1. From the 1970s and throughout the Relevant Years the Applicant owned land and commercial premises in a Sydney suburb (the Premises).
2. Two brothers who will be referred to as the Finance Manager and the Design Manager purchased all the shares in the Applicant in about 1980. The Finance Manager has played a significant role in these proceedings, while his brother has played no role at all.
3. For about five years prior to the purchase of the Applicant by the brothers, companies associated with the brothers and within what may conveniently be described as the "Group" had been the tenants of the Premises. That remained the position after the brothers purchased the Applicant. The Premises were used to conduct a business.
4. In 1989 the Finance Manager and his brother sold their business to an unrelated party. Half of the business was sold for $2.5 million. The second half was sold in 1991, but for less than $200,000.
5. Some time after buying the business from the brothers, the purchaser vacated the Premises. The Applicant, as owner of the Premises, once again leased the premises to a Group company - Tenant One. At around this time, according to the Finance Manager[1], Tenant One borrowed money from the Applicant. The Applicant, in turn, borrowed money from a company which by then had become the "Financier to the Group", Finance Co.
6. It is the interest that the Finance Manager claims the Applicant paid to the Finance Co that is at the heart of the dispute with the Commissioner. As the Finance Manager explained in the affidavit he swore on 15 April 2011[2] (the "Company" is Finance Co):

11. ... The Company acquired funds and transferred some of those funds to companies in the ... Group. I controlled the transfer of funds from the Company. The way the companies in the ... Group operated was as a family business. There were few formal directors meetings, mostly my brother and I discussed issues as they arose in person and by telephone. Minutes were not kept as a general rule. However, on certain occasions minutes would be kept. For example, when an accountant drafted minutes for the purposes of formally tabling and accepting the annual accounts. One of the roles it performed was to provide finance to other companies within the Group. Being a family business, these loans were usually made without entering into written loan agreements. I ensured that interest was usually charged. When I caused interest to be charged to the borrower the rate was usually in excess of bank bill rates. It was paid when the borrower was able to pay interest and to repay principal. My brother and I were directors, and had control of, the Company at all times until it was liquidated. ...

12. To effect the loan to the Applicant, funds were transferred out of the Company and transferred into the Applicant's accounts with financial institutions. Some payments may have been directed to or from third parties. All such transfers made were made by way of loan. I ensured that they were entered into the Company's debtors ledger or equivalent computer book as lending and entered into the Applicant's creditors ledger or equivalent computer book as borrowing. These ledgers no longer exist. These transfers of money were not gifts.

13. Principal and or interest amounts of the loans from the Company to the Applicant were repaid by the Applicant from time to time. Interest was paid and the principal repaid as and when the Applicant could do so. I controlled those payments.

...

1. At least some of the "funds" that Finance Co "acquired" came from an unrelated entity, M Co. M Co was a company that acted as the trustee of a number of discretionary trusts. It appears to have been beneficially owned by HG, an Australian who lived in Hong Kong. The owner of M Co had appointed JB as the Australian resident director of M Co. JB was a solicitor, and from time to time had acted for the Finance Manager or his interests.
2. The Finance Manager's "best recollection", as stated in his affidavit, is that Finance Co borrowed "over two million dollars" from M Co (the Finance Manager has to rely on his recollection because he has been unable to produce any primary records in relation to the borrowings). JB confirmed[3] that he arranged for M Co to lend money to Finance Co. Unfortunately, he "[did] not recall the details of those transactions". He also said that he "[had] no documents to refer to in regard to the establishment" of any such loans, and that any records that may have existed had by now been destroyed in the ordinary course of his practice.
3. Nor are there any primary records to establish the quantum of the borrowings by the Applicant from Finance Co. One of the Applicant's contentions is that "loans were made to the company by Finance Co in the period from 1988 to 30 June 2003"[4], although in cross-examination, the Finance Manager said that the statement should have indicated that the loans were made "from about 1988 ..."[5] He said that the first significant advance took place in about 1988 or 1989, and was for about $2 million, but he also said that "by 1990 it could have been 2.5 or 2.8 or some other - some other number"[6]. He also said there were other cash advances "in probably '92 or '93, but certainly '91 anyway"[7]. He also thought there were no repayments in the early years, so the amount owed to Finance Co "compounded quite a bit"[8]. By 2003, he said that the total amount owed to Finance Co by the Applicant "will be the amount that is recorded in the books of the company and that's in the order of $4.6 million"[9].
4. But back to the loan from M Co to Finance Co. By August 1994 M Co was claiming in the Supreme Court of New South Wales that it had advanced almost $5.6 million to Finance Co under a "Loan Agreement dated 22nd June 1989", that Finance Co had defaulted in its obligations under that Loan Agreement, and that it and its guarantors, the Finance Manager and his brother, owed M Co $6.1 million[10]. Unfortunately, no-one has been able to locate a copy of that Loan Agreement (assuming that it ever existed).
5. On 16 September 1994, and there being no appearance in the Supreme Court by or on behalf of the defendants, Giles J granted leave to M Co to enter judgment against all three defendants - Finance Co, the Finance Manager and the Design Manager. JB was not able to recall whether judgment was actually entered[11].
6. The Finance Manager's recollection is that the dispute in the Supreme Court "settled when a compromise was agreed"[12]. In cross-examination he amplified that by saying that a substantial one-off payment was made, followed by continuing payment of interest up to a certain amount[13].

