Josip Belavic v the Commissioner of Taxation [1989] ACTSC 2 (20 January 1989)

SUPREME COURT OF THE ACT

JOSIP BELAVIC v. THE COMMISSIONER OF TAXATION
S.C. Nos. 709-714 of 1986
Income Tax

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Kelly J.(1)

CATCHWORDS

Income Tax - Appeal against assessments - issues of fact only - no new question of principle.

Denley v. Federal Commissioner of Taxation (1986) 86 ATC 4423

HEARING

CANBERRA
20:1:1989

Counsel for the Appellant Mr B. Meagher

Solicitors for the Appellant Messrs Liu & Robb

Counsel for the Respondent Mr S. Burns

Solicitors for the Respondent Australian Government Solicitor

ORDER

The appeal be allowed.

The assessment of the taxpayer for income tax for the years ended 30 June 1976, 1977, 1978, 1979, 1980, and 1981 be remitted to the respondent for assessment conformably with the reasons for the judgment of this Court.

The respondent pay one half of the appellant's costs of the appeal, those costs to be taxed.

DECISION

These are appeals by Josip Belavic (the taxpayer) against decisions on his objections to amended assessments made by the respondent Commissioner of Taxation (the Commissioner) in respect of the years ended 30th June 1976, 1977, 1978, 1979, 1980 and 1981.

2. The taxpayer returned income of $9,250 for the year ended 30 June 1976, of $6,829 for the year ended 30 June 1977, of $5,250 for the year ended 30 June 1978, of $4,939 for the year ended 30 June 1979, of $6,219 for the year ended 30 June 1980 and of $12,812 for the year ended 30 June 1981.

3. The Commissioner eventually gave notice of amended assessments to show-
(a) for the year ended 30 June 1976 the taxpayer's net

income as $39,903, an alleged understatement of
$30,653;
(b) for the year ended 30 June 1977 his net income as
$35,449, an alleged understatement of $28,620;
(c) for the year ended 30 June 1978 his net income as
$20,055, an alleged understatement of $14,805;
(d) for the year ended 30 June 1979 his net income as
$21,568, an alleged understatement of $16,629;
(e) for the year ended 30 June 1980 his net income as
$14,812, an alleged understatement of $8,593; and
(f) for the year ended 30 June 1981 his net income as
$25,656, an alleged understatement of $12,844.

4. The taxpayer was born in Yugoslavia on 22 October 1943. He came to Australia in 1966, taking up residence immediately in Canberra. He worked first as a baker and then learnt the trade of painting by working on Sundays and in his spare time. He then became an employed painter working in that capacity for what was probably a year and a couple of months.

5. He married in 1970. In 1971 or 1972 he and his wife bought their house at 32 Woolcock Street, Watson for $20,000. He had accumulated money when he had been working as a baker, on night shift all the time, and was able to provide $12,000 immediately towards the purchase of the house. He had borrowed, he thought, $7,000 from the Commonwealth Bank. He was able to pay off the mortgage in about two years. His wife had brought between $9,000 and $10,000 to the marriage.

6. In 1976 he had a savings account with the Commonwealth Savings Bank at Civic and a current account with the National Bank, originally at Civic, but later at Dickson. He and his wife had a joint savings account with the Commercial Banking Company of Sydney Ltd at Dickson. He also had an account with Civic Permanent Co-operative Building Society.

7. He began to work on his own account as a contract painter in 1971 or 1972. In 1978 or 1979 he formed a partnership with one John Lephamer. Later, in 1981, he began to work in partnership in equal shares with one Tony Krachow. They opened a joint account with the Commercial Banking Company of Sydney Limited.

8. The taxpayer's wife opened accounts for their two children. When the taxpayer and his wife saved money they would take it from the savings account and place it in an investment account. Later they changed investment accounts to interest bearing deposits with the Commonwealth Bank and the Commercial Banking Company of Sydney Ltd.

9. In 1979 and 1980 they opened and operated a current account with the Commonwealth Trading Bank, using money withdrawn from the savings account. That account was used while they were building an extension to their house.

