Re Anthony John Scallan v the Commissioner of Taxation of the Commonwealth of Australia [1990] FCA 99 (6 April 1990)

FEDERAL COURT OF AUSTRALIA

Re: ANTHONY JOHN SCALLAN
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Nos. N G3045-3048 of 1987
FED No. 127
Taxation

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Taxation - Income tax - Objection to amended assessments made on an assets betterment basis - Whether the taxpayer discharged the onus of proving that the assessment was excessive.

HEARING

SYDNEY
6:4:1990

Counsel for the Applicant: Mr. S. Motbey

Solicitors for the Applicant: Peter R. Murphy

Counsel for the Respondent: Mr. N.R. Burns

Solicitors for the Respondent: Australian Government Solicitor

ORDER

The appeals be allowed.

The respondent pay the costs of the applicant of the appeals.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

These are four appeals being heard together by consent from the disallowance by the Commissioner of Taxation of the taxpayer's objections to the inclusion of certain amounts in his assessable income for the years ended 30 June 1978, 1979, 1980 and 1981. The taxpayer's returns of income did not include those amounts in his assessable income. Subsequently, the Commissioner conducted an investigation of the taxpayer's affairs and issued amended assessments for the relevant years.

2. The amended assessments were made on an assets betterment basis, or, as it is sometimes called, an accretion of assets basis. In the result the Commissioner treated as assessable income of the taxpayer for the year ended 30 June 1978 the sums of $109,418 and $11,500. The sum of $109,418 represented the amount of an interest bearing deposit of $106,000 with the Commercial Banking Company of Sydney Limited ("the Bank"), Rose Bay Branch together with interest accrued thereon to 30 June 1978. The sum of $11,500 was said to be a profit arising in the hands of the taxpayer from the alleged sale of a motor car described in the evidence as a Jensen Interceptor Mark I. The amended assessments for the three subsequent years of income included as assessable income of the taxpayer the sums of $10,036, $10,674 and $2,205 respectively being interest on the $106,000 placed on interest bearing deposit with the Bank in the 1978 year of income.

3. The case turns solely on its facts. The taxpayer accepts that he has the onus of proving that the assessment was excessive (see Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 64 ALJR 166 the most recent authority of the High Court on the question).

4. The relevant principles governing the making of assessments to income tax on an assets betterment basis were referred to by me in McCauley v Federal Commissioner of Taxation (1988) 88 ATC 4605 where I reviewed the decided cases and need not repeat what I said there. Dalco was decided later and is in the same stream of cases. It is sufficient for present purposes if I say that in an appeal from disallowance of an objection by the Commissioner the burden lies on the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he derived during the relevant year of income. The burden of proving that the assessment is excessive (as explained in Dalco's Case) lies upon the taxpayer.

5. Evidence was given by five witnesses: the taxpayer, Mrs M.D. Vidulich (previously an officer with the Rose Bay Branch of the Bank), Mr. G.B. Kirby (an accountant), Mrs. Florence Rose (the taxpayer's former mother-in-law) and Mr. J.I. Paine (an officer of the Department of Taxation). All witnesses, except Mr. Paine, swore affidavits. The taxpayer, Mrs. Vidulich and Mr. Kirby also gave oral evidence. Mrs. Rose gave no oral evidence because there was medical evidence by affidavit (which was not challenged) that Mrs. Rose's health prevented her from attending Court and giving evidence. I exercised my discretion pursuant to Order 14 rule 9 and allowed Mrs. Rose's affidavit to be read notwithstanding her absence for cross-examination, attaching whatever weight to her evidence I might ultimately give it. There was also a fair body of documentary evidence.

6. The credit of the taxpayer was impugned by the Commissioner. The Commissioner's case was that on critical issues the taxpayer should not be believed and that his evidence, though admittedly supported by documents on some matters, was not supported by documents on other matters. It was argued by counsel for the Commissioner that the taxpayer had not discharged the burden which the Income Tax Assessment Act 1936 ("the Act") casts upon him of proving that the amended assessments were excessive.

7. Counsel for the taxpayer argued that the taxpayer should be believed, that his evidence was supported substantially by documents, including contemporaneous documents, and by other witnesses and that he had discharged the requisite burden of proof.

