Case V23
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The taxpayer
1. The applicant is a man now aged 75 years. He migrated to this country from Greece in 1912. He never married but has maintained households at different times with three ``common law'' wives. His first wife died as a result of an accident shortly after giving birth to a daughter. The daughter was reared by her maternal grandmother but, following her marriage, came to associate more closely and frequently with her father. She is now aged about 50 years. Two other children were born of a second relationship. They are now aged approximately 42 and 39 years. The relationship of which they were born lasted until the early 1960s. On the evidence before me, I am not persuaded that they play any significant part in the story of the applicant, although one daughter was later stated in income tax returns to be an employee.
2. In the early 1960s the applicant formed a new relationship which continues to this day. Of that relationship two children were born: a son born in 1964 and a daughter born some two years later. Both children resided with their parents at all material times, and continue to do so.
3. In about 1937, aged about 25 years, the applicant came to a country region of New South Wales and, with his accumulated resources amounting to approximately 75 pounds, he bought a cafe in a town of the district. At the time it was patronised by personnel associated with a nearby defence establishment and the business prospered. It
ATC 234
suffered a downturn with the closure of the military base but the business continued none the less and has provided acceptable standards of living for the applicant and his family. I accept that he has been content with his lot. Whether his values and satisfactions are shared by others in the family is less clear. It was the submission of the applicant's representative that the applicant had lived ``frugally'' - some might say in a miserly way. For example, the stoves in the cafe are fuel stoves, one of which was recovered from the local tip when dumped there by the defence forces. It still does effective service fuelled by timber recovered each weekend from the tip. The clothing of the applicant is very simple and commonly comes from the stores of the St Vincent de Paul Society. The visits of the applicant to other larger townships in his own region are rare and the bright lights of the capital cities hold no attraction for him. He does not even accompany his wife on her weekly visits to the local club and his only ``holidays'' in many years have been when hospitalised. But it is undisputed that the applicant prospered. What is in dispute is in dispute is the extent (if any) to which that was achieved by avoiding tax.4. His life has revolved around his business activities. At one stage he carried on a small manufacturing business but it ceased some time ago - although probably sufficiently late in his personal history to play a part in his story. How, when and where it operated was not explained. The cafe business operated on the principle commonly identified in recent times with shopkeepers of Greek extraction - it offered service over long hours and all members of the household contributed to the provision of that service. That was all achieved under the firm direction and control of the applicant. In a revealing passage in his evidence he spoke simply of his practice of allowing to his wife about $350 each year to enable her to visit her daughters (born of an earlier relationship) in Sydney; of allowing her $3 per week to get her hair cut, and 80 cents a day for papers; and of letting her keep the commissions of $18 per annum paid by the owners of a lolly machine in the shop and of the $14 or so paid on a half-yearly basis by a man who collected the waste fat from the cafe. He disarmingly acknowledged these things by explaining: ``That is the way I am''. He impressed favourably as a mild-mannered and personable man.
5. He disclaimed any knowledge of matters of accounting and tax, but said that he had held a belief - a belief which he acknowledged might be wrong - that he and his wife were each entitled to $5,000 a year tax free. He was wrong. It was suggested that such errors are understandable in poorly educated persons such as the applicant, but I reject that. The applicant may have had little education but it does not follow that he was unintelligent. I am not persuaded that he ever believed in any entitlement to $5,000 a year tax free. I also observe that there is nothing in the evidence to suggest that his wife ever received such a sum. Perhaps it was considered as satisfied by board, keep and other allowances.
6. I accept that he considered himself as the property-owner within the family and looked upon its members as his dependants. I find that his wife and children were expected to ``work the shop'' as the need arose. I accept that from an early age the younger children were expected to work according to their capacity. In earlier days the obligation probably matched their ambitions. Young children can find pleasure in undertaking tasks performed by their elders: tasks looked upon by their elders as boring chores.
7. In those years, and in the years that followed, the applicant provided for his wife and children as he thought fit. They were fed and clothed; provided with pocket money; and allowed to drive the car. In return, they were expected to be dutiful and helpful, and willing to be so. When the youngest daughter came to be employed outside the family, and thereby to derive a wage, her claim to be financially provided for by her father for her immediate purposes lapsed. The children in those years were confident, and rightly confident, that they enjoyed the goodwill of their father. He had no wish to see them join the ranks of the indolent or to have enough money available to be wasteful. Although they probably did not know it at the time, another factor was working in their favour.