10. In 1981 they bought a house in Downer using money from one of the interest bearing deposits to pay for it.

11. The payments the taxpayer received as a contractor were usually by cheque although some cash payments were received. Most of his painting work was done on Government houses.

12. I accepted the taxpayer's evidence that his receipts from all sources were banked and that the assets which were the subject of debate were paid for by moneys which came from the several bank accounts above referred to.

13. The taxpayer also gave evidence that in 1976 he would have grossed approximately $600 for the painting of an ordinary house. In 1977 he would have quoted approximately $670 for such a house, in 1978 approximately between $725 and $750, in 1979 approximately $800, in 1980 approximately $850 and in 1981 about $900. It would take about two weeks to paint one such ordinary house although the time taken might vary a little up or down.

14. There were times during the six years in question when the plaintiff would not have been working all the time, perhaps because a job was not ready or perhaps even because he could find no work.

15. If the taxpayer's evidence that the time taken to paint an ordinary house and of the amounts which he would have grossed in respect of such a house during the relevant years were correct, one would have expected that, making no allowance for loss of time for holidays or for unavailability of work, he would have grossed approximately $15,600 for the year ended 30 June 1976, approximately $17,420 for the year ended 30 June 1977, between approximately $18,850 and $19,500 for the year ended 30 June 1978, approximately $20,800 for the year ended 30 June 1979, approximately $22,100 for the year ended 30 June 1980 and approximately $23,400 for the year ended 30 June 1981. In fact, he returned his gross income for those years respectively as $19,240, $16,520, $11,979, $13,285, $16,678 and $25,209.

16. The taxpayer went to Yugoslavia in May 1977, returning in September of that year. Allowing for five lost working weeks to 30 June 1977 and 12 more until his return, his estimated gross income for the years ended 30 June 1977 and 30 June 1978 based on his actual returns would have been $18,277 and $15,572 approximately respectively. The average fortnightly gross return for the year ended 30 June 1976, making no allowance for holidays or time off because of lack of work, was $740. I do not think, therefore, that I can take into account the evidence which the taxpayer gave of the approximate return for painting a house in that year. Either the amount per house was underestimated or the time for painting such a house was overestimated. This casts doubt on his figures for subsequent years.

17. The amended assessments made by the Commissioner were based on a statement of net income determined on an asset betterment basis (the "ABS"). I annex a copy of the ABS to these reasons.

18. It will be seen that the base year was that ending 30 June 1975, a date upon which the Commissioner assessed the value of the taxpayer's assets at $48,041.00.

19. The onus of proving the Commissioner to have been wrong in making the amended assessments lies upon the taxpayer. Relevant authorities are conveniently referred to in Denley v. Federal Commissioner of Taxation (1986) 86 ATC 4423 at pp 4426-7.

20. A detailed attack was made on the ABS.

21. Of critical importance to the taxpayer's case were three loans which I am satisfied he made. He lent to Manual Vargas, who had taught him how to paint, the sum of $20,000 in 1974. The loan was repaid in the years 1975, 1976 and 1977. I am satisfied that in the year ended 30 June 1976 Mr Vargas repaid $7,813 and in the year ended 30 June 1977 $10,313.

22. The second loan with which I am concerned was made to one John Ivan Maglicic. Mr Maglicic gave evidence that he approached the taxpayer in about June 1975 to ask whether he could lend him the money. He said that the taxpayer lent him two amounts, one of $6,000 and one of $4,000. He said that the loans were made not long after his approach to the taxpayer. His precise evidence was, "Not long after that (the approach) I would say possibly two or three weeks, so I would say July, some time in July, 1975." He was subsequently asked, "And were they both in July or at different times?" He replied, "It would have been - yes, both in July."

