• The impact of this case on ATO policy is discussed in Decision Impact Statement: Kocic and Federal Commissioner of Taxation (3191-3208 & 4601-4604 of 2007, 1406-1409 of 2008).

KOCIC & ANOR v FC of T

Members:
B Tamberlin QC DP
J Redfern SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2011] AATA 47

Decision date: 1 February 2011

---

B Tamberlin QC (Deputy President) and J Redfern (Senior Member)

1. Mr Steven and Mrs Savko Kocic were directors and shareholders of Ansetat Pty Limited (Ansetat), which owned and operated cafes in Darlinghurst and Paddington from at least 1991 until February 2007. Mrs Kocic became a shareholder of Ansetat from September 1998. Ansetat went into administration on 28 February 2007 and was subsequently wound up, although Cafe Brioni has continued to operate.

2. In September 2005 the NSW Crime Commission executed a warrant on the premises of Mr and Mrs Kocic on matters unrelated to tax and seized handwritten sales books maintained by Mr Kocic. The Commissioner conducted an audit and determined that these records more accurately reflected gross sales for Ansetat for the income years 1995 to 2006.

3. Amended assessments were issued to Mr and Mrs Kocic for each of the income years from 1995 to 2006 on the basis of the undisclosed sales. Administrative penalties of between 75 and 90 percent were also imposed for the years 1995 to 2003. An administrative penalty was imposed on Mr Kocic in respect of an undeclared capital gain in the year ended 30 June 2003.

4. Mr and Mrs Kocic objected to the assessments and penalties. The Commissioner disallowed those objections in full. This is a review of those objection decisions.

Issues

5. Mr and Mrs Kocic accept Ansetat failed to disclose sales in the period 1995 to 2003 but contend Ansetat failed to claim as deductions cash payments for wages and supplies for the period 1995 to 2006 and these should have been taken into account by the Commissioner. They accept there is a difference between undisclosed gross sales and cash expenses but say to the extent there was a distribution of deemed dividend, this was applied for the benefit of Mr Kocic and not Mrs Kocic. They also contend the Commissioner has failed to take into account certain liabilities of Ansetat in respect of each income tax year, such that the profits (for 1995 to 1997) or the distributable surplus (for 1998 to 2006) out of which a dividend could be paid is less than the amounts determined by the Commissioner. Given the assessments should be limited to profits or distributable surplus for Ansetat in each relevant year of income, Mr and Mrs Kocic contend the assessments are excessive. They also challenge the penalties imposed.

6. The Commissioner accepts Ansetat made payments for wages but contends this was in addition to the amount recorded for undisclosed sales. In other words, the income for Ansetat was greater than the amount recorded in the handwritten sales books seized. The Commissioner does not accept the cash expenses claimed. Nor does the Commissioner accept the liabilities claimed by Mr and Mrs Kocic in reduction of the profit or distributable surplus of Ansetat. However, the Commissioner submits that if the amounts paid to Mr and Mrs Kocic are not assessable as dividends as they do not form part of the profits or distributable surplus of Ansetat, they should nonetheless be treated as dividends under s 44 of the Income Tax Assessment Act 1936 (the 1936 Act), or as ordinary income under s 25(1) of the 1936 Act or s 6-1 of the Income Tax Assessment Act 1997 (the 1997 Act). Other than for the 1997 income year, which the Commissioner now concedes is excessive, the Commissioner contends the objection decisions should be affirmed.

7. Ultimately the question is whether the assessments were excessive but in considering this, the parties agree there are specific issues for the determination which are as follows:

• (a) How should the net income for Ansetat for 1995 to 2006 be derived? Do the handwritten books of account seized from Mr and Mrs Kocic sufficiently record the takings for Ansetat for each of the income years 1995 to 2006?
• (b) What were the "profits" of Ansetat out of which a dividend could be paid under s 108 of the 1936 Act for the income years 1995 to 1997?
• (c) Whether the undisclosed sales should be "added back" when determining net assets of the purposes of determining the distributable surplus of Ansetat for the income years 1998 to 2006?
• (d) Whether Ansetat's liability for interest on unpaid tax is a "present legal obligation" of Ansetat as at 30 June each year and, as such, should be taken into account in determining the distributable surplus for Ansetat for the income years 1998 to 2006?
• (e) Whether a loan recorded in the accounts of Ansetat from "S Kocic" is a "present legal obligation" of Ansetat and, as such, should be taken into account when determining the distributable surplus for Ansetat for the income years 1998 to 2006?
• (f) Whether the Commissioner can now make a claim that moneys not declared by Ansetat are assessable to Mr and Mrs Kocic as ordinary income or ordinary dividends, and if so, do these claims support the assessments?
• (g) Whether payment of any deemed dividend by Ansetat was paid to or applied for the benefit of Mr Kocic and not Mrs Kocic?
• (h) Whether the administrative penalties imposed on Mr and Mrs Kocic were properly imposed and, if so, whether they should be remitted?

Legislative framework

8. The period covered by the review is from 1995 to 2006 and different taxation and penalty regimes apply during the twelve year period.

9. Divisions 7 and 7A of the 1936 Act deal with liability to taxation in respect of private companies. Both divisions were intended as anti-avoidance provisions to prevent private companies from distributing profits tax free to shareholders or their associates in the form of loans or other payments. Division 7 applies to payments and loans before 4 December 1997. Section 108(1) provides that if a private company pays or credits an amount to a shareholder or associated person, the amount paid or credited will be deemed to be a dividend paid by the company if, "in the opinion of the Commissioner", the amount paid or credited represents a distribution of profits. Importantly, the Commissioner must analyse the financial information of the company in order to form such a view.

10. Division 7A was introduced by the Taxation Laws Amendment Act (No 3) 1998 and was intended to operate automatically to distributions after 4 December 1997. Section 109C(1) of the 1936 Act provides that a private company is taken to pay a dividend if it pays an amount to a shareholder or an associate of the shareholder. The amount of the dividend is equal to the "distributable surplus" of the company as calculated by s 109Y of the 1936 Act.

11. Section 109Y provides,

"Reduction of amounts of dividends

• (1) If, apart from this section, the sum of all the dividends a private company is taken under this Division to pay at the end of the year of income would be more than the company's distributable surplus for that year, the amount of each of those dividends is the amount worked out under subsection (3).

Distributable surplus

• (2) A private company's distributable surplus for its year of income is the amount worked out using the formula:
  

  Net assets

  +

  Division 7A amounts

  −

  Non-commercial loans

  −

  Paid-up share value

  −

  Repayments of non-commercial loans

where:

'net assets' means the amount (if any), at the end of the company's year of income, by which the company's assets (according to the company's accounting records) exceed the sum of:

• (a) the present legal obligations of the company to persons other than the company; and
• (b) the following provisions (according to the company's accounting records):
  • (i) provisions for depreciation;
  • (ii) provisions for annual leave and long service leave;
  • (iii) provisions for amortisation of intellectual property and trademarks;
  • (iv) other provisions prescribed under regulations made for the purposes of this subparagraph.

If the Commissioner considers that the company's accounting records significantly undervalue or overvalue its assets or undervalue or overvalue its provisions, the Commissioner may substitute a value that the Commissioner considers is appropriate."