1. Acknowledging the paucity of the primary records, the Applicant submits[14] that a "large volume of documentary and affidavit evidence" establishes the existence of:
   • (a) the advance of money by Finance Co to the Applicant;
   • (b) the payment of interest by the Applicant to Finance Co;
   • (c) substantial cash payments made through bank accounts by the Applicant to Finance Co, "most likely as payments in respect of the Finance Co Loans"; and
   • (d) the derivation of assessable income by the Applicant, in particular in interest and rent from its subsidiaries, through the use of the Finance Co Loans.
2. The Applicant also submits[15]:

Several documents which could also have been effective evidence in these proceedings no longer exist or are no longer in the possession, custody or control of the applicants or any summonsed party. In other instances, with the passage of time it is no longer clear whether or not particular documents were produced. These facts are both unremarkable given that this case implicates years going back to 1989, 22 years ago. Furthermore, as discussed above, the Group operated as a close family business and many decisions and agreements were made orally.

1. The Finance Manager swore in his affidavit[16] that funds were transferred out of Finance Co and into the Applicant's accounts with financial institutions, but also that "[s]ome payments may have been directed to or from third parties". The Commissioner was made aware of the existence of three bank accounts belonging to the Applicant. The Applicant appeared to accept, in November 2010, that those three bank accounts were the only ones held by the Applicant, at least for the period 1988 to 1993[17]. All statements relating to those three accounts for the entire period 1988 to 2003 were obtained and included in the documents lodged with the Tribunal under s 37 of the Administrative Appeals Tribunal Act 1975.
2. From those statements the Finance Manager was unable to identify any specific amounts representing proceeds of a loan from Finance Co to the Applicant.
3. In cross-examination the Finance Manager gave two possible explanations for that inability: one, that the Applicant may have had additional bank accounts;[18] and two, that "the way the bank records things and shows it on the statement, it doesn't show where it comes from"[19]. Both statements are plausible (in fact, Macquarie Bank's correspondence dated 24 August 2011[20] appears to support the first statement), but they are unhelpful to the Applicant's case.
4. If the Applicant's case does not fall at the first hurdle, then at least it takes a very significant stumble at this point. It is confronted not only by the problem that it cannot identify any deposits to support the positive assertion that the funds (or at least some of them) physically came into its bank account, or, even if it could do so, that any such funds bore the character of borrowings; it is further hampered by the fact that the ledgers, which are said to have recorded those transfers of funds, and apparently as loans, "no longer exist"[21].
5. A further problem confronting the Applicant's case is that some of the records that are still available are unreliable and inconsistent, or incapable of being reconciled with the oral evidence. There are also many inconsistencies in the evidence given on behalf of the Applicant. Below are some examples.

THE TERMS OF THE LOAN AGREEMENT BETWEEN FINANCE CO AND THE APPLICANT

1. On 20 September 2007 the Finance Manager was examined, under oath, by the Commissioner's officers under s 264 of the ITAA 1936. In that examination, when he was asked whether there was a loan agreement in respect of the loan from Finance Co to the Applicant, he said[22]:

I don't recall that there is a formal loan agreement but there may have been.

1. The Applicant's objection letter dated 9 December 2008[23] states:

... in or about 1990/1991 [the Applicant] desired to establish a ... business and also make real estate investments, so it required significant funding for this purpose. It is not an uncommon feature of associated transactions that the nature of the relationship is not defined until the accounts are done. Accordingly, the absence of documents between [the Applicant] and [Finance Co] is a common feature of transactions entered into between associated entities.

1. The clear suggestion is that the "nature of the relationship" between Finance Co and the Applicant was not defined until the companies' accounts were prepared. The letter states that "[t]he terms of the loan were commercial" but does not specify what those terms were.
2. In a letter to the Tax Office dated 31 July 2009, the Finance Manager stated[24]:

The writer believes that there was agreement in writing between [the Applicant and Finance Co] in or about the early 1990's but along with many corporate records of this era that are beyond the retention period requirement, it is assumed that this is not longer (sic) held. ... The loan agreement was on a commercial basis bearing interest at rates which corresponded to and varied generally in accordance with Reserve Bank of Australia "RBA" movements in published interest rates e.g. business overdraft rate. ... The loan was obtained on commercial terms. Conduct of the Parties generally and in particular the payment of interest/capital regularly and interest, being at rates following the movement trend in interest rates published by the RBA, support the fact that the loan was indeed made and conducted on a commercial basis.

1. The Applicant's Statement of Facts, Issues and Contentions (SFIC) states at [13]:

There were no written loan agreements entered into recording the [Finance Co Loans] or the [Applicant's loans]. [The Finance Manager] controlled the payments, repayments and receipts in regard to each loan made. The transactions were recorded in the computer accounting ledgers maintained by the [Applicant] and [Finance Co]. The annual balance of the loans was recorded in the financial accounts of each company.

