CASE 1/2009

Members:
J Block SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2009] AATA 357

Decision date: 18 May 2009

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J Block (Deputy President)

Part A - Preliminary introduction and background

1. The objection decision, which is under review in this matter, relates to the disallowance by the Respondent of an objection by the Applicant against an amended assessment issued against her in respect of the year ending 30 June 2001 ("the Relevant Year").

2. The Applicant was represented by Mr A.G. Melick SC of counsel, instructed by Djekovic Hearne & Walker, solicitors; the Respondent was represented by Mr James Sheller of counsel, instructed by Ms Lyn James, a solicitor in the employ of the Australian Government Solicitor.

3. For the purposes of these reasons and to preserve confidentiality, the real names of the parties, other natural persons, and various companies have been replaced with pseudonyms.

4. The Tribunal had before it the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) ("the AAT Act"); it also admitted into evidence exhibits as follows:

ATC 103 Exhibit A1:	A statement dated 31 October 2007 by the Applicant;
Exhibit A2:	An affidavit executed on 17 October 2005 by Mr J Kay, a resident of California, and utilised in proceedings in the New South Wales Supreme Court in an action in which [the Company (as defined hereafter) was the plaintiff and the Applicant was the defendant; (the Company associated with Mr. Kay incorporated in the USA, not being either US company number 1 or Us company 2, both as defined hereafter. and which effected the transfers referred to later in these reasons is referred to as "the Kay company");
Exhibit A3:	A letter dated 20 February 2006 from Swaab Attorneys (who acted for Mr George Head), addressed to Mr Kay;
Exhibit A4:	A report dated 22 June 2006 by Dr Parker, a consultant psychiatrist, addressed to the Applicant's solicitors; (the real name of the psychiatrist has been replaced with a pseudonym);
Exhibit A5:	A letter dated 21 August 2008 from the Applicant's solicitors addressed to Dr Parker;
Exhibit A6:	An affidavit dated 2 February 2006 by the Applicant's solicitor, used in the proceedings in the New South Wales Supreme Court and referred to in the context of the description of Exhibit A2);
Exhibit A7:	A (further) statement dated 18 August 2008 by the Applicant;
Exhibit A8:	Accounts in respect of the Applicant issued by Macquarie Investments Management Limited in respect of a Macquarie cash management trust account conducted by her;
Exhibit A9:	Accounts issued by Suncorp Banking to the Applicant in respect of various periods commencing on 20 September 2004;
Exhibit A10:	A statement issued by the Institute of Chartered Accountants in respect of courses undertaken by the Applicant;
Exhibit A11:	A blank cheque book in respect of the Applicant's account at the Bank of America;
Exhibit A12:	A further report dated 9 September 2008 by Dr Parker;
Exhibit A13:	A further report dated 4 December 2008 by Dr Parker;
Exhibit A14:	A statement dated 28 November 2008 by Mr Stephen Hearne, the Applicant's solicitor;
Exhibit A15:	A statement dated 8 October 2008 by Mr Brian Morris, a partner in the Auditors, ,as that term is defined hereafter; (the real name of the partner concerned has been replaced with a pseudonym)
Exhibit A16:	A statement dated 8 October 2008 by Ms Clay, a nurse; (the real name of the nurse has been replaced with a pseudonym); and
Exhibit A17:	A (further) statement dated 31 October 2008 by the Applicant;
Exhibit R1:	A statement reflecting some deposits in to and withdrawals from the Applicant's Bank of America account;
Exhibit R2:	A document entitled "Trading Consultants" (referable to the Company);
Exhibit R3:	A statement by Suncorp Banking for various periods commencing with 17 August 2004;
ATC 104 Exhibit R4:	A document entitled "Loan Request Summary" referable to the acquisition in 2004 by the Applicant for a price of $1,650,000 of a unit in an inner suburb of Sydney (and referred to as the "K unit");
Exhibit R5:	A tax return by the Marketing Company in respect of the 2003 year;
Exhibit R6:	A tax return by the Marketing Company in respect of the 2004 year;
Exhibit R7:	A tax return in respect of the Applicant referable to the 1999 year; and
Exhibit R8:	A document issued by a finance broker to the Applicant.

5. The exhibits referred to in the preceding clause have been listed in full and notwithstanding the fact that some of them proved to be of little, if any, relevance. Some of the exhibits are referred to specifically later in these reasons.

6. The T documents ran to approximately 200 pages. The hearing took place over three days and being 22 July 2008, 22 September 2008 and 18 December 2008. The pages of the transcript in respect of the three hearing days are numbered sequentially from 1 to 200 and so that it is unnecessary to refer in respect of the transcript to the relevant hearing day. At the end of the last hearing day, the parties were given (extended) periods within which to file written submissions, in addition (in the case of the Applicant) to submissions which had previously been furnished. The last of those submissions was received from the Respondent on 17 April 2009.

7. The documents furnished by the parties during the course of the hearing and thereafter are set out as follows:

• (a) Statement of Facts and Contentions by the Applicant ("ASFC") dated 26 June 2008;
• (b) Statement of Facts and Contentions by the Respondent ("RSFC") dated 31 August 2007;
• (c) Applicant's written submissions (undated) and handed in to the Tribunal at the commencement of the hearing; those written submissions are referred to as "AS1";
• (d) Applicant's written submissions dated March 2009 ("AS2"); it may be noted that the Applicant in March 2009 furnished other written submissions referred to in certain instances as "updated". The Tribunal considers that AS2 constitutes the final version and intends to treat it on that basis, more particularly because there does not appear to be any significant difference between AS2 and earlier versions of that document.
• (e) Respondent's written submissions ("RS1") dated 9 February 2009;
• (f) Respondent's submissions in reply and expressed in their terms to relate to the Applicant's submissions dated 25 March 2009 and which are referred to as "RS2".

8. This matter was heard in confidence and so in a number of instances, and in addition to those set out in clause 4, pseudonyms have been used. In this regard:

• (a) Mr Kay is not the real name of the deponent to Exhibit A2 or the addressee of Exhibit A3; the name of his associated company is not in fact "the Kay company";
• (b) The name of the Applicant as contained in this decision and these reasons for decisions is a pseudonym; Mr George Head is not the real name of the man with whom the Applicant lived in a de facto relationship for a number of years and ending in 2004;
• (c) I use the term "the Company" in respect of the limited proprietary company which imported and exported paper; the Applicant and Mr Head were in the Relevant Year and thereafter shareholders in and also directors of the Company.
• (d) The term "Management Company" relates to a company controlled by the Applicant;
• (e) The term "Auditors" refers to the very large and prominent accounting firm in which Mr Bruce Morris is a partner; a pseudonym is as set out previously, used in respect of Mr Morris because to disclose his real name would disclose the name of the Auditors: The term "US company 1" refers to a company incorporated in the USA which made payments of debts owing by it to the Company (routed through the Kay company) into the Applicant's bank account conducted at the Bank of America in San Francisco and which is referred to as the "US account" or the "US bank account"; the term "US company 2" refers to another company incorporated in the USA which paid debts due by it to the Company into the US bank account. All of the payments referred to in this subclause (e) were made in accordance with directions by the Company and/or Mr Head.

  ---

  ATC 105

9. The large quantity of paper in this matter might give rise to the impression that this case is extremely complex. This is in fact not the case as will be evident from later parts of these reasons.

10. In some cases I have included extracts from the submissions, the transcript or other documents; any such included extracts have been edited so as to conform with clauses 4 and 8 of these reasons.

