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BENNETT & ORS v FC of T

Members:
Tamberlin DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2015] AATA 455

Decision date: 29 June 2015

B Tamberlin QC (Deputy President)

1. The hearing of these matters was conducted in private under s 14ZZE of the Taxation Administration Act 1953 (the Administration Act) at the request of two of the Applicants. I am obliged by s 43 of the Administrative Appeals Tribunal Act 1975 (AAT Act), as modified by s 14ZZJ of the Administration Act, to disguise the taxpayers' identities. I have therefore allocated pseudonyms for each of the Applicants.

2. These matters arise from disallowed objections to assessments/amended assessments issued by the Respondent in relation to Adam Bennett, his mother Molly Bennett and the Estate of the Late Edward Bennett, her husband and father of Adam Bennett.

3. In respect of Adam Bennett, the Commissioner, in August 2011, issued notices of amended assessments for the years ended 30 June 2004 to 30 June 2008 and notices of assessment of shortfall penalty for the years ended 30 June 2004 to 30 June 2008.

4. In respect of Molly Bennett, the Commissioner issued notices of amended assessments for the years ended 30 June 2002 to 30 June 2008 and a notice of assessment for the year ended 30 June 2009, and notices of assessment of shortfall penalty for the years ending 30 June 2002 to 30 June 2009.

5. In the case of the estate of the late Edward Bennett, the Commissioner published a notice of determination of his outstanding tax-related liabilities for the years ended 30 June 2002 to 30 June 2009. In determining the outstanding tax-related liabilities of Mr Edward Bennett the Commissioner amended the assessments of Mr Edward Bennett for the years ended 30 June 2002 to 30 June 2009.

6. Objections were made to the above assessments by or on behalf of the three Applicants.

7. In the case of the Estate matter, the Commissioner considered the objection in relation to the determination concerning the 2002-2008 years and disallowed it in full. In respect to the year ending 30 June 2009 the objection was allowed in part.

8. In the case of the other two Applicants the Commissioner disallowed their objections in respect to all tax years in full.

HEARING

9. The review of the objection decisions presently before me in these three matters involves consideration of a range of complex questions of law and fact. The Applicants have previously sought to have a number of issues referred by the Tribunal to the Full Federal Court for determination on questions of law. Having regard to the state of the evidence at that time and to the premature nature of the application when made I refused to make an order referring the matter to the Full Federal Court and the matter was set down for hearing.

10. After hearing detailed submissions over a period of several days, it was considered useful to make a determination on the basis of the evidence adduced on a number of issues which would determine whether it would be necessary to resume the hearing. The determination to entertain these "issues" was made on the basis that all the evidence necessary to enable such a determination had been adduced. Accordingly, I asked the parties to formulate a statement of issues on questions of law having regard to the provisions of s 25(4A) and 33(1) of the AAT Act.

ISSUES

11. There were a number of issues raised by the parties and they are as follows:

  • 1. Whether this Tribunal, on review of an objection decision in circumstances where the Commissioner, pursuant to s 170 of the Income Tax Assessment Act 1936 (the Act), has amended assessments having found that there was avoidance of tax and formed the opinion it was "due to fraud or evasion" is bound to form a positive opinion for itself that there was an avoidance of tax due to fraud or evasion or whether there is an onus on the Applicants to prove the absence of

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    fraud or evasion. This question is the principal issue.
  • 2. Whether the amended assessments issued were made under s 166 of the Act or whether they are amendments by way of a default determination under s 167 under which the Commissioner considers income tax ought to be levied.
  • 3. In relation to the Estate matter:
    • (i) whether an outstanding tax-related liability can include an amount of taxable income which had not been assessed prior to death for the purpose of a determination pursuant to s 260-145 of Schedule 1 of the Taxation Administration Act 1953 (the Administration Act).
    • (ii) whether the power to assess "post-mortem" by way of a determination under s 260-145 is confined to years for which income tax had not in fact been assessed, or does it include a power to amend existing assessments subject to the time limits set out in s 170 of the Act as if the deceased were still alive.
  • 4. Whether the Applicants have discharged or are able to discharge their onus, if any, of proving that the assessments are "excessive" and what is the correct amount of the assessment.
  • 5. Whether the Applicants have discharged or are able to discharge the onus of proving that the decisions in respect to penalties should not have been made or should have been made differently.

