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Federal Court of Australia |
INCOME TAX - taxation objections - appeal against assessments - betterment assessments - quality of evidence to explain source of monies to acquire assets - onus - assessments varied in part.
Taxation Administration Act 1953 s 14ZZ
No SG 69 of 1995
HUY KIEN LUU and MO DUNG LUU v DEPUTY COMMISSIONER OF TAXATION
Mansfield J
Adelaide
24 January 1997
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIAN DISTRICT REGISTRY ) No SG 69 of 1995
)
GENERAL DIVISION )
BETWEEN:
HUY KIEN LUU and
MO DUNG LUU
Appellants
- and -
DEPUTY COMMISSIONER OF
TAXATION
Respondent
MINUTES OF ORDER
CORAM: Mansfield J
PLACE: Adelaide
DATE: 24 January 1997
THE COURT ORDERS THAT:-
In relation to the appellant Huy Kien Luu:
. the amended assessment of taxation on his income for the year ended 30 June 1989 issued on 24 October 1994 be set aside on the basis that there was no omitted income in the taxation return lodged by Mr Luu for that year;
. the amended assessment of taxation on his income for the year ended 30 June 1990 issued on 24 October 1994 be set aside on the basis that there was no omitted income in the taxation return lodged by Mr Luu for that year;
. the amended assessment of taxation on his income for the year ended 30 June 1991 issued on 24 October 1994 be confirmed; and
. the amended assessment of taxation on his income for the year ended 30 June 1992 issued on 24 October 1994 be confirmed.
In respect of the appellant Mo Dung Luu:
. the amended assessment of taxation on her income for the year ended 30 June 1988 issued on 11 November 1994 be set aside on the basis that there was no omitted income in the taxation return lodged by Ms Luu for that year;
. the amended assessment of taxation on her income for the year ended 30 June 1989 issued on 11 November 1994 be varied by substituting for the sum of $50998 (including income declared by her of $4615) of taxable income the sum of $33011 as taxable income; the basis upon which additional tax was imposed is confirmed, but the amount payable for additional tax will have to be recalculated;
. the amended assessment of taxation on her income for the year ended 30 June 1991 issued on 11 November 1994 be varied by substituting for the sum of $73027 taxable income the sum of $70027 as taxable income; the basis upon which additional tax was imposed is confirmed, but the amount payable for additional tax will have to be recalculated; and
. the amended assessment of taxation on her income for the year ended 30 June 1992 issued on 11 November 1996 be varied by substituting for the sum of $45993 (including income declared by her of $26250) taxable income the sum of $42993 as taxable income; the basis upon which additional tax was imposed is confirmed, but the amount payable for additional tax will have to be recalculated.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIAN DISTRICT REGISTRY ) No SG 69 of 1995
)
GENERAL DIVISION )
BETWEEN:
HUY KIEN LUU and
MO DUNG LUU
Appellants
- and -
DEPUTY COMMISSIONER OF
TAXATION
Respondent
REASONS FOR JUDGMENT
CORAM: Mansfield J
PLACE: Adelaide
DATE: 24 January 1997
This is an appeal pursuant to s14ZZ of the Taxation Administration Act 1953 against decisions of the respondent ("the Commissioner") made on 3 August 1995 disallowing the appellants' following taxation objections:
. in the case of the appellant Huy Kien Luu ("Mr Luu"), decisions with respect to amended assessments of taxation on his income for the years ending 30 June 1989 to 30 June 1992 inclusive, and
. in the case of the appellant Mo Dung Luu ("Ms Luu"), decisions with respect to amended assessments of taxation on her income for the years ending 30 June 1988, 30 June 1989, 30 June 1991 and 30 June 1992.
Under s14ZZO of that Act, the appellants each have the burden of proving that the decisions concerning their respective assessments were excessive. The jurisdiction of the Court, once invoked, is of course one in which the Court in cases such as this comes to its own conclusions on the facts and gives effect to its findings in the order which it makes: McCormack v Federal Commissioner of Taxation [1977] FCA 21; (1977) 33 FLR 53 at 55-56 per Bowen CJ and Brennan J (as he then was).
Background
Mr Luu and Ms Luu are brother and sister. Mr Luu was born on or about 13 March 1967 and Ms Luu on 7 September 1952. They, as part of a larger family group including their parents, left Vietnam in late 1978 or early 1979 and arrived in Malaysia. They resided in a transit camp in Malaysia for some months. They applied to Australian authorities for, and were granted, refugee status. They arrived in Australia on 11 October 1979 and were immediately granted permanent residence. They have lived in Australia ever since.
