Federal Court of Australia Youssef v Commissioner of Taxation (Appeal) [2024] FCA 1154 Appeal from: QQRK v Commissioner of Taxation [2023] AATA 3493 File number: NSD 1430 of 2024 Judgment of: PERRAM J Date of judgment: 4 October 2024 Catchwords: INCOME TAX – where substantial deposits not included in applicants' tax returns – where Commissioner assessed deposits as income – where applicants said deposits were referable to gambling and sought to prove maximum taxable income from other sources – whether onus of proof satisfied under s 14ZZK of the Taxation Administration Act 1953 (Cth) Legislation: Administrative Appeals Tribunal Act 1975 (Cth) ss 43, 44(1) Taxation Administration Act 1953 (Cth) s 14ZZK(b)(i) Cases cited: Browne v Dunn (1893) 6 R 67 Haritos v Federal Commissioner of Taxation [2015] FCAFC 92; 233 FCR 315 Imperial Bottle Shops v Commissioner of Taxation (Cth) (1991) 22 ATR 148; 91 ATC 4546 Ma v Federal Commissioner of Taxation (1992) 37 FCR 225; 23 ATR 485 Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; 261 ALR 382 Division: General Division Registry: New South Wales National Practice Area: Taxation Number of paragraphs: 37 Date of hearing: 9 September 2024 Counsel for the Applicants: Mr D McLure SC with Mr K Josifoski and Mr J Nolan Solicitor for the Applicants: Fortis Law Counsel for the Respondent: Mr R Jedrzejczyk Solicitor for the Respondent: Australian Government Solicitor ORDERS NSD 1430 of 2024 BETWEEN: GEORGE YOUSSEF First Applicant DANNY YOUSSEF Second Applicant AND: COMMISSIONER OF TAXATION Respondent order made by: PERRAM J DATE OF ORDER: 4 October 2024 THE COURT ORDERS THAT: 1. The appeal be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT PERRAM J: 1 This is a tax appeal by two taxpayers from the Administrative Appeals Tribunal ('the Tribunal'). The taxpayers are Mr George Youssef and his younger brother, Mr Danny Youssef. For convenience, each will be referred to in these reasons by his first name. 2 The principal questions in the case are short: first, whether the Tribunal erred in concluding that the brothers had failed to prove what their taxable income in certain years was; and, secondly, whether the Tribunal gave adequate reasons under ss 43(2) and (2B) of the Administrative Appeals Tribunal Act 1975 (Cth) ('the AAT Act') for rejecting the brothers' evidence that their income was confined to the operation of a modest concrete pumping business together with some amounts of interest and rent from an investment property. As will be seen, these questions are interconnected. 3 The facts of the brothers' cases do not differ in any material way. It is convenient to focus on George's case. 4 In the relevant income years, being those ending 30 June 2011 to 30 June 2016, George generally returned income from the concrete pumping business together with some amounts for interest and rent. His returned taxable income across these years ranged from a minimum of $352 (in 2014) to a maximum of $177,955 (in 2011). 5 Following an audit of George's tax affairs, the Commissioner identified, predominantly from bank statements and casino records, substantial deposits into his accounts. The Commissioner concluded that these deposits were assessable income which George had failed to include in his returns. Amended notices of assessment followed. The gulf between George's returned income and the Commissioner's estimate of his income is illustrated by the table which the Commissioner provided to George upon the issue of the amended notices of assessment. The table included not only the additional income now identified by the Commissioner but also amounts for penalties and interest: Income Year Pre-audit Taxable Income Adjustment Tax Shortfall Amount Penalties Shortfall Interest Total Amount Payable 2011 114,917 2,199,946 1,040,916.90 780,687.65 419,545.60 2,241,150.10 2012 84,928 3,412,289 1,648,128.30 1,483,315.45 503,519.25 3,634,963.00 2013 108,446 2,087,311 997,811.65 898,030.45 228,826.40 2,124,668.45 2014 352 1,139,380 520,618.35 468,556.50 84,346.60 1,073,521.45 2015 21,418 4,560,180 2,283,487.55 2,055,138.80 229,698.90 4,568,325.25 2016 20,416 2,259,342 1,121,224.75 1,009,102.30 22,017.15 2,152,344.20 Total 7,612,187.50 6,694,831.15 1,487,953.90 15,794,972.45 6 As shown in the table above, George was required to pay to the Commissioner $15,794,972.45. George lodged objections to the assessments. The objection decision was not before this Court and it is unclear what its outcome was from the reasons of the Tribunal. I would infer, however, that it did not result in a significant change to the amended notices of assessment. 7 George then sought a review in the Tribunal. His review was impacted by s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth), which provides that on a review application (such as George's) the applicant has the burden of proving 'that the assessment is excessive or otherwise incorrect and what the assessment should have been' (my emphasis). This provision meant that the Commissioner was not bound at the review hearing to prove anything, although he could if he so chose. Instead, the provision put in George's path two hurdles both of which he needed to surmount. First, he had to show that the assessments were excessive or incorrect, for example by demonstrating that some payments to him treated by the Commissioner as income were, in fact, capital in nature. Secondly, he had to show what his taxable income actually was. 8 George successfully cleared the first hurdle by showing that the assessments were to some extent excessive. But he failed at the second because he did not establish to the Tribunal's satisfaction what his assessable income was. 9 George sought to persuade the Tribunal that his assessable income consisted only of the income derived from the concrete pumping business, interest and rent. The evidence that these were his only sources of income was given in his affidavit. It was not put to him directly in cross-examination that this evidence ought not to be accepted. 