Commissioner of Taxation v Liang

Concessions 13 Before the Tribunal, the Commissioner confined the dispute to the issue of whether the Deposits were ordinary income of the Property Trust: TR [10]. The Commissioner did not otherwise put the taxpayers to proof of the actual amount of their taxable income but accepted that the taxpayers would discharge their onus under s 14ZZK of the TAA if they established that the Deposits were not ordinary income in the hands of the trustee of the Property Trust. 14 Critically, the primary judge proceeded on the basis that it had been accepted in the Tribunal by the Commissioner that the activities of the Property Trust consisted only of property investment activities and that the only such property investment activities were those evidenced in the material before the Tribunal: PJ [11]. It was on the basis of this "concession" that the primary judge at PJ [55] concluded that the Deposits could not be ordinary income of the Property Trust because they were not income from services, interest, dividends, opportunistic profit-making gains or in the nature of rent. 15 By his first ground of appeal to this Court, the Commissioner denied conceding before the Tribunal that the only activity of the Property Trust was property investment. 16 This Court was taken to the transcript of a number of exchanges between Counsel for the Commissioner and the primary judge. Those exchanges included the following: HIS HONOUR: …. So the tribunal's finding is that the corporate trustee is an investor in property. MS LEE: Yes. It was not - sorry, your Honour. I hesitate only because it was not in dispute. The activities of the trust was not in dispute. So yes. That was - the tribunal recorded that in its reasons. It was not in dispute. 17 And then: HIS HONOUR: And correct me if I'm wrong about this, there was no contest that the activity of the property trust was investment. MS LEE [COUNSEL FOR THE COMMISSIONER]: Correct. HIS HONOUR: That these weren't dividends these weren't - - - MS LEE: Correct. HIS HONOUR: - - - interest payments, and they weren't rent. MS LEE: Correct. HIS HONOUR: And there was no profit-making undertaking or scheme in which the property trust had engaged. No one-off adventure in the nature of trade, no Myer Emporium situation. MS LEE: That's correct. It was simply a question of not - the source of the deposits being unexplained. 18 And later: HIS HONOUR: … Why shouldn't I make a finding of fact that on the material before the tribunal, the only activity in which the corporate trustee engaged was property investment? MS LEE: Is that assuming that the source of the deposits could only have come from the activities of the trust? HIS HONOUR: Well, there's nothing to suggest that it invested in any other properties than those mentioned by the tribunal, is there? It was never put that there were other properties, left, right and centre. MS LEE: No. That's correct. HIS HONOUR: So that it engaged in property investment, and that it acquired as part of its business of property investment three properties. MS LEE: Yes. It was not in dispute. 19 And later still: MS LEE: So your Honour, if your question is, is it accepted that the trust conducted activities in property investment, yes it is, but it's not accepted that it could only receive cash from that activity, because we don't know what the source was. So it's not accepted, it's not conceded that the cash could only come from that activity, but it is accepted that that's what it does. So if the question was what is the activity of the subject trust, it invests in properties. It bought three properties in the relevant period. That's accepted, but it's not accepted that the source of the deposits could only arise from that activity because we simply don't know what else was going on, whether it was even - whether the source of the cash even came from activities of the trust or something else. We just don't know, and the applicants have not said. … MS LEE: All I'm saying is we don't know what it was, you know? Like - and, your Honour, just to clarify, when you asked me before was it in dispute the activities of the trust, it's not in dispute that they carried on property investment, but we're not accepting - the Commissioner does not accept that that means that every amount that comes in must be under that business. We simply don't know. That's where we are. So I don't want it to be misunderstood as the Commissioner saying, well, this is the framework; it is property investment, and therefore it must fall within the framework. That was just not tested because we did not know what was going on. We still don't. 20 We recognise the primary judge had the benefit of participating in the exchanges with Counsel in person and the adversarial system requires that a Court be able to rely upon concessions made by the representatives of parties. And while we recognise that on the face of the written record before this Court some of the responses to the primary judge's questions may be seen as ambiguous, it is clear that Counsel for the Commissioner maintained emphatically that the source of the cash for the Deposits remained a mystery, and that therefore in relation to those Deposits, the taxpayers had not discharged their onus of showing that they were not income. 21 We have considered the totality of the circumstances to form a view as to the scope of the matters in dispute. 