In Hourigan and Commissioner of Taxation (Taxation) [2018] AATA 3369an individual taxpayer was partially successful in proving amended assessments were excessive, having contended that various unexplained bank deposits were predominantly received as loans from his father.

The Taxpayer successfully contended that one deposit was not assessable income, as there was sufficient indirect evidence establishing the transfer of money and its purpose. However, due to discrepancies in the evidence provided, and significant gaps in that evidence, the Administrative Appeals Tribunal (Tribunal) held that the Taxpayer had failed to discharge his onus of establishing that the majority of the amounts were anything other than assessable income.

This case serves as a reminder of the importance of accurate and complete contemporaneous records, and the need to be consistent in the evidence put to the Commissioner (and later, to the Tribunal or a Court).

In this case, amended income tax assessments were issued to the Taxpayer for the 2010 to 2014 income years on the basis that the Taxpayer’s private expenditure (established by his bank accounts) far exceeded, and could not possibly be supported by, his reported income.

Following an asset betterment test, the taxpayer’s taxable income was raised by just over $562,000 to reflect a number of unexplained deposits into his bank accounts. The Commissioner concluded that these deposits were received by the Taxpayer as assessable income and he had therefore significantly underreported his taxable income for the relevant years.

The main issues to be determined by the Tribunal in this case were as follows:

  • Were the assessments excessive or otherwise incorrect, and what should the assessment have been?
  • In relation to the years in which the Commissioner formed the opinion that the Taxpayer had engaged in fraud or evasion, should that decision not have been made or should it have been made differently?

Pursuant to section 14ZZO of the Taxation Administration Act 1953 (Cth) the civil burden of proof with respect to the above, rests with the Taxpayer.

Were the assessments excessive?

The taxpayer contended that the deposits in question mostly constituted undocumented loans from his father, or repayments of loans from various friends and relatives. These included substantial deposits that the Taxpayer asserted were received as compensation for the sale of a motor vehicle and undocumented loans from the Taxpayer’s father and partner.

The Tribunal accepted that an unexplained deposit of $13,000 related to the sale of the Taxpayer’s car to his partner. This was supported by bank account records, a Vehicle Registration Renewal Notice and a letter from the Queensland Department of Transport and Main Roads confirming that the vehicle was transferred out of the Taxpayer’s name in 2011. Despite there being no written agreement for the sale of the vehicle, the Tribunal accepted that there was sufficient evidence to conclude that the deposit was received pursuant to the sale of the Taxpayer’s car and adjusted the Taxpayer’s 2010 assessment to reflect this.

Conversely, the scant written and oral evidence put to the Tribunal by the Taxpayer was found to be inconsistent, and at times conflicted with statements previously made by the Taxpayer and his accountants. In light of the various discrepancies and lack of evidence (namely, documents that were subpoenaed but not tendered as evidence, and the fact that various key persons were not called to give oral evidence) the Tribunal held that the Taxpayer had failed to discharge his onus of establishing that the amounts were anything other than assessable income.

Was there fraud or evasion?

The Commissioner may amend a taxpayer’s income tax assessment for a year of income, subject to certain statutory time limits. However, if the Commissioner forms the opinion that there has been fraud or evasion by a taxpayer, the Commissioner may amend that taxpayer’s income tax assessment for any prior year of income. The concepts of fraud and evasion in relation to tax law are set out in Practice Statement Law Administration 2008/6 (recently updated on 17 May 2018).

While the Commissioner was within time to amend the Taxpayer’s income tax assessment for the 2014 income year, he fell outside the applicable 2-year time limit for the 2010 to 2013 income years. The Commissioner determined that by falsely reporting his income (i.e. not returning the above amounts as assessable income) the Taxpayer had engaged in fraud or evasion in the relevant income years, and the Commissioner was therefore empowered to issue amended assessments for those years.

The Tribunal noted that in discharging his civil onus of proof, the Taxpayer must demonstrate that, on the balance of probabilities, there was no fraud or evasion and therefore that the Commissioner’s decision in this respect is wrong. The onus is not discharged by identifying a mere error by the Commissioner.

As the Taxpayer had failed to establish that the amounts received were not assessable income, the Tribunal concluded that the Commissioner was correct in determining that the Taxpayer had failed to return amounts of assessable income. On this basis, the Tribunal refused to overturn the Commissioner’s finding of fraud or evasion with respect to the relevant years.