Case V17
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
In 1978 the applicants, a married couple, commenced business on their own account as motor mechanics in a large country town. In due course they filed income tax returns for the partnership and for themselves and they were assessed in accordance with those returns of income. Some time during the year of income ended 30 June 1982 they established a concurrent second business as manufacturers of sporting equipment. On 6 January 1985, following an investigation into their affairs by officers of the Commissioner, notices of amended assessment were forwarded to them increasing their taxable incomes and the tax payable thereon; and imposing additional tax for incorrect returns. Considered jointly, the figures relating to the couple were as follows:
30 June 30 June 30 June
1981 1982 1983 Total
$ $ $ $
Husband 17,906 13,446 23,397 54,749
Wife 17,940 13,504 23,397 54,841
------ ------ ------ -------
Amended taxable income 35,846 26,950 46,794 109,590
Income previously assessed 16,810 17,226 13,918 47,954
------ ------ ------ -------
Omissions alleged 19,036 9,724 32,876 61,636
------ ------ ------ -------
ATC 192
Nothing was alleged suggesting that it was inappropriate to consider the disputed income as jointly and equally derived.
2. By their accountant, the applicants objected to the amended assessments. At the hearing the objections were confined to contentions that the assessments were inaccurate in relation to a sum of $15,000 in the year of income ended 30 June 1981 and $20,000 in the year of income ended 30 June 1983. In the course of the hearing the accountant explained the absence of any evidence as to the undisputed omissions of $26,636 by stating that he had no confidence in the Commissioner's methodology of calculating taxable income by the use of ``T'' document calculations. It seems that ``T'' document calculations have been introduced as an alternative to the traditional form of calculation of taxable income by the ``asset betterment'' method. As the Commissioner's representative could not direct my attention to any reported decision in which ``T'' document calculations had been considered, and as I was not aware of any such decision, I directed that, following the hearing, the applicants' representative would be allowed 10 days within which to make written submissions to the Tribunal (with a copy to the Commissioner) in support of his contention; and that the Commissioner's representative would have a further period within which to reply.
3. The form of the ``T'' documents provides for two calculations to determine ``Funds Available'' and ``Funds Expended'' respectively. In each case provision is made to bring to account moneys (or overdrafts) at bank; unpresented cheques and unbanked cash; and business items (excluding non-cash items such as Depreciation). On the ``Funds Available'' side provision is made for Capital Receipts and other items. On the ``Funds Expended'' side a record is made of all Capital Expenditure, Loan Repayments and Other Expenses (including income tax paid and Personal Living Expenses). The surplus, whereby the amount expended exceeds available funds, is then presumed to be taxable income and, to the extent not already treated as such, to be undisclosed taxable income.
4. In his submission, the accountant said (inter alia):
``Firstly, my criticism of the Taxation Department's preparation of T-Accounts is based upon the question of classification of monetary items (e.g.; income, vs capital). The audit investigation procedure is one which focuses on balances of the various accounts at the beginning and the end of a period and treats the net additions less taxable income as returned, as an understatement of income.
Conversely, the preparation of the income and expenditure statement and balance sheet by the tax accountant relies upon nationally accepted accounting standards (adjusted only for minor taxation requirements or limitations). It is questionable, to say the least, how the result of an audit? by any person (not a registered company auditor) could detail a taxable income in one year, 333% (1983) greater than that achieved by the general ledger and journal method used by every accountant...
It is finally argued that the T-Account preparations by the Taxation Department are based upon fallacious assumptions and not reliant upon the same information that is stated as required by the Income Tax Assessment Act for return preparation.''
I accept that the accountant has doubts and misgivings about the ``T'' calculations, but I find nothing in his submission which suggests to me that either the calculations or the principles applied in making them are unsound.
However, the purpose in reciting those matters is not so much to consider the soundness of ``T'' calculations. It is rather to give context to the finding that no explanation was offered as to how the undisputed omissions of $26,636 had occurred - a matter of significance in assessing the evidence on other issues.
5. As the omission of $26,636 is not otherwise challenged, the issue which arose for determination was limited to whether taxable income should be reduced for either or both applicants, for either or both of the years of income ended 30 June 1981 and 1983.
6. At the hearing only the husband appeared to give evidence. The absence of his wife as the second applicant was explained as occasioned by the nature of the business, although why that should be so, having regard to the nature of the business, was not explained.