23. On the taxpayer's request Mr Maglicic sent him a letter which unfortunately was not dated. Annexed to that letter was a schedule setting out details of the loan as follows:-

"July $6000 loan and $4000"

24. The schedule went on to show repayments totalling $6,000 as made in the months of January, March, April and May in 1976 and repayments each of $1,000 as made successively in August 1977, October 1977, January 1977 and April 1977. It seems clear that the schedule of the repayments was prepared after the whole loan was repaid. It seems clear also that the last two repayments, shown as having been made in January 1977 and April 1977, were made in fact in 1978 or were shown in the schedule out of order. In the long run it makes little difference to the taxpayer's liability. But it seems more probable than not that there was no gap of 15 months between individual repayments and that the repayments said to have been made in January and April 1977 were in fact made in those months and I so find.

25. If the loans to Mr Maglicic were made after 30 June 1975 they plainly represent an asset which the taxpayer acquired after that date and hence may be properly be taken into account by the Commissioner as relevant income. If, however, the loans were made before 1 July 1975 the combined debt constitutes an asset which the taxpayer had acquired before 1 July 1975 and it may not therefore be taken into account as income earned after 30 June 1975.

26. It will be seen that the evidence given by Mr Maglicic as to the date of payment was vague. The taxpayer himself gave no evidence as to the precise date when the loans were made and it becomes, therefore, a question of probability. The taxpayer gave evidence, which I accepted, that he had no other source of income but his painting and some interest on investments. I am unable to accept that as far back as 1975/76 he earned what must have been, allowing for appropriate deductions, an income of almost $50,000 gross for the year. I am satisfied, therefore, that, on the balance of probabilities, the loans to Mr Maglicic were made before 1 July 1975 and may not, therefore, be taken into account as income received after 30 June 1975. I am satisfied that he repaid $6,000 in the financial year ended 30 June 1976, $2,000 in the financial year ended 30 June 1977 and $2,000 in the financial year ended 30 June 1978.

27. The third loan, of $2,000, was made to a Mrs Pavlakovic. The taxpayer's evidence about the date when he made the loan to her was so vague that I could not be satisfied on that evidence alone that the loan was made before 1 July 1975. He said the loan was made in 1975 but gave no indication of when in that year it was made. However, he said that the loan was finally repaid by Mrs Pavlakovic in 1977. She was by that time a deserted wife and I am satisfied that her circumstances must have been such that she could only have repaid the loan slowly. It seems to me more probable than not that the loan was made before 1 July 1975. Indeed, it may well have been made in 1974. I think that on the probabilities it was repaid in the financial year ended 30 June 1977.

28. In making his amended assessments, the Commissioner first calculated the taxpayer's assets for the financial years 1975-1981 inclusive. He also assessed an amount as spent in each of those years on what he described as "Other private expenditure", ("OPE"), household and ordinary living expenses and the like. He then assumed that where the total assets plus the OPE for any of those years showed (and they all did) an increase in value greater than that for the preceding year by more than the amount of the declared net income for the particular year, the excess represented undeclared income. In assessing OPE he took the total debits drawn from the trading account used by the taxpayer, deducted the business expenses claimed in the relevant tax returns and made allowance for specific items such as improvements, building extensions allocated separately elsewhere in the ABS and any transfers within accounts.

29. It was not suggested that the approach taken by the Commissioner was invalid. Nor do I think it was. The only way in which the amended assessments may be attacked is to show by adequate explanations proved on the balance of probabilities to account for the increases shown in the amended assessments beyond the amounts of net income returned. If, for example, it be proved that for the year ended 30 June 1976 part of the increase in the assets was due to the repayment which I think Mr Vargas made of $7,813, then the amount of the amended assessment should be reduced accordingly. Again, if I am satisfied that the money for the taxpayer's swimming pool, acquired in the year ended 30 June 1976, was paid from moneys which the Commissioner in fact allocated incorrectly to OPE there would be a duplication in the statement of assets and a reduction of the appropriate amount would need to be made.

30. Before proceeding the deal with the assessment for individual years, it is appropriate to make findings on some aspects of the taxpayer's case which were of general application.

