FEDERAL COURT OF AUSTRALIA Kimche v Commissioner of Taxation [2004] FCA 1108 PATRICIA CAROL KIMCHE v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA V 807 of 2001 RYAN J 26 AUGUST 2004 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 807 of 2001 BETWEEN: PATRICIA CAROL KIMCHE Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE OF ORDER: 26 AUGUST 2004 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Each of the assessments for the years ended 30 June 1995, 30 June 1996, 30 June 1997, 30 June 1998 and 30 June 1999 be set aside and be remitted to the respondent for recalculation in accordance with law. 2. The costs of the application, including any reserved costs, be reserved to await further submissions from the parties. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 807 of 2001 BETWEEN: PATRICIA CAROL KIMCHE Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE: 26 AUGUST 2004 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction 1 The applicant did not lodge any tax returns for the financial years ending 30 June 1995, 30 June 1996, 30 June 1998 and 30 June 1999. The applicant lodged a tax return for the financial year ending 30 June 1997, showing income of $5,920 received as a sales assistant. 2 In 1999, the respondent conducted an audit of the applicant's taxation affairs for the period 1 July 1994 to 30 June 1999. On 18 July 1999, on completion of the audit, the respondent issued to the applicant Notices of Assessment or, for the year ended 30 June 1997, Amended Assessment, pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth), for the years ending 30 June 1995 through to 30 June 1999 inclusive ("the assessments"). The assessments imposed income tax, medicare levy and penalty tax on the applicant in the amount of $359,912.20. On 6 April 2001, the applicant lodged with the respondent notices of objection against the assessments ("the objections"). On 12 June 2001, the respondent issued a notice of decision disallowing the objections in full ("respondent's decision"). On 8 August 2001, the applicant filed an application in this Court, under Part IVC of the Taxation Administration Act 1953 (Cth), objecting to the respondent's decision. The applicant seeks to have the objections allowed in full, and specifically contends that the income tax and medicare levy should be fully eliminated and the penalty tax reduced to nil. Background 3 In 1994, the applicant commenced a relationship with one Gad Raveh, a Perth-based businessman. It is common ground that, during this relationship, substantial sums of money flowed between the applicant and Mr Raveh. However, the nature and amounts of these sums of money are in dispute and are fundamental to resolving the matters in issue. It is therefore necessary to examine in some detail the transfer of funds and assets between the applicant and Mr Raveh. 4 In August 1994, the applicant gave Mr Raveh $95,000. The applicant claims that she made the payment to consolidate her relationship with Mr Raveh and to express her commitment to their future lives together. Upon making the payment, the applicant received a handwritten letter dated 22 August 1994 from Battleship Holdings Pty Ltd ("Battleship Holdings") a company controlled by Mr Raveh. The letter purported to create an agreement between Battleship Holdings, as trustee for the Battleship Investment Trust, and the applicant. The letter further recited; 'Financial Acommodation (sic) Pat [the applicant] will invest and provide the trustee with an amount of $95,000, upon the execution of this memo ("the Principal"). Repayment The trustee will repay the Principal upon the float of Peters & Browns Food Ltd on or before 30/11/94. Consideration (a) in consideration for the said principal being invested/provided, the trustee will cause and pay pat, upon the said float of Peters & Browns Foods Ltd ("Peters"), on or before 30/11/94, a lump sum equivalent to an annual interest rate of 60% ("the consideration"). (b) The trustee will further cause and pay Pat an amount equal to the premium that will be achieved on the par value of one Peters share (equal in % to the Principal as the Premium to the par value of the share ("The premium") (c) Both the consideration and the Premium will be paid to pat together with the principal upon the float of Peters, on or before 30/11/94.' The letter was signed by Mr Raveh on behalf of Battleship Holdings. Mr Raveh also personally guaranteed the undertakings of Battleship Holdings. 5 In September and October 1994, the applicant gave Mr Raveh a further $309,166. On 27 October 1994, Mr Raveh acknowledged in writing receipt of funds totalling $404,165.80. The acknowledgement went on to recite: '2. The above funds, of $404,165.80 ("the funds"), have been given to us in trust for you and Miss Iseli, to be managed on your behalf until 31 December 1995. 3. We have received the above funds, as said, and have undertaken to manage them and guarantee you a fixed return, as stated below, during the period that we will manage them. 4. In light of the above mentioned, and our undertaking, we will credit your account with Westpac Banking Co as follows: (a) on or before 30 November 1994 $2,211.79 (b) on or before 31 December 1994 $2,211.79 (c) on or before 31 December 1994 $28,000 (d) on or before 31 January 1995 $11,000 (e) as of 28 February 1995, at the end of each and every month, to 31 December 1995 $4,378.46 5. On or before 31 December 1995, upon our mutual understandings, we will either return the funds to you or continue to manage them further.' That letter was also signed by Mr Raveh on behalf of Battleship Holdings. 