Epov v The Commissioner of Taxation

Federal Court of Australia (Full Court)|2007-08-27|Before: Gordon J, Heerey J, Lindgren J, Gordon JJ

INTRODUCTION 3 On 14 August 2007, the Court dismissed the appeal and ordered the appellant to pay the respondent's costs of the appeal. What follows are my reasons for joining in those orders. 4 The appellant, Peter Epov, was the managing director, chairman of the board and holder of one ordinary share in Australia China Business Bureau Pty Ltd ("ACBB") during the 1997 year of income. 5 This appeal concerns two payments made in the 1997 year of income by ACBB to New Asia International Import & Export Co Ltd ("New Asia"), a company incorporated in the Turks and Caicos Islands on 20 September 1995 and given an exemption from tax in that jurisdiction for 20 years. The appellant was one of the two shareholders and directors of New Asia. 6 The first payment was made on 5 July 1996 when ACBB drew a cheque for $920,565 in favour of Ord Minnett Jardine Fleming ("OMJF") which was used by OMJF to purchase US$701,498, which sum was remitted to New Asia at about the same time ("the First Payment"). The second payment was made on 27 March 1997 when ACBB purchased US$2,355,980 through OMJF which sum was remitted to New Asia on the same day. $1,100,000 of the second payment is the subject of appeal ("the Second Payment"). 7 Two issues were argued on appeal. The first was whether the trial judge was correct to conclude that he could not be satisfied that the First and Second Payments were not, as the respondent contended, made by ACBB on behalf of, or for the individual benefit of, the appellant with the result that each of the payments, under s 108(1)(b) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), was deemed to be dividend paid by ACBB to the appellant ("the s 108 Issue") and assessable income of the appellant by virtue of the combined operation of ss 108 and 44(1) of the 1936 Act. 8 The second issue was whether the respondent had power to issue an amended assessment on 22 July 2004 when there was an appeal to this Court on foot against an appealable objection decision made by the respondent on an objection lodged by the appellant against an original assessment of income for the same year (the "amendment issue").

SECTION 108 ISSUE 9 During the 1997 year of income, s 108 of the 1936 Act was in the following form: "(1) If a private company: (a) pays an amount to an associated person by way of an advance or loan; or (b) pays or credits an amount on behalf of, or for the individual benefit of, an associated person; so much (if any) of the amount paid or credited as, in the opinion of the Commissioner, represents a distribution of profits shall, for the purposes of this Act other than Division 11A of Part III and Division 4 of Part VI, be deemed to be a dividend paid by the company: (c) to the associated person as a shareholder in the company; (d) out of profits derived by the company; and (e) on the last day of the year of income of the company in which the payment or credit referred to in paragraph (a) or (b) is made. … (3) For the purposes of this section: … (c) a reference to an associated person, in relation to a company, is a reference to: (i) a shareholder in the company; or (ii) a person who is an associate, within the meaning of s 26AAB, of a shareholder in the company." 10 It was common ground that, during the 1997 year of income, for the purposes of s 108 of the 1936 Act: (1) the appellant was a shareholder and the managing director of ACBB and was an 'associated person' of ACBB. (The two other directors of ACBB were Mr Dong and Mr Kaye, neither of whom gave evidence at trial); (2) ACBB had sufficient profits to support the respondent's formation of his opinion that the amounts in dispute represented a distribution of profits of ACBB. 11 On appeal the sole issue about the application of s 108 of the 1936 Act was whether the trial judge was correct to conclude that he could not be satisfied that the First and Second Payments were not, as the respondent contended, made by ACBB on behalf of, or for the individual benefit, of the appellant. 12 In order to understand the flow of funds associated with the First and Second Payments, it is necessary to describe some of the other entities involved. The appellant was also a shareholder and director of Viney Pty Limited ("Viney") which, as trustee of the Viney Family Trust, purchased a property at Dural in July 1996 in which the appellant lived. The appellant was a beneficiary and the guardian and appointor of the Viney Family Trust. Georgette Constructions Pty Ltd ("Georgette") was a construction company that built the residence on the property at Dural. 13 In September 1995, the appellant arranged for the establishment of New Asia. The appellant and Mr Dong were the only signatories to New Asia's bank account and they authorised the payment of substantial amounts by New Asia. 14 On 2 May 1996, Beresford Investments Ltd ("Beresford") was established in the Republic of Vanuatu by Mr Tony Hutton. Mr Hutton was the de facto spouse of Ms Rule. Ms Rule was the accountant and tax agent for ACBB, Georgette, the appellant and Viney. Neither Mr Hutton nor Ms Rule gave evidence at trial. Mr Hutton sent accounts to the appellant for acting as a "nominee director of Beresford", although the appellant denied receiving those accounts.

