [53]) that Mrs Gashi had established the actual level of her assessable income in each of the relevant years with the result that she had established that the Commissioner's assessments were excessive. The Commissioner appeals.

D. APPEAL GROUNDS FOR MR GASHI - VID 490 OF 2012

30. Mr Gashi raised three principal appeal grounds.

31. The first, the Validity of the Assessments Issue (Grounds 5(a) and (b) of the Amended Notice of Appeal), was directed to the 2002 year of income and the fact that the Commissioner had issued a number of assessments for that year: see [14]-[15] above.

32. Mr Gashi contended that the trial judge erred in law in holding at [8] that "each assessment after the first was an amended assessment. There was, in relation to each of the applicants in each of the relevant years, only ever one assessment extant" and that, instead, the trial judge should have found that the last

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amended assessment and the last notice of penalty for the year ended 30 June 2002 were invalid.

33. That issue was described in Mr Gashi's written submissions as follows:

In circumstances where multiple assessments are issued to the same taxpayer in respect of the same activity that cover the same subject matter and imposing the same tax payable, whether anyone or more of those assessments is valid? If any one or more of those assessments is not valid, then whether the taxpayer is permitted to challenge the validity of an assessment in proceedings brought under Part IVC of the [TAA]?

A careful reader will notice that the appeal grounds did not directly correlate with the Mr Gashi's description of the issue in his written submissions.

34. The Commissioner filed an amended notice of contention stating that, in an appeal under s 14ZZ of the TAA, the Federal Court does not have jurisdiction to determine the validity of the assessment and that, contrary to Mr Gashi's appeal ground, the assessment referred to by the trial judge at [8] was not the most recent assessment issued. Mrs Gashi's cross-appeal in VID 494 of 2012 raised the same issue in relation to the assessments issued by the Commissioner to her in the 2001 to 2006 income years. This ground of appeal, and Mrs Gashi's cross-appeal, is addressed in section E below.

35. Mr Gashi's other two appeal grounds related to the asset betterment method of calculation and assessment. The first appeal ground (Grounds 4(a) and 4(b) of the Amended Notice of Appeal) was the contention that the trial judge erred in law in holding that the movement in the value of assets held by Mr Gashi in the relevant years was ordinary income within the meaning of s 6-5(1) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act ). Mr Gashi contended that the trial judge should have found that the movement in the value of assets held by Mr Gashi in the relevant years was not ordinary income within the meaning of s 6-5(1) of the 1997 Act. Mr Gashi described this issue in the following terms:

In circumstances where there is no evidence of an activity that is capable of yielding a gain in the nature of income within s 6-5 of the [1997 Act], whether a positive movement in the value of assets held by a taxpayer is income on ordinary concepts within the meaning of that provision.

This ground of appeal is addressed in section F below.

36. The second appeal ground (Grounds 6(a) and 6(b) of the Amended Notice of Appeal) was that the trial judge erred in law in holding that Mr Gashi had failed to show, within the meaning of s 14ZZO of the TAA, that the assessments for the relevant years were excessive. Mr Gashi's contention was that he had discharged the burden of proof that the assessments for the relevant years were excessive within the meaning of s 14ZZO of the TAA to the extent that amounts were wrongly, or without any proper evidentiary foundation, included in the asset betterment calculation. The issue was described by Mr Gashi as follows:

In circumstances where an assessment is made under s 167 [of the 1936 Act] and is predicated upon an asset betterment calculation, whether a taxpayer succeeds in discharging the burden of proof imposed by s 14ZZO of the [TAA] where the taxpayer shows not only that the asset betterment calculation is wrong but also the extent to which it is wrong?

This ground of appeal is addressed in section F below.

E. VALIDITY OF THE ASSESSMENTS ISSUE: GROUNDS 5(A) AND (B) OF MR GASHI'S APPEAL - VID 490 OF 2012 AND GROUND 1 OF MRS GASHI'S CROSS-APPEAL - VID 494 OF 2012

37. Grounds 5(a) and (b) in VID 490 of 2012 concerned the 2002 year of income for Mr Gashi. Ground 1 of Mrs Gashi's cross-appeal in VID 494 of 2012 was stated to extend to all notices of assessment issued in all of the relevant years and the notices of liability for penalty assessment issued in the 2001 to 2006 income years. Given that only one notice of assessment was issued to Mrs Gashi in the 2000 income year, the cross-appeal is taken to be restricted to the 2001 to 2006 income years.