11. It is convenient to commence by including clauses 1 to 15 of RSFC under the head of "Part 1, Facts" as follows:

• "…
• 1. The Company is a company incorporated in New South Wales on 2 December 1980. It carries on the business of exporting shredded recycled waste paper and importing recycled copying paper. It also rents out shipping containers on return trips to and from Australia.
• 2. In the income year ended 30 June 2001 (' relevant year '), the Company was a private company for the purposes of section 109C of the Income Tax Assessment Act 1936 (' ITAA 1936 ').
• 3. In the relevant year, the directors of the Company were [George Head] (' GH ') and the applicant, who were also shareholders in the Company.
• 4. The applicant was qualified as a chartered accountant in 1984 and was the financial controller of the Company during the 2000 to 2003 income years.
• 5. During the relevant year, the applicant and GH were in a de facto relationship. They held bank accounts in joint names and also in their own names. That relationship ended in 2004 in a property settlement dispute which resulted in the applicant ceasing to have involvement with the Company. She ceased to be a director effective 20 February 2004.
• 6. On or about 14 January 2005, the Company made a voluntary disclosure to the Commissioner which indicated, amongst other things, previously undisclosed income in the relevant year of $171,058 consisting of:
  • a) understated sales made by the Company to US company 2 (a US company) in the amount of AUD144,533 (' US company 2 Payments '); and
  • b) understated container commission in the amount of AUD26,525 paid by US company 1 (a US company) to the applicant's Bank of America account via the Kay company's Bank of America account (' US company 1 Payments ').
• 7. US company 2 and US company 1 are unrelated third parties dealing with the Company at arm's length and the US company 2 and US company 1 Payments were in satisfaction of debts owed to the Company.
• 8. At the direction of the Company or one of its directors, the US company 1 Payments were paid by wire transfer into the applicant's Bank of America account, no 0286505282 on the following dates:
  

  Date	Amounts from US company 2 paid to ABA (in USD)	Exchange Rate	Conversion to AUD
  10/4/01	$6,813.60	0.55	$12,388.36
  16/4/01	$12,545.35	0.53	$23,670.47
  23/4/01	$22,528.50	0.53	$42,506.60
  30/4/01	$19,742.05	0.53	$37,249.15*
  5/2001	$12,888.05	0.51	$25,270.68*[1] *evidence of wire transfer suggests it is one payment of $32,630.10
  Total	$74,517.55		$141,085.26

• 9. At the direction of the Company or one of its directors, the US company 1 Payments were paid by wire transfer into the Kay company's Bank of America account, no 02024 05757 which were then transferred to the applicant's Bank of America account no. 0286505282 as follows:
  

  Date	Amounts wired to the Kay company ABA (in USD)	Exchange Rate	Conversion to AUD
  May 01	$4,029	0.52	$7,748.07
  June 01	$9,764	0.52	$18,776.93
  Total	$13,793		$26,525

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  ATC 106

• 10. At all relevant times, the applicant was the sole signatory of the Bank of America account, no 0286505282.
• 11. The funds in that account were used for the private expenditure of GH and/or the applicant as follows:
  • a) holidays to various locations including Lizard Island (Queensland), USA and New Zealand;
  • b) clothing;
  • c) wine;
  • d) jewellery;
  • e) furniture and household items; and
  • f) restaurant bills.
• 12. In the relevant year, the Company's distributable surplus did not exceed its total of provisional dividends for the purposes of section 109Y of the ITAA 1936.
• 13. On 12 April 2006, the Commissioner amended the applicant's income tax assessment for the year ended 30 June 2001 to include the US company 1 and the US company 2 Payments in her assessable income on the basis that they were deemed dividends for the purposes of Division 7A in Part III of the ITAA 1936 (' Div 7A ').
• 14. On 12 April 2006, the Commissioner also issued an assessment of administrative penalties pursuant to section 284-90 of Schedule 1 to the Taxation Administration Act 1953 (' TAA ') in the amount of $61,918.80.
• 15. The applicant has objected to the above assessments and the Commissioner has disallowed these objections so far as they relate to the US company 2 Payments, US company 1 payments and the administrative penalties.
• …"

12. In the interests of balance and fairness, I include the content under the head of "Facts" contained in ASFC and set out in clauses 1 to 18, but excluding for reasons set out below clause 13 and also excluding clause 16, 17 and 18) as follows:

• "…
• 1. The applicant, [Jane Reid], (JR) commenced a de facto relationship with [George Head] (GH) in 1994.
• 2. At all relevant times GH was the managing director and major shareholder of the Company.
• 3. Until about 1998 the Company's business consisted of importing paper for the printing industry.
• 4. In 1998 the Company also commenced exporting waste paper to Asian nations.
• 5. The relationship, both personal and professional, between JR and GH/the Company ceased in January 2004.
• 6. At all times during the relationship GH made all the major decisions relating to the conduct of the Company and any associated entities.
• 7. The personal relationship between JR and GH deteriorated from about 1999 and GH assaulted JR on several occasions. From about 2000 JR was physically and verbally abused and threatened by GH to the extent that she was not prepared to disobey his instructions.
• 8. Prior to JR meeting GH he had been involved in activities amounting to tax evasion, including the operation of a clandestine bank account in Liechtenstein into which monies due to the Company and associated entities were paid and then withdrawn by GH for his personal use.
• 9. JR qualified as a chartered accountant in 1984 but has never practiced as an accountant.

• ---

  ATC 107

  10. Prior to meeting GH, JR had worked in the USA and operated a cheque and Visa card account with the Bank of America, Union Street, San Francisco branch. This account was opened in 1984 and was closed in 2004. The account number is 028655-05282.
• 11. Upon commencing her relationship with GH, JR worked as a business consultant to the Company.
• 12. The nature of this employment changed in about 2000 when JR commenced consulting to the Company in the area of financial management and became the financial controller of the Company.
• 13. Deleted : clause 13 contains allegations as to many other tax irregularities in respect of the Company but which are not relevant for the purposes of this matter;
• 14. In addition to the matters outlined at paragraph 13 above the following transactions occurred at GH's direction. (These are the transactions the subject of this appeal.)
  • (a) Deleted : It is not necessary to include subclause (a) because its content corresponds with clause 8 of RSFC;
  • (b) Deleted : It is not necessary to include subclause (b) because its content corresponds with clause 9 of RSFC;
  • (c) Although JR was the sole signatory to her Bank of America account because of her fear of GH, and his continued assertions that the monies were his and were only to be expended as directed by him, such monies were only withdrawn and expended as directed by GH.
• 15. When the relationship between GH and JR ended, JR was without notice denied access to the business premises of the Company. Many of her personal records, including most of her Bank of America statements, were on the said premises and none have been returned to her. Despite repeated requests to the Bank of America they have been unable to supply copies of her statements prior to closure of the account.
• …"

13. Clause 1 of AS2 is included because it makes it clear that there are matters which are not in dispute; clause 1 of AS2 reads as follows:

• "1. The applicant confirms the following that have been agreed to from the outset;
  • A. The monies that are the subject of these proceedings were paid into the applicant's Bank of America (BoA) account by overseas third parties, namely US company 2 and US company 1 Inc (via Mr Kay) at the direction of [George Head] (GH) and/or the Company.
  • B. The monies so paid were properly due to the Company and should have been disclosed in that company's balance sheets and/or income tax returns.
  • C. If in the relevant financial year the Company had properly accounted for these and other monies the Company would have had a surplus upon which it was liable to pay tax.
  • D. After the cessation of the applicant's relationship with GH there was approximately $18,000 left in her BoA account which was converted by her in late 2004 and early 2005.
  • E. Accordingly the applicant may be liable to pay tax on all or part of that amount but such liability is to be determined by amending her income tax return for 2004/2005.

  …"

14. Clause 1 of AS2 makes it clear in particular that:

• "(a) Monies due to the Company by US company 1 and US company 2 were paid into the US account by direction of the Company and/or Mr Head;
• (b) If the Company had accounted in respect of the Relevant Year on a proper basis, it would have had a surplus and in respect of which it would have been liable for tax. Clause 1 of AS2 does not contain a specific admission that the Company would have had sufficient funds or reserves for the purposes of Division 7A of the Income Tax Assessment Act 1936 (Cth) ('the Act') but the Applicant did not at any stage contend that the Company did not have sufficient funds or reserves for this purpose;

• ---

  ATC 108

  (c) The Applicant admitted that when her relationship with Mr Head ended there was a balance of about $18,000 remaining in the US account and admitted further that the Applicant may be liable for tax in the year ending June 2005; (as will be seen, that admission does not in fact accord with the law which is relevant for this purpose)."

