CASE 53/96
Members:BH Burns DP
BC Lock M
DJ Trowse M
Tribunal:
Administrative Appeals Tribunal
BH Burns (Deputy President), BC Lock and DJ Trowse (Members)
The multitude of issues involved in these references relate to the years 1983 to 1988 inclusive and are the result of audits conducted by the respondent into the financial affairs of the applicant, a partnership consisting of the applicant and his wife, and several companies under the control of the applicant. In short, the questions are whether the respondent was correct in increasing the applicant's taxable incomes to the extent indicated hereunder and, if so, whether the whole or part of the amounts of additional tax imposed for false and misleading statements should be further remitted pursuant to the discretion contained in s. 227, as it then was, of the Income Tax Assessment Act 1936 (``the Act''):
+-----------------------------------------+
| Year | Amount Included | Additional Tax |
|-----------------------------------------|
| 1983 | $ 40,709 | $ 25,845 |
|-----------------------------------------|
| 1984 | $139,360 | $ 71,217 |
|-----------------------------------------|
| 1985 | $401,843 | $172,844 |
|-----------------------------------------|
| 1986 | $ 58,116 | $ 40,490 |
|-----------------------------------------|
| 1987 | $136,274 | $ 66,429 |
|-----------------------------------------|
| 1988 | $309,797 | $ 93,178 |
+-----------------------------------------+
2. For the purpose of introduction, the matters in contention are described in terms of the following summary:
- • whether unidentified bank deposits represent assessable income in accordance with s. 25(1) of the Act;
- • whether alleged outgoings claimed in partnership returns were incurred and, if so, do they qualify for deduction in terms of either ss. 51(1), 54 and former ss. 82AA to 82AR of the Act;
- • to what extent, if any, do payments made by the partnership to a service company under the applicant's control qualify as deductions pursuant to s. 51(1) of the Act;
- • do deficits in personal living expenditure exist and, if so, should equivalent amounts be included as assessable income;
- • whether monies were borrowed from an overseas source and, if so,
- - were those funds used to purchase trading stock so that the cost of those acquisitions together with interest thereon are deductible under s. 51(1) of the Act, and
- - are resultant foreign exchange losses from those borrowings deductible under s. 51(1) or Division 3B of Part III of the Act.
- • deductibility of further amount allegedly expended on the purchase of imported foodstuffs;
- • whether interest and foreign exchange loss on monies borrowed and remitted overseas are deductible under s. 51(1) or Division 3B of Part III of the Act;
- • whether monies withdrawn by the applicant from companies under his control represent deemed dividends for purposes of s. 108 of the Act;
- • deductibility of overseas share trading losses;
- • the quantum of capital gain on sale of real estate;
- • the quantum of penalties imposed by the respondent for false or misleading statements.
3. The Tribunal received in evidence the documents lodged by the respondent pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975, together with various exhibits tendered by the parties. The applicant, who now resides overseas and is unlikely to return to Australia in the foreseeable future, gave telephonic evidence which extended over a period of four days. The Tribunal also heard from two officers of the respondent who had been engaged in the audit of the applicant's financial affairs. The applicant was represented
ATC 505
by Mr D. Caulfield and the respondent by Mr F. Carnovale of counsel.4. The business activities of the applicant together with the entities under his control are now considered in some detail. The partnership, of which the applicant and his wife were equal partners, conducted throughout the period under review a ``Stud Racehorse Breeders'' business on premises located in the Adelaide Hills. An examination of the partnership returns compiled for the years 1983 to 1988 reveal the following information:
- • total net losses incurred and claimed in personal returns of partners - $490,808;
- • number of horses sold - three for a consideration of $2,632;
- • 14 horses disposed of in 1988 (last year of operation) for no consideration;
- • total stake money received in six year period - $47,937.
The respondent accepts that the activities undertaken by the partnership constituted the carrying on of a business for purposes of the Act but, rather belatedly, now argues that winnings from gambling, if any, represent assessable income according to normal concepts. It seems that such a view was developed in order to counter one of the applicant's submissions regarding a possible source of non-taxable funds.
5. U.H. P/L (``Servco'') is a company which, during the six year period, did no more than act as agent for the partnership. Its tasks included the purchase of stock requisites, seed and fertilisers as well as attending to all repairs of plant and improvements. It appears that the applicant, acting as an employee of Servco, either carried out or organised those functions and that, in return, the company was rewarded on the basis of cost plus a margin for profit. The respondent is of the opinion that the margins charged were excessive and that those excesses were driven by the need to generate enough income in Servco to enable the payment of salaries to the applicant and his wife at levels sufficient to support substantial tax deductible contributions to a superannuation fund.
6. Another member of the group was I.C. P/L (``Import''). This company was in the business of selling certain items of builders hardware imported from overseas. Also it will be seen that the banking facilities of Import were utilised by the applicant, this time as a sole trader, in conducting a business whereby foodstuffs were imported into Australia for resale. It seems that those goods were imported in the name of Import and that, on occasions, company funds were applied in settling the resultant outstandings. The manner and calculation of the reimbursement required between the applicant and Import remain unclear.
7. The remaining proprietary company is M. Investment Pty Ltd (``Invest''). While it appears that this company did not enter into any trading transactions during the period under consideration, there is evidence that its bank account was operated on to receive withdrawals from Servco which were treated in the records of Invest as credits to the loan accounts of the applicant and his wife. It is withdrawals of this kind that have raised the spectre of s. 108 of the Act.
8. The applicant also conducted as a sole trader a foodstuff business (``Fine Foods'') which commenced on 24 August 1983 and ceased at some stage early in the 1987 financial year. The respondent rejects the applicant's evidence that monies were borrowed overseas and used to purchase trading stock and on that basis claims for those purchases together with allied borrowing expenses have been disallowed.
9. It is appropriate that the Tribunal now address the credibility of the applicant and the acceptability of his evidence and, in so doing, we begin with the observation that he was well versed on the numerous matters in contention and that he clearly understood the ramifications of his evidence. In our opinion, the applicant was not only evasive in the extreme but also provided answers to questions put to him solely on the basis of self interest. In fact, we found some of his answers and explanations unbelievable. Moreover, when the inaccuracies contained in the applicant's tax returns, some of which are regarded as blatant, are recognised and taken in conjunction with our other views, the conclusion is that little, if any, reliance can be placed on the applicant's evidence unless it has independent support. By the end of the hearing, the Tribunal was left with the impression of a person prepared to employ whatever means at his disposal to evade the payment of tax rightfully imposed by the legislation. Furthermore, it appears to us that the applicant paid scant regard to the concept of
ATC 506
separate legal entity for the companies under his control and that his attitude extended no further than the notion of what was theirs was his. This has led to much intermingling of resources which, in turn, has added to an already confused scenario.10. The testimony of the two departmental officers was of assistance in understanding the methodology applied by them in tracing the cash flow as between the various entities and also transfers in and out of a variety of investment accounts in the names of either the applicant and his wife jointly or the applicant alone. It was this process that revealed the deposits of unknown origin and also the re- banking of withdrawals made from the bank accounts of Servco and Import and which have been treated by the respondent as deemed dividends.
