Income Tax Assessment Act 1936 (Cth): ss.108, 167

Counsel and Solicitors D.M.J. Bennett QC and A.H. Slater

instructed by McPherson Greenleaf and

Associates

Counsel and Solicitors P. Roberts instructed by the

The assessments be remitted to the respondent for amendment in accordance with these reasons.

The applicants pay two thirds of the respondent's costs excluding the costs of the last day of hearing.

The respondent pay the applicants' costs of the last day of hearing.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicants, Imperial Bottleshops Pty Ltd, ("the company") and Mr William John King Egerton, the managing director and a shareholder of the company, appeal to the court in respect of objection decisions of the respondent, the Commissioner of Taxation, relating to assessments made by him pursuant to s.167 of the Income Tax Assessment Act 1936 (Cth), ("the Act") for the years of income ending 30 June 1980 to 1986 respectively. These assessments were directed both to the company and to Mr Egerton, the latter assessment relying upon the provisions of s.108 of the Act.

2. The company, throughout the years of income in question, owned and operated bottleshops in Lismore, Goonellabah (a suburb of Lismore), and Coffs Harbour in NSW. As the case was initially presented, it was said that the company also owned and operated a bottleshop at Grafton. As will later be seen, this turned out not to be true. That bottleshop was operated by Egerton Nominees Pty Limited, acting in its capacity of trustee of a discretionary trust. The company had its administrative centre at the Grafton premises. In addition to the alcohol and other drinks that it sold, and miscellaneous items such as potato chips,it dealt also in cigarettes.

3. Since 1975, there has been in force legislation, the Business Franchise Licences (Tobacco) Act 1975 (NSW) in form an Act providing for the licensing of wholesale and retail cigarette merchandising, but in practical effect, at least, imposing a tax on cigarettes. Such tobacco licensing legislation appears to have had its origin in Tasmania: Dickenson's Arcade Pty. Limited v Tasmania [1974] HCA 9; (1974) 130 CLR 177. As now drafted, it does not infringe the constitutional exclusivity granted by s.90 of the Constitution to the Australian parliament: Dickenson's Arcade (supra); HC Sleigh Limited v South Australia (1977) 136 CLR 475; Evda Nominees v Victoria [1984] HCA 18; (1984) 154 CLR 311. It is not necessary to describe the scheme of that legislation. The provisions of the Victorian equivalent legislation are summarised in detail in Bath v Alston Holdings Proprietary Limited [1988] HCA 27; (1987-8) 165 CLR 411. Suffice it to say here, that a person wishing to wholesale or retail cigarettes is required to be licensed and pay a licence fee calculated by reference to his sales, if any, in a prior period, save so far as retailers are concerned, where the stock sold had been purchased from a licensed wholesaler.

4. At least at some time in the years of income in question this tax was 10%, so that if cigarettes were purchased from a wholesaler in NSW, there was added to the invoiced price of those cigarettes an additional 10% to reimburse the wholesaler for the licence fee.

5. There were those who believed that the licence fee could not validly be imposed in respect of interstate transactions, having regard to the constitutional safeguard of trade, commerce and intercourse among the States guaranteed by s.92 of the Constitution. Thus, it was thought, that if cigarettes were purchased in a State not imposing such a tax for sale in NSW, no licence fee need be paid. There may have been difficulty with this view, even accepting the pre Cole v Whitfield [1988] HCA 18; (1988) 165 CLR 360 view of the ambit of s.92, because a licence fee was payable by retailers calculated by reference to their prior sales. However, the only exclusion from the retailer's licence fee was tobacco purchased in the course of intrastate trade from the holder of a wholesale tobacco merchant's licence: s.12 of the Business Franchise Licences (Tobacco) Act. Goods purchased from a wholesaler in another State in an interstate transaction would not, on the terms of the legislation if otherwise valid, be excluded from the fee.

6. Cole v Whitfield (supra) lay in the future, as did the decision of the High Court in Bath v Alston Holdings Pty Ltd (supra). It is perhaps ironical, that notwithstanding the shift of opinion in Cole v Whitfield (supra) as to the scope of s.92, the High Court by majority in Bath found that s.92 invalidated the licence fee provisions applicable to retailers as involving a protectionist discrimination.

7. Mr Egerton, in 1980, became aware that the NSW government proposed to double its cigarette tax. Advertising of the State government at the time indicated, so Mr Egerton said, that any one who took steps to avoid the duty would be prosecuted. He spoke to a Queens Counsel, who was a friend of his and sought his advice informally whether he could bring in cigarettes from Queensland. He was advised that he could (presumably without the need to pay the licence fee). He spoke to the manager of Nelson Trading Qld Pty Ltd, ("Nelson"), a large tobacco wholesaler in Queensland, also a friend, and was told that there would be no trouble buying cigarettes in Queensland for cash. The manager told him that "everyone's doing it."

8. It was at this time, according to Mr Egerton's evidence which, on this matter I accept, that he decided to purchase a proportion of the company's tobacco requirements from Nelson in Queensland for cash. He decided that it would be necessary to purchase in cash so that there would be no records available for inspection by Inspectors of the New South Wales government, upon which a prosecution could be brought. Similarly, he believed that it would be to his advantage for the same reason that staff at the various outlets not ring cigarettes up on the cash register under the button "cigarettes", but rather to use a "sundries" or "miscellaneous" button.

9. To assist him hide the Queensland purchases from view, it was, so Mr Egerton deposed, necessary for him to obtain the cash from the company's businesses. To this end he gave instructions to the managers of two of the stores, that in Lismore and that in Goonellabah, to "z" the till. This unusual expression, used in evidence both as a verb and a gerundive, derives from the fact that the cash registers used by the company had a button marked "z", which could be used to close the till and provide a print out of the take to that point of time. The cash register then returned to zero, and could be operated thereafter in the usual way. The effect of such an operation was to provide two printouts for the day's trading.

10. The procedure that was thereafter followed, was that the cash was taken out of the till and put, together with the print out, in a bottle bag, and kept in the safe at the shop. After a number of such bags (the tills were "z'ed" off only two or three times a week) had been collected, they were then delivered to the Grafton premises to Mr Egerton. Usually, the deliveries were on a weekly basis. There the amount in the bag was counted and the figure compared with the printout. Initially, Mr Egerton collected the bags personally from the relevant shop.

11. Mr Egerton, according to his evidence, instructed staff to advise their respective requirements of cigarettes. He then telephoned the manager of Nelson in Queensland and ordered the relevant quantity of cigarettes. Cigarettes were, at the relevant time, sold by Nelson in quantities called "outers", containing a number of cartons of cigarettes, amounting in all to 10,000 cigarettes. On occasions, Mr Egerton would drive to Queensland and load a quantity of cigarettes in the boot of his car, usually three or four "outers". On other occasions, cigarettes would be picked up by employees in a 4 tonne truck or a 1 tonne van. The truck held between 50 to 60 "outers" and the van 20 to 25. Cash sale invoices and packing slips were issued by Nelson to whomever paid for the cigarettes or took delivery of them. When the cigarettes arrived in Grafton, the quantities were checked off against the invoice and thereafter the invoices or other documentation issued by Nelson was destroyed, so as to be unavailable for inspection by the NSW government inspectors.