Part B - Overview: what this case is about

15. The only witness who gave oral evidence at the hearing was the Applicant; her evidence was given on all three hearing days. On the first day she gave evidence as to the truth of the content of Exhibit A1; she was however permitted thereafter to tender two further witness statements and for this purpose was permitted to re-open her evidence in chief. Some witness statements were admitted on the basis that the deponents were not required for cross-examination but those statements proved to be of limited relevance.

16. The Applicant was on the first day of the hearing 40 years old. She is a qualified accountant and was for some years before she became involved with the Company and Mr Head employed by the Auditors; (clause 9 of ASFC would appear to be incorrect). The Applicant said that she was employed in the audit side of the practice of the Auditors. The Tribunal infers that the Auditors thought highly of her because she was seconded to work for their associates in California. It was during this period and while she worked in California that the Applicant opened the US account.

17. Between 1994 and 2004 the Applicant was involved in a de facto relationship with Mr Head; that relationship extended to the Company in which the Applicant became a director and a shareholder.

18. During the period of their de facto relationship, which eventually broke up and resulted in litigation and a settlement of that litigation, the US account (and in respect of which the Applicant was the sole signatory) was used as the recipient of payments due to the Company by both US company 1 and also US company 2, although in respect of the payments from US company 1 the payments were in fact routed through the Kay company.

19. Notwithstanding the very large volume of paper produced to the Tribunal, very little is known as to the withdrawals from the US account. Clause 4 of RS1 incorporates information contained in Exhibit R2 as follows:

"…

What is Known about the US Account

Exhibit R2 sets out details of the deposits and withdrawals for the US account and is reproduced here.

Date	Deposits/Credits	Withdrawals	Transaction Narrative
05-Apr-01		$2,000	Cheque drawn payee not known
06-Apr-01		$353.72	Purchase from Chico's at Corte Madera CA
9-Apr-01		$20.87	Purchase from Nordstrom at Corte Madera CA
		$209.16	Purchase from Chico's at Sonoma CA
		$400.00	Purchase from Nordstrom at Corte Madera CA
10-Apr-01	$12,388.36		Money Transfer from US company 2 into the account of Ms [Reid]
		$67.39	Purchase from Warehouse Music at Corte Madera CA
		$10.00	Processing fee for money transfer of 10/4/2001
ATC 109		$63.33	Purchase from Macy's West at San Francisco CA
11-Apr-01		$743.63	Cheque drawn payee not known
12-Apr-01		$323.14	Purchase from Chico's at Carmel CA
13-Apr-01		$117.70	Purchase from Chico's at Pebble Beach Market at Pebble Beach CA
13-Apr-01		$534.79	Cheque drawn payee not known
16-Apr-01	$23,670.47		Money Transfer from US company 2 into the account of Ms [Reid]
		$95.60	Purchase from Gap Kids at Costa Mesa CA
		$150.50	Purchase from Williams-Sonoma at Costa Mesa CA
		$151.42	Purchase from Wine Cask Wine Store at Santa Barbara CA
		$10.00	Processing fee for money transfer of 16/4/2001
18-Apr-01		$347.17	Purchase from Macy's West at Newport Beach CA
		$3.00	Bank fees for the provision of a full statement
19-Apr-01		$599.58	Purchase from Best Buy at Westminster CA
20-Apr-01		$30.48	Purchase from Shell at Huntington Beach CA
23-Apr-01	$42,506.60		Money Transfer from US company 2 into the account of Ms [Reid]
		$10.00	Processing fee for money transfer of 16/4/2001
25-Apr-01	$6.18		Interest paid from 28/3/2001 to 25/4/2001
30-Apr-01	$37,249.15		Money Transfer from US company 2 into the account of Ms [Reid]
? May 2001	$25,270.68		Money Transfer from US company 2 into the account of Ms [Reid]
? May 2001	$7,748.07		Money Transfer from the Kay company into the account of Ms [Reid]
? May 2001	$18,776.93		Money Transfer from the Kay company into the account of Ms [Reid]
31-Jan-02		$9,800.00	Wine Charity auction in New Zealand
28-Aug-02		$256.00	Purchase from David Jones Limited at Brookvale
3-Sep-02		$482.30	Purchase from Charles Melton Wines at Tanunda
ATC 110		$1,172.80	Purchase of resort accommodation at Lizard Island Cairns
04-Sep-02		$1,159.10	Purchase of resort accommodation at Lizard Island Cairns
05-Sep-02		$1,151.92	Purchase of resort accommodation at Lizard Island Cairns
05-Sep-02		$206.30	Purchase from Tucker Seabrook Wines at Botany
07-Sep-02			Travel to California
9-Sep-02		$69.44	Purchase from Bebe at San Francisco
		$75.95	Purchase of a keyring from Aty's at San Francisco CA
		$96.57	Purchase from Bebe at San Francisco CA
		$200.00	Cash withdrawal
		$671.21	Purchase from Nordstrom at San Francisco CA
10-Sep-02		$36.47	Purchase from Bebe at Corte Madera CA
		$96.47	Purchase from Nordstrom at Corte Madera CA
		$112.03	Purchase from Chico's at Corte Madera CA
11-Sep-02		$900.00	Purchase from Barcelino Menswear California
12-Sep-02		$296.75	Purchase from Mini's at San Francisco CA
		$320.08	Purchase from Macy's West at San Francisco CA
		$390.50	Purchase from Macy's West at San Francisco CA
13-Sep-02		$53.13	Purchase from Victoria's Secret at San Francisco CA
		$293.00	Purchase from The Jug Shop at San Francisco CA
		$412.00	Purchase from Pastirio Restaurant at San Francisco CA
		$500.00	Cash withdrawal
		$645.50	Purchase from North Beach Leather at San Francisco CA
		$651.00	Purchase from Bebe at San Francisco CA
		$3.00	Bank fees for the provision of a full statement
16-Sep-02		$32.00	Purchase from Macy's West at San Francisco CA
ATC 111		$300.00	Purchase from Marriage Jewels at Corte Madera CA
		$502.40	Purchase from Rs Basso Lic-Crte at Corte Madera CA
	$502.00		Credit from Rs Basso Lic-Crte at Corte Madera CA
17-Sep-02		$342.70	Purchase from The Jug Shop at San Francisco CA
18-Sep-02		$107.20	Purchase from Macy's West at San Rafael CA
	$32.50		Credit from Macy's West at San Rafael CA
19-Sep-02		$225.23	Purchase from Gene Hiller Inc at Sausalito
23-Sep-02		$330.79	Cash withdrawal
		$3.00	Non BA ATM Transaction fee
25-Sep-02		$328.85	Cash withdrawal
	$6.87		Interest paid from 28/8/02 to 25/9/02
07-Nov-02		$938.00	Purchase from Peacock Gardens restaurant purchase. Melbourne Cup lunch for the Company Staff and spouses
12-Nov-02		$29.00	Credit card bill payment
15-Nov-02		$35.00	Purchase from F Levine's Little
26-Nov-02		$567.54	Cash withdrawal
26-Nov-02		$3.00	ATM Transaction fee
29-Nov-02		$414.70	Purchase from Tucker Seabrook Wines at Botany
02-Dec-02		$327.81	Purchase from Avalon Fine Wine
04-Dec-02		$375.87	Purchase from Palm Beach Wine Co
26-Dec-02	$4.50		Interest paid from 26/11/02 to 26/12/02
10-Jan-03		$332.70	Purchase from Peacock Gardens restaurant purchase.
17-Jan-03		$581.80	Purchase from Aqua Dining restaurant purchase.
21-Jan-03		$45.05	Online payment
23-Jan-03		$548.27	Purchase from Natural Health Clinic at St Leonards.
28-Jan-03	$4.77		Interest paid from 27/12/02 to 28/3/03
29-Jan-03		$178.60	Purchase from Palm Beach Wine Co
07-Feb-03		$298.70	Purchase from Peacock Gardens restaurant purchase. Purportedly for [Head]'s birthday lunch
ATC 112 11-Feb-03		$1,002.00	Purchase of Accommodation from the Queenstown Continental
25-Feb-03	$3.76		Interest paid from 29/1/03 to 25/2/03
Total	$168,170.84	$34,143.21

