Black v. Federal Commissioner of Taxation.

Judges:
Lusher J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 21 February 1986.

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Lusher J.

These are appeals by the taxpayer Robert Alexander John Black in respect of the fiscal years 1973-1980 inclusive. In each case returns were duly lodged and assessments issued and objections lodged. Subsequently an investigation was conducted by the Commissioner and as a result an amended assessment was issued in respect of each year. Objections to these amended assessments were disallowed by the Commissioner and the taxpayer has caused the matters to be referred to this Court by way of appeal. By consent all the appeals were heard together.

Expressed in the briefest terms the matter arises in the following way. The taxpayer and his wife were the shareholders and directors in a company, Passlow Tyre Services Pty. Ltd. (later known as House of Steel and more recently in liquidation). The company conducted business as a tyre fitting and associated sales organization. The taxpayer was a tyre fitter by trade and in effect carried on the business himself with the assistance of a few employees. The receipts were in cash and cheques. The substantial issue arises from the reliance by the Commissioner upon sec. 108 of the Income Tax Assessment Act 1936 as amended. That section provides so far as is presently relevant that if amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of or for the individual benefit of any of its shareholders, so much of the amount or value of those advances, loans or payments as in the opinion of the Commissioner represents distributions of income shall be deemed to be dividends paid by the company on the last day of the year of income in which the payment or distribution is made. The Commissioner also relied upon sec. 44(1) and 25(1) as to dividends and gross income respectively but nothing contentious turns on these aspects.

The basis of the amended assessments is that payments or distributions in each of the relevant years within the terms of the section were made.

In respect of the years 1979 and 1980 there is an objection to the Commissioner having brought to tax under sec. 26(e) of the Act the value to the taxpayer of the benefit of the use of two company motor vehicles, a Rolls Royce and a Porsche.

The income reassessed by the Commissioner is considerably higher than that returned as is illustrated by the following table showing the reassessed income with that returned in brackets for the relevant years together with the distribution assessed as having been received from Passlow Tyre Services.

         Year          Income          Distribution
                          $                  $
         1973       22,486  (1,033)       20,334
         1974       45,354  (1,804)       49,906
         1975       61,568  (1,456)       56,531
         1976       53,735  (7,000)       53,287
         1977       79,632 (15,000)       53,246
      

The years 1978-1980 inclusive revolve mainly around the use of motor vehicles and involve the following figures:

                   $
      1978       30,400 (20,000 assessed)
      1979       24,520 (11,000 returned)
      1980       15,240 (3,800 returned)
      

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ATC 4115

At the outset it is to be kept in mind that the burden of proof that the assessment is excessive is on the taxpayer (sec. 190(b)).

It is submitted on behalf of the Commissioner that as a general rule the taxpayer must show negatively what is wrong but also positively what is wrong but also positively what correction should be made in order to make it right or more nearly right. This comes from
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 per Latham C.J. at pp. 87-89 and which I accept. The submission continues that the taxpayer even if the whole of the evidence on his behalf were to be accepted has failed to discharge that onus. This is because it is impossible to determine whether the assessments were wrong or nearly wrong. The case made by the taxpayer on his material is that moneys were paid into the account of the company out of his own personal funds or out of funds advanced to him and his wife and that other moneys were paid out of the company's account as his own bank, paying moneys of his own into it and out of it for his own needs. The problem or rather the difficulty is that there is no way upon which any calculation can be made with anything approaching any degree of precision what amount of personal funds were paid in and what funds for personal use were paid out. The state of the records and memories, their accuracy and reliability are responsible for this. I accept this submission and so find and for this reason at the outset it is sufficient to dispose of the appeals. It is to be remembered that this submission is on the assumption that the case for the taxpayer is accepted. For reasons which I shall advance later I accept the further submission that the taxpayer's material cannot be accepted in important respects.

I turn now to sec. 108, since in the main the assessments are made pursuant to that section. On the evidence there can be no question that payments were made by way of advances or loans or made for the benefit of the taxpayer. His own case, in this regard, accepts that fact and his own admissions in evidence accept it. By way of example he accepted that sums in excess of $40,000 were paid out of the company's accounts in respect of his personal expenses in 1976 and 1977, and that in other relevant years a great bulk of personal expenses were paid out of the company's account on his behalf. Once it is accepted that the payments were so made and I find they were and the taxpayer has failed to discharge the onus that they were not, the consequence is that there is ample material on which the Commissioner would properly form the relevant opinion that the amounts were within sec. 108, nor could it be said that the assessments were in any way arbitrary or capricious or fanciful, having regard to the totality of the material or that the Commissioner had failed properly to discharge his statutory function. (
Australasian Scale Co. Ltd. v. Commr of Taxes (Q.) (1935) 53 C.L.R. 534 at p. 555;
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at pp. 360-361;
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 72 ATC 4001 at pp. 4002-4003; 4006-4007(1971-1972) 128 C.L.R. 28 at pp. 45, 51.)

