CASE 2/2009

Members:
RW Dunne SM

Tribunal:
Administrative Appeals Tribunal, Adelaide

MEDIA NEUTRAL CITATION: [2009] AATA 356

Decision date: 18 May 2009

RW Dunne (Senior Member)

Introduction

1. The applicant ("JHDY") has applied for review of decisions by the respondent to disallow in full or allow in part taxation objections for the years ended 30 June 1999, 30 June 2000, 30 June 2001 and 30 June 2002 (the 1999, 2000, 2001 and 2002 years of income). The taxation objections related to the inclusion in the relevant notices of assessment and notices of amended assessment of omitted family trust distributions (in respect of the 2000, 2001 and 2002 years of income) and omitted profits from the promotion of tax avoidance scheme arrangements (in respect of the 1999 and 2000 years of income). The assessments and amended assessments gave rise to the inclusion of additional income of $481,690 (in respect of the 1999 year of income), $1,065,363 (in respect of the 2000 year of income), $298,084 (in respect of the 2001 year of income) and $643,153 (in respect of the 2002 year of income). Penalty tax at the rate of 75 percent was applied under s 226J of the Income Tax Assessment Act 1936 ("ITAA 1936") in respect of the profits from the promotion of tax avoidance scheme arrangements. Penalty tax at the rate of 50 percent was applied under s 226H, ITAA 1936 in respect of the other adjustments in the assessments and amended assessments.

2. At the hearing, JHDY represented himself and the respondent was represented by Mr Stuart Cole, of counsel. Evidence was given by JHDY.

3. The T documents and supplementary T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ("AAT Act") were admitted in evidence (as Exhibit R1 and Exhibit R2). In addition, the Tribunal admitted the following documents in evidence:

4. Upon the request of the applicant prior the hearing, the Tribunal made an appropriate order under s 35(2) of the AAT Act restricting the publication of evidence given before the Tribunal and of matters contained in documents lodged with the Tribunal, and that the hearing take place in private.

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Issues

5. The issues for the Tribunal's consideration are as follows:

Legislation

6. The legislation that is relevant in this matter is contained in the ITAA 1936, the Income Tax Assessment Act 1997 ("ITAA 1997") and the Taxation Administration Act 1953 ("TA Act").

7. The provisions of Division 6 of the ITAA 1997 relevantly read:

  • "6-5 Income according to ordinary concepts (ordinary income)
    • (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

    • Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

    • (2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

    • …

    • (4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

  • …

  • 6-10 Other assessable income (statutory income)
    • (1) Your assessable income also includes some amounts that are not *ordinary income.
    • Note: These are included by provisions about assessable income.

    • For a summary list of these provisions, see section 10-5.

    • (2) Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.
    • Note 1: Although an amount is statutory income because it has been included in assessable income under a provision of this Act, it may be made exempt income or non-assessable non-exempt income under another provision: see sections 6-20 and 6-23.

    • ATC 129

      Note 2: Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.
    • (3) If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.
    • (4) If you are an Australian resident, your assessable income includes your *statutory income from all sources, whether in or out of Australia.
  • …
  • 6-15 What is not assessable income
    • (1) If an amount is not *ordinary income, and is not *statutory income, it is not assessable income (so you do not have to pay income tax on it).
    • (2) If an amount is *exempt income, it is not assessable income .
    • Note: If an amount is exempt income, there are other consequences besides it being exempt from income tax. For example:
      • • the amount may be taken into account in working out the amount of a tax loss (see section 36-10);
      • • you cannot deduct as a general deduction a loss or outgoing incurred in deriving the amount (see Division 8);
      • • capital gains and losses on assets used solely to produce exempt income are disregarded (see section 118-12).

  • …"

8. The provisions of Division 6 of the ITAA 1936 relevantly read:

  • "97 Beneficiary not under any legal disability
    • (1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
      • (a) the assessable income of the beneficiary shall include:
        • (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
        • (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
      • (b) the exempt income of the beneficiary shall include:
        • (i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
        • (ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

      • except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and

      • (c) the non-assessable non-exempt income of the beneficiary shall include:
        • (i) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
        • (ii) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

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    • Note: If the trust estate's net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997 also affects the assessment of the beneficiary.
  • …
  • 101 Discretionary trusts

  • For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion."

9. The provisions of Part IVC of the TA Act relevantly read:

  • "14ZL Part applies to taxation objections
    • (1) This Part applies if a provision of an Act or of regulations (Including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision, or with a failure to make a private ruling, may object against it in the manner set out in this Part.
    • (2) Such an objection is in this Part called a taxation objection .

  • …

  • 14ZQ General interpretation provisions
    • In this Part
    • …

    • reviewable objection decision means an objection decision that is not an ineligible income tax remission decision.

    • taxation decision means the assessment, determination, notice or decision against which a taxation objection may be, or has been, made.

    • taxation objection has the meaning given by section 14ZL.

