167 It was unclear from the settlement sheet who had borrowed the $2 million from Westpac. The last two entries on the settlement sheet also suggested that, in substance, there was a net flow of funds to High Trade funded in part by the Westpac loan. In any event, the characterisation placed upon all of this by Mrs Bai was that High Trade was the beneficial owner of the property at Cronulla.
168 The hearing before the Tribunal took place over seven days on 24 to 28 September and 2 to 3 October 2012. Mrs Bai was cross-examined. The contention in her affidavits had, to that time, been that the beneficial owner of the Cronulla development was High Trade. But those affidavits did not clearly explain what Brightfull's role was.
169 Under cross-examination, Mrs Bai gave a different (and third) version of events. It was now said that the developer of the project had been Brightfull and that High Trade had been both a lender to it and had also provided a guarantee to Westpac to allow Brightfull to borrow money for the Cronulla project. Mrs Bai gave evidence to this effect at T333.41-334.14 which appeared to characterise the $331,364.15 appearing in the settlement sheet (there recorded as 'Balance settlement funds from High Trade') as a loan by High Trade to Brightfull. Presumably, a similar position was taken in relation to the deposit although this is not altogether clear. As for the $2,000,000 loan from Westpac also recorded in the settlement sheet, her evidence was that this had been borrowed by Brightfull (T339.3-339.5) with High Trade providing a guarantee of this loan.
170 Pausing there, it is worth observing that the settlement sheet is arguably consistent with the second and third versions of Mrs Bai's case (although not the first). If Brightfull was effectively a nominee for High Trade, then the $331,364.15 could be seen as the settlement of trust monies and the Westpac loan could be a trust obligation. On the other hand, the settlement sheet is also consistent with the loan/guarantee structure described by Mrs Bai in her oral evidence to the Tribunal.
171 At several points in her cross-examination, Mrs Bai was challenged with the suggestion that the concept of a loan by High Trade to Brightfull made no sense if the investor was High Trade and not Brightfull: see, for e.g., T334.5, T334.46, and T335.11. At T339 this aspect of the cross-examination crystallized into the exchange which is relevant to Mrs Bai's case in this Court on procedural fairness. It was in these terms (T339.7-19):
MR KASEP: Ms Bai, why is High Trade loaning money to Brightfall then?
THE INTERPRETER: Because High Trade want to provide help for the Brightfall's project development because the loan borrowed - the loan from the bank was insufficient.
MR KASEP: Ms Bai, why is there not one record of any loan made to High Trade - by High Trade to Brightfall?
THE INTERPRETER: There is record, and the High Trade kept all the records of Cronulla project construction and the records was kept in High Trade. And in April 2009, because of the search warrant, all the documents were seized by ATO and the documents was not returned and - was not returned.
(Errors in original.)
172 There were, in fact, two documents in existence which, so Mrs Bai submitted, recorded a loan by High Trade to Brightfull. The first of these was a loan agreement between Westpac as lender and Brightfull as borrower dated 12 December 2002. It was a $2 million facility to 'assist with the purchase and construction of 11 Burke Road, Cronulla'. Interest and fees on the loan were to be capitalised. The loan was to be secured by four securities:
a mortgage granted by Brightfull over the land situated at 11 Burke Road, Cronulla;
a fixed and floating charge over all of Brightfull's assets and uncalled capital;
a debt and interest guarantee by Mrs Bai; and
a debt and interest guarantee by High Trade.
173 It is not necessarily self-evident that this provided direct evidence that High Trade had lent the $331,364.15 (or the deposit), but it does suggest that Brightfull's role involved borrowing money for the development. It also arguably supports a case that the developer was Brightfull, with High Trade's role being, in part, as a guarantor of Brightfull's facilities with Westpac and, in part, as a creditor.
174 The second document was a guarantee and indemnity between various High Trade entities, Mr Zhang and Mr and Mrs Maurici, the vendors of the premises at 11 Burke Road, Cronulla. Under it High Trade guaranteed the performance by Brightfull of its obligations under the contract of sale. Mrs Bai's evidence under cross-examination had, it is true, touched upon a guarantee given by High Trade of Brightfull's obligations, but these were its obligations to Westpac (T339.3), not the vendors. Contrary to Mrs Bai's submissions, this document does not therefore corroborate her case. It may be put to one side. This perhaps is not a conclusion of great moment, since the loan agreement with Westpac does refer to a guarantee by High Trade and it may be reasonably inferred, at least for the purposes of a procedural fairness argument, that such a guarantee may well have been executed.
