MANO v FC of T

Members:
A Sweidan SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2010] AATA 289

Decision date: 22 April 2010

A Sweidan (Senior Member)

Background

1. Applicant seeks review of various objection decisions made by the respondent on 30 November 2008.

Issues

2. There are three main issues in these applications ie:

Foreign investment income 1993 - 2004

3. The parties have agreed the amounts of foreign investment income received by the applicant and the amounts of foreign tax paid on that income in the relevant years. However, the issue now is whether the Commissioner was authorized to amend the assessments for those years.

4. The applicant lodged returns without including her foreign investment income and assessments initially issued in accordance with those returns. Following an audit, the respondent amended the assessments to include amounts of foreign income as follows:

Year Date of original assessment Date of amended assessment
1993 20/9/93 8/12/06
1994 1/11/94 8/12/06
1995 9/10/95 8/12/06
1996 25/3/97 8/12/06
1999 27/12/99 8/12/06
2000 22/1/01 8/12/06
2001 21/5/02 8/12/06
2002 16/12/02 8/12/06
2003 4/12/03 8/12/06
2004 18/2/05 8/12/06

5. In addition the respondent issued assessments under section 167 of the Income Tax Assessment Act 1936 ("the 1936 Act") for the 1997 and 1998 years to assess the applicant on her income for those years which included foreign investment income.

6. Applicant asserts that the respondent was not authorized by s 170 of the 1936 Act to amend the assessments for 1993 to 1996 and the 1999 to 2001 years.

7. Former ss 170(2) of the 1936 Act allowed the Commissioner to amend an assessment at any time where there has been an avoidance of tax due to fraud or evasion. Absent fraud or evasion he is restricted to amending assessments within four years after the day on which the tax became due and payable.

8. Former ss 170(2) read as follows:

  • "170(2) Subject to this section, where there has been an avoidance of tax, the Commissioner may:
    • (a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time…"

9. The respondent contends that this is "clearly a case of evasion". It is contended that the facts show that the applicant was aware that she had a substantial amount of investment income that she had received in the UK. She has given evidence that her tax agent asked her when she first met him whether she had any overseas income and she said that she did not have any. Applicant's evidence is that she had no intention of withholding information and that at the time she had no knowledge of taxation or finance matters.

10. The applicant's evidence is that she took the question to mean "Did I have any assets that I had purchased overseas from Australia?" Respondent contends that the applicant's evidence in this regard should not be believed "as no reasonable person could interpret the question in such a way". Further reference to the applicant's evidence is made below.

11. In
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) 79 CLR 296, Dixon J made the following comments regarding the term "evasion":

"To apply these principles it is necessary to consider what relevant conduct amounts to evasion…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."

12. Respondent asserts that the applicant deliberately withheld details of her overseas income so that she would pay less tax. It is contended that this constitutes evasion in line with the view expressed by Dixon J in Denver Chemical Manufacturing Co ie "intentionally omitted the income from the return and that there was no credible explanation".

13. With regard to the 1997 and 1998 years, the applicant had failed to furnish tax returns for these years. It was realised by the respondent that, when the applicant's foreign investment income was added to her Centrelink income, her income for both years was above the tax threshold. s 167 of the 1936 Act provides that, where a person fails to furnish a tax return, the Commissioner may make an assessment upon which in his judgment income tax ought to be levied.

14. Respondent asserts that as the applicant had not furnished returns for those years and it was clear that she had an income in excess of the threshold, the respondent was authorised by s 167 to issue these assessments.

Deposits to applicant's bank account

15. The responded included in the applicant's assessable income large amounts of what were stated to be "unexplained deposits" that had been made to her various bank accounts.

16. On objection, cash deposit amounts of $1,157 for the 2002 year and $133 for the 2003 year were accepted as not being income.

17. The respondent also subsequently accepted the following amounts identified in the applicant's witness statement as non assessable:

Paragraph 43.2 $114.85
43.13 $59.46
43.14 $61.13
44.3 $289.71
46.1 $346.00
46.2 $41.70
56.1 $8,000.00
61.1 $64.37

Onus of proof

18. Under s 14ZZK of the Taxation Administration Act 1953 ("TAA"), the applicant has the burden of proving that the assessments are excessive.

19. Paragraph 14ZZK (b)(i) of the TAA provides that:

"On an application for review of a reviewable decision the applicant has the burden of proving that if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive."

20. Respondent asserts that applicant has not discharged this burden.

21. During the 2000 to 2005 years deposits of almost half a million dollars were made to various bank accounts of the Applicant.