22 The Tribunal found that the taxpayers conducted property investment activities through the Property Trust (TR [2]). The Tribunal recorded (at TR [31]) that the Property Trust's income was from rent from various investment properties in its recitation of the distributions of trust income made by the Property Trust. The Tribunal did not record in its reasons any concession by the Commissioner confining the activities of the Property Trust only to those activities and this Court was not referred to any reference in the transcript of the hearing before the Tribunal recording such a concession. The Commissioner's Amended Statement of Facts, Issues and Contentions before the Tribunal does not record any such concession but discloses that the Commissioner was not advancing a positive case as to the likely source (and therefore character) of the Deposits. The Commissioner's written submissions before the Tribunal do not record any such concession. 23 The heart of the Commissioner's case before the Tribunal was that the source of the Deposits was not known. The Commissioner did not know whether the Deposits related to any activities conducted by the trustee of the Property Trust because he did not know where the Deposits had come from. Because the Commissioner did not know the source of the Deposits, the Commissioner did not know how the Trustee came to be entitled to those Deposits. The Commissioner did not know the precise scope of the activities undertaken by the Property Trust and whether those activities were only limited to the conduct of a property investment business. 24 The Commissioner confined the issue in dispute to whether the Deposits were assessable. It is not disputed that the taxpayers bore the onus of proving that the amended assessments were excessive. The Commissioner put the taxpayers to proving that the Deposits did not represent amounts of ordinary income of the Property Trust. The premise of the Commissioner's case was that the material before the Tribunal was incomplete because it did not disclose the basis on which the Deposits had been made. 25 Counsel's exchanges with the primary judge are to be understood in that context. The Commissioner was not advancing a positive case that the Deposits had a particular character as being in the nature of rent, dividends, fees for services or profit from a profit-making undertaking or scheme. The Commissioner was advancing a case that the material before the Tribunal was incomplete and therefore the Tribunal could not be satisfied that the Deposits did not have the character of ordinary income by relying on the incomplete material. Counsel for the Commissioner did not resile from that case in responses to the questions from the primary judge. The Commissioner maintained the position that the material before the Tribunal was incapable of resolving the source of the Deposits. The Commissioner did not concede before the primary judge that the universe of evidence of the source of the Deposits was in any way complete but repeatedly submitted to the primary judge that the source of the Deposits was a "mystery". 26 The issue in this case is not who bears the onus of proof but is how that burden might be discharged by a taxpayer. Both the primary judge and the respondents to this appeal placed much reliance on the following statement of Windeyer J in Elsey v Commissioner of Taxation [1969] HCA 48; 121 CLR 99 at 108: The taxpayer has "the burden of proving that the assessment is excessive" (s. 190). But, unless it appears that there were facts on which the Commissioner could properly rely for including a particular receipt of money as part of the taxpayer's assessable income, that burden is, I consider, discharged. I do not think the Act requires one to start with a presumption that all moneys which a taxpayer receives from any source form part of his assessable income. 27 It was said by the taxpayers that it followed from this statement, that unless the Commissioner could point to a basis for including the Deposits as part of the net income of the Property Trust, the taxpayers will have discharged their burden of proof. 28 The statement quoted from Elsey consists of three sentences. The first is entirely uncontroversial and reflects part of s 14ZZK of the TAA. As the primary judge recognised (at PJ [45]), the second sentence must be read in light of the following statement expressed by Mason J in Gauci v Federal Commissioner of Taxation [1975] HCA 54; 135 CLR 81, which though at the time was in dissent, has subsequently been endorsed as representing the law in Australia: see McCormack v Federal Commissioner of Taxation [1979] HCA 18; 143 CLR 284 at 302-303 (Gibbs J), 306 (Stephen J) and 323 (Murphy J) and Federal Commissioner of Taxation v Dalco [1990] HCA 3; 168 CLR 614 at 624 (Brennan J, Mason J concurring): The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail. 29 The primary judge (at PJ [32]) construed the second sentence in the quote from Windeyer J's judgment in Elsey in the following way: …it seems to me that all that his Honour was intending to convey was that if there were a particular confined issue as to the basis for the assessment and the evidence before the Court disclosed that that basis did not exist, then the onus of proof would be discharged. 