BOTTAZZI v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2008] AATA 890

Decision date: 6 October 2008

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BH Pascoe (Senior Member)

1. This is an application to review a decision of the respondent to disallow an objection to an amended assessment of income tax for the year ended 30 June 1998. The amendment was issued on 20 January 2005 to include a capital gain of $178,867 as assessable income.

2. At the hearing the applicant, Mr R Bottazzi, was unrepresented. The respondent was represented by Mr A Dinelli of counsel. Evidence was given by Mr Bottazzi.

3. The capital gain in issue arose from the sale of a residential property in Brighton, Victoria, under a Contract of Sale dated 15 March, 1998. The amount included as assessable income was calculated as:

Sale Price	$370,000
Less selling expenses	$12,054	$357,946
Purchase Price 5 December 1995	$170,000
Stamp Duty	$6,400
	$176,400
Indexed cost base		$179,079
Net Capital Gain		$178,867

4. The primary argument of Mr Bottazzi was that the property was at all times held in trust for a long time friend, Mr F Scharkosi, who was the beneficial owner. Mr Bottazzi went into a detailed history of his friendship with Mr Scharkosi over nearly 30 years from when he was 13 years of age. Mr Scharkosi ultimately became involved in the operation of several bars and night clubs. From about the mid 1980s, Mr Bottazzi also became involved in the ownership and operations of many licensed venues. Some of these were in conjunction with Mr Scharkosi, the latest being a nightclub called Showgirls Bar 20. In 1998 or 1999, Mr Bottazzi acquired the total ownership of that club and, in turn, sold his interest in a publisher, The Truth, to Mr Scharkosi. It was said that, as close friends, no written agreements were entered into in relation to any business arrangements between them and, at times, each lent the other money without documentation or the requirement for interest.

5. Mr Bottazzi said that Mr Scharkosi had entered into bankruptcy on two occasions, once in the early 1990s and again in either 2000 or 2001. He said that Mr Scharkosi had purchased the Brighton property in or about 1995 but, because of his poor credit history, was forced to pay a high rate of interest on a loan of $170,000 taken out. He said that in late 1995 after discussions with a Mr Lazenby of the Bendigo Bank who they both knew, it was suggested that Mr Bottazzi arrange a loan from the bank at much lower interest rates. It was decided that the property be transferred into the name of Mr Bottazzi for an amount equal to the outstanding loan and Mr Lazenby would arrange the appropriate finance through his bank after a period of six months during which Mr Bottazzi would have displayed a record of due payment of instalments on the current loan. A Transfer of Land showing consideration of $170,000 was signed on 2 December 1995 and a loan agreement for $205,000 was entered into with Bendigo Bank in July 1996. Mr Bottazzi maintained that, at all times, it was recognised that the property would remain occupied by Mr Scharkosi who would be responsible for all loan repayments, all expenditure relating to the property and be entitled to proceeds of any sale of the property. He said that he stayed at the property on a few occasions as a minder while Mr Scharkosi was on holidays but did not have his own key or otherwise reside at the property. He maintained that renovation works were undertaken by Mr Scharkosi and he was the one who arranged the sale of the property in 1998. Mr Bottazzi accepted that he had signed the authority for the agent to sell and the subsequent transfer as the registered owner but, otherwise, had no involvement in the sale.

6. Mr Bottazzi could not recall signing as landlord a lease agreement under which Mr Scharkosi was to pay rental of $300 per week from 1 July 1996 for the property. He accepted that the signature was his. While he accepted that his income tax return for the year ended 30 June 1997 showed rent received of $15,300 and the return for the prior year showed $2,100 rent received, he maintained that he did not receive any rent for Brighton and owned no other rental property. Mr Bottazzi equally was at a loss to explain deductions described as interest and other rental deductions of $6,011 in 1996 and $20,456 in 1997 claimed in the returns lodged. On the basis of his evidence it seems clear that the rental income and deductions all related to the Brighton property.

7. From the documents obtained by the respondent it is clear that Mr Bottazzi borrowed $205,000 in July 1996 and, of that amount, $27,384.82 was paid to him with the balance being expended on settlement of the property. He did not contest that this had occurred. After settlement on the sale of the property, the documents show that, of the balance remaining after discharge of the mortgage and expenses, the amount of $91,084.77 was paid to Mr Bottazzi and $21,918.18 to Mr Scharkosi. Again Mr Bottazzi did not contest that this had happened and maintained that it was likely that this was the amount owed to him by Mr Scharkosi. He said that he had paid the cost of a hip replacement operation for Mr Scharkosi's mother as Mr Scharkosi was short of money at the time. He thought that the cost was between $20,000 and $25,000.