8. The applicant never engaged in ``tax planning'' in the way of the establishment of a partnership or any other available form of business association. He had a simple view: that what he (meaning he, his wife and his
ATC 235
children) earned was his (meaning himself only). It was to be dispensed as he thought appropriate. He also thought that he paid more than he should in tax. His thought was that provided he paid what was demanded by the Commissioner on the basis of calculations presented by his accountant that was enough, and perhaps more than enough, even after setting aside the tax-free $5,000 per annum which he claimed he believed he was entitled to retain. At one stage in the evidence he suggested that he had been over-taxed because he had not claimed all the expenses that he might have claimed. He could not explain why, or indicate anything as to the expenses he had failed to claim.9. I find that in those circumstances his then accountants faced a problem. They knew that his wife and the two youngest children worked in the shop and that if amounts - in themselves reasonable - were paid by the applicant for the services of his wife and children, the tax liability of the household would be significantly reduced. On the other hand, they recognised the desire of the applicant not to become accountable to either his wife or his children except in his own time and upon his own terms.
10. Despite his assertions that he could not afford to pay his wife and children by the standards of industrial awards, he did adopt tax returns prepared for him by his then accountants in which ``wages'' to family members were claimed to have been paid as follows:
Year ended
30 June wife son daughter total
$ $ $ $
1978 NIL NIL NIL NIL
1979 NIL 2,750 2,750 5,500
1980 NIL 3,120 3,120 6,240
1981 NIL 3,016 3,016 6,032
1982 NIL 2,850 2,900 5,750
1983 2,600 2,650 2,900 8,150
Commencing with the year of income ended 30 June 1980, claims were similarly made for wages paid to an older daughter.
11. To some extent those figures are reflected in the financial provision actually made by the applicant for his children. Commencing as early as 1973 he started to make provision for the future of his two youngest children by placing moneys to the credit of accounts operated by him and opened in his own name but so as to indicate that the moneys were held ``in trust for'' the named child. $2,000 was deposited for the son in November 1973 and $2,000 for the daughter in January 1974. In May 1975 $400 added to each account, and in May 1977 a further $300 to each account. Having heard the evidence of the son, I am not persuaded that they then had any idea of the extent of the provision so made. The accounts produced in evidence show that, during the period under review, there was only one withdrawal in relation to each child and, in each case, that was only to enable the moneys to be deposited to the credit of another account for that child. Analysis of the accounts shows that the pattern of deposits during the relevant period was as follows:
Year ended son daughter
30 June $ $
1978 2,750 2,750
109 129
1979 294 53
1980 2,750 2,750
78 27
1981 NIL NIL
1982 1,050 13
1983 2,915 90
319
12. I find that the applicant was not prepared to share with his family more liberally than he did the income benefits of his and their efforts: preferring to keep those benefits to himself to be shared with them as he pleased. That he was entitled to do. However, one consequence of doing so is that he had to accept a greater liability to personal income tax. In the circumstances of this case I consider the submission that he had not engaged in ``tax
ATC 236
planning'' to be of no great assistance to the applicant.13. In addition to conducting business at the cafe, the applicant also controlled a number of amusement machines installed at sites in other premises in the area. For a period he also carried on some unspecified form of manufacturing business. He also was a collector of sets of coins but there is nothing in the evidence which suggests to me that that activity in itself generated assessable income.