12. It is common ground s 108(1) applies to the assessments for Mr and Mrs Kocic for the 1995 to 1997 income years and s 109C(1) applies to the assessments for the 1998 to 2006 income years. In the present case, the Commissioner has determined that Ansetat made profits for 1995 to 1997 over and above the amounts declared; representing undisclosed sales with no deductions for wages or supplies alleged to have been paid by cash. For the income years 1998 to 2006, the "distributable surplus" of Ansetat is the key component for calculating the quantum of any deemed dividend to shareholders and/or associates. The Commissioner formed the view that the accounting records of Ansetat undervalued assets and "added back" undisclosed sales for the purposes of assessing net assets but made no deduction for wages and supplies alleged to be paid by cash. He also failed to take into account a loan recorded in the accounts from "S Kocic" or interest that would have been payable on unpaid tax as "present legal obligations" of Ansetat. The Commissioner deemed all undisclosed sales as dividends for the period 1998 to 2006, except for 1999 to 2001, where the Commissioner calculated that the distributable surplus was less than the amount said to be paid or received to the benefit of shareholders.

13. The obligation to pay income tax is set out in s 4-10 of the 1997 Act, once assessed, becomes due and payable in accordance with s 204 of the 1936 Act which provides,

• "(1) Subject to the provisions of this Part, any income tax assessed shall be sue and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable, not being less than 30 days after the service of the notice, or, if no date is so specified, on the thirtieth day after the service of the notice.
• (2) In subsection (1), income tax includes additional tax under Part VII.
• (3) If any of the tax which a person is liable to pay remains unpaid after the time by which the tax is due to be paid, the person is liable to pay the general interest charge on the unpaid amount for each day in the period that:
  • (c) started at the beginning of the day by which the tax was due to be paid; and
  • (d) finishes at the end of the last day on which, at the end of the day, any of the following remains unpaid:
    • (i) the tax;
    • (i) general interest charge on any of the tax.

    Note: The general interest charge is worked out under Division 1 of Part IIA of the Taxation Administration Act 1953

14. Liability for interest resulting from an amended assessment is imposed under s 170AA of the 1936 Act, which in effect provides that liability for general interest charge (GIC) arises from the due date of the tax payable under the original assessment.

15. The GIC is worked out under Division 1 of Part IIA of the Tax Administration Act 1953 (TAA), comprising ss 8AAA to 8AAH. Section 8AAE of the TAA provides,

"The general interest charge for a day is due and payable to the Commissioner at the end of that day."

16. The Commissioner issued amended assessments to Ansetat on the basis of the undisclosed sales. GIC was imposed from the day tax was payable under the original assessments and was substantial. When calculating the "distributable surplus" for the income years 1998 to 2006, the Commissioner took into account primary tax that would have been payable by Ansetat but did not take into account the GIC. This is a key issue in dispute between the parties.

17. There were two regimes for the imposition of penalties during the relevant period. For the years 1995 to 2000, taxpayers were liable for penalties under Part VII of the 1936 Act, comprising s 222A to 228. For the years 2001 to 2003, penalties are determined under Division 284 of Schedule 1 to the TAA. Both regimes apply in respect of a "tax shortfall".

18. Section 222A of the 1936 Act provides that "tax shortfall" means,

".. the amount, if any, by which the taxpayer's statement of tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year."

19. Where a tax shortfall is caused by the failure of a taxpayer to take "reasonable care", the taxpayer is liable to pay additional tax equal to 25% of the shortfall amount: s 226G. Where a tax shortfall is caused by "recklessness" the taxpayer is liable to pay a penalty of 50% of the shortfall: s 226 H. Under s 226J, the penalty will be 75% of the shortfall where there has been "intentional disregard" by the taxpayer. Section 226X provides for a further penalty of 20% on the additional tax as follows,

"If:

• (a) under a shortfall section, a taxpayer is liable to pay additional tax because of a tax shortfall or part of a tax shortfall; and
• (b) one or more of the following apples:
  • (i) the taxpayer took steps to prevent or hinder the Commissioner from becoming aware of the shortfall or part;
  • (ii) If the shortfall or part was caused otherwise than by the taxpayer in a taxation statement treating an income tax law as applying to the taxpayer in relation to a matter or scheme in a particular way - the taxpayer became aware of the shortfall or part after a taxation statement by the taxpayer that was taken into account in working out the taxpayer's statement tax for the year and failed to tell the Commissioner about it, in writing, within a reasonable time of becoming so aware;
  • (iii) If the additional tax is payable under section 226G, 226H or 226J - the taxpayer was liable to pay additional tax under any of those sections in respect of an earlier year of income;
  • (iv) If the additional tax is payable because the taxpayer, in a taxation statement, treated a law as applying in relation to a matter or scheme in a particular way so that section 226K or 226L applied - the taxpayer was liable to pay additional tax under that section in respect of an earlier year of income in respect of which the taxpayer treated that law as applying in relation to that matter or a similar matter or that scheme or a similar scheme in that way;

the taxpayer is liable to pay, by way of penalty, further additional tax equal to 20% of the amount of the additional tax."

20. From 30 June 2000, a taxpayer is liable for administrative penalties under s 284-75 of the TAA if the taxpayer, or their agent, makes a false or misleading statement and the statement results in a "shortfall amount". Relevantly, there is a shortfall amount under s 284-80(1) if,

"a tax-related liability…. worked out on the basis of the statement is less than it would be if the statement is not false or misleading"

21. Subsection 284-90(1) provides for a base penalty depending on the basis on which the tax shortfall resulted. If the shortfall, or part of it, resulted from a failure by the taxpayer to take "reasonable care", the penalty is 25% of the shortfall amount. If the shortfall resulted from "recklessness" the penalty is 50% of the shortfall amount and if the shortfall resulted from "intentional disregard" the penalty is 75% of the shortfall amount.

22. A taxpayer is liable for additional penalty under s 284-220(1) of the TAA, which is similar in effect to s 226X of the 1936 Act.

23. The Commissioner has discretion to remit penalty under both regimes: s 227(3) of the 1936 Act and s 298-20(1) of the TAA.

24. In the present case, the Commissioner imposed penalties of 75% for the 1995 income year and 90%, comprising additional penalty, in respect of the income years 1996 to 2003. The Commissioner determined there was "intentional disregard" for all years in question. The Commissioner also determined that the additional penalty provisions were triggered for 1996 to 2003 because additional tax was payable for an earlier year of income. The Commissioner imposed penalty of 25% on Mr Kocic in respect of the undeclared capital gain on the basis he did not take reasonable care.

25. The Commissioner refused to exercise discretion to remit penalties for any of the income tax years, although penalty was not imposed for 2004 to 2006 because returns were lodged for Ansetat and for Mr and Mrs Kocic taking into account the undisclosed sales.

Background

26. Mr Kocic established Ansetat in 1980. The shares were held equally between Mr Kocic and his father until his father's death in September 1998. At this time his father's shares were transferred to Mrs Kocic.

27. Ansetat operated a cafe at Darlinghurst between 1991 and 1998 known as Café Majestic. In late 1996 Mr Kocic and a partner, Dr Eugene Molodysky, established Café Brioni in Oxford Street, Paddington. Cafe Brioni was owned by Bowcoy Pty Limited and commenced trading in March 1997. On 1 July 1997, Ansetat purchased Café Brioni and operated two cafes until September 1998, when Café Majestic was sold for $60,000. Both cafes operated seven days a week and Café Majestic was open 24 hours.