ATC 193
7. The representative of the applicants did seek to tender in evidence a number of documents purporting to be from persons who were parties to transactions spoken of in the course of the evidence of the husband. In some instances they were expressed with a degree of precision which was such that, in the circumstances, it made improbable the accuracy of the assertions. In others, they contradicted the evidence given on oath by the husband. The Commissioner's representative objected to their being received in evidence and, having perused them, I refused to admit most of them into evidence.
8. The applicants' representative also sought to tender statutory declarations from two of the children of the applicants in which they asserted, in very general terms, that they had made financial contributions to the household of the applicants. They did not attest to any matter of critical importance. In the exercise of discretion, I determined to admit them over the objection of the Commissioner's representative.
9. The same principles for assessing the available evidence were applied in relation to the case presented on behalf of the Commissioner. The Commissioner's representative did not call as a witness any officer who had been involved in the investigation. In cross-examination, he suggested that bank accounts had been opened as early as 1975 but did not call any witness or seek to tender any document with a view to establishing that contention. He did not call the investigating officer to give evidence to support a contention that, in the course of the investigation, the husband had given explanations which were inconsistent with the explanations presented in the objections and in the course of giving evidence. Similarly when, in the course of closing argument, the Commissioner's representative asserted that the assessments raised had been based on the results of interviews and investigations and on calculations by officers of the Commissioner, I declined to accept the contention as it was not founded in any evidence presented before me.
10. Thus, the case for determination was reduced to a consideration of the reductions, if any, to be effected to taxable incomes as assessed for the years of income ended 30 June 1981 and 1983; and, whether any such reductions be effected or not, to a consideration of a reduction in penalties for incorrect returns.
11. The latter issue was not raised by the notices of objection. Notwithstanding that I decided, in the exercise of discretion, that I should not be limited in a consideration of the case of the applicants and that, without authorising or directing any amendment to the grounds of objection, I would review the imposition of penalties.
12. The Commissioner's representative advised that penalties had been determined by calculating interest on tax avoided at the rate of 10% per annum up to 13 February 1983; at 20% per annum thereafter until a date shortly before the date the assessments issued; and that, in addition, a ``culpability factor'' had been assessed at the rate of 40% of tax avoided. In that way it was contended that penalties had been calculated in accordance with the principles laid down for the direction of his staff in the Commissioner's Taxation Ruling IT 2012 dated 25 January 1983. The mathematical accuracy of the calculations was not challenged.
13. Despite the lack of confidence of the applicants' representative in ``T'' calculations, the challenge to the assessments was limited to the two items already referred to with the result that the accuracy of the assessments was in large measure unchallenged and the admitted omissions largely went unexplained.
14. In monetary terms the principal issues came to be as follows:
1981 1982 1983 Total
$ $ $ $
Omissions alleged 19,036 9,724 32,876 61,636
Items disputed 15,000 - 20,000 35,000
------ ------ ------ ------
Omissions undisputed 4,036 9,724 12,876 26,636
------ ------ ------ ------
15. The disputed items related to the use of cash funds amounting to $15,000 placed on loan at interest on 18 December 1980; and $20,000 utilized in a joint-venture in the 1983 year. That such cash funds existed on those dates is undisputed. The Commissioner's
ATC 194
contention is that, by reason of (inter alia) those amounts, taxable incomes are as alleged by the notices of amended assessment for those two years. The applicants contend that those amounts did not constitute assessable income of those years or of any years. The husband's evidence was that the cash used on those dates had been accumulated by him in a tool-box over many years and had comprised:- (a) the proceeds of sale by him prior to the commencement of the business, or alternatively, commencement of the periods of assessment under review, of several items which he had acquired by way of inheritance, gift or purchase which had not, by the circumstances of their acquisition or sale, generated assessable income; and
- (b) an accumulation of ``board'' paid to the parents by their children, in each case from the time the child had joined the workforce.
If, upon consideration of the evidence placed before me, I think it more probable than not that the explanation proffered by the husband is true, the applicants will succeed.
16. How much evidence is presented in any case depends upon the availability of evidence and witnesses and on an exercise of judgment by the representatives of the parties. In this instance the position was taken by the applicants that only the husband would give evidence and submit himself for cross-examination. Nor was the absence of witnesses, and particularly that of the wife, adequately explained. A mere reference to inconvenience and inability to attend the hearing because of business hardly adequately explains the absence of an applicant on an occasion as important in her affairs as this. In this instance also a decision was taken on behalf of the Commissioner not to call the investigating officer or any other witness. One consequence is that such records of interview as existed (if any) have not been presented in evidence. Another is that, although the husband was questioned to suggest that his testimony before me was inconsistent with statements he had previously made to an investigating officer, I have no evidence from anyone other than the husband as to what was said on such occasions.
