Burden of proof on taxpayers is a heavy one

When a taxpayer disputes an assessment made by the Tax Office, it is the taxpayer that bears the burden of proving that the assessment is excessive. That is a heavy and important responsibility, as a recent Australian Administrative Tribunal case demonstrates.

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In the case, a taxpayer was partially successful in arguing that amended assessments for the 2009 to 2012 income years were excessive.

The taxpayer is a citizen of China and became a resident of Australia in 2005. He has business interests in Australia, China and Malaysia. The taxpayer had reported income from his Australian business interests in his tax returns for the 2009 to 2012 income years, but those returns did not disclose any income from his overseas business interests.

In late 2010, the Tax Commissioner became aware from the Australian Transactions Reports and Analysis Centre (AUSTRAC) that the taxpayer had transferred money to or from another country. In November 2010, a letter was sent to the taxpayer, care of his accountants, advising him of the fact of the report from AUSTRAC and inviting him to consider whether any information needed to be disclosed to the Commissioner. The letter did not prompt any disclosure of information to the Commissioner by the taxpayer.

Following the information received from AUSTRAC and an audit of the taxpayer’s affairs by the Tax Office, the Commissioner issued amended assessments (plus penalties) for the 2009 to 2012 income years that increased his taxable by almost $2.1 million.

Before the AAT, the Commissioner agreed to confine the matter to three particular issues. The AAT noted the taxpayer had the burden of proof of showing that:

• deposits to the taxpayer’s bank account totalling around $505,837 made in October 2008 and June 2009 were transfers of savings originally held in China;
• deposits totalling $678,150 made between October 2011 and March 2012 represented the taxpayer’s share of profits from a business venture in China, and that those profits were derived prior to the taxpayer becoming an Australian resident; and
• his salary from a Chinese company was RMB18,000 per year ($A3600) rather than the RMB2.2m ($A446,000) shown in a salary certificate provided to a bank in Australia for the purposes of applying for a home loan.

The AAT did not accept the taxpayer’s submissions concerning the first two issues above. It said there were no bank statements or other documents evidencing the claimed savings held in China, and there was “not one single document” that evidenced the business in China.

However, the AAT did accept the taxpayer’s evidence concerning his salary from the Chinese company. In doing so, the AAT noted there was corroboration of the taxpayer’s evidence of the actual level of his remuneration from the Chinese company in the bank statements annexed to his witness statement. It also noted that: “It is not outside the bounds of human experience for borrowers to exaggerate their earnings (and assets) to obtain a loan.” As a result, the AAT was satisfied the taxpayer’s assessments were excessive in this regard.

The AAT said that based on its conclusions, the parties had agreed that the taxpayer’s taxable income for the relevant income years should be: $509,147 for the 2009 income year, $102,594 for the 2010 income year, $437,287 for the 2011 income year; and $370,342 for the 2012 income year. The AAT also affirmed the assessment of shortfall penalty at 50% for each of the income years with no remission in the circumstances.

As I noted at the outset, the onus is on taxpayers to prove their case, or more particularly, to prove that the ATO assessments are excessive. If they cannot do this to the satisfaction of a court or tribunal, the result is predictable.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.