SRBBB v FC of T

Members:
RNJ Purvis QC

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2001] AATA 529

Decision date: 14 June 2001

The Hon. RNJ Purvis QC (Deputy President)

The application

1. This application relates to the personal income tax returns of the Applicant for the years ended 30 June 1990, 30 June 1991 and 30 June 1992, Notices of Assessment and Notices of Amended Assessment issued in respect of each of those years. More especially it concerns imposition by the Commissioner of Taxation (``the Respondent'') of additional tax, interest and penalties at a rate consistent with the taxpayer having been party to deliberate evasion of taxation. It is said by the Respondent that no remission of penalties is warranted.

2. The Applicant denies that he engaged in fraud or deliberate evasion. In light of the amended assessments not being issued until 18 April 1997, the Applicant maintains that as to the 1990 and 1991 amended assessments they were and are, in the absence of such a finding, invalid. Otherwise the Applicant contends that the additional tax penalties and interest should be reduced to nil.

Issues

3. The issues that arise for consideration - notices of objection having by leave been further amended to enable the questions of fraud or evasion to be raised and argued referable to the 1990 and 1991 reviews - in this application are:

(a) whether the conduct and behaviour of the Applicant referable to the preparation and lodgement of his 1990, 1991 and 1992 income tax returns constitute fraud or deliberate evasion on his part;
(b) whether pursuant to section 170(2) of the Income Tax Assessment Act 1936 (``the Act'') the Respondent had power to issue the relevant notices of amended assessment.

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It is not at issue that the amended assessments were not issued within four years from the date upon which the tax became due and payable under the original assessments; and
(c) in the absence of a finding of deliberate evasion whether for the purposes of Taxation Ruling IT 2517 there should be a reduction in or remission of additional tax penalties and interest, in respect of the 1992 year.

4. It was not raised as an issue in the proceedings and the Applicant does not take issue with the contention that if deliberate evasion is found then no remission of the penalties, additional tax or interest is warranted.

The hearing

5. At the hearing of the application the Applicant was represented by Mr M Christie of Counsel and the Respondent by Mr D McGovern of Counsel.

6. The documents lodged by the Respondent pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, were admitted into evidence and marked T1 to T57. Further documents tendered on behalf of the parties were marked as exhibits namely:

+---------------------------------------------------------------+
|                 Description                      | Exhibit No |
|                                                  |            |
| Documents prepared pursuant to section 37 of the | T1-T32     |
| Administrative Appeals Tribunal Act 1975         |            |
|                                                  |            |
| Statement of the Applicant dated 20 October 2000 | A          |
|                                                  |            |
| Handwritten document headed ``orders''           | B          |
|                                                  |            |
| Handwritten Proposal Orders                      | C          |
|                                                  |            |
| Handwritten ``Earnings''                         | R1         |
|                                                  |            |
| Income Tax Return forms of Applicant             | R2         |
|                                                  |            |
| Applicant Amended Notice of Objections 1990,     | R3         |
| 1991, 1997                                       |            |
|                                                  |            |
| Bundle of documents in black folder shown to     | R4         |
| Applicant marked ``Subpoena Documents''          |            |
+---------------------------------------------------------------+

7. The Applicant gave oral evidence upon which he was cross-examined. On the application of Mr Christie and with the consent of Counsel for the Respondent directions were made as to the confidentiality of the proceedings pursuant to section 35(2) of the Administrative Appeals Tribunal Act 1975 (Exhibit C). The directions were until further order of the Tribunal:

(a) that the hearing before the Tribunal be in private;
(b) that the Applicant is to be known only as ``SRBBB'' and his identity must not be disclosed except to the parties and their legal representatives and Members and staff of the Tribunal in the course of the performance of their duties;
(c) that publication of names and addresses of witnesses be prohibited;
(d) that publication of evidence given before the Tribunal or of matters contained in documents lodged with the Tribunal or received in evidence before the Tribunal be prohibited;
(e) that disclosure of evidence given before the Tribunal or of the contents of a document lodged with the Tribunal or received in evidence by the Tribunal be restricted to the parties and their legal representatives and Members and staff of the Tribunal and otherwise be prohibited;
(f) liberty to either of the parties to apply to the Tribunal to vary or revoke these directions; and
(g) nothing in the above to restrict the Tribunal from publishing in its reasons for decision the evidence given before the Tribunal.

The relevant factual situation

8. In respect of some of the evidence placed before the Tribunal there was no dispute or no question raised as to its accuracy. The following is the position as disclosed by the evidence

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with, where appropriate, relevant findings of fact.

9. The Applicant prior to the events herein after related had been in business trading under the corporate style of W.B. Pty Limited. Indeed for 20 years or more the Applicant had been involved in businesses that had been carried on under the name and style of companies and admitted to being generally aware of the requirement for companies to have annual general meetings and comply with other relevant statutory requirements.

10. For some years prior to 1990 the Applicant had been an elected representative. On retiring from politics he recommenced business activities but on this occasion by way of providing consultancy services.

11. The business of W.B. Pty Limited had been profitable and on entering the political arena and until 1990 the Applicant entrusted the conduct of the commercial activities of the company to a chartered accountant. The Applicant says that he ``relied heavily'' upon the accountant:

``... to provide me with business financial and taxation advice. I trusted all aspects of his advice and trusted him implicitly. I considered him to be a very close friend and had every confidence that he was always acting in my best interests.''

12. During the period of the accountants' stewardship the business of W.B. Pty Limited, according to the Applicant sustained substantial losses. There was not any evidence before the Tribunal as to the extent of the losses or the particular years in which they were incurred. However the Applicant's post political activities as a consultant were very rewarding and relatively large amounts were earned by him on this account. He retained the accountant as his commercial adviser as well as utilising a member or members of a large firm of chartered accountants as his tax adviser and tax agent.

13. It was said by the Applicant that he had intended to carry on his consultancy activities per medium of a company to be titled ``T.C.S. Pty Limited'' but this did not eventuate by reason of T.C.S. Pty Limited never in fact being incorporated.