17. As a crucial question is whether the husband has persuaded me, by the evidence he has given, I proceed to summarize that evidence. He gave evidence that he was reared in conditions of extreme poverty and that, as a result, throughout his working life, he has worked extremely hard; has lived most economically; and has sought to protect his family from the deprivations he experienced in childhood. In addition, the marriage of his parents was unsuccessful and in his own family life he promoted strong family relationships. He was born in 1937 and, when he was aged 17 years, the applicants married. At the time they had 50 pounds between them. They have since successfully reared three children: girls born in 1957 and 1959 and a son born in 1963.
18. When the husband left school he secured an apprenticeship and later qualified as a motor mechanic. As a young man he was a successful and enthusiastic sportsman. Prior to 1978 he was employed in the businesses of others. Then he and his wife commenced business as motor mechanics in partnership. His evidence was that, when he left his previous employment with a service station operator who was a trusted friend, $2,800 was due to him in holiday pay. He claimed that in some eight years of that employment his annual holidays had been three periods of one week each. As his friend could not afford to pay him in a lump sum at the time he terminated his employment, he accepted payment in the following months by a number of cash payments of the magnitude of $200 or $300 or so. The moneys so received were paid in cash and were placed in a tool-box and there added to moneys already accumulated from other sources. How the amount of $2,800 was treated in his income tax returns was not explained. I also observe that one of the documents not admitted into evidence, purporting to be a certificate from the former employer, asserted that the payment was effected in a lump sum. I mention that only to indicate a difficulty which can be experienced in evaluating evidence not available to be tested by cross-examination.
19. It was asserted that the tool-box also then held the cash proceeds of other sales which had taken place over many years. The list of items so sold and the prices first attributed to them are as they appeared in letters written to the Australian Taxation Office on behalf of the applicants in May and August 1984.
ATC 195
``$
Sale of EJ Holden Ute
(purchased 1967) 1,000
Sale of XM Falcon panel Van
(Deceased Estate) 600
Sale of Ossa Motor Cycle 650
Holiday pay upon leaving
previous employment 2,800
Sale of 1874 Martin Leige Shotgun 450
Sale of 19'6 Lewin Runabout
(... Kempsey) 2,500
Sale of XR Falcon unregistered
(... Townsville) 7,000
Sale of 1937 Morris 8/40 soft-top
utility restored (sold unregistered
to... ) 4,000
Father's tool-box left in will
1976 ... 2,000''
20. The evidence of the husband was in some instances consistent with the date of sale being later than the commencement of the business but, in all cases, he asserted sales preceding the commencement date of the ``T'' calculations.
21. It was also claimed that the ``board'' paid by the children had been accumulated in the same tool-box. The evidence in that regard was scant. That is to be expected. Successful relationships within families, whether between spouses or between parents and children, are not likely to produce documentary records or be the subject of precise recollection. The evidence is that the first child - a daughter - left school after four years of secondary education; that she left school at about the age of 16 years; that she undertook private tuition in typing and shorthand for a few months; that she then secured employment in that field; that she married at about the age of 20 years; and that she lived in the home of her parents until her marriage. It is proposed that her rates of contribution to ``board'' varied according to her income levels. In correspondence of August 1984 it was proposed that her contributions to the household had been at the rate of $25 per week for two years and then $35 per week for two years ($6,240).
The second child - also a daughter - continued to reside at home until some 15 months prior to the hearing. It is sufficient for present purposes to say that her employment pattern closely followed that of her elder sister and that it was suggested that her contributions by way of board had been at the rate of $25 per week for two years and thereafter $35 per week for four years ($9,880).
The youngest child - a son - became apprenticed to the father on leaving school and still resides in the family home ``when not with his girlfriend''. He too is said to have contributed to the board in a fashion similar to his sisters but in the same correspondence no particular rate of contribution was proposed. In his case, it is known from the accounts of the partnership that, in the year of income ended 30 June 1981, he was earning $7,240 per annum.
22. I think it probable that the children were paying ``board'' but that the amounts paid were modest in amount. At this point I merely observe that it does not automatically follow from that finding that the amounts paid were substantially as specified or that they were accumulated in cash and remained in that condition until applied in the amounts of $15,000 and $20,000 in dispute.
23. At the commencement of the business, despite the claimed availability of substantial cash funds, the partnership entered into leasing and other financial arrangements to obtain some of the substantial equipment needed to operate the business. In later years, despite the claimed existence of substantial cash funds, further similar financial arrangements were entered into. It was acknowledged by the husband that such arrangements were expensive, particularly when weighed against the possibility of using cash which was generating no income and losing value year by year due to inflation.