175 It is therefore appropriate to proceed upon the basis that the Westpac loan document of 12 December 2002 was capable of corroborating the new version of events that Mrs Bai gave in the witness box.
176 Following Mrs Bai's oral evidence submissions were made. At T414 Counsel for the Commissioner submitted:
In relation to the assertions that are made in relation to loans that were made to High Trade and the repayment of loans there is very little evidence that is capable of corroborating those assertions. It would certainly seem that monies were provided in some capacity by Ms Bai to High Trade, but it's the characterisation of those funds in which there is absolutely no corroboration. There's no loan account. None of these loans appear to be reflected in the High Trade ledger.
You recall, Deputy President, I referred you to in relation to Mr Chang's proceedings the passage extracted at paragraph 15 of my memorandum from the decision of Hill J in Imperial Bottleshops Pty Ltd about the requirement or the expectation that there be some sort of corroborative evidence in relation to the assertions that are made by a taxpayer. Well, that statement equally applies in these proceedings. There is very little evidence that corroborates the assertions that Ms Bai makes in relation to loans that were said to have been advanced to High Trade and the repayment of those loans. One would expect to see very clear evidence of those sorts of transactions, yet there appears to be none, or very little.
177 The Tribunal, in effect, accepted this submission at [32]:
32. Ms Bai's explanation is hard to understand. On the face of it, Brightfull (a company owned and controlled by Ms Bai, not her husband) was the registered proprietor of the property. The borrowing from Westpac appears to have been in Brightfull's name; no document supporting the assertion that the loan was guaranteed by High Trade has been produced. Construction work undertaken by Constructions was invoiced to Brightfull and apparently paid. When Brightfull sold the units the net proceeds totalling over $1 million were paid to Ms Bai (the owner and controller of Brightfull, the property owner) personally. Ms Bai's explanation does not satisfy me that those payments do not form part of her assessable income.
(Emphasis added.)
178 The loan agreement of 12 December 2002 arguably could have leant material assistance to Mrs Bai's case in relation to the italicised portion. Mrs Bai's submission, in a nutshell, is that the Commissioner did have the loan agreement because it had been seized from her under warrant on 15 April 2009. Furthermore, not only did the Commissioner have the document, but the consequence of his having it was that she did not. There was, therefore, a distinct procedural unfairness in the Commissioner submitting to the Tribunal (and in the Tribunal then finding) that there was no corroborative material. This unfairness was said to have been exacerbated by the fact that the Commissioner had refused to return the seized documents to Mrs Bai. Finally, when there was brought to account the fact that s 14ZZK of the TA Act required Mrs Bai to prove that the assessment was excessive, the apparent unfairness was aggravated. How could she discharge her burden of proving the assessment was excessive when the Commissioner had taken the documents which might assist her in doing so and would not return them to her? Further, how could it be fair for the Commissioner to submit that her account was uncorroborated when he held the very corroborating document himself which, at the same time, he was refusing to return to her?
179 On its face, and couched in general terms, this argument is attractive. It requires, however, close attention. It is useful to begin with some consideration of the materials which were seized, their volume and Mrs Bai's efforts to obtain access to them.
180 As we have said, search warrants were executed on 15 April 2009. Mrs Bai gave evidence about this in the Tribunal. According to her affidavit of 2 April 2012, she had on that day been absent from her home on holidays in the Hunter Valley. It was in her absence that the Australian Federal Police together, according to her, with officers of the Commissioner gained access under warrant to her home in Cronulla. A number of items were removed, including a filing cabinet. Following demands from her solicitors, the filing cabinet was returned but without some of the documents it had contained. Evidence from an officer of the ATO as to what was seized from the Cronulla premises established that the Westpac loan agreement was part of that material. An inventory of what had been seized was kept, and the loan agreement was item LIZ001 in that record.