6 In February 1995, the applicant gave $12,000 to Mr Raveh and on 21 October 1995, gave him a further sum of $144,000. The latter amount, it appears, was derived from the proceeds of the sale by the applicant of her property in Jarrad Street, Cottlesloe. On 18 January 1996, Mr Raveh acknowledged in writing receipt of $660,331.60. The applicant gave evidence that she had requested this letter from Mr Raveh before he left on an overseas trip, as she wanted something in writing from him regarding her money "in case his plane crashe[d]". The letter contained these acknowledgements; '… The above funds, of $660,331.60 ("the funds"), have been given to me in trust for you and to be managed on your behalf. I have received the above funds, as said, and have undertaken to manage them and guarantee you a fixed return, on a basis of 13% per annum, during the period that I will manage them. The funds have been, and are managed by me, through entities that I control. However, I am personally responsible and report to you. To the above funds you are entitled to an additional $47,000 which is your profit of your unit that will be received upon settlement of the purchase. This will bring your total funds to $707,331.6 … The total funds will stand for renewal of management according to your decision during February 1996. For your convenience I attach herewith your total drawings since 29 November 1994 (to date) which come in total to $145,426.80.' It appears that the amount of $660,331.60 was augmented by an amount of $100,000, attributable to the proceeds of a cheque received by the applicant upon the sale by her of a diamond ring to a Robert Embling for $100,000. The cheque received from Embling was later dishonoured and the sum of $100,000 was never actually received by Mr Raveh. 7 On 10 June 1996, the applicant gave to Mr Raveh a further $47,000 which represented the realization of her equity in another unit which she had owned in Northbridge, Western Australia. 8 In summary, it is contended by the respondent that the following amounts were paid by Mr Raveh to the applicant in each of the financial years ending 30 June 10995 to 30 June 1998; (a) for the financial year ending 30 June 1995 - $90,543 (b) for the financial year ending 30 June 1996 - $117,035 (c) for the financial year ending 30 June 1997 - $106,500 (d) for the financial year ending 30 June 1998 - $131,533. 9 It is appropriate to note at this point Ms Kimche's assertions about the character of payments received by her from Mr Raveh during that period. In an affidavit sworn on the 30 May 2002 the applicant deposed that Mr Raveh made monthly advances to her by way of domestic maintenance to cover all her expenses. She claimed that she did not view the payments as a return on her investment, expressed in terms of a percentage yield or otherwise, but regarded them as having been paid by Mr Raveh by way of "taking care" of her or maintaining herself and her son. It should be noted that the applicant was also receiving during the relevant period, maintenance payments from her former husband, Mr Ronald Kimche, who was domiciled in Europe. 10 As to the letters received from Mr Raveh, the applicant claims not to have read them or, to the extent that she had read them, not to have understood their import. Indeed, the applicant's evidence is that she was totally reliant on Mr Raveh for the management of her financial affairs. She admitted that she would have signed without question anything he might have put in front of her. To illustrate her complete ignorance of her own financial affairs and her dependence on arrangements made by Raveh, she claimed to have been unaware that any mortgages had been taken out on to finance the Melbourne property. I accept the applicant's evidence in these respects. 11 In addition to the movement of funds between them which I have already described, Mr Raveh and the applicant purchased a property together at 1 Albert Road, Melbourne ("Melbourne property") on 14 June 1996. The total cost of the acquisition was $657,000. Of this, $500,000 was borrowed from Home Building Society Ltd and secured on the Melbourne property and the balance of $157,000 was paid by Mr Raveh. In October 1997, the mortgage to Home Building Society was discharged and replaced by a mortgage to Hongkong Bank of Australia, and the principal amount of the loan was increased from $500,000 to $550,000. A second mortgage over the Melbourne property securing a principal of $150,000 was also granted in September 1998, to Jeffrey and Pauline Paskulich and Aileen and Johan Sterkenburg. The mortgages were granted in the name of each of the applicant and Mr Raveh. No evidence was adduced as to the purpose for which the funds from the refinance or first mortgage or the second mortgage were applied. However, I infer from the applicant's ignorance that the Melbourne property was subject to any mortgage, that the proceeds from neither mortgage passed through her hands. 