ISSUE 1 - ONUS OF PROOF - FRAUD OR EVASION

12. Under s 170 of the Act the Commissioner may amend an assessment at any time if he or she is of the opinion that there has been "fraud or evasion".

13. In this case the Commissioner has exercised this power in respect of a number of assessments under review.

14. Under s 43(1) of the AAT Act, for the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions conferred by any relevant enactment on the person who made the decision and under s 43(6) the decision of the Tribunal, where there has been a variation or substitution of the decision under the review, is deemed to be that of the decision-maker whose decision is under review.

15. The Applicants rely on these provisions to support the submission that because the Tribunal stands in the shoes of the respondent, the Respondent has the burden of satisfying this Tribunal that in fact "there has been fraud or evasion".

16. It is well settled that under the AAT Act the Tribunal is placed in the same position as the administrative decision-maker at first instance under s 43(6), and generally excludes the introduction of the concept of onus of proof in making decisions on review. No onus of proof in the legal sense generally arises under the AAT Act: see
Catena v Australian Securities and Investments Commission (2011) 276 ALR 25, a decision of the Full Federal Court.

17. However, s 25(6) of the AAT Act provides that where an enactment provides for an application to the Tribunal, "the enactment may also include provisions adding to, excluding or modifying the operation" of, relevantly, s 33 and s 43(1) in relation to such applications, and those sections have effect subject to any provisions so included. In this case the provision in question is s 14ZZK of the Administration Act.

18. Section 14ZZK of the Administration Act relates to grounds of objections and burden of proof. It provides that on an application in the Tribunal for review of a reviewable objection decision, the applicant is, unless the Tribunal otherwise orders, limited to the grounds stated in the taxation objection to which the decision relates and has the burden of proving that the assessment is excessive.

19. Under s 177(1) of the Act the production of a notice of assessment shall be considered evidence of the due making and correctness of the assessment.

20. The Applicants have referred to a number of authorities to support the proposition that where there is an onus to prove fraud or evasion, then in order to prove such fraud or evasion it is necessary to particularise in a precise and clear manner the allegation and to adduce evidence which clearly proves the fraud

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or evasion: see
Briginshaw v Briginshaw (1938) 60 CLR 336 at 360;
Bhagat v Global Custodians Ltd [2002] FCAFC 331 at [13].

21. The Applicants contends that the authorities support the conclusion that when a taxpayer seeks a review on the merits before this Tribunal it stands in the shoes of the Respondent's delegate and must do over again the assessment process, having regard to any new material before it: see
Shi v Migration Agents Registration Authority (2008) 235 CLR 286. On this basis it is said, notwithstanding s 14ZZK of the Administration Act and s 177 of the Act, the Tribunal itself on review must be satisfied on all the evidence before it that there has been fraud or evasion before there is power to amend assessments.

22. In order to determine this issue of onus it is necessary to consider the modification effected by s 14ZZK of the Administration Act on the operation of the AAT Act.

23. In
Rawson Finances Pty Ltd v Commissioner of Taxation (2013) 133 ALD 39 at [90] this question was addressed by Jagot J as follows:

Section 14ZZK is a modification of the AAT Act because, but for that provision , an applicant would not have the "burden of proving that … the assessment is excessive". There are no equivalent provisions in the AAT Act and it is well-established that as the tribunal may "exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision" …, an applicant for review is not subject to any burden of proof, the tribunal's obligation being whether the decision under review is the correct or preferable decision… (Emphasis added.)

24. Her Honour's conclusion is supported by a line of authority which includes the decision of the High Court in
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263. In that case (at 269) the majority expressed the view that where on any appeal to the court there is an issue as to whether conditions precedent to the exercise of a power by the Commissioner are fulfilled, and a regular notice of assessment is produced, then the burden rests on the taxpayer of proving to the reasonable satisfaction of the court that the particular fact or facts which take the case outside the fraud or evasion provision are established.