28. Mr and Mrs Kocic worked in Café Brioni. Their son, Svetozar Kocic, worked part-time in Café Brioni from 1998 to 2000 and full-time from 2000. Their daughter, Svetlana, also worked at Café Brioni on a part-time basis from time to time.

29. Ansetat employed staff in addition to family members, who were paid in cash. These employees were generally overseas students or holidaymakers. Staff numbers varied. On a week day there were usually about five additional staff working through the day but on the weekends this increased to about seven or eight. Mr Kocic maintained a handwritten wages book, which was prepared from timesheets completed by the staff.

30. Mr Kocic managed both cafes, except for brief periods when he was absent, in which case the cafes were managed by Mrs Kocic. Mr and Mrs Kocic were directors of Ansetat during the relevant period but Mr Kocic managed its business on a day to day basis, instructing accountants, banking cafe takings and signing forms, including tax returns and workers compensation declarations, on its behalf. This is not in dispute.

31. The books seized by the New South Wales Crime Commission from the home of Mr and Mrs Kocic recorded sales for Ansetat which were not disclosed in the tax returns for Ansetat for each of the income years 1995 to 2003.

32. It is common ground that Mr Kocic maintained a "second set of books" for Ansetat which recorded sales made and wages paid and that these books were not provided to accountant for Ansetat, Mr Tesanovic. Mr Kocic provided bank statements to Mr Tesanovic but gave evidence he did not bank all of the takings for Ansetat.

33. Mr Tesanovic was also the accountant for Mr and Mrs Kocic and prepared and lodged tax returns for Ansetat for 1995 to 2003 and for Mr and Mrs Kocic from 1995 to 2006. After the dispute with the Commissioner arose, Mr Tesanovic prepared and lodged tax returns for Ansetat for 2004 to 2006 and for Mr and Mrs Kocic on the basis of the undisclosed sales to ensure no penalty would be imposed.

34. The Commissioner assessed the income of Ansetat, therefore the deemed dividend income for Mr and Mrs Kocic, on the basis of the undisclosed sales but did not make any deduction for wages or cash supplies alleged to have been paid from the takings. There is a dispute about whether the wages records were discussed with, or made available to, the Commissioner's representatives at the time of the audit.

Credibility of Mr Kocic

35. The Commissioner contends Mr Kocic is not a believable witness and the Tribunal should make an adverse finding about Mr Kocic's credibility. If any claim in these proceedings is based on the evidence of Mr Kocic it should fail. In support of this contention the Commissioner relies on evidence that Mr Kocic kept a second set of books, overstated his superannuation for the purposes of a loan in 2007 and understated wages for the purposes of minimizing workers compensation premium for a number of years.

36. Counsel for Mr and Mrs Kocic argues this does not advance the Commissioner's case as no issue of credit arises. Mr and Mrs Kocic rely on evidence which is corroborated by independent sources, such as timesheets completed by staff, the evidence of customers, documents, business records and the evidence of Mr Tesanovic and Mrs Kocic, whose credit was not impugned.

37. We agree that Mr Kocic is not a believable witness. He has admitted providing false information to third parties for financial advantage and, unlike Mrs Kocic, his evidence was not always full and frank. However, we also agree Mr Kocic's evidence is not critical to the key factual matters in dispute and where a contentious matter required determination, we have primarily relied on documents and the evidence of other witnesses. On the other hand, Mr Kocic's credibility is relevant to penalties and we deal with this issue in more detail when examining that question.

How should the net income of Ansetat be derived and do the books seized sufficiently record the income for Ansetat for 1995 to 2006?

38. Mr and Mrs Kocic contend the net income for Ansetat for 1995 to 2006 should be derived by deducting wages and supplies paid in cash from the undisclosed sales. The amount paid for wages was based on timesheets maintained by Mr Kocic, and in his absence Mrs Kocic and sometimes the employees themselves. According to Mr Kocic these amounts were recorded in handwritten exercise books which are referred to in the evidence as "wage summaries".

39. Mr Tesanovic reconstructed the accounts for Ansetat for the relevant period for the purposes of calculating the profit and distributable surplus.

40. Mr Tesanovic relied on the handwritten wage records to estimate wages paid in the relevant period. According to the evidence of Mr Tesanovic, no wage records were available for the years ended 30 June 1995 to 30 June 1997 and records for the years ended 30 June 1998 to 30 June 2001 and 30 June 2006 were incomplete. There were gaps for some periods for the years 1998 to 2001, so Mr Tesanovic calculated the average wages recorded by Mr Kocic for each year then extrapolated that average for 52 weeks to arrive at an annual figure for wages. He used the same average wages figures for 1995 to 1997, based on the records available for 1998 to 2001. Wages for the income years 2002 to 2005 were complete so the wages recorded in the wage summaries were used. Mr Kocic could only provide wages records for 22 weeks for 2006 so Mr Tesanovic averaged those wages and extrapolated for 52 weeks using the same methodology as for the period 1998 to 2001.

41. The Commissioner accepts Ansetat had additional employees and does not challenge the timesheets, which are said to be the source documents for a number of the wages summaries. There is evidence Ansetat employed additional staff from Mrs Kocic and customers of Ansetat, Mr John Chambers and Mr Richard Janus. There is also evidence the handwritten timesheets were completed by staff and the handwritten "wages summaries", while completed by Mr Kocic, are consistent with the notion of a "second set of books".

42. Mr Tesanovic has made an assessment of the wages paid based on these handwritten records. He has used the existing handwritten wage records and made estimates based on average wages figures extrapolated over a year. Given the limited records available, the methodology used by Mr Tesanovic to estimate wages paid for 1995 to 2001 and 2006 is reasonable. He used extract figures for 2002 to 2005. We also note he was not challenged on this evidence by the Commissioner. Based on this evidence and the evidence of Mrs Kocic, customers and the handwritten timesheets and summaries, we find that wages were paid by Ansetat in respect of the relevant income years as follows:

Year	Wages
1995	$119,600
1996	$119,600
1997	$119,600
1998	$125,109
1999	$116,751
2000	$120,404
2001	$115,361
2002	$116,111
2003	$131,804
2004	$162,945
2005	$172,631
2006	$140,956

43. Mr Kocic gave evidence he also paid cash expenses of $250 per week out of takings, making a total of approximately $13,000 per annum. Mr Tesanovic has used this amount when reconstructing the accounts for Ansetat. Unlike the claim for wages, there are no records to substantiate this claim, apart from the evidence of Mr Kocic. Mrs Kocic gives some evidence but it is general in nature. Mr and Mrs Kocic bear the onus of establishing the assessments were excessive and having regard to the available evidence, we find the claim has not been established.

44. Mr and Mrs Kocic contend that if cash payments for wages and suppliers are taken into account, the amount of $588,132 (and not $1,615,132 as calculated by the Commissioner) was the net income from undisclosed sales in the period 1998 to 2006. The profits for 1995 to 1997 was $42,136 (and not $536,607 as calculated by the Commissioner) which sum has been further reduced to take into account the Commissioner's concession in relation to 1997 income year. The assessments are therefore excessive insofar as they fail to take into account wages paid from cash.