31. The first relates to gifts which the taxpayer claimed were made by relatives in Yugoslavia. A consideration of the evidence before me as distinct from the claims made in the objection fails to satisfy me that there was any gift of $1,000 or $1,500 made at any time by the taxpayer's family's relatives during the relevant period except, as was conceded, in the financial year ended 30 June 1981. Such a gift may have been made in other years but the evidence is too vague for me to be satisfied that it was. I am, however, satisfied that the taxpayer's wife received each year from relatives sums of not less than $240 as gifts which were credited to the accounts of his children. Again the sums received as gifts may have been greater but I cannot be satisfied on the evidence that they were.

32. I am also satisfied that each year the taxpayer's wife rebanked sums of the order of not less than $45 representing moneys drawn from relevant bank accounts for housekeeping purposes but not used for those purposes.

33. The taxpayer claimed that he made purchases of paint and materials in Sydney or elsewhere beyond those which were claimed on account of expenditure for all such materials in his tax returns. I cannot be satisfied on the evidence that any purchases of paint and materials were so made.

34. I am also satisfied that the taxpayer and his family lived frugally. He did not smoke and made only moderate use of alcohol. This lends credence to his claim that the OPE assessed by the Commissioner was too great.

35. I also note that half of the interest accrued for the financial years 1976-1979 inclusive amounted to $239, $1,300, $1,634, and $1,994 respectively. This appears from the ABS which showed the other half of that interest as accrued in favour of the taxpayer's wife and appropriately deducted from the taxpayer's assets. The taxpayer acknowledged that he made no return of interest for any of those four financial years.

36. I accepted the taxpayer and his wife as being generally witnesses of truth. That does not mean that I have necessarily to accept everything they said as correct. The events about which they were giving evidence all happened a long time ago and they had little in the way of records to support their claims. The taxpayer seems to have relied on his accountants to ensure that his returns were in order but the paucity of his records would seem to have given his accountants little assistance. I set out hereunder part of the taxpayer's cross-examination:-

"What I suggest to you is that your income
tax returns for each of the years in question
here did not properly disclose the income
which you actually received from your work as
a painter and other sources?---Yes.
Do you agree with that?---I agree with that,
yes.
In your evidence this morning you have stated
that for some years you were unaware of an
obligation to disclose interest payments as
part of your ...?---That is right, yes.
I suggest to you that apart from that your
income tax returns have failed to properly
disclose your gross income from your work as
a painter and other sources? Do you accept
that that is the case?---That could be true.
Do you have any explanation as to how it was
that your income tax returns failed to
disclose your full income from your work as a
painter and from other sources?---I cannot
tell you that - nothing more - because I, you
know - it was with accountant anyway. I
cannot work out, you know, what he done, how
he done.
Were there any jobs which you did in your
work as a painter for which you received
payment in cash rather than by cheque?---No,
it does not worry me, because I always put
through the tax anyway."

37. Before considering the case in respect of each of the individual years in question, it should be noted that the Commissioner called no evidence. I have, however, had the advantage of studying at length the careful and detailed ABS and working documents produced by the Commissioner to the taxpayer's advisors under the Freedom of Information Act 1982. Except in one respect, it is not suggested that any of the figures set out in the ABS and in the working documents is inaccurately recorded. The exception relates to the figures for the year ended 30 June 1981 where it was said that an error of $39 had been made in favour of the taxpayer. It is true that there was, during the course of the working up of the ABS, such an error. In the end it was detected and, although the process by which the correction came to be made is not perfectly clear, in the result the figure shown in the ABS is correct.

38. I turn to consider the question of what was the taxpayer's assessable income in each of the years in question.
Financial year ended 30 June 1976

39. It should first be noted that the Commissioner's assumption as to OPE for this year, $11,817, is not based on any records which were available to him. The figure was obtained by taking what he assumed to be the OPE for the year ended 30 June 1977 and reducing it by 10%. As I will show in due course I am satisfied that the OPE for the year ended 30 June 1977 was overstated. I will consider that overstatement in more detail when dealing with the taxpayer's income for that year.