Unidentified cash deposits
11. The respondent has detected a substantial number of unidentified credits which had been deposited into a variety of bank accounts involving the applicant and which had not been returned as assessable income. Indeed, it appears that, for accounting purposes, deposits of this kind into the partnership bank account had been treated as capital contributions by the partners, and that similar deposits into the bank accounts of Servco, Import and Invest had been shared between the loan accounts of the applicant and his wife. Several deposits of this nature were also made into the bank account of Fine Foods and on those occasions they were credited to the applicant's capital account. The respondent, who submits that these deposits constitute assessable income, has shared the amounts in question between the applicant and his wife on the same basis as that used in the writing up of the accounting records. There were several other instances where deposits were made to bank accounts not within the accounting framework and, on those occasions, the respondent has allocated the relevant amounts in accordance with the ownership of those accounts. There were twenty three such credits identified and the following represents a yearly summary thereof and the allocations made by the respondent:
+--------------------------------------------------+
| Year | Total Credits | Allocated to: |
| ending June | | Applicant Wife |
|--------------------------------------------------|
| 1983 | $12,900 | $ 6,450 $ 6,450 |
|--------------------------------------------------|
| 1984 | $ 8,600 | $ 4,300 $ 4,300 |
|--------------------------------------------------|
| 1985 | $72,711 | $42,606 $30,105 |
+--------------------------------------------------+
The respondent, although acknowledging an error of calculation in the 1984 allocation inasmuch that the applicant's share should have been $4,900, confirmed that no further adjustment was intended.
12. The applicant maintains that these unidentified credits totalling $94,211 were the result of successful wagers on racehorses and that the activity of betting was no more than a hobby. By way of explanation, he advised of a prolonged penchant for horses which culminated in the obtaining of a trainer's licence some 30 years ago and the purchase, in about 1970, of stables adjacent to a metropolitan racecourse. His part time training activities were restricted to horses belonging to the partnership and it seems that the number in work at any one time ranged between two and five. Apparently, the chores of training provided the applicant with the opportunity to assess the prospects of not only horses under his care but also others in the performance of their track work. Furthermore, it was acknowledged that the performance of those same duties placed the applicant in a position to receive ``inside information''.
13. In normal circumstances, the average amount wagered by the applicant was between $5 and $10, and yet there were occasions, so it was alleged, when the size of a bet was increased to up to $500. Those larger amounts were wagered only when the applicant was in receipt of information gleaned in the course of his training activities and which, according to his evidence, returned significant rewards, the largest being $15,000. Notwithstanding the applicant's acknowledgment that losses were incurred from time to time, details of which were not touched upon, it is his assertion that the ability to select long priced winners resulted in considerable surpluses. The evidence relating to the applicant's betting was inordinately
ATC 507
deficient in detail. Specific details of individual wagers and when they were placed were not forthcoming. Bearing in mind this major shortcoming and our previous finding as to the applicant's lack of credibility, the submission that the unidentified deposits occurring during the years 1983, 1984 and 1985 represented gambling wins is rejected. In the Tribunal's view, the applicant clearly fails the onus of proof requirement imposed upon him by s. 190(b) of the Act.14. Granted that it is no longer necessary to consider the proposition that in the event of gambling excesses existing they constituted assessable income, the Tribunal considers it appropriate to make the following comments. It is our finding that any surplus emanating from those occasions when the applicant was applying information gained whilst engaged as a trainer was incidental to the racing of horses. The information fundamental to that result was part and parcel of that process. Accepting that the applicant was carrying on a business of breeding racehorses and racing them for profit, it is our conclusion that had gambling excesses been derived in the manner described, they represent assessable income. The decision in
Knight v. C. of T. (1928) S.R.(NSW) 523 is cited as being supportive of that conclusion as is the comment of Hill J in
Evans v. F.C. of T. 89 ATC 4540 at 4555, that gambling is more likely to be a business where it is associated with ``some other business such as that of bookmaking, breeding or training horses''. In our opinion, a likelihood of this kind is further enhanced where the association of activities is joined by such existing features as, the relatively large scale of the amounts wagered and won, a preponderance of profit motive and a greater reliance on informed judgment as opposed to chance.
15. It also befalls the Tribunal to refer to a further submission made on behalf of the applicant regarding an alternative source of funds capable of explaining the origin of the unidentified bank deposits as well as any shortfalls of monies needed for personal living requirements. The applicant's representative pointed to a number of loan withdrawals of loan monies by his client from bank accounts of the controlled companies and also to withdrawals from personal savings accounts, and suggested that the resultant funds created a pool of cash which enabled the applicant to pay sundry expenses from that pool and, from time to time, to re-bank any surplus not so required. The representative added that, had the respondent adopted the more usual course of preparing an Asset Betterment Statement, then this proposed source would have been disclosed.
16. A submission along these lines is in direct conflict with the testimony given by the two departmental officers. In explaining the methodology used in conducting the audit, they referred to the process of tracing withdrawals from one account to another and how due allowance had been made for withdrawals which had not been re-deposited elsewhere. The Tribunal accepts that that was the approach applied and on that basis is satisfied that the withdrawals referred to were not available in the manner suggested by the applicant. Furthermore, we are of the view that an Asset Betterment Statement, had it been prepared, would have produced a similar result.
17. Also in contention is the question of monies standing to the credit of a bank account in Germany in the joint names of the applicant and his wife and which, as at 17 October 1984, had a brought forward credit balance of 200,000 DM. A source for those funds was not identified by the respondent and thus, not surprisingly, the Australian equivalent was regarded as assessable income. The applicant's one half share thereof amounted to $38,386 which was included in his 1985 assessment. It is noted that prior bank statements for this account are not available and thus the precise date or dates of the deposit or deposits leading to the balance of 200,000 DM remain unknown.