45. The Commissioner does not concede these amounts represent net income for Ansetat for the relevant period and contends there is evidence to support a finding Ansetat has further undeclared income over and above that which is disclosed in the seized records from which cash wages were paid.

46. The evidence relied upon by the Commissioner is:

• (a) Mr Kocic's evidence that wages were clear of the takings identified in the second set of books;
• (b) the fact the sales records seized provide for the recording of expenses but few, if any, expenses are recorded;
• (c) the sales information provided to prospective purchasers of Cafe Majestic, which record annual gross sales of $741,000; and
• (d) the wealth acquired by Mr and Mrs Kocic from 1998 to 2005 assessed at $228,000 and expenses paid, or assets purchased, the source for which is "unaccounted for".

47. Mr and Mrs Kocic object to this being raised at such a late stage and contend this infringes the rule in
Browne v Dunn (1893) 6 R 67 (HL). The Commissioner says the issue was raised in his statement of issues and Mr Kocic was cross-examined on the matter. While we agree the issue was not raised in a clear and unambiguous statement before or at the commencement of the hearing, Mr and Mrs Kocic were able to deal with the argument in evidence and submissions and were ultimately not prejudiced.

48. We have considered but rejected the argument as we are not persuaded the evidence supports such a contention. Our reasons follow.

49. Counsel cross examined Mr Kocic on this issue but did not put the allegation to him directly. The Commissioner seeks to rely on answers from Mr Kocic, in respect of which he says Mr Kocic conceded wages were "over and above" undisclosed sales. We do not accept this assertion. There was no evidence from Mr Kocic that wages were clear of takings because he was not asked this question. Nor was he asked whether the seized records understated sales for Ansetat. All Mr Kocic agreed was that wages were "over and above" the amount banked for Ansetat. The following passage of transcript illustrates this point when Mr Kocic was being cross examined about handwritten entries for Ansetat for the week ending 2 December 1997,

Do you agree that in that week, somewhere between maybe seven and a half and $8500 paid into the account of Ansetat?---Whatever it was written here, yes, yes, yes.

Yes?---Yes.

And over and above that, because you weren't paying these workers by cheque but by cash only, were those cash wages, do you agree?---Yes, there were.

I will be fair to you, Mr Kocic, what I'm suggesting to you is over and above the 8 or $9000 banked in that week in the account of Ansetat?---Yes.

You paid these wages you have been telling us about?---For the workers, yes.

Yes. You couldn't have been paying the workers out of the Ansetat bank account because they weren't paid by cheque, for example?---They were paid cash.

That's right. And that week that we've profiled, can I suggest, represented the manner in which Ansetat and you conducted the operations of Café Brioni. That is, in terms of payments into the Ansetat account, frequent payments, yes?---Well, I didn't want to pay the bank fees. I wanted to be my own bank. Why should I deposit all the money, then withdraw for the workers and pay the bank the fees for every transaction, so that's why I just deposited enough money for the rent and gas and electricity and those major expenses, and the rest I kept to pay the workers in cash.

Can I suggest - sorry, Mr Kocic, is the process, whatever the process was between you, the café and Ansetat, was it the same throughout from - say the time the doctor

left until the raid at your house?---Yes, it was the same process because that was the only process I knew.

Yes?---And I believed that that's how it was.

50. There is no evidence about the amount banked and how this relates to the income used by the Commissioner to make an assessment of the profit and/or distributable surplus of Ansetat. The handwritten records used by the Commissioner to calculate income refer to "gross" or "gross takings". It is more likely than not this means what it says. Mr Kocic was not cross examined on whether this excluded wages or why he maintained separate records for wages. While it is true few expenses are recorded in the sales records, this is consistent with the evidence that wages records were maintained in separate handwritten books.

51. The Commissioner also relies on the "unexplained wealth" of Mr and Mr Kocic, expenses paid by them which apparently exceeded their income, the deposit paid for the purchase of a unit by Svetozar Kocic and the sales information provided about Café Majestic that gross income was $741,000. The Commissioner says this evidence supports his contention that the income of Ansetat must have been higher than the amount recorded in the seized records. We do not accept this submission having regard to the following considerations.

52. Mr Kocic denies the sales information brochure was his document and says the author was a business broker and former customer, Mr Keith Abrams. He did not agree with the sales information recorded and says this was an overstatement but conceded gross takings were at least $10,000 per week for Café Majestic in 1998. This is supported by a letter dated 25 May 1998 from the lawyers who were instructed in relation to the sale of Café Majestic and is consistent with the total of disclosed and undisclosed sales for Ansetat for most of the relevant years.

53. Mr and Mrs Kocic submit there were independent sources of funds that explain their wealth and expenditure which is not attributable to additional income from Ansetat as alleged by the Commissioner.

54. There was rental from properties owned by them, together with money provided by Mr Kocic's parents in and prior to 1997. According to an agreement dated May 1997, Mr Kocic's parents, Mr Tihomir Kocic and Mrs Antonja Kocic, advanced $350,000 to Mr and Mrs Kocic, secured by mortgage. There is no evidence about whether this amount was repaid. There is also evidence Mr Svetozar Kocic was the beneficiary of Mrs Antonja Kocic's estate and was entitled to $129, 612 when he turned 21, which was in 2003. Mrs Antonja Kocic died on 9 March 2000 and Mr Kocic was the executor of his mother's estate. There is evidence the proceeds of the estate were paid into the account of Ansetat and credited against the "S Kocic loan account". There is no evidence when or whether this was paid to Mr Svetozar Kocic but it appears Ansetat paid $53,000 towards the purchase of the unit purchased by Svetozar Kocic. It is not disputed the S Kocic loan account was used by Mr and Mrs Kocic for personal expenses and deposits, although the validity of some of the credits has been challenged by the Commission.

55. Mr and Mrs Kocic also contend the under-declared net income of Ansetat should be taken into account when considering the source of funds available to them. We agree.

56. On balance, we accept the seized documents are more likely than not to accurately record the "undeclared sales" of Ansetat and there is no cogent evidence to suggest otherwise. The evidence of the under-declared income of Ansetat and money from Mr Kocic's parents provide some explanation for the source of funds used for expenditure and to accumulated assets. It is highly unlikely Mr Kocic under-recorded "gross" sales in a second set of books, particularly given he also maintained separate records for wages.

57. It is not disputed the assessments for Mr and Mrs Kocic for 1995 to 2006 are based on the undisclosed sales recorded in the books seized by the NSW Crime Commission. It is also not disputed the Commissioner made no deductions for cash wages and supplies in calculating net income. We find the assessments for 1995 to 2006 are excessive insofar as the Commissioner has failed to take into account deductions for wages but make no finding as to what the net income should be.

What were the profits for Ansetat for 1995 to 1997 out of which a dividend could be paid?

58. The Commissioner concedes he incorrectly included in the undeclared sales of Ansetat sales of Bowcoy Pty Limited of $103,835 in respect of the operation of Café Majestic for the year ended 30 June 1997. Given this concession, the only issue in dispute is whether profits for Ansetat for 1995 to 1997 should be adjusted to take into account the cash payments alleged by Mr and Mrs Kocic.

