The recent Administrative Appeals Tribunal (AAT) decision of Gui Ping Wu v Commissioner of Taxation [2015] AATA 78 serves as a timely reminder to taxpayers to ensure that they have adequate evidence supporting the character and nature of assessable transactions, including in relation to overseas transactions.

The risk is that if a taxpayer cannot meet the burden of proof for documenting of a receipt of money or a transaction, the Commissioner successfully argues amounts received can be income.

Evidence

A taxpayer is required to be capable of evidencing all assertions made on his or her tax return. Despite this, a taxpayer is not required to actually lodge any corroborative documents to the ATO.

It only becomes necessary to provide such evidence to discharge the onus of showing an assessment is wrong, pursuant to section 14ZZK of the Tax Administration Act 1953 (Cth) (TAA53).

Regardless, taxpayers should safeguard themselves by keeping documentary evidence of all transactions. As highlighted in Gui Ping Wu v Commissioner of Taxation, sufficient evidence can help discharge the burden of showing the Commissioner’s assessments were excessive.

Facts of the case

Mr Gui Ping Wu (Wu) was a Chinese citizen. Upon becoming an Australia resident, he reported income from his Australian business interests for the 2009, 2010, 2011 and 2012 financial years.

These returns failed to disclose any income from Malaysian and Chinese business interests.

The Australian Transactions Reports and Analysis Centre (AUSTRAC) became aware of Wu transferring money between Australian and overseas accounts.  The report issued by AUSTRAC concerned two deposits (one approximately AUD$433,025, the other AUD$72,812) made in 2008 and 2009 respectively (the first deposits). The Commissioner asserted that these deposits were to be treated as taxable income.

Following the AUSTRAC report, the Australian Tax Office (ATO) audited Wu’s affairs and found that deposits totaling AUD$720,750 were made between 2011 and 2012 into a cash management account held by Wu and his wife (the second deposits). Again, the Commissioner asserted that these deposits were to be treated as taxable income.

Wu and his wife contracted to purchase a multi-million dollar property in Perth. When entering into negotiations with HSBC, Wu falsified his annual earnings from a Chinese company by signing a salary certificate. The Commissioner claimed tax should have been payable upon the amount of this certified salary.

Satisfying the burden of proof

Wu disagreed with these assertions, and brought the associated proceedings.

In accordance with section 14ZZK of the TAA53, the taxpayer bears the burden of showing the Commissioner’s assessment was excessive.

Wu’s (lack of) evidence

DEPOSITS

Wu had not discharged his evidentiary burden because he had:

  • no documents evidencing how Wu came into such a large amount of money;
  • no reference to the claimed savings in Wu’s Visa application;
  • not included any interest in assets outside Australia on any of his tax returns; and
  • no evidence of loans.

Salary certificate

Contrary to the deposits, the Commissioner was satisfied Wu had discharged his evidentiary burden, and was not paid an annual salary equivalent to the amount claimed on the salary certificate. The basis of this finding was that:

  • the Commissioner conceded it is “not outside the bounds of human experience for borrowers to exaggerate their earnings (and assets) to obtain a loan”;
  • in China a salary certificate is considered nothing more than a guarantee by the employer company of the employee’s obligation to the lender;
  • corroborating evidence of what the Chinese company actually did pay Wu was accepted, in the form of bank statements showing regular monthly deposits of RMB 1,511.

Wu paid the price

Without substantial evidence to suggest otherwise, the Commissioner found Wu had a shortfall in his taxable income, and this was brought about because of his false and misleading conduct (i.e. the omission of assessable income from foreign countries). There was inherent recklessness of Wu’s failure to inform his tax agent of the foreign income on several occasions, and this is sufficient to afford a penalty.

What can you do to safeguard yourself?

  • Keep precise and current records for significant monetary transactions.
  • Keep records for the required statutory minimum time periods.
  • Keep associated document and correspondence for all transactions.