12. However, this is not to say that Mr Egerton kept no record of the amounts taken out of the till. There was a note book maintained by employees. It was still in existence, and covered the period from 21 April 1981 until 29 November 1985, in respect of the Lismore shop and 25 June 1981 until 25 September 1984, in respect of the Goonellabah shop. In addition, at the suggestion of the company's internal accountant, so Mr Egerton deposed, (the accountant denied all knowledge of such a book) another book was kept in which the amounts of cash taken from the Lismore and Goonellabah stores were entered. If the suggestion did in fact come from the accountant, and since he only commenced working for the company in 1983, it can be assumed that this book commenced no earlier than 1983. This book was destroyed by Mr Egerton in a panic when representatives of the Commissioner interviewed him in January 1988, presumably to investigate the taxation affairs of the company.

13. The first mentioned notebook formed the basis of the assessments made against the company by the Commissioner. However, the Commissioner did not merely assume that all the amounts shown in the book were assessable income in the relevant years. First, as indicated above, the notebook started and ended part way through a year of income.

14. The assessor accordingly assumed that the taking of money from the till commenced at the beginning of the year of income 1981 and ended on the last day of the year of income 1986. To arrive at the figures which were said to have been the assessable income derived by the company in these two years, he accordingly made the assumption that in each of these years the amount taken out of the till in the period not covered by the book was at the same rate as that shown in the book for the period covered by it. Further, the book, albeit that the entries were consecutive, showed no entries for various periods of time. One possibility deposed to by Mr Egerton in evidence, was that no moneys were taken out of the till in these periods. The other possibility, and that adopted by the assessor, was that the moneys had continued to be taken out of the till in these periods, but that the amounts were not recorded. The assessor, accordingly, extrapolated amounts for the periods not covered by the book, assuming the rate of withdrawal of cash from the business in the relevant year continued during periods not covered by the book at the same rate. Thus, the amounts added to the incomes of each taxpayer were:

Year Cash Unbanked/ Extrapolation Assessed

1981 44,505 181,377 225,882

1982 214,714 39,826 254,540

1983 76,923 25,779 102,702

1984 108,127 Nil 108,127

1985 102,245 31,841 134,086

1986 54,761 121,243 176,004

Total 601,275 400,066 1,001,341

15. The end result of this process of assessment, so far as the company was concerned, was that tax was assessed as follows:

Year Income as Additional Tax

Assessed Returned Income Added

1981 89,326 225,882 144,995

1982 81,980 254,540 154,799

1983 7,229 102,702 50,568

1984 (20,187) 108,126 40,451

1985 814 134,086 71,340

1986 (2,800) 176,005 79,674

16. The assessment of the company also included additional tax under ss.226 or 223 of the Act as the case may be depending on the year of income. It emerged from discovery of that part of the Commissioner's file as concerned the remission of penalties, that the supervisor, who made recommendations to the decision-maker on the matter, had taken into account that the company had avoided State taxes in New South Wales and Queensland (sic). It is difficult to know what State taxes in Queensland the company had avoided as at the relevant time there was no tobacco licensing tax in that State. Moreover, it is clearly an irrelevant matter to the remission of federal additional tax that a taxpayer has been involved in avoiding State taxes. However, the decision-maker, in reaching his decision, expressly states that he did not take into account the avoidance of State taxes. There being no other challenge in respect of the additional tax, that tax will stand or fall depending upon the outcome of the appeals on the merits.

17. It was, initially, the applicants' case that all amounts that had been taken out of the till in cash (whatever the correctness of the extrapolations) had been expended by Mr Egerton on behalf of the company, either in the purchase of trading stock of the company or in paying overtime to employees, or wages to casual employees, save for "odd amounts comprised in loose change or occasionally in small notes". These expenditures were allowable deductions to the company, so that, at the end of the day, there had been no tax avoided and the amounts originally assessed were correct, and the amended assessments were excessive. Mr Egerton swore an affidavit to this effect. He estimated that no more than a total of $500 was used for anything else and that even this was used for the payment of incidental expenses of the business of the company (unspecified). None of the money was, he deposed, used by him for his own private use or for members of his family.

18. It might here be noted that the notebook contained, in addition to a record of moneys withdrawn from the tills, a record of such part of the amounts as was used for the payment to employees of wages or overtime. It will be recalled that the notebook was kept by employees, not Mr Egerton. Evidence was led from employees that cash moneys were indeed paid by Mr Egerton for these purposes. In these circumstances, although not conceding that the assessment was excessive to the extent of the amount shown as having been paid for these purposes, the Commissioner made no submission to the contrary. Nor could he. Once the book is accepted as a record, to the extent covered by it of undisclosed income, it must also be accepted as a record of the amounts it shows as having been paid out.

19. The effect of taking these payments into account (I am satisfied that they were not otherwise claimed by the company in its returns) is to reduce the assessments of the company by allowing as a deduction the following amounts:

Year Amount

1981/2 10,641.60

1982/3 12,791.25

1983/4 19,201.95

1984/5 26,827.45

1985/6 13,579.15

20. It may at this stage also be mentioned that the evidence of employees established that the stripping of the till at Goonellabah ceased in late 1984. Thus the extrapolations for the 1985 and 1986 years are clearly wrong, proceeding as they did on the basis that the practice continued throughout these last two years in Goonellabah. On this basis, the sum of $44,577.66 must be excluded from the assessments in the 1986 year and $42,454.92 in the 1985 year. The Commissioner, while again not conceding this, raised no opposition. Indeed, his counsel quite properly submitted that it was open to me to so hold and I do.

21. All other figures were in issue between the parties. For their part, counsel for Mr Egerton conceded that if I were to find against the company in respect of its assessment, then or to the extent that I did, the amount of income taken from the till would properly have been treated by the Commissioner as a dividend, or deemed dividend to Mr Egerton and assessable to him. It was conceded that the decision of the full court of this court in Macfarlane v Commissioner of Taxation [1986] FCA 266; (1986) 13 FCR 356 necessitated this result.

22. Thus, the issues between the parties appeared to emerge as purely issues of fact. The primary issue, as the case was initially presented was whether, notwithstanding the lack of records, Mr Egerton was to be believed when he said that all amounts taken from the till were expended (with the exception of the $500, estimated and conceded) on deductible outgoings, not claimed in the returns. If that issue was resolved in favour of the company, then the appeals of Mr Egerton and the company both would have had to be allowed. If Mr Egerton was not to be believed, then the secondary issue was whether there was sufficient other evidence from which I was able, on the balance of probabilities, to determine what the taxable income of the company was in the relevant years.