[Finance Co] charged the [Applicant] and was paid interest on the [Finance Co Loans]. This was paid as and when the [Applicant] had the funds available. The level of interest was set from time to time by [the Finance Manager] by reference to movements in bank bill rates. The payment of this interest was recorded in the books of the [Applicant] and [Finance Co].

1. In his affidavit[25] the Finance Manager said at [11], in reference to loans by Finance Co to the various Group companies:

... these loans were usually made without entering into written loan agreements. I ensured that interest was usually charged. When I caused interest to be charged to the borrower the rate was usually in excess of bank bill rates (emphasis added).

1. So, over a period of time, and as to whether there was a written loan agreement between Finance Co and the Applicant, there "may have been" one; the Finance Manager "believe[d]" there was one; until finally it seems to be accepted that there was not one.
2. As to whether the arrangement was a commercial one, it was first suggested that the relationship between the entities had not been defined at the time when funds were first being advanced; then the Finance Manager said that "[t]he terms of the loan were commercial", but without any specificity; then he said that the interest rate was broadly consistent with Reserve Bank rates; and finally he said that the rate charged in respect of loans within the Group was "usually" in excess of bank bill rates.

1. The annual returns that were filed with the then Australian Securities Commission (ASC) for the years 1993 and 1994 for each of Finance Co and the Applicant indicate that each company's financial accounts were audited for each year. Those annual returns also indicate that the external accountant who is said to have audited the accounts was appointed the company secretary of the Applicant on 20 December 1990, and that he still held that position in September 1994 when the 1994 annual return was filed. The accountant is a chartered accountant and a member of CPA Australia (formerly the Australian Society of Certified Practising Accountants). He acknowledged that a company secretary should not also act as the company's auditor[26].
2. The accountant, as a registered tax agent, was involved in the preparation of tax returns for both the Applicant and Finance Co for all the Relevant Years, and for 2004, 2005 and 2006 as well. He was asked about the preparation of the tax returns for Finance Co[27]:

MR McGOVERN: And putting it at large, that was the position year by year in all the cases where you prepared tax returns, that you didn't engage in any exploration of any of the materials or sources of documents that underpin the figures that were given to you by way of trial balance; is that correct?Yes.

1. He confirmed that the tax returns for the Applicant were also prepared on the basis that the figures provided by the Finance Manager were accepted "at face value"[28].
2. Although the annual returns for 1993 and 1994 for Finance Co and the Applicant[29] indicate that the companies' accounts were audited in those years, I find that they were not. This conclusion is based on the following:
   • the only support for the assertion that the accounts were audited is the claim in the annual returns that this occurred. That is a claim that emanated from the Finance Manager, not the accountant;
   • the accountant had no recollection of auditing the accounts in those years (or any other years, for that matter)[30];
   • the accountant's evidence was that the work that his firm undertook for the companies in the Group was to take the information provided by the Finance Manager and to prepare accounts and tax returns based on that information, without verifying it[31]; and
   • the accountant's answer, in cross-examination, that he must have audited the accounts, based on the statement in the annual returns to that effect, must be dismissed as unreliable.
3. As a result there is no independent verification of the Applicant's financial information, and it is unlikely that there ever was.

1. I have already referred in these reasons to the annual returns filed with the ASC for 1993 and 1994. The 1993 returns for both Finance Co and the Applicant contain a declaration signed by the Finance Manager and dated 3 June 1994. The declaration on each of the 1994 returns was similarly signed by the Finance Manager; the Finance Co declaration is dated 22 September 1994, and the one on the Applicant's annual return is dated 30 September 1994.
2. After the filing of the 1993 annual return for the Applicant, but before the filing of the 1994 return, an additional document was filed with the ASC on behalf of the Applicant. This document[32] is described as a "Notification of information supplementary to a form or document previously lodged" and contains a declaration by the Finance Manager which is dated 9 September 1994. The document is identified as a Form 902, and notifies the ASC that certain information on the 1993 return needs to be corrected, and specifically by the reporting of the fact that as at 30 June 1993, Finance Co held 80 redeemable preference shares in the Applicant.
3. It may be noted that the 1994 annual return for the Applicant, dated some three weeks after the Form 902, is entirely consistent with that form in recording that Finance Co holds 80 redeemable preference shares in the Applicant. The "nominal value" of those shares is reported as $80, the "total amount paid" as $5,600,080 and the "balance of share premium account" as $5,600,000.
4. Despite the content of the Form 902 and the annual return for the Applicant for 1994, the Finance Manager said that the Applicant did not issue redeemable preference shares to Finance Co[33]. He said that the Form 902 "must be" erroneous[34].
5. Mr McGovern SC, representing the Commissioner, took the Finance Manager to the 1994 tax return for the Applicant[35]. That tax return declares shareholders' funds at 30 June 1994 in the amount of $6,669,823. It discloses total liabilities of $22,463 at the same date (down from $5,317,917 at 30 June 1993). Mr McGovern noted, for the Finance Manager's benefit, that the tax return discloses an operating profit for the year of $17,749. He noted that the increase in shareholders' funds from 30 June 1993 to 30 June 1994, amounting to $5,617,829[36], was exactly equal to the sum of the "total amount paid" for the redeemable preference shares, as disclosed to the ASC, plus the operating profit of $17,749 for the 1994 financial year.
6. Mr McGovern drew the Finance Manager's attention to the figure of $6,843,256[37] disclosed in the 1995 tax return as "shareholders' funds", and noted that it was exactly equal to the sum of $6,669,823 from 30 June 1994 plus the operating profit for the 1995 year of $173,432 (a derived figure representing the difference between the total income of $858,789 and the total expenses of $685,357)[38].
7. It can therefore be seen that the information provided to the ASC in the Form 902 is consistent with the 1994 annual return filed with the ASC, and is also consistent with significant entries in the Applicant's tax returns for 1994 and 1995. Nevertheless, the Finance Manager maintained that "an error was made"[39] in the provision of the information in the Form 902 to the ASC. If he is right, then it must follow that the information in the tax returns to which I have just referred, consistent as it is with the Form 902, is also wrong. And if that information is wrong, it is not clear on what basis I should accept, as the Applicant submits I should, that the interest expenses declared in those very same tax returns are accurate.
8. In April 2004 - almost ten years after the lodgement of the Form 902 - a document styled "Notification of corrections", Form 492, was lodged with the Australian Securities & Investments Commission (ASIC). The "details of correction" as set out in the Form 492 are:

THE ISSUE OF SHARES BEING 80 REDP SHARES ADVISED ON 9TH SEPTEMBER 1994 WAS NOT PROCEEDED WITH. ACCORDINGLY THE SHARE HOLDING NOTED IN THE 1994 ANNUAL RETURN WAS INCORRECT AND SHOULD BE DELETED. NO REDEEMABLE PREF. SHARES HAVE BEEN ISSUED. PLEASE UPDATE YOUR RECORDS.

1. As noted above, significant disclosures in the Applicant's 1994 and 1995 tax returns are consistent with the content of the Form 902. If the explanation provided in the Form 492 is accurate, then the 1994 and 1995 tax returns include disclosures that reflect a transaction that was intended but did not take place. That is a remarkable state of affairs, and a most inconvenient one for a taxpayer which, at the end of the day, has very little to support its deduction claims beyond the asserted accuracy of its tax returns.
2. It is also remarkable that information in the public domain, said to be inaccurate, was left uncorrected for the best part of ten years.

NO CLAIMING OF INTEREST EXPENSES IN CERTAIN YEARS

1. Mr McGovern pointed out to the Finance Manager that the Applicant's income tax return for 1990[40] - and indeed, this is also the case for 1991[41] - discloses no deduction claim for interest paid. This is despite the fact that "current liabilities" are shown as $2,952,999[42] at 30 June 1990 (and $4,181,045[43] at 30 June 1991).
2. The Finance Manager's initial response was that he believed that interest was accruing in the early years, but no payment was made until later. He described this later payment as a "balloon payment"[44]. But as the questioning proceeded, it became apparent that the Finance Manager had been describing what he could now recall about the arrangement between M Co and Finance Co, rather than the one between Finance Co and the Applicant[45].
3. As to whether there was in fact a "balloon payment" arrangement between Finance Co and the Applicant, the Finance Manager could not recall[46]. There is therefore no explanation as to why the Applicant claimed no interest expenses in its 1990 and 1991 tax returns (a position which is completely at odds with an arrangement of the kind asserted to the Tax Office in the letter dated 31 July 2009, which involved "... the payment of interest/capital regularly ..."[47]).
4. At this point it is also worth mentioning some of the figures disclosed in the Applicant's tax returns for the years 1999, 2000 and 2001. The "current liabilities" at 30 June in each of those years is shown as $4,693,092. The figure does not change from one year to the next, despite the claimed incurring of an interest expense in 1999 of $431,095, in 2000 of exactly $450,000, and in 2001 of exactly $480,000. It is not clear on the evidence before me that the "current liabilities" figure comprises only loan amounts owing to Finance Co, but it may be assumed that the Applicant asserts that to be the case, given that it seeks to draw a parallel between the quantum of the interest expense of the Applicant, on the one hand, and the quantum of the interest income of Finance Co, on the other[48]. That a "current liabilities" figure is identical for three consecutive balance dates, while interest totalling $930,000 is said to have been paid between the first and last of those dates, has two possible explanations. Either it is a coincidence of gigantic proportions, or there is something wrong with the figures. The latter explanation is more likely.

INCONSISTENCIES BETWEEN THE APPLICANT'S FINANCIAL RECORDS AND THOSE OF FINANCE CO

1. The Finance Manager produced a minute of a meeting dated 8 November 2005[49] recording the forgiveness by Finance Co of the debt of $4,666,762.82 owed to it by the Applicant. Attached to the 2006 tax return for the Applicant is a "trial balance" that includes an entry described as "Forgiveness of debt" for the similar (but not identical) amount of $4,666,454.82[50].
2. Inconsistently, the "trial balance" attached to the 2006 tax return for Finance Co[51] shows that the loan amount of $4,666,762.82 is still recorded as an asset at 30 June 2006 (unchanged from 12 months earlier).
3. Equally intriguing is a "Declaration of solvency", Form 520, provided to ASIC in respect of Finance Co and including a "Statement of assets and liabilities", apparently prepared by the Finance Manager and dated 10 May 2006 - six months after the claimed forgiveness of the Applicant's debt[52]. In the "assets" section of the Statement there are only two entries - "cash at bank", $50,797, and "loans and advances", with the name of the Applicant handwritten, next to the amount of $4,666,763. When I asked the Finance Manager to explain how a loan, supposed to have been forgiven only six months earlier, could be declared in a statement of assets and liabilities made to a liquidator, and in circumstances where the loan amount, as reported, represented 99% of the total assets of the company, all he could say was[53]:

I should have picked up that it was not correct, but it seems I did not.