The assessments
14. Upon his own evidence, the applicant did not bank or otherwise bring to account all the takings from his business. Some money was withheld from each banking and a cash fund was accumulated in that way. Then came a robbery. When it occurred was not precisely identified in evidence but the applicant does not dispute that $64,000 was stolen; that being the amount brought to account in the Commissioner's calculations prepared following a later investigation. Following the investigation, amended assessments were raised. The result is that the omissions of income, the tax avoided, and the additional tax in issue before the Tribunal are as follows:
Year ended
30 June 1978 1979 1980 1981 1982 1983 Total
$ $ $ $ $ $ $
Amended
Assessment 31,069 19,400 38,861 41,630 64,533 120,635 316,128
Original
Assessment 26,002 17,963* 32,236 35,946 50,590* 64,815 227,552
------ ------ ------ ------ ------ ------ -------
Omissions
Alleged 5,067 1,437 6,625 5,684 13,943 55,820 88,576
----- ----- ----- ----- ------ ------ ------
Tax
Avoided 2,744 682 3,908 3,410 8,365 33,492 52,601
Additional
Tax 3,222 722 3,745 2,983 6,372 18,782 35,826
*The figure quoted appears in an amended assessment which issued on the application of the applicant shortly after the original assessment.
15. The investigation resulted in amended assessments issuing in November 1984. Objection was taken and some objections were partially allowed. Requests for reference for independent review were made in November 1985 and the requests were complied with in February 1987. The matters came on for hearing in November 1987. Although the amounts in issue were substantial - nearly $90,000 in tax and penalties was involved - at the hearing the applicant was represented by an accountant who had not been involved during the investigation period. The Commissioner was represented by one of his officers.
The issues
16. At the hearing the specific issues to be determined were restricted to the following:
- (a) whether balances in the bank accounts held in trust for the children should have been taken into account in the betterment calculations ($26,856);
- (b) whether the amount stolen of $64,000 should be brought to account in calculating the income of the year ended 30 June 1983; and
- (c) whether the penalties imposed by way of additional tax were excessive.
17. In the course of cross-examination of the investigating officer, it emerged that one factor taken into account in raising the amended assessments for the 1979 year was the reclassification as capital expenditure of amounts of $4,353 and $4,500 previously claimed as repairs and maintenance. Beyond establishing by cross-examination that that had been done, there was no challenge. No evidence was presented to suggest that the adjustment should not have been made.
Problems of quantum
18. As appears from the table presented in paragraph 14 of these reasons, the total omissions alleged by the Commissioner amount
ATC 237
to $88,576. However, the issues raised or touched on account for more than that. Those items comprise: $
(a) children's accounts - para. 16(a) 26,856
(b) stolen moneys - para. 16(b) 64,000
(c) repairs & maintenance -
para. 17 8,853
-------
$99,709
Similar difficulties appear in relation to particular years. The repairs and maintenance issue ($8,853) was presented as relating only to the 1979 year, but omissions alleged for that year were only $1,437. Similarly, the issue as to stolen moneys ($64,000) relates only to the 1983 year in relation to which the alleged understatement is only $55,820. Those unexplained inconsistencies will have to be addressed and the problems arising in consequence of them resolved later. For the moment it suffices to say that it is important in presenting a case such as this that such problems are faced and addressed in the course of the presentation of a case. It may be that a clear exposition of the inconsistencies and the reasons for them will tend to support a submission that there are fallacies in the Commissioner's betterment calculations. But when such inconsistencies remain unexplained and untested, it is unlikely that the mere fact of the inconsistency will assist in satisfying the burden of proof which lies upon the taxpayer (sec. 190).
19. At the hearing, the Commissioner's representative produced calculations which indicated that additional tax had been calculated as:
- 10% per annum of tax avoided to 13 February 1983;
- 20% per annum of tax avoided from 14 February 1983; and
- a flat-rate culpability component of 50% of tax avoided.
Expressed simply as a percentage of tax avoided, the assessments ranged from 117% in the earliest year (1978) to 56% in the last year (1983).
Children's accounts
20. Having heard the evidence of the applicant and his son, I am satisfied that the children's accounts were beneficially owned by them and that they should be excluded from consideration in measuring increases in assessments from year to year. The prima facie result is that overall omissions should be reduced to the extent to which the amount of those accounts as a closing asset exceeds the amount of those accounts as an opening asset; and that that reduction be distributed over the years of assessment in accordance with the movement of balances brought to account in the calculation.
