FAVARO v FC of T
Judges:Spender J
von Doussa J
Sackville J
Court:
Full Federal Court
Spender, von Doussa and Sackville JJ
The proceedings
The appellants appeal against orders made by a Judge of this court, Branson J, dismissing their appeals against certain decisions of the respondent (``the Commissioner''). By those decisions, the Commissioner disallowed in full the appellants' objections to amended assessments issued in respect of the years of income ended 30 June 1986, 30 June 1987 and 30 June 1988. The primary Judge also dismissed the appeals insofar as they related to the Commissioner's disallowance of objections to an amended assessment issued in respect of the year ended 30 June 1989. Since no argument was put by the present appellants in relation to the amended assessments for the 1989 taxation year, it is not necessary to consider those amended assessments any further.
The appellants are husband and wife. The first appellant (``Mr Favaro'') lodged returns for the relevant years disclosing the following taxable income:
Year ended Taxable income
30 June returned
$
1986 33,490
1987 35,285
1988 16,468
The second appellant (``Mrs Favaro'') lodged returns for the same years disclosing the following taxable income:
Year ended Taxable income
30 June returned
$
1986 33,000
1987 35,285
1988 16,199
In about January 1990, the Commissioner commenced an audit of the taxation affairs of the appellants. Upon the completion of the audit, the Commissioner issued amended assessments to each of the appellants, adjusting their respective assessable incomes. In the case of Mr Favaro, the adjustment was as follows:
Year of income Additional Adjusted
ended 30 June assessable income taxable income
$ $
1986 13,573 47,063
1987 151,915 187,200
1988 5,572 22,040
In the case of Mrs Favaro, the adjustment was as follows:
Year of income Additional Adjusted
ended 30 June assessable income taxable income
$ $
1986 12,103 45,103
1987 148,253 183,538
1988 2,046 18,245
In May 1991, notices of amended assessment were issued to each of the appellants on the basis of the adjusted taxable income figures recorded in the tables.
It was common ground that the Commissioner based his amended assessments upon ``T''-accounts for the appellants prepared by his officers. The primary Judge described ``T''-accounts as
``a technique used as an indirect method of ascertaining a taxpayer's taxable income. They compare cash available at the beginning of a period plus cash received during the period with cash expended during the period plus cash on hand at the end of
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the period. With full and accurate information, the two sides of the exercise should balance.''
The appeal heard by the primary Judge was brought pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (the ``Administration Act''). On the hearing of that appeal, the present appellants accepted that s 14ZZO of the Administration Act applied. Section 14ZZO provides as follows:
``In proceedings on an appeal under section 14ZZ to the Federal Court against an appealable objection decision:
- (a) the appellant is, unless the Court orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
- (b) the appellant has the burden of proving that:
- (i) if the taxation decision concerned is an assessment... - the assessment is excessive;
- ...''
Before the primary Judge, the Commissioner did not attempt to establish positively the accuracy of the ``T''-accounts prepared by his officers. Rather, he relied on s 14ZZO to require the appellants to establish that the amended assessments were excessive. Her Honour concluded that the appellants had not discharged that burden and thus dismissed their appeals.
Background to the hearing below
To assess the arguments advanced by the appellants, some further background to the proceedings before the primary Judge is necessary. During the taxation year ended 30 June 1987, the appellants made five deposits with Partnership Pacific Ltd (``PPL'') totalling $245,000. These deposits were made in cash over a short period, from 6 November 1986 to 11 November 1986. The deposits were made in the name of Principe Del Bolzano Pty Ltd, the trustee of the Taurus Trust. One effect of the deposits was that the appellants became creditors of the Trust. During the same financial year, on 1 July 1986, the appellants entered into a contract to purchase a residential unit known as Unit 5/17 Penfold Road, Magill (the ``Magill unit''). The contract price was $84,000, of which $3,000 was paid as a deposit on 4 July 1986. The purchase was settled on 6 August 1986, the balance of moneys required for this purpose being $84,064.33.