  • …
  • 14ZZK Grounds of objection and burden of proof

    On an application for review of a reviewable objection decision:

    …

    • (b) the applicant has the burden of proving that:
      • (i) if the taxation decision concerned is an assessment (other than a franking assessment)-the assessment is excessive; or

  • …"

10. The repealed provisions of Part VII of the ITAA 1936 relevantly read:

  • "s 222A Interpretation
    • (1) In this Part:

    • …

    • tax shortfall , in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year.

    …

  • s 226H Penalty tax where shortfall caused by recklessness

  • Subject to this Part, if:

    • (a) a taxpayer has a tax shortfall for a year; and
    • (b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;

  • the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.

  • …

  • s 226J Penalty tax where shortfall caused by intentional disregard of law

  • Subject to this Part, if:

    • (a) a taxpayer has a tax shortfall for a year; and
    • (b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

  • the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part.

  • …

  • ATC 131

    s 227 Assessment of additional tax
    • (1) The Commissioner shall make an assessment of the additional tax payable by a person under a provision of this Part.
    • (2) Nothing in this Act shall be taken to preclude notice of an assessment made in respect of a person under subsection (1) from being incorporated in notice of any other assessment made in respect of the person under this Act.
    • (3) The Commissioner may, in the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under a provision of this Part, but, for the purposes of the application of subsection 33 (1) of the Acts Interpretation Act 1901 to the power of remission conferred by this subsection, nothing in this Act shall be taken to preclude the exercise of the power at a time before an assessment is made under subsection (1) of the additional tax.
    • Note: Section 204 sets out when the additional tax is payable and the consequences of not paying it on time."

Background

11. The applicant was registered as a tax agent from 1991 until 2006 and also worked for South Australian accounting firms. He was a director of the following companies during the periods stated:

12. During the relevant years of income, the applicant promoted the following tax avoidance scheme arrangements:

To give an example, investment in the Zurich project was by a $1,000 upfront deposit, with entities associated with the applicant providing a $10,000 three month short-term loan and a $20,000 long-term loan. The long-term loan would only be repayable from the income of the project, which was marketed on the basis that a tax deduction of $31,000 could be claimed by investors in the 2001 year of income.

13. All income from arranging and managing the projects was invoiced by FMC Corporate Services Pty Ltd and JHDY & Associates Pty Ltd, returning gross income of $4,091,050 over the 1999 to 2002 years of income. The amounts involved were as follows:

1998-1999 1999-2000 2000-2001 2001-2002
FMC Corporate Services Pty Ltd $1,120,050 $1,946,000    
JHDY & Associates Pty Ltd     $690,000 $335,000

14. FMC Finance Pty Ltd provided the working capital for the Samson Vineyard and Winery project. FMC Finance Pty Ltd transferred its loan book to Profee Finance Pty Ltd, and all loans were subsequently written off. The applicant had loan accounts with FMC Finance Pty Ltd, Profee Finance Pty Ltd and the JHDY Family Trust. The credit balance of JHDY's loan account with the JHDY Family

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Trust as at 30 June 1999 was $1,113,865 and as at 30 June 2000 was $2,567,189.

15. The applicant's original assessments for the relevant years of income issued as follows:

1998/1999 1999/2000 2000/2001 2001/2002
Original issue date 21.10.99 16.5.01 7.3.02 28.1.03
Due date Not applicable Non-taxable 18.6.01 Not applicable Non-taxable 21.3.03

In the applicant's income tax returns for the relevant years of income, as originally lodged, the following gross income was disclosed:

1998/1999 1999/2000 2000/2001 2001/2002
$5,000 $9,727 $6,000 $7,243

From its taxation returns, the JHDY Family Trust distributed the following amounts of income to the applicant in the relevant years of income, which amounts were included by him in his taxation returns:

1998/1999 1999/2000 2000/2001 2001/2002
Nil $499 (and $3,628 capital gain) Nil $7,243

16. On 7 June 2005, the respondent issued assessments or amended assessments to the applicant for the 1999, 2000, 2001 and 2002 years of income in respect of the following adjustments in the assessments:

ISSUES 1998-1999 1999-2000 2000-2001 2001-2002
1. Omitted distribution from JHDY Family Trust, or alternatively omitted interest from FMC Finance Pty Ltd   $101,013    
2. Omitted distribution from JHDY Family Trust (as a result of audit amendments to Hawthorndene Property Trust)     $35,000 $30,179
3. Omitted distribution from JHDY Family Trust (as a result of audit amendments to Lynton Property Trust)       $23,457
4. Profits from tax avoidance scheme promotion via the JHDY Family Trust - net loan account increase $481,690 $964,350    
Alternate position - actual loan account (debit) drawings     $263,084 $589,516

17.

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On 14 June 2005, the respondent issued a notice of assessment of additional penalty tax for having a tax shortfall in respect of the 2001 and 2002 years of income. On 10 August 2005, the applicant lodged objections against the assessments or amended assessments for the 1999, 2000, 2001 and 2002 years of income. On 7 February 2008, the respondent issued the decision on the applicant's objections reducing the distribution from the JHDY Family Trust in respect of the 2002 year of income by $1,040.