21. However, it is then necessary to consider whether the amounts deposited to those accounts from the funds of the applicant need to be brought into the calculation. I think not. Despite the disparities in dates I accept that the deposits of $2,750 to each of the two children in each of the 1978 and 1980 years represented payment of wages. I also accept that deposits to the credit of the son in amounts of $1,050 (1982) and $2,915 (1983) are to be treated on the same basis. As there is nothing in the evidence to suggest that the other small amounts deposited should be sourced to the applicant in any relevant way, I consider that they too should be excluded from consideration.
The $64,000 stolen
22. The applicant has sought to persuade me that the money stolen wholly represented accumulations from already taxed earnings. I reject that. Such an explanation ignores the admitted habit of the applicant of withholding moneys from banking, and thereby from the accounting process. I am not persuaded that he provided any information as to the moneys withheld to his former accountant. In consequence, the income was omitted from his returns of income.
23. Before me he claimed that $40,000 to $50,000 was already on hand at the beginning of the investigation period. The applicant has also sought to persuade me that the $64,000 was not wholly attributable to the year of income ended 30 June 1983. That I do accept. I think it quite improbable that such an amount of additional income as $64,000 could have been accumulated in the period between 1 July 1982 and the date of the robbery: a period of perhaps no more than one month.
ATC 238
The adjustments
24. However, the question which then needs to be addressed is what consequences should flow from such a conclusion. I observe that to the extent to which I direct a reduction in the 1983 assessment, that direction will not be because I am persuaded that some of the moneys stolen did not constitute assessable income, but only because I have been persuaded that it did not constitute assessable income of the year to which it has been attributed.
Future adjustments
25. In consequence of such a finding it is to be expected that the Commissioner will in due course issue further amended assessments and impose penalties by way of additional tax. Assuming that the Commissioner follows principles already applied in determining additional tax on the assessments before me, then the 20% per annum component (or 10% per annum, as appropriate) will be increased for the appropriate number of years. It will be open to the applicant to object to any such amended assessments, and should the objections be disallowed, to undertake a further challenge to the actions of the Commissioner in proceedings before the Court or this Tribunal. Such a course will involve substantial expense both to the community - the costs of operating the Tribunal and the costs of conducting the litigation incurred by the Commissioner - and to the applicant. Upon any such hearing, the Court or Tribunal as then constituted may be persuaded to different conclusions than I have reached. That could be for many reasons. It might be because different evidence is presented. It might be because the same witnesses are found to then persuade, although in these proceedings they have not persuaded. But such proceedings will be traversing issues which might have been determined in these proceedings.
26. I recommend that the Parliament give consideration to avoiding such problems and duplication of effort by conferring on the Courts and this Tribunal the power, when presented with such problems as the present, to direct the amendment of other assessments found to be inaccurate in consequence of the determinations made upon the hearing.
A problem of proof
27. However, one submission put for the Commissioner suggests that the problem I have outlined should not arise. The submission is that, until the applicant displaces the figure of $64,000 from the calculations for the 1983 year by establishing with precision a figure to be substituted for it, the assessment based on (inter alia) the $64,000 should stand. The submission is founded in a quotation from the High Court of Australia in
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 in which Latham C.J. said (at p. 92):
``As a general rule, proof that a particular item was wrong would also show what should be substituted for it. In other words, proof of what is right is the ordinary method of proving what is wrong.''
In my view the submission is based on a widely-held and long-held misunderstanding of the passage quoted - a misunderstanding probably occasioned by a failure to have regard to the context which gave rise to the comment.
28. The Trautwein case was perhaps as complicated a ``betterment'' as most will ever know of. It embraced the years 1921 to 1927 inclusive. Amended assessments issued over a period 1925 to 1934. In relation to some years, as many as five amended assessments issued. The affairs of Trautwein were extensive and intricate and the issues raised in the litigation were numerous. The passage cited related to only one aspect of that complicated litigation.