It was these transactions or, more accurately, the source or sources of funds for these transactions, that particularly attracted the attention of the Commissioner. The amended assessments reflected the view of the Commissioner that the funds deposited with PPL and the bulk of the funds used to purchase the Magill unit represented assessable income derived by the appellants during the period 1 July 1986 to 11 November 1986.
In support of the appeal heard by the primary Judge, Mr Favaro filed a lengthy affidavit, sworn on 16 June 1995, setting out the financial history of himself and his wife. In that affidavit Mr Favaro made the following claims:
- • On 27 November 1984, Bauhinia Development Corporation Pty Ltd (``Bauhinia''), as trustee of the Favaro Family Trust, sold two residential units. The net proceeds of sale amounted to $117,725.68. Mr Favaro took the bank cheques made out to Bauhinia and cashed them. He took the cash to his home and placed it in a steel ammunition box under the house. He expected to use the cash in connection with the development of a pasta factory. As events transpired, that development did not proceed.
- • On 19 June 1985, Mr Favaro's son, Geraldo Favaro, advanced $50,000 to Mr Favaro as a loan. Geraldo Favaro provided those funds in the form of a cheque drawn on a building society account. Mr Favaro cashed the cheque and placed the cash with the other cash he kept at his home.
- • On 14 May 1986 Mr Favaro closed an account he had with a bank in Italy and withdrew the full balance of L144,067,534 in cash. He packed the cash in a travel bag which he carried as hand luggage on the return trip to Australia, arriving on 24 May 1986. He then transferred the Italian Lire to the ammunition box.
- • On 4 July 1986, $3,000 of the money in the ammunition box was used to pay the deposit on the Magill unit. The balance of the purchase price was later paid in cash from the same source.
- • From about July to September 1986 Mr Favaro exchanged some of his Lire holdings with individuals who intended to travel to
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Italy. He could not remember how many transactions took place, but by September 1986 he had about L80,000,000 left in cash. - • In July 1986 Mr Favaro paid $7,300 towards the purchase of a car, using part of the cash kept in the ammunition box.
- • In about September or October 1986, Mr Favaro went to the offices of Thomas Cook and exchanged the balance of about L80,000,000 for Australian currency, at an exchange rate of about L875 to AUD1. He received the proceeds of the conversion either in cash or in the form of a cheque which he subsequently cashed. He placed the Australian bank notes in the ammunition box.
- • In August 1986, Mr Favaro used cash from the ammunition box to settle the purchase of the Magill unit, except that $15,000 of the balance was provided in cash by his mother.
- • At that stage Mr Favaro had about $245,000 in cash at his home. In November 1986 he invested the remaining cash with PPL in the name of the Taurus Trust.
The Commissioner's amended statement of facts, issues and intentions identified the ``overriding issue in [the] appeals'' to be determined by the primary Judge as whether the appellants' taxable incomes for the relevant years were less than the taxable incomes assessed to them. The Commissioner's amended statement noted that the appellants had included in their affidavits an assets betterment statement, prepared on their behalf. The Commissioner disputed the correctness of the statement in many respects. Among the matters disputed by the Commissioner were the appellants' claims that:
- • they had cash on hand at 30 June 1986 of an amount including $158,938 (or the Italian Lire equivalent prior to its conversion to Australian currency) representing the money withdrawn from the Italian bank;
- • they had used the Italian Lire in the manner set out in Mr Favaro's affidavit;
- • they had cash on hand at 30 June 1985, 30 June 1986 or at any other time, representing the sum of $117,725 received from the sale of units in November 1984;
- • they used the whole or part of the moneys received from the sale of the units in the manner set out in Mr Favaro's affidavit; and
- • the appellants received a loan of $50,000 from their son and that the sum was kept in cash until the 1987 taxation year, when it was allegedly used in the manner described in Mr Favaro's affidavit.