40. The taxpayer challenged an amount of $4,000 included in the ABS for 1976 under the heading "Improvements - Watson". The improvement was identified as a swimming pool. It is not suggested that the amount shown as its value is incorrect in any way. The taxpayer paid $3,500 towards the cost of the pool but the subcontractor permitted him to complete the surroundings of the pool himself. That work was therefore valued at $500 and that constitutes an initial deduction from the ABS for that year. Since I am satisfied that the taxpayer paid the $3,500 from one or other of the relevant bank accounts, it follows, I think, that the Commissioner has duplicated that amount in the ABS which should be further amended by the deduction of that $3,500. In effect it must be taken to have come from the notional figure of $11,817 referred to above.

41. The taxpayer also challenged the accuracy of the amount shown in the ABS as representing the value of a Falcon utility purchased in May 1976. The taxpayer financed the purchase by a cash deposit of $2,000 paid from a bank and a trade-in of $450 on a vehicle shown as an asset in the ABS for the year ended 30 June 1975. His equity in the vehicle therefore amounted to $2,450. The working papers produced by the Commissioner show the total price of the vehicle including registration and delivery charges to have been $4,861 leaving a balance due at settlement of $2,411. This approach to the total sale price was not challenged but the value of the vehicle is shown in the ABS as $4,724. No challenge was made to the amount shown on the basis that it represented the total value of the vehicle rather than the equity which the taxpayer had in it. Instead it was said that the sum of $2,000 paid as a deposit was duplicated in the same way as the sum of $3,500 was duplicated in respect of the swimming pool. I agree with the submission.

42. The evidence showed that the taxpayer paid the balance due under the hire purchase agreement by two payments instead of the 24 provided for by the agreement. There was no evidence to show the precise amount of each of the two payments, one of which is said to have been made in the year ended 30 June 1976 and the second in the year ended 30 June 1977 but it seems reasonable to assume that the agreement was paid out in two equal payments. The balance originally payable under the hire purchase agreement was $3,299 of which $594 was terms charges. Making allowance for the appropriate rebate, calculated under the rule of 78 at $500, the taxpayer must have paid $1,400 towards payment out of the hire purchase agreement in the year ended 30 June 1976 and $1,400 in the year ended 30 June 1977. Again, in my opinion, this sum should be deducted from the OPE.

43. There ought, therefore, to be deducted from the amount of the amended assessment the following items:-

Amount rebanked by taxpayer's wife - $45
Gifts - $240
Repayment of loan by Mr Vargas - $7,813
Repayment of loan by Mr Maglicic - $6,000
Amount duplicated in respect of
improvements (swimming pool) - $4,000
Amount duplicated in respect of
deposit on car - $2,000
Amount duplicated in respect of
repayment on account of hire
purchase agreement - $1,400
TOTAL $21,498

44. It follows that, although the taxpayer has proved to my satisfaction that the amended assessment is excessive, he has nevertheless failed to account for an increase in assets of $9,155. Since the onus lies upon him, I find that that failure means that his income for the year ended 30 June 1976 is to be assessed at $18,405 against a returned income of $9,250.
Financial year ended 30 June 1977

45. In respect of that year I am satisfied that Mr Vargas repaid $10,313 on account of the loan which he had received from the taxpayer, that Mr Maglicic repaid $2,000 and that Mrs Pavlakovic repaid $2,000. I am also satisfied that gifts from relatives amounting to $240 were received and that the taxpayer's wife rebanked $45.

46. For the reasons given in respect of the year ended 30 June 1976, I am satisfied that there is to be deducted from the assets shown by the Commissioner the sum of $1,400 being part repayment of the loan taken out to complete the purchase of the utility in May 1976. In addition I am satisfied that there should be deducted from OPE an amount of $1,174 shown by the Commissioner as "Tax paid" but also shown as an item paid from the taxpayer's bank account and therefore duplicated.