29. One identifiable element in the Trautwein calculations related to a sum alleged to have been omitted as income over the whole period of the betterment. In raising annual assessments, the Commissioner had taken the arbitrary course of distributing the total of that sum in equal amounts over the years of calculation. Without attempting to establish that the aggregate omissions were on that account excessive, Trautwein contended that the prospect of the omissions having occurred equally over the years in question was so remote that the Court should be of the view that, on the balance of probabilities, some assessments at least were excessive. Had the submission found favour, it would have followed that one at least of the other assessments within the period was inadequate. That consequence could only have been avoided by establishing that the aggregate
ATC 239
omissions for the period had been overstated. That might have arisen if there had been a basis for finding that the aggregate omissions for the period were excessive either because the amounts were not assessable income at all or because they were not assessable income of the period. But no such attempt was made at that point in the litigation. There was no evidence before the Court which would have enabled the Court to make alternative findings. The contention simply was that, because the distribution made by the Commissioner was most unlikely to be precise that, therefore, some or all of the assessments ought be set aside.30. But the High Court held that that assertion alone was not enough to warrant setting aside any of the assessments. It said that no reduction in the figure for any one or more years would be warranted until the Commissioner's figures were shown by evidence to be incorrect. Then an alternate figure than that contended for by the Commissioner could be established. As Latham C.J. said (at p. 92):
``(Trautwein) has not shown positively that the total amount, or that any particular amount going to make up that amount, is wrong.''
Further, it follows that had such an alternate figure been established - for example, by reducing the assessment for 1925 by 1,000 pounds - that same evidence might well have established that the 1924 or 1926 assessment was inadequate by 1,000 pounds.
31. At the hearing the investigator who prepared the calculations was challenged as to why he had not distributed the $64,000 over several years in the betterment. His answer was that he had decided not to do so after conferring with the accountant previously engaged and with whom he had dealt at the time. The accountant shared the investigator's view that, by reason of considerations of additional tax, such a distribution over a longer period would act to the detriment of the applicant. I agree with that view.
32. The same problem as in Trautwein would have arisen here if $64,000 had been apportioned equally over the years of assessment and no evidence had been presented to suggest that the figures were inaccurate in aggregate or in their distribution. But that is not the case. In this instance, the $64,000 is attributed to one year in the period only. What is more, it seems likely it is alleged to have been wholly derived in July 1982. Unlike the High Court in Trautwein, I do not have evidence and, upon the evidence before me, I do not accept that that was so. Consideration of the entirety of the evidence persuades me that the money stolen was accumulated over a much longer period; and that the action of the Commissioner in wholly attributing the $64,000 to the 1983 year was a generous one. Upon making the appropriate finding of fact, it will follow that the 1983 assessment will be reduced; and the way will be open to the Commissioner to issue further amended assessments.
The findings
33. The next matter for consideration is what is required of the Tribunal in making findings of fact in such circumstances as these where there is little documentary evidence and testimony based on recollection is, from the nature of the case, quite vague. In my view, the duty of the Tribunal is to make such findings of fact as it considers appropriate. It happens that that may require the Tribunal to make findings which will find expression in precise monetary sums: just as a finding of contributory negligence will find expression in a precise statistic expressed by way of percentage. But the mathematical precision of expression of the conclusion does not necessitate that the conclusion be reached by similar precision of calculation. Findings of fact in such circumstances call for an exercise of judgment based upon an assessment of the evidence (cf. the directions given by the Full High Court of Australia to the trial Judge in
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47). Once the evidence satisfies a tribunal that any particular item in an assessment is wrong, then ``the matter is open for decision on all the evidence submitted...'' (Latham C.J., in Trautwein (ante) p. 92).
34. In the circumstances of this case I am satisfied that the applicant withheld substantial takings to an extent sufficient to have enabled him to accumulate at least $64,000 by some date unknown, but probably June or July 1982. I also find that by 31 May 1984 - the date upon which the investigating officer attended at the cafe in the course of his investigation - the applicant was able to show him not only the
ATC 240
desk with false top from which the $64,000 was stolen but also his coin collection and $20,000 in cash (comprising $19,500 in notes ranging from $5 to $50 in denomination, with the remainder in coins). I accept the investigator's evidence that the notes were in reasonably good condition, and that there was no indication that they had been there for any great length of time. I accept that the applicant then maintained that, like the money stolen, the further $20,000 had been accumulated from savings over the years. That assertion carried with it the implication that the moneys had been missed at the time of the theft. I do not accept the implication. I find that when initially interviewed about the theft the applicant contended that, prior to the theft, there had been ``about $70,000'' and that $5,000 had been missed by the thieves; and that that was substantially accurate.35. Although there is clearly some imprecision about all of these matters, I am satisfied that the appropriate finding is that, between the date of the robbery and May 1984, the applicant had been able to accumulate a sum of the order of $15,000, doing so in a period of some 22 months. I find that the money so accumulated constituted assessable income. I am not persuaded that the $64,000 stolen constituted disclosed assessable income. However, in those circumstances I reject any contention that most of the $64,000 had been accumulated during the year of income ended 30 June 1983 prior to the robbery - possibly in July 1982 - so as to constitute assessable income of that year.