12 The applicant asserted that by 1996 the relationship between Mr Raveh and herself had begun to deteriorate. At all events, it came to an end in 1998 and a substantial correspondence ensued, both directly between the parties and through their representatives, concerned with, amongst other matters, repayment of the applicant's money. Although many letters were written, I shall examine only those extracts which shed further light on the relationship between the applicant and Mr Raveh and the consideration for the movement of funds from one to the other. 13 On 6 March 1998, Mr Raveh provided to the applicant a summary of funds which he had received from, and paid to, the applicant. The summary was sent by way of a letter from Anthony Ho & Associates, and recited; 'We act for Mr Gad Raveh and manage his private affairs accounts. At Mr Raveh's request, we have prepared an up-to-date summary of all the funds Mr Raveh has received from you, as well as all the payments (monthly and otherwise) that Mr Raveh has made to you. The summary is herewith enclosed for your observation. You will note that: (a) Funds received from you were: $607,166.00; (b) Interest due (on the basis of 13% p.a. up to 31 March 1998) was: $274,368.58; (c) Actual payments made to you total: $387,610.38; and (d) Total overpayments made amount to: $113,241.80. The above summary does not include those payments listed under "Other Payments" on the attached document.' The "Other Payments" referred to were for legal costs in the amount of $10,259.63 (incurred in bringing an action against Mr Embling in relation to the diamond ring) and interest payments under the mortgage on the Melbourne property in the amount of $101,060.60. 14 On 11 March 1998, Mr Raveh personally wrote a letter to the applicant embodying, amongst other things, these proposals; 'Following the last telephone conversation we have had, and the financial report you received regarding your managed funds, I propose that: 1. The apartment will now be sold at the best price we can get. 2. The proceeds will be disbursed as follows: - $657.250 will be applied, prior to any payment, to repay the costs of the purchase (see enclosed an acquisition statement) - the remainder will be used to cover the costs of the current sale, and - the balance will be split in two equal halves, one to go to you (taking into account the above $37,000) and one to me. 3. Since the purchase was handled by Joseph Mulcahy, and he has all the details, I have asked him to handle this matter. 4. Regarding your managed funds, I propose, to assist you and not to bring into account the overpayments of $113.241.80 and the "other payments" made towards you. I am proposing to do so notwithstanding your recent unfriendly comments and your complete lack of appreciation of what has been done for you, continuously, almost three years, free of any charge. 5. As I have advised you, your funds have been reinvested towards the end of 1997 (in order to get you your high return) to 31/12/98, and will be handed back to you on 10 January 1999, accompanied with a detailed report. 6. I will make sure that you get a return of 13% on your original funds (without any deduction), and will bring into account the agreed profit on the sale of the unit in Northbridge, as well as the profit on the sale of the Domain apartment, when it is recouped. 7. I strongly suggest that you consult your accountant regarding your ongoing income, as well as the expected one, since I believe it is subject to tax and you should attend to it.' 15 In October and November 1998, a further $35,000 was paid by Mr Raveh to the applicant. On 3 November 1998, Freehills, solicitors acting for Mr Raveh, sent to Mr Ross McBain, an accountant acting on behalf of the applicant, a letter containing a reconciliation of moneys paid and received by Mr Raveh. An attachment to that letter revealed that, as at 31 October 1998, the applicant had paid to Mr Raveh $607,166 and Mr Raveh, in turn, had paid to the applicant $474,610. The letter recited; 'Having now spoken with Corrs I provide a reconciliation of all monies paid by Kimche to Raveh, all monies paid by Raveh to or for and on behalf of and under the direction of Kimche (subject to what follows below), as well as an interest reconciliation at the agreed rate of 13%. You will see that we calculate the balance payable as at 31 October 1998 to have been $355,757. That is, however, subject to me further exploring with Mr Raveh his payment on behalf of Kimche of a further $111,320(referred to as "Other Payments" in the facsimile from Anthony Ho and Associates to Kimche dated 6 March 1998, a copy of which is attached for your ease of reference).' 