24. The business was successful. The husband ordinarily worked a 50-hour week as a motor mechanic and the ``employed'' mechanics a 40-hour week. Ordinarily there were two employed mechanics. The son was recorded as the only employee for the 1981 year at a wage of $7,240. In the two following years ``wages'' were claimed at $8,857 and $4,634, but no payments to ``Associated Persons'' were acknowledged. It is also acknowledged that, in some instances, motor vehicles were improved and even restored before sale, although it is contended that the proceeds of sale did not constitute assessable income.
25. However, the acknowledged business activities of the partnership were not always limited to the business of motor mechanics. The son was a gifted sportsman and the father's
ATC 196
enthusiasm for the same sport had continued. During the year of income ended 30 June 1982, at a time when manufacturers were incapable of promptly satisfying the market demand for the quite expensive sporting equipment necessary, the partnership embarked on a new business. Both husband and wife invested substantial time - five evenings of three hours each and for the husband and wife invested substantial time - five evenings of three hours each and for the husband at least a full working day on Saturday. Sunday was a day for rest and recreation. In the same year the son travelled overseas in relation to the business. By 30 June 1982 sales had reached the acknowledged level of $8,058 and twelve months later the acknowledged level of $9,372.26. It is against that background that the husband contends that on 18 December 1980 there was an accumulated fund in the tool-box of not less than $35,000; that on that date he withdrew $15,000 and deposited it in the State Bank; that $20,000 at least remained there until it too was invested. He contended that the reason for withdrawing $15,000 in December 1980 was a fear of robbery. No reasonable explanation was offered as to why the same fear had not caused any similar action earlier, or why, when action was taken, it was limited to making secure less than half of the cash fund.
27. In addition to the foregoing, in argument it was contended that it was quite improbable, if not impossible, for such a small business to have generated the levels of taxable income contended for by the Commissioner. I have no evidence before me which would warrant any such conclusion. It was also contended that the fact that the family lived as frugally as they did tended to prove that they could not have derived the levels of income contended for. In my view the conclusion contended for does not follow. Further, the ``T'' documents brought to account figures for private expenditure and they were not challenged.
28. In face of all the foregoing, the question for determination is whether either applicant has, in relation to each or any of the years in question, persuaded me that the assessments of taxable income raised by the Commissioner are excessive. They will succeed in that if they can either establish that the sums of $15,000 and $20,000 referred to did not constitute assessable income or that, if they did constitute assessable income, they constituted assessable income in years other than those contended for by the Commissioner. To the extent to which they succeeded in establishing the former proposition, it should follow that the assessments before me will be reduced and there would be no justification by reason of these findings for the Commissioner to issue increased amended assessments against either taxpayer for any other year. To the extent to which the Applicants succeed only by reason of persuading me that amounts found to be assessable income constituted assessable income of an earlier year or years then, although my determination would result in a reduction of the assessments presently before me, application of these reasons for decision would more than justify the Commissioner issuing amended assessments in relation to those earlier years. It is then to be expected that the Commissioner would apply the same principles in the fixing of penalties by way of additional tax and, by doing so, the applicants would become liable to a further 20% of tax avoided, measured by the new calculations. Against that additional impost, there would need to be offset any overall reduction in tax there might be by reason of newer assessments giving effect to a lower marginal rate of tax than the assessments under review.
29. As to the first question: whether I have been persuaded - on the balance of probabilities only - that the sums of $15,000 and $20,000 did not constitute assessable income: I do not think that it is more probable than not that the amounts did not constitute assessable income. If in truth those amounts did not constitute assessable income, the applicants have failed in their endeavour to persuade me that that was so.
30. The next question is whether the evidence persuades me that the disputed income was derived in years other than those in which it has been assessed. In another decision handed down this day (Case V23,
88 ATC 232) I have considered the matters to be taken into account in deciding such questions. In that case I was persuaded that the disputed income under consideration represented by the moneys stolen could not have been derived only in the year for which it had been assessed. In this instance I am not so persuaded.
31. The remaining question relates to additional tax. I considered questions as to the exercise of discretion to remit additional tax at some length in Case U36,
87 ATC 266 and I
ATC 197
have applied the principles there expressed in a number of decisions delivered subsequently. One of those other decisions (Case V23, 88 ATC 232) also related to the imposition of additional tax where there has been a concealment of assessable income. In neither that case nor this have I been persuaded that it would be reasonable to further reduce additional tax.32. For all of the foregoing reasons, the determinations of the Commissioner upon the objections under review will be affirmed.
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