8. I shall state my findings of fact. The taxpayer was born on 9 August 1945 in the United Kingdom. He migrated to Australia in 1967, met and married Gail Slater in 1969 who had a daughter, Victoria, by her previous marriage. Her daughter (called Vikki in the evidence) was aged four at the time of the taxpayer's marriage to Gail Slater. Gail Slater's parents were Eli and Florence Rose and Gail was an only child. The taxpayer and his wife had a son (Eden) born in 1970. Mr. Eli Rose died in 1972. The taxpayer's relationship with Mrs. Florence Rose was amicable until towards the late 1970's when the relations between the taxpayer and his wife deteriorated, resulting in their separation in 1981 and divorce in 1982. The deterioration in the relationship between the taxpayer and his wife also led to a progressive deterioration in his relationship with his mother-in-law, Mrs. Florence Rose.

9. The late Mr. Eli Rose conducted, in conjunction with others, a gambling club in Sydney known as the Forbes Club. After the late Mr. Rose's death in 1972 Mrs. Florence Rose continued to retain an interest of some kind in the gambling business. During her husband's life Mrs. Rose played some role in the affairs of the Forbes Club, in particular relating to the handling of money, a role which continued after his death. The Club closed in 1978. The Club's business was essentially a cash business.

10. The taxpayer commenced his own business in 1968 of importing and selling fancy goods and electrical goods which he conducted through a company, Custom Cleared Imports Pty. Limited ("Custom Cleared"). The business had five retail outlets in Sydney and Parramatta. Custom Cleared was a subsidiary of Vicman Holdings Pty. Limited. The taxpayer controlled the companies as its principal shareholder and director, the other shareholders being members of his family.

11. The main source of income of the taxpayer consisted of payments (whether salary or dividend, the evidence is not clear as to which) from the business of Custom Cleared. The only other sources of income to him were nominal amounts from associated companies.

12. The taxpayer never had any involvement with the Forbes Club. After the death of Mr. Eli Rose the taxpayer helped Mrs. Florence Rose with her business affairs to some extent, but most of this work was done, not by the taxpayer himself, but by the staff of his business. Mrs. Florence Rose had accountants to prepare and lodge her income tax returns who also generally attended to work of an accounting nature on her behalf. The taxpayer ceased to assist Mrs. Florence Rose in about 1978 or 1979 when relations between his wife and himself became strained.

13. The taxpayer was a director of F. Rose Investments Pty. Limited, a company substantially owned by Mrs. Florence Rose, but it is not clear when he ceased to be a director thereof.

14. Mrs. Florence Rose was fond of her daughter Gail and granddaughter Vikki. At all relevant times she had access to substantial sums of cash, doubtless in the main from the Forbes Club. In the 1970's, including the 1978 year, Mrs. Florence Rose had investments which moved from one account to another, from one branch of the Bank to another and from one name to another, but she controlled all of them. They consisted of a considerable number of interest bearing deposits, a few savings bonds, some other fixed interest securities and some real estate. The moneys were deposited with the Rose Bay and Kings Cross branches of the Bank. Larger investments tended to be with the Rose Bay branch. The relevant year is the year of income ended 30 June 1978; but for some years before that, during the year itself and thereafter Mrs. Florence Rose placed money on interest bearing deposits in her own name, the name of her company - "F. Rose Investments Pty. Limited", her daughter - Gail Scallan, and her granddaughter - Vikki. Investments in the name of her granddaughter were sometimes in the name of Victoria Sarah Slater and at other times in the name of Victoria Sarah Scallan. Mrs. Florence Rose also had at least one interest bearing deposit in the name of her grandson, the taxpayer's son, Eden Charles Scallan. Some of those investments of Mrs. Florence Rose were held jointly in her name and that of her daughter or granddaughter. It should be noted that among the various names used by Mrs. Florence Rose for investments was her maiden name "Florence Hampson". The taxpayer had no banking account or investment of any kind with the Bank at its Rose Bay branch at any time relevant to this case.

15. Mrs. Florence Rose frequently brought her granddaughter Vikki into the Rose Bay branch of the Bank where she attended to banking business at times relevant to this case.