Applicant's contentions

18. In his opening, the applicant's primary contention was that the omitted distributions from the JHDY Family Trust for the 2000 and 2002 years of income and, alternatively, the omitted interest from FMC Finance Pty Ltd were not received by him during the relevant years of income and were not assessable income in his hands. As the Tribunal understood it, the applicant accepted that the distribution of $35,000 from the JHDY Family Trust for the 2001 year of income was properly assessable to him. The profits from the promotion of tax avoidance scheme arrangements received through the net increase in his loan account with the JHDY Family Trust, or alternatively received through actual drawings from his loan account with the JHDY Family Trust, were not received by him and were not assessable income.

Respondent's contentions

19. In his opening, Mr Cole's first contention for the respondent was that the amount of $101,013 for the 2000 year of income represented interest on a loan of $2.5 million which had been claimed as a deduction in the taxation return of FMC Finance Pty Ltd and was received or derived by the applicant either directly or as a distribution of income through the JHDY Family Trust. His next contention was that the amounts of $30,179 and $23,457 represented a one-half share of deductions claimed and disallowed in the 2002 returns of the Hawthorndene Property Trust and the Lynton Property Trust. The disallowed amounts were distributed to the JHDY Family Trust and then assessed as income (or assessable income) to the applicant in the 2002 year of income. His final contention was that the amounts of $481,690 and $964,350 were profits received or derived by the applicant from the promotion of various tax avoidance scheme arrangements. The amounts represented the net loan account increase of the applicant with the JHDY Family Trust for the 1999 and 2000 years of income. The respondent's alternative position was that, assuming the entries in the applicant's loan account with the JHDY Family Trust were "book entries only", the drawings against those book entries amounting to $263,084 in 2001 and $589,516 in 2002 were assessable income of the applicant in the years drawn. The relevant amounts were assessable to the applicant in either the 1999 and 2000 years of income or the 2001 and 2002 years of income, depending on when the amounts were derived or received by the applicant.

20. Mr Cole corrected the basis of the calculations of assessable income adopted by the respondent in making the 1999 assessment and the 2000 amended assessment for JHDY. The corrected calculations were as follows:

1998-1999 1999-2000 Total
Gross amount credited to loan account for the applicant $996,000 $1,946,000 $2,942,000
Less: Portion of loan written off in 2004 $514,310 $1,029,650 $1,543,960
Net Assessable Income $481,690 $916,350 $1,398,040

Evidence

21. JHDY referred to the adjustment of $101,013 in the 2000 year of income. His evidence was that this amount was part of a larger amount of $200,762 claimed by FMC Finance Pty Ltd as an interest expense. He tendered a copy of a letter to the respondent dated 27 April 2005 (Exhibit A2) and a copy of a notice of assessment of FMC Finance Pty Ltd for the 2000 year of income (Exhibit A1) and

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contended that the claim of $200,762 had, in fact, been reduced by $101,013. On this basis, the adjustment of $101,013, whether as an omitted distribution from the JHDY Family Trust or as omitted interest from FMC Finance Pty Ltd, could not be sustained.

22. As to the omitted distributions of $30,179 and $23,457 from the JHDY Family Trust, which resulted from amendments to the 2002 returns of the Hawthorndene Property Trust and the Lynton Property Trust, JHDY's evidence was that the distributions had been assessed on an incorrect basis. It was his contention that the adjusted distributions from the Hawthorndene Property Trust and the Lynton Property Trust should be assessed to the beneficiaries of the JHDY Family Trust, based on their proportional entitlement to the net income of the Trust for trust law purposes.

23. In relation to the three tax avoidance scheme arrangements - Great Southern Olives, Sampson Vineyard and Winery and Zurich Investment Trust, JHDY described them in the following terms:

"… I guess just briefly what those schemes were, the wine and the olives were just that. The Zurich scheme was one of purchasing shares, that is public company shares. The wine and the olive project, that, as did the Zurich, that happened. There was loans approved. There was properties purchased. There was vineyards planted. There was wine produced. And the money from the schemes acted as a seed capital to those projects. Because the approved funding fell through, it was my job to call in the liquidators and they, in essence, realised all of those assets, wound the various companies up. In relation to the Zurich investments, when the tax office got involved and it was put as being a scheme, and all of the consequences that flowed from that in relation to the investors, those shares were returned to the investors. Where shares had been realised then money was paid back to the investors, and most of those investors are still clients of mine in an accounting and tax way. In just giving that very brief overview what I'm trying to say there is that at no time did I receive any income from - certainly the sorts of figures that are put by the tax office out of those schemes. … They're quite right in saying that all of the invoicing in terms of raising income for these schemes were through the companies FMC Corporate Services and JHDY and Associates. Now, if we were to proceed to look at the tax returns and the financial statements of those two companies in the said years 1999 to 2002, one will see that all of the income had been declared. And during those years those companies operated either at a small profit or at a loss. And for each of those years the tax office have never sought to amend what was lodged at that time." (Transcript, 9 December 2008, page 20)