In Vietnam, the appellants' parents Mr Vinh Luu and Ms Ngoc Yen Phuong had a family business involving milling and food wholesaling. It was a successful and profitable enterprise, until about the mid 1970s when the South Vietnamese government collapsed. It had enabled their parents to accumulate some wealth, but it is not possible on the evidence to decide to what extent. The victimisation of Mr Vinh Luu and the family by the new Vietnamese government led to their decision to come to Australia.
Mr Luu from an early age worked casually as a cleaner in restaurants and as a gardener. He said he started doing that work from 1980, and was challenged in cross-examination about his then age. I do not think that anything really turns on the apparent discrepancy between his asserted age at the time of 15 years, and the calculation from his date of birth to reach 13 years; he explained that his declared birth date in Vietnam would have an earlier starting point.
Mr Luu's earnings increased over time, and his evidence is that from about 1985 he worked full time in restaurants, as a cleaner, kitchen hand and later as a chef. There is also evidence from Mr Luu that he lodged taxation returns for periods prior to the year ending 30 June 1987, as his casual earnings had reached the then prescribed level, but the Commissioner has a record of him first having lodged a taxation return for the year ending 30 June 1987.
Ms Luu suffered, apparently quite severely, from a childhood illness of polio. Her income from the time the family arrived in Australia until 1989 was from either sickness benefits, unemployment benefits or rehabilitation benefits, under the Social Security Act in force from time to time. She supplemented that income by casual dress designing and dress making for friends and acquaintances. She first lodged an income tax return for the year of income ended 30 June 1989.
In about January 1989, Mr Luu and Ms Luu commenced to operate a restaurant business known as the Tandoor Shalimar Restaurant and continue to do so. Associated with that activity, they operated also an Asian food outlet in the University of Adelaide from 1989 to 1994. Their taxation returns disclose income received in the operation of those businesses.
From 1983, Mr Luu and Ms Luu lived with their parents at 10 Hammond Road, Findon ("the Hammond Road property"), purchased for $83000 said to be with funds from their parents' resources but at the time put into the names of two of their brothers Mr Dan Kien Luu and Mr Lac Kien Luu. Unfortunately, both the appellants' parents are now deceased, Mr Vinh Luu in February 1995 and Mrs Ngoc Yen Phuong in September 1994. It is one of the strongly voiced concerns of each of the appellants that, despite the issues concerning their taxation assessments being current from August 1992, the Commissioner through his officers did not make direct inquiries of either of their parents to confirm the source of funds which they assert were made available to them by, or through, their parents and to confirm other matters relating to their sources of revenue for the years in question.
The taxation returns and initial assessments
The taxation returns lodged by, or on behalf of, Mr Luu for the years to June 1992 disclosed taxable income (before deductions) and the sources of income as follows:
Year ending
30 June 1987
3154
Share own restaurant
and $3120 rent received
Income Source
$14573 Restaurants as
employee 30 June 1988 10255
Restaurants as employee
39 June 1989 4680 Restaurants
as employee 30 June 1990
19267 Share own restaurant
30 June 1991 (120)
Share own restaurant
30 June 1992 23855 Share own restaurant
The taxation return for the year ending 30 June 1987, and the group certificates accompanying it, indicate income mainly from one restaurant with which he commenced work on 19 October 1986; for the period thereafter they disclose income of about $318 per week on average. Further income from another restaurant averages over the full taxation year about $78 per week.
For the year ending 30 June 1988 that income was from three restaurants, each for parts of the year, and to some extent for overlapping periods. It reflects taxable earnings disclosed of about $200 per week on average. The taxable earnings as an employee for the period covered by the group certificates during the period of overlap of employment, if averaged during that period, amount to about $216 per week. Those figures are to be compared to his oral evidence that he was earning considerably in excess of the amounts disclosed on those group certificates, and of the order of about $350 per week. There is no independent evidence confirmatory of his oral evidence, and no apparent reason why such conduct should be undertaken by those employers either generally, or specifically from 1 July 1987. Mr Luu's evidence was that he did not request that conduct, nor have any discussions with his employers about it.
The taxation returns lodged by, or on behalf of, Ms Luu for the period 1988-1992 including the years in question disclose taxable income (before deductions) and the sources of income as follows:
Year ending
30 June 1988
661
Interest, bank accounts
2413
3120
Interest
Rental received
Income Source
No return 30 June
1989 $ 4154 Share own
restaurant, 30 June 1990
19357 Share own restaurant
30 June 1991 (738)
Share own restaurant
30 June 1992 23592 Share own
restaurant,
The partnership taxation returns for the years ending 30 June 1989 to 30 June 1992 and the accompanying financial statements show trading profit consistent with the distributions declared in the personal taxation returns for the respective years. The balance sheet shows that each of Mr Luu and Ms Luu introduced capital of $14519.85, and that the restaurant operations had been financed in part by loans from the Hindmarsh Adelaide Building Society.