59. For the reasons set out above, we find the profits for 1995 to 1997 should be reduced to take into account wages paid by Ansetat in cash and the assessments for Mr and Mrs Kocic are excessive insofar as the deemed dividends calculated by the Commissioner exceed the adjusted profit for these income years.

Should the undisclosed sales of Ansetat be added back?

60. Mr and Mrs Kocic contend the Commissioner has incorrectly "added back" the undisclosed cash sales for the purposes of calculating the distributable surplus of Ansetat for 1998 to 2006. There is said to be no basis for this in view of the approach of the Tribunal in
Waffles Pty Ltd and anor and Commissioner of Taxation [2010] AATA 78. If the undisclosed sales are not added back, the entirety of the assessments are excessive and there would be no "distributable surplus" for any of the relevant years. The Commissioner rejects the assertion that Waffles is authority for this proposition. We agree.

61. Under s 109Y(2) the net assets component of the formula will be derived from the company's assets "according to the company's accounting records". However, the general proposition is displaced "if the Commissioner considers the company's accounting records significantly undervalue or overvalue its assets". As observed by the Tribunal in Waffles at [70],

"…In our view, the proviso may be triggered in any case where the Commissioner considers that any amount representing 'assets' or any amount representing 'provisions', in the company's accounting records is overstated. It is not restricted to cases of inaccurate or unsustainable valuations of assets or provisions. For example, a proviso would be triggered if a company included in its 'assets' an amount that is actually a liability - even if the amount of the liability is properly valued. It would also be triggered if a company omitted, from the total 'assets' amount in its accounting records, certain categories of assets - even if they were properly valued. The question is simply this: does the Commissioner (or, on review, the Tribunal) consider that the value of the assets, as shown in the company's accounting records, is significantly understated or overstated? If the answer is 'yes', then the Commissioner or the Tribunal standing in his place, may substitute a value that is considered appropriate."

62. In Waffles, the Commissioner "added back" payments made by the company to a related company even though the payments were made and the assets of the company "were necessarily less than they were before the payments were made". The loss of value was properly reflected in the company's accounting records and the Tribunal found that the proviso in the definition for net assets was therefore not triggered.

63. In the present case, the undisclosed sales, after taking into account deductions for wages, were assets of Ansetat in the relevant period but were improperly excluded from the company's accounting records. The net assets of Ansetat were undervalued by failing to take into account those net sales and the proviso in s 109Y(2) was triggered. It was therefore appropriate for the Commissioner to add back the undisclosed sales, although he should have deducted wages, when determining the value for net assets.

64. In support of the argument, counsel for Mr and Mrs Kocic referred to the explanatory memorandum and amending legislation passed in 2010 to close the loophole created by the facts of Waffles. Given the facts of this case can be distinguished from Waffles, we are of the view this material is irrelevant to the determination of the issue and does not assist either party.

65. We note that the calculations provided by Mr Tesanovic for the "distributable surplus" of Ansetat for 1998 to 2006 have adopted the Commissioner's approach in any event and have added back undisclosed sales. The difference is that Mr Tesanovic has also deducted cash wages and supplies to arrive at a figure for net income.

Is interest on unpaid tax a "present legal obligation"?

66. This question has already been determined by the Tribunal in Waffles and has now been confirmed on appeal by the Full Federal Court in
Commissioner of Taxation v H (2010) 188 FCR 440; [2010] FCAFC 128. We note that an application for special leave to appeal to the High Court has now been withdrawn.

67. Given this authority, we proceed on the basis that Ansetat's liability for interest on unpaid tax is a "present legal obligation" of Ansetat for each of the income years 1998 to 2006 and must be taken into account in determining the distributable surplus for Ansetat. The amended assessments for Mr and Mrs Kocic are therefore excessive to the extent they exceed the distributable surplus in this regard.

Is the loan from Mr Kocic to Ansetat recorded in the accounts a "present legal obligation"?

68. The Commissioner excluded a loan owed by Ansetat to "S Kocic" as a present legal obligation for the purposes of calculating the distributable surplus of Ansetat from 1998 to 2006 on the basis the loan was not genuine and there was no evidence the loan was provided by Mr Kocic from his own resources as opposed to the resources of Ansetat, presumably from additional undisclosed sales.

69. The loan was recorded in the accounts of Ansetat for 1998 to 2004 in varying amounts and is recorded in the balance sheet for the year ended 30 June 1998 as $167,118.60, having increased from $91,570 in the previous year. Mr and Mrs Kocic rely on the evidence of Mr Tesanovic and documents, which are said to form part of the business records of Ansetat, being documents headed "Ansetat Pty Ltd 5 Year Comparative Listing for the year ended 30 June 1997" and "Ansetat Pty Ltd 5 Year Comparative Listing for the year ended 30 June 2005", the financial statements for Ansetat for the years ended 30 June 1998 to 30 June 2004, the financial report for Ansetat for the year ended 30 June 2002 and the Annual General Ledger for Ansetat, including the loan account ledgers for S Kocic, for the period 30 June 1998 to 30 June 2004 and for 30 June 2006. The loan account ledger for the year ended 30 June 2005 is missing but the information about the loan is recorded in the 2006 ledger and the 5 Year Comparative Listing document.

70. Mr Tesanovic gave evidence he prepared the accounts for Ansetat by using source documents such as bank statements, cheque butts, receipts and deposit books. Mr and Mrs Kocic contend the ledgers, balance sheets and financial statements are business records and, by reason of s 1305 of the Corporations Act 2000 (Cth), are admissible and prima facie evidence of the balance of the loan account. The fact the source documents from which the ledgers and balance sheets were created are no longer available does not undermine their admissibility and Mr and Mrs Kocic contend the Commissioner has adduced no evidence to rebut the presumption of the loan. In these circumstances, they say the loan should be included as a present legal obligation in reduction of the distributable surplus of Ansetat for 1998 to 2006.

71. The Commissioner contends the loan is predicated on the general ledgers accurately representing the affairs of Ansetat but there is evidence from Mr Tesanovic the ledger is not accurate. The Commissioner also contends it must be established the loan recorded from "S Kocic" was from Mr Kocic's own resources, rather than the resources of Ansetat, and this cannot be established. Furthermore, there was a concession made by Mr Tesanovic under cross examination that it is possible deposits into the loan account were from Ansetat. The Commissioner relies on these matters to rebut the presumption.

72. Mr Tesanovic gave evidence he prepared the general and loan account ledgers from source documents such as bank statements, cheque butts, receipts and correspondence. Mr and Mrs Kocic often used the Ansetat account for personal expenses and deposits. Mr Tesanovic created a loan account for the Kocics referred to as "S Kocic" representing credits and debits from the account. He explained the process for dealing with the ledger as follows,

Can you explain, first of all in general terms, the nature of the debits you entered and the nature of the credits you entered?---The debits are transactions from the company that do not relate to the business of Ansetat, things like counsel rates for the home, water bills, car expenses, any private expenditure that is not Ansetat's expense and, accordingly, deposits to that account are personal moneys that have been deposited into Ansetat and capital raised for working capital within the business and most often when he refinanced, moneys were deposited to that account. On a few occasions that there was money from an inheritance from his late mother that was deposited to that account as well and the way to exclude that from Ansetat's operations and calculations, the profit was to put that through the loan account.