23. After the evidence had been concluded, save for an incidental matter, on which I gave leave to the taxpayer to call limited evidence, counsel for the Commissioner sought leave to reopen his case, because it had come to his notice that the bottleshop at Grafton had not at the relevant period been owned by the company, but rather was owned by Egerton Nominees Pty Limited ("Nominees"). This presented somewhat of a difficulty for the applicants, because to that time their case had been presented on the basis that, other than amounts for wages, and the incidental amount of $500, all the funds taken from the tills in Lismore and Goonellabah had been used in purchasing trading stock for shops owned and operated by the applicant company. Prima facie, if the moneys were used in part to purchase trading stock for another taxpayer, they were, to that extent, not an allowable deduction to the applicant company. I gave leave to the Commissioner to reopen his case and adduce evidence of the tax returns of Nominees, in its trustee capacity, which returns duly showed that the Grafton bottleshop was owned and operated by that company.

24. In reply to this evidence, Mr Egerton deposed to the effect that cigarettes were sent to the Grafton shop in exchange for alcohol which was either taken from the Grafton shop and distributed to the bottleshop outlets of the company or was taken from stock at Mr Egerton's wholesale liquor operation, invoiced to Nominees but delivered to outlets owned and operated by the applicant company. In this way, while the money from the till, did, in part, go to the other taxpayer, it found its way back to the company in the form of trading stock, albeit alcohol, rather than cigarettes.

25. Mr Egerton sought to explain his actions by reference to complaints that had been made by Mr Goldsmith, who, until May 1985, had been the manager of the Lismore and Goonellabah bottleshops, and who had, indeed, managed those shops before they had been acquired by the company. The exchange of the cash from the till, for alcohol, was designed to avoid, so Mr Egerton said, distorting Mr Goldsmith's profit margin. Although stock transfers between shops, including Nominees, was commonplace, such transfers were ordinarily accompanied by stock transfer records. Where the stock was, in essence, exchanged for cigarettes, no stock transfer records were kept. This was in line with Mr Egerton's fear of record keeping where tobacco purchases from Queensland were involved.

26. Mr Goldsmith was called to give evidence. It was he who actually maintained the notebook upon which the assessments were based. He deposed that on some four to five occasions in a period of eighteen months up to the middle of 1983, he had driven to Queensland to collect cigarettes, that he had on some occasions been given cash, on others a bank cheque which he converted to cash, and that on others the cigarettes which he collected had been prepaid. Cigarettes after delivery to Lismore were then taken to the Grafton outlet, and the truck returned to Lismore taking with it stocks of liquor from the Grafton shop. He said, and I accept his evidence, that on an unspecified number of occasions there were no stock transfer records completed, although on some there were. In such cases, the records did not cover all the stock.

27. Evidence was further adduced of cigarette wholesale and retail prices at various dates and profit markups of the company, as well as figures of monthly takings and recorded purchases of each of the bottleshops including Grafton, from which evidence detailed financial submissions were made. I shall return to this evidence later.

28. A taxpayer challenging an assessment made under s.167 of the Act (sometimes referred to as a default assessment) bears the onus of proof (s.190 of the Act) to show not only that the assessment is wrong but also what the true taxable income is. It is not sufficient to merely show that the assessment is in error, thereby leaving a "blank": Trautwein v Federal Commissioner of Taxation (No 1) [1936] HCA 77; (1936) 56 CLR 63, Federal Commissioner of Taxation v Dalco (1990) 64 ALR 166.

29. It is necessary to refer now to the evidence as initially adduced. First, there was the evidence of Mr Egerton. Mr Egerton deposed (and there was no objection to this evidence, or cross-examination upon it) that following upon an accident, in which he was severely burned, he suffers from a loss of memory in relation to events prior to the date of the accident in August, 1986. It follows, that to the extent that Mr Egerton's memory is not good in relation to pre 1986 matters, I would not readily draw the conclusion that there was something sinister about that, and thereby disbelieve him.

30. Counsel for the Commissioner nevertheless submitted that I should not believe Mr Egerton.

31. A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be "tested most closely, and received with the greatest caution": Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as "prima facie unacceptable", cf McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1978-9) 143 CLR 284 at 302 per Gibbs J.

32. In the present case, I had the opportunity of observing Mr Egerton in the witness box throughout a relatively long cross-examination. He gave his evidence with apparent honesty and, prior to the revelation as to the ownership of the Grafton outlet, I formed the view that he was, at least substantially, telling the truth. I should say, however, that to the extent that Mr Egerton seemed intent upon presenting himself as naive, I do not believe that he is. Rather, I am inclined to the view that he is far more astute that he wishes to portray himself. Apart from his failure to advert, in the case initially presented, to the exchange of alcohol for cigarettes involving the Grafton outlet, the greatest difficulty with his evidence was his inability to recall particular matters. Unexplained, it would have posed great difficulty to the acceptance of his evidence. As it is, while clearly making his task difficult, it did not adversely affect his credit.

33. Mr Egerton's evidence as to the use of cash moneys for the purchase of Queensland cigarettes was not, in the main, inherently improbable. I accept that he believed that many other people were purchasing cigarettes in Queensland and importing them to New South Wales. I accept also, that in the state of the law then existing, the outcome was uncertain and that Mr Egerton had a fear, indeed a justifiable fear, that inspectors of the New South Wales Revenue might well investigate this activity and that he might face prosecution. It is not for me to comment on the morality of the course upon which he embarked. In the end, the High Court held that the retail licence fee, to which prima facie he was subject, was invalidly imposed as infringing s.92 of the Constitution. Hence, his actions were legal, so far as the importation of cigarettes to New South Wales, and subsequent sale without payment of licence fee were concerned. Not so, of course, his failure to keep records or his destruction of them.

34. To overcome the lack of records, counsel for the taxpayers called evidence providing corroboration in various respects of Mr Egerton's evidence. This evidence, prior to the reopening of the Commissioner's case, took three forms. First, there was evidence called from employees of Nelson; second, evidence from employees engaged in taking delivery of cigarettes, or deposing to the practice of paying staff from the till; thirdly, there was accounting evidence showing that there had been no unexplained increase of funds of Mr Egerton or members of his family. This latter evidence took the form of a reverse asset betterment statement, and a source and application of funds analysis. It was not the subject of cross-examination or indeed criticism. It is necessary to turn to that evidence.

35. Two employees of Nelson gave evidence, Ms Samuelson and Mrs Williams. I accept their evidence without hesitation. Ms Samuelson was a bookkeeper/clerk with Nelson. Her evidence was that Mr Egerton commenced calling at Nelson to purchase cigarettes for cash sometime during 1980, although she could not recall precisely when. She believed that it was in the latter part of 1980. Cash sale invoices were made out, but did not record the name of the purchaser. In any event, the records of Nelson were destroyed in a flood or tempest and so were no longer available. She said that Mr Egerton would call approximately once a month and take cigarettes back in a car; sometimes he might not call for about six weeks; occasionally there was a gap of two months. There was no set pattern. On other occasions employees of the company would call to take delivery of cigarettes that had previously been ordered. She thought that occurred once a month. Purchases were paid for in cash which was not ordered into denominations. Her job was to check the cash. When Mr Egerton would take cigarettes, he would take quantities which she estimated to be valued at between $2,000 to $6,000. She was understandably unable to give details of large orders, save to depose that such orders occurred. She estimated, although the estimation she conceded was a guess, that such orders happened on at least twenty occasions.