24. JHDY referred to the taxation return of FMC Corporate Services Pty Ltd for the 2000 year of income (Exhibit R2, ST1 at pages 1-6). When questioned about the nature of the income derived by the company, he said:

"Well, the income was - those firms were set up as accounting firms, so the nature of the income was, if you like, accounting fees on a fixed price agreement, prepaid for various clients. And the fees were comprised of a physical payment, cash, or cheque, or a dollar payment. Partly a loan that was taken out in some instances by clients from a third party finance company. And it was paid back by the client direct to that finance company on a monthly basis. That was a third party. The company was Highland Finance which I'm not sure if it's still going, but it was bought out by GE Money. And the balance was a loan, an internal loan from a finance company that was set up by myself, whether it be FMC Finance or Pro Fee which the details are in the document." (Transcript, 9 December 2008, page 21)

25. With regard to the JHDY Family Trust, JHDY contended that the Trust had not received any management fee, dividend or other form of payment from either FMC Corporate Services Pty Ltd or JHDY & Associates Pty Ltd. In those circumstances, he could not, as a beneficiary of the Trust, have received any income from the promotion of the schemes. Also, there was no physical record of any bank account or credit card statement showing that

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he received income anywhere near the amounts claimed by the respondent.

26. JHDY referred to his notice of objection for the 1999 year of income (Exhibit R1, T18 at page 108) and to the loan reconciliation which appeared as follows:


" Year (1)FMC Finance (2) Profee Finance (3) PE Brown Trust (4) Loan Write Offs (5) PE Brown Trust - Amended
Dr Dr Cr Dr Cr
1998 0 0 65,454 0 65,454
1999 1,070,900 0 1,113,865 1,070,900 42,965
2000 2,563,621 0 2,567,189 2,563,621 3,568
2001 0 2,317,606 2,304,105 2,317,606 -13,501
2002 0 1,656,716 1,683,203 1,656,716 26,487
2003 0 1,428,078 1,695,397 1,428,078 267,319
2004 0 0 266,431 0 266,431

Column 1 represents FMC Finance loan portfolio balance

Column 2 represents Profee Finance loan portfolio balance

Column 3 indicates book entry loan account supporting column 1 & 2 loan balance

Column 4 represents loan write-offs as a result of ATO action, project liquidation, company de-registration

Column 5 represents amended loan balance as a result of write-offs


* LOAN WRITE OFF
* LOAN WRITE OFF
Total Invoices Raised 1999 - 2002 $4,091,050
Loan Funding @ 66% $2,727,366
Less Client Repayments $38,415
Loan Write Off $2,688,951"

He contended that the amount within the JHDY Family Trust was directly attributable to the schemes and was represented by the loan accounts of FMC Finance Pty Ltd and Profee Finance Pty Ltd. He then went on to say:

"… And what I've attempted to do is in column 4 to say well okay, that's the amount of loan that was carried in those companies. If I took column 4 away from column 3 then that is the actual loan account after amendments to writing off loans within the trust. And having got through those years one would find in the years lodged for the financial statements, for example, in the 2004 year the balance of the beneficiary account within the JHDY Family Trust was, indeed, 266,431. The loans that were put through FMC Finance and Pro Fee Finance, as I stated in the past to the tax office, were all book entries. They were book entries. And those loans came from JHDY Family Trust which was in turn a book entry. And the loans that were passed through my own beneficiary account to the trust was in turn a book entry. What I was in the situation of once the tax office came in and declared that these were schemes, and part of the process of tidying up the whole year by year scheme as it was, was to write off those loans that, of course, were never going to be paid back. And that's what's represented in that loan reconciliation in the objection. Now, the point that I'm making with all of this is that the tax office, within their respondent statement, have agreed to writing off bad debts, the loans that weren't going to be paid

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back as a result of closing the scheme down. And they've done that in clause 52. My point is that the amounts that they've used to write those loans off, are incorrect.

…

The point being is that if the tax office are wishing to make assessable income to me, a movement within a loan account, or a beneficiary loan account within a trust, then that's' what - column 5 is what the actual balances were after clearing out these bad debt loans. That's where I'm coming from." (Transcript, 9 December 2008, pages 23-24)

27. In cross-examination by Mr Cole, JHDY explained that the invoices raised of $4,091,050 represented the total accounting fees raised to clients. The clients received invoices from FMC Corporate Services Pty Ltd and JHDY & Associates Pty Ltd for fixed price accounting fees for 12 months. Loans of $2,727,366 were made to clients by FMC Finance Pty Ltd and then by Profee Finance Pty Ltd. Both FMC Finance Pty Ltd and Profee Finance Pty Ltd had no sources of loan funds themselves. The loans were merely recorded as book entries. Then, the loan write-off of $2,688,951 was a book entry - a write-off of the book entry. FMC Finance Pty Ltd was set up as the internal finance company to process the book entry loans and to allow the schemes to work as intended. When asked for clarification, the applicant said that there needed to be funding put through the companies involved in the schemes to allow tax deductions to be claimed by the investors.