22. The respondent contends that the applicant was unable to give a satisfactory explanation of the source of these funds during the audit. She claimed that the deposits were made by her husband, Peter Mano, and her evidence before this Tribunal is to the same effect.

23. Peter Mano has given evidence that he had made the deposits and the source of the funds was a wedding gift from his uncle and other amounts loaned, to him by his family members.

24. Respondent contends that the evidence of Mr Mano in this regard should be disregarded, because it contradicts evidence he previously gave at the audit and there is no documentation to support his claim.

25. Respondent points out that the Courts have held that it is not up to the Commissioner to show that the assessment is correct, it is up to the taxpayer to show that her taxable income is in truth less than the amount assessed [
Federal Commissioner of Taxation v Dalco 90 ATC 4088; (1990) 168 CLR 614]

26. The respondent is also not required to establish a positive case as to the source of the funds in question (
Vu v Commissioner of Taxation 2006 ATC 4387; [2006] FCA 889).

27. Respondent asserts that in order for the applicant to discharge her burden of proving that the assessment is excessive, she has to prove what the source of these unexplained deposits actually is.

28. The amended assessments that issued to increase the income of the applicant to take into account the so called "unexplained deposits" issued on the following dates:

Year Date of original assessment Date of amended assessment
2000 22/01/01 06/09/06
2001 21/05/02 06/09/06
2002 16/12/02 06/09/06
2003 04/12/03 06/09/06
2004 18/02/05 06/09/06

29. The 2000 and 2001 amended assessments issued more than four years after the dates that the original assessments became due and payable. Accordingly, and similarly to the position in relation to the foreign income the Commissioner is only empowered to amend these assessments if there was fraud or evasion.

30. The Commissioner says that this is a case of evasion and that the applicant has not discharged the burden of proving that the assessment is excessive. It is not disputed that applicant filed returns which did not include these "unexplained deposits" in her income. It is asserted that she has failed to give a satisfactory explanation of the source of these funds and has not shown that the respondent erred in finding that this was a case of evasion.

Penalties

31. Because the adjustments related to a period of many years, there are different penalty provisions that may apply depending on the year which was adjusted.

32. In relation to the adjustments to include understated income for the 1993 to 1996 and 1999 to 2000 years Part VII of the 1936 Act is the relevant provision and for the 2001 to 2004 years, Division 284 of Schedule 1 to TAA may apply.

33. The late lodgement penalties for the 1997 and 1998 years fall for consideration under sections 163A to 163C of the 1936 Act.

34. The burden of proof is on the applicant to show that the penalties were excessive (
Nozzi Pty Ltd v Commissioner of Taxation [2003] FCA 356).

Part VII of the 1936 Act

35. Part VII contains the main penalty tax provisions of the Act, which apply to all taxpayers for financial years commencing on or after 1 July 1992.

36. Sections 226G, 226H, 226J, 226K, 226L and 226M (the shortfall sections) specify certain rates of penalty tax applicable to specific behaviours of taxpayers who have a "tax shortfall" in respect of a "taxation statement".

37. Liability to penalty tax under Part VII is dependent upon the existence of two key concepts: "tax shortfall" and culpable behaviour.

38. "Tax shortfall" is defined in subsection 222A(1) as, broadly, the amount by which the taxpayer's "statement tax" is less than the taxpayer's "proper tax" for the year. These two terms are in turn defined in subsection 222A(1). "Statement tax" is, broadly, the tax payable by the taxpayer in respect of a year of income "if it were assessed on the basis of [taxation] statements made by the taxpayer". "Proper tax" is, broadly, the tax payable in respect of a year of income "in accordance with the law".

39. The shortfall sections specify certain rates of penalty tax for different types of culpable behaviour, which are then applied to the amount of the particular tax shortfall. For instance, section 226J sets a rate of 75% penalty tax for culpable behaviour, where there has been an intentional disregard of the law.

40. Culpable behaviour of a kind referred to in the shortfall sections must be evident in the taxation statements of the taxpayer, in order to trigger a penalty tax liability. "Taxation statement" is defined in subsection 222A(1). An omission of income is specifically deemed to be a statement that the income was not derived during the period, as per section 222F.

41. Section 226J of ITAA36 provides that where a taxpayer has a shortfall and that shortfall was caused by intentional disregard by the taxpayer, the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the shortfall.