36. Mrs Williams was also a bookkeeper with Nelson. She commenced her employment there in January 1981, and at that time Mr Egerton had for some time been coming to purchase cigarettes from Nelson. Sometimes he came himself, on other occasions, employees of the company came to purchase cigarettes. She said that cigarettes, collected by truck, cost in the range of $10,000 to $50,000; cigarettes collected by Mr Egerton personally,cost between $3,000 and $4,000. These figures, were, however, based on current prices of about $1,000 an outer. She said that Mr Egerton or employees of the company, called to pick up cigarettes infrequently and irregularly, on average about every month, but sometimes he, or employees, would not call for between two to four months, or even longer. Most cigarettes were collected by van, and not personally by Mr Egerton. When this happened, Mr Egerton would call first and pay in cash for the cigarettes to be taken away. The last time she recalled Mr Egerton calling was in February or March 1986.

37. Mr Egerton would come in with money in bags, and it was necessary to count the money, which came with a till roll wrapped around it.

38. Six employees, or former employees, of the company gave evidence on behalf of the applicants. I accept their evidence.

39. First, there was Mr Skennar, who was a bookkeeping assistant employed by the company from 30 August 1984 until 1988, at Grafton. He observed the delivery of the money, which was counted and checked off against the till rolls. That task had, until her departure from the company in April 1986, been carried out by Miss Chapman. He recalled Mr Egerton from time to time telling him that he had a sum of money and asking him to check with the manager of the Coffs Harbour outlet for his needs of cigarettes. He would check cash sale invoices from Nelson against delivery dockets and hand them back to Mr Egerton. These invoices indicated cash sales between $10,000 and $20,000. On occasions he observed Mr Egerton destroying the cash sale dockets from Nelson. In his time of employment, invoices were received of the Nelson purchases approximately six to eight times a year.

40. Mr Skennar also gave evidence that casual staff at Lismore were paid amounts that were not recorded on the pay sheets, but he was not a party to the manner in which they were paid or the source of funds. The till rolls would record, however, that amounts had been paid for wages and the amount in the bags sent to Mr Egerton would equal the amount shown on the till roll, less the amount shown for casual wages.

41. Recalled, Mr Skennar said that when cigarettes from Queensland were placed into stock, no attempt was made to differentiate stock ex New South Wales and stock ex Queensland. At the time of stocktake, stock was counted and it would seem costed on the basis that it was all New South Wales stock, that is to say on the basis that State tax had been paid on it. In other words, the assumption of the stock take was that Queensland stock had been sold first.

42. According to his evidence, where payments were made in cash to employees, no claim was made in respect of them in the company's tax return.

43. The next witness in this category was Mr Lawrence, whose relevant employment ended in December 1983. From about June in that year he was in charge of a warehouse of the company at Grafton. Before that he had been a casual bottleshop attendant. He had in 1980 travelled to Nelson's premises in Queensland to take delivery of cigarettes on four occasions. The first was between April and June, 1980. The second, between July and September; the third between October and December and the fourth between December 1980 and January 1981. On the first and third occasions, $20,000 or $25,000 was paid over; on the second $9,500 to $10,000 and on the fourth a similar amount. The van took between 20 and 25 outers and the truck about 50. On two of these occasions he had travelled with another employee in a 4 ton truck, on two occasions alone, on one of these occasions he had driven a van. The cigarettes had been ordered, and were paid for in cash of the precise amount, that having been given to him prior to his departure. A cash sale invoice was issued by Nelson. The cigarettes were taken to Grafton and later distributed.

44. The third employee of the company to give evidence was Ms Chapman, who worked for the company from 1982 to April 1986. She noted the regular arrival of money in bags from the Lismore outlet. There were no deliveries from other outlets. From about the end of 1983 she would count the contents of the bags and compare them with the till rolls, then handing the money and till rolls to Mr Egerton. She said that Mr Egerton had kept a green ledger book in which takings were recorded, including the cash amounts received. She also checked cash sales invoices from Nelson which varied from $10,000 to $20,000 against cigarettes, and handed this documentation to Mr Egerton. She never wrote cheques for payment for cigarettes purchased from Nelson in Queensland.

45. The next employee to give evidence was Mr Coe, who had commenced to work with the company in April 1984 as a clerk responsible to the financial controller. He said that the bags, containing cash that were received from Lismore or Goonellabah (the latter only until no later than the end of 1984, and such deliveries finishing in 1986), contained notations of amounts of money with the words "casual wages". He, from time to time, counted the money and checked it off against the amounts shown on the bags as the contents of them. The money was then placed in a safe kept at the rear of the office. The only invoices recording sales from Nelson in Queensland that he saw were cash sale invoices. On one occasion he recalled that the amount of such an invoice was $25,000. He saw a truck and a van belonging to the company delivering cigarettes. When cigarettes were purchased in New South Wales they were purchased from a van of a supplier who called to take orders.

46. In cross-examination Mr Coe said that from time to time staff at both Lismore and Goonellabah were paid in cash from moneys taken from the till, this occurred with both casual staff and overtime for permanent staff. This did not, however, apply to staff at other outlets. His rough estimate was that this amounted to $40,000 to $50,000 a year. The practice of sending money from the till stopped at Goonellabah around the end of 1984 and at Lismore in 1986, around the middle of that year.

47. The next witness was Mr Geary, who had commenced employment with the company in 1970 as a casual bottleshop attendant and was manager at Grafton from October 1980 to 7 January 1983. He said that every month he would give to Mr Egerton, or one of his staff, orders for cigarettes. Each month or so Mr Egerton would requisition the services of Mr Lawrence or Mr Babcock for a day, they would return with a quantity of cigarettes that had previously been ordered by Mr Egerton. The cigarettes came in either a truck or van; in the truck there were 50 or 60 outers, in the van about 20. Cigarettes were also supplied by New South Wales distributors, who called and distributed them. He said that the major amount of stock came from Queensland.

48. Mr Franklin, the next witness, was employed by the company from 31 October 1983 until 29 January 1986. He first worked at Lismore for 12 months and then went to Goonellabah in October 1984 where he became the licensee. He was aware that cigarettes were being purchased from Queensland and believed that competing outlets were doing the same. He could recall only one occasion when cigarettes delivered to Goonellabah had been delivered from Queensland.

49. During the time that Mr Franklin was at Goonellabah, all cigarettes sales were rung through the till on a button marked "cigarettes" and no moneys were taken from the till. He was aware that the till was "z'ed" off at Lismore, a couple of days a week, and that regularly employees were paid cash, both casuals and regular employees for overtime. He too was paid in cash for overtime but not for his regular wages.