Counsel for the appellants opened the case before the primary Judge in a manner that left no doubt that the question to be determined revolved around the evidence to be given by Mr Favaro. Counsel said this:
``The structure, your Honour, of the [case] to be presented by the applicants is that Mr Favaro who is the main witness to be called by the applicants, has prepared an affidavit which [goes] through the various items in the Assets Betterment Statement.''
After referring to the judgment of Burchett J in
Ma v FC of T 92 ATC 4373; (1992) 37 FCR 225, counsel continued:
``we will be submitting to your Honour that those principles referred to by Burchett J will, in effect, decide this case. That, if your Honour accepts the evidence of Mr Favaro, his explanation, then your Honour will be satisfied that the assessments are excessive in this case and your Honour will allow the appeal.''
The primary Judge's reasons
The learned primary Judge commenced by citing passages from
FC of T v Dalco 90 ATC 4088; (1990) 168 CLR 614 and from Ma. In Dalco, Brennan J, with whom four other members of the Court agreed, said this about s 190(b) of the Income Tax Assessment Act 1936 (Cth), the predecessor to s 14ZZO of the Administration Act (at ATC 4091; CLR 621):
``Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.''
The passage cited by her Honour from Ma was as follows (at ATC 4377; CLR 230):
``... if a taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spends his time, and demonstrates a reasonable explanation for
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any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved. Any other view would introduce a degree of arbitrariness into liability for tax.''
The primary Judge formed an adverse view of Mr Favaro's credibility. She did not regard Mr Favaro's evidence on any significant issue as worthy of belief unless confirmed or corroborated by other evidence or as adverse to the interests of the appellants. Accordingly, she did not accept his evidence on a number of important issues affecting the asset betterment statements prepared on behalf of the appellants.
Despite her view of Mr Favaro as a witness, the primary Judge accepted some of his evidence. In particular, her Honour accepted that:
- • the appellants had obtained the sum of $117,725 from the sale of units in November 1984;
- • Mr Favaro borrowed $50,000 from his son in June 1985; and
- • Mr Favaro withdrew L144,067,534 from a bank in Italy in May 1986, this sum being the proceeds from the sale of land in Italy that took place in 1981, and that he brought the currency back to Australia in cash.
Her Honour was not satisfied, however, that Mr Favaro kept the proceeds of the sale of the residential units ($117,725) in cash at his home for any significant period. She found his reasons for wanting to keep the cash at home ``unconvincing''. She noted that Mr Favaro did not strike her ``as the sort of man who would allow large sums of money to remain idle''. She also said that she did:
``not find it improbable that the $117,725.68 was invested or otherwise spent, by Mr Favaro in some way not disclosed to me. As mentioned above, I am not satisfied that Mr Favaro was frank in his evidence to this Court. Nor am I satisfied that he has been frank with those persons who have provided him with accounting advice. I am left in a state of uncertainty as to many aspects of the applicants' financial affairs in the years of income. I am not satisfied, on the balance of probabilities, that the $117,725.68 referred to above formed part of the funds invested in November 1986 in Partnership Pacific Limited.''
(Emphasis added.)
Her Honour did not accept that Mr Favaro retained at his house in cash the sum of $50,000 obtained from his son. Nor was she satisfied that Mr Favaro exchanged any significant amount of the Italian currency in transactions with individuals who may have been planning to visit Italy. Her Honour thought it probable that he had exchanged most of the currency with Thomas Cook, in early to mid July 1986. She did not accept that Mr Favaro held the Australian currency he thus obtained in cash until early November 1986. She considered that this was an unlikely course for him to have followed, and no convincing reason was advanced for the funds ``not having been invested promptly'' after the conversion transaction.