30 His Honour's statement is to be construed having regard to the High Court's decision in Dalco. In that case, the taxpayer had submitted (and a Full Court of this Court had agreed) that, if the basis of assessment was known, and was shown to be incorrect, the taxpayer has shown the assessment to be excessive. The taxpayer in that case had furnished returns, but the Commissioner was not satisfied with those returns and issued amended assessments. The taxpayer had shown that the bases on which the Commissioner had proceeded in making the assessments were wrong. The High Court nonetheless upheld the amended assessments because the taxpayer had failed to discharge the onus of proving that his taxable income was in truth less than the amount assessed. The reasons for judgment are found in the reasons of both Brennan and Toohey JJ (at 626 and 634), with whom Mason CJ, Deane J and Dawson J agreed. 31 In the course of his Honour's reasons, Brennan J observed (at 624) that: The manner in which a taxpayer can discharge that burden [of proving that the amounts assessed were excessive] varies with the circumstances. If the Commissioner and the taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. 32 His Honour (at 625) explained how a taxpayer might discharge the onus in circumstances where the issue is confined: If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessed taxable income an amount which, on those facts, ought not to have been included. 33 Justice Brennan (at 625) observed that in Dalco, the issue had not been confined in that way: But where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that the objection should have been allowed or that the appeal against the assessment must be allowed. 34 A distinction is to be drawn between showing an error where all material facts are known and showing an error where all material facts are not known. 35 The third sentence of the quoted passage from Elsey was considered by the primary judge (at PJ [32]) to be "unremarkable" but subject to the qualification that "the burden of proving that a receipt is not income under ordinary concepts always remains with the taxpayer". The third sentence is thus of no assistance. The following observation of Walsh J in Krew v Commissioner of Taxation (1971) 45 ALJR 324 at 326-327 concerning an unexplained surplus of assets is equally applicable to a case of unexplained deposits (citations omitted): It was said that where there is a surplus of assets over those which would be explained by returned income, there is no presumption that surplus is income, or is assessable income. In a sense that is true: cf Elsey v Commissioner of Taxation. But, in my opinion, that is of no assistance in deciding the present case… [W]hen the [Commissioner] made assessments which included the betterment funds as assessable income and disallowed the appellant's objections, the matters were taken to the board of review and the onus was then on the appellant to show that the assessments were wrong. 36 It followed that it was wrong "to say that as a matter of law the appellant must succeed if the [Commissioner] has not proved affirmatively that the disputed receipts were taxable income because (as was submitted) there was no presumption that they were" (at 327 (Walsh J)). 37 In a case of unexplained deposits, although it may be accepted that the issue of an assessment by the Commissioner gives rise to no presumption of a particular fact other than a presumption that the amount of the assessment is correct (Macmine Pty Ltd v Commissioner of Taxation (1979) 53 ALJR 362 at 371 (Stephen J)), that proposition does not assist. It remains the burden of the taxpayer to prove the assessments were excessive. 38 The primary judge focussed on the second sentence of the quoted passage from Elsey, construed in light of the subsequent decisions of the High Court in determining how the taxpayers might discharge their onus. 39 As the primary judge recognised, there is always a danger in reading a sentence from a judgment in isolation from the facts and context in which it was made. The issue in Elsey concerned the character of moneys received from the sale of various parcels of land and in particular whether those moneys were the result of realising capital assets or were assessable income (either according to a general concept of income, or specifically according to what was then s 26(a) of the 1936 Act). Elsey was a case in which both the source of the moneys and the activities of the taxpayer were known. Unlike the present case, the issue for determination in Elsey was the purpose of the taxpayer in acquiring the land and in carrying out the transactions in fact carried out. In those circumstances, the relevant objective facts were known. 40 The observations later made by Jacobs J in Macmine at 375-376 are apposite to the facts considered in Elsey: …when all the relevant facts are known, and those facts disclose no material from which it may be concluded or inferred that the property was acquired with a dominant purpose of resale at a profit or from the carrying on of a profit-making undertaking or scheme the proper inference is that there was no such purpose or no such profit-making undertaking or scheme. The decision is thus to be regarded not as a decision on where the onus lies but on a particular way in which the onus may, and in appropriate cases, should, be regarded as satisfied. The onus of proving a negative may not be able to be satisfied in any other way. This form of "negative proof" assumes that the relevant facts have been placed before the court and are known and no doubt the taxpayer has the obligation of satisfying this condition. 