14. The Applicant at all relevant times was chairman and director of a company R.C. Limited which company it was said, intended to retain the to be incorporated ``T.C.S. Pty Limited'' as a consultant. On 8 January 1990 at a meeting of directors of R.C. Limited (T33) it was resolved to retain ``T.C.S. Pty Limited'' at an annual consultancy fee of $250,000. It was said by the Applicant that in January 1990 he intended to have W.B. Pty Limited change its name to ``T.C.S. Pty Limited'' but this did not eventuate.

15. During the income tax years the subject of this application R.C. Limited made payments for consultancy services by cheques drawn in favour of ``T.C.S. Pty Limited'', the Applicant himself and to ``cash''. All of these cheques were deposited into the Applicant's personal bank account. Invoices for ``services rendered'' signed by the Applicant were issued under the name of T.C.S. Pty Limited referring to the Applicant as payee. Cheque butts designated the payee as the Applicant.

16. On 8 December 1992 W.B. Pty Limited was deregistered and dissolved (T27-15). No income tax returns were lodged by the company W.B. Pty Limited in respect of the relevant years. The Applicant says that in about January 1990 he received advice from his accountant to the effect that if consultancy fees were paid to W.B. Pty Limited instead of himself, W.B. Pty Limited on account of its accumulated losses would not be liable for payment of income tax and any payments by W.B. Pty Limited to the Applicant could be by way of reduction of his ``account'' with W.B. Pty Limited, and also not subject to income tax. The Applicant says this ``advice'' was not questioned by him. He was not advised that his personal exertion income ``could not be put through'' W.B. Pty Limited or that he ``could not personally utilise the accumulated losses of W.B. Pty Limited''.

17. The relevant income tax returns were according to the Applicant prepared by the tax agent from information supplied to him by the accountant. ``This is the reason why the [R.C. Limited] consultancy income attributed to me was not originally returned by me'', he said. He was not advised by the tax agent that ``... it was not possible to channel my consultancy income through [W.B. Pty Limited] then repaid to me as repayment of loans I had made to that company''. More specifically as stated in his affidavit evidence:

``I often received advice from [the accountant] and followed it without question. I recall that at or around the time [ T.C.S. Pty Limited] was appointed to

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consult to [R.C. Limited] [the accountant] said to me in words to the following effect:

[The Applicant], you have got these losses in [W.B. Pty Limited] which you should take advantage of. [W.B. Pty Limited] get paid consultancy fees from the [R.C. Limited] it won't pay any tax because of the losses. You can get the consultancy fees as a payment in reduction of your loan to the company so you don't pay any tax either.''

18. Had the Applicant been told that he could not channel his income through the company, he said he would have not allowed his returns to appear as they were. He now criticises the accountant and the tax agent for ``poor representation and advice''.

19. The Applicant states that he did not attempt to defraud the Respondent or ever attempt to evade tax. His oral evidence was, as relevant, as follows:

``Mr McGovern: `You fully appreciated that the money you received from your own personal consulting activities was income in your hands, didn't you?'

Applicant: `I've never denied that it was income in my hands.'

Mr McGovern: `All I'm asking you about in relation to consulting income as opposed to [ R.C. Limited] receipts is - do you agree that the consulting income that was received by you was received by you from personal activities in which you engaged in that year?'

Applicant: `I have never denied that.'

Mr McGovern: `Did you provide your personal bank account to your accountant - a copy of your bank statement?'

Applicant: `Well, I presume I did Mr McGovern... Right?... Otherwise he wouldn't have known what my income was.'

Mr McGovern: `Of course looking at that document [a document in the handwriting of the Applicant on parliamentary letterhead] and bearing in mind it is in your own handwriting it is clear enough, isn't it, that you were earning very substantial amounts of money from activities that you were engaged in personally in the 1990 through 1992 period?'

Applicant: `Yes, we haven't denied that.'''

The returns and assessments

20. The Applicant caused his 1990 and 1991 income tax returns to be lodged together on 25 May 1992. The Applicant's 1992 return was lodged on 16 March 1994, a notice of assessment being issuing on 5 April 1994. It was not until 18 April 1997 that amended assessments were issued in respect of the relevant years. The amended assessments included additional tax with a culpability component of 45 per cent.

21. The Applicant says as earlier mentioned that he relied upon the advice of professional advisers when preparing the returns, that is his personal accountant and his tax agent. He relied he said upon the personal accountant to supply the tax agent with financial information relevant to his returns. On his behalf it was said he provided details of his ``personal income and expenditure'' to his tax agent and relied upon the tax agent to prepare his returns. The Applicant in his affidavit (Exhibit B) said that he relied on the accountant to supply the tax agent with ``... all relevant information in relation to my interest'' in W.B. Pty Limited.

22. The Applicant says he did not make any suggestions on how ``his income should be treated by [the tax agent] in his returns'' and was never advised ``that income from personal exertion could not be offset against the losses of `W.B. Pty Limited'.'' Any error or omission in his returns was consequent upon his relying upon his professional advisers. The errors or omissions were alternatively the result of inadvertence.

Explanations of the omissions

23. The Applicant and his accounting representatives have at various times been asked to provide an explanation for the Applicant's omission to disclose the amounts received on account of consultancy services and fees deposited to his personal bank account as income in his returns. These explanations include the grounds upon which objection was taken to the amended assessments. Such explanations as forthcoming were as follows. They are relevant in that they not only reveal the extent of the Applicant's knowledge awareness and understanding but reveal a situation where the Applicant maintained or sought to maintain an intent, so it is submitted on behalf of the Respondent, to deceive the Respondent by the making of statements known by him to be false.

ATC 2199

24. In his affidavit of 15 December 2000 the Applicant says that he often received advice from the accountant and ``followed it without question''. He recalled that at or about the time ``T.C.S. Pty Limited'' was ``appointed'' to consult to R.C. Limited, that is 8 January 1990, the accountant said to him words to the effect of:

``You have got these losses in [W.B. Pty Limited] which [you] should take advantage of. If [W.B. Pty Limited] get paid consultancy fees from [T.C.S. Pty Limited] it won't pay any tax because of the losses. You then get the consultancy fees as a payment in reduction of your loan to the company so you don't pay any tax either.''

25. Over part of the period 1990 to 1992, invoices were issued for services rendered in the name of T.C.S. Pty Limited. For example, on 21 January 1990 an invoice was raised in the amount of $62,500 ``for services rendered for the month of Nov, Dec and Jan''. On 23 January 1990 a cheque was drawn by the Applicant for $62,500, payee noted as the Applicant the payment being for ``consultancy one quarter fee Nov-Jan''. A similar procedure was followed in each month thereafter. The monies were banked to the credit of the personal account of the Applicant.

