The Federal Court case of FCT v Ross [2021] FCA 766 concerned several aspects of taxation administrative law. This is the third article in a series on issues in FCT v Ross. The first two articles are available here and here.
Part IVC of the Taxation Administration Act 1953 (Cth) (TAA) gives taxpayers statutory avenues to argue that the substantive liability imposed by an assessment is excessive through a review or appeal of an objection decision. Under section 14ZZK(b)(i) of the TAA, the taxpayer has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been.
In FCT v Ross, the Commissioner concluded an audit of the affairs of Mr and Mrs Ross for not disclosing all of their assessable income over several years. The Commissioner adopted the asset betterment approach in making the assessments. The taxpayers alleged that the Commissioner’s assessments were excessive.
At first instance, the AAT found the Commissioner erred in attributing several amounts to the taxpayers’ assessable income. The Commissioner contended that the AAT erred in interpreting and applying the onus of proof under section 14ZZK(b)(i) of the TAA.
Section 167 of the Income Tax Assessment Act 1936 authorises the Commissioner to form a judgment as to the amount on which tax ought to be levied and that amount forms taxable income (default assessment).
The Federal Court held that in the context of a default assessment based on the asset betterment method, the taxpayer must demonstrate that the identified unexplained accumulated wealth was derived from non-income sources. The taxpayer must account for the unexplained increase in assets by explaining the source of those assets and identifying that those sources are not taxable. It is insufficient for a taxpayer to prove that an item in their asset betterment statement was wrong or should not have been included.
In FCT v Ross, the issue between the parties was whether the taxpayers were able to discharge their onus by giving explanations for some of the transactions and assets identified in the Asset Betterment Statements and otherwise giving an account of the transactions in their bank accounts.
The taxpayers submitted that Logan J in Le v FCT [2021] FCA 303 held that where the Commissioner has made a default assessment using the asset betterment method, a taxpayer can succeed in establishing that the assessment is excessive by merely identifying errors in the Commissioner’s methodology which inflated the amount of the default assessment. We have previously discussed the decision in Le here.
However, in this case, the Federal Court considered Logan J’s approach in Le would be directly inconsistent with the Full Court decisions in Gashi and Rigoli and the earlier High Court authorities in Dalco and Trautwein. A default assessment is a judgment of what the taxpayer’s taxable income should be and it establishes the taxpayer’s liability to the Commonwealth and unless they can successfully challenge it by demonstrating the amount of their actual taxable income and that it is less than the amount of the default assessment.
If the taxpayers do not also satisfactorily explain the source or sources for the other unexplained wealth, that is that they were derived from non-income sources, the onus under s 14ZZK(b)(i) will remain unsatisfied. Merely demonstrating that some of the assets on which the Commissioner relied in estimating the taxpayer’s wealth were not owned by them, not as valuable as thought, or were obtained from non-assessable income does not assist the taxpayer in the absence of proof of their actual taxable income.
These principles can result in a situation where the default assessment can be assumed to be inaccurate in some respects but, in the absence of the taxpayer establishing what their actual taxable income was, it must nevertheless stand.
To discuss or for further 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