…"

20. It will be noted that while the Tribunal has before it some (limited) information as to how the US account was utilised, there is much that is not known. The Tribunal was informed in evidence that it has not been possible despite a number of attempts to obtain records from the Bank of America. The Tribunal notes that it is surprised that this should be so and would have thought that banking records in respect of the dates reflected would be readily available. There was evidence before the Tribunal that there was considerable expenditure on what might be referred to as luxuries and including in particular travel and holidays and including by way of one example, holidays at Lizard Island (and where the cost of accommodation is high). Some of the expenditure was, according to the evidence before me, referable to the Applicant alone and some according to her evidence, related to Mr Head alone, but her evidence was that it related in the main to expenditure for them both. They lived in a manner indistinguishable from the manner applicable to a married couple and the evidence was that they took regular holidays together, and usually at expensive resorts.

21. The Applicant in her evidence said that although she was the sole signatory in respect of the US account, she could not spend the monies unless authorised to do so by Mr Head. As to whether this is true is open to doubt. The US account was that of the Applicant alone and she alone had access to it.

22. When the relationship between the Applicant and Mr Head broke down, there was a balance standing to the credit of that account, although once again there was no proper evidence before the Tribunal as to what amount exactly remained in the US account at the relevant time. Reference was made during the hearing and in this context, and on more than one occasion, to an amount of between $16,000 and $20,000. The Tribunal proposes to accept that the amount in question was on her own admission and see clause 1D of AS2, $18,000 and that that amount was appropriated by the Applicant to her own use. She sought to justify that appropriation on the basis that it belonged to her by virtue of a property settlement agreement between her and Mr Head but no such property settlement agreement was produced to the Tribunal. In any event that amount was appropriated by her for her own use (for living expenses) in point of time prior to her reaching any agreement with Mr Head. In clause 1E of AS2 and as set out previously in these reasons, the Applicant accepted that she might be liable for tax on all or part of that amount and moreover by an amendment to her return for the 2005 year. That admission does not accord with the law relevant for this purpose.

23. The Applicant's evidence given at such length was criticised by the Respondent as to a number of aspects; these aspects will be referred to later in these reasons.

Part C - The legal issue

24. At the commencement of the hearing Mr Melick indicated that the Applicant contended that the payments by US company 1 and US company 2 into the US bank account were not caught by s 109C of the Act. Put in simple terms, Mr Melick contended that the debts due by US company 1 and US company 2 were choses in action which were discharged, and in effect disappeared, when they were paid into the US account and so that at least for the purposes of s 109C of the Act, the amounts paid into the US account did not ever constitute property of the Company; on this basis, so it was contended, s 109C could not operate so as to permit those payments to be treated as deemed dividends.

25.

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ATC 113

The argument referred to in brief in the preceding paragraph was set out in clauses 4 to 14 of AS1 which are included in these reasons as follows:

• "…
• 4. Section 109C(1) sets out when private company is taken to pay a dividend. It relevantly provides as follows:

  • '(1) A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:
    • (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or
    • (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.'

• 5. Thus the criterion of liability is that 'the private company pays an amount to the entity' during the year. Section 109C(3) sets out 'what is a payment to an entity?'. It relevantly provides that:

  In this Division, payment to an entity means:

  • '(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and
  • (b) a credit of an amount to the extent that it is:
    • (i) to the entity; or
    • (ii) on behalf of the entity; or
    • (iii) for the benefit of the entity; and
  • (c) a transfer of property to the entity.'

• 6. In the taxpayer's contention, sections 109C(1) and (3) requires payment, as defined, by the Company to the shareholder/director. It is a two dimensional requirement. It is not enough that payment is received by the shareholder/director. Each of paragraphs (a), (b) and (c) extend the concept of payment to 'constructive' receipt by the shareholder/director.
• 7. It must also be a payment made by the private company. That this is the proper approach to the construction of section 109C is established by section 109B which contains the overview of the Division. That section provides as follows:

  'The following is a simplified outline of this Division:

  This division treats 3 kinds of amounts as dividends paid by a private company:

  • • amounts paid by the Company to a shareholder or shareholder's associate (see section 109C);
  • • amounts lent by the Company to a shareholder or shareholder's associate (see sections 109D and 109E);
  • • amounts of debts owed by a shareholder or shareholder's associate to the Company that the Company forgives (see section 109F).' (Emphasis added)

• 8. Whilst an amount paid 'for the benefit of the entity' is deemed to be a constructive receipt by the entity (that is, the relevant shareholder/director) under section 109C(3)(a), there is no corresponding or matching provision that deems a payment on behalf of the private company to be 'a payment by, or on behalf of the private company'.
• 9. That is the proper construction of the provision [which] is confirmed by the Explanatory Memorandum accompanying the introduction of Division 7A by Taxation Laws Amendment Act (No 3) 1998. At paragraph 9.19 and 9.20, under the heading 'Explanation of the amendments' the EM states as follows:
  • '9.19 Generally, all payments made by a private company to a shareholder or associate are treated as dividends at the end of the private company's year of income [new subsection 109C(1)]. The shareholder or associate need not be a shareholder or associate at the time the payment is treated as a dividend if the amount was paid because the entity was a shareholder or associate.' (Emphasis added)

    ---

    ATC 114

• 10. Again, what is emphasised by the EM is al payments made by a private company. The words 'made by' the private company within paragraph 9.19 are significant words of explanation and limitation. Paragraph 9.20, immediately following in the EM explains what the legislature meant by a 'payment'.

  • '9.20 A payment is defined in a new subsection 109C(3) as:
    • • a payment to the extent that it is made to a shareholder or associate; or
    • • a payment to the extent that it is made on behalf of a shareholder or associate; or
    • • a payment to the extent that it is for the benefit of a shareholder or associate; or
    • • an amount to the extent that it is credited to a shareholder or associate; or
    • • an amount to the extent that it is credited on behalf of a shareholder or associate; or
    • • an amount to the extent that it is credited for the benefit of a shareholder or associate; or
    • • a transfer of property to a shareholder or associate.'

• 11. There is no payment 'made by' by the private company within the terms of the EM. There is also no 'transfer' of 'property' as required by section 109C(3). The word transfer means a sale, conveyance, disposition, transfer, an assignment, a change in ownership of an asset that is a piece of property. In order to satisfy section 109C(3)(c) there must be an assignment or transfer of the asset being the chose in action (the debt itself), ' from ' the private company to the entity being the shareholder/director.
• 12. Here there is no transfer, and no change of the ownership of the asset or property from the private company to the entity.
• 13. At best there is a payment by direction. But that direction is addressed from the private company to its creditor. But that is not a transfer or a change of ownership or property within the section.
• 14. To labour the point, there is not a constructive payment provision, as opposed to deemed a deemed constructive receipt, within section 109C.
• …"

26. The Tribunal does not accept that the Applicant's argument, while ingenious (or perhaps more aptly, ingenuous), can be correct. To accept that it is correct would inevitably lead to the extremely odd and unintended consequence that a company and its shareholders can escape Division 7A of the Act simply by misappropriating debts due to that company by its debtors and by causing those debts to be discharged otherwise than through payments to that company.

