Trautwein v Federal Commissioner of Taxation

Federal Court of Australia|1988-06-03|Before: Lockhart J, Beaumont J, Wilcox J, Evatt JJ, Walsh J, Gummow JJ

The application of sec.39 is not, in my opinion, excluded as soon as it is shown that an element is the assessment is a guess and that it is therefore very probably wrong. It is prima facie right -- and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say 'as a general rule' because, conceivably, there might be a case where it

appeared that the assessment had been made upon no intelligible basis even as an

As I have said, it is not suggested in the present case that the relevant amended assessments have been made upon no intelligible basis. The submission put on behalf of the appellant goes no further than to assert that, in a situation where there is an absence of the necessary records, Mr Kidd wrongly attributed particular income to Mr Dalco, either generally or for particular taxation years. Sheppard and Gummow JJ regard this assertion as being made out, in respect of all four taxation years. I need not elaborate particular objections which might be made to their Honours' conclusions; such as the assumption, in respect of all years, that Mr Dalco scrupulously observed corporate interests and the ignoring, in

respect of 1976, of annexure A to Mr Kidd's report showing

cash paid by 30 June as $264,840. The fundamental vice in their Honours' reasoning, with respect, is that it casts upon the Commissioner the onus of proving the correctness of his assessments. In respect of each of the relevant years their Honours introduce their critical conclusions with phrases such as "there is no real basis for a judgment that", "the material available to Mr Kidd did not provide a basis", etc. This is language appropriate to the rejection of an unsatisfactory case sought to be made by a party bearing the onus of proof. The approach overlooks the instruction in George that it is "no part of the duty of the commissioner to establish affirmatively what judgment he formed, much less the grounds of it, and even less still the truth of the facts affording

The present case is not one, like that envisaged in McAndrew, of a demonstrated failure of the statutory conditions precedent to the imposition of liability. There is here no question about the entitlement of the Commissioner to issue the relevant amended assessments. The question is merely whether the amounts of taxable income shown in those assessments are excessive. It is not enough for the appellant to raise doubts as to the correctness of the figures adopted by the Commissioner, or even to demonstrate that Mr Kidd's reasoning is faulty. In respect of any particular year he must show that the adopted taxable income exceeds his actual

with that discussed by Sheppard J in The Queen v Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR

That case differed from the present case in that it was a proceeding for prerogative relief (mandamus and prohibition) in which the prosecutor challenged the legal validity, as distinct from the correctness, of the relevant assessments. To use the words of Mason and Wilson JJ in Bloemen at p.371i it was said that "no assessment has been made at all", so that s.177 of the Act did not operate to make conclusive the notices of assessment issued by the Deputy Commissioner. In the present case, there is, of course, no suggestion that any of the subject amended assessments is invalid in point of law. The issue is whether any of those amended assessments is excessive, the appellant conceding that each of them is an "assessment" within the meaning of s.177 of the Act. But the comments made by Sheppard J at p.269 are nonetheless pertinent:

position of having to do the best he can in the circumstances."

In fairness to the respondent, and to his officers, I should say that, in making the above comments, I do not intend

to indicate that any of the assumptions which were made in

connection with the subject assessments was unjustified, or that any of the assessments was for any other reason erroneous. I have no concluded opinion on either of those matters. They are matters upon which, on the limited material in evidence, it is impossible to reach any conclusion, one way or the other. I readily acknowledge that this material does not prove that the appellant received the taxable incomes attributed to him by the Commissioner. But neither, in my opinion, does it demonstrate to the contrary. It must be remembered that the relevant taxation officers had access to more documents than are before the Court. The point I make is that any conclusion by this Court as to the accuracy of the Commissioner's assumptions and reasoning is irrelevant to the true issue in the case: in relation to each of the relevant years, did the taxable income for which the appellant was

It appears that, in preparing for the trial, those advising the appellant appreciated that this was the issue. The appellant's primary affidavit went to pains to identify, in connection with each of the four years, the source or sources of the items of income declared by him and to assert that, in each of such years, he had no other income whatever. This was the appellant's case in the Supreme Court. I£ that case had been accepted in respect of any particular year, he would, of course, have been entitled to succeed in relation to that year. The amount declared in each year being much less than the taxable income assessed by the Commissioner, he would

have established that the assessment was excessive.

Be eee ene mew Cen epee ermemnyneenaven: ene

. _ 7 ae 4, .

The problem for the appellant is that Yeldham J did not accept that case, in relation to any of the four years. The appellant was cross-examined at some length. Although his

Honour expressed himself in courteous terms, it is clear from his reasons for judgment that, on key matters, Yeldham J simply did not believe the appellant. In the course of those reasons his Honour said:

"... it is abundantly clear that his explanations for many of the transactions, and for the amounts returned in the various years as assessable income are entirely unsatisfactory. According to his returns, after deducting cash outgoing, his income in the year 1976 was $68 per week, in 1977 it was $77 per week (together with an additional amount of $840 received on retirement), in 1978 it was $84 per week and in 1980 it was $150 per week. During this time he lived in a house in Vaucluse purchased in 1973 for $66,000 and subject to a mortgage to the Royal Far West Children's Home for $65,000, this being discharged in the 1978 year. At all material times he was supporting three children who were at private schools and his former wife, and also apparently, at least from time to time, another lady with whom he resided. His claim that the mortgage was repaid by a loan from a family trust is not, in my view, borne out by the documents in evidence."