26. In the course of his cross-examination the Applicant was asked:

``Mr McGovern: `Short circuiting this you'd agree with me that for each month throughout 1990, 1991, 1992 you were in the habit of raising an invoice and signing the invoice and then signing a cheque requisition in [R.C. Limited] paying you fees?'

Applicant: `Well not on every occasion but most I did, yes.'

Mr McGovern: `Yes and banking all of those fees to your own account?'

Applicant: `Yes.'

Mr McGovern: `Now, I want to suggest to you that those fees were fees which you knew at the time of preparation of your 1990, 1991 and 1992 tax returns were fees earned by you personally?'

Applicant: `I knew that, yes.'''

27. In an extract of minutes of a directors meeting of 31 August 1990, accompanying the accounts of R.C. Limited for the period ended 30 June 1990, the Applicant being a signatory to the accounts and the extract, it was stated:

``During the period ended 30 June 1990 the company engaged [T.C.S. Pty Limited] as its principal consultant pursuant to a board resolution dated 8 January 1990. The company has ratified this pre-incorporation contract pursuant to section 81 of the company's code. [The Applicant] is a director of [T.C.S. Pty Limited] and has an indirect financial interest in the contract.''

Fees paid to the consultant for the period from November 1998 to balance date totalled $166,667.00. As already mentioned in these reasons ``T.C.S Pty Limited'' was never incorporated.

28. In a handwritten letter to his banker, noted as received on 13 May 1991, the Applicant under the heading ``income'' included an amount of $250,000 per annum ($12,500 per month) from R.C. Limited. He also noted his receipt of a parliamentary pension.

29. In the directors report of R.C. Limited for the year ended 30 June 1991, signed by the Applicant as a director on the 8 November 1991, it is stated:

``Directors,

[The Applicant] has declared his beneficial interest in a contract to provide a consultancy service to the company [T.C.S. Pty Limited] in which he holds a material interest.''

30. In notes accompanying the accounts of R.C Limited for the year ended 30 June 1991 and under the heading ``consultancy agreement'' it is stated:

``The company engages [T.C.S. Pty Limited] as its principal consultant sealed to a board resolution dated 8 January 1990. [ The Applicant] is a director of [T.C.S. Pty Limited] and has an indirect beneficial interest in the contract. Fees paid or payable to the consultant for the year ended 30 June 1991 totalled $250,000 plus a reimbursement of certain incidental expenses.''

31. The notes to the 1992 accounts of R.C. Limited stated:

``Consultancy Agreements

The company engages [T.C.S. Pty Limited] as its principal consultant pursuant to a

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board resolution dated 8 January 1990. [The Applicant] is a director of [T.C.S. Pty Limited] and had an indirect beneficial interest in the contract. Fees paid or payable to the consultant for the year ended 30 June 1992 totalled $145,000 plus the reimbursement of certain incidental expenses.

It is agreed that such consultancy will cease if the fund raising activities of [T.C.S. Pty Limited] are insufficient to prudently meet the operating expenses of [R.C. Limited].

This is in accordance with the original agreement between [T.C.S. Pty Limited] and the directors of [R.C. Limited] on 8 January 1990.''

32. On the 8 August 1991 the accountant wrote to the Applicant detailing ``Your current status of income and consultancies as at 30 June 1991'', including as income a monthly fee of $12,500 from R.C. Limited. His parliamentary annuity was also shown as part of his income (Exhibit 4).

33. During the course of his cross- examination, the Applicant was asked: ``So that was the position wasn't it that in the year ended 30 June 1991 your belief at that time was that you had something in the order $470,000 of net income from the year?'', to which he replied, ``Yes, I think that's right''. And further, he was asked ``Does that serve to assist your recollection that in the 1991 year you received $250,000 from [R.C. Limited] by way of consulting fees?'', to which he replied, ``Yes, that's never been a problem''.

34. Although outside of the relevant period, on 1 September 1992 the cheque voucher for ``consultancy fees for August 1992'' for $12,500 showed the payee as the Applicant, the initiating invoice being raised on the letterhead of the Applicant. The cheque drawn on the account of R.C. Limited was signed by the Applicant and made payable to him. The same procedure was followed in September, October and November 1992.

35. An undated document in the handwriting of the Applicant and on parliamentary letterhead (Exhibit 1), details ``earnings'' of the Applicant in respect of inter alia the relevant years. R.C. Limited is shown as the source of $275,000 for the 1990 year and $125,000 for the 1991 year. Neither of these amounts later brought to account in the amended assessments was disclosed in the original returns. On its face the document would have been written no later than March 1993, the last date appearing on it being 5 February 1993.

36. In a letter to his banker in 1992 or 1993 (T54/345), the Applicant stated as a part of his personal income monies receivable from R.C. Limited in the amount of $250,000 per annum.

37. In 1995 the Applicant was the subject of an income tax audit. At a meeting with officers of the Respondent on the 9 October 1995 he stated that the consultancy fees received were returned in a company ``TAS Pty Limited''. However no taxation returns had been lodged by TAS Pty Limited, it having been registered on 1 November 1990 under another name, but it had not traded. The Applicant is shown (T5/319) as having been appointed on 1 July 1992 as director and secretary of that company. Even though TAS Pty Limited was deregistered on 15 May 1995 (T57/317) a ``consultancy agreement'' was purportedly entered into between TAS Pty Limited and R.C. Limited on 23 October 1995 (T5/33).

38. Notes taken by an officer of the Respondent in relation to an interview held on 19 September 1996 at the office of the Applicant's tax agent (the large firm of chartered accountants), with a partner and a manager of the tax agent they acting on behalf of the Applicant, state as here relevant:

``Details were then sought on how the payment for the 1990 to 1992 years were brought to account. [The tax agent] advised that his involvement in this matter commenced with a 1993 income year and that before that time the matter was dealt with by [the previous tax agent] from [the large firm of chartered accountants]. He understood that all [the Applicant's] earnings for the earlier years were passed through a company called [W.B. Pty Limited] the principals of which were [the Applicant] and...