There was a dramatic dip in the profit level of the business in the financial year ended 30 June 1991, a year in which the assets of both Mr Luu and Ms Luu increased very significantly. After allowing for personal business related expenses, both Mr Luu and Ms Luu declared a small loss as appears above. It is the Commissioner's view that that drop reflects in some way the inappropriate withdrawal of funds from the business operations before declaring the partnership income, and those withdrawn funds were used to finance asset acquisitions during that year. The gross partnership revenue disclosed for the three years ending 30 June 1990 to 30 June 1992 for both parts of the business is $191863, $173352 and $187201, so there is some but not a great fluctuation in declared gross revenue over that period.
The detailed trading financial statements tendered by the appellants show the following picture:
YE 30/6/90
YE 30/6/91
YE 30/6/92
YE 30/6/93
sales
cost of sales
expenses
(rent)
(wages)
101311
40498
60813
27552
5135
58157
2656
101908
45451 *
56457
25256
7827
60628
(4171)
116200
37392
78807
29122
9242
56571
22231
135140
42241
92899
25772
15188
58025
34874
University food bar:
sales
cost of sales
expenses
(wages)
90553
35850
54703
7500
12425
42278
71443
57145 *
14298
-
7383 *
6915
71000
37293
33707
1155
4535
29171
66400
53274
13126
3652
7287
5839
Overall
44934
2744
51403
40714
Restaurant:
* Those figures suggest that the 1990/91 result is out of kilter on cost of sales in both aspects of the business, and that the non wages expenses at the University Asian food bar were higher in that year. I do not know if the cost of sales figures was independently verifiable, or if its composition in detail identifiable, but no attempt to prove either of those matters has been made.
The Commissioner initially assessed the tax payable and medicare levy (and provisional tax) on the figures declared in the personal income tax returns, allowing also for personal deductions claimed.
The betterment assessments
In August 1992, the Commissioner commenced a routine audit of the taxation affairs of Mr Luu and Ms Luu.
The information sought included their personal living expenses, which in the case of Mr Luu for the 1990/91 financial year was stated to involve no personal expenses (including food) except for clothing of $240 per annum, superannuation of $1200 per year (claimed as a deduction in his tax returns), and car expenses for registration and insurance of $880 per year and for operating costs of $40 per week. He also stated that he had acquired on 18 May 1992 a Mercedes motor car at a cost of $37000 on credit from the ANZ Bank. Ms Luu's stated personal living expenses for 1990/91 indicated $10 per week only was spent on food, and that she also incurred $1460 per year on car expenses including insurance, clothing of $400 per year, and expenses relating to a house for rates, insurance, telephone and electricity of about $830 per annum; she also disclosed an expense of $600 per annum for superannuation (claimed as a deduction on her taxation returns). Both statements, which were provided through their accountant, also disclosed rental revenue for each of them of $240 per month and interest to ANZ Bank on a mortgage of $215 per month, leaving a surplus of $25 per month each, from a property at Grange Road, Findon.
By letter dated 22 December 1993, the Commissioner gave notice of proposed betterment assessments to each of Mr Luu and Ms Luu, allowing for living expenses adjusted having regard to Australian Bureau of Statistics information. This notice invited response from them. The significant features of the proposed asset betterment statements were:
. in the case of Mr Luu, the increase in net assets from assets worth $60061 at June 1987 to assets worth $283646 at June 1992. The increase in assets was represented principally by new assets being:
50% business plant and equipment $19534 (1989)
1988 Ford motor car 26644 (1990)
increase in land and buildings by the sum of 74650 (1991)
for 50% of purchase price of property
at 213 Grange Road, Findon
increase in land and buildings by the sum of 60000 (1992)
for 50% of purchase price of the
Hammond Road property (the earlier
50% having been acquired in 1986)
1980 Mercedes motor car 38736 (1992)
when his liabilities over that period did not greatly increase; they were $46384 in June 1987 and increased to about $61000 for 2 years but were at $49020 at June 1992.
The net asset increase in each year was adjusted to allow for private expenditure of $11609 in 1987/88 (and increased slightly for each subsequent year), interest on borrowings not otherwise brought to account, taxable income declared, and lesser monetary items, to reach the proposed omitted income. Schedules were provided to show the calculations.
. in the case of Ms Luu, much the same issues emerged. The increase in her assets over the relevant period was from $2364 at June 1987 to $216787 at June 1992. Again that increase was represented principally by new assets being:
increase in funds in bank accounts by $ 9889 (1988)
and by a further 29080 (1989)
and by a further 6270 (1990)
(it reduced somewhat in
1991 and 1992)
50% business plant and equipment 19534 (1989)
1988 Ford motor car 15000 (1988)
land and buildings, for 71000 (1988)
purchase of property at
78 Barker Road, Flinders Park
land and buildings, a further 74650 (1991)
for 50% purchase of property
at 213 Grange Road, Findon
when her liabilities over that period were only for mortgage loans with the amount outstanding including $44858 at June 1988 for the property at 78 Barker Road, Flinders Park, which reduced by in excess of $15000 in 1991 and was repaid in full by June 1992; the amount of $7150 at June 1989 for the business but which progressively reduced to $1416 by June 1992; and the amount of $14458 at June 1991 for the Grange Road property.