38.

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Mr and Mrs Gashi's submissions on the Validity of the Assessments Issue contained two components. First, the contention that all of the assessments issued in any year where the Commissioner issued multiple assessments were invalid and, secondly, the contention that they were entitled to challenge the validity of the assessments in proceedings under Pt IVC of the TAA.

39. In relation to VID 490 of 2012, Mr Gashi explained the "basis" for these contentions as follows:

At all times the Commissioner persisted with the assessments and put [Mr] Gashi to proof of the excessiveness of all the assessments to primary tax and penalties.

The Commissioner purported to place the onus upon [Mr] Gashi of proving that each of the purported assessment was excessive and of proving what his taxable income and tax liability actually was. It is submitted that by issuing the multiple assessments and persisting with same the Commissioner did not act bona fide and his acts were not reasonably referable to the power conferred upon him by section 167 of the [1936 Act]. It follows that the notices of assessment to primary tax and penalty were not a bona fide exercise of the Commissioner's function of assessment and the notices were void.

In relation to the cross-appeal in VID 494 of 2012, Mrs Gashi made the same submission.

40. These contentions are not sound.

41. First, in proceedings under Pt IVC of the TAA, the Court does not have jurisdiction to determine if assessments are "invalid" because they are tentative, provisional or made in bad faith or conscious maladministration resulting in jurisdictional error on the part of the Commissioner:
Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 at [25].

42. The jurisprudential basis that precludes consideration of jurisdictional errors in Pt IVC proceedings is well established:
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 187; Futuris at [24]-[25];
FJ Bloemen Pty Ltd v Commissioner of Taxation (1981) 147 CLR 360 at 376-8. Put simply, the subject matter of a tax appeal under Pt IVC of the TAA is a valid assessment. Section 175A(1) of the 1936 Act entitles a taxpayer to object against an "assessment" in the manner set out in Pt IVC of the TAA. Section 14ZW of the TAA requires a taxpayer to lodge a "taxation objection" under s 175A of the 1936 Act within a specified time in response to the assessment. Upon receipt of a "taxation objection", the Commissioner must then give an "objection decision": s 14ZY of the TAA. If the taxpayer is dissatisfied with that "objection decision", the taxpayer may then apply to the Administrative Appeals Tribunal for review of that decision or appeal to the Federal Court against that decision: s 14ZZ of the TAA. At the hearing of the review or the appeal under s 14ZZ, upon the production of a document matching the description of a notice of assessment, ss 175(1) and 177 of the 1936 Act preclude any argument about the "due making" or actual making of the assessment: FJ Bloemen at 376-8.

43. If the decision to issue the assessments was infected with jurisdictional error, those questions (and orders seeking to address those questions) may not be pursued under Pt IVC of the TAA. They may not be pursued under Pt IVC because the subject matter of an appeal under Pt IVC is absent - an assessment. A purported assessment that is "tentative", "provisional" or made in bad faith or conscious maladministration is not an assessment:
Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39 at 54 and Richard Walter at 237. The appropriate challenge to a purported assessment is by way of constitutional writs or associated relief under s 39B of the Judiciary Act:
Mount Pritchard & District Community Club Ltd v Federal Commissioner of Taxation (2011) 196 FCR 549 at [2];
Kennedy v Administrative Appeals Tribunal (2008) 168 FCR 566 at [11]-[13] and [22]-[26].

44. Secondly, and in any event, as Items 4 to 9 of Annexure A make clear, each assessment, or amended assessment, issued to Mr Gashi in relation to the 2002 year was issued pursuant to a particular provision of the taxing Acts. Mrs Gashi's position was not dissimilar: see Items 21 to 23, 26 to 28, 31 to 33, 36 to 38, 41 to 43 and 46 to 48 of Annexure B. Each assessment, or amended assessment, imposed a fresh liability or adjusted an existing liability:

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Trautwein at 95. The mere fact that the Commissioner issued those assessments, and amended assessments, to Mr Gashi does not suggest, let alone establish, that the Commissioner did not act bona fide: cf
Stokes v Federal Commissioner of Taxation (1996) 136 ALR 632 at 641;
Commissioner of Taxation v Stokes (1996) 72 FCR 160 at 173;
Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175 at 188. Indeed, the history of those assessments (including the circumstances in which each assessment was issued and the exercise of power to issue those assessments) establishes the contrary.