10 The records for the concrete pumping business were unsatisfactory. But George sought to outflank this problem by proving that the maximum amount the concrete pumping business could possibly have made in the relevant years was, even together with his rental and interest income, significantly lower than his assessed income. 11 Whilst this solved one problem, it left unexplained the very many, and significant, deposits made into George's accounts. But here George had an answer too. He gave evidence that he was a prolific gambler and that the various deposits into his accounts were either gambling winnings or the repayment of loans he had advanced to other gamblers. The theory of this may be accepted. The Commissioner did not suggest, and the Tribunal did not find, that George was a professional gambler. Hence, it is correct that any winnings he made from his gambling activities were in the nature of capital rather income. Likewise, the repayment of any loan moneys would have been on the capital account. However, as will be seen, George's evidence was incomplete. The Gambling Winnings: Ground One 12 Before the Tribunal, and in this Court, the parties' evident focus was on George's gambling 'winnings'. It is necessary however to draw a distinction between George's winnings from gambling and his net profits, being his winnings less his losses. The evidence showed that he often funded his gambling with prior cash winnings. Thus, amounts he deposited from gambling would reflect his net profits across a period of gambling (which might have involved multiple wins or losses), rather than the unadulterated proceeds of individual victories. In assessing then whether the deposits at issue were explained by George's gambling both sides of the ledger needed to be taken into account. 13 George gave evidence before the Tribunal and was cross-examined. The cross-examination did not go well. The Tribunal concluded that George was not a reliable witness following a thorough survey of his evidence. On appeal to this Court, George does not seek to disturb that conclusion (and could not, by virtue of the strictures imposed by s 44(1) of the AAT Act on an appeal on a question of law such as this). 14 Despite its view that he was an unreliable witness, the Tribunal was willing nonetheless to accept that George was a prolific gambler who had won significant amounts in a variety of gambling activities. These included, as the Tribunal noted at [27] of its reasons ('TJ'), multi-day poker symposia at which participants were afforded massages, amongst other things. 15 The difficulty the Tribunal encountered was that, even extending to George this latitude, his record keeping for his gambling profits was unsatisfactory in the sense that it was plainly incomplete and in places contradictory. One significant problem was that George appeared to have left very many of his gambling losses out of the picture. This problem prevented any view being formed about the extent of George's gambling profits. Without a clear picture of what his losses were, it was not possible even to hazard a guess about what his actual gambling profits were. 16 This problem was insuperable for George's case. Since it could not be known to any extent how much profit he had made from gambling in the relevant years, it was not possible to assay how much of the amounts deposited into his account comprised those profits. The Tribunal reasoned that this entailed that George had failed to show what his assessable income was. He had not shown that the amounts were all gambling profits and, in relation to those portions which were not gambling profits, he had not shown what they were at all. 17 George's first point on the appeal is short. As already noted, George had given evidence that his only sources of income were the concrete pumping business, interest and rent. It followed that it did not matter whether he had shown the full extent of his gambling profits. Nor did it matter whether each of the deposits which found their way into his account were gambling profits or something else. It did not matter because his evidence was that he had no other sources of income beyond the concrete pumping business, interest and rent. Whatever the deposits were, therefore, they were not income. 18 The logic of this argument may be accepted but it rests upon a premise that George's evidence in his affidavit that he had no other sources of income was correct. Without that premise, the Tribunal's conclusion that it could not identify how much of the deposits into his accounts comprised his gambling profits necessarily implied that George had failed to prove what his assessable income was. 19 Was the premise correct? Here Mr McLure SC, for the applicants, pointed out that George was not cross-examined to suggest that it was false that his only sources of income were his concrete pumping activities, interest and rent. During argument, Mr McLure accepted that the Tribunal was not bound to accept this evidence but he submitted that the Commissioner's choice to put the case the way he did shaped the forensic contest. 