8. It was accepted by Mr Bottazzi that there was no documentary evidence of any express or implied trust involved in his legal ownership of the Brighton property. All of the documents produced show the purchase and sale of the property in the sole name of Mr Bottazzi, and the loan documents state that no other person has an interest in the property. Until approximately four weeks prior to the hearing, Mr Bottazzi was represented by a firm of solicitors who had indicated that evidence would be called from Mr Scharkosi, Mr Lazenby who was alleged to be aware of the trust arrangement and Mr Georgiou, as accountant who acted for Mr Bottazzi. The legal firm ceased to act and none of these witnesses was called to give evidence. Mr Bottazzi said that he could have asked Mr Scharkosi to give evidence if he had thought it necessary. He was unable to comment on a statement made by Mr Scharkosi in a Statement of Affairs dated 20 August 2002 in relation to his bankruptcy that he had not sold any assets in the previous five years.

9. It was submitted by Mr Bottazzi that the purchase and sale of the property was as trustee for Mr Scharkosi and the transactions in December 1995 and July 1996 were solely for the purpose of enabling Mr Scharkosi to refinance his residence. As an alternative submission it was argued that the cost base of the property should include some $50,000 of improvements to the property. As a further alternative, it was submitted that, if it was held that Mr Bottazzi purchased the property in his own right, the parties were not dealing at arm's length and the cost base should be the market value of the property assessed at $260,000 by a valuer for the Bendigo Bank in June 1996. Finally it was submitted that the amended assessment was not valid, having been issued more than four years after the original assessment was due and payable.

10. For the respondent it was submitted that no evidence, other than that of the applicant, supported the argument that the property was held in trust, with all documentary evidence to the contrary. It was stressed that Mr Bottazzi had included rental income from the property in 1996 and 1997 and, more relevantly, had claimed deductions for interest and other property expenses. The Tribunal was invited to infer that the failure to call Mr Scharkosi or any other witness indicated that such evidence would not have assisted. Further argument against finding any trust relationship was the personal use by Mr Bottazzi of part of the sum borrowed in 1996 and a substantial part of the sale proceeds. It was said that there was no evidence of the nature, cost or date of any alleged improvements to the property. One instance was the evidence of Mr Bottazzi that the construction of a swimming pool at the property was in the second half of 1996, while the valuation report at 18 June 1996 noted an established in-ground fully tiled and heated swimming pool. It was submitted that the documentary evidence indicated a dealing at arm's length notwithstanding the parties were friends.

11. It is noted that the record of the title search of the property shows that the property was transferred to Mr Scharkosi on 3 May 1995 and a mortgage to Gardana Nominees Pty Ltd recorded at the same date. The transfer to Mr Bottazzi was recorded as 28 December 1995 but the mortgage was not discharged until 3 October 1996, the same date as the mortgage to Bendigo Bank was recorded. It must be assumed that Mr Bottazzi accepted responsibility for the existing mortgage on the transfer but no documentary evidence of this was provided. It is noted also that a further mortgage to the National Australia Bank was recorded on 23 September 1997, some ten months prior to the transfer to a new owner on 30 July 1998. Again no evidence was produced as to the details provided to the National Australia Bank, the amount advanced or the purpose for which a further borrowing was made.

12. Pursuant to s 14ZZK of the Taxation Administration Act 1953, an applicant for review of an objection decision has the burden of proving that an assessment is excessive. Here, the only evidence in support of the contention of Mr Bottazzi is his own oral evidence unsupported by any documentation or evidence of any other person, particularly Mr Scharkosi. Given that the purchase price was $170,000 which was the amount of the then mortgage and, given a valuation of 31 March 1995 of $285,000 for the purpose of that mortgage and a valuation of $260,000 at 18 June 1996, it seems clear that this purchase price was considerably less than the market value in December 1995. However, it appears also, that Mr Scharkosi, with two bankruptcies, was likely to have been suffering some financial difficulties and may well have been prepared to sell the property to a friend for the amount of the mortgage while retaining occupancy and control of the property.