42. Intentional disregard means that there must be actual knowledge that the actual statement made is false. To establish intentional disregard, the entity must understand the effect of the relevant legislation and how it operates in respect of the entity's affairs and make a deliberate choice to ignore the law (
Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation [2007] FCA 345; 2007 ATC 4320; (2007) 66 ATR 10).

43. Evidence of intention must be found through direct evidence or by inference from all the surrounding circumstances, including the conduct of the entity (Paragraph114 Miscellaneous Taxation Ruling MT 2008/1).

44. Respondent contends that the applicant deliberately chose not to return her foreign investment income.

45. The applicant did not lodge returns for the 1997 and 1998 years and the Respondent raised assessments under section 167 of the 1936 Act. Former sections 163B and 163C of the 1936 Act applied until 1 July 1999 and the new section 163B applied after that. s 163C was repealed 1 July 1999. As the taxpayer had failed to lodge her returns, former s 163B of the 1936 Act automatically charged by way of penalty, additional tax at the rate of 8% per annum from the date that the returns were due until 30 June 1999. From 1 July 1999 new s 163B applied to charge the applicant GIC. Former section 163C also imposed a penalty by way of interest at the rate provided for under section 214A until 1 July 1999.

46. Former s 163B(7) of the 1936 Act provided that the Commissioner may, in his or her discretion remit the whole or part of the additional tax. Subsection 8AAG(1) of the TAA gave the Commissioner general discretion to remit any GIC that had been imposed under section 163B from 1 July 1999. It is contended by the respondent that no remission is warranted.

Tribunal's findings

Foreign income - 1993 to 2004 years

47. The Tribunal finds that, as accepted by the applicant, the following amounts of foreign income were derived by her during the relevant years with the following amounts of foreign tax paid:

YEAR AUD $ Tax Paid $
1993 24,626 2,873.00
1994 22,860 2,990.00
1995 26,036 3,453.00
1996 23,746 3,368.00
1997 22,583 2,750.00
1998 17,619 2,159.00
1999 31,451 3,994.00
2000 28,688 2,702.84
2001 25,407 2,200.56
2002 24,801 2,292.96
2003 23,362 2,558.03
2004 21,232 1,695.15

48. The Tribunal notes that the applicant has disclosed the actual taxable income derived from foreign sources as opposed to the "estimate" provided by the respondent. This is so even where the amount actually derived was more than the respondent's estimate. In the 1999 year the respondent assessed the applicant for $22,839.00 of foreign income derived. The applicant has provided evidence that the amount actually derived was $31,451.00. It appears to the Tribunal in the light hereof and for the further reasons set out below that the applicant's desire to ensure that her tax affairs are correct cannot be questioned and any suggestion that she lacks credibility or that she had or has an intention to not comply with the taxation laws is unsupported by the evidence. In the Tribunal's view she was a credible witness whose evidence has the ring of truth and should be accepted.

Fraud or evasion - 1993 to 1996 and 1999 to 2001 years

49. The respondent formed the opinion that the "avoidance of tax is due to fraud or evasion.." and therefore seeks to authorise the relevant amended assessments at any time and in this instance more than 4 years following the date upon which tax became due and payable on the original assessments on the grounds of fraud or evasion, pursuant to section 170(2) of the 1936 Act.

50. As noted above, absent fraud or evasion the respondent was not authorised to issue the assessments as the assessments were issued more than 4 years from the date that tax became due and payable on the original assessments for these years:

YEAR DATE AMENDMENT DATE
1993 20 September 1993 8 December 2006
1994 1 November 1994 8 December 2006
1995 9 October 1995 8 December 2006
1996 25 March 1997 8 December 2006
1999 27 December 1999 8 December 2006
2000 22 January 2001 8 December 2006
2001 21 May 2002 8 December 2006

51. In the Tribunal's view, unlike the taxpayer in the case of Denver Chemical Manufacturing Co supra, the evidence here shows that the applicant's shortfall did not result from "fraud" or "evasion". The principal passage which has been relied upon by the Courts and Tribunals as to the definition of "evasion", given that it is not defined in the statute, was expounded by Dixon J in Denver Chemical as follows:

"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 probable safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated."