The primary Judge observed that, if the funds originally obtained from the sources identified by Mr Favaro had been withdrawn from an earlier investment, for the purpose of being invested with PPL or the purchase of a unit, she would have expected evidence of the withdrawal to be available. No such evidence had been adduced and her Honour noted that evidence to this effect would have been inconsistent with Mr Favaro's story of holding the funds in cash. Her Honour concluded as follows:
``Having rejected Mr Favaro's evidence that the funds were held in cash, I am unable to be satisfied that any part of the funds invested in Partnership Pacific Limited in November 1986 derived from the $50,000 loan from Mr Favaro Jnr, the $117,725.68 loan from the Favaro Family Trust or from the funds obtained from Thomas Cook in exchange for the Italian currency. I am simply unable, on the whole of the evidence, to form any view as to what ultimately happened to the proceeds of those two loans, or to the funds obtained by Mr Favaro from Thomas Cook in exchange for the Italian currency. I am also unable to be satisfied as to the source of the funds invested in Partnership Pacific Limited in early November 1986.''
The appellants' contentions
Mr Finkelstein QC, who appeared with Mr Gaszner for the appellants, did not dispute that the appellants bore the onus before the primary Judge of showing that the amended assessments were excessive. He also accepted that the principles enunciated in Dalco were applicable.
ATC 4447
It followed that it was not enough for the appellants to show that the Commissioner had erred in forming a judgment as to the amount of the assessment. Mr Finkelstein also accepted that it was not open to the appellants to challenge her Honour's assessment of Mr Favaro's credit and her findings of primary fact. He nonetheless submitted that her Honour's conclusions, specifically in relation to the 1987 taxation year, were erroneous.Mr Finkelstein contended that the central question before the primary Judge was whether the appellants had discharged the onus of establishing that the sums invested in the 1987 tax year did not represent assessable income. The primary Judge, while rejecting much of Mr Favaro's evidence had failed to take account of other evidence that she was bound to consider. In particular, she had failed to consider that, notwithstanding the detailed investigations carried out by the Commissioner of the appellants' affairs, there was no evidence that the appellants' had conducted any remunerative activity that could have generated assessable income in the order of $300,000 in the first five months of the 1987 tax year. No suggestion had been put to Mr Favaro, for example, that he had carried on a business that was capable of yielding $300,000 in several months. Moreover, it was said that the primary Judge had found that the cash resources had been invested in income producing investments. The inevitable inference, so it was argued, was that the purchase of the unit and the deposit with PPL had come from the realisation of such an investment.
Mr Finkelstein relied, in particular, on two cases to support the appellants' contentions. The first was
Isabella McLean Hines; Henry James v FC of T (1952) 9 ATD 413, an appeal to the Full Court of the High Court from a decision of Webb J ((1951) 9 ATD 304). One issue on the appeal was whether the taxpayer had discharged the burden of showing that the Commissioner's amended assessment for the 1946 taxation year was excessive. The taxpayer gave evidence that the only amounts he had derived in that year, other than his share of income from a business, were winnings from betting. The Commissioner did not suggest that the winnings constituted assessable income.
The judgment of the Court (Dixon CJ, Williams and Fullagar JJ) noted (at 419) that the ultimate issue in the case was the credibility of the taxpayer's evidence on oath. Their Honours also noted that the taxpayer's credit had not been attacked. The only reason the trial Judge had given for not accepting the taxpayer's account (other than a reason which their Honours rejected earlier in their judgment) was that the taxpayer had not kept full records of his betting operations. They concluded (at 420) that there was a ``very definite preponderance of probability'' in the taxpayer's favour:
``Is it possible, in this state of affairs, to justify a refusal to accept Hines' statement on oath that in this year he had no other source of income than the business? In our opinion, it is not. Three important factors come to Hines' aid at this point. The first is that there is nothing in the evidence that seriously suggests any source of income other than the business. The second is that, as soon as Hines' betting wins became substantial, the taxpayers voluntarily directed the Commissioner's attention to the position, and, in each year in which an increase of assets took place, voluntarily placed the figures before the Commissioner. It is not perhaps impossible, but it is in the highest degree unlikely, that this course would be adopted if Hines was really concealing a secret source of substantial income. The third is that the Commissioner had in 1947 conducted a full investigation and inquiry, which had failed to reveal anything worthy of being adduced in evidence or even to suggest any definite line of cross-examination. It may be added that, generally speaking, it is not altogether an easy matter to conceal from all the world a secret source of substantial personal exertion income.''