181 In the course of preparing for the hearing in the Tribunal, Mrs Bai's solicitors sought access to some of the material held by the Commissioner. The first such request was made on 7 February 2011, and as a result the Commissioner augmented the T documents which had been filed. By a letter dated 1 March 2011, however, Mrs Bai's solicitors sought further documents. This commenced a process which culminated in the preparation by Mrs Bai's solicitors of an application under s 37(2) of the AAT Act requiring production by the Commissioner of a broad range of documents. This application appears to have had its genesis at a directions hearing in the Tribunal on 2 March 2011, at which procedural directions were made for the preparation of such an application.
182 Submissions were produced in relation to that application on 14 March 2011, by which time it appeared that the request was relatively broad in scope. It is useful to interpolate at this point that, as then constituted, the proceedings involved two taxpayers and several income years. Correspondingly there were more entities involved than just Brightfull and High Trade. Indeed, the submissions sought documents relating to five companies which did, however, include Brightfull and High Trade. The documents sought were those which recorded or related to the making of payments to or from Mrs Bai, Mr Zhang and another man, Mr Peter Chang. The range of documents sought was very broad and included, relevantly, loan agreements.
183 The Commissioner resisted production. Evidence elicited on his behalf suggested that the quantity of material held by him was very large, for it appeared that several warrants had been executed in relation to a number of people at multiple premises. Further, a second set of warrants had been executed on 17 February 2010. The material seized by the Australian Federal Police was provided to the ATO pursuant to s 3ZQU(1)(a) of the Crimes Act 1914 (Cth) for the purpose of the ATO investigating offences under the Criminal Code. There is no need to set out that section. It suffices to observe that it did not authorise the sharing of documents with the ATO for the purposes of assessing income. Evidence was given by an ATO solicitor on the s 37(2) application, which indicated that none of the material seized under warrant by the AFP and shared with the ATO under s 3ZQU(1) had been seen by the officer who had determined the objection decision.
184 The solicitor went on to explain that the material seized was very voluminous. In relation to physical documents, the total volume of paper was in the order of two to three pallet loads. Insofar as electronic records were concerned, there were approximately 300 million pages. She estimated that it would take several months to go through the material in response to, inter alia, Mrs Bai's application. The evidence went into detail about the nature of the problems which existed (such as, for example, the format of the data being such as not to permit key word searching). This affidavit was prepared on 21 April 2011. The Commissioner continued his preparations for the s 37(2) application as the year progressed. On 12 October 2011 an affidavit of an ATO official, Mr Crowe, was delivered. He was the ATO officer in charge of the on-going investigation which had resulted in the issue of the search warrants. He gave evidence that, in fact, many of Mrs Bai's documents had been returned to her. He also gave this evidence:
15. On 4 October 2011 I requested Kevin Short a member of my team to review all of the remaining hard copy documents held by the ATO which had been seized from the Cronulla premises.
16. I am informed by Kevin Short and believe that two documents relating to Brightfull Pty Ltd were located. One is a Contract for Sale of Land (with various attachments) and the other is a copy of a Westpac finance agreement for the purchase of land. These documents were located in item LIZ001 on the property seizure record.
185 This was important evidence. It shows that from 12 October 2011, Mrs Bai's solicitors had been explicitly informed that the Commissioner held the Westpac loan agreement for the Cronulla property.
186 At the same time, and in parallel, a debate was taking place between the parties about the degree of access which should be given to certain hard drives. That debate is not material to the issues relating to the loan agreement, and although some attention was devoted to it in argument, no more need be said about it in these reasons.
187 On 10 February 2012, Mrs Bai's solicitors indicated that they would not be pursuing the s 37(2) application. In this Court Mrs Bai gave evidence about this decision. Paragraphs 12 to 18 of her affidavit of 30 April 2014 were as follows:
12. The Respondent resisted my application on grounds that included that (i) the documents were not considered relevant to his objection decision (ii) I had not proved that they would be relevant to the hearing in any way (iii) I could obtain them from other sources (iv) searching for the documents requested would potentially cost $140,000 and (v) I should only be entitled to seek specific documents. At Tab 3 of the Exhibit is a copy of the Respondent's submissions on this application.
13. At this time, the Respondent had not ever suggested that he believed that High Trade had not provided a guarantee to Westpac or that High Trade had not provided funding to Brightfull. Nor could he properly make that suggestion, because the documents in his possession showed it to be untrue.
14. If the Respondent had made such a suggestion, then I would have proceeded with my application for those specific documents and made particular efforts to obtain them from other sources.