13. Against accepting the evidence of Mr Bottazzi as discharging his onus of proof are the following factors:

• • no documentary evidence of any trust relationship exists while, to the contrary all documents show Mr Bottazzi as the legal and beneficial owner;
• • a formal lease agreement was entered into with Mr Scharkosi;
• • Income Tax Returns for the year ended 30 June 1996 and 1997 included rent received and claimed deduction for interest and other property expenses; These returns were prepared and lodged by an accountant who allegedly knew of the purported arrangement between Mr Bottazzi and Mr Scharkosi;
• • substantial amounts from the Bendigo Bank loan and the proceeds of sale were paid direct to Mr Bottazzi;
• • further borrowings against the property were made in September 1997 with no evidence of the destination of such borrowings; and
• • the failure to call Mr Scharkosi to give evidence in support.

14. On balance, I am unable to accept the primary contention of Mr Bottazzi that the property was held at all times in trust for Mr Scharkosi as the beneficial owner.

15. In relation to his next contention that the cost base should include the cost of improvements made subsequent to the purchase in December 1995, there is simply no evidence of either the cost of any such improvements or the date on which they were made. Consequently, this contention cannot be accepted. In relation to the third contention, I accept that Mr Bottazzi and Mr Scharkosi were friends and had many financial dealings with each other over many years. Nevertheless, I cannot be satisfied that, in relation to the purchase of the property, they were not dealing with each other at arm's length. Under s 160ZH(a) of the Income Tax Assessment Act 1936, (the 1936 Act) as then in force, the amount deemed to have been paid or given as consideration for the acquisition of an asset is the market value at the time of acquisition where the actual consideration was less than that market value and the purchaser and vendor were not dealing with each other at arm's length in connection with that acquisition. Here there is no supporting evidence that, in relation to this transaction, there was no arm's length dealing. In addition, while it appears likely that the consideration was less than market value, there is no evidence of that actual market value at the date of acquisition. Valuations for the benefit of lenders were done nine months prior and six months later. Mr Bottazzi has the onus of not only proving that the dealing was not at arm's length but also of proving the market value at the date of acquisition. This he has not done. As a consequence, I cannot find in his favour in relation to this argument.

16. The next contention was that the amended assessment was not valid, being out of time. Section 170 of the 1936 Act provides a limit of four years from the date upon which tax became due and payable on the original assessment. However, where the Commissioner is of the opinion that there has been an avoidance of tax due to fraud or evasion, there is no such time limit. Here the original assessment was issued on 8 September 1998 and the amended assessment issued on 20 January 2005, clearly outside the four year limitation. On the findings there was a clear avoidance of tax. Given the inclusion of rent received as income and the claims for deduction of interest on borrowings to purchase the property and other property expenses it is clear, also, that both Mr Bottazzi and his tax agent regarded the property as owned by him. No rental income or expense deductions were included in the income tax return for the year ended 30 June 1998, the year in which the property was sold. In
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at p 313, Dixon J said:

"… I think it is unwise to attempt to define the word "evasion." The context of s 210(2) shows that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion."

It is difficult to accept that the tax agent did not at least enquire as to the non-inclusion of rent with the result of either considering the capital gain or amending prior returns. On balance, I am satisfied that here there was an avoidance of tax due to evasion and, consequently, the amended assessment was valid.

17. The final issue is that of penalty. In the amended assessment the respondent imposed by way of penalty additional tax equal to 75 per cent of the amount of the shortfall. This penalty was pursuant to s 226J of the 1936 Act on the grounds that the tax shortfall was caused by the intentional disregard by the taxpayer or his registered tax agent of the Act. Having found that the shortfall was the result of evasion it is difficult to find that the appropriate penalty section was other than s 226J. Sections 226G and 226H provide penalties at 25 per cent and 50 per cent respectively where the shortfall results from a failure to take reasonable care or from recklessness. Section 227 provides a discretion to the respondent and, therefore, to this Tribunal to remit the whole or part of any additional tax. In this matter, the findings against the applicant have been primarily based on his failure to discharge the onus of proof, a failure to provide any substantiating evidence to support his contentions and a failure to explain the various factors seen as being against the acceptance of his evidence. On the other hand, Mr Bottazzi was not legally represented, there are some factors, such as the purchase price possibly being less than the true market value, which indicate a possible non arm's length dealing and he stated that he was not aware of the expectations of him at the hearing. In these circumstances it is appropriate to remit the penalty by way of additional tax to 25 per cent of the tax shortfall. In so deciding, I am conscious that the sale of the property was some 10 years ago and such a time-lag can cause difficulties with evidence. In addition, the amended assessment produces a substantial penalty by way of liability for General Interest Charge over which the Tribunal has no jurisdiction.

18. It follows from the foregoing that the decision under review should be varied to the extent of reducing the additional tax by way of penalty to 25 per cent of the tax shortfall.