16 Following this letter, representatives of both the applicant and Mr Raveh attempted to negotiate a deed of release. An undated Deed of Acknowledgement, Settlement and Release ("the Deed") was executed by the applicant and Mr Raveh, apparently early in 1999, and provided, so far as is relevant; 'Recitals A. During the period August 1994 to June 1996 inclusive, Battleship received from Kimche the sum of $607,166 purportedly for and on behalf of Kimche and Iseli ("the Funds"). B. Pursuant to two letters from Battleship to Kimche dated 27 October 1994, Battleship agreed to manage the Funds on behalf of Kimche and Iseli. C. Raveh guaranteed the obligations of Battleship. D. During the period November 1994 to November 1998 inclusive, Raveh, for himself and Battleship, made numerous payments to Kimche, such payments totalling $474,616 ("the Payments"). E. Raveh and Kimche are the registered proprietors of the property known as Apartment 13, "The Domain" Albert Road, Melbourne, Victoria ("the Apartment"). F. The parties hereto have differing views as to their respective rights and liabilities with respect to the Funds and the Payments, but have agreed to resolve their differences in accordance with and subject to the terms of this Deed. 1. Transfer of interest in Apartment 1.1 Raveh agrees that he will transfer to Kimche, free of all encumbrances, all of his right, title and interest in the Apartment. … 2. Payment by Kimche 2.1 On the date being 6 months from the date of this Deed, Kimche will pay to Raveh or his nominee(s) the sum of $132,500, as well as interest calculated and capitalised in accordance with clause 2.2 hereof. 2.2 Kimche agrees to pay to Raveh or his nominee(s) on the date referred to in clause 2.1 hereof interest on the said sum of $132,500 calculated at 6% per annum from the date being 3 months from the date of this Deed. 3. Mortgage Simultaneous with the transfer provided for in clause 1 hereof, Kimche will grant to Raveh or his nominee(s) a first mortgage, in registrable form, over the whole of the title to the Apartment, in terms of the Mortgage attached hereto and marked "A", to secure to Raveh or his nominee(s) the payment of the sum of $132,500, provided for in clause 2 hereof.' According to the applicant, she consistently disputed the assertions and the calculations in the Deed but was advised by her accountants at the time to "cut her losses" and accept the terms of the Deed. 17 On 15 April 1999, the applicant granted a mortgage over the Melbourne property to secure the $132,500 payable to Raveh under the Deed. On 6 May 1999, the applicant was registered as the sole proprietor of the Melbourne property and the mortgage to the Hongkong Bank was discharged. On 28 July 1999, the second mortgage to Mr and Mrs Paskulich and Mr and Mrs Sterkenburg was also discharged. 18 As mentioned at [2] of these reasons, the respondent in 1999 conducted an audit of the applicant's taxation affairs for the period 1 July 1995 until 30 June 1999. On 18 July 1999, on completion of the audit, the respondent issued the assessments. Evidence as to how the respondent calculated the applicant's taxable income was provided by Daryl Freame, an auditor employed by the respondent. The relevant paragraphs of Mr Freame's affidavit were in these terms; '3. First I determined the excess of the amounts received or applied for the benefit of the Applicant by Mr Raveh and Battleship Holdings Pty Ltd over the amounts which she had paid them in the years of income ended 30 June 1995 to 30 June 1999. 4. I calculated this amount from the Deed of Acknowledgment, Settlement and Release executed by Battleship Holdings Pty Ltd, Mr Raveh and the Applicant ("the Deed") … and information provided to me by Mr McBain … … 5. The actual calculation was as follows: Payments received by the Applicant $652,611 Less payments made to Mr Raveh $628,166 Add the value of Mr Raveh's 50% interest in Apartment 13 under the Deed $465,000 Less payments to be made to Mr Raveh under the Deed $132,500 Add the value Applicant's obligations under the mortgages assumed by Mr Raveh $350,000 $706,945 6. Then I allocated the assessable income to the years of income ended 30 June 1995 to 30 June 1998 respectively in accordance with the payments which were made to the applicant in each year of income and the balance of the assessable income to the year ended 30 June 1999.' 19 It is clear that the final assessment involved variations of the amounts set out in the Deed. These were explained by Mr Freame by indicating, first, that to the "Payments" of $474,616 were added payments of $15,000 and $6,000 received by the applicant on 2 November 1998 and 27 January 1999 respectively. The assessment also credited the applicant with payments of $2,000, $60,000 and $95,000 totalling $157,000 which represented the deposit paid by Mr Raveh on the Melbourne property, as described at [11] above of these reasons. Mr Freame, when asked in cross-examination why he took these payments into account given that they had been made to a third party (the vendor of the Melbourne property), replied that, the information before him during the audit indicated that those payments had been made by Mr Raveh as a benefit to the applicant. He was not aware that these payments had been made to a third party and did not turn his mind to that issue. In relation to the amounts paid by the applicant to Mr Raveh, Mr Freame deposed that to the sum of $607,166 he had added payments of $6,000 and $15,000 made on 2 November 1998 and 27 January 1999 respectively. 20 Mr Freame conceded that the source documents upon which he based his audit of the applicant may not have revealed completely the flow of funds between Mr Raveh or Battleship Holdings and the applicant. 