The First Payment 15 As noted in [6] above, the First Payment was made on 5 July 1996 when ACBB drew a cheque for $920,565 in favour of OMJF which was used by OMJF to purchase US$701,498, which sum was remitted to New Asia at about the same time. US$510,019 was sent by New Asia to Beresford on 8 July 1996. On 17 July 1996, Beresford transferred $629,990 to Ms Rule's Trust Account and these funds were used by Viney to complete the purchase of the property at Dural. A mortgage was granted over the Dural property by Viney to Beresford for the amount transferred to it. 16 The First Payment comprised two parts: the $629,990 the respondent identified as having been remitted to Australia in the manner outlined in para [15] and the balance of the First Payment of $920,565, namely $290,575. 17 The appellant did not dispute that the First Payment was made but submitted that the trial judge should have found that this payment was not made by ACBB "on behalf of or for the individual benefit of" the appellant. The appellant submitted that it represented the purchase of US dollars by ACBB on it electing to exercise currency trading options it held with OMJF which funds were allegedly used to make prepayments for tooling for cable hardware items that were manufactured in China at the instigation of ACBB. The appellant further asserted that ACBB incurred outgoings and generated revenue from these sales to Optus. Alternatively, the appellant contended that payment was made by ACBB for the benefit of Viney. In relation to the $290,575, the appellant also submitted that it may properly be inferred to be part of a loan to Mr Dong's Family Trust.

The Second Payment 18 The Second Payment was made on 27 March 1997 when ACBB purchased US$2,355,980 through OMJF which sum was remitted to New Asia on the same day. $1,100,000 of the Second Payment is the subject of appeal, being those sums which the respondent identified as remitted to Australia for use in Australia. Of this amount, the sums of $300,000, $100,000, $200,000 and $500,000 were paid to Viney via Beresford. The first three payments were used by Viney in connection with the property at Dural. The fourth amount was used by Viney to acquire another property at Quorrobolong. 19 The appellant, however, asserted that the Second Payment made by ACBB to New Asia was in fact further prepayments for tooling for cable hardware items that were manufactured in China.

