FEDERAL COURT OF AUSTRALIA Liu v Commissioner of Taxation [2003] FCA 124 INCOME TAX – whether assessments by the Commissioner under s 167 of the Income Tax Assessment Act 1936 (Cth) were excessive – no error of law revealed in approach of the Administrative Appeals Tribunal. Administrative Appeals Tribunal Act 1975 (Cth) Income Tax Assessment Act 1936 (Cth) Taxation Administration Act 1953 (Cth) Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 Liedig v Federal Commissioner of Taxation (1994) 50 FCR 461. SUNNY SOON KAIT LIU v COMMISSIONER OF TAXATION N 448 of 2002 ALLSOP J 28 FEBRUARY 2003 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 448 of 2002 BETWEEN: SUNNY SOON KAIT LIU APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: ALLSOP J DATE OF ORDER: 28 FEBRUARY 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The "appeal" under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) be dismissed. 2. The applicant pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 448 of 2002 BETWEEN: SUNNY SOON KAIT LIU APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: ALLSOP J DATE: 28 FEBRUARY 2003 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an appeal on a question of law from a decision of the Administrative Appeals Tribunal (the Tribunal) under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) made on 22 April 2002 in which the Tribunal affirmed the decision of the respondent Commissioner of Taxation. 2 The applicant lodged tax returns declaring his taxable income for the years ending 30 June 1996, 1997 and 1998 as $4,604, $15,894 and $147,532, respectively. Notices of assessment were originally raised stating the tax payable in these respective years including medicare levy and penalties was nil, $2,218.99 and $64,786.45. 3 On 20 December 1999, after an audit of the applicant's affairs and an investigation by the National Crime Authority (the NCA), amended assessments were raised under s 167 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The amended assessments stated taxable income as $248,932 (compare $4,604), $382,313 (compare $15,894) and $511,793 (compare $147,532) for the three years respectively. The sums assessed as payable for the three respective years, including tax, medicare levy and surcharge, penalties and interest were $225,665.92 (compare nil), $326,539.05 (compare $2,218.99) and $395,680.91 (compare $66,261.77 referred to in a calculation document with an amended medicare levy). 4 The penalties incorporated in the amended assessment were calculated at 75%. 5 The applicant, through his accountant, Mr Chang, objected to the amended assessments. 6 The respondent disallowed the objection. 7 From this disallowance the applicant appealed to the AAT. 8 It is important to recall the nature of the task facing the taxpayer in contesting an assessment by the Commissioner under s 167 of the ITAA 1936. Such an assessment represents the Commissioner's bona fide judgment as to the amount of the taxpayer's taxable income: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, 624. 9 There was no challenge to the bona fides of the Commissioner here or before the AAT. 10 The applicant carries the burden of proving that the amended assessment was "excessive": par 14ZZK(b) of the Taxation Administration Act 1953 (Cth) (the TA Act). The applicant in this regard referred to what Toohey J said in Dalco at 631: I agree with Wilcox J in the Federal Court that "the task for the taxpayer, upon an appeal or a review under Pt V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer". As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. He or she may also do so by pointing to some error of computation or, as suggested by McAndrew, by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment. [emphasis added] 11 The applicant emphasised, in seeking to demonstrate an error of law on the part of the Tribunal in dealing with what purported to be expert evidence of Mr Chang, that Mr Chang's evidence demonstrated not only that the respondent had made fundamental errors in his approach, but also that such demonstration of error concluded the question that the amended assessments were excessive. 12 Some background facts are necessary. The applicant, during the relevant years of income, conducted one or more brothels in Sydney and was entitled to the receipt of the income of those businesses. The applicant, during the relevant years of income, attended casinos in Sydney and Melbourne and gambled in large amounts of money. 13 The amended assessments were based on calculations reflected in documents before the Tribunal. Those calculations reflected enquiries that had been made of financial institutions and casinos. The calculations included details of cash deposited or incoming into financial institutions, transactions showing funds leaving financial institutions, transactions moving into financial institutions, transactions of cash out of gambling institutions, purchases of chips from gambling institutions, cash amounts withdrawn from financial institutions, various credit card transactions, various bank account movements. 14 I do not propose to describe in detail the calculations made from this body of material. 