The net asset increase in each year was adjusted in a similar process as that adopted in respect of Mr Luu's position.
The substantial issues arising from the proposed assessment confronting Mr Luu were the source of funds for the assets acquired, their value or cost (if contested), and the legitimacy of the private expenditure figure. It was accepted by him that the assets were not acquired from disclosed income in the year of acquisition of each of the assets. The evidence is that those assets were each acquired from funds (apart from borrowed funds) provided by his parents and representing a mix of moneys from moneys held by them on his behalf (as his practice had been to hand over any earnings to be held by them), from their personal moneys, and from moneys generated by the private sale of diamonds which had been brought from Vietnam by them to acquaintances.
The substantial issues arising from the proposed assessments confronting Ms Luu were much the same as those for Mr Luu. The evidence as to the source of funds to support the asset growth, and as to the level of personal expenditure was much the same. As with her brother, she said they were each supported by their parents who paid for all food and outgoings on the family home, and that they lived very frugally. Her available cash resources were said to include both $US6000 brought with her from Vietnam, and moneys repaid to her by an acquaintance who visited Adelaide and to whom she had made certain cash loans whilst in the transit camp in Malaysia in 1979.
There were certain communications, both oral and in writing, emanating from the accountants for Mr Luu and Ms Luu in response to those proposed assessments. As the Commissioner submits that I should give no weight to the evidence of either of them, it is desirable to note these early responses.
It was asserted for their clients by the accountants by letter of 17 January 1994 that the source of funds to increase assets was not income, and that those funds were from cash savings of Mr Luu of $60000 and Ms Luu of $50000 saved between 1979 and 1987, plus their parents' support by proceeds of realisation of jewellery, plus support from the Vietnamese community which was said to "have a system whereby support is given when members of the community are wanting funds for real estate". It was also asserted that the personal spending was each in the order of $40 per week. By further letter of 31 May 1994 the accountants submitted to the Commissioner their clients' version of asset betterment statements, which were said to "reflect their positions, without disclosure of moneys borrowed from community arrangements". It indicated that each of Mr Luu and Ms Luu would accept amended assessments to "avoid disclosing these arrangements and being seen to betray the trust of other community members".
In the case of Mr Luu, that statement included substantial cash of $72000 as an opening figure at June 1987. It also included a Saab motor car valued at $10000 as an opening asset said to have been realised for that sum in 1989. It asserted the opening figure for land, representing his then 50% interest in the Hammond Road property was worth $40000 (not $60000 as the Commissioner had indicated.) It made no allowance for the cost of acquisition by Mr Luu of the remaining 50% of that property during 1992. Otherwise the asset figures were only slightly adjusted. The liabilities asserted for mortgages were considerably less than those proposed by the Commissioner, but it appears that that is because the borrowing from the Hindmarsh Building Society secured over the Hammond Road property was not included. The private expenditure was allowed at $2000 per annum. The net result of the response was firstly to present a picture of an increase in gross assets from $122061 at June 1987 to $202483 at June 1992, and then (after the further adjustments for personal expenditure and interest thereby assuming greater resources available from earnings for each year) an offer to submit to betterment assessments in respect of the years 1990-1992 for omitted income of $691, $9100 and $4596 respectively.
It is significant, in my judgment, that apart from the initial cash resource of $72000, the proposed asset betterment statement put forward by Mr Luu did not identify any source of funds from his parents, either of his own money or from their own savings or from realisation of jewellery in any of the years in question. The only external inflow of funds was said to be a gift of $10000 from Ms Luu during 1992.
