Gashi v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 490 of 2012, VID 491 of 2012)
Judgment date: 14 March 2013
Date published: 13 September 2013

Summary of decision:
Outlines the ATO's response to this case which concerned whether the taxpayers had discharged the onus of proving that default income tax assessments issued to them based on the asset betterment methodology were excessive.

Overview of facts:
Mr Gashi did not lodge income tax returns for the 2001, 2002 and 2006 income years, but lodged returns for the 2000, 2003, 2004 and 2005 years, declaring only modest amounts of taxable income. Mrs Gashi did not lodge returns for any of those years. An audit into the income tax affairs of both taxpayers revealed ownership of substantial real estate investments and other assets and significant transfers of funds by the taxpayers to associates overseas during those income years. Following the audit, the Commissioner issued assessments to the taxpayers in March 2010 under section 167 of the Income Tax Assessment Act 1936 (ITAA 1936), utilising the 'asset betterment' method of estimating the combined incomes of the taxpayers, and then dividing that income between them equally on the basis that they were in partnership. | In June 2010, Mrs Gashi lodged returns for the 2001 to 2006 income years, declaring amounts of taxable income well below those assessed to her in March 2010. Those returns caused amended assessments to be issued to her reflecting her declared income. Further amendments were issued in August 2010 that restored the amounts assessed on the original assessments. A similar process occurred when Mr Gashi lodged a return for the 2002 income year. | On appeal to the Federal Court, the taxpayers argued that the multiple assessments issued to Mrs Gashi, and to Mr Gashi for the 2002 income year, were invalid. They also challenged the Commissioner's reliance on the asset betterment approach as a basis for inferring the existence of partnership income. | Jessup J [2012] FCA 638 rejected the taxpayers' argument that the assessments were invalid, as there was only ever one assessment extant for each taxpayer for each year. His Honour found that Mr Gashi did not satisfy the burden of proving that the assessments issued to him were excessive, as he primarily sought to attack the Commissioner's asset betterment calculations, rather than positively establishing what was his actual table income for the relevant years. However, his Honour accepted both Mrs Gashi's evidence that she was not in partnership with her husband and her accountant's evidence of the amounts of her actual taxable income. His Honour also found that the Commissioner did not establish that Mrs Gashi had derived any income in excess of that established by her accountant. | The Full Federal Court (Bennett, Edmonds and Gordon JJ) dismissed Mr Gashi's appeal, and, in Mrs Gashi's case, allowed the Commissioner's appeal, from the decision of Jessup J. On 16 August 2013, French CJ and Gageler J refused special leave to the taxpayers to appeal to the High Court from the decision of the Full Court. Their Honours noted that no ground warranting a grant of special leave was disclosed in either case. | Issues decided by the court | The Full Court found that the Federal Court does not have jurisdiction in tax appeal proceedings under Part IVC of the Taxation Administration Act 1953 to determine if assessments are invalid, because of jurisdictional error of the type considered in FC of T v Futuris Corporation Ltd (208) 237 CLR 146, as the subject matter of such an appeal is a valid assessment (paragraphs 41-43). The Court then found that, in any event, each assessment or amendment validly imposed a fresh tax liability or adjusted an existing liability (paragraph 44). | The Court rejected arguments that Jessup J had found that the movement in value of Mr Gashi's assets was ordinary income and should have found that the movement was not ordinary income (paragraph 49). Those arguments misconceived the operation of section 167. Unlike section 166, where the Commissioner is required to make an assessment of the amount of taxable income (being assessable income less allowable deductions), section 167 empowers the Commissioner to make an assessment of the amount on which in his judgement income tax ought to be levied. This does not require the Commissioner to adopt a view of the facts which discloses a taxpayer's taxable income (paragraphs 53-56). | The Court agreed with Jessup J that Mr Gashi had not discharged the onus of proving that his assessments were excessive. It is insufficient for a taxpayer simply to show error on the Commissioner's part under section 167. A taxpayer must positively prove his actual taxable income, and must show that unexplained accumulated wealth was from non-income sources. This was what Mr Gashi did not show (paragraphs 62-67). | However, the Court disagreed with Jessup J that the evidence of Mrs Gashi's accountant was sufficient to discharge the onus of proving that her assessments were excessive. Neither Mrs Gashi, nor her accountant, identified her sources of income, nor provided an explanation of the sources for the unexplained increase in her assets, nor identified whether any such source was taxable (paragraphs 75-79).