This company was said by the [tax agent] representatives to have had losses carried forward and that the earnings of [the Applicant] for the 1990 and 1992 years would have been run through this company and been absorbed by the company's losses. [ The Applicant] was said to have had an existing loan account with [W.B. Pty Limited] a substantial amount owing to him.

ATC 2201
There was an agreement or understanding in place that even though all the consultancy earnings of [the Applicant] for the years in question passed directly into his bank account they would have been taken as company income and set off against the previous years losses and then categorised as repayments to him against his [W.B. Pty Limited] account.

...''

(T42/278)

39. It was further stated in the same notes:

``The ATO representatives then put their view that all the consultancy income received by [the Applicant] in the 1990 to 1992 years represented personal exertion income and assessable to [the Applicant] in his own right. The [tax agent] representatives argued that this position would be most detrimental to [the Applicant] as it would increase his total taxation liabilities to a point where it would be impossible for [the Applicant] to carry on. The question of [the Applicant's] total liability was discussed but that any arrangements for payment would be best discussed after the completion of the audit process.''

40. Under date 16 June 1997 the Applicant lodged with the Respondent notices of objection to the amended assessments. In each such notice it was inter alia stated:

``The grounds upon which I rely are as follows:

(1) In relation to the amount of $... included in my assessable income as net consultancy income, the relevant amount should have been properly assessed as income derived during the year income by [W.B. Pty Limited] a company in which I was both an employee and held an equity interest.

(2) Payments were made to [W.B. Pty Limited] by clients of that company in respect of consultancy services provided by that company. Such consultancy services were performed in part by me as an employee of that company. [W.B. Pty Limited] provided me with administrative assistance, office space and equipment etc in order to fulfil my employment duties.

(3) Such payments to [W.B. Pty Limited] were not for my personal exertion.

...''

(T17/62)

41. In the course of his cross-examination the Applicant gave the following evidence:

``Mr McGovern: `In the 1990 financial year, that is the year ended 30 June 1990, you were not an employee of [W.B. Pty Limited], were you?'

Applicant: `I think I owned the company at that stage.'

Mr McGovern: `Well, you agree with me that you weren't an employee of that company?'

Applicant: `I hadn't been an employee of that company since 1977.'

Mr McGovern: `You certainly earned no income as a result of any employment with [ W.B. Pty Limited] in that year did you?'

Applicant: `No.'

...

Mr McGovern: `... When you stated in your objection: I was both an employee and held an equity interest - we know that the statement ``I was an employee of [W.B. Pty Limited]'' is false, isn't it?'

Applicant: `Technically, yes.'

Mr McGovern: `Well, can you have non- technical falsehoods, can you?'

Applicant: `No, I wouldn't think so, no.'

...

Mr McGovern: `When you say ``... such payments were not for my personal exertion,'' that was false, wasn't it?'

Applicant: `In hindsight, it - it certainly is not true.'

...

Mr McGovern: `All right, well, is what you are saying that as at 16 June 1997 when you signed the notice of objection you wished to indicate that your state of mind in 1992 was that payments were made to [W.B. Pty Limited] by clients of that company in respect of consultancy services provided by that company, is that right?'

Applicant: `Well, I was led to believe I could do that. Yes.'

Mr McGovern: `Right, well, who were the consultancy services provided by?'

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Applicant: `They were provided by me.'

Mr McGovern: `They were provided by you weren't they?'

Applicant: `Yes.'

Mr McGovern: `Well they weren't provided by [W.B. Pty Limited] at all were they?'

Applicant: `Well I've been through that before and quite freely admit: no there [ weren't but I was led to believe I could use that as a way of minimising my tax].'

...''

(T38/39/41/74)

42. In his reasons for seeking review by the Tribunal of the objection decisions in respect of each of the relevant years lodged on 17 March 1998 it was inter alia stated:

``...

(3) The Assessment is excessive for the following reasons:

(a) The amount of $... [the W.B. Pty Limited income] should not have been included in the taxpayers assessable income for the year of income ended 30 June 1991 [30 June 1990 and 30 June 1992] as it was income of [W.B. Pty Limited].

(b) The [W.B. Pty Limited] income is not referrable to the taxpayers personal exertion.

...

(d) The culpability component of the additional tax imposed in the assessment is excessive because:

(i)...

(ii) the consultancy fee upon which the assessment of additional tax is based was, to the Taxpayer's knowledge, income derived by [W.B. Pty Limited];

...''

(T1/3)

43. Under date 27 October 2000 the Applicant lodged Amended Notices of Objection referrable to each of the relevant years. As to the omission of the consultancy fees income from his returns, the Applicant stated [Exhibit 3]:

``...

The consultancy fee upon which the assessment of additional tax is based was to the best of my knowledge income derived by [W.B. Pty Limited] and not income derived by me.''

Yet in the course of his cross-examination the following evidence was forthcoming:

``Mr McGovern: `Of course looking at that document and bearing in mind it is in your own hand writing, it is clear enough; isn't it, that you were earning very substantial amounts of money from activities that you engaged in personally in the 1990 through to 1992 period?'

Applicant: `Yes, we haven't denied that.'

...

Mr McGovern: `So isn't the document suggesting that the consultancy fee was income was income derived by [W.B. Pty Limited]?'

Applicant: `Well, that was my state of mind at the time when I was advised by [the accountant] and the [tax agent] that that income could be put against tax losses. So that was my - that was my fault at the time. Now obviously I have information since which is different but that was the basis on which that statement was made.'

...

Mr McGovern: `Do you see: [1967 objection]. Payments were made to [W.B. Pty Limited] by clients of that company... Now you go on to say: ``In respect of consultancy services provided by that company''... do you see that?'

Applicant: `I do see that yes.'

Mr McGovern: `Right, well, is that true or false? - Well in my mind at the time that was true, on account of the advice I was given.'

...''

(T62/69/71)

44. The Applicant also gave the following evidence:

``Mr McGovern: `What I want to suggest to you is you were keenly aware at all times and relevantly in the 1990/1991 1991/1992 years that you were generating very large amounts of money from your own personal exertion earning consultancy fees?'

Applicant: `Yes.'

Mr McGovern: `You were perfectly aware of the fact that all of those moneys were

ATC 2203
being banked to your own personal bank account?'