In the case of Ms Luu, there was no opening cash at June 1987 but $50000 brought in at June 1988. Credit in bank accounts for the years 1987 and 1988 was asserted to be some $14000 more than identified by the Commissioner from records presented to him. Jewellery worth $5000 was included as an opening asset, but apparently realised during 1992. There was an opening entry of a Honda motor car valued at $1500 at June 1987, also apparently realised during 1988. Otherwise the assets and liabilities were much as proposed by the Commissioner. The items referred to indicated an increase in net assets of some $116000 during 1988 represented mainly by the cash, the banking, the Ford motor car, and the property at 78 Barker Road, Flinders Park, and the interest in the business (I suspect this should have been included first in the figures for the 1988/1989 year) less the home loan of $44858. There were further increases of net assets of some $5000 only in 1989 (mainly due to some increase in bank funds offset by increased borrowing of about $7000) and then about $22000 in 1990 (represented mainly by further cash and bank surplus) and a further amount of about $29000 in 1992 (largely reflecting some $23000 reduced borrowing). The 1991 year did not involve any significant deviation other than a slight change in net assets, although the figures showed the substantial new asset of $74650 representing her half of the property at 213 Grange Road, Findon offset by a reduction in available funds from cash and bank accounts of about $74000. No explanation was offered for the source of the cash of $50000 which became available in the 1988 year, nor for the other material increases in cash funds (the cash and money in the bank) of an additional $9889 in 1988 and $20263 in 1990, nor for the source of funds to reduce bank liabilities by $22880 in 1992, other than the implication that the funds may have come from the Vietnamese community. The adjustments allowed $2000 per year for private expenditure, but only from 1989 onwards and a gift of $10000 to Mr Luu in 1992. She disavowed that gift in her oral evidence. Otherwise the figures in the proposal were close to the figures provided by the Commissioner. The result was an offer on her behalf for a betterment assessment to be issued for omitted income of $116281 for 1988 but otherwise a relatively neutral position.
Again, in my judgment, it is significant that Ms Luu was prepared to submit to betterment assessments on the basis that there was an unaccounted for increase in her net assets of $116281, but also with the additional cash availability referred to. It was not then suggested that the source of those funds was non-taxable money received from her parents from the sale of jewellery, from her savings held by them on her behalf, or from their own money.
By letter of 16 August 1994, the accountants wrote providing assertions, acknowledged to be unsubstantiated by documents, of the income and savings of Mr Luu and of Ms Luu from their arrival in Australia. In the case of Mr Luu the total to 1988 was said to be $107000, made up of savings from casual work ($4000 in 1980 and slowly increasing to $12000 in 1985 when he was said to have been in full- time employment and further increasing to $13500 by 1988) totalling $77000 plus $30000 in 1986 from his mother "to look after in respect of house and shop purchase (note that is still owed at present)". I do not understand the comment in parenthesis; it is not suggested in any evidence that a loan from Mr Luu's mother was given to him. In the case of Ms Luu the total to 1988 was said to be $70000 including $US6000 brought from Vietnam, $7000 from sale of jewellery in 1982, $5000 from repayment of repaid loans in 1983, and savings from her unemployment benefits or pension and casual work increasing from $3000 in 1980 to $8500 in 1986.
The Commissioner, after considering that material, on 27 October 1994 in the case of Mr Luu and on 11 November 1994 in the case of Ms Luu issued amended assessments, which are the subject of this appeal, following advice of his intention to do so and including additional tax imposed as follows:
40% flat
14.026% per annum up to 30 June 1992
10% per annum from 1 July 1992 to 16 August 1994.
In the case of Mr Luu, the assessments were on the following bases:
Period
YE 30/6/89
YE 30/6/90
YE 30/6/91
YE 30/6/92
28367
68891
98085
37366
83467
97052
18099
83587
73197
16354
54367
50822
$144108
Net assets
increase Adjusted
taxable income after allowing for private expenses and non-deductable
losses Omitted
income Tax assessed
including additional tax
23684 34954
27370
22565
The more significant increases or changes in assets year by year which called for explanation as to their funding source, and which are reflected by the Commissioner's view now challenged on this appeal, that they were funded from income, are:
1989:
business plant and equipment
19534
Ford motor car
disposal of Saab motor car
decrease in mortgage debt
26644
(10000)
8278
50% purchase price property at
213 Grange Road, Findon
74650
increase in stock on hand (50%)
Mercedes motor car
purchase of remaining 50% property at
10 Hammond Road, Findon
increase in mortgage debt
1850
38736
60000
(5562)
increase in funds in bank $ 4218 1990: increase in funds in bank 3595 1991: reduction of funds in bank (7279) 1992: increase in funds in bank 2511
The private expenditure was deducted at $6247 for 1989 increasing by 5% per annum to $7268 for 1992, and interest on loans on the family home at the Hammond Road property was also deducted as a cost on available funds.
A similar process was undertaken in relation to Ms Luu. In her case, the assessments were on the following bases:
Period
YE 30/6/89
YE 30/6/90
YE 30/6/91
YE 30/6/92
43067
7912
58438
29942
50998
14175
73027
45993
46383
-
73765
19743
33842
-
45943
12746
$145095
Net assets
increase Adjusted
taxable income Omitted
income Tax assessed
including additional tax YE 30/6/88
49531 58216
58216
52564
In fact her declared taxable income for 1989/90 was $19357.