18. According to the applicant the source of the 200,000 DM was twofold. First, there was the repayment of a loan of 30,000 DM which the applicant had made to his parents in about 1970 to assist with the purchase of a residence in Germany. Secondly, following the death in 1979 of his mother-in-law who resided in Germany, his wife received an amount of cash (unspecified) and a stamp collection from the estate. It was alleged that the cash and the sale proceeds of the stamp collection, once more unspecified, formed part of the 200,000 DM. No documentary evidence was tendered to support these proposed sources, nor did the Tribunal have the benefit of hearing from the applicant's wife. Based on our assessment of the applicant's credibility, which is further tainted by the non-inclusion of interest received
ATC 508
on this and other overseas accounts as assessable income, these proposals as to the source of the 200,000 DM are rejected. Additionally, it is the Tribunal's view that the applicant has failed to establish that the Commissioner erred in bringing the amount of $38,386 to account as assessable income in the 1985 tax year.Partnership expenditure disallowed
19. Various adjustments have been made to the partnership returns lodged in connection with the breeding and racing of racehorses. Those adjustments, which have reduced the amounts of ``partnership loss'' (see s. 90 of the Act) and thus the applicant's one half share thereof (see s. 92 of the Act), are based mainly on the belief that the expenditure had not been incurred. Details of the cheques in question are:
+-------------------------------------------------+
| Date Drawn | Amount | Claimed As |
|-------------------------------------------------|
| 7 June 1983 | $2,500 | Stallion service fee |
|-------------------------------------------------|
| 1 May 1985 | $3,200 | Horse training expenses |
|-------------------------------------------------|
| 1 May 1985 | $1,825 | Track fees |
|-------------------------------------------------|
| 10 May 1985 | $4,321 | Fodder |
+-------------------------------------------------+
It is accepted that these cheques were either re- deposited into the partnership bank account and treated as capital contributions or invested in term deposits in the applicant's name. The explanation that these withdrawals were in the form of reimbursement of cash outlaid by the applicant on those types of expenditure finds no favour with the Tribunal and is discarded. Not only is there a total absence of evidence to sustain such a possibility, the source of the cash used to fund the professed expenditure in the first instance remains unresolved.
20. Also in issue are two cash cheques, one for $3,300 and the other for $1,600, drawn on 29 June 1985 and claimed as ``erection of silo'' and ``repairs to sheds and bridge'' respectively. Additionally, there is a journal entry made in the books of the partnership during the 1985 year for $2,080 and described as reimbursement for the purchases of petrol and oil. Again, the lack of probative evidence on these issues results in a decision unfavourable to the applicant.
21. Finally, under this heading, there is a claim in the 1985 year for road repairs of $9,540 which initially was disallowed by the respondent as being expenditure of a capital nature. The cheque pertaining to this outgoing was made payable to Servco and, according to the information contained on the cheque heel, represented reimbursement of costs associated with the bituminising of a road on the stud property. Irrespective of the fact that the cheque heel narration was in the applicant's handwriting, his testimony before the Tribunal was that the work undertaken on behalf of the partnership involved no more than the re-laying of rubble by contractors engaged by Servco and that, as such, it should be viewed in the manner of a repair as distinct from a capital item of expenditure. In the course of the hearing, faxed copies of Servco's cheque heels covering the 1985 financial year were sent to the applicant with the request that he identify those that related to this claim. This he was unable to do and when asked how Servco paid for the work allegedly carried out his reply was that he could not remember. It was on this basis that the respondent altered his reason for disallowance to ``expenditure not incurred''.
22. The Tribunal is not satisfied that any of the expenditure claimed under this heading was incurred. Indeed, in all of the surrounding circumstances, the applicant's practice of drawing cheques said to relate to business expenditure followed by their re-banking is suggestive of fraudulent manipulation. Needless to say, failure to satisfy the Tribunal that the expenditure was incurred means that deductions for the items claimed are denied.
Payments by partnership to Servco
23. The extent of profit margin charged by Servco to the partnership for goods and services rendered has captured the attention of the respondent. Actually, the respondent has adjusted the 1986, 1987 and 1988 partnership returns to reflect an allowable mark-up of 15% of cost, the result of which shows in the following abridgment:
24. The foundation of the applicant's calculations on this issue was not expanded upon before the Tribunal. All that can be said is that the amounts charged were in convenient parcels of hundreds and fifties which bear no apparent mathematical relationship to the amounts expended by Servco, and that, from a relative point of view, the margins built into those charges seem excessive and wanting in commercial reality. Certainly, there is room for the conclusion that a purpose over and above the gaining of partnership assessable income was present. Indeed, that is our finding.
25. The method of sharing the outgoings between those purposes has its own problems. The principal amounts used by the respondent in his calculations are based on the costs of materials and goods only and make no reference to wages paid by Servco to the applicant and his wife. It may be that neither of them participated in any of the tasks undertaken on behalf of the partnership and thus no allowance for wages is necessary. Conversely, if the applicant and his wife were so involved, the extent of that involvement is unknown. The simple fact is that this matter was not addressed by the applicant and thus the quantum of the mark-up applied by the respondent can be taken no further.
26. The decision of the High Court in
Fletcher & Ors v F.C. of T. 91 ATC 4950 is ample authority for the apportionment of expenditure voluntarily incurred where more than one purpose prevails. If it is established that there is no obvious commercial explanation for the amount being charged and that one of the objects and advantages being sought by a taxpayer in making the outgoing relates to a purpose other than the gaining of assessable income, then the portion of the expenditure connected to that purpose will not quality for deduction.
27. The amounts in question are claimed under either ss. 51(1) or 53(1) of the Act, both of which limit the deduction to the extent to which the expenditure is incurred in gaining the assessable income. It has not been established, to our satisfaction, that the apportionment method applied by the respondent contained any error and thus his decision on this issue is affirmed.
Personal living cash requirement deficits
28. The respondent has compared estimated living expenses for the applicant and his wife with total amounts available for that purpose and has arrived at the following discrepancies, a half share of which have been included in the applicant's assessable income:
+----------------------------------------------------------------------+
| | Estimated Living | | |
| Year ending June | Expenses | Available Cash | Discrepancies |
|----------------------------------------------------------------------+
| 1983 | $12,010 | $9,100 | $2,910 |
|----------------------------------------------------------------------|
| 1984 | $13,345 | $3,911 | $9,434 |
|----------------------------------------------------------------------|
| 1985 | $14,680 | $9,645 | $5,035 |
+----------------------------------------------------------------------+
The living expenses have been estimated on the basis of the average cost of living statistics appearing in the Household Expenditure Survey for Adelaide which is published by the Australian Bureau of Statistics. Excluded from those calculations was the cost of transport and accommodation for the reasons that the applicant and his wife used cars owned and maintained by the companies and that the house where they resided was owned by them and was free of any encumbrances. It does appear that the respondent's calculations contain some inconsistencies and yet the applicant displayed no interest in disputing the quantum of the adjustments made by the respondent. Instead reliance was placed on the submission that,
ATC 510
once the winnings from gambling and the other source of funds mentioned in paragraph 15 are taken into account, there is no shortfall. Bearing in mind our earlier rejection of those other sources and the absence of any proof that the amounts included by the respondent were excessive, the adjustments for the three years must stand.Claims for stock purchases by Fine Foods from overseas loan
29. The applicant conducted the business of Fine Foods as a sole proprietor. The business imported foodstuffs from West Germany and Holland although it does seem that there were occasions when trading stock answering this description was imported by Import which in turn on-sold them to Fine Foods. The applicant asserts that on another occasion, stock purchases were acquired from loan monies made available by a friend and relative of his wife (``A'') who resided in Germany. Support for such an arrangement was forthcoming from a loan agreement dated 1 July 1983 which recites that the applicant will borrow the amount of 400,000 DM from ``A'' upon the following terms and conditions:
- (a) applicant to draw the money as required for the purchase of goods in West Germany;
- (b) interest of 1% per month to be paid from the time of draw until repayment of loan;
- (c) loan to be repaid upon ``A'' giving six months' notice in writing.