27. It will be noted that AS1 refers in the first instance to s 109C(1) of the Act and thereafter to s 109C(3) of the Act, but omits s 109C(2). It is preferable to refer to s 109C of the Act in full as follows:

"…

Payments treated as dividends

When private company is taken to pay a dividend

(1) A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

• (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or
• (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

Note 1: Some payments do not give rise to dividends. See Subdivision D.

Note 2: A private company is treated as making a payment to a shareholder or shareholder's associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E.

---

ATC 115

Amount of dividend

(2) The dividend is taken to equal the amount paid, subject to section 109Y.

Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.

What is a payment to an entity?

(3) In this Division, payment to an entity means:

• (a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and
• (b) a credit of an amount to the extent that it is:
  • (i) to the entity; or
  • (ii) on behalf of the entity; or
  • (iii) for the benefit of the entity; and
• (c) a transfer of property to the entity.

…"

28. Subsections 1(a) and (b) of s 109C of the Act set out in the alternative when a dividend is taken to have been paid. The relevant elements in ss 1(a) are firstly that a payment has been made and secondly that the entity is a shareholder in a private company.

29. Subsection 3(c) makes it clear that a payment to an entity includes a transfer of property to that entity.

30. The term "entity" includes a person; (s 470 of the Act). The Applicant was a shareholder in the Company at the time when the relevant payments were made into the US account.

31. The manner of payment is dealt with in parts of Division 7A. Section 109S of the Act provides as follows:

"…

This Subdivision allows a private company to be taken under Subdivision B to pay a dividend to an entity (the target entity ) if an entity interposed between the private company and the target entity makes a payment or loan to the target entity under an arrangement involving the private company.

…"

32. Section 109T(1)(b) includes a presumption that the Company made a payment to the US account if:

• "… (b) … a reasonable person would conclude (having regard to all the circumstances) that [the Company] made the payment or loans solely or mainly as part of an arrangement involving a payment or loan to [the Applicant]; and …"

33. It cannot be doubted that the Respondent is entitled to conclude that the Company made the payment by directing its debtors to pay monies either directly or indirectly into the US account.

34. In the alternative, a payment occurred through a transfer of property (and the property consisted of the debts owing to the Company) within s 109C(3)(c) of the Act.

35. Were the narrow interpretation of Division 7A for which the Applicant contends to be accepted, the purpose of Division 7A could easily be defeated. Such a construction and in particular of s 109C is contrary to the statutory rule of construction set out in s 15AA of the Acts Interpretation Act 1901 (Cth) which reads as follows:

"…

Regard to be had to purpose or object of Act

(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

…"

36. The plain fact is that the Company, in which the Applicant was a director and a shareholder, disposed of the debts due to it by causing them to be paid into the Applicant's US account and by directing that payment be made by the debtors to the Applicant in this manner.

37. It is plain that Division 7A of the Act operates in accordance with its terms and so that all of the payments by US company 1 and US company 2 to the Applicant constituted deemed dividends and in respect of which, but subject to Part E below, she is liable to tax.

---

ATC 116

Part D - Criticism of the Applicant's evidence

38. The Applicant's evidence was indeed in a number of important respects open to criticism. The Tribunal refers in this context, and with approval, to clauses 11 to 24 of RS1, which as a matter of convenience are included (together with their footnotes) in these reasons in full as follows:

"…

Withdrawal of the Balance of the US Account

11. Ms [Reid] has significant wealth. At the time of the acquisition of the K unit, [Reid] appears to have had about $750,000 available to her in cash used for the purchase and a further $250,000 in shares (see Transcript 94.1-94.38)^[2] The sale of the W unit for which she received income of $422,500 was described as the base from which the monies and shares held prior to the purchase (along with the deposit of $165,000) was derived. . She was also able to finance a loan for $990,000 from Suncorp.

12. The impressive resources built up by Ms [Reid] as at the time of the acquisition of the K unit contradicts the suggestion of the need to appropriate to her the balance of the funds in the US account at the time it was closed. On this matter, Ms [Reid]'s evidence is simply not credible. As Exhibit R4 shows, along with T99.2, the personal wealth of the plaintiff estimated as at the time of the application for the loan was in excess of $2 million. In fairness, this assessment was in part derived from her being the owner of the B house;, however she only owned a half share (see R4). Therefore her wealth was closer to $1.5 million although Ms [Reid] referred to other interests that she had at that time which may not have been disclosed on R4^[3] See the reference to NB Direct Property Trust at T152.18-23 and it also does not include any assets held by the Marketing Company.

13. Ms [Reid]'s wealth is to be compared to income tax returns filed in the years 1999-2004 (Exhibit R7 and T3 of Exhibit R1 in the case of the 2001 return) which can be fairly described as indicative of average weekly earnings and the returns filed in 2003 and 2004 for her company the Marketing Company, which indicate overall a significant loss (Exhibit R8). Her access to funds also includes credit cards which appear to be for personal use and had a combined limit of $34,500 (T100.42-46).

14. Coupling the above, with the inadequate explanation for not producing a bank statement at the time of its closure, would support a finding by the Tribunal that Ms [Reid] spent the residue of the US account as if it was her own money. This in turn would permit an inference that Ms [Reid] generally spent the money in the US account being proceeds of the operations of the Company freely, as if it were her own and without supposed deference to the will of Mr [Head].

Suncorp Metway

15. The relevant documents again are contained in Exhibit R4.

16. The significant document within R4 is that headed Premium Low Doc Loan Declaration which contains the statement that Ms [Reid], as an applicant for a loan from Suncorp Metway for the K unit over which she had previously exchanged contracts on 25 May 20004, had annual income totalling in of $238,720 representing income from employment of $220,000 and rent of $18,720.

17. If the information in the declaration is accepted, Ms [Reid] has given false evidence in the AAT and has either made:

• (a) false representations to the intermediary on oath (the accuracy of the form being sworn to); or
• (b) has made truthful representations to the intermediary but false representations in terms of her declaration as to income in her income tax return for the relevant year, 2004-2005^[4] Yet another alternative is that there is falsity both in what was told to the intermediary and what was told in the income tax return. .

18. There are a number of factors which support the authenticity of the document and its contents:

• (a) The address of Ms [Reid] is correctly identified at the K unit. By this time, Ms [Reid] had moved into the unit: T102.43-44. If the declaration had been completed earlier as suggested by Ms [Reid], the address would have been incorrect because the plaintiff was then still living at the B house^[5] The timing of Ms [Reid]‘s move into the K unit is confirmed by what appears in the affidavit of her solicitor, Stephen Michael Hearne, sworn 2 February 2006 (Exhibit A6) where at paragraph 15 there is reference to Ms [Reid] moving out of the B house on 28 June 2004. ;
• (b) There is an accurate reference to the Marketing Company, Ms [Reid]'s company including its Australian business number.

• ---

  ATC 117

  (c) The description under proposed loan purpose at about the middle of the declaration is accurate in that, as at this time, Ms [Reid] was intending to purchase the property^[6] Ms [Reid] gave evidence in her statement (Exhibit A7) at paragraphs 10 and 12 which indicate that by the time that she moved into the K unit, she intended to live there rather than to purchase the property for investment purposes (see also paragraph 6 of Exhibit A7) so while earlier than July 2004 it would have been inaccurate to describe the property as being owner purchaser, as at the date of the declaration (8 July 2004), that information had, albeit only recently, become accurate. Note also the reference at T103.41-46 concerning Ms [Reid’s previous intentions to own the property as an investment property. ;
• (d) It is unlikely that Ms [Reid], as she asserts, would have agreed to execute the declaration in blank. Firstly, there could not be any reason for doing so given that at the time of the meeting she had with the intermediary, all information relevant to the application for the loan would have been available. As well it suggests combined bad practice on behalf of her, a professional, and a regulated intermediary that the document in respect of which the accuracy is sworn would be so prepared. Ms [Reid]'s evidence on the circumstances in which she signed the declaration was unsatisfactory containing a series of blank denials interspersed with a surprising observation that she probably did not read the document in detail: T105.24-25;
• (e) There is an inherent unlikelihood that a regulated intermediary who is presumably acting as an agent of the lender, would simply write in fictitious numbers to secure the loan.