45. Mr Gashi's appeal on grounds 5(a) and (b) is dismissed. Mrs Gashi's cross-appeal is also dismissed.

F. ASSET BETTERMENT CALCULATION: GROUNDS 4 AND 6 OF MR GASHI'S APPEAL - VID 490 OF 2012

46. Mr Gashi's remaining appeal grounds raise directly the ability of the Commissioner to assess under s 167 of the 1936 Act and, secondly, the principles applying to a taxpayer's discharge of the burden under s 14ZZO of the TAA of showing that an assessment issued under s 167 is excessive.

Mr Gashi Appeal Grounds 4(a) and (b) - the basis of assessment under s 167 of the 1936 Act

47. Mr Gashi submitted that, under s 167 of the 1936 Act, when the Commissioner ascertained an amount which, in his judgment, was taxable, the Commissioner must go further and identify the "ordinary and charging provisions of the 1936 Act and the 1997 Act" and, in particular, the Commissioner must:

  • 1. apply the relevant taxing Act to the facts as known to and accepted by the Commissioner;
  • 2. adopt a view of the relevant facts in a way that "they must be facts which disclose a taxable income";
  • 3. assign a source or sources for the amounts included in the assessments over and above those admitted and/or disclosed as taxable income in the returns lodged by the taxpayer.

Put another way, Mr Gashi submitted that the Commissioner's formation of a judgment under s 167 of the 1936 Act, of necessity, involved the formation of a view as to the source or sources of the income from which the assets were increased and the taxable character of those sources.

48. Consistent with those submissions, Mr Gashi submitted that the trial judge erred in law in holding that the movement in the value of assets held by Mr Gashi in the relevant years was ordinary income within the meaning of s 6-5(1) of the 1997 Act: Ground 4(a). Mr Gashi contended that the trial judge should have found that the movement in the value of assets held by Mr Gashi in the relevant years was not ordinary income within the meaning of s 6-5(1) of the 1997 Act: Ground 4(b).

49. These appeal grounds are rejected. Ground 4(a) proceeds upon a misstatement of the trial judge's findings. The trial judge did not make a finding as to the nature of Mr Gashi's income for each of the relevant years and, in particular, did not hold that the movement in the value of assets held by Mr Gashi in the relevant years was ordinary income within the meaning of s 6-5(1) of the 1997 Act. Indeed, that was not the task of the trial judge. The task for the trial judge was to determine if Mr Gashi discharged his onus under s 14ZZO of proving that the assessments in issue were excessive. The trial judge found he had failed to do so: see [28] above.

50. Appeal ground 4(b) proceeds upon a misconception of the proper operation of s 167 of the 1936 Act. Part IV of the 1936 Act is concerned with assessments. The primary provision s 166, entitled "Assessment", provides:

From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).

51. The balance of Pt IV of the 1936 Act recognises that the process envisaged by s 166 may not be necessary or appropriate. Relevantly, s 167, entitled "Default assessment", provides:

If:

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    (a) any person makes default in furnishing a return; or
  • (b) the Commissioner is not satisfied with the return furnished by any person; or
  • (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;

    the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.

    (Emphasis added.)

52. Section 167 comprises three parts - the circumstances in which an assessment under s 167 may be issued (sub-ss (a)-(c)), the fact that the Commissioner may make an assessment of the amount upon which income tax is levied and, finally, a deeming provision which provides that the amount so assessed by the Commissioner shall be the taxable income for the purposes of s 166.