30. The following summary reflects the amounts claimed by the applicant which originate from the alleged arrangement with ``A'':
1984 Year
Stock purchases - $106,046
Interest - $6,408
1985 Year
Stock purchases - $40,800
Interest - $17,767
Foreign exchange loss - $20,254
1986 Year
Foreign exchange loss - $50,562
The applicant advised the Tribunal that the stock purchases were paid for by ``A'' and formed the principal of the indebtedness. The amounts of interest together with the foreign exchange loss for the 1985 year, which incidentally was an amount calculated by the applicant's then accountant to record an anticipated loss on ultimate discharge, were the subject of entries in the general journal. It was in this way that the supposed indebtedness as at 30 June 1985 was $191,275.
31. On 18 February 1986 Fine Foods borrowed 400,000 DM from the State Bank of South Australia for the declared purpose of repaying the amount outstanding to ``A''. At that time the Australian equivalent to 400,000 DM was $241,837 and thus the exchange loss of $50,562 in the 1986 year. It is of some moment to observe that the parties appear to have ignored the need to pay interest for the period 1 July 1985 onward and, more significantly, that the remittance of 400,000 DM was not to ``A'' but instead to the credit of a joint account in the name of the applicant and his wife with a bank in Germany.
32. The respondent challenged the authenticity of the loan arrangement with ``A'' and it seems that information exchanged in terms of Article 24 of the Australia/Federal Republic of Germany Double Tax Agreement was fundamental to this stance. The information gained was in the form of a letter from ``A'' and which in part reads:
``... The text [of the loan agreement] was written in English, and with the exception of the sum I did not understand it. I was also unaware that this attestation, which I had issued as a favour, would be misused for presentation to the Taxation Office in Australia. I have not made any payments to my relatives, nor have I ever received any such payments. I did not have any funds available anyhow, and following my divorce in 1981 I had considerable personal debts which meant that I was certainly unable to lend any money.''
33. Bearing in mind our earlier finding as to the applicant's lack of credibility and also to the fact that, in our opinion, his evidence on this issue was even less convincing, we are not prepared to accept his version of these events. We do not accept that monies were borrowed from ``A'' for the purpose of acquiring trading stock. If trading stock to the values of $106,046 and $40,800 had been acquired, and on the documentary evidence before the Tribunal this seems likely, the probability is that payment in some other form has been treated as purchases for income tax purposes. It follows that our decision on the alleged loan also negates the
ATC 511
applicant's claim for interest and foreign exchange losses. We also add that, in any event, the foreign exchange loss calculated by the accountant for the 1985 year was claimed prematurely and that for income tax purposes, no such loss was incurred in that year.Further claim for alleged expenditure on imported foodstuffs
34. Another allied matter is the deductibility of $20,000 claimed in the applicant's 1985 return and said to represent purchases of stock for the business of Fine Foods. It seems that the claim in question relates to a cheque drawn on the business account on 10 January 1985 with the cheque heel bearing the narration of ``purchases'' and that the respondent became suspicious of that detail upon learning that the cheque had been paid to a merchant banker as part of a money market investment in the name of Import. The applicant endeavoured to clarify this transaction by insisting that it was his practice to label re-deposited cheques as purchases because of the intention of eventually using those monies for that purpose at some time in the future. The Tribunal finds the explanation implausible and misleading and does not accept that the amount claimed was expended on the acquisition of trading stock to be used in the business of Fine Foods. In our view, it represented a maladroit attempt to manufacture a tax advantage.
35. The Tribunal acknowledges that the disallowance of the claims for purchases allegedly made from funds made available by ``A'' produces inflated gross profit margins in the years 1984 and 1985 and, in view of the reliance placed upon such a result by the applicant, some comment is called for. The evidence reveals that major purchases of foodstuffs were effected by Import which then on-sold those goods to Fine Foods. The Tribunal is of the opinion that the degree of accountability between the parties was not all it should have been and that monies were paid to Import on the basis of need rather than on the value of goods supplied. Needless to say, a practice of this kind will result in a similar distortion of gross profit margin.
Deutschmark loan expenses
36. These expenses relate to the borrowing of 400,000 DM from the State Bank of South Australia and supposedly used to repay monies allegedly owing to ``A''. The following associated claims which appear in the applicant's 1987 return have been disallowed by the respondent and are in issue:
Interest to Bank - $19,467
Foreign exchange loss - $91,495
It seems that the bank loan was rolled over for an extended period during the 1987 financial year and that the ultimate pay-out occurred in the following year. There is no doubt that the amount of interest claimed was paid in the 1987 year and yet, paradoxically, the respondent, despite the obvious depth of his enquiry, has not been able to locate the source of portion thereof ($9,303).
37. In the light of our earlier decision not to accept the applicant's assertion that the loan monies were used in a business sense, the claims for interest paid to the Bank together with borrowing expenses must fail. We also express the view that the foreign exchange loss did not crystallise until the following year and that, accordingly, this expenditure was not incurred in the 1987 year of income.
Deemed dividends
38. Former s. 108(1) of the Act, which is the legislation relevant to these matters, reads as follows:
``108(1) If amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of those advances, loans or payments, as, in the opinion of the Commissioner, represents distributions of income shall, for the purposes of this Act other than the purposes of Division IIA of Part III and Division 4 of Part VI, be deemed to be dividends paid by the company on the last day of the year of income of the company in which the payment or distribution is made.''
If a payment or distribution is deemed to be a dividend then, subject to the requirement that the payment or distribution be paid out of profits derived by the company from any source, it is brought to account as assessable income under s. 44(1)(a).
39. A decision to treat a payment or distribution in this manner must be based on all of the relevant facts. A finding that the payment or distribution was of a temporal kind and that
ATC 512
restitution was intended does not sit comfortably with the concept of a ``distribution of income''. In point of fact, the presence of an intention to repay would in our view nullify the notion that such a payment or distribution represented a distribution of income. Certainly, the comments of Lusher J inBlack v. F.C. of T. 86 ATC 4113 at 4116 are supportive of this conclusion.