25. That is to say that the onus of proof lies on the taxpayer to demonstrate that he did make a full and true disclosure of all the material facts necessary for his assessment or that there had not been an avoidance of tax. The majority concluded (at 271) that the relevant section expressly placed on the taxpayer the burden of proving that the assessment is "excessive" and that the expression "excessive" relates to the amount of the substantive liability. See also Kitto J at 274-275.

26. The Applicants point out that McAndrew was not a merits review case. It was a judicial review case. However, the principles in McAndrew as to the extent and effect of the onus of proof are relevant to these matters. In these matters there is an express provision imposing the specific onus of proof on the taxpayer in a hearing before this Tribunal.

27. The provisions of s 170 form part of the substantive liability under an amended assessment: see
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614;
Rigoli v Commissioner of Taxation (2014) 141 ALD 529;
Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301;
Rawson Finances Pty Ltd v Commissioner of Taxation (2013) 133 ALD 39 and
Commissioner of Taxation v Rigoli [2013] FCA 784.

28. In Rigoli the taxpayer contended that the authorities did not apply to merits review, but applied only to judicial review. However the Full Court rejected this argument as ignoring or giving no effect to the "fundamental provisions" of s 14ZZK. The Full Court adopted the observations of Jagot J in Rawson set out above in [23]. Cf.
Hii v Commissioner of Taxation [2015] FCA 375 at [108].

29. On these authorities I am satisfied on a review of the objection decisions in this case that the onus of proof imposed by s 14ZZK and its predecessor provisions apply where the Commissioner has found that there has been "fraud or evasion". The Applicants bear the onus of disproving the finding.

30. For the above reasons I consider that on the present applications there is no obligation or onus, formal or otherwise, on the respondent on

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a merits review before this Tribunal to prove that in the relevant matters there has been fraud or evasion within the meaning of s 170 of the Act. It is for the Applicant to disprove fraud or evasion.

ISSUE 2 - WHETHER THE AMENDED ASSESSMENTS WERE MADE UNDER S 166 OR S 167 OF THE ACT

31. Section 166 of the Act provides that the Commissioner from the returns and from any other information in his possession must make an assessment of the amount of taxable income of the taxpayer and of the tax payable thereon.

32. Under s 167 which is entitled "Default assessment" it is provided that where a person defaults in furnishing a return or the Commissioner is not satisfied with a return furnished by any person or the Commissioner believes that a person who has not furnished a return has derived taxable income, he or she "may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of section 166".

33. In the present case I am satisfied that the assessments in issue were made pursuant to s 167 on the basis that the Commissioner was not satisfied with the return furnished by the Applicant: see s 167(b).

34. In the case of each Applicant, the Respondent has prepared a position paper as part of the audit process. In that position paper the Respondent has considered whether he can make default assessments pursuant to s 167 of the Act and given the Applicants an opportunity to respond. The audits have then been finalised and the reasons for decisions have concluded that default assessments pursuant to section 167 of the Act should be issued. The Respondent has then proceeded to issue the notices of amended assessment. There is no reference to s 166 as the source of the power being expressed. Not only is there power in the Commissioner in this case to apply s 167 but there is express reliance on that power.

35. The Applicants have produced no persuasive evidence to support a proposition that the Commissioner in making the amended assessments relied on s 166.

ISSUE 3 - ESTATE MATTER

36. In respect to the Estate, the Commissioner issued a notice of determination pursuant to s 260-145 of Schedule 1 to the Administration Act which provides that if no probate or letters of administration are granted within six months after a person's death, the Commissioner may determine the total amount of "outstanding tax-related liabilities" that the person had at the time of death. Such a notice is conclusive evidence of the outstanding tax-related liabilities unless the determination is amended.

