The Federal Court has confirmed that the onus is on the taxpayer to prove that there is no fraud or evasion.

The taxpayer challenged an AAT decision (Nguyen and FCT [2016] AATA 1041) that the taxpayer had failed to discharge her burden under s 14ZZK(b)(i) of the TAA of showing that amended assessments for the 2008, 2010, 2011 and 2012 income years were excessive.

The AAT had rejected the taxpayer’s claims that relevant amounts, the ATO had included in her assessable income, were loans from a friend, casino winnings and gifts from family members. In issuing the amended assessments, the ATO alleged that there had been fraud and evasion. The administrative penalties were calculated on the basis there had been an intentional disregard of the law (75% of the shortfall).

The AAT had relied on Binetter v FCT [2016] FCAFC 163, where the Full Federal Court held that the onus is on the taxpayer to show that there has been no fraud or evasion. In dismissing the taxpayer’s appeal in this case, the Federal Court said that the AAT had been correct to apply Binetter and there had not been any error in the AAT’s application of the relevant legislative provisions.

The Federal Court also rejected an argument that, by applying Binetter, the AAT had invalidly exercised the judicial power of the Commonwealth.

(Nguyen v CofT  [2018] FCA 1420, Fed Court, Kenny J, 18 September 2018).

[LTN 185, 25/9/18; Tax Month – September 2018]

Catchwords

TAXATIONappeal under s 44 ofAdministrative Appeals Tribunal Act 1975(Cth) (AAT Act) and application under s 39B of Judiciary Act 1903(Cth) – where amended income tax assessments issued to applicant under item 5 of table in s 170(1) Income Tax Assessment Act 1936(Cth) – whether Tribunal required to form an opinion as to fraud or evasion – whether by applying Binetter v Commissioner of Taxation [2016] FCAFC 163, the Tribunal was exercising judicial power of the Commonwealth – whether Tribunal erred when concluding applicant failed to discharge her onus of proof –– whether Tribunal erred by failing to re-exercise Commissioner’s discretion to remit penalties – no question of law raised as to weighing up evidence and making credit assessments – applications dismissed.

‘Fraud or evasion’ and penalty – effectively ‘unchallengable’

Centrally, the taxpayer was complaining that the AAT had applied the Binetter decision – to make unchallengeable, the Commissioner’s ‘fraud or evasion’ opinion (and, thus, his power to assess out of time), and likewise, his decision to impose a 75% shortfall penalty (which depended on ‘intentional disregard of a taxation law’).

The Federal Court recited the AAT’s findings, on these two issues, as follows.

  1. With respect to the issue of fraud or evasion, the Tribunal relied on the decision of the Full Court of this Court in Binetterv Commissioner of Taxation[2016] FCAFC 163, on the basis of which the Tribunal concluded:

[34] Provided the Commissioner has formed the requisite opinion, in an income case, the effect of the Binneter decision, and those on which it is based, may well be to make a fraud or evasion finding unchallengeable independently of the challenge to the assessability of the relevant amount. If that is so that is not a matter that the Tribunal can alter. Thus the Applicant’s contention at paragraph [29(m)] above, in the present circumstances, and notwithstanding the possibility noted at paragraph [27] above, cannot be accepted.

[35] Where the character of an amount remains unestablished, the taxpayer has not proven the amount is not assessable, [and] it is difficult, if not impossible to:

(a) form any view as to the level of shortcoming, if there be one;

(b) form a view as to whether there has been an innocent mistake or a blameworthy act; and

(c) say that the taxpayer has demonstrated that there was not fraud or evasion.

  1. With respect to penalty, the Tribunal held (at [38]) that “[t]he considerations concerning the approach to challenging the fraud or evasion opinionapply to the penalty imposition”. The Tribunal stated that:

[38] … The failure to demonstrate that the amounts were not assessable as income means the level of seriousness of any shortcoming has not been established and whether there was reasonable care or otherwise, or more serious shortcomings have not been established or disproven as the case may be. Similarly, whether the safe harbor rules apply has not been established.

[39] Again, in an income case this may make the penalty unchallengeable independently of the substantive assessment challenge. Again, if that is so, it is not something the Tribunal can alter.

  1. Accordingly, the Tribunal affirmed the decision under review.

A ‘road map’ to the issues raised by the Taxpayer, and Court’s deliberations

Issue 1: whether the Tribunal was required to re-form or adopt the opinion formed by the Commissioner as to fraud and evasion, including whether the Tribunal erred by failing to determine if it was required to adopt or re-form the Commissioner’s opinion

[80] – [85] Submissions

[113] – [132] Consideration by the Court

Issue 2: whether by applying the decision in Binetter the Tribunal was exercising the judicial power of the Commonwealth

[86] – [87] Submissions

[133] – [148] Consideration by the Court

Issue 3: assuming Binetter is correct, whether the Tribunal erred in its approach when concluding that the applicant failed to disprove fraud or evasion

Issue 4: whether the Tribunal failed to review and decide the applicant’s objection that the Commissioner had amended assessments without forming an opinion in lawful compliance with item 5 of the table in s 170(1) of the 1936 Act.

[88] Submissions

[149] – [157] Consideration by the Court

Issue 5: whether the Tribunal erred in law by failing to weigh up the evidence or give due weight to the evidence relied upon by the applicant

[92] – [93] Submissions

[158] – [167] Consideration by the Court

Issue 6: whether the Tribunal erred in law by failing to make a credit assessment of the applicant and Ms Hang Nguyen prior to discounting their evidence

[92] – [93] Submissions

[168] – 169] Consideration by the Court

Issue 7: do the jurisdictional errors as to the decision being procedurally unfair, amounting to failure to exercise jurisdiction, or amounting to jurisdictional error extend more generally to the Tribunal’s failure to make factual findings of its own on other issues?

[94] – [96] Submissions

[170] – [172] Consideration by the Court

Issue 8: whether the Tribunal erred by failing to re-exercise the Commissioner’s discretion to remit penalties

[97] – [98] Submissions

[173] – [191] Consideration by the Court.

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