40. Generally, the combined effect of ss. 108(1) and 44(1) of the Act is that a dividend so deemed becomes assessable income in the hands of the shareholder. The wording of s. 44(1)(a) makes it clear that the degree of assessability is dependent on the availability of ``profits'' derived by the company from any source and that, in the absence of profits, the payment or distribution will not constitute assessable income. The word ``profits'', in the context of these two sections, was considered by the Full Federal Court in
MacFarlane v. F.C. of T. 86 ATC 4477, the decision of which is authority for the view that it should be given a wide meaning. On this topic Fisher J made the following comments;
at page 4482:
``There are in my opinion a number of indications in the Act which confirm my view that there is no justification for attributing a narrow or accounting meaning to the word `profits'.''
and at page 4484:
``... So long as the company has made profits it is permissible, though not necessarily prudent, to declare thereout a dividend. Likewise to deem a payment from such profits to be a dividend accords with and does not contravene the principle that dividends cannot be paid out of capital. It follows that there is nothing in subsec. 108(1) which requires that the word `profits' in subsec. 44(1) be so narrowly defined that a deemed dividend is not assessable unless profits are set aside as available for dividends. So long as there are profits, any portions thereof distributed to shareholders are liable to be deemed to be dividends and are assessable as such.''
The following extract taken from the decision of Beaumont J in this same case demonstrates a further expansion (at page 4493):
``In my opinion, for the purposes of sec. 108(1) and 44(1)(a), the relevant inquiry is directed to the ascertainment of the actual source of the informal payment. If the payment was in fact made out of profits or income or earnings of the company - and in the present context, these terms have the same meaning - the provisions of sec. 44(1)(a) are satisfied.''
(Emphasis added).
41. It is agreed that the applicant and his wife were shareholders in Servco and Import throughout the relevant years and that the payments in question are:
1983 Year
Drawn on bank account of Import
+--------------------------------------------------------------------------+
| | | | Recorded in | |
| Date | Cheque No. | Amounts | books as | How disposed of |
|--------------------------------------------------------------------------|
| 31.1.83 | 274 | $1,500 | Entertainment | Cashed |
|--------------------------------------------------------------------------|
| 30.4.83 | 6361 | $ 210 | Vehicle | Paid to Motor |
| | | | registration | Registration Dept as |
| | | | | registration of private |
| | | | | vehicle |
|--------------------------------------------------------------------------|
| 30.6.83 | 6828 | $6,500 | Overseas | Paid into partnership |
| | | | travel | as capital contribution |
|--------------------------------------------------------------------------|
| 30.6.83 | 6829 | $2,400 | Travel | `` `` `` |
|--------------------------------------------------------------------------|
| 30.6.83 | 6830 | $1,800 | Entertainment | `` `` `` |
+--------------------------------------------------------------------------+
Drawn on bank account of Servco
+---------------------------------------------------------------------+
| | | | Recorded in | |
| Date | Cheque No. | Amounts | books as | How disposed of |
|---------------------------------------------------------------------|
| 7.6.83 | 636 | $6,200 | Purchases | Paid into partnership |
+---------------------------------------------------------------------+
Also involved are six withdrawals totalling $90,000 from the bank account of Import which were transacted during the month of June 1983. All of these withdrawals were recorded as purchases and yet it is clear that they were cloistered into a newly opened bank account in the name of ``Import No. 2 Account'' and that the funds remained there until July/August of 1983. It was then that $45,487 was applied towards the purchase of trading stock, which is accepted by the respondent, and the balance, after allowing for bank fees, of $44,496 was transferred on 1 August 1983 to a term deposit account in the joint names of the applicant and his wife. The respondent decided that the payments of $44,496 and those tabulated above, which in all total $63,106, came within the purview of s. 108 of the Act and on that basis included a half share thereof as assessable income of the applicant for the 1983 year of income.
1984 Year
Drawn on bank account of Servco
+-----------------------------------------------------------------------+
| | | | Recorded in | |
| Date | Cheque No. | Amounts | books as | How disposed of |
|-----------------------------------------------------------------------|
| 9.6.84 | 4864 | $2,750 | Purchases | Deposited into Building |
| | | | | Society account in name |
| | | | | of applicant and wife |
|-----------------------------------------------------------------------|
| 9.6.84 | 4865 | $4,500 | `` | `` `` `` `` |
|-----------------------------------------------------------------------|
| 9.6.84 | 4866 | $3,750 | `` | `` `` `` `` |
|-----------------------------------------------------------------------|
| 9.6.84 | 4867 | $4,300 | `` | `` `` `` `` |
|-----------------------------------------------------------------------|
| 9.6.84 | 4868 | $4,000 | `` | `` `` `` `` |
+-----------------------------------------------------------------------+
Drawn on bank account of Import
+---------------------------------------------------------------------------+
| | | | Recorded in | |
| Date | Cheque No. | Amounts | books as | How disposed of |
|---------------------------------------------------------------------------|
| 18.11.83 | 6993 | $2,000 | Travel | Paid into Fine Foods as |
| | | | | capital contribution |
|---------------------------------------------------------------------------|
| 3.1.84 | 6622 | $200 | Tyres | Paid into partnership as|
|---------------------------------------------------------------------------|
| 28.6.84 | 5718 | $1,200 | Petrol | `` `` `` `` |
|---------------------------------------------------------------------------|
| 28.6.84 | 5719 | $1,500 | Entertainment | `` `` `` `` |
+---------------------------------------------------------------------------+
The respondent, in deeming all of above to be dividends allocated $12,100 to the applicant when, in fact, the amount should have been $13,100. However, the respondent advised that it was not his intention to issue a separate amended assessment to correct that position.
It appears that during this same period Import had an interest bearing account with a credit union and that of the total interest received, $6,834, only $4,779 had been returned as assessable income. The balance of $2,055, which had been paid into the partnership bank account as a capital contribution, also forms part of this year's calculation. When all of these transactions are brought together, the applicant's share of the amounts deemed to be dividends in the 1985 year is $203,298.
42. The Tribunal has considered all the circumstances of the transactions which come within this heading, and is of the opinion that they represent a series of fraudulent manoeuvres organised for the sole purpose of defeating the revenue. No evidence, other than general and implausible statements made by the applicant which by themself are of little weight, was produced to establish the bona fides of the outgoings nor do we accept that the withdrawals represented some form of reimbursement of expenditure previously incurred on behalf of the companies. The Tribunal repeats its previous conclusion that the applicant has not satisfied the Tribunal he possessed the cash resources needed to settle these outgoings in the first place.
