Under the Taxation Administration Act, the burden of proof rests with the taxpayer. The Commissioner can (even without previously notifying the taxpayer) issue an assessment shifting the burden to the taxpayer to prove the Commissioner wrong. The standard of proof in taxation review proceedings is the balance of probabilities.
Of the 11 cases litigated in 2024, there were three taxpayer wins, so it’s clear that this is no easy feat.
Here’s a list of the cases:
- Cheung v Commissioner of Taxation [2024] FCA 1370 (29 November 2024)– Taxpayer win
- Buzadzic v Commissioner of Taxation [2024] FCAFC 50 (17 April 2024) – Taxpayer loss
- Wang v Commissioner of Taxation [2024] FCA 585 (4 June 2024) – Taxpayer loss
- Rusanov v Commissioner of Taxation [2024] FCA 777 (18 July 2024) – Taxpayer loss
- Commissioner of Taxation v Bazzo [2024] FCA 452 (2 May 2024) – Taxpayer Win
- Liang v Commissioner of Taxation [2024] FCA 535 (14 May 2024) – Taxpayer Win
- GNBF and Commissioner of Taxation (Taxation) [2024] AATA 2152 (24 June 2024) – Taxpayer Loss
- CJYB and Commissioner of Taxation (Taxation) [2024] AATA 2640 (29 July 2024) – Taxpayer Loss
- YNVP and Commissioner of Taxation (Taxation) [2024] AATA 2588 (30 June 2024) – Taxpayer loss
- The Counsellor and Commissioner of Taxation (Taxation) [2024] AATA 220 (13 February 2024) – Taxpayer loss
- Waters and Commissioner of Taxation (Taxation) [2024] AATA 1211 (27 May 2024) – Taxpayer loss
Taxpayer wins
In the latest in a series of cases this year, where the Commissioner of Taxation sought to capture ‘unexplained wealth’ as assessable income of the taxpayer, the Federal Court ruled in favour of the taxpayer in Cheung v Commissioner of Taxation [2024] FCA 1370 (29 November 2024).
In this case, the taxpayer received $33 million over 10 years (99 deposits) from his sister. The sister owned Au Bon Marche (ABM) – a successful supermarket chain in Vanuatu. The Commissioner amended the taxpayer’s assessments and argued that the amounts should be assessed as income, essentially reflecting an interest in ABM which he had previously worked for as a general manager, as opposed to non-assessable gifts.
Though there was no formal documentation, the Federal Court found that the payments were gifts based on:
- Credible testimony from the family and,
- A cultural practice of familial support.
In the Liang case, Liang v Commissioner of Taxation [2024] FCA 535 (14 May 2024), the taxpayers ran restaurant businesses (in trading trusts) and conducted a property investment business (property trust). The property trust received seven large unexplained deposits ($735,825) which the taxpayer used to purchase property. The ATO amended the property trust’s assessments to include the deposits as assessable income.
In ruling against the taxpayer, The Administrative Appeals Tribunal explained that it did not find the taxpayer’s claim that the loans in cash were from Ms Li’s mother (kept in a plastic box in the taxpayers’ home) credible. There was minimal evidence or documentation to substantiate the claim and the taxpayer wouldn’t provide clarity as to whether the cash was brought to Australia by the parents and why a high quantity of cash would be held in the taxpayer’s home.
However, the Federal Court held on appeal that despite the credibility of the taxpayer’s evidence, the Tribunal remained obliged to determine whether, on the material before it, the deposits constituted income under ordinary concepts.
The Federal Court found that based on the material before the Tribunal, including concessions of the Commissioner, the deposits were not income from services, were not interest, were not dividends, were not rent and were not opportunistic profit-making gains.
‘The material before the Tribunal ought, in my view, to have led the Tribunal inexorably to a conclusion that whatever these Deposits might be, they were not, in the hands of the Property Trustee Company, income.’
The Commissioner now seeks to appeal this decision in the Full Federal Court, and we may get clarity on the degree of evidence required to defend an ATO assessment.
Taxpayer losses
In Rusanov v CMR of Taxation [2024] FCA 777, the taxpayers were unsuccessful in discharging the burden of proof.
In Rusanov, the taxpayers provided declarations from the donor (father-in-law), copies of the donor’s bank accounts and financial records and evidence regarding the source of the funds to substantiate that the amounts were a gift.
Though the AAT was convinced that the father-in-law was sufficiently wealthy, it was not persuaded about the nature of the deposits, i.e. was not assessable income.
It is a curious feature, in respect of the transfers, that no emails or texts are available to indicate the nature of the transfers, how they were initiated, or even to acknowledge receipt.
A further important factor is the fact that taxpayer admitted that for some of the relevant years he was trying to assist his father-in-law’s business providing weight that the gift was really renumeration for service.
Takeaway
It isn’t uncommon for familial arrangements to be based on trust and undocumented. For many, this is just the way things are done but the ATO reviewing the transaction without context can easily misconstrue these transactions as something else. The Cheung case clearly shows that the lack of documentation is not necessarily fatal, but it is prudent to review and document these transactions. As the burden of proof is on the taxpayer, it is crucial that the taxpayer can clearly trace through and explain the source of the alleged income and, more importantly, provide persuasive supporting evidence.
For more information, please contact Coleman Greig’s Taxation law team.
