The AAT has upheld default assessments totalling $8.9m based on cash withdrawals by the taxpayer from 2 companies conducting a “bogus” gold trading business.

The taxpayer held 100% of the share capital in Company 1 and 45% of Company 2 (with the remainder held by her son: Aldo and not, with her other son: Danielle). Company 1 had originally been established by the taxpayer to conduct a jewellery business. However, the business did not prosper and her son took charge of the companies which he operated from the back of the taxpayer’s property. The taxpayer was assessed on her shareholder proportion of money the companies paid, purportedly to suppliers of gold, which the ATO had proved did not exist.

The taxpayer was assessed on the basis that she received the money as ‘ordinary income’ under s6-1 of the ITAA97, or as ‘dividends’ or ‘deemed dividends’ under s44 & s109C of the ITAA36.

There is a suggestion that these companies had been fraudulently claiming ‘input tax credits’ on fake purchases of gold. This would certainly have been of interest to the Commissioner, but for different GST related reasons. Any fraudulently obtained tax credits, however, may have helped fund the payments, now assessed as to the taxpayer. This can be gleaned from the following paragraph in the AAT’s reasons.

7.   Companies 1 and 2 had a purported business of buying and selling gold, with GST paid on its purchases and sales. In fact, the Commissioner’s evidence shows that the purported suppliers of the gold were bogus, and the applicant has not required the Commissioner to produce the witnesses to those facts for cross-examination. If there were actual suppliers of gold to Companies 1 and 2, those persons may or may not have charged GST to Companies 1 and 2, and if no GST was charged and if Companies 1 and 2 had claimed input credits in their tax returns, those claims would have been false. Companies 1 and 2 would have derived hidden profits amounting to many millions of dollars if they had, for a time, successfully claimed GST input credits which were false. Where any such money may have gone does not appear from the evidence.

The taxpayer had (like all taxpayers) the onus to establish that the assessments were excessive and she sought to do on on the single ground that “she did not receive the money in question or any of it”. The following paragraph, from the AAT’s reasons canvasses this.

10.   No attempt has been made by the applicant to prove what happened to the amounts of cash said to have been paid to suppliers, but proved not to have been paid to them. According to the applicant, only her son Aldo would be able to say what happened to the money in question [but she refused the AAT’s invitation to call her son to explain what happened to the money]. She said that she knows only one thing: that she did not receive the money in question or any of it. The question is whether she has discharged her onus of proof of that fact.

Aldo had received equivalent assessments without objecting. Danielle had received other assessments, in respect of companies, of which he was a director, and he had objected to them.

It appeared that the Commissioner did not have any evidence that the taxpayer had banked this money or had any other unexplained assets, as this portion of the AAT’s reasons reveals.

13.   The applicant was cross-examined over about two days before me. The cross-examination did not involve any affirmative suggestion that funds had been applied by her in any particular way, or that she had acquired identifiable assets, or that funds had been banked by her in any bank account which was identified in the evidence. She repeatedly professed puzzlement about the funds apparently earned by Companies 1 and 2, and said that she was unaware of receipt of funds of the order shown by the accounts.

Nonetheless, the AAT found that the taxpayer had not discharged her onus of showing that she did not receive any of the funds paid by the companies, supposedly to the bogus suppliers. It did so on the basis of the taxpayer not calling her son: Aldo; the family being close and working together; and on the basis of what was likely, given a statement, which the AAT attributed to Aldo (in para 16 of the AAT’s reasons). The crux of this can be found in the AAT’s reasons at para 17.

17.   The statement [attributed to Aldo] recognising that the company structures served as a way of allocating the profits among individual family members suggests that profits would be divided among family members, including the applicant herself, and presumably in accordance with the shareholdings. Now, if monies were siphoned off from the companies, or profits were hidden somewhere, it seems likely that the respective family members would benefit from those monies in proportion to their shareholdings, that is, in the case of the applicant, her entitlement would be to 45% of Company 1, and 100% of Company 2.

The Commissioner issued the taxpayer with default assessments of $6.560m and $2.367m for the 2012 and 2013 tax years. Penalties of $2.324m and $972,309 were also applied.

The AAT upheld those assessments.

(BXCD and FCT [2017] AATA 2826, AAT, File No 2016/1597, Rayment DP, 21 December 2017.)

[FJM; LTN 7, 11/1/18; Tax Month January 2018]

Study Questions

  1. Were the payments, in question, to suppliers of gold?
  2. Was there a suggestion of GST fraud leading to hidden profits?
  3. Did the taxpayer admit having received the amounts?
  4. Did the basis of the assessment include the amounts being ordinary income?

 

 

 

[answers:no(bogus);yes;no(that was her defence);yes]

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