53. The s 167 power is necessarily different to that in s 166. Under s 166, the power is to "make an assessment of the amount of the taxable income". The phrase "taxable income" is defined to mean "assessable income" minus "deductions": s 4-15 of the 1997 Act and s 6(1) of the 1936 Act. Under s 167, that process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part) because of one of the preconditions to the exercise of the power in sub-paras (a) to (c) of s 167 - a failure by a person to lodge a tax return, the tax return is deficient or the Commissioner has reason to believe that a person who has not lodged a return has derived taxable income. It is for those reasons that the balance of s 167 empowers the Commissioner to make an assessment of the amount upon which income tax ought to be levied and for that amount to be deemed to be the taxpayer's taxable income for the purposes of s 166.

54. The third part of the section - the deeming provision - would be futile if it was necessary for the Commissioner to undertake a process of the kind referred to in s 166. As the Commissioner submitted, the assessment of the "amount" in s 167 is not constrained by a process of subtracting "deductions" from "assessable income". Instead, in making his judgment of the "amount" that becomes taxable, the Commissioner may use what is known as the "asset betterment" method: Trautwein at 87, 99-100 and 105.

55. The asset betterment method, and the resulting assessment, is necessarily a guess to some extent and "almost certainly inaccurate in fact": Trautwein at 87. It is therefore "no part of the duty of the commissioner to establish affirmatively what judgment he formed [under s 167 of the 1936 Act], much less the grounds of it, and even less still the truth of the facts affording the grounds":
George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 204.

56. Contrary to Mr Gashi's submissions,
Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214 at 217 does not support the proposition that the process of assessment under s 167 of the 1936 Act requires the Commissioner to adopt a view of the facts and for those facts to disclose a taxable income. Bailey considered s 166 of the Act, not s 167 of the 1936 Act. The process of assessment under s 166 of the 1936 Act has no resemblance or analogy to the process of assessment under s 167 of the 1936 Act: Bailey at 218. Section 167 involves an exercise of the Commissioner's power to determine the principal fact to which the 1936 Act should be applied, namely the "amount of income upon which … income tax ought to be levied". That is not the process of assessment under s 166 of the 1936 Act, as made clear by Barwick CJ in Bailey at 218. The asset betterment method of calculation as a basis for assessment under s 167 of the 1936 Act is legitimate: Trautwein at 86-87, 99-100 and 105.

57. Mr Gashi's appeal on grounds 4(a) and (b) is dismissed.

Mr Gashi Appeal Grounds 6(a) and (b) - discharge of burden of proof

58. These appeal grounds contend that the trial judge erred in law in holding that Mr Gashi had failed to show, within the meaning of s 14ZZO of the TAA, that the assessments for the relevant years were excessive. Mr Gashi's contention was that he had discharged the burden of proof that the assessments were excessive within the meaning of s 14ZZO of the

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TAA to the extent that he had shown that amounts were wrongly, or without any proper evidentiary foundation, included in the asset betterment calculation.

59. In particular, Mr Gashi submitted that the trial judge erred in holding that Mr Gashi had failed to show, within the meaning of s 14ZZO of the TAA, that the assessments for the relevant years were excessive when the Asset Betterment Statement was wrong in the following respects:

  • (a) The opening asset position was inconsistent with evidence of property and other transactions prior to the income years 2000-2006 that yielded a greater net asset position than that conceded in the betterment statement. His Honour did not reject Mr Gashi's evidence of those transactions [at paragraphs 16-31] and unchallenged expert evidence was given that the opening asset position should have been $541,944.
  • (b) The Commissioner conceded that the amounts at line 50 [of the Asset Betterment Statement] (property in the name of Samira Gashi) and at line 56 (business known as Sam's Café) should not have been included. That concession was made at the hearing of the appeals and could not retrospectively have amended the assessments.
  • (c) The Commissioner included bank deposits at lines 9-29 [of the Asset Betterment Statement] and then separately treated asset acquisitions as additional gains.
  • (d) The Commissioner included bank deposits at lines 9-29 [of the Asset Betterment Statement] and then separately treated funds sent overseas (line 80) and other payments (lines 81-87) and unexplained withdrawals (line 88) as additional gains.
  • (e) The Commissioner treated what he described as "unexplained" withdrawals (lines 88 and 89) as separate gains to the deposits in those accounts.
  • (f) There as no evidence of overseas transfers that would warrant the amount included in line 80 [of the Asset Betterment Statement]. In cross-examination [Mr] Gashi denied making transfers of that magnitude. The primary Judge found that there was no evidence that he had been responsible for such transfers and that "a very considerable amount of cross-examination of Mr Gashi ultimately came to nothing in terms of admissible, useful, evidence." [at paragraph 37]. [Mr] Gashi admitted to making transfers where he and/or his wife was the ordering customer.