1. By November 2007, shortly after the first s 264 examination by the Commissioner's officers, the Finance Manager had notified the liquidator that he had "made a mistake" by including the Applicant as a debtor on the Form 520[54].

1. On the second hearing day the Finance Manager produced a printout from the National Personal Insolvency Index that indicated that he and his brother had each entered into an arrangement under Part X of the Bankruptcy Act 1966 in October 1994[55]. He said that the arrangements arose from the guarantees that the brothers had given in relation to Finance Co's borrowings from M Co[56].
2. Three days after that production by the Finance Manager, the Commissioner produced to the Tribunal a bundle of documents that had been filed with the Federal Court in 1994 and 1995 in relation to the Part X arrangement[57]. Included in the bundle are minutes of a creditors' meeting on 26 October 1994. The information provided to the creditors' meeting was that:
   • (a) M Co had advanced $6 million to companies associated with the Finance Manager and his brother and obtained security from those companies. M Co had obtained judgement against the Finance Manager and the Design Manager and the shortfall to M Co on its security was estimated to be in excess of $2 million;
   • (b) the amount of the debt claimed by M Co from the Finance Manager and the Design Manager was $6,113,120, which is the amount claimed in the summons in the M Co debt recovery proceedings[58];
   • (c) the Finance Manager and Design Manager agreed to pay $550,000 to a trustee under Part X of the Bankruptcy Act.
3. Taking those matters into account, it is most unlikely that Finance Co's liability to M Co remained at around $7.4 million at 30 June 1995[59], or at the continuing high levels reported in the tax returns from 1996 to 2003 - $7,942,805 for 1996, reducing to $4,715,429 by 2003. It is also unlikely that Finance Co incurred an interest expense as high as $1.94 million[60] in the 1995 year.
4. M Co was deregistered in 1999, a fact of which the Finance Manager does not seem to have been aware at the time. JB accepted that he would not have allowed M Co to be deregistered if it had been owed a significant amount of money[61].

1. On 13 June 2007 the Commissioner issued a notice to the Applicant for the production of documents under s 264 of the ITAA 1936. Following correspondence in which the Applicant sought an extension of time to respond, the notice was withdrawn and a new notice issued on 30 July 2007.
2. In response to the second notice, the Applicant produced in August 2007 some documents relating to the 2004, 2005 and 2006 income years, and then in September 2007, some accounting records for the 2003 income year, including balance sheet, profit and loss statement and notes to the accounts.
3. Mr Tony Samuel, a chartered accountant, was asked by the Commissioner to provide an expert report dealing with, among other things, the maintenance of books and records by a company in the position of the Applicant. After noting the Corporations Act 2001 requirement[62] that "financial records" be retained for a period of seven years, and the requirement in the ITAA 1936[63] that a taxpayer retain for a period of five years "any documents that are relevant for the purposes of ascertaining the person's income and expenditure", Mr Samuel said in his report[64]:

In summary, I would expect the Applicant to have created or received:

(a) source documents, including a formal loan agreement or less formal memorandum of understanding, bank statements, minutes of directors' meetings, and documentary evidence of drawdowns and repayments;

(b) general ledgers and journal entries reflecting the drawdowns, repayments and interest charges;

(c) workpapers supporting the manner in which interest charges were calculated; and

(d) financial statements, reflecting the transactions identified above.

1. Accepting Mr Samuel's opinion, as I do, then at the very least, the Applicant should have been able to produce, or arrange for the production of, workpapers of the kind described in category (c), for any calculation of interest undertaken after August 2002. That it did not do so suggests either that no such workpapers had been created; or, if they had been, that they could not be located; or, alternatively, that they did not support the Applicant's case.
2. In those circumstances it is impossible to confirm that the interest expense of $264,156 claimed by the Applicant for the 2003 year is correct, and of course, the same conclusion follows for every other income year in question.