15 The applicant gave evidence before the Tribunal. His version of events was that he won substantial money from gambling. However, contrary to this, he had told the NCA that he was overall not a gambling winner. The matter proceeded before the AAT on the basis that the gambling winnings would not be taxable. The correctness of that assumption was not an issue before me. 16 The applicant did not attempt to provide to the Tribunal any explanation of the income of his brothels. No accounting records were produced; no statement of trading results were brought forward. Likewise the applicant was unable to produce any records at all covering his gambling. After referring to the different evidence given by the applicant to the NCA about the success of his gambling, the Tribunal said the following at [16] of its reasons: 16. Whereas the applicant in these proceedings contended that he had won substantial amount of money at either the Star City or Crown Casinos, that is in direct contrast to his evidence to the NCA. He was unable to produce any records at all regarding his gambling activities, so that I can only conclude that I am not satisfied that the applicant's source of moneys in the tax years 1996, 1997 and 1998 was from gambling. As was pointed out in R v Federal Commissioner of Taxation; Ex Parte Trautwein 56 CLR 63 at 87: A taxpayer cannot get an advantage by losing either his memory or his books, but must show the true position. 17 A statement of Mr Chang was tendered to the Tribunal. The Tribunal dealt with the statement in [17] to [20] of its reasons as follows: 17. Exhibit A3 is a statement by the applicant's accountant, Mr Chang. Attached to that statement is a reconstruction by Mr Chang of the respondent's calculation of undisclosed income (T1-18). That document does not advance matters as it is based upon assumptions made by Mr Chang. Conclusions based upon assumptions do not meet the onus of proof placed upon the applicant. 18. In any event, in cross examination, Mr Chang conceded that his accounting was based upon what he was told by the applicant and further, that if the records of the Star City and Crown Casinos obtained by the respondent were accurate, then the respondent's amended assessments had been generous to the applicant. He also conceded that if the applicant was a gambling loser, rather than a winner, his reconstruction at Annexure X to his statement would not be valid. 19. Mr Chang also conceded that he had written the document at page 6 of Exhibit R2, which was a letter to the National Australia Bank, dated 1 October 1998. In that letter he states: There is no question about Mr Liu (sic) serviceability of $7000 loan repayment a month. 20. I have no reason to believe Mr Chang to be dishonest. If he, as the applicant's accountant, stated to the National Australia Bank that the applicant could service a loan repayment of $7,000 per month, this indicates a knowledge of net income plus a regularity of income, not compatible with gambling. 18 The Tribunal then noted that in the 1996 taxation year, the income declaration of the applicant was limited to the unemployment benefits he received. The Tribunal then noted at [21] of its reasons: …Document T23 in the documents prepared for the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 is an application to ESANDA Finance. This document is an application for finance to purchase a motor vehicle for $40000.00. A deposit of $8000.00 was paid in cash, and monthly payments were scheduled at $821.35 per month. This is hardly the type of contract a finance company would enter into with a person whose sole source of regular income was unemployment benefits. 19 This was also said to go to the applicant's credit. 20 The conclusion of the Tribunal was set out at [22] of its reasons: As stated above, I am simply not satisfied that the applicant has discharged the onus of proof required by s14ZZK of the Taxation Administration Act 1953. 21 Looking at the reasons as a whole, it is clear that the Tribunal did not accept the applicant's evidence that he was a large winner at gambling. Further, the Tribunal did not accept that there was a body of evidence before it which discharged the onus of proof on the applicant as to whether the assessments were excessive. In circumstances where the taxpayer brought forward no records revealing the trading position of either of his two sources of income (one said to be taxable and one not) that is hardly surprising. 22 As to penalty the Tribunal said the following at [27]of its reasons: So far as penalty is concerned, I am affirmatively satisfied on the material before me that the applicant had deliberately understated his income in the years in question. Section 226J of the Income Tax Assessment Act provides for a penalty of 75% of the amount of shortfall of tax payable if the shortfall was caused by the intentional disregard by the taxpayer of the Income Tax Assessment Act. This is clearly the case here and the decision as to penalty is affirmed. 23 This was a finding of deliberate understatement of income. The matter had been brought to the Tribunal by the applicant who said he made large gambling wins. That was rejected. It was common ground that he had another possible source of income: operating brothels. The finding of the Tribunal involved a rejection of the evidence of the applicant about his success at gambling, in the context that the material available did show large amounts of disposable income. In these circumstances the finding of deliberate understatement was understandable and open to the Tribunal. The challenge of the appellant 24 The appellant identified what are said to be the questions of law as follows: 2.1 Whether the decision of the Tribunal was so unreasonable that no reasonable Tribunal could so conclude. 2.2 Whether the Tribunal failed to properly exercise its jurisdiction in that it failed to:- (a) Give a proper, genuine and realistic consideration to the evidence; (b) Address a central question which was raised by the Appellant and supported by the material in the proceedings; (c) Include in its reasons, findings on the material questions of fact and, a reference to the evidence or other material on which those findings are based; (d) Comply with Section 43(2) of the Administrative Appeals Tribunal Act 1975 in not providing substantial reasons and further, in so doing, brought about a miscarriage of justice by preventing the Court from affording the parties a determination whether the Tribunal's decision was vitiated by an error of law. 25 The grounds identified were as follows: 4.1 The Appellant had contended that the Respondent had made substantial errors in assessing the Appellant's income for the years ending 1996, 1997 and 1998. Those contentions were set out in paragraphs 8, 9 and 10 of the Applicant's Statement of Facts and Contentions filed in the Tribunal (Exhibit "A1", Folios 1 to 5, Vol. 3 of the Appeal Books). 