Issues decided:
The Full Court found that the Federal Court does not have jurisdiction in tax appeal proceedings under Part IVC of the Taxation Administration Act 1953 to determine if assessments are invalid, because of jurisdictional error of the type considered in FC of T v Futuris Corporation Ltd (208) 237 CLR 146, as the subject matter of such an appeal is a valid assessment (paragraphs 41-43). The Court then found that, in any event, each assessment or amendment validly imposed a fresh tax liability or adjusted an existing liability (paragraph 44). The Court rejected arguments that Jessup J had found that the movement in value of Mr Gashi's assets was ordinary income and should have found that the movement was not ordinary income (paragraph 49). Those arguments misconceived the operation of section 167. Unlike section 166, where the Commissioner is required to make an assessment of the amount of taxable income (being assessable income less allowable deductions), section 167 empowers the Commissioner to make an assessment of the amount on which in his judgement income tax ought to be levied. This does not require the Commissioner to adopt a view of the facts which discloses a taxpayer's taxable income (paragraphs 53-56). The Court agreed with Jessup J that Mr Gashi had not discharged the onus of proving that his assessments were excessive. It is insufficient for a taxpayer simply to show error on the Commissioner's part under section 167. A taxpayer must positively prove his actual taxable income, and must show that unexplained accumulated wealth was from non-income sources. This was what Mr Gashi did not show (paragraphs 62-67). However, the Court disagreed with Jessup J that the evidence of Mrs Gashi's accountant was sufficient to discharge the onus of proving that her assessments were excessive. Neither Mrs Gashi, nor her accountant, identified her sources of income, nor provided an explanation of the sources for the unexplained increase in her assets, nor identified whether any such source was taxable (paragraphs 75-79).

ATO view of decision:
The ATO notes that the decision of the Full Court is consistent with the views of the Commissioner on the inability to challenge the validity of assessments in Part IVC tax appeals, on the operation of section 167 of the ITAA 1936, and on what is required by a taxpayer in a Part IVC tax appeal to discharge the onus of showing that an assessment issued under section 167 is excessive.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None

Legislative references: Income Tax Assessment Act 1936 s 6(1) s 166 s 167 s 170(1) s 170(1A) s 175 s 175A(1) s 177 Income Tax Assessment Act 1997 s 4-15 s 6-5(1) Taxation Administration Act 1953 Part IVC s 14ZW s 14ZY s 14ZZ s 14ZZO Schedule 1 s 284-75(3) Schedule 1 s 298-30
Case references: Darrell Lea Chocolate Shops Pty Ltd v FC of T (1996) 72 FCR 175 34 ATR 491 97 ATC 4040 DC of T v Richard Walter Pty Ltd [1995] HCA 23 (1995) 183 CLR 168 29 ATR 644 95 ATC 4067 FC of T v Futuris Corporation Ltd [2008] HCA 32 (2008) 237 CLR 146 69 ATR 41 2008 ATC 20-039 FC of T v Hoffnung & Co Ltd [1928] HCA 49 (1928) 42 CLR 39 FC of T v Stokes (1996) 72 FCR 160 34 ATR 478 97 ATC 4001 FJ Bloemen Pty Ltd v FC of T [1981] HCA 27 (1981) 147 CLR 360 11 ATR 914 81 ATC 4280 Gauci v FC of T [1975] HCA 54 (1975) 135 CLR 81 5 ATR 672 75 ATC 4257 George v FC of T [1952] HCA 21 (1952) 86 CLR 183 Kennedy v AAT [2008] FCAFC 124 (2008) 168 FCR 566 2008 ATC 20-037 73 ATR 276 Ma v FC of T (1992) 37 FCR 225 23 ATR 485 92 ATC 4373 Mount Pritchard & District Community Club Ltd v FC of T [2011] FCAFC 129 (2011) 196 FCR 549 2011 ATC 20-288 85 ATR 496 Stokes v FC of T (1996) 136 ALR 632 32 ATR 500 96 ATC 4393 Trautwein v FC of T (1936) 56 CLR 63 [1936] HCA 77
Subject references: Default assessment Onus of proof - excessiveness Asset betterment Validity of assessments Part IVC appeal