60. Mr Gashi submitted that this was not a case where he contended only that the Commissioner formed a judgment as to the amount of his taxable income on a wrong basis but that he went further and proved that the amount assessed as his taxable income in fact exceeded his taxable income. The result - according to Mr Gashi - was that he had discharged the burden of showing that the assessments were excessive. As these reasons for judgment will explain, Mr Gashi did not discharge the onus he bore under s 14ZZO of the TAA in establishing that each of the assessments issued under s 167 of the 1936 Act was excessive.

61. In seeking to establish in Pt IVC proceedings that an assessment issued under s 167 is excessive, the ultimate question was and remains whether the amount of each assessment was excessive:
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623. Section 14ZZO of the TAA places the burden of proving each assessment is excessive on the taxpayer: Dalco at 623 citing George at 189. The TAA does not place any onus on the Commissioner to show that the assessments were correctly made: Dalco at 624 citing
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89. Indeed, absent agreement with the Commissioner to confine the issues for determination in a Pt IVC proceeding, the Commissioner is entitled to rely upon any deficiency in the taxpayer's proof of the excessiveness of the amount assessed in seeking to uphold the assessment: Dalco at 624.

62. What must a taxpayer do to discharge the onus of proving that a s 167 assessment is excessive? As explained earlier (see [51]-[54] above), the process of assessment under s 167 of the 1936 Act differs from the process of assessment under s 166. Unsurprisingly, and consistent with the reason for the Commissioner being entitled to judge an amount as taxable under s 167 (namely the satisfaction of one of

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the three pre-conditions to the exercise of the power (see [53] above)), it is insufficient for a taxpayer simply to show error on the Commissioner's part: Dalco at 621 and 623. Indeed, Mr and Mrs Gashi did not seek to contend otherwise.

63. A taxpayer who seeks to establish that a s 167 assessment based on the asset betterment method of calculation is excessive must positively prove his or her "actual taxable income" and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer: Dalco at 623-5 and Trautwein at 88. The taxpayer must show that the unexplained accumulated wealth was from non-income sources. The manner in which a taxpayer discharges that burden is not defined or specified - it varies with the circumstances: Dalco at 624.

64. So, for example, in
Ma v Commissioner of Taxation (1992) 37 FCR 225 at 230, Burchett J said that, in seeking to establish that an assessment under s 167 was excessive, that burden may be discharged:

… [I]f 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. …

65. Justice Burchett identified a number of steps - identification of sources of income, explanation of a taxpayer's activities and an explanation of the source or sources of a taxpayer's assets. The steps identified by Burchett J are not surprising. In addressing a s 167 assessment based upon an asset betterment statement, a taxpayer must account for an unexplained increase in assets. The taxpayer must explain the source or sources of those assets and then identify whether that source, or those sources, are taxable. Put another way, if the disclosed "actual" taxable income does not explain the increase in assets, then the taxpayer is unlikely to have discharged the burden of establishing the assessment is excessive. And, of course, that unexplained increase in assets cannot be viewed in isolation - it must also take into account the expenditure during that period.

66. Consistent with that view, even if a taxpayer was able to prove that an item in the asset betterment statement was wrong or should not have been included, but did not adequately explain the source or sources for the otherwise unexplained increase in wealth, the taxpayer would not discharge the onus under s 14ZZO of the TAA.

67. Against that background, it is apparent that Mr Gashi's appeal grounds are misconceived. Even if Mr Gashi was able to prove that one or more of the items listed in the Asset Betterment Statement (or in paragraph [59] above) was wrong or should not have been included, that of itself would not have been sufficient to discharge the onus he bore under s 14ZZO of the TAA. Mr Gashi was required to demonstrate the unexplained accumulated wealth in each of the relevant years was from non-income sources. Mr Gashi did not show the source or sources of funds from which he acquired the increase in assets in each of the relevant years. In fact, he did not attempt to do so. Mr Gashi therefore failed to discharge the onus under s 14ZZO of the TAA. The appeal on grounds 6(a) and (b) is also dismissed. Mr Gashi having made out none of the grounds of his appeal, the appeal must be dismissed.