The finding in that passage as to the appellant's financial commitments has not been challenged. It is plainly inconsistent with the proposition that the only income derived by him during the relevant period was the meagre amount disclosed by him in his taxation returns; unless the assumption be made that, during that period, he was living on capital. As to that matter, the suggestion was made that Mr

Dalco's living expenses were subsidised by loans from one or

more of the various companies or trusts under his control, so that his indebtedness increased over this period. Not only is there no documentary evidence to support that suggestion; it seems to be denied by his own statements of assets and liabilities. Moreover the probabilities must be considered. In March 1976 the appellant attained the age of 40 years. During the relevant taxation years he was probably at or near the peak of his earning capacity. According to his own evidence, during that period he worked long hours. He was aware that, as a direct result of his personal exertions, each year fees and commissions amounting to hundreds of thousands of dollars were being earned. He was a man who, according to his affidavit, had long held the philosophy that, in conducting his business affairs, he should attempt to keep his capital intact. Under all of these circumstances, it beggars belief that Mr Dalco would have been content to receive, as the total reward for his efforts, the paltry salary and director's fees disclosed in his taxation return and to live on capital to meet his living expenses. Of course, it is not impossible -~ indeed not unlikely -- that a person in Mr Dalco's position would have wished to divert some of the income he would otherwise have received to a family company or to a family trust. If such a diversion was proved, one might readily accept that Mr Dalco himself was content to receive only a modest income. But no such evidence was tendered. On the contrary, as I say, the appelliant's case at the trial was

At a later stage in his reasons, Yeldham J made these findings:

other companies with which he was connected are concerned, and the entitlement of 'Sydney' to its share of the net proceeds. I consider that in each of the years of income there was a derivation of income by the taxpayer that was dealt with at his direction with a disregard of corporate rights. Clearly he lived at a rate beyond his disclosed cash income and had control of large sums of money in respect of which there was no proper accounting or adequate explanation, and none has yet been given."

These findings were open to his Honour. The appellant conceded in evidence that, in one respect, he "completely disregarded the capital structure of CCS". That concession was properly made. As mentioned, ex.R was a document prepared by Mr Dalco to press his claim with Mr Maher for further payments. The final figure in this document, being the amount claimed to be due to the Dalco interests, was $187,148. Strictly, of course, as Mr Dalco stated in his evidence, the whole of the additional moneys shown on this statement should have flown through the books of CCS. If that had occurred, in due time Martine, as a one-third owner, would have taken the benefit of one third of the additional profit, less tax. But CCS had been disposed of before the claim was made, so Mr Dalco short-circuited the matter by directly seeking one third of the shortfall. The logic of that

position was that Martine would be entitled to receive the

money. However, when the money was paid, on 20 February 1979, the cheque was drawn in favour of Dalvest. It is true that the ultimate fate of that cheque does not appear. The money seems to have gone back to Mr Maher as part of a complex transaction involving the acquisition by the Dalco interests of a motor boat, a block of land and two home units. But it is noteworthy that no mention of the payment is made in the

income tax return of Martine for the year ended 30 June 1979.

Yeldham J referred to the evidence given by the appellant in connection with the application made to Barclays in 1980 for a loan to Dalvest, commenting that in the application "the taxpayer indicated that his income was $60,000 per annum". His Honour impliedly criticized this as an unsatisfactory element of the appellant's evidence. Before this Court, counsel has protested that this criticism was unfair, that the loan application clearly showed that Dalvest was the applicant and that it was therefore not incorrect for

the applicant to refer to an income of $60,000 per year.

In my view the Barclays' application is a very minor aspect of the case. Although I have no idea whether the combined income of the appellant and of companies associated with him then amounted to $60,000, it must be said that there is a measure of ambiguity in the answers given by the applicant on the loan application form. This ambiguity was occasioned by the fact that the form was designed for an individual applicant whereas it was used in this case by a

corporate applicant. Having regard to that ambiguity, I would

not be prepared to take the appellant's answers as being admissions inconsistent with his evidence in the Supreme

However, it would be quite wrong to treat Yeldham J's dissatisfaction about the evidence upon this matter as being critical to his overall conclusion. I agree that cases may occur in which a trial judge is shown to have rejected the evidence of a particular witness because of his dissatisfaction with one particular aspect of that witness' evidence and that if, in such a case, it can be shown that the judge's dissatisfaction was unjustified, concern may legitimately arise as to the judge's decision,to reject the remainder of the witness' evidence. This is not such a case. The Barclays' loan application was only one of a series of matters considered by his Honour. No separate weight was put on it. On the contrary, his Honour made clear that, in respect of other -- and more critical -- matters, he was unable to accept the evidence of the appellant. This is scarcely surprising. The appellant's evidence bristled with improbabilities and inadequacies. Notwithstanding that the appellant was represented in the Supreme Court by senior counsel well versed in taxation matters, no real attempt was made to discharge the burden of proof which rested upon hin. The material put before the Supreme Court was scanty in the extreme, raising more questions that it answered. It is true that the appellant's affairs during the relevant years were complex and that it would have been necessary for him to put

before the Court evidence relating to his various companies

and trusts in order to negative the receipt by himself personally of income from them. It would also have been necessary for him to establish with some precision the sources of his living expenses. But, whilst this evidence may have taken a little time, it ought to have been possible for the appellant to do these things. I can only assume, from the course taken by the appellant, that it was realized by him and by his advisers that a full and frank disclosure would not in

fact make out his case: cf Jones v Dunkel (1959) 101 CLR 298.

I share the view of Yeldham J that the appellant's assertion that his only income in the relevant years was that declared in his various income tax returns cannot be accepted; at least in the absence of evidence such as I have mentioned. The appellant failed to make out his case in the Supreme Court. His appeals were rightly rejected. The appeals to

I certify this and the forty-six (46) preceding pages to be a true copy of the Reasons for Judgment of

Painton & Nottingham Ltd. v Miller Gate «& Winter [1971] NZLR 164 at 168, 175-178; Esanda

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Judgment (39 paragraphs)

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Cases Cited (21)

Cited By (2)