28. Mr Cole then referred JHDY to the balance sheet of the JHDY Family Trust for the 1999 year of income (Exhibit R2, ST36 at page 224) and to the loan of $1,113,865.76 shown as owing by the Trust to the applicant. He acknowledged the amount disclosed as the loan, but again described it only as a book entry. Its purpose was to enable the loan of $1,070,900 owed by FMC Finance Pty Ltd to the Trust to be "book entried" out of the Trust's balance sheet. Both amounts recorded in the balance sheet were merely book entries. When asked about the purpose of the book entries, JHDY said:

"For just that. A book entry loan had to be made by me as a beneficiary, a beneficiary-loan account of the trust to enable the loan account to be then transferred into FMC Finance, which then enabled FMC Finance to make a book-entry loan to - in 1999 - FMC Corporate. So it filtered through that way." (Transcript, 9 December 2008, page 43)

When referred to the balance sheet of the JHDY Family Trust for the 2000 year of income (Exhibit R2, ST37 at page 227), JHDY acknowledged that his credit loan account with the Trust increased from $1,113,865.76 to $2,567,189.54 and that this increase came about as a result of further investors investing in the schemes through either FMC Corporate Services Pty Ltd or JHDY & Associates Pty Ltd. The difference comprised funds invested by investors in the schemes and represented approximately one third (or $11,000) of the total investment for which tax deductions were being claimed.

29. Mr Cole asked the applicant about the overseas funders or brokers that were involved in providing funds for the schemes. Several that the applicant mentioned were Dr Teobaldo Campanelli of European Financial Engineering, Anton Schmidt of Schmidt and Partner, Mr Xavier Duracell of Middle East Investment Company and Churchfield Consultants Limited. In relation to Churchfield Consultants Limited, no fees were paid to and no funding was produced by that company. JHDY was referred to the trading statement of FMC Corporate Services Pty Ltd for the 2000 year of income (Exhibit R2, ST2 at page 8). He acknowledged that licence fees of $1,050,000 to Churchfield Consultants Limited had been disclosed as a book entry in the 1999 year of income and a similar disclosure for licence fees of $ 920,000 had been made as a book entry in the 2000 year of income. But, no payments were made. The amounts were "taken up into the accounts as per the contract". Service fees of $472,800 were also disclosed in the 2000 year trading statement. These were actually paid as up-front fees to either Mr Schmidt or Dr Campanelli.

30. Mr Cole then took the applicant to the balance sheets of the JHDY Family Trust for the 2003 and 2004 years of income (Exhibit R1, T33 at pages 178-179) and to his loan accounts in the Trust. JHDY acknowledged that the loan accounts disclosed him as a creditor of the Trust

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in the 2003 year for $1,810,381.01 and in the 2004 year for $266,431.02. The difference of $1,543,950 was written off in the 2004 balance sheet of the Trust. In the balance sheet of the Trust for the 2001 year of income (Exhibit R2, ST38 at page 228), the applicant acknowledged that his loan account had reduced by $263,084, from $2,567,189 to $2,304,105. He denied that the reduction reflected a payment of income to him from the loan account balance.

Consideration

Trust distribution or interest of $101,013 in the 2000 year of income

31. The taxation return of FMC Finance Pty Ltd for the 2000 year of income (Exhibit R2, ST5 at page 19) disclosed a loss of $26,295. In that taxation return interest of $220,762 was claimed as a deduction. On the evidence, this claim included interest of $101,012.35 (or $101,013 rounded up) paid to the applicant (Exhibit R1, T34 at page 180). The remainder related to interest paid to Marque One Super of $99,750. The respondent disallowed the interest claimed of $99,750 and issued an assessment (Exhibit A1) increasing the loss of $26,295 to a taxable income of $73,455. In a letter dated 27 April 2005 (Exhibit A2), the respondent requested that the taxation return of FMC Finance Pty Ltd for the 2000 year of income be amended to reduce the interest claimed of $200,762 to $99,749 (or $99,750 rounded up), effectively excising the interest of $101,013 claimed as paid to the applicant. It appears this request for amendment has not been given effect to by the respondent. As a result, the interest of $101,013 has remained as a deduction claimed in the 2000 return of FMC Finance Pty Ltd.

32. In his notice of objection for the 2000 year of income, JHDY has asserted that the interest of $101,013 claimed by FMC Finance Pty Ltd was payable to the JHDY Family Trust. Whether this was the case or whether the interest was paid to JHDY himself, it remains that the amount has been allowed as a deduction to FMC Finance Pty Ltd and, on the evidence, is properly assessable to JHDY, whether as omitted interest or as an omitted distribution from the JHDY Family Trust.

33. In the Tribunal's view, there is a residual issue and that is for JHDY to pursue the request for amendment to the taxation return of FMC Finance Pty Ltd for the 2000 year of income to excise the interest of $101,013 that has remained as a deduction in the company's taxation return. The consequence would seem to be that the interest would no longer be assessable to JHDY, but this is a matter on which the Tribunal intends to make no further comment.