37. The Applicant submits that this provision merely empowers the Commissioner to aggregate all pecuniary liabilities to the Commonwealth that the deceased had at the time of death and in respect of which Notices of Assessment had been issued for the purpose of expeditiously recovering the debt. Therefore it is said that any amount that the Commissioner had not assessed to the deceased as at the date of his death cannot be caught by the determination where letters of administration or probate have not been taken out. The outstanding liabilities are limited to those which have arisen as at the date of death as a consequence of notices of assessments being issued.

38. The predecessor provision to s 260-145 was s 220 in Part VI of the Act. That section provided that where in respect of the estate of a deceased taxpayer neither probate nor letters of administration had been granted or taken out within six months of the death of the taxpayer, and tax had not been assessed or paid on the whole of the income derived before the death of the taxpayer, the Commissioner may make an assessment of the tax payable by the estate of the taxpayer. The Explanatory Memorandum in relation to the substitution of s 260-145 states in para 2.49 that:

Some current recovery provisions (e.g. section 72 of the STAA 1992) permit the trustee of a deceased person's estate, or a person with an interest in an unadministered estate (e.g. section 220 of the ITAA 1936), to lodge an objection against an assessment of the tax payable by the estate of the deceased person. The standardised rules in the new sections 260-140 and 260-145 will continue

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to apply to the collection and recovery of all tax-related liabilities, including tax assessed, from a deceased person's estate.

This indicates that s 260-145 was not intended to relevantly amend s 220 and, in particular, it supports the proposition that the reference to determining the "total" amount of outstanding tax-related liabilities in s 260-145(2) was not intended to cut down the operation of the provision to simply combining the amounts claimed in previous notices of assessment issued to the deceased before death.

39. In particular, the reference to "total amount" of outstanding tax-related liabilities is a reference to a "tax-related liability" of an entity that has arisen at or before the time, whether or not it is due and payable and which has not been paid before that time. The definition of "tax-related liability" is found in s 255-1 of Schedule 1 to the Administration Act and states that such a liability is a "pecuniary liability to the Commonwealth arising directly under a taxation law". The obligation to pay income tax in this case arose directly under the Income Tax Act 1986. There is no requirement in the Administration Act that the Commissioner's power to make a determination in relation to outstanding tax-related liabilities is dependent on whether or not there has been any pre-death assessment. Moreover, in addition, a determination under s 260-145 is treated in the same way for collection and recovery purposes as an assessment for the purposes of Part IVC of the Administration Act, which provides for the collection and recovery of an amount from a person who is not personally liable to pay that amount.

40. For the above reasons I consider that in determining the outstanding tax-related liabilities of Edward Bennett for the purpose of issuing a determination under s 260-145 of Sch 1 of the Administration Act the Respondent had power to issue amended assessments notwithstanding assessments had been made prior to the taxpayer's death.

ISSUE 4 - EVIDENCE - WHETHER THE APPLICANTS HAVE DISCHARGED OR ARE ABLE TO DISCHARGE THE ONUS OF PROVING THAT THE AMENDED ASSESSMENTS ARE EXCESSIVE AND WHAT THE CORRECT AMOUNT OF THE ASSESSMENTS SHOULD BE

41. The distinction between s 166 and 167 assessments, in terms of the onus of proof borne by the taxpayer, was summarised by the Full Federal Court in Gashi's case and was adapted as applicable to s 167 by Pagone J in
Commissioner of Taxation v Rigoli [2013] FCA 784.

42. In Gashi the Court considered that a taxpayer who seeks to establish that a s 167 assessment is excessive "must positively prove his or her 'actual taxable income' and in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer". This is a very heavy burden of proof.

43. The Court pointed out that under s 166 the process of assessment of the amount of the taxable income and tax payable involves a finding of assessable income minus deductions. Under s 167 the process of assessment of calculating taxable income as assessable income minus deductions is not possible, and therefore s 167 empowers the Commissioner to make an assessment of the amount on which the income tax ought to be levied and for that amount to be deemed to be the taxpayer's taxable income for the purpose of s 166. This deeming provision would be irrelevant if it was necessary for the Commissioner to undertake the process referred to in s 166. The assessment under s 167 is not constrained by a process of subtracting deductions from assessable income. The Commissioner under s 167 must make a judgment of the "amount" that is taxable.