It will be seen that Hines was a different case from the present. The issue identified by the High Court on the appeal was whether the taxpayer's evidence, in circumstances where his credit was not attacked, was to be accepted. The Court held that, in the light of all the evidence, including the matters referred to in the extract, his statement on oath should be accepted. In the present case, the primary Judge found that Mr Favaro's evidence could not be accepted unless corroborated or against interest. Her Honour specifically rejected his account of the sources of the 1986 investments and found that she could not form any view as to what ultimately
ATC 4448
happened to the proceeds of the sale and loan and the funds obtained in the conversion of the Italian Lire. The judgment in Hines does not require the primary Judge, in these circumstances, to consider a case that was not put to her and, in any event, was inconsistent with the appellants' own version of events.The second case on which Mr Finkelstein relied was the decision of Walsh J in
Krew v FC of T 71 ATC 4213 (H Ct). That was a case in which the taxpayer disputed amended assessments based on betterment statements. His case, like that of the taxpayer in Hines, was that he derived substantial amounts in cash from successful gambling. Walsh J characterised (at 4214) the principal contest between the parties was one ``as to a question of fact''. His Honour pointed out (at 4217) that the Board of Review had not accepted the taxpayer's explanations for his improved financial position and thus found that he had not discharged the onus of showing that the assessments were wrong. His Honour then said this:
``It is one thing to say that the failure of the [ Commissioner] to produce positive evidence of activities of the [taxpayer], which produced money not recorded in the books of his business in dealing in metal and other goods, is a matter to be taken into account when deciding the question whether his evidence should be accepted. It is a different thing to say that as a matter of law the [taxpayer] must succeed if the [ Commissioner] has not proved affirmatively that the disputed receipts were taxable income, because (as was submitted) there is no presumption that they were. The former proposition is correct. The latter proposition is, in my opinion, plainly wrong.''
Like the observations in Hines, Walsh J's comments on the failure of the Commissioner to produce positive evidence of the taxpayer's activities were directed to assessing whether the taxpayer's evidence should be accepted. They do not suggest that the finder of fact must address a case not put by the taxpayer and which is inconsistent with the taxpayer's own evidence.
It is crucial to bear in mind that the appellants' case, as put to the primary Judge, was that funds used from the 1986 investments came from specific, non-taxable sources that had remained intact (as cash) for periods ranging from four months to two years. The appellants did not put forward any evidence that the cash obtained from these sources had been applied to investments, which had in turn been liquidated to provide funds for the investment in PPL and the purchase of the Magill unit. As her Honour observed, any such evidence would have been inconsistent with Mr Favaro's story.
In these circumstances, the observations made by Davies J in
Raffaele v DFC of T 94 ATC 4746 are apposite. His Honour in that case was not satisfied on the balance of probabilities with the taxpayer's explanation for deposits totalling $25,400, which were paid into her bank account. His Honour concluded as follows (at 4749):
``In my opinion, the facts concerning the sums totalling $25,400 have not been disclosed to the Court. It may be that, if disclosed, those facts would show that the moneys were not income of Mrs Raffaele. It may be that the moneys were in whole or in part undisclosed income of Mr Raffaele. But it is not for the Court to speculate. Mrs Raffaele has put forward her version of the facts. If the Court is not satisfied on the balance of probabilities with this version, then Mrs Raffaele fails to satisfy the Court as to the issues which she has raised for the Court's determination and fails to satisfy the burden of proving that the amended assessment was excessive.''
(An appeal to the Full Court was dismissed:
Raffaele v DFC of T 95 ATC 4650.) See also
Saffron v FC of T 94 ATC 4049 (FCA/FC), at 4052-4053, per Gummow and Lee JJ.