15. Ms. Luk decided not to contest the Respondent's strong opposition to providing me with all the documents that he had seized. She had agreed to represent me on a no win no fee basis. Rather, Ms. Luk followed up the Respondent's suggestion by seeking access to the 4 hard drives provided by the ATO to High Trade's earlier legal representative Ernst & Young. She engaged a forensic data expert to examine the hard drives.
16. Having regard to the data expert advice, I believe that two of the hard drives contain electronic images that could only be viewed using a specialized computer, and one of the hard drives was corrupted/not initialized and could not be accessed. I also asked through Ms. Luk if the ATO could offer help with these two matters, but that request was unsuccessful. At Tab 4 of the Exhibit is a copy of Ms. Luk's letter to the ATO.
17. Before the Tribunal hearing I also rang my ex-husband Li Zhang, who at that time was living in China, to ask him if he could obtain any documents. He told me that he had obtained electronic versions of the documents seized by the ATO. He said the task would be huge and that some of the files could not be read properly. However he said he would review the files whenever time was available and he would do what he could about those files with difficulties.
18. As I have said, until the hearing I did not know that the Respondent would be making the suggestion that no High Trade loan documents existed or that the matter of High Trade's guarantee would take on such importance for the Tribunal. Had I realized the importance of the Westpac loan document and the guarantee given by High Trade, I would have insisted on waiting to obtain the relevant documents, notwithstanding the costs and time involved.
188 There are a number of aspects of this which deserve emphasis. First, paragraphs 13 and 18 suggest surprise on Mrs Bai's part that the Commissioner's counsel had submitted that there appeared to be no evidence that High Trade had provided a guarantee to Westpac or lent funds to Brightfull. However, it needs to be kept in mind that there was no occasion for the Commissioner to have referred to the loan documentation until, unexpectedly, Mrs Bai gave for the first time a different account in the witness box of the relationship between Brightfull and High Trade. It was only when Mrs Bai went off piste from her own affidavit evidence (that the investor was High Trade with Brightfull a mere nominee) and reformulated her account as involving a loan/guarantee by High Trade to Brightfull that the need for making such a submission arose. The unexpected development in paragraphs 13 and 18 has to be seen in a context, therefore, where it had been caused by Mrs Bai's own assertion of a new case from the witness box. That context makes it difficult to put the blame for what happened at the feet of the Commissioner's representatives. More is this so when the ATO officers involved in the objection process have never seen the material which had been seized under warrant (which, it will be recalled, included the loan agreement).
189 Secondly, Mrs Bai's solicitors had been told by means of Mr Crowe's affidavit that the Commissioner held, amongst the documents seized, the Westpac loan agreement. Once counsel for the Commissioner submitted that there was no evidence of a loan or a guarantee by High Trade, it was entirely within Mrs Bai's abilities to obtain the loan agreement from the Commissioner by summons. This was not done.
190 Thirdly, that observation is particularly material when one takes into account the fact that Mrs Bai was represented at the hearing. Not only that, she had been represented in relation to the abandoned s 37(2) application.
191 Fourthly, it may well have been the case that production of all of the material seized under warrant would have been onerous for all concerned. But that production was not necessary. Only Mrs Bai could have known that she was going to give entirely unforeshadowed evidence about the loan and the guarantee. The proper course would have been for this new case to have been advanced in a fresh affidavit, rather than disgorged unexpectedly during cross-examination. Had that approach been taken, it would have focussed Mrs Bai's representatives (and Mrs Bai) on the need for corroborating evidence. This, it would have been obvious at that point, would have included the loan agreement. Given that the Commissioner had told Mrs Bai's solicitors that he held the loan agreement, its production could readily have been arranged.
192 These matters rather suggest that the procedural disadvantage of which Mrs Bai complains is something of an own goal. It is not that it would not have been convenient if the Commissioner had volunteered the loan agreement - it would have been, no doubt. But we can perceive no procedural unfairness in the way in which the hearing was conducted.
193 The trial judge rejected Mrs Bai's procedural fairness case on the basis that she had both documents at the time of the Tribunal hearing. In this Court, both parties agreed that this was not correct. Nevertheless, for the reasons just given, Mrs Bai's claim that she was denied procedural fairness should be rejected.