The bottom line
36. To this point in these reasons I have refrained from making specific findings as to amounts to be taken into account in any adjustments to taxable income as assessed. My reason for doing so is the complications which arise out of the evidence presented, both in relation to the ``children's accounts'' and the $64,000 fund.
(A) Adjustments for the children's accounts
37. The following table records the findings I have made as to the effect of including the children's accounts in a computation of the taxable income of the applicant. At the hearing, the applicant produced evidence of balances in one bank account at 30 June 1977, 1978 and 1979, which were not taken into account in the original calculations of the Commissioner. The credit balances so established by that further evidence were $192, $329 and $395 respectively. Amended assessments issued to effect the appropriate adjustments. Close analysis of the material in evidence before me shows that the alleged omissions include the following amounts based on increases in the children's accounts:
Year ended
30 June 1978 1979 1980 1981 1982 1983 Total
$ $ $ $ $ $ $
6,324 1,279 7,000 1,933 3,665 6,655 26,856
If that had been the only issue the assessments would have been reduced accordingly.
(B) Adjustments for the $64,000
38. I am well satisfied that the applicant did not derive undisclosed assessable income in the sum of $64,000 between 1 July 1982 and the date of the robbery: probably June-July 1982. In reaching that conclusion I especially take into account two considerations: the improbability that untaxed income should have been derived so rapidly; and the improbability that such evasion only commenced on 1 July 1982. However, I repeat that I have not been persuaded that the $64,000 constituted disclosed assessable income. Having so found, I commence by considering what findings ought to be made in relation to the year of income ended 30 June 1983.
39. The applicant says that the assessment under review for 1983 is excessive in the sum of $55,820 being the difference between a taxable income of $120,635 assessed by the amended assessment and the taxable income of $64,815 returned by the applicant. By reference to the item ``children's accounts'' I have excluded $6,655, leaving a balance in dispute of $49,165 for that year. If I was satisfied that, say, $9,165 was on hand at 30 June 1982 that would reduce omissions for the year to $40,000. (The corollary would be that the
ATC 241
$9,165 would be liable to assessment in one or more earlier years.) If I am satisfied that $49,165 of the cash fund was on hand at 30 June 1982, that would be sufficient to set aside the particular amended assessment, but with consequences for earlier years. To find that a larger sum than $49,165, perhaps $64,000, was on hand at 30 June 1982 would have the immediate consequence of reducing taxable income for the 1983 year below the level contended for by the applicant. I decline to reach any such conclusion as the latter, both because it is quite improbable that the applicant would have returned a level of taxable income substantially in excess of his actual taxable income and because, even if I were so persuaded, I have no jurisdiction to do so. I am satisfied that the bulk of the $64,000 was not accumulated during the year of income ended 30 June 1983. However, despite the amount - which is quite remarkable if the robbery occurred in July 1982 - the applicant has not persuaded me that less than $14,835 constituted assessable income of that year. The result is that the amended assessment of both tax and additional tax for the year of income ended 30 June 1983 will be set aside.40. As to the years 30 June 1978 to 1982 I have not been persuaded that the cash fund as a source of assessable income was accumulated in each year at any lesser rate than that brought to account by the Commissioner and presented as increases in the children's accounts ($6,324, $1,279, $7,000, $1,933 and $3,665 respectively). In consequence the objections to those assessments will fail.