G. APPEAL GROUNDS FOR MRS GASHI - VID 494 OF 2012

68. The trial judge accepted that Mrs Gashi was a housewife who played no role in any of her husband's business dealings. The trial judge found that "Mrs Gashi simply co-operated in whatever her husband sought of her, whether it be lending her name to a bank account, making her property available as security, or anything else": at [42]. At trial, the Commissioner submitted that Mr and Mrs Gashi were in partnership within the meaning of s 995-1(1) of the 1997 Act. The trial judge rejected that submission. On the hearing of the appeal, the Commissioner abandoned any reliance on that contention. The trial judge also found that Mr and Mrs Gashi "were not in receipt of income jointly": at [42].

69. Mrs Gashi adopted a different approach in seeking to discharge the onus of establishing that the assessments issued to her were

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excessive. Mrs Gashi relied upon a separate report prepared by Mr Kelly, a chartered accountant and registered tax agent. The trial judge found, having regard to Mr Kelly's report, that Mrs Gashi had established the actual level of her assessable income in each of the relevant years with the result that she had established that the Commissioner's assessments were excessive: at [53].

70. The Commissioner contended that the trial judge erred in finding that Mrs Gashi discharged the onus under s 14ZZO of the TAA of proving that the assessments were excessive. The Commissioner's appeal in relation to Mrs Gashi contained six appeal grounds. Appeal grounds 1 and 2 were directed to the general contention that the trial judge erred in finding that Mrs Gashi discharged the onus under s 14ZZO of the TAA. The Commissioner submitted that the Court should have held that Mrs Gashi failed to discharge the onus. In particular, the Commissioner submitted that the Court erred in finding that Mrs Gashi discharged the onus under s 14ZZO of the TAA in circumstances where Mrs Gashi had failed to explain the accretion in her assets set out in the Asset Betterment Statement, had failed to prove the source of moneys deposited into her accounts and had failed to exclude by proof all sources of income other than those she had admitted. The remaining appeal grounds (Grounds 3, 4, 5 and 6) were an amplification of the general appeal grounds.

71. At the core of the Commissioner's appeal in relation to Mrs Gashi was the important question of the manner in which a taxpayer is able to establish that an assessment issued under s 167 of the 1936 Act was excessive. The relevant principles have been addressed earlier: see [61]-[66] above.

72. First, it is necessary to understand what steps Mrs Gashi did take to seek to discharge her onus. First, she gave oral evidence. The trial judge made findings (see [68] above). Those findings were not the subject of the appeal.

73. Next, Mrs Gashi called Mr Kelly to give evidence. He had prepared a report which was in evidence. The report was prepared on certain stated assumptions which informed the approach adopted by Mr Kelly. He explained the assumptions and the approach as follows:

Upon the basis that [Mrs] Gashi's role was a passive homemaker, that there was no partnership between her and her husband and that her sources of income are known (being rental, interest and government payments), I have calculated [Mrs] Gashi's taxable position using a normal income tax return approach …

…

[Mrs] Gashi was not engaged in paid employment and did not carry on business during the 2000 to 2006 income years. [Mrs] Gashi's income during those years comprised rental income from the lease of residential property, interest in respect of bank account deposits and Australian Government assistance payments only.

…

In my view, the better approach when calculating [Mrs] Gashi's assessable income is to ascertain any rental income actually received, any interest income actually received and any taxable Australian Government assistance payments she has received in order to calculate her assessable income based on the taxable income she actually received during the relevant income years.

…

As the information available does not take into account any deductions that [Mrs] Gashi may be entitled to claim in each year of income, I have proceeded on the premise that there were no deductions available to [Mrs] Gashi.

(Emphasis added.)