41 The circumstances of the present case are a long way from those considered in Elsey. Here the Commissioner assessed the taxpayers on the basis that the Deposits were ordinary income of the trustee of the Property Trust and confined the case before the Tribunal to that issue. As explained further below, this is not a case in which the transaction giving rise to the Property Trust's entitlement to the Deposits was known. In these circumstances, it was for the taxpayers to disprove the basis of that assessment by establishing the relevant facts. It was not for the Commissioner to posit or prove a basis from which it might be inferred that the Deposits were income but for the taxpayers to place the relevant facts before the Tribunal. 42 The facts that are relevant to the characterisation of a receipt will vary. As the High Court said in GP International Pipecoaters Pty Ltd v Commissioner of Taxation [1990] HCA 25; 170 CLR 124 at 138 (Brennan, Dawson, Toohey, Gaudron and McHugh JJ): Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. 43 As a general rule, a taxpayer proves an amount is not assessable as income under ordinary concepts by proving what the amount represents and demonstrating that what the amount represents is not ordinary income. It would be a very rare instance where a taxpayer was able to prove an amount was not income under ordinary concepts without positively establishing the source and character of the amount. As a matter of logic, it is difficult to prove a negative by proving a series of other negatives unless those other negatives represent the entire universe of possibilities. 44 Income according to ordinary concepts is not confined to categories of dividends or rent or interest. Those amounts have the character of income as income from property, as do amounts of royalties. As the High Court said in Commissioner of Taxation v McNeil [2007] HCA 5; 229 CLR 656 at [21] (Gummow ACJ, Hayne, Heydon and Crennan JJ): as a general proposition, a gain derived from property has the character of income … 45 It is not the label attached to the amount but its relationship to the taxpayer's underlying property (in the sense that they are amounts that are severed from that property) that gives these amounts the character of income. The categories of income from property are not closed, as the facts in McNeil demonstrate. It follows that an amount may be income according to ordinary concepts even though it may not be described as interest, rent or dividends. 46 Income according to ordinary concepts also includes income from carrying on a business. In this context, income can include gross receipts from a transaction carried out in the ordinary course of business or a net profit from an isolated venture in the nature of trade or business, that is not undertaken in the course of some other, wider business activity: Commissioner of Taxation v Montgomery [1999] HCA 34; 198 CLR 639 at [111] (Gaudron, Gummow, Kirby and Hayne JJ); Commissioner of Taxation v The Myer Emporium Ltd [1987] HCA 18; 163 CLR 199 at 209-210 (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ). 47 It is well-established that "[i]n considering whether a profit arising from a transaction is of an income or capital nature, it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities": Western Gold Mines (NL) v Commissioner of Taxation [1938] HCA 5; 59 CLR 729 at 740 (Dixon and Evatt JJ). The application of that principle requires the identification of the transaction giving rise to the profit or receipt and an understanding of the relationship or connection between that transaction and the taxpayer's activities. 48 The Tribunal in the present case was not satisfied that the accounts of the Property Trust were reliable and rejected the evidence of the taxpayers as not sufficiently reliable (at TR [80]-[84]). Reading the Tribunal reasons as a whole, it is apparent that it was the entirety of the written and oral evidence of the three witness that was rejected. 49 The material before the Tribunal did not enable the wide survey and exact scrutiny of the activities of the Property Trust. Absent a concession from the Commissioner that the Property Trust conducted no activity beyond the acquisition of property and the leasing of those properties, the material before the Tribunal could not support findings of the precise scope and nature of the activities of that trust. As explained above, we are not satisfied that the Commissioner made such a concession before the Tribunal. 50 On the evidence that was accepted by the Tribunal, the taxpayers did not establish the source of the Deposits beyond establishing that Ms Li was the individual who physically deposited the cash into the Property Trust's bank account. The basis for the Deposits and the legal nature of the transaction by which the Property Trust became entitled to receive the Deposits was not explained. 51 Accordingly, the Tribunal did not err in law in concluding that the taxpayers in this case had not discharged the onus of proving the Deposits were not ordinary income of the Property Trust. 52 The primary judge was correct to observe (at PJ [52]) that the question for the Tribunal was whether the taxpayers had proved their amended assessments to be excessive. We have formed a different view on whether it was possible for the assessments to be shown to be excessive on the basis of the material and any concessions made before the Tribunal in the circumstances of this case. Having rejected the evidence of the taxpayers and the books of the Property Trust, and having regard to what was in issue before the Tribunal, we do not consider that it was open to the Tribunal to conclude that the taxpayers had discharged their onus of proving the Deposits were not receipts of ordinary income in the hands of the trustee of the Property Trust.