Distribution of $35,000 from the JHDY Family Trust in the 2001 year of income

34. JHDY has accepted that the omitted distribution of $35,000 from the JHDY Family Trust in the 2001 year of income, arising as a result of audit amendments to the Hawthorndene Property Trust, is properly assessable to him under s 97(1) of the ITAA 1936. In his statement of facts, issues and contentions, JHDY has indicated that he accepts the distribution of $35,000 on the basis that there was no trustee resolution for income distribution in the 2001 year of income and, as he was the only beneficiary of the Trust in that year, the total distribution is assessable to him. In these circumstances and to this extent, the Tribunal affirms the respondent's objection decision.

Distributions of $30,179 and $23,457 from the JHDY Family Trust in the 2002 year of income

35. In relation to the omitted distributions of $30,179 and $23,457 from the JHDY Family Trust in the 2002 year of income, as a result of audit amendments to the Hawthorndene Property Trust and the Lynton Property Trust, the applicant does not dispute the quantum of the distributions involved. However, he has contended, properly in the Tribunal's opinion, that the amounts of the distributions are not wholly assessable to him. In
Zeta Force Pty Ltd v FC of T 98 ATC 4681, the Federal Court was required to consider the situation where the net income of a family trust, calculated for tax purposes under s 95 of the ITAA 1936, was greater than the income of the trust estate, calculated for trust law purposes. In that case, Sundberg J held that the "excess" was assessable to the beneficiaries of the trust, based on their proportional entitlement to net income for trust law purposes.

36.

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In the Tribunal's view, the decision in Zeta Force is presently applicable. In further submissions by Mr Cole after the end of the hearing, the respondent has accepted the application, in the present case, of the proportional principle in Zeta Force. In the circumstances, the Tribunal finds that, on the authority of Zeta Force, and having regard to the existing proportional distributions of income to the beneficiaries of the JHDY Family Trust in the 2002 year of income as they appear in the Trust's taxation return for that year, the amounts of $905 (as a result of audit amendments to the Hawthorndene Property Trust) and $704 (as a result of audit amendments to the Lynton Property Trust), a total of $1,609, are properly assessable to the applicant in the 2002 year of income under s 97(1) of the ITAA 1936

Were profits from the promotion of tax avoidance scheme arrangements omitted from the assessable income of the applicant for the 1999 and 2000 years of income or, alternatively, for the 2001 and 2002 years of income?

37. The respondent has raised assessments against the applicant for the 1999 and 2000 years of income largely based upon the trading statement of FMC Corporate Services Pty Ltd for the year ended 30 June 2000. The trading statement discloses income from consultancy fees of $996,000 in the 1999 year of income and $1,946,000 in the 2000 year of income. The applicant acknowledged that the source of the consultancy fees was from amounts invoiced to investors in the schemes. When asked whether the fees were monies paid or accrued, the applicant was unsure. Claims for deduction were made against the consultancy fees. In the 1999 year, licence fees of $1,050,000 were claimed as a deduction. A similar claim of $920,000 for licence fees was made in the 2000 year. The licence fees in both years were payable to Churchfield Consultants Limited, but no physical payments were made. The amounts for the licence fees were described as merely book entries. Claims for deduction were also made in the 2000 year for service fees of $472,800 and consultancy fees of $323,444.82. The applicant's evidence was that the service fees were up-front payments actually made to Mr Schmidt and Dr Campanelli. The consultancy fees were also actually paid and the recipient was either Mr Schmidt or Dr Campanelli. The applicant also acknowledged that certain other expenditure for advertising, bank charges and commissions was actually paid.

38. The assessments raised against the applicant for the 2001 and 2002 years of income were based upon the balance sheets of the JHDY Family Trust for the 2001 and 2003 years. The balance sheets disclosed the following movements in the credit loan account of JHDY with the JHDY Family Trust during 2001 and 2002:

Year of Income Opening Balance Closing Balance Movement
2000/2001 $2,567,198 $2,304,105 $263,084
2001/2002 $2,304,105 $1,714,589 $589,516

The financial records of the JHDY Family Trust were not available to the Tribunal and actual movements in the applicant's loan account with the Trust could not be traced. According to the applicant's "Loan Reconciliation" in his 1999 notice of objection, the balance of his loan account with the JHDY Family Trust in the 2004 year of income, after loan write-offs, was $266,431. Again, actual records of the Trust setting out the basis on which the loan write-offs occurred were not available to the Tribunal.