74. Mr Kelly then proceeded to make the following findings about the Commissioner's Asset Betterment Statement:

In my view, the asset betterment statements prepared by the … Commissioner … do not accurately calculate the assessable income derived by [Mrs] Gashi in the 2000 to 2006 income years for the following reasons:

  • (a) [Mrs] Gashi did not derive the levels of income required in order to acquire the assets, or a share of the assets, included in the asset betterment statements prepared by the … Commissioner …

    ATC 14673

  • (b) The … Commissioner … has failed to take into account that [Mrs] Gashi did not receive any employment income during the 2000 to 2006 income years.
  • (c) The … Commissioner … has failed to take into account the fact that [Mrs] Gashi's only income producing assets were investments in property and bank account deposits.
  • (d) The asset betterment statements prepared by the … Commissioner … contain a number of errors and omissions …
  • (e) It is unsafe to assume that the assets owned by [Mrs] Gashi were paid for by her husband, [Mr Gashi].

75. As will be apparent, the process adopted by Mr Kelly, and his ultimate findings, were insufficient to discharge the onus Mrs Gashi bore under s 14ZZO of the TAA to establish that the s 167 assessments issued to her were excessive. First, Mr Kelly did not identify Mrs Gashi's sources of income. Mr Kelly assumed, based on his instructions, that Mrs Gashi's sources of income were known - rental, interest and government payments: see [73] above. Next, Mr Kelly did not provide (because he could not) an explanation of the source or sources for the unexplained increase in Mrs Gashi's assets. And, of course, he did not (because he could not) identify whether that source was, or those sources were, taxable.

76. Indeed, as will be apparent from the "findings" of Mr Kelly set out at [74] above, the question posed by Mr Kelly was whether Mrs Gashi's disclosed level of income was sufficient to fund the increase in assets from year to year: para (a) in [74] above. For the purposes of s 14ZZO of the TAA in the context of an assessment issued under s 167 of the 1936 Act, that question was irrelevant. The relevant question was: what was the source, or what were the sources, for the yearly increase in her net assets and were those sources taxable? Mr Kelly was not asked that question. Notwithstanding that he was not asked the question, he made a finding that it was "unsafe to assume that the assets owned by [Mrs] Gashi were paid for by her husband". That finding, again unexplained, simply begs the question - if Mrs Gashi's assets were not paid for by her husband, what was the source of funding and was that funding taxable? For those reasons, Mr Kelly's report was not sufficient to discharge Mrs Gashi's onus under s 14ZZO of the TAA of proving that the assessments issued to her were excessive. As the Commissioner submitted, Mr Kelly's report was an arithmetical calculation based on a number of unproved assumptions and unsupported by evidence.

77. Indeed, Mrs Gashi did not seek to address the unexplained increase in her wealth in each of the relevant years. She gave no evidence of what activity (income producing or otherwise) was being carried on by her or, if carried on not by her, how she funded the unexplained yearly increase in her assets having made allowance for her annual expenditure and other disclosed sources of income.

78. In support of the contention that Mrs Gashi had failed to discharge the onus under s 14ZZO of the TAA, the Commissioner also referred to what was described as unexplained but "significant economic activity" by Mrs Gashi during the relevant years. That activity was said to include the acquisition of significant assets in her own name, the incurring of significant liabilities subsequently reduced by large repayments, large deposits into accounts she held jointly with her husband and a deposit in a Luxembourg bank account. Mrs Gashi's responses to these matters varied. For example, Mrs Gashi did not attempt to explain the large deposits into accounts she held jointly with her husband or the source of funding for the significant assets in her own name. Mrs Gashi did adduce evidence about the source of the deposit into Luxembourg bank account but that evidence was rejected by the trial judge: at [51]. As is self evident, Mrs Gashi was not entitled to pick and choose which part or parts of her increased wealth set out in the Asset Betterment Statement she would seek to explain. She was required by s 14ZZO to address the whole of the unexplained increase in her wealth in each of the relevant years. She chose not to do so.

79. For those reasons, Mrs Gashi failed to discharge the onus under s 14ZZO of the TAA of proving that the assessments issued to her were excessive. The Commissioner's appeal on grounds 1 and 2 is allowed with costs.

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ANNEXURE A - TABLE OF ASSESSMENTS FOR RASIM GASHI



ANNEXURE B - TABLE OF ASSESSMENTS FOR MANUELA GASHI






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