In Australasian Scale Co. Ltd. v. Commr of Taxes (Q.) at p. 555 per Rich and Dixon JJ., dealing with discretion there invested in the Commissioner said:

``... the enactment means to withdraw from the consideration of the Court the correctness of the opinion of the Commissioner upon the matters in question.... Of course this does not mean that the validity of the exercise of the Commissioner's discretion, as opposed to the correctness of his opinion, is not examinable. If he exercises his discretion capriciously, or fancifully, or upon irrelevant or inadmissible grounds, it may be set aside.''

• (See also per Starke J. at p. 557.)

As mentioned earlier, the taxpayer was subject to an investigation by the Commissioner prior to the issue of the assessments in question and which issued obviously as a consequence thereof. The full detail of the material before the Commissioner is not available to me which is a further problem adversely confronting the taxpayer. (See F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd., supra.) The same observation relates to the material considered by the Commissioner on the objections.

The Commissioner also submits and in my opinion correctly, that the assessments could be justified under sec. 44 of the Act. The Act, by

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ATC 4116

sec. 6, defines dividend as including any distribution made by a company to any of its shareholders in money or other property. The facts here justify that there were distributions. There was no question of any intention or arrangement to repay. If paid out of profits they would be taxable as dividends. Here again the onus is on the taxpayer to show the payments were not so paid out of profits (
F.C. of T. v. Slater Holdings Ltd. (No. 2) 84 ATC 4883 at pp. 4885-4886).

It is perhaps necessary that I should say something as to the taxpayer's evidence and credibility and that of his wife. A number of matters are properly put and which I accept as affecting their credibility to the extent that their evidence should not be accepted or at best only where it is supported by an original primary or similar supporting document. Apart from such matters neither impressed me by their demeanour and manner when giving evidence as reliable witnesses. In the result any challenge to the Commissioner's approach fails.

At the commencement of his evidence, the taxpayer strained credulity. He says that at the start of the business he was told by his accountant to open a company account and to use it for personal matters as well and not to have a personal account. That accountant is since deceased. He began to record the sales and bank deposits but rapidly found he ended up with more cash than was written in the books. The accountant told him to put the accumulated cash in the safe. He soon had an accumulation of $18,000 in cash in the safe during six months' trading. An accountant then told him to enter it in his day book and bank it as a loan from some fictitious person. He chose two names Dobson and Henry and just did as suggested without realising it would reflect anything in the books. He said this latter accountant was James Horn. Horn, whom I accept, denied this and was not cross-examined to suggest otherwise. The submission by his counsel was the taxpayer must have been mistaken or confused. This practice is an indication of the taxpayer's business and other standards. I do not accept this evidence.

There were cash transactions for which no receipts or invoices were issued and the amounts were more in subsequent years and continued but he did not tell the accountant of the excessive cash in subsequent years.

The next matter is that large numbers of cheques were drawn in favour of matters personal to the taxpayer whereas the butts were filled in falsely with the name of a business supplier in such a manner as to show business expenses. These were numerous and was systematic as I find. I reject his explanation that he was too busy to fill in the butt at the time and that he and his wife filled in from memory. The practice was far too systematic, it involved sums in the area of $40,000 in some years. A stocktaking was never done. His wife agreed there were butts with false entries. She was unable or unwilling to say whose writing was on the butt other than her own. In cross-examination in particular on the butts revealed her as an unsatisfactory witness. Furthermore there were instances where comparison of invoices with the suppliers' ledger card showed that no cheques of the amount on the invoices were received over the relevant period.