CONCLUSION ON THE ACCURACY OF THE INCOME TAX RETURNS

1. I am not at all satisfied that the interest expenses claimed by the Applicant in its tax returns for the Relevant Years are accurate. To accept the Applicant's assertion about the availability of interest deductions and the quantum of them would be to engage in an exercise of speculation. There are simply too many inconsistencies and "errors", many of them with unsatisfactory or non-existent explanations. Any superficial correlation that there may be between the quantum of the Applicant's claimed interest expenses and the quantum of Finance Co's declared interest income[65] is of no assistance in circumstances where the entities are related, since all the figures are ultimately sourced to the Finance Manager.
2. Ultimately, the Applicant's case rests heavily on the assertion that the figures shown in the tax returns are accurate. But nothing worthwhile has been produced to bolster the assertion. Given the magnitude of the numbers, in both absolute and relative terms, the Applicant needs to do more than ask rhetorically "Why would the numbers be wrong?" Under s 14ZZK of the Taxation Administration Act 1953 it must prove that its numbers are right: see George v FCT [1952] HCA 21; (1952) 86 CLR 183 at 201. And pointing to the tax returns, as if they hold some special, almost mystic, force, will not discharge that burden.
3. That finding renders it unnecessary to deal with a number of other matters traversed during the hearing, including whether, and if so for what purpose, the Applicant lent funds to other companies in the Group; and whether, if it did, those companies made repayments and, if so, in what amounts.
4. As for the Finance Manager himself, I must say that I found him in many respects an unsatisfactory witness. Documents of his own creation were dismissed as "erroneous" when they did not support the Applicant's case. That renders him either unacceptably error-prone or, worse, less than truthful with his explanations of relevant events. I find him to have been both. As a result I have had to treat some of his evidence with a good deal of caution.

1. That is not the end of the matter. There is still the question whether the assessments were made out of time. If they were, then they will be excessive for that reason.
2. The Commissioner submits that the assessments were made within the timeframe allowed by s 171A of the ITAA 1936. Section 171A, enacted in 2005, restricts the period within which the Commissioner may make original assessments of a taxpayer's liability. The section is relevant to this case because earlier notices issued by the Commissioner as a consequence of the lodgment of the Applicant's tax returns, and showing no tax payable, are not, on the authority of FCT v Ryan [2000] HCA 4; (2000) 201 CLR 109, notices of "assessment". That means that the assessments made by the Commissioner, which were the subject of the objections in this case, are original assessments, not amended assessments, so that the normal time limits in s 170 of the ITAA 1936 do not apply.
3. The Commissioner then makes two points. First, he notes that the Applicant did not raise s 171A as a ground in its objection. Next, he submits in any event that the ground has no reasonable prospects of success. He submits as follows[66]:

18. Section 171A covers all of the years 1993-2003 inclusive, as it applies to the applicant in the 2003-04 year and each of the years back to 1993, as they are all nil years. The specific time limits under Items 1 and 2 of s 171A that apply depend upon whether the taxpayer did or did not deduct a tax loss in the nil year. If not, Item 1 applies; otherwise Item 2 applies. Item 1 precludes the Commissioner making an original assessment after 31 October 2008 if that date is later than the date determined under para (b) of Column 3. However, under Item 2, that time period is enlarged if the taxpayer did deduct a tax loss in the nil year, to after 6 years from the day the taxpayer lodged its return for the 2004-05 year, if that is later than the day the taxpayer lodged its return for the nil year.

...

22. In the present case, the applicant made no attempt to prove whether it did or did not deduct losses in the nil years, bearing in mind that for 1993 to 1997, ITAA 1936 and specifically s 79E applied, for 1998-2002 s 36-15 ITAA 1997 applied and for the 2003 year only corporate taxpayers as defined in s 960-115 were governed by s 36-17. It also needed to prove but failed to do so, that even if it did deduct a tax loss in any nil year, the day on which it lodged its return for the 2004-05 year, or the day on which it lodged its return for any nil year, in order to show that the assessments were not made within time.

23. Accordingly, even if the applicant had applied successfully to amend its objection (which it did not do), it has not proved the assessments for 1993-2003 are excessive by reason of being time barred. ...

...

26. By s 14ZZK, the applicant may not raise non-satisfaction of s 171A as a ground of objection in the proceedings unless the Tribunal makes an order permitting it to do so. The Tribunal has not been invited to make such an order, nor should it do so now as the issue was not raised by the applicant in its [Statement of Facts Issues and Contentions], the evidence has closed and in any event the ground has no reasonable prospect of success. Even on the applicant's own evidence, in schedule 10 of Mr McGrane's[67] report, the applicant deducted losses in the 1995, 1996, 1998 and 2000 to 2003 income years.

27. Of course, there is no time limit for amendment in the case of fraud or evasion and the Commissioner contends that the applicant has not discharged the burden of proof that there was no fraud or evasion in the relevant income years: cf McAndrew[68] at 269-271, SRBBB v FCT [2001] AATA 529 at [63]; The Optimise Group Pty Ltd v FCT [2010] AATA 782 at [53].

1. The Applicant urges the Tribunal to construe the grounds of objection broadly enough as to accept that s 171A has been raised; or, alternatively, to grant leave to the Applicant to extend the grounds to incorporate s 171A. Ordinarily I would favour taking a liberal approach (provided the application for leave is made early enough), and would take one of the courses suggested by the Applicant. But neither course would assist the Applicant here.
2. The following table sets out the major disclosures in the Applicant's tax returns for the Relevant Years (and also, because they are relevant to the transitional provisions in s 171A, 2004 and 2005):

Loss carried forward must be at least ...[69]

1. The figure shown in Column 6 is the minimum amount of loss carried forward in any particular year. The actual amount of loss carried forward will be greater than the figure shown if there were losses carried forward from 1992 or earlier years.
2. An examination of the figures in the table confirms that, since the taxable income of $240,342 in 1998 was entirely extinguished by carry-forward losses, there must have been at least $15,604 ($240,342[84] - $224,738[85]) of losses already accrued by the end of the 1992 year. Indeed, the figure is much greater than that. The Applicant's tax return for 2004 declares that tax losses that were still available, at 30 June 2004, in relation to "1998/99 and earlier years" amounted to $636,775. That means that the losses carried forward from 1992 must be $377,231 ($636,775[86] - $275,148[87] + $15,604[88]).
3. On that basis, the true carry-forward loss figures are as follows:

1. Those figures agree with relevant figures shown in the Applicant's tax returns for 2004 and 2005[89]. Significantly, they establish that:
   • tax losses were deducted in 1994, 1995, 1997 and 1998 (which are all within the Relevant Years) and also in 2005;
   • the tax loss incurred prior to the 1993 year was recouped by the 1998 year;
   • the tax loss of $361,627 carried forward from the 1998 year comprised $83,680 from the 1996 year plus an unrecouped amount of $277,947 from the 1993 year; and that, therefore,
   • the tax losses incurred in 1993, 1996 and each of the years from 1999 to 2003 inclusive had not been fully recouped by 2005.
2. Items 2 and 4 in the table in s 171A(1) of the ITAA 1936 read as follows:

The taxpayer's return of income for a nil year disclosed, or the Commissioner has given the taxpayer a notice for a nil year that stated, either of the following:

(a) the taxpayer had an amount of taxable income, and that no tax was payable;

(b) the taxpayer had no taxable income because the taxpayer's deductions equalled the taxpayer's assessable income;

and the taxpayer did deduct a tax loss in the nil year

The Commissioner cannot make an original assessment for the taxpayer for the nil year after the period of 6 years beginning on the later of the following:

(a) the day on which the taxpayer lodged the taxpayer's return of income for the 200405 year of income or, if the taxpayer is a member of a consolidated group at the end of that year of income, the day on which head company's return of income for that year of income is lodged;

(b) the day on which the taxpayer lodged the taxpayer's return of income for the nil year.

(a) the taxpayer had a tax loss in a nil year, some or all of which has been carried forward to the 200405 year of income; and

(b) the taxpayer or, if the taxpayer is a member of a consolidated group at the end of the 200405 year of income, the head company notifies the Commissioner, in the approved form, that the taxpayer or the head company had a tax loss in the nil year

The Commissioner cannot make an original assessment for the taxpayer for the nil year after the period of 6 years beginning on the later of the following:

(a) the day on which the Commissioner received the notification;

(b) the day on which the taxpayer lodged the taxpayer's return of income for the nil year.

1. It is clear that item 2 applies in relation to the 1994, 1995, 1997 and 1998 years, and that item 4 applies in relation to the 1993 and 1996 years and each of the years from 1999 to 2003. Since "the day on which the Commissioner received the notification" in the context of item 4 is the day on which the Applicant's 2005 tax return was lodged, it follows that for both item 2 and item 4 the Commissioner had six years after that date to make original assessments in respect of each of the Relevant Years.
2. The 2005 return was lodged most likely in June or July 2006 (the Finance Manager having signed the accountant's file copy of the return, presumably before lodgment, on 28 June 2006[90]). That means that the Commissioner's assessments for the Relevant Years, notice of which issued to the Applicant on 3, 4 and 5 November 2008[91], were well within time.
3. The Applicant cannot succeed on this point.

1. Administrative penalty was assessed by the Commissioner at 90% of the shortfall amount for each of the Relevant Years. This was on the basis that the Applicant had a shortfall amount resulting from "intentional disregard" of a taxation law and that circumstances existed that supported a 20% uplift to that figure. (I use the current expressions "administrative penalty" and "shortfall amount" in relation to each of the Relevant Years, although in the earlier years - 1993 to 2000 inclusive - the expressions used in the law were "additional tax" and "tax shortfall" respectively.)
2. The statutory basis for the penalty is:
   • in respect of the 1993 to 2000 years inclusive - s 226J of the ITAA 1936; and
   • in respect of the 2001 to 2003 years inclusive - s 284-75 and item 1 in the table in s 284-90(1) in Schedule 1 to the Taxation Administration Act 1953,

both of which impose penalty at 75% of the shortfall amount. The 20% uplift, resulting in 90% penalty, is founded, respectively, on s 226X of the ITAA 1936 and s 284-220 in Schedule 1 to the Taxation Administration Act 1953, on the basis that the Applicant had been liable to a similar penalty in respect of a previous income year (As mentioned above, the Commissioner conceded at objection that he could not sustain that position for the 1993 year and so removed the 20% uplift for that year).

1. The central question is whether the shortfall resulted from the Applicant's "intentional disregard" of the law. In Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345, Collier J said at [43]:

As made clear by the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 which introduced s 226J, s 226J requires knowledge by the taxpayer that, for example, it has claimed a deduction knowing that it is not allowable. Accordingly, "intentional disregard" of the ITAA 1936 or regulations requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations. The legislation treats "intentional disregard" differently from, and more seriously than, negligence to comply with the Act (cf s 226G) or recklessness with regard to the correct operation of the Act (cf s 226H).