Applicant: `There's no question about that, Mr McGovern.'

Mr McGovern: `I want to suggest to you that there is no suggestion, from any document that I've shown you this afternoon, that you will agree, that there were any consultancy fees that were being payable to [W.B. Pty Limited], were there?'

Applicant: `Well, they weren't payable to [ W.B. Pty Limited], no. They were payable to me.'

Mr McGovern: `All of the clients for whom consulting fees were payable were clients of you personally weren't they?'

Applicant: `Yes.'

Mr McGovern: `What appears in your objections to the effect that the consultancy fees were income derived by [W.B. Pty Limited] and not income derived by you is absolutely incorrect isn't it?'

Applicant: `That was the advice I was given at the time, and I acceded to it very foolishly. I have never backed away Mr McGovern from it either, by the way.'

...''

(T100/101)

The ``advice'', the Applicant and the Accountants

45. The Applicant maintains that any errors or omissions appearing in or from his taxation returns were as a result of his relying on professional advisers namely the accountant and tax agent as earlier mentioned. To the extent to which he was personally responsible for any such errors or omissions it is submitted that this conduct could most accurately be described as inadvertence, carelessness or at the worst, negligence. The Respondent maintains that the Applicant engaged in deliberate evasion, hence enabling it pursuant to section 170(2) of the Act to amend the 1990 and 1991 assessments. The amended assessment for the 1992 year was within time.

46. In his affidavit evidence the Applicant stated:

``...

9. At the time of the preparation of my personal 1990, 1991 and 1992 tax returns, my personal accountant was...... were my tax agents.... was the person at [the firm of chartered accountants] with whom I was dealing. From my recollection... prepared and lodged on my behalf my personal tax returns for the 1990, 1991 and 1992 tax years.

...

12. When it came to the preparation of my tax returns for 1990, 1991 and 1992, I relied on [the accountant] to supply [the tax agent] all relevant information in relation to my interests in [W.B. Pty Limited].

...

14. I did not question [the accountant's] advice and simply assumed he was helping me and acting in my best interest. [The accountant] never advised me that:

(a) my personal exertion income could not be put through [W.B. Pty Limited] or any other companies;

(b) that I could not personally utilise the accumulated losses of [W.B. Pty Limited].

15. Furthermore [the tax agent] of [the chartered accountants] prepared my tax returns for the 1990, 1991 and 1992 tax years upon information supplied to them via [ the accountant]. This is the reason why [ R.C. Limited] consultancy income attributed to me was not originally returned by me. [The tax agent] had never advised me to the effect that it was not possible to channel my consultancy income through [ W.B. Pty Limited] then repay it to me as repayment of loans I have made to that company. Had he or [the accountant] done so I would not have ever allowed my tax returns to be prepared in the circumstances they were.

...

17. I believed that [the firm of chartered accountants] and [the accountant] have advised me very poorly and I am now considering taking legal advice in respect of my rights against [the firm of chartered accountants] for what seems to be clearly poor representation and advice.

...''

(Exhibit A)

47. In his oral evidence the Applicant said that he ``presumed'': that he provided his personal bank account a copy of his bank

ATC 2204

statement sheets to the accountant, ``... otherwise he wouldn't have known what my income was'' (T31). The tax agent prepared the tax return, as the Applicant recalls it, on advice provided by the accountant. The Applicant himself, so he said, had all of his bank statements showing the consulting income and the amounts he had received from R.C. Limited which had been deposited to his own bank account. He said that he had a meeting with both the accountant and the tax agent and that he told them what his income was. When asked in what form had his income been revealed to the tax agent, the Applicant said:

``Applicant: `Well, I presume in terms of bank receipts or whatever or maybe a written document I gave, I can't recall.'

...

Mr McGovern: `At the point that you signed your tax returns in 1992 you agree that those tax returns don't tell the full story about your income earning activities in those years, do they?'

Applicant: `Well in isolation from whatever tax were claimed, no, they don't.'

Mr McGovern: `Right and what I'm asking you about now is do you say that you disclosed all of that income to [the tax agent]?'

Applicant: `Absolutely.'

Mr McGovern: `By what form or in what form did you disclose it?'

Applicant: `Well I just forget now but - whether it was either - and I presume that I gave him my bank accounts. If I hadn't given them to him I would certainly have given them to [the accountant] who prepared these tax returns in conjunction with [the tax agent]. I've made no attempt whatever to conceal one cent of my income as I haven't all my life.'

...''

(89/103)

48. The Applicant maintained that he was convinced by his accountant that he could claim ``that income as income earned'' by W.B. Pty Limited. When asked whether he ever spoke to the tax agent on the subject, he said that he ``probably did in the preparation of the return'' (T5). Later, the following was put to the Applicant and he gave answers as under:

``Question: `[The Applicant], you have told us that [the accountant] was your accountant general accountant and [the tax agent] was your taxation accountant is that correct?'

Applicant: `That's correct.'

Question: `If this method of treating your income had been successful, you would probably have saved yourself in the vicinity of $200,000 to $300,000?'

Applicant: `Correct.'

Question: `It was probably one of the most significant financial transactions that you could have entered into?'

Applicant: `Correct.'

Question: `And you are telling us that you do not recollect whether you discussed this with your tax accountant or not?'

Applicant: `Well I discussed...'

Question: `Is that what your telling us sir?'

Applicant: `Well I discussed it with [the accountant].'

Question: `Yes I know that, yes.'

Applicant: `Yes.'

Question: `You've told us that, but I'm asking you whether you discussed it with your tax accountant, and are you telling us that you do not recollect whether you discussed it with him or not?'

Applicant: `Well I can't recall with accuracy whether I discussed it with him or whether [ the accountant]. - I know [the accountant] consulted with him about the preparation of the return whether I was involved in that discussion on the specific issue with [the tax agent] I can't recall. I said here I can't recall. I'm not exactly sure whether I did or not. I certainly had discussion with him about the tax return but whether it was on this specific issue I couldn't tell you. I relied entirely upon the advice.'

Question: `You say you certainly had a discussion with [the tax agent] in relation to the tax return?'

Applicant: `Well I had to go there to sign it for a start.'

...''