20 I do not accept this submission. The Commissioner did nothing during the course of the hearing in the Tribunal which shaped the forensic contest in such a way that he was foreclosed from submitting that the Tribunal should reject George's evidence about the business earnings, interest and rent being his only sources of income. On the contrary, it is evident that one of the principal efforts made at the hearing by the Commissioner was to discredit George. 21 In fact, the Tribunal was fully entitled to reject this aspect of George's evidence. George was taxed extensively before the Tribunal about many aspects of his evidence, and it is apparent that his credibility was one of the central issues at the hearing. Without setting out all of George's travails in the witness box, some of his evidence about the extent of his gambling, and his success at it, evidently provoked a degree of constrained incredulity on the part of the Tribunal. 22 To give a flavour of this, George gave evidence that in the relevant years he had not owned any luxury cars. But he was then cross-examined about some orders made by the Supreme Court of New South Wales. Those orders had been made following, as the Tribunal put it, certain 'interactions' between George and the New South Wales Crime Commission: TJ [68]. Under the orders, George had been required to divest himself of assets in settlement of a debt including, so it would appear, an Audi R8. As the Tribunal observed, an Audi R8 is the 'very definition of a luxury car': TJ [71]. This vehicle was also, apparently, George's favourite car although problematically he was unable confidently to recall what colour it was ('Blue, I think. Like a blue colour'): TJ [68]. The Tribunal found that many other aspects of George's evidence were implausible in similar ways. In light of these matters, it was not satisfied that George was a reliable witness. It would be impossible to challenge this conclusion and very sensibly his advisors have not sought to do so. 23 One has therefore the situation where (a) George's credibility was directly challenged in cross-examination; and (b) the Tribunal found he was an unreliable witness. Was the Tribunal thereafter bound to accept George's evidence in his affidavit that he had no other sources of income apart from the concrete pumping business, interest and rent? It was not. Where there is no doubt that the credit of a witness has been challenged – which was certainly the case here – a tribunal of fact is entitled to reject evidence of that witness that has not been directly challenged on cross-examination: Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; 261 ALR 382 at 404-5 [105] per Campbell JA (Allsop P agreeing at [1], Basten JA agreeing at [4]). Put another way, the rule in Browne v Dunn (1893) 6 R 67 does not require every aspect of a witness's evidence to be put to them if the cross-examiner has successfully demonstrated that the witness's evidence is otherwise unreliable. 24 Once George's evidence that he had no other sources of income was put aside by the Tribunal, his case could not succeed. The Tribunal could not be satisfied that the various deposits which made their way into his account were all gambling profits. And if they were not all gambling profits, he had failed to show what portion comprised the non-gambling profits. Further, as already noted, an artefact of this failure was that it was not possible to make even an approximation of what his gambling profits were. 25 Against this, Mr McLure submitted that George's case was on all fours with the position of the taxpayer in Ma v Federal Commissioner of Taxation (1992) 37 FCR 225; 23 ATR 485. He drew attention to the fact that in that case the Commissioner assessed as income deposits into Mr Ma's account that arose from gambling. Mr McLure submitted that the Tribunal had found that Mr Ma was not a credible witness and could not prove the precise amount he had earned from gambling. He placed particular reliance upon a passage at page 230 in the reasons of Burchett J: If a taxpayer denies any undisclosed sources of income, provides acceptable evidence of how he spends his time, and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved. Any other view would introduce a degree of arbitrariness into liability for tax. (Emphasis added.) 26 However, this principle has no application in this case. Whilst it is true that George denied having 'any undisclosed sources of income', it will be apparent from the above that the Tribunal had 'some positive reason why he [was] to be disbelieved'. The Tribunal rejected George's denial of undisclosed sources of income because it did not believe George was a credible witness. This case does not, therefore, fall within the statement made by Burchett J. 27 Next, Mr McLure submitted that the Tribunal had drawn conclusions adverse to George because of his failure to keep proper records of his gambling activities. Whilst acknowledging that a failure to keep proper records in the conduct of a business has been said to make it harder for a taxpayer to discharge his onus in review proceedings (Imperial Bottle Shops v Commissioner of Taxation (Cth) (1991) 22 ATR 148; 91 ATC 4546 ('Imperial Bottle Shops') at 155 per Hill J), Mr McLure contended that principle had no application in this case because George's gambling activities were not a business in respect of which he was required to keep records. 