Conclusion 20 The appellant's contentions should be rejected on a number of bases. 21 The contention that the First and Second Payments were no more than payments made by ACBB to OMJF to purchase US dollars which did not attract the operation of s 108 of the 1936 Act, ignores the express words of s 108 and is contrary to its evident statutory purpose. Section 108, in its terms, ensures that any transaction involving the appropriation of profits of a company for the benefit of a shareholder or an "associated person" is treated as the payment of a dividend. It is not necessary that the payment be made to the associated person. It can be made on behalf of, or for the individual benefit of, the associated person: s 108(1) and Lonsdale Sand and Metal Pty Ltd v Commissioner of Taxation (1998) 81 FCR 419 at 426-427. It is the character of the payment with which the section is concerned. The enquiry cannot and does not end at the first step in the transaction. 22 Secondly, the appellant carried the burden of proving that the assessment was excessive and failed to discharge that burden: see s 14ZZO(b) of the Taxation Administration Act 1953 (Cth) ("the TAA") and Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624, 625 (per Brennan J), at 626-627 (per Deane J) and at 631 (per Toohey J). Other than the appellant's sworn evidence, no documentary evidence in the form of orders, title documents, invoices, statements of account, bank statements or any other document was adduced by the appellant to support the characterisation of the two payments by ACBB to New Asia as prepayments for tooling. Some documentary evidence was produced for part of the prior financial year but there was no evidence to relate either of the payments now in issue to any purchase during that period. The lack of evidence and the consequences that flowed from that position were described by the trial judge (at [47]) in the following terms: "However, the failure of the [appellant] to adduce any evidence - apart from bold assertions by the [appellant] in the witness box - as to what the ACBB payments to New Asia were for, make it impossible to be satisfied that they were not for the individual benefit of the [appellant], with New Asia being nothing more than the [appellant's] collection vehicle. If the [appellant] had adduced evidence which enabled one to be satisfied that the ACBB payments were for stock-in-trade as asserted by the [appellant], this lack of satisfaction may not have arisen. It is not as if the adducing of such evidence imposed a difficult task; there were only two relevant payments by ACBB - one for $920,565on 5 July 1996 and the other for $2,984,643 on 27 March 1997. This too impels the inference that the two payments were not for stock-in-trade otherwise evidence in support would surely have been adduced." 23 No error in this conclusion was identified by the appellant. Whether the oral evidence of the appellant should be accepted was quintessentially a matter for the trial judge. There is nothing to suggest that the trial judge acted on any wrong principle or otherwise erred in making that assessment. As the trial judge stated at [65], the appellant carried the burden of proving that the assessment was excessive: see s 14ZZO(b) of the TAA and Dalco at 624, 625 (per Brennan J), at 626-627 (per Deane J) and at 631 (per Toohey J) and [22] above. He failed to discharge that onus. The appellant's attempts on appeal to have this court draw some different inference from evidence led at trial depends, in part, upon ascribing a weight to the oral evidence that the trial judge did not. When it is recognised, as it must be, that the trial judge was not persuaded by the appellant's evidence, the attempt to have this court draw some other inference must fail. 24 Finally, the appellant's contention that it was not reasonable for the respondent to infer that ACBB paid the additional sum of $290,575 on behalf of, or for the individual benefit of, the appellant because he was only one of three shareholders in ACBB and there was evidence that another shareholder's family trust had received funds in a similar manner should be rejected. Whether it was reasonable for the respondent to draw that inference was irrelevant. The appellant carried the burden of proving the assessment was excessive. He failed to lead any evidence at trial or call any witnesses to explain what the additional sum of $290,575 was for or how it was used.