The significant increases or changes in assets year by year identified in the asset betterment statement and which were treated by the Commissioner as indicative of undeclared income are:
1988:
Ford motor car
sale of Honda motor car
purchase of property at 78 Barker Road,
Flinders Park
mortgage debt
15000
(1500)
71000
(44858)
business plant and equipment
increase in mortgage debt
19534
(6797)
50% purchase price property at 213 Grange Road,
Findon
decrease in mortgage debt
74650
2949
increase in stock on hand (50%)
decrease in mortgage debt
1850
22880
increase in funds in bank $
9889 1989: increase in funds in bank 29080 1991: decrease in funds in bank (19161) 1992: increase in funds in bank 4661
The adjustments for private expenses and non-deductible losses were done in much the same way as those for Mr Luu.
The objection
Both Mr Luu and Mrs Luu objected to the assessment on 2 December 1994. Both objections were disallowed on 3 August 1995.
The evidence
As indicated above, the evidence was that of Mr Luu and Ms Luu. They each asserted in evidence that the build up of their assets was from funds from within the family resources, and not indicative to any extent at all of non-declared taxable income. That is not consistent with what was said by them through their accountants on 31 March 1994. They each said that they had considerable savings by 1987, held by their parents on their behalf; they were unable to provide any details of those amounts, even as to where that money was held. In addition they each said their parents gave them extra funds from their parents savings as required, and including funds generated by the sale of diamonds brought from Vietnam to relatives and acquaintances. Ms Luu also said she had savings from $US6000 brought with her from Vietnam, $7000 from the sale of jewellery brought with her from Vietnam and some loan money repaid to her. In regard to the properties at 78 Barker Road, Flinders Park and 213 Grange Road, Findon their parents simply presented them with the cash necessary to procure the bank cheques required for settlement.
I have considered separately the question of their reliability as witnesses. For reasons which are common to each, I have reached the same view with respect to each, namely that whilst I think that the general family financing arrangements were as they each have described - that is that their parents ran the family finances and helped each of them out to the extent they could - I reject the proposition that all the funds used to generate the asset growth were from such sources. I am unable to place any great weight on their evidence on matters of detail.
There are a number of reasons for that conclusion. However, before expanding on those reasons, there are some general observations to be made.
Both Mr Luu and Ms Luu put forcibly that their parents, but especially their mother, should have been approached by the officers of the Commissioner to confirm their assertion as to the source of the funds, and for the Commissioner it was urged that they could have procured from their parents such supporting material. I do not, in the end, think that the fact that there was no information procured from the parents influences my judgment on the facts either way. I accept that both Mr Luu and Ms Luu felt that it was not their place to require their parents to provide such information. Nor does the fact that the officers of the Commissioner did not seek information directly from them colour my conclusions in any way adversely to the Commissioner. There is simply a lack of information when information might have been available.
It is obvious from the way that Mr Luu and Ms Luu gave evidence, and from correspondence tendered, that they are each generally critical of the officers of the Commissioner in the processes of the investigation into their affairs. The Court did not hear evidence into that conduct; it was not relevant to the appeal. But, whatever the perception of Mr Luu and Ms Luu, it is fair to say that on the material put before the Court on this appeal there is no objective basis for such criticism. However, it is obviously a genuinely and deeply felt belief on the part of Mr Luu and Ms Luu that those officers behaved aggressively and unfairly towards them. One can speculate about possible reasons why such belief came to be formed, albeit in truth (on the evidence before me on this appeal) misconceived. What is important is to recognise that that belief coloured the way each of them gave their evidence, so that they each appeared aggressive, argumentative and at times unresponsive. It is a pattern of behaviour that, in that context, I do not find of itself is indicative of a deliberate desire to mislead the Court.
I have referred to my overall assessment of the reliability of the evidence of Mr Luu and Ms Luu above. Although I have considered their evidence separately, I do not need to differentiate between them in the light of that conclusion. It is based in part upon the presentation of their evidence, but also upon the different explanations for the funding for their asset growth from time to time. There was no explanation for the information they provided by their accountants, either directly or by calling the accountants. Their evidence did not assert any funds provided by the Vietnamese community. Indeed, Mr Luu suggested that the reference to the Vietnamese community was really a reference to his parents, but did not satisfactorily explain then why such arrangements needed to be confidential and then shortly afterwards complained that his parents had not been approached to give the information on those matters which they would have given. It did not explain why in 1994 they, but in particular Ms Luu, were prepared to submit to substantial betterment assessments. It did not provide any detailed information about their individual spending patterns. I do not accept Mr Luu's evidence that his earnings from employment during the years 1988 and 1989 were greater than disclosed in his group certificates; no explanation for those employers from that time adopting that practice was proffered, and they were not called nor was any confirmatory evidence proffered. The explanation for the dramatic turnaround in the affairs of their business in the 1991 year, namely the illness of Ms Luu, is unsatisfactory. As noted above, the main differentiating factors for that year compared to the surrounding years' trading are not an increase in wages, which would have occurred when Ms Luu was ill and her services replaced by paid staff, but in the cost of goods sold. I have not enumerated all the matters of significance, but sufficient to indicate the general types of considerations which have led to that judgment.