We should add that the appellants' submissions appeared to assume that the primary Judge had found that the cash obtained by Mr Favaro from the three sources identified by him had been invested in a form that could readily have been realised and reinvested in PPL or in the residential unit. This assumption was used to support the proposition that it was inevitable, or at least likely, that the funds invested in PPL and the Magill unit came from a non-taxable source. But her Honour did not make the finding assumed by the appellants. She specifically said that she did not find it improbable that the moneys derived from the sale of units in 1984 had been invested ``or otherwise spent''. She also concluded that she was simply unable, after considering all the
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evidence, to form a view as to what happened to the moneys obtained from the sources identified by Mr Favaro. Indeed, her Honour said that she was left in a state of uncertainty on many aspects of the appellant's financial affairs in the relevant years.Finally on this aspect of the case, Mr Finkelstein submitted that it was improbable that the appellants could have derived some $300,000 in assessable income in the first five months of the 1987 taxation year. But, having regard to her Honour's findings, many possibilities are open that are consistent with such a conclusion. As Mr Carnovale, who appeared with Mr Materne for the Commissioner, pointed out, the funds invested in the 1987 taxation year may have come from profits obtained on the sale of an asset in that year, or deferred interest or some other deferred assessable gain obtained in the same year. The burden was on the appellants to show the source or sources of the investment. Establishing that over a period prior to that investment, the appellants had received a series of non-taxable amounts which might have been the source of the investment, did not discharge that burden. On the findings made by the primary Judge, there is simply no basis for concluding that she erred in concluding that the appellants had failed to discharge the burden of doing so.
The 1988 assessments
Mr Finkelstein put forward a further argument which, as finally formulated, related primarily to the assessments for the 1988 taxation year. As Mr Finkelstein acknowledged, the argument was not put to her Honour, despite the appellants being given the opportunity to make submissions as to the appropriate form of orders following publication of her Honour's reasons for judgment. Nor was the argument covered by the grounds of appeal.
The submission was based on the finding made by the primary Judge that Mr Favaro had received a sum of about $10,500 in January 1988, partly in cash and partly as the proceeds of furniture, from his mother's estate. The finding was made by her Honour in the course of dealing with a deposit of $10,500 to the credit of Mr Favaro's bank account in May 1988 (that is, four months after Mr Favaro received moneys from the estate). Mr Favaro asserted that the deposit represented the inheritance received from his mother. However, the primary Judge recorded that she was not satisfied that the deposit to Mr Favaro's account in May 1988 represented the inheritance from his mother.
Mr Finkelstein submitted that the finding that Mr Favaro received an inheritance was not reflected in betterment statements handed up by the Commissioner's counsel in final addresses and the assessment should be modified to reflect the Commissioner's final position. It followed, he said, that the appellants' assessable incomes for the 1988 taxation year should be reduced by $10,500. But the purpose of the betterment statements relied on by the Commissioner's counsel at the hearing was simply to assist her Honour in relation to the submission made on behalf of the appellants. The appellants had prepared their own betterment statements and a comparison was put forward in order to clarify the issues. The betterment statements did not represent the Commissioner's final position. Moreover, the finding made by her Honour concerning the inheritance does not alter or detract from her conclusion that the appellants had not discharged the burden of showing that the amended assessments for the 1988 taxation year were excessive. The source of the deposit to Mr Favaro's account remained unexplained, since the only explanation he offered was not accepted.
Mr Finkelstein also suggested that there was a small discrepancy between the Commissioner's assets betterment statements attached to his written submissions and the amounts of assessable income actually assessed to each of the appellants for the 1986 taxation year. The discrepancy was said to total $7,334, although part of this sum seems to relate to a particular method of calculating living expenses which worked to the appellants' advantage in another taxation year. Having regard to the limited purpose of the betterment statements accompanying the Commissioner's sub- missions, they cannot support the conclusion that the appellants discharged the burden of demonstrating that the assessments for the 1986 taxation year were excessive.
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The appellants' submissions in relation to the 1986 and 1988 taxation years should be rejected.
Conclusion
The appeals should be dismissed, with costs.
THE COURT ORDERS THAT:
1. The appeals be dismissed, with costs.
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