16. I come now to the interest bearing deposit with which this case is concerned. On 9 January 1978 the sum of $106,000 was placed on interest bearing deposit with the Rose Bay branch of the Bank. The IBD deposit number is 4632 and the money was placed for a term of three months until 9 April 1978 at the interest rate of 9 percentum per annum. The IBD was placed in the name of "Miss Victoria Sarah Slater, 37 Dudley Road, Rose Bay, 2029". The taxpayer and his wife lived at the Dudley Road, Rose Bay address until early in 1980 when they moved to a house in Vaucluse which they had purchased in either late 1978 or early 1979 for $250,000, $153,000 of which was a gift by Mrs. Florence Rose to her daughter, Gail, for the purpose of assisting in that purchase.

17. When the deposit matured on 9 April 1978 the principal of $106,000 and $2,000 of the $2,385 accrued interest was rolled over and deposited with CBC Properties Limited, the remaining $385 interest being paid to Mrs. Florence Rose. Interest accrued on the deposit with CBC Properties Limited in the sum of $1,033 and was relodged in the form of an interest bearing deposit, again with the Bank at its Rose Bay branch in the sum of $109,033 on 19 May 1978. That deposit was rolled over on a number of occasions until at least August 1980 when it was withdrawn and probably paid to Mrs. Florence Rose. I say "probably" because the evidence does not permit a positive conclusion to be drawn that Mrs. Florence Rose in fact received the moneys; but it does lead to a firm conclusion that it was not paid to or on behalf of the taxpayer. All relevant rollovers of the deposit, which was initially IBD No. 4632 opened on 9 January 1978, were in the name "Miss Victoria Sarah Slater". There is one slightly curious aspect of this history of deposits, namely, that the deposit lodged on 19 May 1978 (IBD deposit no. 4721) was expressed as being "Renewal IBD 4691 + Int". The evidence is not clear about IBD 4691, but it seems that it was a short term IBD somewhere between the maturing of deposit 4632 on 9 April 1978 and the placing of the principal sum plus accrued interest into deposit 4721 which opened on 19 May 1978.

18. I am satisfied that the amount of $106,000 placed on interest bearing deposit with the Bank on 9 January 1978 was a deposit of moneys, probably the property of Mrs. Florence Rose, in the name of her granddaughter, Vikki, but not the property of the taxpayer. I am satisfied that the taxpayer was a truthful witness on the material matters.

19. The taxpayer's case that those moneys were not his property is supported strongly by the documentary evidence including contemporaneous documents. The taxpayer's case is also supported by the evidence of Mrs. Vidulich, the bank officer with the Rose Bay branch of the Bank at the relevant time, who said, when asked to identify the taxpayer in Court, that she had never seen him before. She was continuously employed during relevant times in the Rose Bay branch of the Bank and at the most relevant times in the section dealing with interest bearing deposits. She was familiar with Mrs. Florence Rose, who came frequently to the Rose Bay branch often accompanied by her granddaughter, Vikki.

20. I mentioned earlier that Mrs. Florence Rose swore an affidavit in this proceeding but was not cross-examined because of her medical condition which rendered her unfit to attend Court. In paragraph 3 of her affidavit she swore that she did not recall opening the relevant interest bearing deposit (No. 4632), had no recollection of depositing moneys to that account and no recollection of receiving proceeds from it. The evidence before the Court establishes affirmatively that this interest bearing deposit was opened by Mrs. Rose and operated by her without any benefit accruing to the taxpayer.

21. Mrs. Rose swore in paragraph 5 of her affidavit that "I know nothing" about the relevant interest bearing deposit in the name of her granddaughter. I am satisfied on the evidence that the IBD was opened by Mrs. Rose herself in the name of her granddaughter. Whether her granddaughter has or had any beneficial interest in the interest bearing deposit is not a matter which I need decide and do not do so.

22. In paragraph 4 of her affidavit Mrs. Rose swore:

"After the death of my husband in 1972 the
applicant took charge of all of my business and
personal affairs because I trusted him. I left
all business matters to him including any banking
matters and he dealt with all matters for me. All
of my papers were held by the applicant. I never
used to handle any business. He looked after
everything."