On the other hand, I do not think either Mr Luu or Ms Luu were attempting to be untruthful in their evidence. It is possible to speculate why, despite their genuineness, their evidence is unsatisfactory. It may be a consequence of their lack of detailed knowledge of the running of the family's financial affairs, and a lack of contemporary appreciation of the source of all funds to support asset growth. It may be that the general understanding they each had as to the operations of the family's financial affairs has led to the beliefs which they now assert. It is unnecessary to make a specific finding on that aspect.
The result is that, whilst I reject the case as presented by the appellants, I find the broad features of their family financial arrangements and of their activities are made out. In particular, I accept in general terms that Mr Luu did engage in casual work at least from the early 1980s and that both he and Ms Luu gave to their mother for safekeeping their earnings or income or at least part of it, subject to it being available to them for day to day needs upon request. I do not accept that it was of the order he deposed to. I also accept, and find, that their parents were responsible for the money management of the family, including attending to the supply of food and the payment of recurrent household and like expenses. It is unclear what the level of those expenses were, in particular in respect of Mr Luu and Ms Luu, or whether their parents used only the parents' own money for such expenses or used some of that given to them from the earnings or income of Mr Luu and Ms Luu towards such expenses. I also accept, and find that the family brought with them from Vietnam some diamonds, and that they were held by the mother and realised by her by sale to friends or acquaintances from time to time. No independent evidence assists me in finding the extent of the funds so generated, or their application, or the occasions of the sale.
I accept that by 1987 Mr Luu and Ms Luu had some not insubstantial savings, and that in the case of Ms Luu those savings included $US6000 brought with her from Vietnam. I am unable to find that her savings included the loan repayment she referred to, as the evidence as to the time and circumstances of the loan and of its repayment is too vague to be convincing. In the case of Mr Luu, I have indicated that I do not accept that his earnings from 1980 were of the order he deposed to, and apart from his taxation returns there is no other reliable evidence to utilise to make a finding. I accept that each of Mr Luu and Ms Luu lived frugally, and to some extent were supported by their parents, thus increasing their capacity for saving, but again I do not accept that it was of the order they each described although I accept Ms Luu's case that her needs were very modest.
The result of those conclusions is that I regard certain of the challenged assessments as excessive, because they make no allowance for any accumulated savings of Mr Luu at all and an allowance of $10000 only for accumulated savings to 30 June 1987 for Ms Luu, and because they make no allowance at all for any funds made available from their parents' resources, whether from the sale of jewellery or otherwise. Although I suspect that the amount allowed for private expenses in the case of Mr Luu is on the high side, given the view I have taken on the issue of his unreliability on matters of detail, I am unable to find that the figure allowed by the Commissioner is excessive in that regard. In the case of Ms Luu, I find that her personal expenses were less than the amounts allowed by the Commissioner, and for that additional reason in my view she has established that the assessments are excessive.
However, my conclusion overall is that the assessments are based upon reliable information as to the asset growth, both as its time and value, and that subject to the personal expenses of Ms Luu they also reflect a realistic picture of the application of available funds for private expenses and non-deductible losses. Plainly, in respect of both Mr Luu and Ms Luu there is substantial asset growth which remains unexplained except on the basis of undisclosed taxable income. If, in reaching the conclusions set out below in the light of those general findings, the appellants' feel that I have insufficiently reflected the funds available to them from their own savings or from their parents resources, or in the case of Ms Luu I have insufficiently cut back the figure for her personal expenditure, they will have to recognise that such findings are made on the evidence before me and in the light of the weight which I have decided I can give to that evidence. There is no especial science in selecting the figures which I have selected. They are the result of conclusions reached considering all of the material before me.
In the case of Mr Luu I conclude that the assessments issued on 27 October 1994 for the years ending 30 June 1989 and 30 June 1990 are excessive. In respect of those years, in my judgment, it is probable that the assets acquired were from cash resources available to him from his own savings, held by his parents, and to some extent from resources of his parents. I am unable to find whether those cash resources were of any greater amount than needed to acquire those assets. In other words, on my judgment, the funds used to acquire those assets during those years had exhausted the available non-income cash resources available to him. I think that there is no omitted income in respect of those years, and I order that the assessments be varied to reflect that conclusion. The taxable income of Mr Luu for each of those years was the amount disclosed by him in his taxation returns.
In respect of the years ending 30 June 1991 and 30 June 1992, I am not satisfied that those assessments are excessive.