AMENDMENT ISSUE 25 The appellant submitted that the respondent did not have power to issue an amended assessment on 22 July 2004 in respect of the 1997 year of income when there was already an appeal to this Court on foot against an appealable objection decision made by the respondent on an objection lodged by the appellant against an original assessment of income for the same year. 26 The facts relevant to this ground of appeal may be summarised as follows: (1) the original assessment was issued on 11 September 2001. It included taxable income of $629,552 which was particularised as "relat[ing] to the balance of the purchase price, paid on or about 16 July 1996, in respect of the property situated at 17-19 Vineys Lane Dural NSW 2158"; (2) on 2 April 2003, the respondent disallowed the appellant's objection to the original assessment ("the first appealable objection decision"); (3) on 29 April 2003, the appellant lodged an appeal with the Federal Court against the first appealable objection decision; (4) the appellant lodged his income tax return for the 1997 year on or about 27 October 2003. The return disclosed taxable income of $151,711; (5) on 22 July 2004, the respondent issued an amended assessment to the appellant for the 1997 year. The amended assessment included an additional sum of $2,496,165 being the $151,711 returned together with, inter alia, the two payments referred to in paragraph [6] above totalling $2,020,565 which were included pursuant to s 108 and further or alternatively, Part IVA of the 1936 Act. 27 The appellant contended that the issue of the amended assessment by the respondent was in fact an attempt to alter or vary the first appealable objection decision which was not permitted. The trial judge was correct to reject that contention. The appellant's contention was contrary to the express terms of s 170 of the 1936 Act, contrary to the facts, ignored Part IVC of the TAA and is contrary to authority. 28 Section 170 of the 1936 Act, as at 22 July 2004, provided that: "(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment. (1A) If: (a) an assessment has been amended in any particular in a way that effected a reduction in the liability of a taxpayer; and (b) for the purposes of making the amendment, the Commissioner accepted a statement made by or on behalf of the taxpayer; the Commissioner may: (c) if the taxpayer is not a SPOR taxpayer for the year of income to which the amended assessment relates - within 4 years after the day on which notice of the amended assessment was served; or … further amend the assessment in, or in respect of, that particular in a way that increases the taxpayer's liability to the extent that the Commissioner thinks necessary. (2) Subject to this section, where there has been an avoidance of tax, the Commissioner may: (a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; or (b) if paragraph (a) does not apply, the taxpayer is a relevant entity within the meaning of Division 1B of Part VI and the assessment is taken by section 166A to have been made - within 4 years after the day on which the assessment is so taken to have been made; or (c) if neither paragraph (a) nor (b) applies and the taxpayer is not a SPOR taxpayer for the year of income to which the assessment relates - within 4 years after the day on which tax became due and payable under the assessment; or (d) if neither paragraph (a) nor (b) applies and the taxpayer is a SPOR taxpayer for the year of income to which the assessment relates - within 2 years after the day on which tax became due and payable under the assessment; amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment. … (5) If an assessment has, under this section, been amended in any particular, the Commissioner may: (a) if the taxpayer is not a SPOR taxpayer for the year of income to which the assessment relates - within 4 years after the day on which tax became due and payable under the amended assessment; or … make, in or in respect of that particular, such further amendment of the assessment as, in the Commissioner's opinion, is necessary to effect such reduction in the taxpayer's liability under the assessment as is just. … (7) Nothing contained in this section shall prevent the amendment of any assessment in order to give effect to the decision upon any appeal or review, or its amendment by way of reduction in any particular in pursuance of an objection made by the taxpayer or pending any appeal or review." 29 Section 170(1) was, at the relevant time, a general grant of power. It permitted the respondent, at any time, to amend an assessment by making such alternations in or additions to it as he considered necessary. As s 170(1) stated, the respondent was not precluded from amending an assessment even if tax had been paid in respect of the assessment. 30 The circumstances in which the respondent could amend an assessment in order to increase a taxpayer's liability were set out in ss 170(1A) and 170(2). Section 170(1A) was not engaged. Under s 170(2), the respondent had four years in which he could issue an amended assessment. The four year period commenced on the date upon which the tax became due and payable under the original assessment: s 170(2)(b). There was no dispute that the four year period had not expired when the respondent issued the amended assessment. Where the respondent was within the prescribed time period, he was entitled to make such alterations in, or additions to, the assessment as he "[thought] necessary to correct the assessment" and that process of amendment extended to include "the addition of new items of income or the allowance of deductions not previously allowed": see Hill J in Commissioner of Taxation v Jackson (1990) 27 FCR 1 at 14. As the facts outlined in [26] demonstrate, that is what the respondent did. The respondent had no power to and did not purport to alter or vary the first appealable objection decision. 