23. Mrs. Rose does not state in her affidavit for how long she alleges the taxpayer attended to these matters on her behalf; but I am satisfied that any assistance by him to her was of a limited nature, that he did not attend to all her business matters including banking and did not hold all her papers, though he did hold some of them, that he did not handle her business affairs and that he did not look after everything following her late husband's death. I give no weight to the affidavit of Mrs. Rose.

24. There were tendered in evidence by counsel for the taxpayer certain documents which I marked as exhibits "voir dire A, B, C and D" for the purpose of discrediting the evidence of Mrs. Rose in her affidavit. I deferred ruling on the admissibility of these documents until giving judgment. In the light of my earlier findings, particularly with respect to Mrs. Rose's affidavit, it is not necessary that I rule on the admissibility of these documents.

25. The question of admissibility raises interesting questions of the kind referred to by Jacobs J. in Patmoy v Paltie (1960) NSWR 334 and Cross on Evidence, 3rd Australian edition, pp 485-6 (para. 10.10). It is preferable that a decision on the relevance of Patmoy v Paltie and the authorities referred to in Cross in a case such as the present one are left to another case for another day where they may have more direct relevance and must be decided. This is not such a case.

26. This disposes of the principal issue in the case and leaves only the inclusion by the Commissioner in the taxpayer's assessable income of what was said to be the profit of $11,500 arising from the alleged sale by the taxpayer in the 1978 year of income of a motor vehicle.

27. The taxpayer was an enthusiastic collector of motor cars known as Jensen Interceptors manufactured in the United Kingdom. He also had an eye for colour. He bought what the evidence describes as a Jensen Interceptor Mark I motor car, coloured red, for $10,000 which in December 1973 he traded in for the purchase of an orange coloured Jensen Interceptor Mark II motor car from a Mr. Kurt Kellor of Kings Cross for the purchase price of $20,000, of which the taxpayer paid cash of $5,000. The trade-in value of the red Jensen was $15,000.

28. In March 1974 the taxpayer bought a Jensen Interceptor Mark III motor car, this time coloured blue, from Sanderson Motors of Rose Bay for $13,000.

29. In either late 1973 or March 1974 the taxpayer sold his Jensen Interceptor Mark II orange coloured vehicle to a Mr. Phil Stanton for $20,000. Whilst on a visit to the United Kingdom in 1974 the taxpayer purchased another Jensen Interceptor motor vehicle for 2,000 pounds sterling, coloured yellow, which he sold for $13,000 in 1975.

30. In June 1976 the taxpayer acquired a Mercedes Benz motor car from a Mr. Stevens which was financed by lease from Industrial Acceptance Corporation Limited. The taxpayer traded in his blue coloured Jensen Mark III car which he had purchased in March 1974 from Sanderson Motors. The taxpayer drove the Mercedes Benz car from the time he purchased it in June 1976 until November 1979. He said that he owned and drove no other vehicle during those three-and-a-half years. I accept his evidence as truthful.

31. The taxpayer therefore succeeds in his appeals with respect to both the interest bearing deposit and the motor vehicle.

32. There is one final matter which must be dealt with before leaving the case. Counsel for the taxpayer asserted that the amended assessments should be set aside because they were made by the Commissioner without any reasonable basis for making them and for a purpose foreign to the process of assessment under the Act, in essence to cause inconvenience or embarrassment to the taxpayer. I reject this submission. The Commissioner made a thorough investigation of the taxpayer's affairs and produced at the end of the investigation the assets betterment assessment, limited though to the two sources of alleged income, namely, the interest bearing deposit of $106,000 and the alleged profit arising from the sale of the Jensen Interceptor motor car. It is clear from the evidence, including reports of officers of the Australian Taxation Office, that the Commissioner was in doubt as to whether the interest bearing deposit was the property of the taxpayer and whether he had derived a profit from the sale of a motor car during the 1978 year of income; and that the Commissioner took the view that it was for the taxpayer to prove his case in Court. In the circumstances of this case this attitude by the Commissioner was supportable. Also, the Commissioner's officers interviewed the taxpayer on more than one occasion and he was not entirely frank with them for a variety of reasons, including his fear of his mother-in-law. I have taken all these matters into account in assessing the credibility of the taxpayer; but nevertheless believe him with respect to the issues in this case. I am satisfied, however, that there is no foundation for the attack made upon the bona fides of the assessment process.

33. The appeals must be allowed with costs.