50. The final witness in this category, who was not cross-examined, was Mr Fuller who was manager of Goonellabah from January 1986. He deposed that in his time as manager of that outlet, which continued until July 1987, no moneys were taken out of the till and used to pay casual wages. All proceeds of the sale of cigarettes were rung up on the correct till button.

51. It is not necessary to analyse the accounting evidence in detail. The figures took no account of moneys in Mr Egerton's own cheque account, but no evidence was called by the Commissioner to suggest that this materially affected the outcome. The analysis showed that cash cheques drawn from the business were spent by Mr Egerton on gambling, to the extent of $24,000 out of the total of approximately $54,000 of such cheques; this information came from Mr Egerton himself. The figures also showed gambling wins by Mr Egerton in some of the years in question.

52. The asset statement showed, in the years in question, the net asset position of Mr Egerton and companies under his control, although not of his wife (they were in the meantime divorced). It also showed cash available to Mr Egerton, which fluctuated during the years in question from a high of $185,424 in the 1984 year to a deficit of $24,083 in 1985 with an average in the total period of $70,987.17. This evidence made it unlikely that My Egerton had available to him amounts in cash of the quantum which would be required if the Commissioner's assessment were to be correct. Mr Egerton swore to the correctness of the information, and that he had no other assets nor had purchased or sold other assets.

53. Counsel for the Commissioner called a Mr Bungate, who had been employed by the company from July 1985 as manager of the Lismore and Goonellabah outlets until his dismissal from the company in December 1985, at which time he was a bankrupt.

54. According to Mr Bungate's evidence, the tills at Lismore were "z'ed" off two days a week at approximately 11am, when takings of approximately $600 to $700 were reached and on a third day when the takings reached $1,500. The moneys and the till roll were removed and placed in a paper bag. They were subsequently sent to Mr Egerton at Grafton.

55. Mr Bungate gave evidence of a conversation, said to have taken place with Mr Egerton when Mr Egerton was said to have requested that six lots of takings taken from the till be set aside for him as spending money. The amount totalled $4,000. He gave evidence of another conversation which took place following the seizure by the police of tickets and prizes for an art union, for which no licence had been obtained by the company. On this occasion, according to Mr Bungate's evidence, Mr Egerton had told him that he had obtained the name of an "Inspector" in Sydney, who, the conversation implied, could fix matters up on payment of $1500 cash. Mr Bungate used moneys taken from the till to give this sum to Mr Egerton, who, it was said, needed it urgently and did not wish that it be sent to him in the normal manner or by telegraphic transfer.

56. The name Mr Egerton mentioned for the "Inspector" was Ken Bunyan, who had been known to Mr Bungate, who had formerly been an employee of the police force, and had worked with Inspector Bunyan at Pyrmont before Mr Bungate's resignation from the police force.

57. I observed Mr Bungate in the witness box and found him to be an unimpressive witness. He had been dismissed by Mr Egerton and resented it. He was subsequently charged with larceny as a result, he believed, of complaints by Mr Egerton. A no bill was subsequently filed in relation to one of the charges with a directed verdict to acquit in the other two. He regarded Mr Egerton's conduct as wrongful towards him and as having been brought without justification. Although he denied that he held a grudge against Mr Egerton (which evidence I do not accept) he conceded that he did not like the man.

58. In relation to the alleged art union conversation (there was no doubt that the police intervened and seized tickets and prizes, although a licence was subsequently granted with retrospective effect and these items returned) counsel for the company called Mr Bunyan in reply. He denied having seen Mr Bungate since 1969 or 1970. He denied ever hearing of Mr Egerton, let alone meeting him. According to Mr Bunyan, because of the procedures in place in respect of the granting of licences for the conduct of art unions which were controlled by the Department of Services he would, in any event, have been unable to help Mr Egerton gain a licence. Mr Egerton's evidence on this matter, which I accept, was that it was Mr Bungate who suggested contacting Mr Bunyan and that this suggestion had been rejected.

59. I accept Mr Bunyan's evidence, which was not the subject of cross-examination by the Commissioner.

60. As regards the conversation with Mr Egerton concerning the money said to be required for spending money on the Melbourne Cup, I think that it is unlikely, on the balance of probabilities, that it occurred. In evidence were cheques for the payment of the travel expense to Melbourne and expenses, the latter being for $3,500. Further, if such a transaction occurred there were considerable difficulties in identifying the cash payments from which any payment of this nature must have come. It overlapped with the alleged payment for Mr Bunyan, which Mr Bungate's affidavit evidence suggested was a precise amount that was given to Mr Egerton. In the circumstances, the bribe amount clearly had to be an exact amount. In cross-examination Mr Bungate said that the bribe money was not a precise amount, presumably because the notebook would not have supported any other answer. He said also that the Melbourne Cup payment to which he had deposed was not an even amount.

61. Mr Bungate's evidence in cross-examination was largely corroborative of that of the other employees of Mr Egerton. The notebook, which was in evidence, had been maintained, in part, by him, and he had recorded in it the amounts taken from the till. He said that Mr Egerton had, in response to a proposed visit of the State Revenue Inspectors (Mr Bungate's evidence suggested that the visit was from the Australian Taxation Office, although he was not certain and it is clearly more probable that it was the State Tobacco Licensing Inspectors to which reference was made), told him to hide the note book, and that he had done so. When he was dismissed he had, the implication was accidentally, taken the note book with him when removing his belongings, and handed it to investigators of the Income Tax Office during an investigation, which he said he had not instituted, into the affairs of Mr Egerton and his companies.

62. His evidence confirmed, however, that on at least one occasion Mr Egerton had personally delivered cigarettes, which were taken from the boot of Mr Egerton's car. Further, the fact that he had kept the book, and noted in it payments to casual staff etc, makes it highly probable, that the amounts so noted were in fact expended in paying cash salaries to staff.

63. Counsel for the taxpayer sought to rely upon calculations, said to be based on the evidence as to expenditure on cigarettes, as corroborative of Mr Egerton's evidence. Evidence as to the price of cigarettes over the period was scant, although after the case for the Commissioner was reopened, additional evidence of invoice prices was adduced. There was evidence that cigarettes cost between $400 to $550 in 1982, depending on brand, and $450 to $500 in early 1984, these figures being pre tobacco tax figures.

64. It was said that the evidence supported the conclusion that the truck and van collected three times each in a tax year and that Mr Egerton took carloads six times annually. Taking an average cost of an outer of cigarettes over the period of $500, this, it was said, amounted to some $660,000 over the six years. These calculations left out of account the fact that amounts taken from the till, were wildly disparate in the various tax years. It was said that if the lowest figure open on the evidence is taken, the result was not substantially different. The evidence established that five trips annually were taken by the truck or van over the six year period, some in the truck and some in the van and that Mr Egerton did 10 trips annually by car. The lowest range of evidence suggested that the trips (on this basis 15 by each of truck and van) resulted in expenditure of, on average, $25,000 for the truck and $15,000 for the van. Mr Egerton's trips were costed at $2,000 with a total of $645,000.