31 Secondly, every amended assessment was an assessment for all purposes of the 1936 Act: s 173. Part IVC of the TAA applied to the amended assessment: see s 175A of the 1936 Act and Hill J in Jackson at 14. However, at the relevant time, the taxpayer's rights to object against the amended assessment were limited to the particular amendment: s 14ZV of the TAA. When the respondent issued the amended assessment on 22 July 2007, s 14ZV provided: "If the taxation objection is made against a taxation decision, being an assessment or determination that has been amended in any particular, then a person's right to object against the amended assessment or amended determination is limited to a right to object against alterations or additions in respect of, or matters relating to, that particular." (Emphasis added.) 32 The courts have held the phrase "in any particular" to mean "in some specific or definite respect": Hughes v Phillips (1948) 75 CLR 436 at 443 (per Dixon J). In other words, if a taxpayer wished to object to an assessment, then he or she could do so. If they did not and the respondent served an amended assessment, the taxpayer's grounds of objection were limited to the specific items addressed in the amended assessment. The object of s 14ZV was to prevent a taxpayer treating the amended assessment as an assessment with unlimited rights of objection under Part IVC of the TAA. Each of those principles was made clear in Puzey v Commissioner of Taxation (2002) 124 FCR 514 (upheld on appeal at (2003) 131 FCR 244 at [1], [81]-[95]). In that case, Part IVC proceedings in respect of amended assessments disallowing certain deductions under s 51(1) of the 1936 Act and s 8-1 of the Income Tax Assessment Act 1997 (Cth) were due to commence in December 2001. Just a few weeks before trial, the respondent issued further amended assessments in respect of the same years of income to incorporate Part IVA determinations. The two sets of appeals under Part IVC of the TAA were before the Court. The further amended assessments were held to be valid on the basis that there had been a change in the process of assessment in which the liability for tax had been calculated even though they did not alter the incidence of tax payable. 33 The fact that the taxpayer had limited rights to object against an amended assessment reflected the interaction between s 170(2) of the 1936 Act and Part IVC of the TAA. The 1936 Act permitted the respondent to amend the assessment to include "the addition of new items of income or the allowance of deductions not previously allowed" within prescribed time limits, and at the same time preserved the time limits imposed upon taxpayers to object to items included or excluded from their assessable income: see Part IVC of the TAA. The interaction of the 1936 Act and Part IVC of the TAA therefore imposed safeguards for the proper administration of the tax legislation for both the respondent and the appellant. 34 The substance of the appellant's contention was that the operation of s 170 of the 1936 Act and, in particular, the respondent's power of amendment, was somehow stayed or otherwise rendered inoperable if a taxpayer had instituted proceedings under Part IVC of the TAA. The express words of s 170 are directly contrary to that contention. Subject to the limitations I have identified, it permitted the respondent to amend the assessment at any time. The terms of s 170(7) did not lead to a different conclusion. It did not, as the appellant contended, limit the respondent's power of amendment when Part IVC proceedings were on foot only to those circumstances described in that section. Section 170(7) did not operate as a limit on the other sub-sections. Section 170(7) contained an additional power to permit the respondent to issue an amended assessment even if the time limits otherwise prescribed in s 170 had expired and, then, only in the most limited of circumstances: to give effect to a decision of a court or tribunal or to reduce the assessable income of a taxpayer as a result of an objection, appeal or review. The existence of that power does not result in the reading down of the other provisions of s 170 in the manner contended for by the appellant. 35 If the appellant's submission were to be accepted, it would render the operation of the statutory scheme unworkable. As the High Court said in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 178, the central element of the statutory scheme is the process of assessment by which a taxpayer's true substantive tax liability is ascertained. As noted, the statutory scheme in 2004 imposed limits on that process of assessment. Acceptance of the appellant's submissions would require this Court to ignore or abandon that central element. There is no basis for doing so: see also Merkel J in Fabry v Commissioner of Taxation (2003) 132 FCR 239 at [29]-[32]. 36 Finally, the appellant's reliance upon the decision of the New South Wales Supreme Court in St George Leagues Club Ltd v Commissioner of Land Tax [1983] 2 NSWLR 399 was misplaced. It was concerned with different facts and a different legislative scheme. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate: Dated: Counsel for the Appellant: Mr H R Sorensen

Solicitor for the Appellant: Conomos & Spinak Lawyers

Counsel for the Respondent: Mr P M Fraser and Ms L McBride

Solicitor for the Respondent: Australian Government Solicitor

Income Tax Assessment Act 1936(Cth)ss 44, 108, 170, 174

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