A further matter which affects Mrs Black relates to alleged antique dealing. A second-hand dealer's licence was taken out first in the name of an employee Mrs Anna Crosby and later in Mrs Black's name. A book kept for that purpose recorded sales of various articles, said to be antiques from the Blacks' home collected over a period of years. They were sold for cash and the cash was kept in the company's safe at the company's premises from part of which the antiques are said to have been sold. A sum of $16,000 was accumulated in cash from alleged sales. This sum was then placed in the name of Mr and Mrs Black in the N.S.W. Permanent Building Society. A cheque was drawn on that Society for that sum and transferred to the company's bank account. Thus $16,000 in cash was transferred by cheque to the company, because credits were needed for personal bills according to Mrs Black. The sales were made on a regular and systematic basis, the records (i.e. the book) are carefully kept as distinct from those of the company. Mrs Crosby was not called to corroborate this activity, nor were any of the purchasers. The insistence on cash sales is significant, some of the amounts claimed as sales of antiques were entered in the day book under tyres, according to Mrs Black incorrectly although she could offer no explanation and said there was none. She thought $16,000 was not a very large amount to keep in cash in the

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ATC 4117

safe and did not think it safer in a bank. Her explanation for paying it into the building society instead of into the company direct was not convincing. The whole of this antique matter has been considered carefully by me and in the result I am not satisfied to accept that I can find that genuine sales took place at all or certainly to anything like that amount, nor am I satisfied that I can accept Mrs Black as a reliable witness.

There are others aspects of her evidence as to the use to which the motor cars were put in picking up the children from school which I found unsatisfactory and unacceptable.

For the above reasons, I find that the taxpayer has not discharged the onus and the appeals fail. I shall need to add something further later in respect to the appeals so far as concerns the use of the cars in the years 1979 and 1980.

There is little precise evidence as to the use to which the cars were put in 1979 and 1980 although there is general evidence as to their overall use including, I infer, those years. There was a Rolls Royce and a Porsche. The taxpayer claimed that parking them in a side street beside the business premises attracted business from owners of luxury cars for tyre service. No evidence was produced to show what number or types of such vehicles were serviced and I reject this submission. It was also claimed they were used to ferry the children from school to the business premises to work in the business. Having regard to their ages and the way this was given I do not accept this. Finally it was claimed the cars were used to ferry customers from the business to the nearby railway station. Mrs Black went so far as to say two or three times a day. As I have said earlier I do not regard her as a reliable witness. It may be such was the case on occasion, even accepting her estimate that use alone would be quite insufficient to enable the taxpayer to succeed on this issue. The reality was that the cars were as I find virtually for the personal use of the taxpayer and his wife and as such the challenge to the assessment under sec. 26(e) fails.

The taxpayer called Mr Richards, an accountant. He was consulted by the taxpayer after the taxation investigation had already commenced. His initial task was to assist to prepare account information to become the basis for objections for Passlow's and the taxpayer and his wife. Then he prepared proper books of account for the company for 1973-1977 and from them prepared and submitted amended income tax returns since the originals lodged were far from accurate. The amended accounts included trading accounts, profit and loss accounts, balance sheets and other relevant statutory returns. No audit was conducted. His evidence does not really assist the case for the taxpayer or, indeed, me. In adjusting the loan accounts he took as his starting point the balance sheet for the year ended 30 June 1972. He did not proceed from primary records but from records prepared by the accountant whom the taxpayer insisted was the source of the manipulations. Similarly, Mr Richards did not refer to primary records or reconcile various relevant figures and their obvious differences. He relied upon Mrs Black to answer queries and the accuracy of her recollection and others who gave information. On at least one occasion her information was significantly wrong which was carried into a balance sheet. On the basis of this analysis of his evidence as developed by counsel for the Commissioner his evidence provides no real assistance. The cash books he relied on had been written up years after the events they purported to record and after reference to Mrs Black and the taxpayer mainly for information. It is to be remembered that the taxpayer was quite unable to offer any assistance on any aspect of financial records or their basis transactions, claiming no knowledge of such matters and preferring Mrs Black to deal with them. By way of illustration, he could not explain which or if any of the different loan account figures annexed to the original tax return of Passlow's, the amended balance sheets or the figures in the objections lodged by the company were correct.

Having regard to the unsatisfactory nature of documentary, oral and other material, including so much of that which was before the Commissioner as has been placed before me, I could not and do not find that the Commissioner must have been moved by some or any misconception or extraneous consideration or that a reasonable mind ought not have been dissatisfied so as to show that the Commissioner's decision must have been the result of some undisclosed error on his part or was capricious or arbitrary. It was for the

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ATC 4118

taxpayer to satisfy the Commissioner, if he was left in doubt the taxpayer failed. It is in directing my consideration to such matters that I have made such observations on the material and the witnesses as I have.