4.2 The Appellant supported those contentions with expert evidence being Mr. Herman Chang's statement dated October 2001 which was also filed in the proceedings and ultimately admitted into evidence as Exhibit "A3". 4.3 The Tribunal rejected the Appellant's expert evidence for reasons that were incorrect or alternatively unreasonable. 4.4 In rejecting the expert evidence, in the manner that it did, the Tribunal failed to consider, analyse and evaluate arguments central to the Appellant's case and thereby made an error/s of law as pleaded above. 26 Thus, it was the manner of dealing with Mr Chang's evidence that formed the entire basis of the grounds of appeal in the Amended Notice of Appeal. 27 Mr Chang's statement takes issue with many aspects of detail in the material to which I have referred at [13] above. The appellant submitted that from the report it could be concluded that fundamental errors had been made by the Commissioner. It was said that this evidence standing alone proved that the amended assessments were excessive. It was said that the Tribunal was wrong to conclude that the evidence was founded on assumptions. 28 Leaving aside the question as to whether any such errors were legal or factual, it is plain that the evidence of Mr Chang in significant part did depend on the assumption of the accuracy and truthfulness of the applicant's evidence. For Mr Chang's evidence to assist in the ultimate question of excessiveness (as opposed merely to dealing with the Commissioner's calculations) this had to be so. He made relevant concessions to that effect in his cross-examination. Thus, the fact that Mr Chang could show errors, even large ones, in the calculations of the Commissioner did not lead, of itself to a conclusion as to excessiveness when that evidence depended on acceptance of the applicant that he made large gambling wins. This is especially so in circumstances where there was no attempt by the applicant to prove the trading position of the brothels. Mr Chang's evidence was only of assistance in dealing with one aspect of the matter – the approach of the Commissioner. Insofar as it sought to express opinions or conclusions going to excessiveness it necessarily rested on the applicant's evidence. The Tribunal dealt with Mr Chang's evidence in this way. It was correct to do so. 29 That disposes of the grounds of appeal in the amended notice of appeal. 30 Further submissions were made by the applicant complaining of the inadequacy of the Tribunal's reasons. 31 I see no such error. The Tribunal was not obliged to traverse the detail of Mr Chang's report when, in its context, it plainly could not of itself prove excessiveness. 32 The Tribunal, for reasons which it gave, did not accept the applicant's evidence. Any error in that regard was factual. 33 The submissions of the applicant were redolent of the proposition denied by the High Court in Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 that where a Tribunal has an obligation to give reasons or a statement of material facts, what must be provided is what the reviewing court says are or should have been the reasons or material facts. What is required here by subs 43(2B) of the AAT Act was for the Tribunal to make findings and express itself as it considered was necessary to its reasoning process. 34 From the reasons given here it is plain why the Tribunal reached the conclusion it did. It did not accept the applicant's evidence as to gambling winnings. It did not have before it an acceptable body of evidence on which to conclude that the amended assessments were excessive. It did not find Mr Chang's evidence useful as to the issue of excessiveness, based as it was, as the witness accepted, and as logic compelled, on the acceptance of the applicant's evidence. 35 From such reasons it cannot be concluded that the Tribunal committed any error of law. 36 On the way the matter was approached by the parties before it, the Tribunal was entitled to conclude as it did in [27] of its reasons about penalty. The matter did not proceed before the Tribunal on the basis that there was a possibility that there had been an accidental understatement of income. The applicant said that he had won money gambling. That and that alone explained his tax returns. The Tribunal plainly did not believe him. 37 I fail to see what else the Tribunal needed to say. 38 This makes it unnecessary for me to consider whether in proceeding as it did, the Tribunal, in some fashion, extended the grounds of the objection in circumstances where the applicant had not at the Tribunal hearing raised any argument in support of revision of penalty: see generally Liedig v Federal Commissioner of Taxation (1994) 50 FCR 461. 39 I see no basis to conclude that the Tribunal committed any error of law identified in [24] above on the grounds identified at [25] above, or for any other reason. 40 The "appeal" under s 44 of the AAT Act should be dismissed with costs. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop J. Associate: Dated: 28 February 2003 Counsel for the Applicant: M S Campbell Solicitor for the Applicant: Messrs W Chan & Co Counsel for the Respondent: D McGovern S C Solicitor for the Respondent: Australian Government Solicitors Date of Hearing: 6 February 2003 Date of Judgment: 28 February 2003