44. The Court considered that the resulting assessment under s 167 is necessarily "a guess to some extent and 'almost certainly inaccurate in fact'", but it is not the duty of the Commissioner to establish affirmatively what judgment he formed under s 167 of the Act, much less the grounds for his judgment and even less the truth of the facts supporting the grounds.

45.

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The taxpayer seeking to challenge an assessment under s 167 will not succeed merely by proving error by the Commissioner, but must prove, on the balance of probabilities, what is the correct amount on which the tax should be levied:
Re Raschta Coatings Pty Ltd as trustee for the Raschta Coatings Trust and Commissioner of Taxation [2015] AATA 34.

46. The Applicants sought to rely on reports prepared by Mr Peter MacLean, who is an accountant.

47. Mr MacLean was requested to review the documents contained in material given to him and provide his opinion regarding what transactions the documents establish in the context of the Commissioner's decision to disallow the objections. He has had discussions with the parties in relation to the matters and has relied on those discussions. There is no evidence as to precisely what he was told and when or where these discussions took place in relation to specific entries. This evidence is so vague, general and lacking detail that it is unreliable and is not probative of any relevant fact.

48. In his reports Mr MacLean has attempted to correlate entries in joint bank accounts with entries recording transactions of various kinds. The transaction ledgers relied on by Mr MacLean to form his opinions are not authenticated or explained, and rely on schedules that he says he reviewed but which he did not prepare. He simply attempts to relate the information and relies on bank account statements with handwriting and numbers where there is no explanation of the statements or handwriting or the numbering. This falls far short of establishing what is the true amount in issue.

49. The reports do not provide any probative relevant evidence in view of the unauthenticated material and oral input on which it relies. For this reason, the reports were not taken into evidence.

50. The reports could not establish that any of the Commissioner's amended assessments are excessive or what the relevant taxable income is for the years in question.

51. No witnesses have been called on behalf of the Applicants to testify as to any of the records.

52. An attempt was made to rely on the Memorandum and Articles of Association of two companies provided as exhibits A and B in the hearing before me. However, no attempt was made to indicate the way these documents were supportive of the case sought to be made by the Applicants.

53. The documents filed pursuant to s 37 of the AAT Act are before the Tribunal. There was a discussion about a possible resumption of the hearing, if necessary, to undertake a matching or "line by line" exercise similar in nature to the one Mr MacLean had conducted. In light of the approach expressed in Gashi such an exercise would not and could not discharge the Applicants' heavy onus of proof.

54. On the basis of the evidence adduced in these proceedings the Applicants have not discharged and cannot discharge the onus on them to prove the assessments were excessive.

ISSUE 5 - WHETHER THE APPLICANTS HAVE DISCHARGED OR ARE ABLE TO DISCHARGE THE ONUS OF PROVING THAT THE DECISIONS IN RESPECT TO PENALTIES SHOULD NOT HAVE BEEN MADE OR SHOULD HAVE BEEN MADE DIFFERENTLY

55. On the evidence and in the absence of any testimony from the Applicants, I am not satisfied that the Applicants have discharged the onus or adduced sufficient evidence to make out a sufficient case for setting aside or varying the liability or quantum of the penalty amounts or for remitting the penalty in respect of the relevant income years.

CONCLUSION

56. There is no onus on the Commissioner to prove fraud or evasion in the present case.

57. The relevant onus on the Applicants is to establish that in each case the assessments are excessive and what the correct amount of the assessments should be.

58. The relevant amended assessments are made under s 167 of the Act.

59. In relation to the Estate matter, the Commissioner had power to issue amended assessments.

60. On the evidence before me the Applicants have not established the assessments

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were excessive and what was the actual taxable income.

61. The Applicants have not discharged the onus of proving the decisions in respect to liability to pay penalties and not to remit the penalties should not have been made or should have been differently.

DECISION

62. The decisions under review are affirmed.


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