(TR9)

49. When it was put to the Applicant that in 1992 he was not an employee of W.B. Pty

ATC 2205

Limited, he replied, ``Well I had been convinced by my accountancy people that I could purport to be an employee of [W.B. Pty Limited] and claim the tax losses''. (TP11) Further he said that he was ``convinced that the money that I'd earned as a consult could be claimed against losses in a company I own''. (TP-12) More specifically he was asked:

``Mr McGovern: `Whatever the quality of the advice was, the advice that you were given was that you would be able to not include the amounts that you personally earned from your own consulting activities provided [W.B. Pty Limited] was engaged in some activities in the relevant years, that was the advice you were given was it not?'

Applicant: `In round about terms I guess.'

Mr McGovern: `Yes so you knew in 1990, 1991 and 1992 that [W.B. Pty Limited] the company was then not doing anything at all by way of trading, you knew that?'

Applicant: `I knew that, yes of course I knew that.'

Mr McGovern: `And you knew that [W.B. Pty Limited] was not engaging in any consulting activities didn't you?'

Applicant: `I was convinced by [the accountant] that it was legal for me to transmit one lot of income to a company I owned which had tax losses.'

Mr McGovern: `But only if [W.B. Pty Limited] was paid consultancy fees by [R.C. Limited] that is what he told you, didn't he?'

Applicant: `Well that's what it says there.'

Mr McGovern: `And that is what you assert he told you?'

Applicant: `That's what I assert he told me, yes.'

Mr McGovern: `Yes and when it came to the time of preparing your tax returns you knew that [W.B. Pty Limited] was not in receipt of any consultancy fees from the taskforce didn't you?'

Applicant: `Directly yes, but I was convinced that I could do that...'

...''

(TP-17)

50. The Applicant acknowledged that he banked to his own account all of the funds that he received by way of consultancy services from his own personal exertion and that he knew that these funds were not repayments of capital from W.B. Pty Limited (T18). The Applicant further acknowledged that in order to be able to utilise any tax losses W.B. Pty Limited had to have income to generate in a year against which it could offset any available losses and that there was no other way of utilising the losses (T24). That is, in order to offset the losses W.B. Pty Limited had to generate income and had to be engaged in income earning activities to generate such income (TP-26/26). The Applicant acknowledged that he was aware of this being the position at the time he was given the advice referred to in paragraph 13 of his affidavit (TP-26). Nevertheless, he went ``forward generating the income from your own consultancy activities and from your own activities in which you engaged in with'' R.C. Limited (TP-26). When questioned as to the tax loss position the following evidence emerged:

``Mr McGovern: `Right and when you came to look at your tax return you must have known at the time, just pausing there with the pen before signing the tax returns, that not all of the gross income had been returned in those tax returns is that right?'

Applicant: `Quite obviously because it had been - it had been put against tax losses in [ W.B. Pty Limited].'

Mr McGovern: `And when you say it had been put against tax losses in [W.B. Pty Limited], did you sight any [W.B. Pty Limited] tax return at the time of signing your own personal tax returns?'

Applicant: `No I didn't.'

Mr McGovern: `And you didn't know anything about the quantum or the qualification of any tax losses that might be available in [W.B. Pty Limited]?'

Applicant: `No, I put myself firmly in the hands of [the accountant] and the [tax agent]. [The accountant] had obviously supplied the information to [the tax agent] upon which he prepared the tax returns. I was dealing with [the firm of chartered accountants] not a little suburban accountant.'

...''

(TP-29)

51. It was submitted on behalf of the Respondent and on the assumption that advice

ATC 2206

was given to the Applicant as contained in paragraph 13 of his affidavit, that, looked at on its own such advice was not in the category of erroneous advice per se. However it was not this ``advice'' which was ultimately relied upon by the Applicant and as the basis upon which the returns were lodged. The course now relied on by the Applicant is of a different type and a lot less sophisticated than the advice narrated in paragraph 13. The assertion by the Applicant, it was said, was that because of the fact that he controlled a company which had ``tax losses'', he could simply automatically offset income from personal exertion against those ``tax losses''. Conduct of this nature was not consistent with ``the advice'' referred to in the affidavit.

52. Having in mind the consistency of the position maintained in the Applicant's affidavit and in the objections as well as that put forward by the accountants to officers of the Respondent, the Tribunal is satisfied that the course of conduct pursued by the Applicant referable to the consultancy fees was not consistent with ``the advice'' referred to in paragraph 13 of his affidavit. The Applicant did not conduct his affairs in a way consistent with the advice, set out in paragraph 13 of his affidavit. Such advice was never relied upon the Applicant. He knew at all relevant times that he had derived personal exertion income.

53. It was submitted on behalf of the Respondent that the Applicant knew at the time he signed and had lodged his taxation returns that W.B. Pty Limited was a defunct company, that the company had not generated any income and that there was no capacity for it to offset any ``income'' against any ``prior year losses''. The returns on their face did not bear out the proposition that there was any advice given let alone followed along the lines of that asserted in the affidavit. It was further submitted that there is nothing appearing in the income tax returns that could in any way suggest there was a professional adviser who had supported the preparation of a return reporting primary or material facts upon the basis of an offsetting approach. The Tribunal concurs with these submissions.

54. The Applicant said that he did not recollect receiving any advice from the tax agent in contrast to the accountant on the issue of setting off losses of a company against income personally derived and he did not recall placing information before the tax agent for the purpose of preparing the tax returns. The Applicant did not have any awareness as to the extent of any losses that might have been suffered and he did not sight any W.B. Pty Limited tax return at the times of signing his own personal returns. Each of the relevant income tax returns was misleading and did not disclose the gross income received by the Applicants in each of the relevant years.

55. Deliberate evasion entails an adverse finding as to intent on the part of a taxpayer, that is that information was deliberately withheld from the Respondent for the purpose of avoiding tax. It was submitted on behalf of the Applicant that it was reasonable for him to rely upon professional advisers they being reputable professional advisers, and it cannot be said that there was on his part an intention to withhold information.

56. In this context the Tribunal was referred to a number of Commonwealth Taxation Board of Review decisions (10 CTBRD case number 3; 10 TBRD case number K88; 1950 TBRD case number 9). However, each matter must be determined on the basis of its own factual situation. Be it that the Applicant passed on ``documentary evidence'', ``deposit books and the like'' to his accountant and that the accountant provided ``all relevant information'' to the tax agent, these facts do not of themselves bear significantly upon the Applicant's state of mind.