21 On behalf of the applicant, evidence was given by Mr Chris Pavlides, an accountant. Much was made in the competing contentions of the parties of Mr Pavlides' evidence, most of which concerned his preparation of a Bank Deposit Analysis ("BDA"). The BDA compared Mr Pavlides' examination of the applicant's own bank account documents and other records, with the reconciliation of the flow of funds between the applicant and Mr Raveh provided in the letter from Freehills on 3 November 1998; (see [16] of these reasons). Where an amount in the applicant's bank statements did not correspond with an amount in the Freehill's reconciliation, Mr Pavlides allocated it to another source, such as "overseas transfers", "salary", "bank interest" or an independent source referred to as "other". Mr Pavlides concluded from his examination of the documents and the BDA, that the respondent had overstated by $78,083.72 the amounts received by the applicant from Mr Raveh in the period November 1994 until November 1998. Further, Mr Pavlides concluded that the respondent had understated the amounts paid by the applicant to Mr Raveh. 22 The applicant gave evidence that the amounts allocated by Mr Pavlides' in the BDA to "overseas transfers", represented maintenance payments sent to her by her former husband, Mr Kimche, who is a resident of Switzerland. In an affidavit sworn 4 September 2003, Mr Kimche deposed that he was obliged by orders made in consequence of his divorce from the applicant to make periodic payments of maintenance to her. He appended to his affidavit copies of correspondence confirming transmission of various amounts to the applicant by way of maintenance payments between 2 August 1994 and 29 June 1999. 23 As to amounts allocated by Mr Pavlidis to the category "other", the applicant deposed that, as far as she could recall, they represented the proceeds from the sale of jewellery and furs, which she had made from time to time to raise money to meet her personal expenses. Under cross-examination, the applicant was unable to identify any particular piece of jewellery as yielding a specific amount in the "other" column. The applicant also conceded that she didn't know when she had sold particular items of jewellery, as she never kept any records. Further, cross-examination of Mr Pavlides revealed that in response to his enquiries the applicant did not disclose any sale by her of furs during the relevant period. Legislation 24 Sections 166 and 167 of the Income Tax Assessment Act 1936 ("the ITAA") provide as follows; '166 From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer, and the tax payable thereon. … 167 If: (a) any person makes default in furnishing a return; or (b) the Commissioner is not satisfied with the return furnished by any person; or (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income; the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of section 166.' 25 Part IVC of the Taxation Administration Act 1953 ("the Administration Act") deals with objections to assessments made by the Commissioner, including those under ss 166 and 167 of the ITAA which I have just set out. Sub-sections 14ZY(1) and (2) provide; '(1) If the taxation objection has been lodged with the Commissioner within the required period, the Commissioner must decide whether to: (a) allow it, wholly or in part; or (b) disallow it.' (2) Such a decision is in this Part called an "objection decision".' Section 14ZZ the Administration Act which deals with reviews of, and appeals against, a Commissioner's objection decision, provides, so far as is relevant; 'If the person is dissatisfied with the Commissioner's objection decision, the person may: … (c) if the decision is an appealable objection decision (other than a reviewable objection decision) – appeal to the Federal Court against the decision. 26 There was no dispute in these proceedings that each of the Commissioner's objection decisions was an "appealable objection decision" and thus susceptible of an appeal to this Court. In these circumstances, ss 14ZZO and 14ZZP of the Administration Act apply, by providing; '14ZZO In proceedings in an appeal under section 14ZZ to the Federal Court against an appealable objection decision: (a) the appellant is, unless the Court orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and (b) the appellant has the burden of proving that: (i) if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive. … 14ZZP Where the Federal Court hears an appeal against an appealable objection under section 14ZZ, the Court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision.' 