Increasing the assessments
41. That leaves a further question to be considered. $28,964 of the cash fund remains to be accounted for. I have not been persuaded that it was not assessable income. The question is whether I should proceed to make findings as to when it was derived as assessable income and then, on the basis of those findings, to increase the assessments of taxable income before me in relation to the years of income ended 30 June 1978 to 1982 inclusive. I have decided that I should not do so. That is because I have no jurisdiction to effect any amendments which might be appropriate for the year of income ended 30 June 1977 or any earlier year. Secondly, I consider the evidence presented before me as to the levels of business activity in relation to the cafe and in relation to the manufacturing business to be insufficient to warrant such a course. Thirdly, it seems to me that it would be more appropriate that the making of such amended assessments should in the first instance be effected by the Commissioner after undertaking such further investigations, if any, as he thinks appropriate. It would then be open to the applicant to challenge any such amended assessments if advised to do so. Accordingly, I have decided not to increase any of the assessments in issue before me and merely to affirm the assessments of taxable income in relation to the years of income ended 30 June 1978 to 1982 inclusive.
Penalties
42. The assessments in dispute issued in November 1984, prior to the repeal of sec. 226 of the Act (as it then was) and the fixing of new standards for the imposition of additional tax when a taxpayer has caused an underpayment of tax. Section 226, so far as is material, provided:
``(1)...
(2) Any taxpayer who
- (a) omits from his return any assessable income;
- (b) includes in his return as a deduction for, or as a rebate in respect of, expenditure incurred by him an amount in excess of the expenditure actually incurred by him;
- ...
shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of $2, whichever is the greater.
...
(3) The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.
(4)...''
43. In Case U36,
87 ATC 266 I wrote at some length on the subject of additional tax and of the responsibilities to be carried out in the exercise of a discretion to remit the additional
ATC 242
tax which, but for the exercise of that discretion, is automatically imposed. Those comments were made in circumstances where there was little, if any, evidence as to the exercise of that responsibility or even as to the application of the Commissioner's guidelines.
(A) Aggravating factors
44. In the circumstances of this case there is evidence before me that the accumulation of the cash fund was itself seen as constituting an aggravating factor: sufficient to warrant increasing the culpability component from 40% of the tax avoided over the whole calculation to 50% of that amount. I reject that as unreasonable. The basis for imposition of additional tax is to punish the taxpayer for avoiding his tax liabilities. Whether the undisclosed income had been accumulated in cash - something which in the circumstances of this case enabled the quantum of the fund to be determined - or whether the undisclosed income had been dissipated on entertainment, gambling or other amusements, the matter to be punished is the same. If anything, the person who dissipated his undisclosed income is the worse offender because he will leave less readily discernible evidence of his additional untaxed income.
45. Nor is the circumstance that the business was largely a ``cash business'' a consideration warranting the imposition of an aggravating factor. Persons conducting cash businesses are quite as capable of honesty as anyone. What is punishable by way of additional tax is the non-disclosure of income. It is not to be punished more severely because of an understatement not easily detected in the absence of detailed documentary financial records. After all, even detailed documentation is only of limited value if the documentation is incomplete.
46. It was also unreasonable that an aggravating factor limited to one element in the assessments should have been applied automatically to all. It was unreasonable that the flat-rate component should operate - as it did - in relation to a problem of characterisation (whether deductions claimed for repairs and maintenance should have been considered as capital - cf. Case U60,
87 ATC 388) - as if that were as deserving of the same rate of penalty as non-disclosure of income.
(B) Culpability - omission of income
47. Having reached that conclusion, the question which then remains for determination is whether, coupled with a compensatory interest rate of 10% per annum to 13 February 1983 and 20% per annum thereafter, there should be imposed a culpability factor at 40% or more of tax avoided.
48. For the applicant it was argued that he is a migrant; that he comes from a different cultural background to many ``older Australians''; that he is a man of limited education; and that he has no detailed understanding of matters of either accountancy or taxation law. I accept those matters so far as they go. But the applicant was not unintelligent and he had long since ceased to be a stranger in a new land. I do not accept evidence that he had at any time believed that he and his wife were entitled to $5,000 per annum (or anything like that figure) tax-free. I find that he shared a characteristic of nearly all citizens of all cultures at all times: a conviction that they would prefer to pay less taxes rather than more. I further find that, in common with many such persons, he used the opportunities available to him to reduce the level of taxes assessed against him by the simple device of misrepresenting his liability to tax. In his case, that was principally done by understanding his takings. I also find that, in understanding his receipts, he did so quite consciously and that he did so persistently over a long period.