57. It was submitted that:

``Where the return has been prepared solely by a professional taxation adviser a lay person is entitled to rely upon that return by which I mean that it is not unreasonable for a lay taxpayer to rely upon the return in circumstances where it has been prepared in conformity with the documentation provided by him - or not in conformity but based on the documentation provided to him.''

(T8-11)

58. Whether this be so or not must inter alia depend upon the nature and extent of the information that was provided to the adviser. In the present case apart from referring as above stated to bank deposit books and the like, the Applicant was not able to assist the Tribunal in identifying the material provided to the accountant. Significantly the Applicant did not identify the various invoices and cheque

ATC 2207

authorisations in evidence as being material provided to the accountant.

59. This does not enable a taxpayer to maintain that a position reflected in a return as being correct has received ``the blessing of a reputable accounting firm'' unless it can be reasonably shown that the ``reputable accounting firm was fully informed as to the factual situation''. It is trite to say that the role of a professional tax adviser is relevant or can be relevant in determining whether there has been evasion. To seek assistance in such a situation where a tax adviser has been utilised, a taxpayer having the onus of disavowing evasion has a need to show that the tax adviser was appraised of the situation, as was the taxpayer. Thus, where it can be established that a tax adviser was fully informed by a taxpayer and the taxpayer received appropriate advice, then the intent of the taxpayer may be shown as other than one directed to deceiving the Respondent with the object of evading tax. In such a case it may be that a taxpayer could maintain a credible explanation for a failure to include income in a return. This in circumstances where there was an honest and reasonable reliance upon a tax agent.

60. However in the present instance, assuming the taxpayer received the advice referred to in paragraph 13 of his affidavit, it is clear that he did not conduct his affairs in accord with such advice and further he was aware at all relevant times that he was not an employee of W.B. Pty Limited, that W.B. Pty Limited was not trading and that W.B. Pty Limited was not conducting consultancy services. Further, he was not aware of the extent of losses, if any, that might have been suffered by that company. Assuming that the said advice was given to the taxpayer did not follow such advice and was aware that the factual situation was in any event such that it would not have been possible to implement the advice.

61. Accordingly the role of the professional advisers in the present matter is of no assistance to the Applicant. He did not rely upon their advice, assuming that it was given, in structuring the invoicing, requisition, drawing of cheques and depositing of monies, each stage of which was carried out under his direction and control. On the evidence before the Tribunal, the course of conduct entered into by the Applicant was one devised by and implemented by himself.

Inference to be drawn by reason of parties not calling the accountant and/or the tax adviser

62. The Applicant did not cause the accountant or the tax adviser to be summonsed to give evidence or to produce any documents. Nor did the Respondent. It was submitted on behalf of the Applicant, that the Tribunal ought to draw an inference adverse to the Respondent as a result of the failure to call the accountant and/or the tax agent. This, in circumstances where the Applicant had given evidence as to advice and assistance he had received in the preparation of the returns and the Respondent sought to rebut that position. Thus it was said the failure to call evidence gave rise to an adverse inference consistent with what was stated to be the rule in
Jones v Dunkel (1959) 101 CLR 298. In the sixth edition of Cross on Evidence the ``rule'' is summarised as:

``... the unexplained failure by a party to give evidence, to call witnesses, or to tender documents or other evidence or produce particular material to an expert witness may, not must, in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party's case...''

Thus:

``... The significance to be attributed to the fact that a witness did not give evidence will in the end depend upon whether, in the circumstances, it is to be inferred that the reason why the witness was not called was because the party expected to call him feared to do so... The reason why the witness is not called may have no relevant relationship with the fact in issue: it may be related to, for example, the fact that the party simply does not know what the witness will say. That party is not, under pain of a detrimental inference, required to call a witness `blind'.''

(
Fabre v Arenales (1992) 27 NSWLR 437 at 449-500.)

But it is clear that:

``What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of evidence in the case (
Nuhic v Rail and Road Excavations [1972] 1 NSWLR 204 at 221). No inference can be drawn unless evidence is given of facts `requiring an answer'. If there is no issue between the parties of a matter, there is nothing to answer; and if there is an issue between

ATC 2208
them, but the party bearing the burden of proof has tendered no evidence of it, the opponent is not required to answer.''

63. In the present application the Applicant bears the onus of proof as to there not being deliberate evasion. The evidence tendered by the Applicant is such as to show that even be it he was given advice as set forth in his affidavit, the course of conduct pursued by him was not consistent with that advice.

64. The Tribunal does not derive from the returns as lodged a finding that could suggest that a professional adviser had supported the preparation of the returns reporting facts consistent with offsetting income against losses. The Tribunal is not satisfied that in the absence of evidence from the accountant and/or the tax agent there was any basis for treating the consultancy income as being able to be offset in the way in which the Applicant asserted, particularly in light of the evidence as to advice as set forth in paragraph 13 of the affidavit. There is no suggestion in the affidavit material that the Applicant was advised that he could simply offset his personal income against losses in a non operating company that he may have controlled. If he had implemented the advice that was suggested the situation may have been different but that is not the position that confronts him.

65. Thus the problem so far as the Applicant is concerned lies in the fact that assuming the advice was given, it was not followed. The Applicant was aware of this fact. The factual issue that could have been addressed by calling the accountant and/or the tax agent was as the extent to which they were informed of the consequence of such non compliance.

66. No explanation was given by the Applicant other than a possible dispute not as yet materialised for not calling the accountant and/or tax adviser. Accordingly the Tribunal does not draw an inference adverse to the Respondent by reason of the advisers not being called. Indeed evidence from the advisers would not have played a significant part if at all in a determination of this matter. If there had been a compliance by the Applicant with the advice said to have been given then the position might have been otherwise.

Evasion

67. As was said by Dickson J in
Denver Chemical Manufacturing Co v C of T (NSW) (1949) 79 CLR 296 at 313:

``... I think it is unwise to attempt to define the word `evasion'. The context of s 210(2) shows that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.''

68. In
Barripp v C of T (NSW) (1941) 6 ATD 69 at 71; (1941) 2 AITR 161 at 164, McTiernan J said:

``... The appellant intentionally omitted the income from the return and there is no credible explanation before the Court why he did so. His conduct in my opinion answers to the description of an avoidance of taxation at any rate by evasion.''