Ms [Reid]'s Relationship with Mr [Head]

19. In her evidence at the hearing on 22 July 2008, Ms [Reid] made statements to the effect that the relationship she had with Mr [Head] was such that she followed his directions concerning the expenditure of the monies in the US account. She gave evidence about constant fighting in the business (T51.16-18), sleeping in separate bedrooms on separate levels of the B house (T51.19-21) and Mr [Head]'s demands at T42.29-31. She made reference to bouts of violence and threats at T46.27-29.

20. None of the objective evidence tendered in Ms [Reid]'s case, other than the more recent and unsigned report of Dr [Parker] dated 9 September 2008 which has been specifically prepared for the current proceedings, supports the assertions. The latter report of Dr [Parker] should be seen in the context that it was prepared following Ms [Reid]'s evidence on 22 July 2008 (see Exhibit A5 at page 1). Significantly, the earlier report of Dr [Parker] dated 22 July 2006 (Exhibit A4), says nothing about a violent, abusive and overbearing relationship suffered by Ms [Reid] at the hands of Mr [Head] which would permit the court to infer that the management of the US account lay in the hands of Mr [Head] only.

21. Exhibit A4 states clearly at the bottom of page 1 and over to the top of page 2 that the symptoms associated with the deterioration of the relationship with Mr [Head] manifest themselves first in late 2003 or early 2004. This is against a finding that Ms [Reid] was in effect bullied into actions related to the US account in 2000, 2001 or at any time after that during the remainder of the relationship.

22. The absence of evidence to support Ms [Reid]'s defence is reinforced in the report of Dr [Ar] which appears as Annexure Z to the Affidavit of Mr Hearne sworn in the Supreme Court proceedings (Exhibit A6 in these proceedings) along with the history of the relationship between Mr [Head] and Ms [Reid] as set out in the body of the affidavit of Mr Hearne.

23. As well, Mr Hearne deposed in his affidavit at paragraph 4(b) that as at the time of separation in January 2004, Mr [Head] and Ms [Reid] continued to occupy the B house together and only then:

'The plaintiff commenced sleeping in the spare bedroom.'

24. There is no reason to doubt Mr Hearne's observation about the circumstances of cohabitation between Ms [Reid] and Mr [Head] contained as it is in an affidavit sworn in proceedings in which Ms [Reid] was plaintiff, Mr Hearne her solicitor and where the affidavit appears to be relied upon by Ms [Reid] in support of an application for expedition (or perhaps more accurately no further delay) in then her proceedings against [Head] and the Company.

…"

39. In general terms the Applicant's evidence relies for the most part on her own word and where in most cases her own word was not supported.

40.

---

ATC 118

The Applicant's evidence as to her resources at the time when she acquired the K unit was at times quite extraordinarily convoluted. I refer in this regard to p115 of the transcript commencing with line 21 and ending with line 20 of p122 (but edited to remove unnecessary content) as follows:

"…

MR SHELLER: Before that time - sorry, at the time of the settlement of the purchase - sorry, by that time, I take it you had sold a substantial amount of your shares - let me withdraw that and I'll ask a preceding question. In effect, you needed to come up with about half a million dollars to complete the purchase out of your own funds. That's right, isn't it?---Yes.

Including paying a quite substantial amount of stamp duty?---Yes.

And so, in effect, you had to draw out of your cash management account a substantial sum of money?---Yes.

And you had to sell hundreds of thousands of dollars worth of shares?---Not at that point, because I had the $377,000 sitting in my cash management trust account and then I transferred the $216,000 that I had sitting in my money market account.

Right?---Which gave me a balance of $593,000.

…

MR SHELLER: So you effectively were exhausting your cash reserves and were left with the Macquarie portfolio, is that right?---Yes.

And the IAG shares?---Yes. And the property trust.

…

THE WITNESS: It was just a few shares that I had in NRMA that we all got through - - -

…

MR SHELLER: Ms [Reid], at the time - you have got documents in front of you. At the time of the settlement of the [K unit] these were, as I understand it, the sources of funds paid for the purchase price, stamp duty, and let's call them associated legal costs. You'd already paid the deposit of $165,000?---Yes.

And that was money drawn out of a cash management account?---Yes.

That you held with Macquarie Bank?---Yes.

Earning interest of 5 or 6 per cent or something like that?---Yes.

You had, as another source to pay off the purchase price, the finance from Suncorp?---Yes.

And then the other source to pay off the shortfall was a combination of cash management account and the money market account?---And shares.

Well, the shares you held at that time, as I understand it, were the Macquarie portfolio?---Yes.

And IAG?---Yes.

And that's, at that time, roughly - approximately $120,000 - - -?---I - - -

- - - worth of shares?---I'm guessing, yes.

All right. But as at the time of the settlement of the purchase price, most, if not all of the cash resources you had were exhausted. That is, all you had left in the Macquarie Bank cash management account was 40 or $50,000?---At the time of settlement?

Yes?---Probably about 40 or 50 - $50,000.

Yes?---Plus my share portfolio.

That's right. And at some later stage you paid off about $30,000 in about October 2004 - - -?---Yes.

- - - towards the loan, to keep it below its limit?---Yes.

And the source of that was the Macquarie Bank cash management account?---Yes.

And after the payment out of the $30,000, you had $8000 left in the cash management account?---Yes.

And your shares?---Yes.

All right. And is it fair to say that your asset - - -?---And - sorry - and the money market account. I had about some $42,000.

I see. So is it fair to say that, as at October 2004, your cash resources were about

---

ATC 119

$50,000 combination cash management trust and money market account?---Yes.

And your shares?---Yes.

Now, in R3, which is the bank statements for Suncorp in relation to the loan up until about August this year - - -?---Mm.

- - - which you have in front of you, would you agree with me that the loan has been reduced - - -?---Mm.

- - - in the following way. Firstly, as a result of $600,000 received from your settlement with Mr [Head]?---I wouldn't say it's that much, because I had to pay a considerable amount of legal fees, but - - -

All right. Well, you paid - Mr [Head], all up, including legal fees, paid you $700,000, didn't he?---Yes.

And 100,000 at least was - - -?---Well, more than that.

- - - paid to lawyers?---More than that.

…

MR SHELLER: You made two $300,000 payments in relation to the Suncorp loan, didn't you?---If you could tell me what date they were.

The first one was - sorry - $280,000 paid on 3 August 2006?---Yes.

And that was moneys received from - or, in effect, payment over of moneys received from Mr [Head]?---Yes.

And then on 25 October 2006 you paid another $300,000?---Yes.

Can I suggest to you that outside those payments you have paid about $300,000 towards the loan facility, from about October 2004 until to date?---If you have done the calculations, I'll - I'll trust that you have done the calculations correctly. Yes.

And in that period, at the starting point in that period you had your shares worth $115,000, and the residue of your cash resources of about $50,000?---Yes.

Have you sold all your shares?---Yes.

When did you sell those?---Progressively.

Right. When was the last sale, as best you can recall? Some time ago, or recently?---I was still selling them in June 2006. No. I was still selling them in October 2006. No, I wasn't. I think there was - they were all sold earlier. I think the only - there was one outstanding - there were two that came in late because one was - no. In fact, I probably sold most of them - before I put my foot in anything - they were predominantly - they were predominantly sold through to October 2004, with the exception of a couple which I was not able to liquidate. One of those was a property trust, which I had to wait about a year to liquidate, and the other was a private equity trust, which I lost the majority of the investment, but on the winding up of that fund there was a small residual payout, I think, in about - in 2006. But the two - the two that were liquidated after 2004 were ones that I was not able to liquidate earlier.

And when you were able to liquidate both of those, there wasn't much return to you. Is that right?---Return to me?

