Mano and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/228-244)
Judgment date: 22 April 2010
Date published: 30 June 2010
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office's response to this case, which concerned: whether deposits made to the taxpayer's bank accounts were assessable as income; whether the failure to return overseas investment income was due to fraud or evasion; and whether penalties had been correctly imposed.

Overview of facts:
The taxpayer and her husband moved to Australia from the UK in 1992. At that time, she held investments in the UK from which she derived income. When the taxpayer was audited, it was discovered that she had not included her investment income ($292,411) from the UK in her Australian tax returns for the 1993 to 2004 income years. The audit also discovered that deposits of almost $500,000 were made to various bank accounts of the taxpayer during the 2000 to 2004 income years. | Amended assessments were issued to the taxpayer in September 2006, including the deposits made to her bank accounts in her assessable income for the 2000 to 2004 years, on the basis that she did not have a satisfactory explanation for the source of the funds. Amendments for the 1993 to 1996, and 1999 to 2004, income years, as well as original assessments for the 1997 and 1998 years, were also issued to the taxpayer in December 2006, including the amounts of investment income from the UK in her assessable income. | The amendments for the 2002 to 2004 years were made under the former paragraph 170(2)(c) of the Income Tax Assessment Act 1936 ('ITAA') within 4 years from the date on which tax was due and payable under the original assessments. | The amendments for the earlier years relied on the former paragraph 170(2)(a) of the ITAA, on the basis that the Commissioner had formed the opinion that an avoidance of tax was due to fraud or evasion. In relation to the December 2006 amendments, the opinion was based on the findings that the taxpayer knew that she had derived UK-source income for the relevant years and had deliberately withheld details of that income from her Australian tax returns. The audit had established that the taxpayer's Australian tax agent had asked her when she arrived in Australia whether she had any overseas income, and she had said that she didn't have any. | In relation to the amended assessments, penalties of 75% for intentional disregard were imposed under the former section 226J of the ITAA and Division 284 of Schedule 1 to the Taxation Administration Act 1953 . Penalties were imposed under the former sections 163B and 163C of the ITAA for the 1997 and 1998 years. | Before the Tribunal, the taxpayer challenged the amendments issued in September 2006 on the basis that the deposits were not her assessable income, but came from her husband as gifts. The taxpayer accepted that the investment income from the UK was assessable to her, but argued that the December 2006 amendments for the 1993 to 1996, and 1999 to 2001, years were not authorised by paragraph 170(2)(c) because the avoidance of tax was not due to fraud or evasion. The taxpayer also argued that the penalties were not payable or should be remitted. | Issues decided by the tribunal | In relation to the September 2006 amendments, the Tribunal accepted that the deposits were not assessable income of the taxpayer because she had established that they were gifts from her husband (sourced from a wedding gift and loans from relatives). This conclusion was supported by the fact that the taxpayer's employment has always been as a teacher and that no evidence was provided by the Commissioner of any other income source (paragraph 74). | In relation to the December 2006 amendments, the Tribunal found that they were not authorised by paragraph 170(2)(a) because the non-inclusion of the investment income from the UK in the taxpayer's income tax returns was not due to fraud or evasion. In particular, the Tribunal accepted the credible evidence of the taxpayer, when she lodged her relevant Australian tax returns, that: her UK tax obligations in relation to the investment income were controlled by her accountants in the UK; she had a genuine belief that there was no need to declare the investment income in Australia (including a genuine misunderstanding of the question asked of her by her Australian tax agent about overseas income); and that she was not of a character to deliberately not declare income (paragraphs 52 to 54). | Similarly, the Tribunal found that no penalties were payable under section 226J or Division 284 because the taxpayer did not have an intentional disregard for the law in not disclosing the investment income in her tax returns. The Tribunal accepted that the taxpayer genuinely believed that she was not liable to pay tax on the investment income which had already been taxed in the UK, and that the Commissioner had been effectively informed of the investment income in a letter written to the ATO by the taxpayer's husband in October 1993 (paragraphs 59 to 65). | Finally, the Tribunal also decided that the late lodgement penalties under the former sections 163B and 163C should be remitted (paragraph 75).

Issues decided:
In relation to the September 2006 amendments, the Tribunal accepted that the deposits were not assessable income of the taxpayer because she had established that they were gifts from her husband (sourced from a wedding gift and loans from relatives). This conclusion was supported by the fact that the taxpayer's employment has always been as a teacher and that no evidence was provided by the Commissioner of any other income source (paragraph 74). In relation to the December 2006 amendments, the Tribunal found that they were not authorised by paragraph 170(2)(a) because the non-inclusion of the investment income from the UK in the taxpayer's income tax returns was not due to fraud or evasion. In particular, the Tribunal accepted the credible evidence of the taxpayer, when she lodged her relevant Australian tax returns, that: her UK tax obligations in relation to the investment income were controlled by her accountants in the UK; she had a genuine belief that there was no need to declare the investment income in Australia (including a genuine misunderstanding of the question asked of her by her Australian tax agent about overseas income); and that she was not of a character to deliberately not declare income (paragraphs 52 to 54). Similarly, the Tribunal found that no penalties were payable under section 226J or Division 284 because the taxpayer did not have an intentional disregard for the law in not disclosing the investment income in her tax returns. The Tribunal accepted that the taxpayer genuinely believed that she was not liable to pay tax on the investment income which had already been taxed in the UK, and that the Commissioner had been effectively informed of the investment income in a letter written to the ATO by the taxpayer's husband in October 1993 (paragraphs 59 to 65). Finally, the Tribunal also decided that the late lodgement penalties under the former sections 163B and 163C should be remitted (paragraph 75).

ATO view of decision:
The Tax Office accepts that the decision was open to the Tribunal on the evidence given at the hearing. The case was decided on its own facts.

Administrative treatment:
Implications on current Public Rulings & Determinations; Implications on Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1936 163B 163C 167 170 226J Taxation Administration Act 1953 14ZZK Div 284 Schedule 1
Case references: Attwood v R (1960) 102 CLR 535 Barripp v Commissioner of Taxation (NSW) (1941) 6 ATD 69 (1941) 65 CLR 661 Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) 79 CLR 296 [1949] HCA 25 Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 20 ATR 1370 1990) 90 ATC 4088 [1990] HCA 3 Harris v Burrows (1945) 7 ATD 518 Nozzi Pty Ltd v Commissioner of Taxation [2003] FCA 356 52 ATR 521 Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation [2007] FCA 345 66 ATR 1 2007 ATC 4320 Simic v R (1980) 144 CLR 319 (1980) 30 ALR 519 [1980] HCA 25 Vu v Commissioner of Taxation [2006] FCA 889 2006 ATC 4387 (2006) 63 ATR 341 Wedd v R 2000 WASCA 273
Subject references: Foreign income Fraud or evasion Unexplained deposits Penalties Culpable behaviour