The Tribunal is satisfied in the present matter that the Applicant omitted the income from the relevant three returns and this he did intentionally. There is no credible explanation before the Tribunal favourable to the Applicant as to why he did so in the circumstances established on the evidence. He did so where the company said in some of the material to be the recipient of the income, or the entity entitled to it, ``T.C.S Pty Limited'' was not existent and where W.B. Pty Limited, which on one reading of the material was intended to be the recipient, was not trading.

69. The Tribunal is further assisted in discerning the meaning to be attached to the words ``deliberate evasion'' by Income Tax Ruling IT 2517 where this term is explained as meaning ``an intention to deceive the commissioner with the object of evading tax or the making of a false or misleading statement knowingly or without belief in its truth''. As with fraud, so with deliberate evasion, conduct cannot be assumed merely by reason of there not being full or true disclosure. However the onus under the legislation is on the Applicant to

ATC 2209

satisfy the Tribunal that the correct or preferable decision is that he did not engage in deliberate evasion.

Additional tax interest and penalty tax

70. As has earlier been mentioned in these reasons, the Applicant did not argue the extent of the penalties imposed in the event of the Tribunal being satisfied as to the Applicant having engaged in deliberate evasion, that is, having the intent to deceive the Commissioner with the object of evading tax or the making of a false or misleading statement knowingly or without belief in its truth. If the Tribunal was not minded to make this finding then the Respondent did not have the power to issue the two Amended Assessments referrable to the 1990 and 1991 years.

71. As will shortly appear in these reasons, the Tribunal is satisfied that the Applicant did intend to deceive the Commissioner with the object of evading tax in the relevant years and will affirm the decisions under review. However it might be noted that the Tribunal has studied and read the material tended in evidence by the Respondent, as it appears in T44 T46, T47, T48 and T49, referrable to the imposition of additional tax and penalty tax. If the Tribunal had been asked to consider the question of the extent of the impositions imposed they would have been affirmed. The Tribunal would not have further remitted the amount of penalty tax in respect of the years in question.

Decision

72. The Tribunal has earlier in these reasons set forth much of the submissions made on behalf of the parties. It is true as it was submitted on behalf of the Applicant that deliberate evasion is not something, which ought to be readily found and should only be found in the more extreme cases. In the present matter the Tribunal is to be satisfied that the avoidance of tax was due to fraud or deliberate evasion.

73. The Tribunal is satisfied that the Applicant did seek to evade payment of tax on substantial income received by him in the relevant years. If he did receive advice the like of that referred to in paragraph 13 of his affidavit, he did not pay heed to it and did not seek to implement the stratagem implicit in the advice. There is no evidence that he received any advice from the accountant or tax agent as to the actual course of conduct that was pursued by him. He did act however in order to evade the payment of income tax. Thus the positions of the accountant and the tax agent are not relevant to the finding of deliberate evasion. There is not any evidence as to the extent of the awareness or otherwise of the accountant and/or tax agent as to whether the Applicant did or did not seek to implement the advice said to have been given to him by the accountant. It is the intent of the Applicant that is relevant, and the Applicant was aware at all relevant times as to the falsity of his returns and indeed this position was maintained even up until the objections lodged in the year 2000. The series of events enumerated earlier in this decision indicate the Applicant as one seeking to maintain an erroneous and misleading position over a number of years, he well knowing that the factual situation did not support the position he was propounding.

74. It is not now for the Respondent to establish that there has been avoidance of tax but rather it is for the Applicant to show that there has been no avoidance. The burden rests on the Applicant to establish to the reasonable satisfaction of the Tribunal a fact or facts, which take the matter outside of the confines of section 170(2). The taxpayer is to demonstrate that there was a full and true disclosure of all material facts necessary for assessment and that there has been no fraud or evasion or no avoidance of tax. Evasion involving as it does an intent to avoid payment of tax in circumstances where a taxpayer may be under obligation to pay involves some blameworthy act or omission on the part of the taxpayer. This prerequisite has been established.

75. The Tribunal is not satisfied that the Applicant relied upon advice said to have been given to him. Even if advice had been given as detailed in his affidavit he did not follow it and engaged in his own stratagem to evade payment of tax. The Tribunal is not satisfied as to the credibility of the Applicant. He sought to avoid answering questions put to him where the question was aimed at eliciting details as to conversations that he had had more particularly with his tax agent and notes the inconsistency between his declaration given on a few occasions n the course of his cross-examination that he had never sought to deny the receipt of income by himself and the reiteration in his objections and elsewhere of a contrary position. The Tribunal is satisfied that it should exercise

ATC 2210

great caution in accepting the Applicant as a witness of truth.

76. The Applicant knew at all relevant times that the income derived from consultancy services was his personal exertion income. He knew that W.B. Pty Limited was a defunct company having no income in the relevant years and he knew that he was not an employee of that company. He signed objections and other declarations that are inconsistent with his state of knowledge. He was not truthful in his objections or the other statements attributed to and made by him. As was submitted on behalf of the Respondent there was never any reasonable basis for a belief that the Applicant's income from personal exertion could be offset against W.B. Pty Limited's losses or the income earnings as being other than those of the Applicant. He did not have an individual consulting agreement with W.B. Pty Limited or any employment with that company at the relevant time.

77. The Tribunal is not satisfied that the Applicant has shown that there has not been deliberate evasion of the payment of income tax. The Applicant had an intention to deceive the Respondent with the object of evading tax. He made false and misleading statements in the relevant returns knowingly and without belief in their truth. The Applicant was a willing participant in the implementation of a scheme or stratagem to colour his consultancy service fees received from R.C. Limited as if T.C.S. Pty Limited was entitled there to and to be the recipient. Often as not the invoices purporting to be issued in the name of T.C.S. Pty Limited were in the handwriting of the Applicant as were the cheques written on behalf of R.C. Limited. Whatever the communication between the Applicant and the accountant and/or tax agent, the position set forth in the returns was to the knowledge of the Applicant not consistent with the course of conduct adopted him the same being to deliberately evade the payment of income tax.

78. The Applicant has not discharged the onus that rests upon him. The decisions under review are affirmed.

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