Decision impact statement

Uratoriu v Commissioner of Taxation

Venue: Federal Court of Australia
Venue Reference No: WAD 242 of 2007
Judge Name: McKerracher J
Judgment date: 27 October 2010
Appeals on foot:
No

Impacted Advice

Impacted Practice Statements:

• N/a

Subject References:
Undeclared Income
Capital Gains
Cost Base
Legal Expenses

Précis

Outlines the ATO's response to this case, which concerned the assessability of a number of payments received by the applicant, and whether legal fees incurred by the taxpayer in defending his proprietary interest in a property formed part of the cost base of that property under subsection 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997).

Decision Outcome

Partly adverse

Brief summary of facts

An audit of the taxpayer's affairs for the 1997 to 2004 income years identified substantial payments made to him which had not been returned as income.

Following the audit, the Commissioner assessed the taxpayer to additional income of about $5.2 million over the relevant income years (the applicant had returned income of about $127,000 for those years). By the time of the hearing, the taxpayer had conceded that his income for those years should have been about $3.1 million.

Of the amounts totalling about $2.2 million still in dispute at the hearing, the bulk involved payments made to the taxpayer by associated companies. He claimed that these payments, which he admitted receiving, were either repayments of advances made, or should not otherwise be characterised as income in his hands.

The assessments also included amounts which represented the value of liquor said to have been taken by the taxpayer for his personal use from an associated company which operated a liquor store. The taxpayer denied that he had not paid for the liquor.

The taxpayer purchased a residential property in 1986 for $113,500 and sold it in 2002 for $852,000, giving rise to a taxable capital gain. He argued that the amount of the gain assessed should be reduced by various expenses which were said to have increased the cost base of the property.

Issues decided by the court

His Honour found that the taxpayer had not discharged the burden of proving that the amounts received from related companies were not in the nature of income and that he did not take alcohol for personal use from the related company.

Of the expenses that the taxpayer claimed should form part of the cost base of the property, his Honour was prepared to accept that $33,078 was actually paid by the taxpayer in legal expenses. His Honour found that those expenses were incurred in defending in the Supreme Court of New South Wales a proprietary interest that the taxpayer had in the property, and were part of the cost base of the property under subsection 110-25(6) of the ITAA 1997.

Tax Office view of Decision

The Court was not satisfied that the taxpayer had discharged his onus of proving that various amounts assessed to him were not his income. Based on the limited evidence presented by the taxpayer at the hearing, it was open to the Court to find that the legal expenses were incurred by the taxpayer in defending his proprietary interest in the property, and were part of the cost base of the property.

Administrative Treatment

Implications on current Public Rulings & Determinations and Implications on Law Administration Practice Statements

None

Court citation:
[2010] FCA 1157
[2010] ATC 20-219
(2010) 80 ATR 646

Legislative References:
Income Tax Assessment Act 1936
167
264
222AOB
222AOC
222AOE
222AOG

Income Tax Assessment Act 1997
110-25(6)
121-20(1)

Taxation Administration Act 1953
14ZZO(b)(i)

Case References:
Commissioner of Taxation v Dalco
(1990) 168 CLR 614
[1990] HCA 3
90 ATC 4088
20 ATR 1370

Danmark Pty Ltd v Commissioner of Taxation
(1944) 7 ATD 333

Davies v Uratoriou; Davies v Residential Tenancies Tribunal and Anor
(1995) 6 BPR 13,917

Jones v Dunkel
(1959) 101 CLR 298
[1959] HCA 8

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

Uratoriou v Davies
[1994] NSWRT 55