27 The issue in this matter is whether the applicant has proved, on the balance of probabilities, that the assessments made by the respondent were excessive. The applicable principles 28 It seems to be common ground between the applicant and the Commissioner that the applicant was assessable to tax in the years in question only on receipts which can properly be characterised as income in the applicant's hands. In making that characterisation regard is to be had to contemporaneous documents which are claimed to shed light on the relationships in the course of which the payments were made, and the evidence of the makers and recipients of the payments as to the contractual, domestic or other relationship pursuant to which they were made. If it is established that a payment was received in a particular year of income, the onus is on the taxpayer to establish, on the balance of probabilities, circumstances which deprive that receipt of the character of income, eg because it was a repayment of a loan or other capital advance or by way of gift. If the taxpayer fails in respect of a particular receipt to discharge that onus which is imposed by s 14ZZO(5) of the Taxation Administration Act 1958 set out at [26] above, then the amount of that receipt remains assessable to tax. This approach I consider to be consistent with that taken by Davies J in Martin v Federal Commissioner of Taxation (1993) 93 ATC 5,200 where his Honour pointed out at 5,202; 'A court may set aside an assessment and remit the matter for reconsideration by the Commissioner where the court is satisfied that there was an error of law in the Commissioner's approach which led to an excessive assessment and that the taxable income should be recalculated by the Commissioner on a particular basis. But that is not to say that it is sufficient for a taxpayer merely to show that there was some error in the Commissioner's assessment. The taxpayer must demonstrate what is the amount which should be substituted for the taxable income assessed by the Commissioner or the basis upon which a calculation of that taxable income should be undertaken. The ultimate burden of the taxpayer is to show not merely that the assessment was in theory excessive, but that the amount assessed was excessive. Ordinarily, such a burden can be discharged only by proving what was the amount of the taxpayer's true taxable income and by comparing that sum with the taxable income assessed.' 29 However, Davies J went on in the same case to cite with approval this observation of Burchett J in Ma v Federal Commissioner of Taxation (1992) 37 FCR 225 at 233 [92 ATC 4,373 at 479]; 'Furthermore, the making of estimates upon inexact evidence, which is so much a feature of both judicial and administrative decision-making, cannot be uniquely excluded from appeals against betterment assessments. To refuse to consider the credit, not only of the applicant, but also of his independent and unchallenged witnesses, simply because the effect of the evidence was to support his accountant's generalisations about double-counting rather than to hit upon a precise figure, was to fall into an error of law. If authority be needed for this proposition, it may be found in the decision of Walsh J in Krew v Commissioner of Taxation (Cth) (1971) 45 ALJR 324; [1971] ATC 4,213, to which Mr Gibb, with his usual frankness, referred me. That was a betterment case, bearing some similarity to the present, in which Walsh J, in various parts of his judgment, acted on evidence that "substantial" portions of sums of money represented the proceeds of gambling; expressly eschewed (at [ATC] 4,223) any attempt to reach a "precise result"; and acknowledged (at [ATC] 4,224) that his decision as to certain "large payments" lacked "satisfactory evidence of a specific kind", concluding nevertheless that it was "probable that a large part of the money was derived from gambling", with the result that "a somewhat arbitrary decision" was required, to some extent in favour of the taxpayer.' 30 It follows, I consider, that if, in a case like the present, the taxpayer is able to establish facts tending to show that some part of a particular receipt did not bear the character of income but is unable to quantify with precision the amount of that part then the assessment will be excessive only in respect of the minimum amount which could have borne a different character. I proceed now to apply these principles to each of the assessments in question. (i) The 1995 assessment 31 The Commissioner assessed the applicant's taxable income for the year ended 30 June 1995 as $90,543 which was the amount said to have been received by the applicant from Mr Raveh in that year. The applicant contends that, in fact, she received only $62,527 from Mr Raveh in 1994-1995. I am satisfied on the basis of the BDA that the total amount of the funds deposited by the applicant with Mr Raveh or Battleship Holdings during this year was $519,575.90. Although the bulk of that deposit was constituted by a payment of $442,394 on 18 July 1994, other amounts were contributed from time to time during the financial year ending with a payment of $43,591.90 on 15 June 1995. I accept, in light of the letters of 27 October 1994 and 18 January 1996 quoted at [5] and [6] above, that Mr Raveh or Battleship Holdings contracted to pay the applicant a return on the capital sum standing to her credit from time to time calculated with monthly rests at the rate of 13% per annum. Accordingly, even if the full amount of $519,575.90 had been deposited by the applicant with Mr Raveh or Battleship Holdings at the beginning of the year ended 30 June 1995, she could not have derived any amount by way of income from the investment in excess of $68,000. The evidence does not disclose any other commercial or contractual basis on which either or both Mr Raveh or Battleship Holdings became liable to pay amounts by way of income to the applicant in the 1995 tax year. I am satisfied from the