52. The Tribunal is further of the opinion that unlike the taxpayer in the case of
Barripp v Commissioner of Taxation (NSW) (1941) 6 ATD 69 the applicant has not acted deliberately to omit the foreign income from her tax returns. The Tribunal finds that the applicant's explanation is credible. The Tribunal accepts her evidence that she:

53. The Tribunal accepts the applicant's contentions that it is critical to the determination of whether a shortfall has resulted from "fraud" or "evasion" for the Tribunal to review the facts and circumstances of the applicant at the time of the filing of the relevant tax returns and not subsequent or other events. "Fraud" or "evasion" cannot be presumed, it must be proven on the facts
Harris v Burrows (1945) 7 ATD 518 at 521

54. In the Tribunal's opinion to file taxation returns without any deliberate action to omit income or in circumstances where an adequate explanation is given for not declaring income cannot amount to a "design" or "purpose" to support the opinion of "fraud" or "evasion".

Penalties - 1993 - 2004 years

55. As noted earlier the respondent further contends that the applicant is liable for additional tax by way of penalties caused by an alleged intentional disregard to the relevant income tax legislation pursuant to section 226J of the 1936 Act and pursuant to section 284-75(1) of Schedule 1 to the TAA.

56. The respondent has also imposed a penalty for the late lodgement by the applicant of her 1997 and 1998 tax returns pursuant to section 163B of the 1936 Act.

57. The relevant penalty provisions are invoked in circumstances where there is a statement made to the respondent about a taxation law, the statement is false or misleading whether by what is included or what is omitted and a shortfall of tax arises. S 284-90 of the Schedule 1 to the TAA will then apply an amount of penalty depending on the behaviour of the applicant. A penalty amount equal to 75% of the shortfall will apply in circumstances where there is an intentional disregard of a taxation law.

58. The Tribunal must examine the direct evidence of the applicant to determine what her actual intention was at the relevant times. The applicant's intention may also be inferred from the surrounding circumstances. The Tribunal must be satisfied that the applicant understood the effect of the relevant tax legislation and how it operates in respect of the applicant's specific affairs and that she deliberately chose to ignore the law as it applied to her.

59. For the reasons set out above in relation to the Tribunal's decision to reject the respondent's assertion regarding "fraud" or "evasion", the Tribunal finds that the applicant is not liable to additional tax by way of a penalty under section 226J of the 1936 Act, and relevantly section 284-75(1) of the TAA. The Tribunal cannot find on the evidence, that the applicant has had an intentional disregard for the law. Furthermore, no other person relevant to the enquiry, such as the applicant's tax agent can be suggested, on the evidence, to have had an intentional disregard for the law.

60. On the applicant's own evidence she was not aware of the relevant taxation law that applied to her circumstances. As set out further below the applicant's husband wrote to the respondent in 1993 and asked what his and the applicant's tax obligations were as new residents to Australia. There is no evidence of any response by the respondent. The Tribunal finds that the applicant did not deliberately choose not to comply with the taxation laws.

61. An important factor in the Tribunal's conclusions as to the applicant's intention is the letter dated 25 October 1993 (Ex A4 annexure) written with her knowledge and approval in which her husband Peter (then her partner) wrote to the Australian Tax Office regarding the tax obligations of UK migrants to Australia who had become Australian citizens and permanent residents of Australia. At page 3 of that letter he informed the ATO, with applicant's knowledge and approval (he said that she had supplied the information to him) the name and address of her UK accountant since 1991, and said that Mr Haswell "handles all her UK tax matters". This letter is very significant. Not only does it state that applicant and her husband had no understanding of tax matters, and asks for information; but it also makes it clear to the ATO that she had income in the UK and named the accountant handling all of her "tax matters" in the UK. (It also invited a request for any further information required). If she had been intent on concealing the fact that she had UK source income, why would she have given that information? That is clearly inconsistent with a course of conduct aimed at concealing the fact that she had UK income.

62. Further, as mentioned earlier when the ATO made an estimate of her UK taxable income for the 1999 year of $22,839 she voluntarily amended, and increased that, by stating that the amount actually derived was $31,451. That again shows that she was not the kind of person who would deliberately conceal assessable income in order to avoid Australian tax, or that she had any intention of doing so.

63. The evidence further shows that once she was alerted to the fact that she had to declare in her Australian tax return UK income on which UK tax had already been paid she cooperated fully with the ATO investigation.

64. Applicant's evidence that she believed she was not liable to pay tax on UK source income which had already been taxed in the UK was unshaken in cross examination She said that she held this belief until the commencement of the enquiries by the ATO in 2005 (see para 23 of her statement).

