Ma and Anor v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2010/2657-62; 2010/2663-65)
Judgment date: 31 January 2012
Date published: 4 June 2013

Summary of decision:
Outlines the ATO's response to this case which concerns whether deposits made by a private company into a joint bank account of the company's directors was income derived beneficially by the taxpayers and thus assessable in their hands.

Overview of facts:
Mr and Mrs Ma were directors of a private company which carried on business as an importer and seller of bearings to the wholesale industry. | In January 2008, the ATO began an audit for the income years ended 30 June 2001 to 2006 inclusive. The audit revealed that amounts reported in the company's income tax returns as "payments to associated persons" had actually been paid into the taxpayers' joint bank account. The taxpayers did not return the amounts as income in their income tax returns during the relevant years. | The wife passed away in September 2008. Her husband was the executor of her Estate. | The taxpayer claimed, on behalf of himself and the Estate of his wife, that the payments represented wages paid to his three children and his nephew. | The Commissioner issued amended assessments to the taxpayer and the Estate of his wife for each of the years under audit on the ground that the amounts deposited in their account was ordinary income that they had beneficially derived. In respect of the taxpayer, an administrative penalty of 50% of the tax shortfall was imposed. | The Tribunal reviewed the amended assessments for the taxpayer for the 2005 and 2006 income years and the amended assessments for the 2004, 2005 and 2006 income years for the Estate of the wife. | Issues decided by the court | 1. Whether the amended assessments were excessive? | The Tribunal found that the children had spent significant hours working for the company, but there was insufficient evidence to substantiate all the hours they claimed to have worked. Therefore, only a small proportion of the amounts deposited represented wages of the children. | In respect of the nephew, the Tribunal found he was expected to work, he would be paid for this work and that he did indeed perform the work. When money was paid by the company in the bank account as a wage paid to the nephew, that money was held on trust for the nephew. | In so far as the payments constituted wages of the children and the nephew, the amended assessments were excessive. | 2. Whether the administrative penalties should be set aside? | The Tribunal found that the 50% penalty was appropriate. There was no basis for remitting the penalty. However, the objection decision in relation to administrative penalties was set aside to be recalculated having regard to the revised shortfall amount.

Issues decided:
1. Whether the amended assessments were excessive? The Tribunal found that the children had spent significant hours working for the company, but there was insufficient evidence to substantiate all the hours they claimed to have worked. Therefore, only a small proportion of the amounts deposited represented wages of the children. In respect of the nephew, the Tribunal found he was expected to work, he would be paid for this work and that he did indeed perform the work. When money was paid by the company in the bank account as a wage paid to the nephew, that money was held on trust for the nephew. In so far as the payments constituted wages of the children and the nephew, the amended assessments were excessive. 2. Whether the administrative penalties should be set aside? The Tribunal found that the 50% penalty was appropriate. There was no basis for remitting the penalty. However, the objection decision in relation to administrative penalties was set aside to be recalculated having regard to the revised shortfall amount.

ATO view of decision:
The decision was based solely on the facts and will not have any impact on subsequent cases.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | N/A

Legislative references: Income Tax Assessment Act 1997 s 6-5 s 6-10 s 6-25 Taxation Administration Act 1953 s 14ZY s 14ZZ s 14ZQ s 14ZZK Part IVC Schedule 1 Division 284 Schedule 1 Division 298 Income Tax Assessment Act 1936 s 175A
Case references: 3D Scaffolding Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 75 75 ATR 604 2009 ATC 20-111 Countess of Bective v Federal Commissioner of Taxation [1932] HCA 22 47 CLR 417 Federal Commissioner of Taxation v Dalco [1990] HCA 3 168 CLR 614 20 ATR 1370 90 ATC 4088 Federal Commissioner of Taxation v H [2010] FCAFC 128 188 FCR 440 2010 ATC 20-218 Federal Commissioner of Taxation v Rozman [2010] FCA 324 186 FCR 1 75 ATR 782 2010 ATC 20-171 Gauci v Federal Commissioner of Taxation [1975] HCA 54 135 CLR 81 5 ATR 672 75 ATC 4257 Hart v Commissioner of Taxation [2003] FCAFC 105 131 FLR 203 2003 ATC 4665 53 ATR 371 Jones v Dunkel [1959] HCA 8 101 CLR 298 McCormack v Federal Commissioner of Taxation [1979] HCA 18 143 CLR 284 9 ATR 610 79 ATC 4111 Trautwein v Federal Commissioner of Taxation [1936] HCA 77 56 CLR 63 Uratoriu v Commissioner of Taxation [2010] FCA 1157 2010 ATC 20-219 80 ATR 646
Subject references: Deemed dividends or ordinary income Whether assessments were excessive Payments to associated persons Whether children and relatives were employees Domestic or private arrangement Documentary evidence Wages not paid directly to children or relatives Trusts Burden of proof in taxation matters Recklessness Whether penalties should be remitted Decisions under review varied