43. The respondent is of the opinion that the payments now in question were made by Servco and Import on behalf of the applicant and that they fully represented distributions of the income of those companies. The respondent contends that the qualifying criteria set out in s. 108(1) of the Act has been met and that, accordingly, the deeming process contained in the legislation is activated. In all the circumstances, particularly the manner in which the monies were applied, the Tribunal is satisfied that the payments were made for the
ATC 515
benefit of the applicant and that also, it was reasonably open to the respondent to regard them as distributions of income. We should add that no other source for these payments was recognised nor was there any suggestion of the applicant repaying any of the amounts under review.44. The Tribunal turns to considers s. 44(1)(a) of the Act and more specifically whether there were profits (and here the wider meaning espoused in the case of MacFarlane (supra) is contemplated) properly available to cover the amounts in question. If not, the requirement of the sub-section will not be met and thus the distributions now under consideration will not constitute assessable income. The financial statements of Servco and Import contained in the T documents together with other material at hand have been examined in some detail and, acting on the information so disclosed, the Tribunal accepts that the profits earned during the years 1983, 1984 and 1985 together with accumulations brought forward from earlier years were of sufficient magnitude to cover the amounts of deemed dividends. In summary, they were paid by the companies out of profits and as such represent assessable income. Mention is made of the applicant's submissions that due allowance for the liability of company primary tax and additional tax imposed by way of penalty must be made in the determination of company profit and that, if the amounts of deemed dividends exceed that reduced figure, the excess portion cannot be said to be paid out of profits. Such a proposition may find favour with accountants and financial advisers, but, unfortunately for the applicant, the courts have decreed otherwise. This contrary view is to be found in the case of MacFarlane (supra) and more specifically in the decisions of Fisher J at page 4484 and Beaumont J at page 4493. The Tribunal is satisfied that the before tax profits were sufficient to cover the amounts of deemed dividends and thus our decision that they are assessable under s. 44(1).
45. Reference is made to the amount of the deemed dividend included in the 1983 year and in particular to the amount of $44,496 withdrawn from the No. 2 account of Import on 1 August 1983. It will be recalled (see paragraph 41) that the source of this withdrawal was the $90,000 surreptitiously transferred to the No. 2 account just prior to the close of the 1983 tax year and that the respondent deemed the dividend of $44,496 to have occurred in the 1983 year. Irrespective of the secretive nature of the No. 2 account, the Tribunal is of the opinion that the amount of $90,000 remained an asset of the company until the time of its withdrawal. The amount of $44,496 was taken from the company account and placed to the credit of the joint personal account on 1 August 1983 and it is only then that any benefit of a personal nature passed to the applicant. On that basis, the applicant's one half share of the $44,496 has been brought to account in the wrong year and thus the amount of deemed dividend included in the applicant's 1983 return should be reduced by $22,248 which leaves a balance of $9,306. Conversely, the amount of deemed dividend to be included in the applicant's 1984 assessable income is $35,348, ie. the original figure of $12,100 plus the $22,248 incorrectly included in the 1983 year plus the $1,000 allocation error discussed in paragraph 41.
Deemed dividends ex overseas bank accounts
46. During the 1984 and 1985 financial years, the applicant and his wife operated several joint accounts with a bank in Germany, details of which were provided by the relevant taxation authority in that country. It appears that difficulties were encountered in the establishment of an overseas account in the name of Import and for that reason funds belonging to that company were transferred from Australia to these German accounts with the intention that the monies be applied towards the purchase of foodstuffs to be on-sold to Fine Foods. The respondent is of the view that those monies, until expended in the manner described, remained the property of Import and that any other withdrawals from this source constituted payments for the individual benefit of the applicant and his wife. Furthermore, the respondent is of the opinion that these withdrawals represented distributions of income and, on that basis, they were deemed dividends pursuant to s. 108(1) of the Act. Details of the withdrawals so identified by the respondent as relating to the 1984 year are as follows:
Using the appropriate exchange rate, the applicant's one half share of the total is $5,789 which is the amount the respondent included as assessable income in the 1984 year. On behalf of the respondent, it was conceded that the withdrawals transacted between the 27 August 1982 and 28 June 1983 inclusive pertain to the 1983 year and that the correct allocation of the applicant's share of those withdrawals was:
1983 year:$2,357
1984 year:$3,432
47. In considering the applicant's assertion that the above withdrawals related to the acquisition of trading stock, ie foodstuffs, it is appropriate to observe that the original transfers from Australia were treated as purchases and that the details of the transactions appearing in the German accounts were not provided by the applicant to his accountant. It follows that the withdrawals now in question were not taken up in the records of Import nor are they reflected in the financial accounts of that company. Also of importance is the fact that the business of trading in foodstuffs commenced on the 24 August 1983. How then can it be claimed that the eight withdrawals occurring before that commencement date represent purchases of foodstuffs? The applicant's submission on this issue is rejected.
48. Reference is made to the point raised on behalf of the applicant that the transfers from Import formed part only of the deposits into the German accounts, the inference seeming to be that some kind of apportionment was necessary. An examination of the relevant bank statements shows the total number of deposits during the period August 1982 to December 1983 as being six and yet it is not possible to discern what portion, if any, came from sources other than Import. The applicant offered no assistance in this regard nor did he indicate any basis for apportionment. The Tribunal is therefore unable to take the matter any further.
49. Also in question is a dividend deemed during the 1985 year and which, once more, relates to a joint personal account with a German banker. It seems that the respondent's knowledge as to the details of this account is limited to the balance as at 12 November 1984 and that, bearing in mind the applicant's propensity to intermingle funds irrespective of their ownership as well as other factors, the respondent was of the view that this balance represented income of Import which had been applied for the benefit of the applicant and his wife. The Australian equivalent of the balance was $3,430 of which the applicant's share is $1,715.
50. The suggestion that this balance emanated from loan repayments by the applicant's parents and from his wife's inheritance was again relied upon and is again rejected. No other alternative source was proposed nor was there any attempt by the applicant to show that the monies in this account were received in a year other than the one utilised by the respondent. While the Tribunal is uncomfortable with the use of a balance date rather than the date upon which those monies first came under the personal control of the applicant and his wife, it accepts that the other date was not available to the respondent. In point of fact, the applicant has not established that the date of individual control occurred sometime prior to the 1985 financial year.
51. In our view the applicant has not demonstrated that the amounts under review came from a source other than Import nor that they benefited anybody other than the applicant and his wife. Furthermore, we conclude that it is reasonably open to the respondent and this Tribunal to form the opinion that the amounts of $2,357, $3,432 and $1,715 represented distributions of income to the applicant in the years 1984 and 1985 respectively and that those distributions were made out of the profits of Import. Arithmetically, that means the applicant's share of deemed dividends for the years 1983, 1984 and 1985 are varied to $11,663, $38,780 and $205,013 respectfully.