65. In Denver Chemical Manufacturing Co Dixon J referred to conduct amounting to "evasion": "an intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede". In other words, an intention to pay less tax than the taxpayer knows he or she would be liable to pay, if full disclosure were made. There is no evidence that applicant had any such intention, or that she knew at any relevant time that additional tax, over and above UK tax already paid, would be payable in Australia. (In fact, in some years the UK tax credit exceeded the Australian tax). It was never put to her in cross-examination that she knew that additional Australian tax would be payable. Her evidence that she did not believe that any further tax, in addition to the UK tax, would be payable was unchallenged, uncontradicted, and in the view of the Tribunal inherently credible.

66. There are before the Tribunal three character references which attest to the applicant's integrity and honesty, and that it would be out of character for her to deliberately conceal income which she knew was subject to Australian tax, or do anything which might impugn her good name. Two High Court decisions
Attwood v R (1960) 102 CLR 535 at 359 and
Simic v R (1980) 144 CLR 319 at 333 make it clear such evidence has a twofold relevance and that it should not be "downgraded", or treated as having little weight. See also
Wedd v R (2000) WASCA 273 at [14] - [25].

"Unexplained deposits"

67. The question is whether the taxpayer has provided a satisfactory explanation for the deposits made to her account. In particular, has she established on the balance of probabilities that they were not assessable income? That is a question to be determined by the Tribunal, "standing in the shoes of the Commissioner", but having regard to all the evidence now before the Tribunal (and only that evidence).

68. There is no contention by the Commissioner that she derived these payments from some business. Is true that the respondent "does not have to establish a positive case as to the source of the funds". However in the decision relied on by the respondent (
Vu v Commissioner of Taxation 2006 ATC 4387) the evidence was that the taxpayer (and his wife) did in fact conduct a profitable business, and the amended assessments were made on the basis that the unexplained deposits were undisclosed assessable income derived from that business. The lack of any evidence of any business engaged in by Mrs Mano in this case, her sole occupation being a schoolteacher, and her long hours of work, all tell against the proposition that the deposits in this case were assessable income. The respondent puts the taxpayer to proof (as it is entitled to do) that the deposits did not constitute assessable income. The applicant says that all of the "unexplained deposits" were gifts paid into her bank account by her husband. That is not only a credible explanation, but the Tribunal has formed the view that it is the only credible explanation, in all the circumstances.

69. In paras 42 and following of her witness statement Mrs Mano details all of the "unexplained deposits" and states that in each case the source was her husband. That was also the evidence she gave, in January 2006, to the ATO investigators. She said to them that she knew that her husband did not have any business and was unemployed earning no income, and that she understood that the source of the payments he made into her account was his family in Thailand, but did not know any further detail at the time of her interview in January 2006. She has since learned, however, that her husband received from his uncle in Thailand $500,000 as a wedding gift.

70. The respondent suggests in its submissions that this is not credible because, it asserts (para 33) that the uncle was "just a high ranking police officer presumably earning a wage from which it would be impossible to accumulate that sort of wealth". The fact that he was a "high ranking police officer" does not mean that he did not have, from some source other than his salary, substantial assets. Peter Mano gave evidence that his family (including his uncle) was extremely wealthy, as they owned a majority of the business of supplying sugar to brewing companies in Asia.

71. Mr Mano's evidence is that since 1991 he has suffered from psychiatric problems for which he still receives medication. (Several references to this appear in his 2006 interview, in which he is patently unable to provide or remember detail). He has however given evidence that since 1991, because of that condition, he has not been able to engage in any income-producing employment or business, and that the source of the payments he made to his wife's account before the marriage (and before his uncle's gift) was interest-free loans made to him by his wealthy family in Thailand, repayable when he is able.

72. In any event, the issue is clearly not where Peter Mano got the money which he paid into the applicant's bank, but whether in fact he did make those payments into her bank as gifts, not as income. His evidence is that he brought into Australia whenever he returned from Thailand to which he made frequent trips, amounts of just under $10,000 on each occasion.

73. Much reliance was placed by the respondent on various statements made by Mr Mano in his interview by the ATO in March 2006 and in which, at one point, he said his family had not given him money. However, the Tribunal notes that he was and is on medication for a psychiatric disorder, which may well make it difficult for him to remember details of the source of money that he paid into his wife's account.

74. In summary, given that:

the Tribunal finds that the applicant has established on the balance of probability that the "unexplained deposits" were gifts by her husband, and therefore not assessable income.

Penalties

75. The Tribunal finds that there is no basis for the imposition of any penalties on the applicant, other than in relation to the late lodgement of her 1997 and 1998 tax returns, and that in relation to those penalties they should be remitted under former s 163B(7) of the 1936 Act.

Decision

76. The Tribunal:

 

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