1. The Finance Manager is quite clearly the controlling mind of the Applicant, and it is his behaviour that will determine the level of penalty to which the Applicant is liable.
2. I have no doubt that the Finance Manager has "an understanding ... of the effect of the relevant legislation or regulations" and "an appreciation ... of how that legislation or regulation applies to the circumstances of the taxpayer". With his involvement in business over very many years I could hardly conclude otherwise.
3. But I am comfortably satisfied that he did not engage in "deliberate conduct ... so as to flout the ITAA 1936". A major contributor to my reaching that position is that Finance Co declared interest income throughout the Relevant Years. Those interest income disclosures resulted just as much from the Finance Manager's mistaken belief in the existence of a loan between Finance Co and the Applicant, as did the Applicant's deduction claims for interest expenses. It is inconsistent with a finding of "intentional disregard" of the taxation law that the purported recipient of impugned interest payments (controlled by the same individual) should declare assessable income arising from those same arrangements.
4. Nevertheless, I consider that the Finance Manager exhibited an extreme level of carelessness in relation to his attempts, on behalf of the Applicant, to comply with the taxation law. Even accepting that he thought that he had done enough to put a loan in place between two companies that he controlled, I remain mystified as to how he arrived at the amounts of interest he thought was paid by one to the other. The essential reference points - the amount borrowed, and the applicable interest rate - are nowhere to be found. And they should be. That they are not, invites the inference that the amounts declared in tax returns were based on the Finance Manager's whim or convenience rather than hard science or prudent businesslike processes. The level of culpability is that of recklessness[92], or "gross carelessness": BRK (Bris) Pty Ltd v FCT [2001] FCA 164 at [77].
5. However, this is not a case where the 20% uplift is appropriate.
6. The previous legislation (s 226X(b)(iii) of the ITAA 1936) provided that a taxpayer was liable to an additional 20% if:

the taxpayer was liable to pay additional tax under any of [s 226G, 226H or 226J] in respect of an earlier year of income.

1. Similarly, the current legislation (s 284-220(1)(c) in Schedule 1 to the Taxation Administration Act 1953) provides that the base penalty amount is increased by 20% if:

the base penalty amount was worked out using item 1, 2 or 3 of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items for a previous accounting period.

1. The evident purpose of the uplift is to provide an additional deterrent in respect of a taxpayer who has previously become liable to a penalty of this kind. However, in circumstances such as these, where one broad factual matrix applies to a number of tax years, and where amended assessments for those multiple years were made at or around the same time, a finding against the taxpayer in relation to the first income year should not count against the taxpayer in relation to subsequent income years when the taxpayer has had no opportunity to modify its behaviour in response to the finding.
2. Once the finding is made under the old law in relation to the 1993 year, s 226X(b)(iii) applies in relation to each of the years 1994 to 2000 inclusive because 1993 is an "earlier year of income". Once the finding is made under the current law in relation to the 2001 year, s 284-220(1)(c) applies to each of the years 2002 and 2003 because 2001 is a "previous accounting period". In addition to that, and by operation of the transitional provisions in s 3 of Schedule 1 to the A New Tax System (Tax Administration) Act (No. 2) 2000 (which introduced the current administrative penalty provisions), the uplift applies to the 2001 year. This is because the reference in s 284-220(1)(c) to items 1, 2 or 3 in the table in s 284-90(1) is taken to be a reference to s 226J, 226H or 226G of the ITAA 1936. Therefore the provisions, which are self-executing, result in penalty levels of 50% for 1993, and 60% for each of the remaining years.
3. However, as already indicated, I do not consider that to be an appropriate outcome in the circumstances of this case. I will exercise the discretion in s 227(3) of the ITAA 1936 (for the years 1994 to 2000 inclusive) and s 298-20 in Schedule 1 to the Taxation Administration Act 1953 (for the years 2001 to 2003 inclusive) to remit the penalty, in part, so that the penalty for each of those years is 50% of the shortfall.

1. The objection decision relating to the 1993 income year is varied, so as to reduce the penalty to 50% of the tax shortfall.
2. The objection decisions relating to the remaining years are set aside, and substituted in each case with a decision that the objection is allowed in part, so as to reduce the penalty to 50% of the tax shortfall, or 50% of the shortfall amount, as the case may be.

1. I certify that the preceding 96 (ninety-six) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost.

........................[sgd]................................................

[1] the Applicant's Statement of Facts, Issues and Contentions says from "1991 onwards"

[4] Applicant's Statement of Facts, Issues and Contentions, p. 6

[14] Applicant's Opening Submissions [44]

[15] Applicant's Opening Submissions [46]

[17] Applicant's Statement of Facts, Issues and Contentions, p. 2

[47] T67-750/751, and referred to in [27] of these reasons

[48] e.g. Applicant's Opening Submissions [27]

[54] Exhibit R9, covering letter from liquidator to ATO

[59] The figure shown in the Finance Co tax return for 1995 is $7,457,941; the applicant's expert, David McGrane, was instructed that the liabilities comprised mainly a liability to M Co

[60] The figure declared is exactly $1,940,000

[62] Corporations Act 2001, s 286

[65] Applicant's Opening Submissions [27]

[66] Commissioner's Closing Submissions

[67] Mr McGrane is an expert accountant called by the applicant

[68] McAndrew v FCT [1956] HCA 62; (1953) 98 CLR 263