65. When these estimates were added together with the payments out of the till for casual wages, (in the end it was difficult to do other than accept that part of the taxpayer's case, and indeed, while not conceding it, counsel for the Commissioner did not make any submissions about payments in cash to staff), it was said that a figure much the same as that assessed to the company as understated income was arrived at.

66. To the extent that these figures were to be looked at on their own, as establishing the quantum of outgoing by the company, I would not be of the view that the company had, on the balance of probabilities, satisfied me as to a figure to replace that adopted by the Commissioner in making the assessment. Indeed, it is possible to construct from the evidence any number of possible figures as reflecting the purchases of Queensland cigarettes, depending upon the result sought ultimately to be achieved. The calculations were very properly criticised by counsel for the Commissioner. As I have already suggested, they take no account of the differing figures of each year, and particularly the gaps in time in which no amounts were apparently taken from the till in those years.

67. Nevertheless, as a rough check against the probability that Mr Egerton's evidence in the witness box as to the use of funds to purchase cigarettes was truthful, they provide some corroboration that it is probable that over the period of time amounts in the order of those which Mr Egerton deposed as having been spent on cigarette purchases from Queensland, were in fact so spent. I accept that the amounts shown in the note book as having been spent on cash payments to employees were in fact so spent. One other item in the note book provided further corroboration of the entries concerning employees. Mr Bungate gave evidence of the payment out of the till proceeds for cigars of $627.42. This amount was shown in the note book under the notation "cigars - Nigel". It was clearly included in the amount assessed.

68. One additional matter was raised in Mr Bungate's evidence upon which comment must be made. In his evidence in cross-examination, Mr Bungate deposed that records of amounts taken from the till were recorded in a green ledger book entitled "Lismore and Goonellabah weekly". This book was said to have been kept by Mr Nigel Palmer, the accountant. He had not been called to give evidence. I gave leave, on the adjournment of the case to call Mr Palmer concerning this ledger book. Mr Palmer, when called, denied that he had any knowledge of amounts taken out of the till, and said, in effect, that he had had no part in the keeping of any record of amounts taken from the till.

69. There was a strong disincentive for Mr Palmer to admit his involvement in the moneys taken out of the till. In the first place, he is a professional man, and his standing could be affected by the giving of such evidence. Second, on the first day of the hearing Mr Egerton had been served with initiating process for criminal proceedings, brought by the Director of Public Prosecutions, presumably for conspiracy to defraud. It is obvious that Mr Palmer would have been aware of those proceedings, and the possible implications for him that they carried. Obviously, Mr Palmer was not cross-examined about this matter at any length by counsel for the Commissioner, since he relied on the contradiction between the evidence of Mr Palmer, and that of Mr Egerton in support of a submission that Mr Egerton's evidence should be rejected.

70. This aspect of the matter has given me considerable concern. Mr Palmer was obviously nervous in the witness box, but that, of itself is not an indication that he was not telling the truth. On the whole, however, I think that it is more probable than not, that Mr Palmer was aware that moneys were being taken from the till and being used to purchase cigarettes. It is hard to believe otherwise. Accordingly I prefer, on this aspect to accept the evidence that there was a separate book kept, which did record the true results of the shops, including moneys taken out of the till, that this was the book that was destroyed by Mr Egerton, and that if Mr Palmer did not suggest the keeping of the book, a matter upon which I make no finding, he at least was aware of it.

71. Counsel for the Commissioner submitted that Mr Egerton's evidence should not, despite the corroboration to which I have referred, be accepted.

72. The first matter concerned the figures in the first year of income. Mr Egerton was unable to recall precisely when he had embarked upon the course of skimming cash from the business. He conceded that it was before the first entry in the book, but said that there were only small amounts of money. When asked to indicate a range of time in which the first such activity had commenced, he gave a range of from three to eight months. Mr Lawrence's evidence, if the estimates of time frame elicited in cross-examination are accepted (he could, understandably, not be precise) showed that there had been one shipment in the first year of income from Queensland of between $9,500 and $10,000, $23,000 in December 1980 and $9500 before June 30, 1981. The fourth shipment may have been outside the first year of income. These were not, it was submitted, small amounts of money. This was said to make it reasonable to accept that extrapolation made by the Commissioner for the first year of $225,000, particularly having regard to the evidence of frequency given by the employees of Nelson. It will be recalled, that the first entry in the book was April 1981.

73. In answer to this submission, counsel for the applicants pointed out correctly that Mr Lawrence was not sure of dates, so that it was not clear which of the trips occurred in the 1981 year and which in the 1982 year. Given the lapse of time, this is not surprising. If one accepts the Commissioner's calculations, the amount excluded from the book would amount to $42,500, and not the much larger figure extrapolated of $181,377. By comparison, it is not a large figure, and casts little doubt on the evidence of Mr Egerton. I should say that, while I accept the evidence of the Nelson employees, they too were far from firm as to the starting date of the arrangements with Mr Egerton.

74. I should add that Mr Goldsmith in his evidence, given after the Commissioner's case had reopened, expressed the view that the taking of moneys from the till had commenced in 1981 or 1982. Later he said that it was around the time that the book commenced to be kept, that is to say 21 October, 1981. Although I accept Mr Goldsmith's evidence without hesitation, I think it is clear that with the effluction of time, Mr Goldsmith's recollection as to the commencement date cannot be taken as being accurate, other than within a range of a year.

75. The next matter, to which counsel for the Commissioner referred, was the great fluctuations in the amounts recorded in the books, dropping from $214,714 in the 1982 year to $76,923 in the 1983 year, albeit rising to over $100,000 in the next two complete years of income. The Commissioner virtually conceded that the drop to $54,761 in the 1986 year was explicable by the fact that the Goonellabah store had in that year discontinued the practice of taking moneys out of the till. Mr Egerton, in his oral evidence in chief, explained this discrepancy by reference to business factors. He said that the discrepancy of less money being taken out of the Lismore till, and more from the Goonellabah till in the six months between April 1982 and November 1982 was that he was "specialling" cigarettes in Goonellabah, but not in Lismore. He said that the practice of taking money out of the till at Goonellabah ceased in September 1984, a fact that is to some extent corroborated by the evidence. He said that in periods where there were no amounts taken out of the till between 1981 and 1986, he had elected not to purchase cigarettes in Queensland. This depended upon whether he was promoting cigarettes, or whether his competitors were engaged in active promotion. It is possible, although the evidence does not confirm this, that the activities of the New South Wales revenue authorities may also have played a part. The explanations of Mr Egerton in this regard are not inherently improbable, and I have no reason to disbelieve them, subject to the other matters to which counsel for the Commissioner later adverted. Further, the evidence is, including the evidence adduced by the Commissioner, that the note book was kept by employees of the company, including Mr Bungate and Mr Goldsmith. There is no reason to believe that the entries in that note book do not correctly set out the amounts taken out of the till in the relevant periods. Further, the independent evidence was that orders were intermittent (albeit over time regular).