49. I have had regard to his age (now 75) and his health (now poor) but observe that neither explains why the understatements in question were made. It is regrettable that these assessments, and the proceedings before this Tribunal which arise from them, have come at so late a stage in the applicant's life and that the prospect of losing a further substantial part of his earnings to the revenue causes him distress. But that is the burden he created for himself when he embarked upon a course of action leading to these assessments. Indeed it was the applicant's decision to understate his income so as to avoid liability to tax which is the foundation for all the consequences which have flowed. To that extent, he is the cause of his own misfortune.
50. It was also contended that, by reason of the complete reliance placed upon his former accountant, that that should be seen as a
ATC 243
mitigating factor. I reject that as having no relevance in the circumstances - except perhaps in relation to the ``repairs and maintenance'' item. There is nothing in the evidence to suggest that the former accountant had any knowledge of the concealed earnings. Another consideration advanced was that the applicant had not availed himself of tax planning opportunities. I have already commented on that, and observe that that can be put another way: his ``tax planning'' was confined to a deliberate understatement of his earnings.51. Applying the principles more expressed in Case U36, 87 ATC 266, as further developed in Case U60, 87 ATC 388 and in these reasons, I am not persuaded that a culpability factor of 40% of tax avoided is unreasonable so far as it relates to undisclosed income. However, I consider it to be excessive so far as the item ``repairs and maintenance'' (para. 17) is concerned.
(C) Culpability: deduction claims
52. In my view, in so far as the characterisation of capital items as ``repairs and maintenance'' (ante, para. 17) contributed to the underpayment of tax, it was not by reason of the omission of any assessable income from any return. Nor was it by reason of an overstatement of ``the expenditure actually incurred''. For the reasons stated in Case U60, 87 ATC 388, I am of opinion that no liability to additional tax arose by reason of that item. Nor is that position altered by reason of the circumstance that that factor came to be coupled with omissions of assessable income as contributing to the overall result. If I should be in error in that regard, I think that a culpability factor of 20% of tax avoided would have been more appropriate.
53. One further difficulty remains: the amount of the item ($8,853) is more than enough to account for the alleged omissions in the 1979 year ($1,437). I think a fair result will be achieved if I reduce the penalty factor in relation to the 1978, 1979 and 1980 years as if the repairs and maintenance item had accounted for ``omissions'' in those years of $5,067 and $1,437 and $2,349 respectively.
54. In summary, the result with reference to taxable income and additional tax is as follows:
- (a) total omissions for the years under review ($88,576) will be reduced by $55,820 - all effected in the year ended 30 June 1983;
- (b) further amended assessments for years up to 30 June 1982 increasing income by $28,964 should be expected;
- (c) additional tax is considered unreasonable in so far as it is based on a culpability factor of 50%;
- (d) additional tax is not considered to be unreasonable in so far as it is based on a culpability factor of 40% of tax avoided being applied to undisclosed assessable income; and
- (e) to the extent to which the avoidance of tax is attributable to mischaracterisation, no additional tax is leviable.
Conclusion
55. Accordingly, the determination of the Tribunal will be that for the year of income ended
- (a) 30 June 1983, taxable income will be reduced from $120,635 to $64,815; and the assessment of additional tax at $18,782 will be set aside;
- (b) 30 June 1982 - the decision of the Commissioner upon the objection will be affirmed save that additional tax will be reduced from $6,372 to $5,536;
- (c) 30 June 1981 - the decision of the Commissioner upon the objection will be affirmed save that additional tax will be reduced from $2,983 to $2,642;
- (d) 30 June 1980 - the decision of the Commissioner upon the objection will be affirmed save that additional tax will be reduced from $3,745 to $2,165;
- (e) 30 June 1979 - the decision of the Commissioner upon the objection will be affirmed save that additional tax of $688 will be remitted; and
- (f) 30 June 1978 - the decision of the Commissioner upon the objection will be affirmed save that additional tax of $3,222 will be remitted.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.