applicant's evidence of her personal and domestic relationship with Mr Raveh that any payments over and above the sum of $68,000 were by way of gifts or contributions to their joint domestic and social expenses. It follows that I am satisfied that the assessment of the applicant's taxable income for this first year was excessive by an amount in the order of at least $22,000. (ii) The 1996 assessment 32 The applicant's taxable income for the year ended 30 June 1996 was assessed to be $117,035 which was the total amount which the Commissioner regarded as having been received by the applicant from Mr Raveh. During that year the BDA indicates that $5,995 was received by overseas transfer, presumably as a payment by the applicant's ex-husband for the maintenance of their son. However, as that amount was not brought to account in assessing the applicant's taxable income, it can be disregarded for present purposes. 33 The BDA also confirms the payment, noted at [6] above, on 2 October 1995 by the applicant to Mr Raveh of $144,000 from the sale of real estate. On the assumption that there had been no repayments to the applicant of capital advanced during the 1995 financial year, the payment of $144,000 brought the amount standing to the applicant's credit with Mr Raveh or Battleship Holdings to $663,757.90. That corresponds reasonably closely with the $660,331.60 acknowledged by Mr Raveh on 18 January 1996 to have been "given to me in trust for you to be managed on your behalf." To the capital sum of $663,757.90 which I have imputed to the applicant has to be added the further sum of $47,000 which the BDA records as having been deposited by the applicant with Mr Raveh on 10 June 1996. However, I am satisfied that the sum of $59,393.68 was received by the applicant in October 1995 as the net proceeds of sale of a property at 20 Jarrad Street Cottlesloe. That is attested by a settlement statement from Steven Currie & Associates, Solicitors who acted for the applicant on the sale and who paid the sum of $59,393.68, presumably at her direction, to the credit of an account in the name of Mr Raveh at the Hongkong Bank. I do not regard that amount as having been invested by the applicant with Mr Raveh or Battleship Holdings because, I infer, it was later applied by Mr Raveh to the purchase in the joint names of himself and the applicant of the Melbourne property. 34 It follows, from the analysis which I have undertaken of payments received by the applicant in this tax year, that no more than $72,250 could have represented interest or a dividend at the rate of 13% per annum on the amount from time to time standing to the credit of the applicant's capital account with Mr Raveh or Battleship Holdings. Any amounts in excess of that sum, I am satisfied, were paid by Mr Raveh in recognition of their mutual domestic and sexual relationship which was correspondingly acknowledged by the applicant's contribution of the proceeds from 20 Jarrad Street Cottlesloe to the cost of acquiring the Melbourne property as a joint domestic establishment. (iii)The 1997 assessment 35 This is an amended assessment, the applicant having lodged a return showing income of $5,920 being wages earned as a shop assistant. By the amended assessment for the tax year ended 30 June 1997 the Commissioner assessed the applicant to tax on an assessable income of $106,500 which corresponded with the total of the amounts indicated by the BDA as having been received from Mr Raveh in that year. Consistently with her evidence that her relationship with Mr Raveh had begun to deteriorate in 1996, there is no record in this financial year of the applicant's having made any further payments to Mr Raveh or Battleship Holdings. Accordingly, I consider that she should be treated as having, for the whole of that year, had the capital sum of $700,757.90 on deposit with Mr Raveh or Battleship Holdings. That corresponds reasonably closely with the "total funds" of $707,331.60 acknowledged by Mr Raveh in his letter of 18 January 1996 quoted at [6] of these reasons. On the funds on deposit which I consider are disclosed by the evidence, the applicant was entitled to interest at the rate of 13% per annum which I calculate, in round figures, as $91,100. It follows that the taxable income imputed to the applicant for this tax year exceeded by something of the order of $15,400 the income which she has established on the balance of probabilities that she actually received as interest or a dividend. To that income the Commissioner would be entitled to add the wages of $5,920on which the applicant was originally assessed. (iv) The 1998 assessment 36 For this year also, the Commissioner has adopted as the applicant's assessable income the total of $131,533 shown in the BDA as having been received from Mr Raveh. As with the previous year, there is no indication that there had been any increase in the capital "funds" standing to the applicant's credit with Mr Raveh or Battleship Holdings which I have quantified in the sum of $700,757.90. That figure is almost $100,000 in excess of the sum of $607,166 acknowledged by Mr Raveh in the letter of 6 March 1988 quoted at [13] above to have been "funds received from" the applicant. The discrepancy between the latter sum and the $707,331 