And could you describe the process by which you confirmed the accuracy of the entries?---It would be from source documents, receipts, statements from real estate agents for the rent, letters from solicitors when loans were dispersed, and so forth.

73. Mr Tesanovic gave evidence about entries to the loan account as recorded in the ledger. For instance, when questioned about the source of the loan for the year ended 30 June 1998, Mr Tesanovic gave evidence the funds used for the source of the credits to the loan account included $78,000 from the proceeds of sale of a property at Petersham, a payout of approximately $23,000 from GIO in respect of a commercial property owned by Mr and Mrs Kocic, rental income from investment properties owned by Mr and Mrs Kocic of approximately $15,000 and the refinancing and payout by Mr Kocic of a loan owed by Ansetat in the sum of $81,031. Mr Tesanovic identified an amount of $18,000 that he now believes was improperly credited by him to the loan account for that year and which he said would reduce the loan by the same amount. He conceded the accounts for 1998 would have to be amended to reflect this.

74. Mr Tesanovic gave evidence that records of Ansetat were taken from his office as part of the audit and the general ledger for 30 June 1999 was missing because the copy he had received was too faint to be legible. However, Mr Tesanovic produced the general ledger for 30 June 2000 to 30 June 2004 and for 30 June 2006 and gave evidence about entries made. The ledgers showed amounts being credited and debited to the "S Kocic loan account". In some cases the entries identified the source of the credit or recipient of the debit but in some cases no particulars were provided. Where a credit was substantial and he was questioned about the source, Mr Tesanovic was able to give evidence on most occasions about his recollection of the source of the funds to support the entry. Mr Tesanovic also identified a number of incorrect credits, as he had done for 1998, which he told the Tribunal should be adjusted for the years ended 30 June 2000, 2002 and 2003.

75. Mr Tesanovic produced documents which were tendered, without objection, representing his calculation of the distributable surplus for Ansetat for 30 June 1998 to 30 June 2006. In producing these documents, Mr Tesanovic used the original balance sheets for Ansetat as a basis but:

• • Included undisclosed sales as recorded in the seized records but deducted cash payments for wages and suppliers;
• • Included the loans recorded in the accounts for "S Kocic" as a present legal obligation but made adjustments for those items that had been identified by him as being credited to the loan account in error; and
• • Included liability for tax and interest on unpaid tax as a present legal obligation.

76. Mr Tesanovic was cross examined on the general ledger and conceded there were limitations as the ledger did not record all cash taken out of Ansetat by Mr and Mrs Kocic. He was also unable to recall the likely source for the loan balance of $91,750 for the year ended 30 June 1997 and said he would have to examine the general ledger to be able to form a view. Mr Tesanovic was asked whether the source of the loan may have been from the cash takings of Ansetat. He disagreed with this proposition and responded, when asked why he disagreed, as follows,

Because over the years - subsequent years, he's - I don't recall him making large cash deposits of personal monies to the account other than when there's a property transaction or a loan.

77. Mr Tesanovic confirmed this in re-examination but earlier conceded it was "possible" Ansetat funds may have been the source of credits to the loan account.

78. There is no challenge to the credibility of the evidence of Mr Tesanovic. Mr Tesanovic was unaware of the second set of books and was not a part of the deception. He prepared the financial statements for Ansetat that recorded loans from "S Kocic" on the basis of source documents and was able to explain most questions in relation to entries in the loan account ledgers. These were contemporaneous documents and were not prepared for the purposes of the proceedings. He could not explain the source for the amount in the loan account for the year ended 30 June 1997 but said he would need access to the general ledger, which he said was no longer available. Given the time that has passed, this is understandable. Mr Tesanovic reasonably makes the concession that it is possible Ansetat funds were used for the loan but also discounts this on the basis that he does not recall such deposits being made to the credit of the account. On reviewing the loan account ledger for the purpose of these proceedings, Mr Tesanovic identified errors to the loan account, in respect of which he has now made adjustments.

79. On balance, we formed the view the presumption of the records was not rebutted and the assessments for 1998 to 2006 were excessive to the extent they did not take into account this loan, which should be adjusted for the errors identified by Mr Tesanovic, when calculating the distributable surplus.

Can the commissioner claim new grounds for the assessments?

80. The Commissioner contends that if money "paid" to Mr and Mrs Kocic is not assessable as deemed income because the monies do not form part of the distributable surplus, the monies should be treated as ordinary dividends under s 44 of the 1936 Act or as ordinary income under section 25 (1) of the 1936 Act or s 6-1 of the 1997 Act and therefore assessable in the same way.

81. Mr and Mrs Kocic accept the Commissioner can support an assessment on grounds not taken into account at the time of the original assessment but say he can only do so after giving proper notice and particulars to the taxpayer:
Federal Commissioner of Taxation v Australian and New Zealand Savings Bank Ltd 94 ATC 4844; (1994) 181 CLR 466 and
Pacific Exchange Corporation Pty Ltd v Federal Commissioner of Taxation (2009) 180 FCR 300; [2009] FCA 115. This was not done and it is argued Mr and Mrs Kocic are prejudiced by the late notice and would be denied procedural fairness if the new grounds are allowed. They say their case would have been run differently.

82. Mr and Mrs Kocic also contend that allowing assessments on the basis of ordinary income would amount to double taxation as Ansetat has already been assessed on the undisclosed sales and the Commissioner has "collected his proportion of the tax debt from the liquidator's dividend". While the Commissioner can issue alternative assessments to different taxpayers on the same account he cannot recover from both. The debt is therefore said to be "discharged" and there is no utility in allowing the Commissioner to argue this issue. Mr and Mrs Kocic rely on
Commissioner of Taxation v Grimaldi (No 9) (2009) 181 FCR 275; [2009] FCA 1404 to support this proposition.

83. We will deal with the issue of double recovery and discharge of the debt first as if Mr and Mrs Kocic succeed on this point; the question of procedural fairness does not arise, at least on the question of whether the Commissioner can base his assessment on "ordinary income".

84. In Grimaldi, the issue was whether the Commissioner was entitled to enter judgment against a taxpayer when he already had judgment against another taxpayer in respect of the same income. There was no res judicata or issue estoppels as there was no mutuality between the parties and the causes of action relied on arose out different assessments. According to Graham J, the Commissioner could issue and obtain judgment on alternative assessments but double recovery would be "oppressive" (at 7). Graham J, referring to the decision of Davies J in
Trustee of the Balmain Trust v FC of T 99 ATC 5334, observed (at 28),

"Plainly, alternative or concurrent assessments are permissible and judgments founded upon such assessments are also permissible. As Davies J observed one might expect the courts to intervene to ensure the alternative assessments and judgments based thereon would not lead to double recovery by the Commissioner."

85. In our view, Grimaldi does not support the proposition that a concurrent tax liability is "discharged" by the payment of the tax debt by another taxpayer. It is confined to the issue of recovery. In any event, there is no evidence in this case as to whether the liquidator has recovered the tax debt, or any part of the debt, from Ansetat. The Commissioner says not, but there is no evidence either way. This being the case, the issue of procedural fairness remains to be considered.

86. Mr and Mrs Kocic contend they would be prejudiced if the Commissioner was now allowed to argue the assessments are not excessive because they are justified by other provisions of the taxation legislation.