ATC 517
Overseas share losses
52. A further matter in dispute is a claimed loss of $65,570 which relates to share trading in West Germany. It is apparent that the respondent accepts that such losses were incurred during the 1988 tax year and that the applicant was engaged in the activity of share trading. Instead, the respondent relies upon the quarantine effect of s. 51(6) and (7) of the Act for the disallowance of the claim. The subsections, which came into operation from 1 July 1987, provide:
``51(6) Where the amount of a class of foreign income derived by a taxpayer in a year of income from a foreign source is exceeded by the sum of-
- (a) any deductions allowed or allowable from the assessable income of the taxpayer of the year of income that relate exclusively to income of that class derived from that source; and
- (b) so much of any other deductions allowed or allowable from that assessable income (other than apportionable deductions) as, in the opinion of the Commissioner, may appropriately be related to income of that class derived from that source,
a deduction is not allowable under subsection (1) in respect of the amount of the excess.
51(7) In subsection (6) `class of income' and `foreign source' have the same meanings as in section 160AFD.''
The terms ``class of income'' and ``foreign source'' appear in s. 160AFD(6) and (7) of the Act which state:
``160AFD(6) For the purposes of this section:
- (a) interest income constitutes a single class of income; and
- (b) all other income constitutes a single class of income.
...
160AFD(7) In this section-
`foreign source' in relation to a taxpayer, means-
- (a) a business carried on by the taxpayer at or through a permanent establishment in a foreign country; or
- (b) any other business, commercial or investment activity carried on by the taxpayer in a foreign country.''
In simple terms, a finding that the applicant carried on either a business, commercial or investment activity in West Germany will limit the deductibility of the share trading losses to an amount equal to foreign sourced income of the same class. In that event, and bearing in mind that no such foreign income is available for off-set, no deduction for the amount of $65,570 will be permitted.
53. The evidence of the applicant confirmed:
- (1) that he implemented the share transactions when personally present in Germany;
- (2) that his bankers in Germany acted for him in the buying and selling of those securities in that overseas country; and
- (3) that the purchase considerations were paid from monies held in his German bank accounts.
When those features of the share trading are taken in conjunction, it seems irrefutable that the applicant was carrying on a business/ commercial or investment activity in West Germany. The Tribunal is satisfied that no income of the same class was derived by the applicant in the 1988 year and, for that reason, affirms the respondent's decision to disallow the claim of $65,570.
Capital gains on sale of property
54. Part IIIA of the Act is devoted to the subject of capital gains and capital losses, the general thrust being that any ``net capital gain'' derived from the disposal of assets acquired after 19 September 1985 forms part of assessable income. It is of interest to note that some assets are exempted from these provisions and that in calculating the taxable gains the amount to be deducted from the consideration payable on sale is the indexed cost of the asset disposed of. More relevant to the matter under review are the provisions of s. 160P(3) and (7) of the Act which state that land acquired by a taxpayer after 19 September 1985 which is adjacent to land acquired before 20 September 1985 is deemed to be a separate asset and that, where those assets are sold as a single holding, apportionment of the consideration is necessary. In situations of this kind, s. 160ZD(4) of the Act provides that the value to be attributed to
ATC 518
the asset disposed of shall be as much of the total proceeds as may be considered reasonable.55. In 1977 the applicant and his wife purchased 56.4 acres of vacant land in the Adelaide Hills for approximately $40,000. This land, together with improvements constructed in subsequent years, was used by the partnership in the conduct of the horse breeding and racing business. On 4 August 1986 an adjoining block of land comprising 40 acres was acquired by the applicant and his wife for an amount of $74,000 which together with stamp duty and fees provided an overall cost basis of $76,457. Once more this property was made available to the partnership in the pursuit of its business operations. In February 1988 both properties were sold in a single transaction for a consideration of $600,000. No disclosure of the sale of the property acquired after 19 September 1985 was made in either the returns of the partnership or the applicant. The explanation that non disclosure resulted from the belief that the indexed cost of the land equated with its selling price can only be described as fanciful.
56. Acting on information supplied by a licensed valuer in the employ of the Australian Valuation Office, the respondent allocated a figure of $240,000 to the post capital gains tax land and then proceeded to calculate a gain in the following manner:
Sale value after allowing for rate adjustment and costs $240,004
Indexed cost base 83,322
--------
Capital gain $156,682
========
Applicant's one half share $ 78,341
As between the parties, there is no dispute:
- (1) that the land in question was an asset to which this Part of the Act applies,
- (2) that there has been a disposal of that asset, and
- (3) that the methodology applied by the respondent in his calculation was correct.
57. The only matter in contention is the quantum of selling consideration allocated by the respondent to the property purchased in August 1986 and thus the need to examine in some detail the opinions expressed by the licensed valuer in his letter dated 30 August 1991 (T230). The valuer commenced with the statement that his valuation was based on sales of comparable land in the same general locality. After identifying the potential of the more recently acquired land to be either grazing or market gardening, the valuer opined that the land value of the subject portion, based on comparable sales in the district for land with similar potential and a reliable supplementary supply of water, was $240,000 (40 acres @ $6,000 per acre). The correspondence clarifies that the figure of $6,000 relates to the capacity to grow vegetables and that, had the property use been restricted to grazing, the per acre multiplier would have been $2,000.
58. A reconciliation of the value of the remaining land and improvements with the balance proceeds of $360,000 was then undertaken by the valuer who expressed his conclusion in the following terms:
``Using an adjusted rate of $5,500 per acre which would be equally valid in valuation terms, a further division of value for the 22.84 hectares remaining (56.4 acres) would be Land $310,000 (56.4 acres @ $5,500 per acre), Buildings/Improvements $50,000 (remaining).''
The problem of valuing improvements erected for a specific purpose, such as a horse stud, on land capable of a higher use which is adopted by a new owner was adverted to. In those circumstances, the inference was that a willing purchaser would attach a significantly lesser value to those improvements. On this same point, the valuer, ``after a quick inspection of the horse stud'', indicated a view that, had the improvements been situated on a grazing only location, their value would be in the range of $150,000-$200,000. Finally, the valuer advised that he had discussed his valuation with the purchaser of the property and also the local Elders man and that they had confirmed the value quoted.