39. The respondent's contention was that the amounts credited to the applicant's loan account with the JHDY Family Trust were his profit from managing and marketing the tax avoidance schemes, calculated by reference to the number of investors who had participated in the schemes. Mr Cole submitted that there was a significant loan account balance in the name of JHDY in the Trust. There were changes to the loan account over at least three years which indicated that there was money paid or, at the very least, there was a financial benefit to the

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applicant which was assessable income in his hands. In its statement of facts, issues and contentions the respondent asserted that, during the 2004 year of income, the sum of $1,543,960 was debited to the applicant's loan account with the JHDY Family Trust. This was in respect of loans to investors in the schemes that had been written off as bad debts. According to the respondent, of the sum of $1,543,960 written off, $514,310 related to the 1999 year of income and $1,029,650 related to the 2000 year of income. As a result of the write-offs, the income from consultancy fees of $996,000 in 1999 and $1,946,000 in 2000 was reduced to the net assessable income for those years appearing in paragraph 20 of these reasons.

40. The Tribunal notes that there have been significant sums disclosed in the loan account of the applicant with the JHDY Family Trust and there have been changes to this loan account during the period from 1999 to 2004. The applicant has acknowledged that the sums in the loan account represent funds invested by the investors in the tax avoidance schemes. However, the funds invested have been declared as income in the relevant taxation returns of FMC Corporate Services Pty Ltd and JHDY & Associates Pty Ltd. The applicant has argued that, as the sums are book entries only in the accounts of the JHDY Family Trust, the reductions in his loan account with the Trust do not comprise income which is assessable in his hands. The Tribunal is unable to accept this argument. Mere movement in the applicant's loan account in the Trust does not give rise to income, but moneys drawn from the loan account may comprise income where there have been credits to the loan account from another source. On the evidence, the source of the funds in the loan account represents monies invested in the schemes and where reductions have occurred the funds involved constitute income derived or dealt with by the applicant. Significant funds were invested in the schemes by the investors which enabled the purchase of two properties at Mount Benson and the planting of a vineyard on one of the properties. The funds invested also enabled the purchase of a property in the Adelaide Hills with a vineyard, and allowed for the payment of fees to overseas brokers to facilitate the schemes. In the absence of records of the JHDY Family Trust or those of FMC Corporate Services Pty Ltd and JHDY & Associates Pty Ltd, which disclosed the movement of funds invested in the schemes and of funds outlaid as part of the schemes, the Tribunal is unable to accept the applicant's contention that no income was received or no profit distributions were made to him during the relevant years of income.

41. In the Tribunal's opinion, the appropriate basis of assessment of the income or profits to the applicant from the promotion of the tax avoidance schemes is by reference to the reductions in his loan account with the JHDY Family Trust in the 2001 and 2002 years of income. The Tribunal is not satisfied that the assessments for the 1999 and 2000 years of income, based upon the increases in his loan account with the Trust, represent the proper taxation outcome from the applicant's involvement in the promotion of the tax avoidance schemes. Accordingly, the amounts comprising the reductions in the applicant's loan account with the JHDY Family Trust, namely $263,084 in the 2001 year of income and $589,516 in the 2002 year of income, constitute assessable income of the applicant under s 6-5 or s 6-10 of the ITAA 1997. Section 6-15 of the ITAA 1997 has no application.

Burden of proof

42. In proceedings before the Tribunal, neither party carries the burden of proof. However, under s 14ZZK(b)(i) of the TA Act, when the Tribunal reviews an objection decision, the taxpayer applying for review has the burden of proving, where an assessment is involved, that the assessment is excessive. In seeking to show that the assessment is excessive, the taxpayer must put his or her case before the Tribunal and produce records and other evidence in support of the case. In considering the predecessor to s 14ZZK(b)(i), Foster J observed in
Eldridge v FC of T 90 ATC 4907 at 4921:

"This, it must not be lost sight of, was the main and substantial case put to the Tribunal by and on behalf of the applicant. It was through this case, mainly if not solely, that the applicant sought to demonstrate, the onus being on him, that the assessments were 'excessive' within the meaning of sec. 190(b). The Tribunal rejected this case.

ATC 140

Quite clearly, it was not rejected on the basis of some 'rubber-stamping' of the Commissioner's previous views. It was rejected fairly and squarely upon evidence given before the Tribunal itself through documentary exhibits and through witnesses who were examined, cross-examined and re-examined in the ordinary way.

It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the court than of the office desk.

It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer's objections. Although it is not bound by the rules of evidence (s 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it. …"

43. The Tribunal's role was explained more fully in the decision of the Full High Court in
FC of T v Dalco 90 ATC 4088. There, speaking of the ITAA 1936 (but the principles apply equally to the TA Act) and also in speaking of an appeal (but the same principles apply to a review in this Tribunal), Brennan J observed (at 4091):

"… It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. 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.

…"

44. As Brennan J also said in Dalco (at page 4093), the manner in which a taxpayer can discharge the burden of proof varies with the circumstances. In some cases, the burden may be discharged by pointing to some error of computation. The burden can also be discharged by the taxpayer proving that the Commissioner erroneously included in the assessment an amount that should not have been included. On the other hand, as Mason J pointed out in
Gauci and Others v FC of T 75 ATC 4257 at 4261 (when considering the application of the predecessor to s 14ZZK(b)):

"Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. The appellants relied on their evidence and that of Graham in order to show that the assessments were excessive. Once that evidence was rejected, the appellants' case necessarily failed."