87. Section 44(1) of the 1936 Act provides that dividends paid to a shareholder out of profits of the company are assessable income. Mr and Mrs Kocic say there is no evidence of the profits of Ansetat, expert evidence would be required on this issue and there is no evidence of the franking credits that would be available to them.

88. The Commissioner says indicia of ordinary income under s 25(1) of the 1936 Act or section 6-1 of the 1997 Act includes the "regular or periodic receipt" of money. The basis for the new grounds is set out in his final submissions which state "there appears to be no contest by Mr and Mrs Kocic that Ansetat monies, which were not declared by the company, were paid equally to them in their capacities as directors and shareholders".

89. The only concessions made by Mr and Mrs Kocic were the purposes of confining the issues in dispute and defending the claim for deemed dividends under Divisions 7 and 7A of the 1936 Act. Any loose language in submissions should not be taken as a formal admission of receipt of funds from Ansetat. Mr and Mrs Kocic do not concede receipt for the purposes of ordinary dividend or ordinary income as this was not the case they were required to meet.

90. This illustrates the difficulties created by the Commissioner raising new grounds for the assessments for the first time in final submissions.

91. The Commissioner accepts there should be procedural fairness but says there is a distinction between raising new grounds based on a legal point, as opposed to grounds that require some analysis or agreement on the facts. He also says Mr and Mrs Kocic must identify the prejudice.

92. This is not a case were the Commissioner has raised a new legal argument or new grounds for assessment based on undisputed facts. There are factual matters that need to be determined to establish ordinary dividends or ordinary income. These facts are not conceded. We also accept Mr and Mrs Kocic may have run their case differently if they had notice of the new grounds prior to, or even at the outset of, the hearing. The Commissioner's new grounds must therefore be rejected for two reasons. First, the grounds should have been raised and particularised before the hearing to give Mr and Mrs Kocic the opportunity to meet the case. As a matter of procedural fairness the new grounds should not be allowed. Secondly, the grounds have not been established.

Who was paid or received the benefit of the deemed dividends?

93. Mr and Mrs Kocic contend the Tribunal should find that any payments for the purposes of ss 108(1) and 109C(1) were made to Mr Kocic because there is no evidence of any agreement between Mr and Mrs Kocic to split the cash equally, there is no evidence Mrs Kocic took cash and there is no evidence to suggest Mrs Kocic knew sales were being made but not being declared or banked in the Ansetat bank accounts.

94. The Commissioner complains that this issue was not raised until final submissions but nonetheless opposes the claim on the basis there is no evidence to support such a finding. There is no evidence as to where dividends were paid, whether there were separate accounts or whether it is alleged Mr Kocic received the cash in his own pocket. The evidence before the Tribunal suggests Mr and Mrs Kocic managed their affairs "collectively" during the relevant period.

95. We accept this submission. It is not disputed Mrs Kocic was unaware sales of Ansetat were not disclosed to Mr Tesanovic or the Commissioner or that Mr Kocic controlled the banking and business affairs of Ansetat. However, the fact Mrs Kocic did not know about the undisclosed sales and where they were paid is irrelevant if the funds were in fact paid into joint accounts or were paid towards joint assets and expenditure. The evidence is that Mr and Mrs Kocic had joint loans with the National Australia Bank and St George, shared expenses equally and owned assets jointly. They owned the shares in Ansetat equally. There is no evidence of any separate accounting and in the absence of evidence to the contrary, this claim must fail.

Penalties

96. The Commissioner imposed administrative penalties on Mr and Mrs Kocic for "intentional disregard". It is submitted Mr Kocic did not have full appreciation of the seriousness of his actions because he was bipolar and his penalty should be reduced, "at the very least", to recklessness. Section 29 of the Disability Discrimination Act 1992 (Cth) provides that it is unlawful to discriminate against another on the ground of the other person's disability and to impose an administrative penalty would be discriminatory. In the alternative, it is submitted that the whole of the penalty should be remitted. Mrs Kocic was not involved in the management of the business of Ansetat, she did not sign the company tax returns and was unaware sales were not disclosed to Mr Tesanovic or to the Commissioner. The penalties should also be remitted in full, or at the least, reduced to the level imposed for failure to take reasonable care.

97. The Commissioner submits that Mr Kocic's illness does not explain the intentional and sustained nature of his conduct in keeping a second set of books and failing to disclose those books to his accountant or the Commissioner. This was a "plan" and the Commissioner says evidence of Dr Ouzas, Mr Kocic's treating psychiatrist, does not support the contention that the deliberate concealment was an act affected by the disorder. There is evidence of repeated deception in another context, such as completing inaccurate workers compensation wages returns for a number of years. The Commissioner accepts that Mrs Kocic's conduct was not intentional, but says she was reckless because she turned a "blind eye".

98. Dr Ouzas gave evidence that he has treated Mr Kocic since 1 August 2005. Mr Kocic has bipolar disorder, which is a condition characterised by periods of recklessness and impaired judgment, particularly if not appropriately medicated. This condition was first diagnosed in 2000, but it is likely Mr Kocic has been suffering from the disorder since early adult life. Mr Kocic did not regularly take medication for this condition until receiving treatment from Dr Ouzas, which is said to be from about 2006. According to Dr Ouzas,

"Persons who suffer from Bipolar Disorder are likely to act irresponsibly without appreciating the full consequences of their actions."

99. There is evidence Mr Kocic signed workers compensation wages returns for several years declaring that Ansetat only employed 4 staff when he knew at least 8 staff were employed for peak periods. There was financial advantage in under-declaring wages for the purposes of workers compensation premiums. Dr Ouzas agreed it was possible Mr Kocic under-declared wages because of financial motivation rather than as a result of his bipolar disorder. Dr Ouzas also agreed that people with bipolar disorder are capable of telling lies and Mr Kocic may have under-declared his income and the income of Ansetat for financial gain. There was evidence Mr Kocic provided false information to Approved Finance Solutions Pty Ltd, mortgage brokers, on 15 May 2007 about the value of his superannuation to obtain a loan of $500,000. This was after Mr Kocic was on mood stabilizing medication.

100. Dr Ouzas gives evidence about recklessness and impaired judgment, but does not support the proposition that people with bipolar disorder have no capacity or diminished responsibility to form intent or to deliberately undertake dishonest or misleading conduct. He concedes it is possible. This is reinforced by the evidence of Mr Kocic when he was cross-examined about he is personal tax return for the year ended 30 June 2007 as follows:

You see the income you declared, it's about the middle of the page there, for Ansetat, that's you, in that year was $26,000?---Yes.

Not the $31,000 we just calculated from your own books; do you agree?---Yes, of course. Yes.

And can I suggest to you that Mrs Kocic also, in that return, asserted that she'd received $26,000 by way of income?---Yes.

Not the $31,000 I have just mentioned to you?---Yes.

You see, it's the case that, even just on the figures in your own books for the income you're paying, you are under declaring that income. That's correct, isn't it?---Yes. But, who would be a fool to work in that many hours and have a - and not make some money in a seven day operation or 24 hours and have a responsibility?

Sorry, are you saying you deliberately under declared your income for that year?---No, I didn't deliberately, Mr Sheller. I'm just trying to tell you that, I'm sorry, that's what it was done.