47. The taxpayer purchased another vehicle in the year ended 30 June 1977. He traded in a Cortina sedan, the depreciated value of which was taken by the Commissioner to be $3,500, but in fact he was allowed $4,000 on account of the trade-in. I am satisfied that the additional $500 should be treated as a capital gain and should therefore be deducted from the amount of the assets taken into account by the Commissioner for the year. In addition, there should be deducted an amount of $1,787 representing the amount paid from his bank account by the taxpayer on delivery of the vehicle and a further $1,200 paid in similar fashion as a deposit.

48. The taxpayer purchased traveller's cheques and airline tickets in connection with the trip to Yugoslavia earlier referred to. I am unable on the evidence before me to show the source of all that money and since the onus is on the taxpayer I have to assume it forms part of his taxable income in the absence of any evidence explaining its source. It is not necessary that I attempt to ascertain that source. It is enough if I calculate those items which I am satisfied on the evidence ought not to be attributed to income and deduct those from the amount assessed by the Commissioner.

49. In the result, therefore, there is to be deducted from the amount of the amended assessment a total of $20,659 representing:-

Repayment of loans - $14,313
Amount paid and amount of capital
gain in respect of the purchase
of the second vehicle - 3,487
Rebanking by taxpayer's wife - 45
Gifts - 240
Completion of hire purchase payments
in respect of vehicle purchased in
May 1976 - 1,400
Amount duplicated on account of payment
of tax - 1,174

50. The assessable income of the taxpayer is therefore to be taken at $14,790 representing a failure to return an amount of $7,961 or, more accurately, an inability on the part of the taxpayer to demonstrate the source of that amount.
Financial year ended 30 June 1978

51. In this year there was only one repayment on account of a loan - that made by Mr Maglicic in the sum of $2,000. I find gifts to have amounted to $240, rebanking by the taxpayer's wife to have amounted to $45 and that $3,290 was rebanked from the moneys expended for the purchase of travellers' cheques in the previous year. In the result, there should be a deduction from the amount assessed by the Commissioner under the amended assessment of $5,575. The taxpayer has failed to establish that the amount of his income for the year in question should be taken as other than $14,480, an increase of $9,230 over the amount returned.
Financial year ended 30 June 1979

52. For this year I am satisfied that there should be deducted from the amount assessed by the Commissioner the sum of $1,450 for furniture paid from a bank account and therefore constituting a duplication when shown as a separate item in the ABS. Additionally, there should be deducted an amount of $240 representing gifts and an amount of $45 representing rebanking by the taxpayer's wife. In the result, therefore, there should be deducted from the amount assessed an amount of $1,735 so that the taxpayer's income for the year is to be taken as $19,833, an increase of $14,894 over that returned, $4,939.
Financial year ended 30 June 1980

53. I am satisfied that there should be deducted an amount of $1,630 for furniture (which the Commissioner dealt with in the same way as he dealt with the furniture purchased in the previous year) together with a sum of $285 representing gifts and amounts rebanked by the taxpayer's wife. There should therefore be deducted from the Commissioner's amended assessment an amount of $1,915 so that the taxpayer's income for the year is to be taken as $12,897, an increase of $6,678 over the income returned by the taxpayer.
Financial year ended 30 June 1981

54. In this year there should be a further deduction on account of furniture of the sum of $1,820, an amount on account of jewellery purchased, as conceded, of $330, an amount of $172 representing tax paid and shown twice because already included in expenditure paid from a bank account. Additionally an amount of $1,067 for legal costs should be deducted since they were incurred in connection with the transfer of a leasehold interest in a property which the taxpayer uses solely as an investment.

55. I accept the evidence of Mr Peter James McDonald, the taxpayer's accountant, that there was a further overstatement in the assessment for the year of $2,785. Additionally, it is accepted that there was in this year a gift of $1,000 but this was correctly and appropriately apportioned by the Commissioner. I am satisfied that the usual minimum gifts of $240 were received as well. In addition there is to be added the sum of $45 representing moneys rebanked by the taxpayer's wife. In the result, there falls to be deducted from the amended assessment an amount of $6,459 so that the taxpayer's amended income for the year amounted to $19,197, $6,385 more than was returned.