Taxpayers' alternative contention 53 At the hearing of this appeal, the taxpayers contended that even if the concessions identified by the primary judge were not made, it ought nonetheless be concluded that the Deposits were not income based on the objective facts known to the Tribunal, namely: (a) the fact that the Deposits were physically made by an individual who was a controller of the trustee; (b) the fact that the Deposits did not exhibit any regularity in terms of their timing; (c) the size of the Deposits; and (d) the fact that the Deposits were in fact applied to the acquisition of investment properties, being capital assets. 54 It was submitted that those facts supported a conclusion that the Deposits were in the nature of equity contributions. It is noted that the last of these facts does not support a conclusion that the Deposits were not income but seems to confuse the character of the receipt with the nature of the asset acquired by application of the moneys received. As the High Court said in GP International Pipecoaters at 136 (Brennan, Dawson, Toohey, Gaudron and McHugh JJ), a taxpayer may apply income in the acquisition of a capital asset or, conversely, apply a capital receipt to discharge a liability of a non-capital nature. 55 When asked if such a submission had been made to the Tribunal, Senior Counsel for the taxpayers referred the Court to the applicant's closing written submissions before the Tribunal. Included in those submissions were the following (emphasis in original): [24] It is uncontroversial that the circumstances of each Subject Deposit were different in terms of amount and time. The payments were not periodic nor regular, and varied significantly from $7,475 (Deposit 6) to $220,000 (Deposit 7). There is no pattern. [25] The Subject Deposits were of a significantly greater amount, and extraordinary, when compared to regular transactions during FY17 and FY18 … [26] The Subject Deposits all had their origin in cash deposits made by Ms [Li] which means that from the perspective of the Trust the immediate source of the deposits was Ms [Li] … … [32] Given no positive case by the Respondent and nothing to contradict the finding that the Subject Deposits constituted loans and equity contributions, it is a very low threshold for the Tribunal to find in favour of the Applicants. In fact, the Tribunal only needs to find that: (a) there is no evidence before it that would indicate that the Subject Deposits constituted income; and/or (b) there is evidence that the Subject Deposits constituted loans and equity contributions (even if not all of it is accepted) and no evidence to contradict this (or such evidence is of insufficient weight). [33] With respect to (b), the Applicants say that this could be put a different way as "there is some evidence that is accepted by the Tribunal, which is not contradicted." 56 These submissions were not submissions that the Tribunal ought to find that, in the alternative, the Deposits were equity contributions from Ms Li. That is hardly surprising given that Ms Li gave evidence that the Deposits were equity or loan contributions from the parents of herself and her husband and did not testify that the Deposits were equity contributions by her. It would be odd for a taxpayer to run an alternative case that directly contradicted the taxpayer's own evidence. 57 The premise of the submission in fact made to the Tribunal was that there was evidence to support a finding that the Deposits "constituted loans and equity contributions". Having regard to the rejection by the Tribunal of the evidence of the witnesses and the books of account, the premise of the submission that was made to the Tribunal fell away. 58 An appeal to the Court from a decision of the Tribunal is an appeal on a question of law: s 44(1) of the AAT Act. The power of the Court to make findings of fact under s 44(7) does not exist in a vacuum. It may be engaged where the Court is satisfied that there was an error of law coming within the scope of the appeal. 59 For the reasons set out above, the Tribunal did not err by failing to consider a submission that the Deposits were an equity contribution from Ms Li because no submission was made in those terms. Nor did the Tribunal err by failing to perform its task for the reasons given above at [51]. The power of the Court to make findings of fact under s 44(7) is not engaged. 60 The appeal is to be allowed, with costs. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Perram, Wheelahan and Hespe.