What does that mean?---What does that mean?

Yes. What do you mean, that's what was done?---The 26,000 declaration of the income?

Yes?---Well, I just thought it was appropriate for me to have some incentive to be there.

101. Later Mr Kocic told the Tribunal,

What you did tell him for that year was that you were earning $500 a week from the business?---Yes.

Even though you knew that you were recording in the business's books $640 to yourself. That's right, isn't it?---Yes.

And your explanation for that is something to do with some incentive for working hard. Is that right?---Not some incentive. Well, with a seven day business, 24 hour business, and having the responsibility, I thought I needed as a - need a bit of extra.

102. Mr Tesanovic gave evidence that he explained to Mr Kocic the information required to prepare accounts and tax returns for Ansetat and Mr and Mrs Kocic and it was his impression Mr Kocic knew what was involved.

103. "Intentional disregard" involves deliberate conduct and an appreciation the conduct would "flout" the tax legislation;
Price Street Professional Centre Pty Ltd v Commissioner of Taxation 2007 ATC 4320; (2007) 66 ATR 1. Mr Kocic deliberately kept a second set of books for at least 12 years and did not disclose these to the accountant for Ansetat, the Commissioner or apparently to his wife. He has been in business since the 1980s and had advice from his accountant about his tax affairs. There was financial advantage in failing to disclose the sales of Ansetat and Mr Kocic has a history of providing false statements to workers compensation insurers and financiers for financial gain. There is evidence he has engaged in similar conduct, while on medication. His psychiatrist did not treat him during the relevant years but concedes Mr Kocic's conduct may be deliberate and financially motivated. There is no evidence that people with bipolar disorder, even without the benefit medication, lack capacity to act with intentional disregard. Mr Kocic's illness does not explain or excuse the conduct and the imposition of a penalty is therefore not discriminatory.

104. We reject the contention that Mr Kocic's penalty should be reduced and find the penalty was properly imposed. We also find that the penalty for undisclosed capital gain for 2003 was properly imposed as Mr Kocic should have realised capital gain was disclosable and failed to take reasonable care in lodging his return for this year.

105. The question in relation to Mrs Kocic is more complicated. It is common ground Mrs Kocic did not know of the under-declaration of sales, had little involvement in the management of Ansetat and relied on Mr Kocic for the preparation of the company returns and personal returns. The question is whether she was reckless or merely careless in these circumstances.

106. In
Hart v FCT (2003) 131 FRC 2003., the Full Federal Court stated,

"Recklessness is a concept of well-known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by reasonable person. In some context a subjective test is applied, in others the test is objective."

107. In this case, Mrs Kocic did not appreciate there was any risk of non-compliance. She did not disregard it, nor was she indifferent. She relied on her husband, who managed the business. There was nothing to alert her to the under-declaration. She gave evidence, which we accept, that she was not aware of the second set of books, the family did not spend money extravagantly and she was not on notice of any anomaly.

108. Mrs Kocic was nonetheless careless in relation to her returns because she says she signed them without making further enquiries or properly reading them and relied on the accountant and her husband for their accuracy. Her statements about income for the years 1997 to 2003 were false, although not intentionally so, but she made no enquiries to verify the amounts declared, nor did she question Mr Kocic about the Ansetat returns and whether they were receiving distributions greater than the amount disclosed in her personal returns. If she had made such enquiries, it is possible the truth would have been disclosed.

109. A further issue arises at to whether these penalties should be remitted. The Commissioner has discretion to remit penalties and has issued guidance to decision makers as to the relevant matters to consider when exercising this discretion. While guidelines are not binding on the Tribunal, if they are consistent with the provisions of the relevant legislation, they should be considered by this Tribunal. The Commissioner has issued Practice Statement Law Administration (PSLA) 2006/2, which applies to penalty imposed from 30 June 2001 under the TAA, and Tax Ruling TR 94/7, which applies to the penalty regime under the 1936 Act. The guidelines are similar in that both require the decision maker to consider the circumstances of the case, consider whether the result would be unjust and reserve the discretion for exceptional cases.

110. TR 94/7 provides,

"The discretion to remit penalty otherwise attracted under a shortfall section should be exercised in only those exceptional cases where, having regard to all of the circumstances, the application of a particular shortfall section and/or the rate of penalty prescribed under that section would provide a clearly unreasonable or unjust result. However, the guidelines provided by this Ruling do not fetter authorised officers when exercising the discretion to remit. Each case should be decided on the basis of its own facts and circumstances."

111. According to PSLA 2006/2,

"A major objective of the penalty regime is to promote consistent treatment in respect of the rates of penalty imposed. The objective would be compromised if the penalties imposed at the specific rates were remitted without just cause, arbitrarily or as a matter of course."

112. PSLA 2006/2 suggests penalty should be remitted where there would be "unintended or unjust results" but it notes such cases would be "exceptional". Matters that should be considered include:

• • The particular circumstances of the taxpayer
• • The history of compliance
• • Whether the mistake was honest and unintended
• • Where there is a voluntary disclosure

113. There is no evidence to support remission of penalty for Mr Kocic under either penalty regime. In the case of the deemed dividend assessments, his conduct was intentional. He failed to take reasonable care on the capital gain assessment and there is no suggestion his failures to disclose were inadvertent or based on an honest and unintended mistake. Mr Kocic does not have a good compliance history and there was no voluntary disclosure. The extent of the under-declaration was substantial and sustained over a period of 12 years. There is no evidence the penalty will cause unintended or unjust results or that there are exceptional circumstances that warrant remission. We decline to remit penalty for Mr Kocic.

114. On the other hand, there is a case for remitting part of the penalty for Mrs Kocic. Mrs Kocic failed to take reasonable care and we have found a penalty of 25% was properly imposed. The failure to disclose deemed dividends from Ansetat was not an honest and unintended mistake. It was caused by the failure of Mrs Kocic to have sufficient regard to properly completing her tax returns or make the appropriate enquires in relation to the affairs of Ansetat. As a director of Ansetat, Mr Kocic had a duty to understand the accounts and ensure they accurately reflected the financial affairs of the company. However, her failure does not warrant additional penalty of 20% on the existing penalty in circumstances where Mr Kocic did not disclose the true financial position to her or the existence of the second set of books. The evidence is that Mrs Kocic did not participate in, nor was she aware of, the sham. In our view, it would be unjust to penalise her for her husband's actions over and above the penalty for the failure to take reasonable care. These are exceptional circumstances and we therefore remit the additional penalty imposed by the Commissioner.

Conclusions

115. The income assessments for Mr and Mrs Kocic for the years ended 30 June 1995 to 30 June 2006 are excessive and the related objection decisions are therefore set aside. We remit these matters for reconsideration by the Commissioner so that amended or further assessments can be made in accordance with these reasons.

116. The objection decision in relation to administrative penalties for Mr Kocic in respect of the income assessments is set aside but only as to quantum, having regard to the revised shortfall amount to be assessed by the Commissioner.

117. The objection decision in relation to the administrative penalty for Mr Kocic in respect of the undeclared capital gains for 30 June 2003 is affirmed.

118. The objection decision in relation to administrative penalties for Mrs Kocic is set aside and is reduced to 25% but is also set aside as to quantum, having regard to the revised shortfall amount to be assessed by the Commissioner.