acknowledged as the applicant's "total funds" in Mr Raveh's earlier letter of 18 January 1996 may be explicable by Mr Raveh's having treated some of the moneys paid by him to the applicant in the intervening two years as having been in part repayment of the capital "funds" as they had stood to the credit of the applicant as at January 1996. However, neither the available contemporaneous documents nor the applicant's own evidence provides any support for that explanation. I therefore consider that payments to the applicant by Mr Raveh during the year ended 30 June 1998 should be taken to have been made first in discharge of the liability of either or both Mr Raveh or Battleship Holdings to pay interest or a dividend at the rate of 13% per annum on the "funds" held for management on behalf of the applicant. As the amount of the funds, on the hypothesis which I consider the evidence requires, remained unchanged from the previous year, the income from this source to be imputed to the applicant is again not more than $91,000 which the income postulated by the Commissioner's assessment exceeded by $40,533. (v) The 1999 assessment 37 For the year ended 30 June 1999, the Commissioner assessed the applicant to tax on a taxable income of $261,334. Unlike the amounts attributed to income in the earlier assessment, that amount bears no relation to payments shown in the BDA to have been received from Mr Raveh which were all received between 8 July 1998 and 1 October 1998 and amounted in all to only $29,000. What Mr Freame appears to have done, is to have proceeded on the assumption that each of the total amounts of $90,543, $117,035, $106,500 and $131,533 received by the applicant from Mr Raveh in each of the years from 1995 to 1998 represented income in her hands. For the reasons which I have already explained that assumption was not entirely borne out by the evidence in respect of any of the relevant years. 38 For the final tax year ended 30 June 1999, Mr Freame added to the sum of $445,611, treated as having been received by the applicant as income in the four preceding years, the amount of $29,000 revealed by the BDA as the total of the payments made by Mr Raveh to the applicant between 8 July 1998 and 1 October 1998. That yielded a total of $474,611 which more or less equated with the total amount of $474,616 acknowledged by the extract from the Deed quoted at [16] above to have been paid by Mr Raveh "for himself and Battleship ….. during the period November 1994 to November 1998." To that figure, Mr Freame added payments of $6,000 and $15,000, which Mr Raveh had made to the applicant on 2 November 1998 and 27 January 1999 respectively. After treating in the way indicated at [18] above payments actually or notionally made by Mr Raveh to the applicant and the sum of $132,500 which she was obliged to pay Mr Raveh under the Deed, Mr Freame arrived at a final figure of $706,945. From that amount he deducted $445,611, being the total treated as having been received as income in the four preceding years, to arrive at a taxable income for the remaining year of $261,334. 39 I consider that the facts surrounding the execution and implementation of the Deed evince an intention that the payment to Mr Raveh by the applicant of $132,500 and the adjustment of their respective equities in the Melbourne property thereby brought about should be in full satisfaction of the applicant's claims, if any, on either or both Mr Raveh or Battleship Holdings; (i) for return of the capital sum standing from time to time to the credit of the applicant as "funds under management"; (ii) for unpaid interest on the capital sum at the agreed rate of 13% per annum; (iii) for a share of the realization of Mr Raveh's and the applicant's net joint equity in the Melbourne property. On that analysis only the amount which could be apportioned to (ii) could properly be characterised as income derived by the applicant in the tax year ended 30 June 1999. If the assumption be made that the capital amount of the "funds under management" remained for the whole of the 1999 tax year at the figure of $700,757.90 imputed at [35] and [36] of these reasons, the amount of income characterised in that would could again not have exceeded $91,000. It follows that the applicant has succeeded in showing that the assessment for that last year was excessive by something of the order of $170,334 less the personal exertion income derived by the applicant in that year which, according to the BDA, amounted to $3,587.74. Conclusion 40 As the applicant has discharged the burden of proving that each of the disputed assessments was excessive there must be an order that each assessment be set aside and be remitted to the Commissioner for recalculation in accordance with law. That recalculation will doubtless have an effect on penalty tax and I shall receive submissions from Counsel as to costs. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate: Dated: 26 August 2004 Counsel for the Applicant: Mr F E Farrow Solicitors for the Applicant: Sholl Nicholson Pty Counsel for the Respondent: Ms D Harding Solicitors for the Respondent: Australian Government Solicitor Dates of Hearing: 23, 24 & 25 July 2003, 25 and 29 March, and 6 April 2004 Date of Judgment: 26 August 2004