76. The next matter, referred to by counsel for the Commissioner as "telling" was an admission said to have been made by Mr Egerton during the prosecution of Mr Bungate. There is no dispute as to what Mr Egerton said, the dispute is as to what it meant. Mr Egerton said, somewhat gratuitously in re-examination, in reply to a question as to whether there was any particular reason for sending money that came out of the tills to Grafton:

"I wanted a bit of cash and so I cut my tills

off a little bit early on certain days and some

of my staff, including Mr Bungate was going to

get a two thousand dollar bonus at Christmas

time, which he was quite aware of, so normally I

strip a till and avoid some taxation and pay

them, but Mr Bungate was quite aware of that

fact."

77. Mr Egerton's answer, unexplained, is capable of three interpretations. The first is that he was avoiding tax for employees by paying them in cash. The second, which the Commissioner suggested, was that he was avoiding the company's income tax on undeclared income. The third is that he was concerned to avoid the State tax on cigarettes. The third possibility was that suggested by Mr Egerton under oath. Mr Egerton did not specify in his evidence in the Bungate matter what tax he was referring to. The matter has given me some difficulty, but I think in the context of the company's activities and having regard to Mr Egerton's concern with the State taxation authorities, the reference to the avoidance of tax was a reference to the State tax on cigarettes, and not a reference to income tax. It is difficult to believe that, no longer under cross-examination, Mr Egerton should confess to a scheme to avoid ("evade") income tax.

78. Some emphasis was, as well, placed upon the use of moneys taken from the till to pay bonuses to staff. The notebook recorded no such payments. If moneys, unrecorded, were taken from the till to pay staff bonuses, then it would be clear that such bonuses would be deductible, and would not affect the company's taxable income. It is, therefore, unnecessary to make a finding as to whether this occured. There is, however, a body of evidence which suggests that bonuses were in fact included in group certificates issued to employees, from which it would follow that Mr Palmer would have had to have made entries reflecting the payments, and that such payments would have come from the company's bank account, rather than from the moneys taken from the till.

79. For the Commissioner, it was submitted that Mr Egerton would not submit himself and the company to such a large risk to purchase cigarettes in the volumes suggested to save State taxes, which varied in the period from 10% to 20%. However, I find this not inherently improbable. First, Mr Egerton believed, on reasonable grounds, that others, including his competitors, were doing this. Second, it enabled him, not only to sell cigarettes more cheaply than some competitors, and as cheaply as others, and thereby make an enhanced profit (the evidence showed that not all the saving was passed on to the consumer) but it enabled him also to get customers in the door to whom liquor could be sold.

80. The next matter, to which the Commissioner referred was the destruction by Mr Egerton of the record he had kept of takings, and of the cash sale invoices. I would certainly not like it to be thought that such conduct is countenanced by me. However, given what seems to be a real fear by Mr Egerton of the State revenue authorities (not without foundation, before the High Court passed on the matter of validity) I do not disbelieve Mr Egerton's explanation for this conduct.

81. The final matter, apart from the evidence of Mr Bungate, to which I have already referred and which I do not accept, in relation to credit to which counsel for the Commissioner initially referred, was the fact that Mr Egerton in cross-examination gave answers which suggested that he had shown the cash takings from the till in his tax returns. This was totally contrary to the admissions that had been made in the statement of facts and contentions that had been filed on his behalf and on behalf of the company, and a prima facie inexplicable statement. I have reviewed this evidence and the subsequent retraction of it in response, inter alia, to a question put by me. I believe that the answer was the result of a misunderstanding between the questioner and Mr Egerton. The amounts clearly were not shown in the returns as income and there was no reason at all for Mr Egerton to give false evidence of something that was already admitted on his behalf. In my view this matter does not reflect upon Mr Egerton's credit.

82. More difficult is the failure of Mr Egerton, prior to the revelation that the Grafton store was not operated by the company, to narrate the circumstances of the back to back transfer of cigarettes and alcohol. It is perhaps matched by the failure of anyone, including the Commissioner and legal advisers of both parties, to notice that the figures for the Grafton store were not contained in the tax returns of the company, but were contained in the tax returns of Nominees. I can well accept that Mr Egerton and others regarded all the bottleshops as part of the "Imperial group", from a commercial, although not financial reporting, point of view. However, the calculations which Mr Egerton said he was required to make to even up the situation between the Grafton store on the one hand and the Lismore stores on the other, would, one would think, have been present to Mr Egerton's memory at the time he gave his evidence. There is the uncomfortable possibility that Mr Egerton was perfectly aware of the problem, but observing that it had been overlooked by the Commissioner, chose not to mention it.

83. This is a matter which has given me great concern. It was not put to Mr Egerton that he had deliberately chosen to ignore the Grafton problem, and in those circumstances I do not think that I should draw the inference that he did do so. In the end, I think that the failure to avert to the Grafton situation was either an oversight, or the result of the commercial thinking that saw all the bottleshops as one group, as they were undoubtedly operated. I do not therefore think that this matter reflects upon Mr Egerton's overall credit.

84. Given the state of the evidence, I am satisfied that Mr Egerton is to be believed when he says that, with the minor amount which he has conceded, made up of uneven amounts, in change etc. the whole of the amount taken out of the till, other than such part as went to purchase cigarettes for the Grafton store, was utilised for the purpose of the business of the company in either buying trading stock or paying cash wages. It follows that the company and Mr Egerton must succeed in their appeals to this extent.

85. The moneys used in the purchase of cigarettes delivered to Grafton presents a more difficult problem. There is little doubt that cigarettes were delivered to Grafton and that alcohol was sent without stock transfer charge between Grafton and the Lismore stores. So much is corroborated by the evidence of Mr Goldsmith. The more difficult question is whether, as counsel for the applicants submitted, on the balance of probabilities all of the cigarettes were replaced by an equivalent amount of alcohol sent to the stores at Lismore. If that question be answered in the negative, the remaining issue is whether, on the balance of probabilities, the applicants have shown the extent to which the assessments are excessive.