Yes. Did you make any money out of their sale?---No.

So I take it that whatever you made out of those probably wasn't applied to the reduction of the - - -?---Yes.

- - - Suncorp facility?---Yes, it was.

But only in very small amounts. Is that right?---No. No, they were significant amounts. Are you talking about return in terms of profit, or just return? There was still significant value that was returned to me.

I see?---I think one was about 70 - I don't know. The property trust - sorry - the one that I wasn't expecting to get anything from was the private equity trust, and I'll have to find - it's somewhere here in my statements.

All right. Okay. Well, if you would accept from me that - - -?---$30,000. $31,000, which I wasn't expecting, came from the private equity trust.

All right. And is that how much you sold your interest in that private equity trust for, or was it the profit on the sale?---No. That's - that's what I sold my interest for.

And when was that sold?---That was in October 2006.

---

ATC 120

Right. And is that the last of the share sales?---Yes.

And the other one I think you mentioned something like $70,000?---I recall there was NB direct property trust. I can't remember the exact amount, and I can just try to find when it was liquidated, but I'm not able to source it at the moment.

If you'd accept from me that you - I'm sorry. I take it the cash resources in the Macquarie Bank facility have been exhausted?---Yes.

And I think we agree that that was about $50,000 as of October 2004?---Yes.

If we add those amounts together we get about $150,000. Is that correct? That is, the amount you had in the cash management accounts, as a cash resource, and the sale of the shares. Does that sound correct?---Yes, with the exception of the MB direct property trust and the private equity trust, which were about another 100,000.

Well, Ms [Reid], at the time you applied for the loan you had, in terms of shares, $110,000 with Macquarie, and about 6000 with IAG. Is that right?---Yes, except that would - that probably didn't include the private equity trust, and I'm not sure about the property trust, what value that was at.

Well, if you accept from me that you reduced the loan on the K unit by $300,000, over and above the payments you have received from Mr [Head], what do you say are the sources of funds to pay off that $300,000?---The sale of my investments - the sale of my investments, and the income I was earning.

The sale of investments ended in October 2006?---Yes.

And, for the moment, we're not entirely sure what the sales price was of all your shares - - -?---I can give you - - -

- - - that you owned at - - -?---I can give them to you.

Well - - -?---I can cross - I can tell you exactly what the source of every payment on the Suncorp asset loan statement is.

I see. Is it fair to say that you - subject to selling the shares from time to time - were generally in a position to pay off parts of the loan when you could?---Yes.

And you were also able to continue to pay off living expenses?---Yes.

When did you cash in the money that was left over from the US bank account?---Some time in - it's either late 2004 or early 2005.

All right. And where's that? Is that documented in the material you have got, as a source of funds used to reduce this loan?---No, because it wasn't used to reduce that loan.

I see.

…"

41. The Applicant in her evidence accepted that the debts were paid into her account for a purpose which was illegal. See in this regard p177 of the transcript from line 6 to p178 at line 2 as follows:

"…

MR SHELLER: …

I think you've said this already today but so it's abundantly clear and so that I'm fair to you, you accept that what was involved in the transfer of these monies into your account were acts of tax evasion. Is that right?---Yes.

And you also understand that these monies which were transferred into your account as an act of tax evasion have now been all spent. That's right?---Yes.

And they've all been spent from the date of the first deposit which I think was in early 2001?---Except for the monies that he transferred in from his Liechtenstein account.

That was in 1999?---Mm.

But you understand that that's not part of the argument here. It's just the two debtors that we're concerned with.

…

MR SHELLER: Two debtor companies that deposited. But you accept that all the monies that were deposited in your account in the Bank of America account, as an act of tax evasion, have now been spent and that - and the period of spending started in 2001 and

---

ATC 121

ended when you exhausted those funds in early 2005?---Mm.

You accept that?---Yes.

And you accept that at the time those monies were being spent you were aware that those monies had found their way into the account as a result of an act or acts of tax evasion?---Yes.

Including, at times, where the money was being spent to your benefit?---Well, are you referring to the monies that were left in my account when I separated from Mr [Head]?

Any time in which - in that period between early 2001 when these deposits took place, up until the final spending in early 2005, you were aware at the time that the money - that at least some of those monies were being spent for your benefit that they were the proceeds of acts of tax evasion?---The majority of the monies were spent for Mr [Head]'s benefit.

Right. Could you answer my question?---As I said, I knew that they were the result of tax evasion.

And you knew that at the time at least some of those monies were being spent for your benefit?---Yes.

…"

42. A particular oddity in respect of the Applicant's evidence was that she insisted that although she was and is a qualified accountant, she knew nothing whatever about tax. The Tribunal does not accept that these statements can be true, in that it is not possible to qualify as or to practise as an accountant without any knowledge of tax. This aspect arose in particular when she was cross-examined as to her sale of the W unit. It was acquired in the late 1980s and sold in 2001 and at a time when the Applicant was living with Mr Head in the B residence and so that at the time of sale of the W unit, it was not and had not for some years been her principal place of residence. The Applicant insisted that the profit was exempt, and no part of the gain was reflected for tax purposes. (Mr Sheller indicated that the Respondent does not intend to take any action in respect of the profit on the sale of the W unit). In the same context her admission that the debt payments into the US account were illegal came at a late stage of the proceedings.

43. I consider that the Respondent's criticism of the Applicant's evidence is valid. I could add to those criticisms or could amplify them but for the reasons set out in Part E of these reasons do not think that it is necessary for me to do so, and moreover that to do so would serve no useful purpose. I would add though that I find as a matter of fact that there was no evidence before the Tribunal as to the Applicant's contention that all of the relevant monies were held on constructive trust for Mr Head. One admission (by way of example) by the Applicant is sufficient to establish that this cannot possibly be so. When the relationship terminated, there was a balance of between $16,000 and $20,000 in the US account (admitted in AS1 to be about $18,000). If those monies were held on trust for Mr Head they would and should have been paid to him but they were not and the Applicant did not for one moment accept or admit that there was any obligation on her to do so. On the contrary, she insisted that she was entitled to use those monies for her own (living expenses) purposes. Her evidence that she was entitled to those moneys pursuant to a property settlement cannot be accepted because her evidence was that she needed and used the moneys for living purposes when the relationship broke down and at a point in time when the property settlement agreement to which she referred, but did not produce, would not have been executed. It is likely having regard to all of the circumstances that such an agreement would not have been entered into until the conclusion of negotiations which may well have been lengthy and thus at a much later time. The Tribunal finds as a matter of fact that it cannot be said of the moneys paid into the Applicant's US account that they were used and could only be used when Mr. Head so directed.

44. While I do not accept that the relevant monies were held on constructive trust for Mr Head, I consider that the Applicant has furnished evidence which would support the proposition that the monies in question were not hers alone. She was in a de facto relationship with Mr Head; she lived with him in the B house which had previously belonged to him alone until he transferred one half of the

---

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property to her. She was a shareholder in and a director of the Company and she furnished services to the Company. She and Mr Head were partners both personally and professionally at the relevant time. The case authority which is most in point in this regard is that of the Full Federal Court in
MacFarlane v Commissioner of Taxation 86 ATC 4477; (1986) 13 FCR 356 and in particular the judgment of Beaumont J. In respect of MacFarlane:

• (a) It was decided in relation to s 108 of the Act which was the section which preceded s 109C and which was cast in somewhat different terms but that particular difference is not material for the purposes of these reasons;
• (b) There was a de facto relationship between Mr MacFarlane (the appellant) and Ms Marie Masterman and they worked in the business; and
• (c) It involved monies drawn out of a business and then invested in the name of the appellant alone. The issue to be decided in that case related to the investment income which was so derived.