28 It is true that George was not required to keep records of his gambling activities. But his failure to do so, regardless of whether it is blameworthy or not, still leaves an evidentiary lacuna on the question of losses. Accepting that Imperial Bottle Shops does not apply, it is difficult to see how the lacuna could have been filled other than by records of the losses. The Maximum Taxable Income Case: Ground Two 29 George's case before the Tribunal accepted the inadequacy of the documents pertaining to the concrete pumping business. He therefore gave evidence that even the maximum income which the business could have generated, together with interest and rent, did not come close to the amounts in the Commissioner's amended assessments. It was submitted on the basis of Haritos v Federal Commissioner of Taxation [2015] FCAFC 92; 233 FCR 315 ('Haritos') that the Tribunal ought to have determined that maximum amount. The relevant passage in Haritos appears at 392 [236] per Allsop CJ, Kenny, Besanko, Robertson and Mortimer JJ: If a taxpayer claims his or her expenses were $10, but fails to prove that fact because their evidence is rejected, this does not prevent the Tribunal from finding that the expenses were $5 where there is other satisfactory evidence establishing expenses of at least that amount. 30 Even assuming, however, that this reasoning applies to the obverse assessment of an 'at most' figure in relation to George's income, it would not assist him. There was not 'satisfactory evidence' establishing his maximum income. That was because George failed for the reasons given above to prove what his gambling losses were. The Tribunal therefore could not be sure how much George made as profits from his gambling. In turn, it could not be sure that the deposits represented gambling profits. Whilst it found that the deposits were to some extent gambling profits, that left an indeterminate amount of deposits whose provenance was unknown and not the subject of any explanation by George. In those circumstances, George failed to demonstrate that the maximum amount of his assessable income was limited to the maximum amount the concrete pumping business could have earned together with interest and rent. 31 In this Court, George submitted that the Tribunal failed to give any reasons at all for why it did not accept his case as to his maximum income. But there was no occasion for the Tribunal to embark upon this issue in light of its conclusions about his gambling profits. Loans? 32 A second part of George's case under Ground Two turned on a contention that some of the deposits related to loans which had been repaid to him mostly by fellow gamblers but also on occasion by other persons. The Tribunal accepted at a level of generality that George did provide loans to fellow gamblers in a number of situations and that these were repaid. However, it was dissatisfied with the level of detail in George's evidence about these transactions. This dissatisfaction sprang from a number of sources: a lack of detail about some of the transactions; a lack of documentary records of the transactions; unsatisfactory aspects of George's evidence of what he knew about the borrowers; the failure to call some of the borrowers; the service of statements from borrowers after George's cross-examination had concluded; and, on some occasions, the implausibility of what was being suggested. 33 Thus, the Tribunal was not persuaded that George had actually demonstrated any particular repaid loan. There was one exception to this. The Tribunal accepted that an amount of $30,000 deposited into one of the George's accounts was a repaid loan: TJ [53]-[54]. Other than that, the Tribunal did not find that the deposits into his accounts reflected the repayment of loans which he advanced. 34 In his submissions, George sought to utilise his case on the repaid loans to aid him in demonstrating what his assessable income was. It was submitted that the repaid loans showed that his assessable income should be reduced by the amount of the repayments because one could be sure that the repayment was not income. I do not accept this submission. First, as I have explained, George failed to prove what his assessable income was and failed in such a way that it is not possible to estimate it even roughly, because he failed to show what his gambling losses were. Secondly, even if his income was the maximum amount made by the concrete pumping business with interest and rent, that figure is in no way connected to the deposits made into his account. If one proceeded on the basis that his assessable income comprised all of those deposits then I would accept that it would be logical to take out of his assessable income the $30,000 repayment in accordance with Haritos at 392 [235]-[236]. The Tribunal did not do this. In this Court, however, the applicants did not submit that the Tribunal's failure to deduct the $30,000 from the deposits in the relevant year was error. 35 I detect no error in the Tribunal's decision to affirm the objection decisions. Danny 36 For the reasons I have given in relation to George, I conclude that it has not been shown that the Tribunal erred in reaching its decision in relation to Danny. Outcome 37 The appeal will be dismissed with costs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Perram. Associate: Dated: 4 October 2024