Part IVC of the Taxation Administration Act 1953 gives taxpayers statutory avenues to argue, in the Administrative Appeals Tribunal (AAT) or Federal Court, that the substantive liability imposed by an assessment is excessive through a review or appeal of an objection decision. Where an assessment is found to be excessive, the Commissioner must amend the assessment.
In Le v FCT [2021] FCA 303, the taxpayers, Ms Le and Mr Trieu, carried on, in partnership, various businesses that often dealt in cash. Following an audit, the Australian Taxation Office (ATO) concluded that the taxpayers must have had significant unreported income. As a result, the ATO issued amended assessments increasing their taxable income (by almost $3.4m in Ms L’s case and $1.15m in Mr T’s case) and imposing significant administrative penalties.
The ATO adopted an asset betterment approach. That is, the annual change in the taxpayers’ net assets became a part of the taxpayers’ taxable income. The ATO also assumed that for amounts paid from bank accounts, to make such payments, the taxpayers must have derived a corresponding amount of income.
The taxpayers contended at the AAT that the Commissioner’s assessments were excessive. They submitted that it is wrong to assume that every withdrawal of cash from a bank account constitutes ‘expenditure’ because such withdrawals are equally consistent with transferring funds by withdrawing cash from one account and depositing it into another. The taxpayers also contended that amounts deposited in the bank accounts were either repayments of loans made by the taxpayers to third parties or loans made by third parties to the taxpayers (all borrowers and lenders were members of the Vietnamese community and the loans were ‘Hui’ within that community). The taxpayers admitted that they had earned interest income on various loans.
At the AAT, the taxpayers’ case was largely rejected, although the Tribunal made some adjustments to the assessments in favour of the taxpayers (see NGFZ v FCT [2019] AATA 5410).
The taxpayers appealed on the basis that the AAT failed to consider and deal with a central argument to explain why certain amounts attributed to them as taxable income was not in fact income. They also argued that there was an illogical inconsistency in the AAT’s reasons, because the AAT had concluded that certain transactions resulted in them deriving interest income, whilst simultaneously concluding that it was not satisfied that the same transactions were loans.
Logan J in the Federal Court allowed the taxpayers’ appeal and remitted the matter to the AAT for a rehearing. Logan J held that the AAT had failed to consider one of the taxpayers’ central arguments as to why the assessments were excessive. “The flow of funds into and out of bank accounts was in evidence, as was an explanation as to why outgoings from accounts were not income. The [taxpayers] gave precision in their tabulations as to the resultant excess in the amount of each assessment. A failure to consider that explanation is, truly, a failure to undertake the statutory review function.”
Another reason for setting aside the AAT’s decision was its failure to decide the review “by a logical process of reasoning”. Logan J said there was “an internal inconsistency” between accepting the derivation of interest from a loan and rejecting that same transaction as a loan. It was also illogical for the AAT to accept that transactions with identified persons were loans from which interest was derived, while rejecting the evidence of these persons, where given, that they had entered into loans.
Logan J in holding that allowed the taxpayers’ appeal and remitted the matter to the AAT for a rehearing.
To discuss or for more information, please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