45. I refer in particular to the judgment of Beaumont J (at pp367-368) as follows:

"…

I turn first to the question whether Miss Masterman was beneficially entitled to one-half of the investment income. His Honour found that the appellant and Miss Masterman expressly agreed that the business generating the earnings represented by the investments was to be beneficially owned by himself and Miss Masterman in equal shares. There was also evidence that, in discussions between them, the appellant and Miss Masterman agreed that the investments were jointly owned in equal shares. In any event, the investments could be traced back to the earnings of the business. Moreover, as has been said, Miss Masterman made an equal contribution to their venture. She injected a cash amount equal to that provided by the appellant. She also matched his contribution to the profits of the business by way of services rendered.

In these circumstances, equity would regard the appellant and Miss Masterman as beneficially entitled in equal shares to the assets and income of their joint venture, including the income from the investments in question. Given the express agreement of the parties, it is appropriate to characterise their relationship as involving an express trust. However, if the appellant sought to raise the possible application to such a trust of the Statute of Frauds 1677 (UK) (see Conveyancing Act 1919 (NSW), s 23C), equity would declare a resulting or constructive trust in favour of Miss Masterman: see
Calverley v Green (1984) 59 ALJR 111;
Muschinski v Dodds (1985) 60 ALJR 52;
Last v Rosenfeld [1972] 2 NSWLR 923. The appellant, of course, has never sought to deny the beneficial entitlement of Miss Masterman. Moreover, before us, the respondent disclaimed any reliance upon the Statute of Frauds. It follows, in my view, that since the appellant held the investment income as to a one-half share upon trust for Miss Masterman under an express or, alternatively, resulting or constructive trust, the appellant was beneficially entitled to the remaining one-half share of income only.

In my opinion, the learned judge erred in holding that, for the purposes of the Act, the legal title to income is determinative. The Act, in my view, takes the taxpayer's income as it finds it - that is to say, subject to the general law in all its aspects. This will pick up the position at law and in equity, modified by any relevant legislation, including the provisions of the Act itself. In
Stewart Dawson and Co (Vic) Pty Ltd v Federal Commissioner of Taxation (1933) 48 CLR 683 Dixon J, speaking of the presumption of advancement, said (at 691):

'I see no reason why this rule should not apply in revenue matters. If liability for tax depends upon the existence or non-existence of a trust, the occasion seems to demand the application of the rules by which the determination of such questions is governed in courts of equity.'

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Dixon J was there dealing with a question arising under land tax legislation, but his observations are equally applicable to the operation of the Act.

I should add that nothing here turns on the circumstance that, in the events which happened, it was not necessary for Miss Masterman to seek relief from a court of equity with a view to enforcing her rights as beneficiary under a trust. The learned judge, viewing the case as one of constructive trust only, was much influenced by the fact that equitable relief had not actually been granted or even sought by Miss Masterman. His Honour thought that, unless and until such relief were granted, the respondent, as a 'stranger' to the trust, could ignore any equitable interest claimed by Miss Masterman.

With all respect to the learned judge, I cannot agree. Since equity will regard as done that which ought to be done, the existence of equitable interests does not depend upon the making of a curial order granting equitable relief, even in the case of a constructive trust: see
Muschinski v Dodds, (supra), per Deane J at 65. The position is a fortiori in the cases of express and resulting trusts, where the kind of relief granted by the court of equity is more uniform than in the case of a constructive trust.

It follows, in my opinion, that, for taxation purposes the income in question should be treated as derived by the appellant and Miss Masterman in equal shares.

…"

46. It must be noted that in MacFarlane there was an express agreement between the appellant and Ms Masterman that the income would be shared, whereas there is in fact no such evidence in this matter. On the contrary, the Applicant has contended that the monies in question belonged to Mr Head alone. There is however evidence before the Tribunal that to a very large extent, the relevant monies were used by the Applicant and Mr Head jointly. It would seem in fact that they behaved just as so many married couples behave, in that, until the relationship ended, they used their joint resources to fund their expenses. The relevant moneys (and thus excluding the remaining amount which was spent by the Applicant for herself alone) would on some few occasions be spent for the benefit of one only of a couple and sometimes for the benefit of the other, but they were expended by them as a couple. The fact that Mr Head transferred one half of the B house to the Applicant indicates that they were a couple and that in particular Mr. Head regarded her in this light.

Part E - Conclusion

47. The admission by the Applicant that $18,000 might be taxed in her hands in the 2005 year cannot be sustained. Section 109C in its terms treats the relevant payments into the US account as dividends paid on the last day of the Relevant Year, ie 30 June 2001. As to what occurred thereafter is irrelevant and so that there is no question of a reassessment in a later year on the basis for which the Applicant contends.

48. There are two possible conclusions as to how this matter should be decided:

• (a) It can be argued that the relevant monies were paid to the Applicant, that there is no dispute as to the fact that moneys due to the Company were diverted into the Applicant's US bank account, that there were reserves available which if the Company had accounted honestly would have been sufficient to support the amounts assessed as deemed dividends, and that there is no express evidence (as there was in MacFarlane) as to the sharing of that money as to one half each. On the contrary, the Applicant's evidence, which cannot be accepted, is that the monies belonged entirely and only to Mr Head. A finding then that the Applicant has not discharged the onus and that MacFarlane is distinguishable is thus one possible option. The law as to contested assessments has been referred to repeatedly in the case law; see by way of one example only
  Federal Commissioner of Taxation v Dalco 90 ATC 4088; (1990) 168 CLR 614. The onus is on the taxpayer not only to establish that the assessment is incorrect but also to establish what the correct assessment should have been. It is abundantly clear that the Applicant has failed to discharge the onus on her in this regard. Her case might have been that the relevant moneys were paid into the US account as to specific amounts for her and as to other specific amounts for Mr. Head. This was not her evidence; it was on the contrary that all of the moneys were held by her in trust for Mr. Head. That evidence cannot stand both because her evidence was in significant respects not worthy of credit and also because she demonstrably regarded the amount remaining in the account as her own property and available to her for use in respect of living expenses. On this basis the Applicant would fail and moreover in relation to all of the moneys paid into the US account.

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  (b) The other conclusion (and which is preferred) is that, although there was contradictory and at times unacceptable evidence given by the Applicant, there was (if by a narrow margin) sufficient evidence that the monies in question were paid into the US account for use by the couple and were in fact and until the relationship ended, so used and so that applying the equitable principles referred to by Beaumont J in MacFarlane, it should be taxed in the hands of the Applicant and of Mr Head as to one half each. On this basis there remains the question of what, if anything, should be done about the amount of $18,000, which the Applicant took for herself and the answer so far as the Tribunal is concerned is that there is nothing that can or should be done. It is possible that Mr Head is entitled to require the Applicant to pay him half of that amount, but it is also possible that there was a property settlement agreement (and as set out previously no such agreement was produced to the Tribunal) between them which has the effect that he would be precluded from making such a claim. It goes without saying that Mr Head did not give evidence and, as the Tribunal indicated at the hearing, it would not be fair to draw any adverse inference by reason of that fact; (the Tribunal was made aware of the fact that there are proceedings pending against Mr Head).

49. I have come to the conclusion, not without some hesitation, that in the light of MacFarlane and notwithstanding the fact that there are differences which are relevant, MacFarlane does furnish authority for the proposition that where a couple live and work together and make contributions to the business, money appropriated (or to be more accurate, misappropriated) by them from that business, should be taxed in their hands as to one half each. The evidence before the Tribunal while in some respects unsatisfactory does indicate that the moneys paid into the US account were paid in for use by them as a couple and so that it is not possible to say that it was paid into the US account for either of them alone.

50. The penalty assessment was not raised at the hearings; in particular the Applicant did not seek a reduction in the level of penalty imposed. In my opinion the conduct of the Applicant was such (bearing in mind that she was party to conduct which she knew was illegal) that it would not be appropriate to reduce the rate of penalty imposed, although of course the penalty will apply to one half only of the amount assessed.

51. Accordingly, the objection decision is varied so as to reduce the amount assessed and penalty imposed by one half, and so that the objection decision is affirmed to this extent only.