45. Section 14ZZK(b) effectively creates a rebuttable presumption that an assessment is not excessive. As was further said by Mason J in Gauci (at page 4261):

"The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail."

46. Finally, in commenting on the taxpayer's absence of records, Lockhart J in
McCauley v FC of T 88 ATC 4605 at 4612 referred to the judgment of Latham CJ in
Trautwein v FC of T (1936) 56 CLR 63 and said:

"I have already made some observations about the effect of the absence of records on the taxpayer's case and it is pertinent to recite the observation on this matter by Latham CJ in Trautwein's case (supra) at p 87:

'In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment

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would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.'

…"

47. As already mentioned, the applicant has not provided to the Tribunal relevant records of the JHDY Family Trust and its related entities. To assist the Tribunal, documents disclosing the complete picture of the tax avoidance schemes, including details of monies in, monies out, receipts from investors and balances in various accounts, should have been produced. The applicant argued that the respondent had already been provided with the relevant documents and information and that this would be made available to the Tribunal. However, as was submitted by Mr Cole, it was not for the respondent to produce the applicant's documents to the Tribunal. The documents may not be complete in terms of what had been provided to the respondent, and it was not for the respondent to second-guess what the documents were and what they meant. The applicant is an accountant and former registered tax agent and is obviously familiar with the operation of the tax laws. As such, he should have been familiar with the provisions of s 14ZZK(b)(i), the burden of proof obligation cast upon him and the need to produce documents and evidence to support his case. When this was indicated to him, he said:

"I see. I must admit I've assumed that all of the documentation that I have supplied to the Tax Office would have been made available to the tribunal. I never thought of the situation where I would need to do the same. I accept that." (Transcript, 10 December 2008, page 95)

When asked whether he took professional advice as to his position in the event that the respondent argued that the burden of proof requirements in s 14ZZK(b)(i) applied, he admitted that he had not done so.

48. It is unfortunate that the applicant did not fully appreciate what documents would be before the Tribunal. He had received the T documents and supplementary T documents lodged with the Tribunal pursuant to s 37 of the AAT Act. As a professional accountant with experience in promoting tax avoidance scheme arrangements, he should have taken independent advice on the conduct of proceedings before the Tribunal, on the production of documents and on the tendering of evidence. The Tribunal notes that, in correspondence to the respondent subsequent to the hearing, which was copied to the Tribunal, the applicant forwarded copies of all personal bank and credit card statements for the 1999 to 2002 years of income which he said were not included in documents previously tabled at the Tribunal.

49. For the reasons outlined above, the Tribunal is not satisfied that the applicant has discharged the onus of proving that the assessments raised against him on profits or income of $263,084 and $589,516 respectively in the 2001 and 2002 years of income are excessive.

Tax penalties and general interest charge

50. In the provisions of Division VII of the ITAA 1936, which have been repealed but still apply in the present case, a system of tax penalties applies where there is a "tax shortfall" caused by particular behaviour of the taxpayer. Under s 226J, where the tax shortfall is caused by the intentional disregard of income tax law, the taxpayer is liable to a penalty tax of 75% of the shortfall. Where the tax shortfall is caused by recklessness of the taxpayer with regard to the correct operation of the income tax law, the taxpayer is liable to pay a penalty tax of 50% of the amount of the shortfall (s 226H). Where the tax shortfall is caused by the failure of the taxpayer to take reasonable care to comply with the income tax law, the taxpayer is liable to pay penalty tax of 25% of the amount of the shortfall (s 226G). Under s 227(3) of the ITAA 1936, the respondent (and this Tribunal on a review) has the discretion to remit a tax shortfall penalty in whole or in part.

51. In the present case, in the reasons for decision on the applicant's objections (Exhibit R1, T2 at page 9), the respondent has indicated that penalty tax of 75% has been imposed under s 226J in respect of the omitted profits or

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income from the promotion of the tax avoidance scheme arrangements. Penalty tax of 50% has been imposed under s 226H in respect of the other amendments in the 2000, 2001 and 2002 years of income.

52. It has been said (rightly, in the Tribunal's view) that a person's intention is a question of fact. It may be proved by direct evidence of a person's state of mind, but may also be inferred from the circumstances and conduct of the person. Given the applicant's accounting and tax agent background, together with his obvious experience as a promoter of tax avoidance schemes, the Tribunal is satisfied that the manner in which he prepared his income tax returns and made (or lacked) disclosures in them, based upon what he referred to as "book entries", amounted to intentional disregard of the income tax law. Penalty tax of 75% of the tax shortfall in the 2001 and 2002 years of income has been correctly applied.

53. In relation to the penalty tax of 50% in respect of the other amendments, it is the Tribunal's view that:

54. As to the issue of the general interest charge, which was raised by the applicant in his statement of facts, issues and contentions and during the hearing, the Tribunal has no power to review a decision of the respondent relating to the remission of the general interest charge.

Decision

55. The decision under review is varied:

 

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