59. On behalf of the applicant it was submitted that the valuation relied upon by the respondent for the dissection was ``very doubtful'' and ``lacking in substance''. Notwithstanding a reference to the selection of $6,000 rather than $2,000, the central issue appears to be the value of the improvements, all of which, it was agreed, were situated on the property acquired before the advent of capital gains tax. The Tribunal was taken to the depreciation schedules and balance sheets of the partnership and to the fact they revealed expenditure of $206,197 on improvements which included such items as hay sheds,
ATC 519
divisional fencing, silos, horse lunging rings and yards. On that basis, it was contended that the value ascribed to the improvements should be more in line with actual cost and that any resultant increases would effectively lower the value of the property under review. This proposition has its own difficulties. First, the improvements were acquired through the agency of Servco at margins comparable with those discussed earlier in these reasons and which in our opinion are excessive. The fact that those costs were accepted by the respondent for depreciation purposes, and that the written down values of the improvements at time of sale were regarded as their selling considerations for that same purpose, has no bearing on the resolution of the dispute. Secondly, there is the added complication that the improvements subject to the deal between the vendor and purchaser are located on a property which was to be used in a way that makes the bulk of the improvements superfluous. In all of these circumstances, our conclusion is that cost is not a suitable foundation for the determination of value as at date of sale.60. The Tribunal is uneasy with the valuer's method of applying $6,000 per acre to one section and $5,500 to the other. Perhaps in more ideal circumstances, such as where the improvement values have been agreed upon by the parties, the value of the land in question could have been better ascertained by applying the fraction, area of same as it relates to the whole, multiplied by, consideration receivable less the value of improvements.
61. At the end of the day the value of the improvements remains unknown. The only opinion as to the value of the land in question is that contained in the correspondence of the licensed valuer, who is regarded by the Tribunal as an expert in this field. We would add that nothing was said or produced at the hearing to contravene the view that the land was suitable for market gardening. The Tribunal has had regard to all of the circumstances and is not satisfied that the amount of $240,000 attributed by the respondent to the land originally acquired in August 1986 by the applicant and his wife was unreasonable.
Penalty tax
62. Section 223 of the Act, as it then operated, imposed a statutory penalty for false or misleading statements. The penalty was stated to be the equivalent of 200% of the tax avoided although a reference to s. 227(3) of the Act discloses that the Commissioner had the power to remit the whole or any part of the penalty imposed by the legislation. It is fair to say that the extent of any such remission is related to the degree of wrongful behaviour displayed by a taxpayer which, more often than not, is referred to as the culpability component. The other penalty element is the per annum component which, in this case, is not in dispute.
63. The rates of penalties included in the applicant's assessments and which refer to the culpability component for the following are:
Unidentified cash income 40%
Personal living deficit 40%
Omission of deemed dividends 40%
Alleged partnership expenditure 40%
Claims for purchases ex overseas loan
and interest thereon 40% (1984,1985) 65% (1986)
Claim for purchases by Fine Foods 40%
Excessive payments by partnership to Servco 60%
Deutschmark loan expenditure 80%
Omission of capital gain on sale of Hills property 60%
Also in issue, is the quantum of penalties imposed on the following matters which were conceded in the course of the hearing:
Omission of interest received on overseas
bank deposits 40%
Omission of interest received on overseas
personal loan 80%
Claim for share losses 80%
Rent understated 5%
The total amount of interest omitted was $27,657 which was said to be the result of an
ATC 520
oversight by the applicant. The claim for share losses was for an amount of $121,266 which allegedly was incurred from the sale of shares in Bell Resources Ltd. As it unfolded, the shares were not sold but instead were pledged as security with a lending institution on behalf of the applicant. It was conceded that beneficial ownership remained with the applicant and that the amount claimed represented the calculated difference between cost and the value of the shares on a variety of dates selected by either the applicant or his accountant. The lowly rate imposed in connection with the rent understatement was because the applicant's accountant was solely responsible for the error.64. It was accepted that, with one exception, the Tribunal was empowered to review the remission decisions of the respondent. The exception related to the rent understatement penalty of 5% and the provisions of s. 14ZS of the Taxation Administration Act 1953 which limit the Tribunal's jurisdiction to situations where the penalty exceeds 20% per annum of the tax sought to be avoided.
65. The Tribunal appreciates that the respondent has issued extensive guidelines on the remission of penalties and that, generally, these may be of assistance. However, the Tribunal sees its role as one of having particular regard to the circumstances of the false or misleading statement made by the applicant. The Tribunal has no doubt that the returns of the applicant and the partnership of which he was a member contained many falsehoods which were deliberatively made with the intention of evading tax. Moreover, the Tribunal is satisfied that information subsequently supplied by the applicant to the respondent, as well as the applicant's testimony before this Tribunal, included many inaccuracies designed to mislead. Given those factors, the Tribunal is not receptive to the submission that further remissions are warranted. The Tribunal is conscious of the fact that some of the rates of penalty appear to be at the upper part of the scale normally adopted by the respondent and, yet, in our opinion they coincide and reflect the degree of wrongful behaviour by the applicant. Also it is true that there seems to be some inconsistencies in the rates used by the respondent. On that issue, our view is that the lesser rates were too low rather than the upper ones being too high.
66. The imposition of additional tax on the amounts of deemed dividends was a cause of initial concern to the Tribunal. It will be recalled that a number of withdrawals had been made from the bank accounts of Import and Servco and which had been claimed as deductions in the returns of those companies. Sometime well after the end of the financial years in which the withdrawals occurred, those payments were deemed to be dividends paid by the companies on the last day of the year of income in which the payments had been made.
67. The point of concern was whether, in view of the delay in the deeming and the retrospective nature thereof, it can be said that the applicant had made a false statement by omitting as assessable income those dividends in the years in which the deeming took effect. Expressed another way, can it be said that at the time of lodging the relevant tax returns, the applicant was in a position to disclose an event yet to transpire. Interestingly, Sir Garfield Barwick, when appearing before the Privy Council in
Newton & Ors. v. F.C. of T. (1958) 11 ATD 442; (1958) 98 CLR 1, sought to raise a point similar to the one currently under consideration, in that the amount there omitted took the form of income ex post facto. Although their Lordships were not disposed to allow the raising of the point, they commented that, in any case, the point was bad and that, because assessable income had not been included, the taxpayer was liable to the penalty. Furthermore, it seems that former s. 223(7) of the Act, which provided that where a taxpayer omits assessable income he shall be taken to have made a false statement, was designed to cover this very point and that the subsection applied in all of the years comprised in these references. On either basis, we are satisfied that our initial misgiving was more illusionary than real.
68. The Tribunal has considered all of the circumstances and finds no reason to further remit the penalties imposed by the respondent.
Decision
69. For the reasons enunciated above, the Tribunal varies the respondent's decisions on the objections in the following ways:
- • The applicant's 1983 assessable income to include deemed dividends of $11,663.
- • The applicant's 1984 assessable income to include deemed dividends of $38,780 and
ATC 521
$4,900 for his share of unidentified bank deposits. - • The applicant's 1985 assessable income to include deemed dividends of $205,013.
In all other respects, the objection decisions are affirmed.
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