86. The applicants, based on the evidence, produced a number of mathematical calculations in an endeavour to show that it was more probable than not that the whole of the cigarettes sent to Grafton were exchanged for alcohol. The first of these calculations showed the profit ratios of sales of liquor and cigarettes at the various outlets, excluding altogether the cash taken from the till. If the whole of the cigarettes at Grafton were exchanged for alcohol it would logically be expected that the profit margins for alcohol, for which the Grafton shop had been invoiced, but which would not all be reflected in sales, would be substantially less than that prevailing at the Lismore outlets. Conversely, it would be expected that the profit margin on cigarettes (substantial quantities of which were provided without cost to Nominees) would be substantially higher in Grafton than that prevailing at the Lismore outlets. The calculations in summary form showed the following:

1980-1 1981-82 1982-3 1983-4 1984-5 1985-6

Cigarettes 69.66 40.44 39.312 74.02 50.50 34.02

Alcohol 16.80 30.25 30.66 21.70 35.31 37.32

Imperial Bottleshops Pty Ltd - Other Outlets

Cigarettes 222.35 322.16 106.45 168.07 56.55 53.94

Alcohol 10.13 12.33 9.87 31.63 29.46 27.46

87. The table certainly reveals that there is something very strange about the profit ratios for cigarettes at the company's outlets, for the profit ratios are wildly distorted. What it does not show is that the profit ratios for alcohol of Grafton are significantly down on the results obtained in the other outlets. Indeed, with the exception of the 1983-4 year, profit ratios of alcohol at the Grafton outlet were higher than those prevailing in the company's outlets.

88. There are, of course, a number of criticisms that may be made of the calculation. First, the syphoning of of cash at the Lismore outlets may have come more from alcohol sales than from cigarette sales. This would have the consequence of reducing the sales prices of the alcohol at the company's outlets and thus offsetting the advantage of the absence of cost. Second, the summary disguises the fact that no cash was skimmed off at the Coffs Harbour location. Third, the first and last two years were only partly affected by the cash transactions, as money was taken out of the till only part of the time. Nevertheless, while the results are telling as to the effect of moneys taken from the till being used to purchase cigarettes at the company's outlets, they provide no corrobation of the exchange of cigarettes for alcohol.

89. The next table showed the gross profit margins of cigarette sales of the company and of Nominees, divided between outlets. The table was as follows:

GROSS PROFIT RATIOS

GRAFTON Total Gross Profit Mark-up (%)

Purchases

1981-2 222,471.13 89,976.09 40.44

1982-3 219,397.53 86,253.32 39.31

1983-4 201,260.71 148,968.37 74.02

1984-5 159,499.99 80,543.82 50.50

1985-6 146,734.82 49,919.98 34.02

COFFS HARBOUR Total Gross Profit Mark-up (%)

Purchases

1982-3 64,191.23 41,891.38 65.26

1983-4 68,031.29 94,178.42 138.43

1984-5 83,664.39 45,359.39 54.22

1985-6 83,359.77 49,197.39 59.02

LISMORE - Total Gross Profit Mark-up (%)

GOONELLABAH Purchases

1980-1 61,890.50 137,614.67 222.35

1981-2 51,092.95 164,602.18 322.16

1982-3 109,408.15 142,912.74 130.62

1983-4 84,340.69 161,910.09 191.97

1984-5 118,328.01 46,209.08 39.05

1985-6 114,725.37 57,644.04 50.25

90. It will be recalled that neither in Grafton, nor in Coffs Harbour were moneys taken out of the till. According to Mr Egerton's evidence, both Grafton and Coffs Harbour outlets received cigarettes. Accordingly, it could be expected, at least if proportionial numbers of cigarettes were distributed to each of Grafton and Coffs Harbour, that the Grafton outlet would show a similar profit ratio, to that prevailing at Coffs Harbour. A second assumption that would be necessary to make would be that selling prices at the two outlets were similar.

91. In fact, while the table shows the figures at Lismore to be greatly distorted in the years up to and including 1983-4, the results in the next two years, show much less distortion, and indeed the profit margin at Lismore for cigarettes was in the 1984-5 year less than that prevailing at both Grafton and Coffs Harbour.

92. A number of other tables were prepared, which assumed that profit mark-up on alcohol was normally 60%. However, there was no evidence at all of this and as such the tables themselves were of no value. After argument had been completed, counsel for the applicants submitted further calculations said to be based upon the evidence. There are a number of difficulties with the calculations. The first is that it is not known whether the money taken from the till came from alcohol, tobacco or miscellaneous sales. The evidence suggests the latter category was often employed. Second, it is not known in what proportions cigarettes were allocated among the various outlets. While it would presumably have been sensible to allocate cigarettes among stores in proportion to sales (an assumption made by more than one of the calculations), the evidence is silent on the matter. The calculations assume that the selling prices of products sold through the company's stores was comparable to those sold through the Grafton store. Again, there is no evidence that warrants that assumption. With respect to those who produced the tables I derive no assistance from them. They are dependent upon the making of so many hypotheses that the outcome is merely speculative.

93. It was submitted by the applicants that if I were not satisfied that all the cigarettes which found their way to the Grafton shop were exchanged for cigarettes I could, on the evidence, arrive at some intermediate sum. No attempt was made by the applicants, however, to suggest what that sum should be, or, indeed, how I should go about calculating it. While it is for the applicants to show on the balance of probabilities what the true taxable income of the company was, no doubt there are cases where a court might be able, on the evidence, without reaching a view on the quantification of the taxable income as a matter of mathematical precision, to determine that the taxable income was not more than a particular figure. In my view, the present case is not one of them. Ultimately, it is a result of Mr Egerton's destruction of records that this result is arrived at.

94. All that can, in the end, be said is that the quantum of cigarettes delivered to Grafton could not exceed the gross sales of cigarettes from the Grafton outlet, less the cost of those sales. Such a calculation assumes that all cigarettes purchased in the normal way New South Wales tax paid were disposed of at no profit. The evidence suggests that this was not the case, although one brand of cigarettes, "Martins" was apparently sold at cost in 1985. Generally, however, the profit margin on cigarettes seems to have ranged between .21 and 9.54%. The evidence does not enable one to determine an average relevant to the cigarettes sold, so that to assume any particular profit margin on the cigarettes sold at Grafton would be to indulge in guesswork. That is not the role of the court.

95. It follows, that the taxable income of the applicant company should be calculated on the basis that it was no greater than the amount of the net profit of the trading of Grafton in cigarettes in the relevant years (plus the incidental amount of $500 admitted by Mr Egerton to have been taken by him). While this probably overstates the quantity of cigarettes that were supplied to Nominees for sale in Grafton, this figure is the only one which is rooted in fact upon which I am able to fasten.

96. Accordingly the assessments should be remitted to the Commissioner to enable the assessments to be amended to give effect to these reasons. The sum of $500 admitted, should be apportioned over the years in question evenly, given the insignificance of the amount. To the extent that the result is greater than the amount of taxable income calculated after taking into account the payments to employees, and the reduction of the extrapolations for the 1985 and 1986 years, the latter figure should be adopted.

97. The assessment of Mr Egerton should also be remitted to the Commissioner for amendment similarly. Additional tax will pro rata abate.

98. The applicants have been only partially successful. Given that the matter of the ownership of the Grafton shop was raised very late in the proceedings by the Commissioner and did not form any part of the Commissioner's case until it emerged on what was scheduled to be the last day of the hearing, I am of the view that the Commissioner should pay the respondent's costs of the last day of hearing, notwithstanding the Commissioner's success on the issue. Otherwise, I am of the view that the applicants should pay two thirds of the Commissioner's costs, excluding the last day of hearing.