The Commissioner has as I understand it to consider all the material before him when he makes his assessment. So far as objections are concerned his obligation is to consider matters therein which would bring him to the opinion that his initial assessment was not properly exercised, i.e., e.g., was arbitrary or capricious (
Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. 75 ATC 4028; (1974-1975) 132 C.L.R. 535 per Gibbs J. at ATC p. 4049; C.L.R. p. 568 and Stephen J. at ATC pp. 4053-4054; C.L.R. at p. 576). It is only where acceptable material presented to him by the objections show he wrongfully exercised his discretion and the material is within the objections that the assessment should be reviewed. In my opinion, on the material before me, the taxpayer has failed to show such matters and there is no case for the Commissioner to review the assessment.

It is appropriate that I say something as to the taxpayer's approach to the appeal. It is necessary to guard against dealing with the appeal as a rehearing on factual material and in effect reaching a conclusion as to the assessable income even were that possible, as to which I have already made some observations.

The approach of the taxpayer through his counsel was to start with the objections which imported the objections of Passlow's to that company's assessment, since the approach was that the taxpayer's assessments were based on the company's affairs so far as concerned distributions. It was then sought to reduce and suggest corrections to those figures in various ways and in some detail. One problem, of course, was to achieve an acceptable accurate and trustworthy base on which to build the company's accounts as I have already observed. Objections as to small items of interest were not pursued and can be left to one side. Accordingly, this submission fails.

The next submission was that the sales of private antiques were effected in accordance with the records said to have been in respect thereof and the proceeds banked into the company's funds as claimed so that these sums admittedly mixed with company funds were in reality those of the taxpayer personally. I have dealt with the unsatisfactory nature of this material previously.

Similarly, lengthy submissions were put as to the use of the motor vehicles as having been virtually exclusively for company business purposes. This too I have already commented upon.

Lengthy submissions were made as to the evidence of the taxpayer and his wife and that they should be accepted as reliable witnesses. This too has been already referred to. It was put that it all arose from business inexperience and inefficiency and lack of appreciation or knowledge of proper procedures and that no other reflection could fairly be made. The use of cash receipts, their accumulation and the way they and personal expenses were dealt with of themselves make this impossible to sustain.

Further, it was submitted that there was an availability of funds to which payments for personal expenditure to or on account of the shareholders could have been charged, i.e., that the loan accounts show credits and that these should be set off against any payments sought to be treated as distributions. Whilst as a general rule such a proposition may have appeal, bearing in mind the unsatisfactory nature of the records and that it is an appeal from the Commissioner's opinion and the onus the taxpayer carries, the submission fails, as I have indicated earlier.

It was submitted that sec. 108 was imprecise and inoperative and accordingly cannot be applied in this case. The argument was that the word ``any'' in the phrase ``any of its shareholders'' meant ``all its shareholders''. The next step was to take the words which authorise the Commissioner to treat the distribution as dividends and put that the section does not say whose dividends. This is a construction of the section and a submission which I cannot and do not accept. It was further submitted that even if the section applied to individual shareholders as opposed to all, it was not open to the Commissioner to select one particular shareholder to be assessed for the whole of the payments made to or for the benefit of a group of or shareholders generally. This submission not only misconceives the sense of the section but also its application to the given instant situation and I reject it. It was also submitted that the Commissioner produced no evidence to justify the assessments of the

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ATC 4119

taxpayer on distributions and therefore so much of the assessments as arise out of his attempt to do so must fail. I have already dealt with the appropriate approach and reject this submission. On the assumption that this was not accepted it was urged that the Commissioner acted arbitrarily and capriciously and could not have properly directed his mind to the formation of an opinion. This too has been dealt with by me.

There is one matter that should be mentioned. It relates to loans made by Mrs C.E. Black. Counsel for the Commissioner did not challenge these items. Similarly, counsel conceded loans of $10,000 by Stott and Vassella respectively to the taxpayer and his wife on 19 December 1973. In my opinion, this circumstance does not affect the outcome of the appeal. As mentioned at the outset, it is not sufficient for the taxpayer to show that the Commissioner is wrong but he is required to show positively what correction is to be made to make it right. The state of the financial dealings and records and lack of them and the procedures adopted are such that the taxpayer has failed to carry this onus.

In saying this, it does not follow on this point that the Commissioner's decision in arriving at his opinion is necessarily otherwise vitiated by any appealable error by these transactions.

I order the exhibits may be returned.