I have also considered the basis upon which the Commissioner imposed additional tax for those years, for interest under s170AA of the Income Tax Assessment Act 1936 and for penalties under s223 of that Act including the exercise of his discretion to remit part of the additional tax under s227(3) of that Act having regard to Taxation Ruling No.IT 2517. I see no reason to interfere with his decision in that regard.
I accordingly confirm each of the taxation assessments dated 27 October 1994 issued to Mr Luu in respect of his income for the financial years ended 30 June 1991 and 30 June 1992. It will be desirable for the Commissioner to notify Mr Luu of the amounts payable thereunder, as the notification of those assessments was accompanied by a notice of the total amount payable by him (then ultimately $144108.75) and included the amounts payable in respect of the assessments for the years ended 30 June 1989 and 30 June 1990 which I have varied by determining that there was no omitted income for those years.
In the case of Ms Luu, I conclude in respect of each of the financial years ended 30 June 1988, 30 June 1989, 30 June 1991 and 30 June 1992 that the taxation assessments issued on 11 November 1994 are excessive. I think that, given her illness, the support given to her by her parents was probably of greater order than that given to Mr Luu, but her capacity to save from her own resources was of course more restricted. In respect of the year ended 30 June 1988, I conclude that her asset growth was funded from non-income resources available to her, represented by her savings including from realised jewellery and contributions from her parents. Accordingly, I vary the assessment made on 11 November 1994 by determining that there is no omitted income in respect of that year.
I have reached the conclusion in respect of the financial year ended 30 June 1989 that the asset growth was to some extent, but not exclusively, funded from similar resources. It is not possible on the evidence to conclude precisely what that figure is. If I err on the side of caution, it is simply because I have not been satisfied that non-income resources explain the asset growth beyond a limited figure. The conclusion I have reached is that the asset growth other than the increase in funds in the bank of $29080 is likely to have been funded by similar non-income resources. I have also allowed for the personal expenses of Ms Luu at a considerably lower figure than that fixed by the Commissioner. There should therefore also be an adjustment to the private expenditure by reducing it by about $3000. On my calculations, after allowing for private expenses (at that lower level) and non- deductible losses and non-assessable receipts, and for the taxable income returned of $4615, that would represent an amount for omitted income of $29396 during that year.
I conclude that there were no resources available to Ms Luu from her savings, or from her parents, beyond 1989 to explain the asset growth in the years ended 30 June 1991 and 30 June 1992. Accordingly, I conclude that the asset increases for those years were funded from omitted income. After again reducing the private expenditure by $3000 for each of those years for the reasons expressed above, I conclude that the omitted income for the year ended 30 June 1991 was $70765 and for the year ended 30 June 1992 was $16743 and I determine that the assessments for those years issued on 11 November 1994 should be varied accordingly.
I see no reason to interfere with the basis upon which the Commissioner imposed additional tax for those years ended 30 June 1989, 30 June 1991 and 30 June 1992 although the calculations will need to be adjusted to reflect the primary tax payable on the omitted income as reflected in the variations I have ordered.
It is appropriate that such calculations should be made by the Commissioner and that the appellants have an opportunity to consider them. Again, I note that it is desirable that the Commissioner notify Ms Luu of the adjusted amounts payable by her.
In summary, my orders are that in relation to Mr Luu:
. the amended assessment of taxation on his income for the year ended 30 June 1989 issued on 27 October 1994 be set aside on the basis that there was no omitted income in the taxation return lodged by Mr Luu for that year;
. the amended assessment of taxation on his income for the year ended 30 June 1990 issued on 27 October 1994 be set aside on the basis that there was no omitted income in the taxation return lodged by Mr Luu for that year;
. the amended assessment of taxation on his income for the year ended 30 June 1991 issued on 27 October 1994 be confirmed; and
. the amended assessment of taxation on his income for the year ended 30 June 1992 issued on 27 October 1994 be confirmed.
In respect of Ms Luu, my orders are that:
. the amended assessment of taxation on her income for the year ended 30 June 1988 issued on 11 November 1994 be set aside on the basis that there was no omitted income in the taxation return lodged by Ms Luu for that year;
. the amended assessment of taxation on her income for the year ended 30 June 1989 issued on 11 November 1994 be varied by substituting for the sum of $50998 (including income declared by her of $4615) of taxable income the sum of $33011 as taxable income; the basis upon which additional tax was imposed is confirmed, but the amount payable for additional tax will have to be recalculated;
. the amended assessment of taxation on her income for the year ended 30 June 1991 issued on 11 November 1994 be varied by substituting for the sum of $73027 taxable income the sum of $70027 as taxable income; the basis upon which additional tax was imposed is confirmed, but the amount payable for additional tax will have to be recalculated; and
. the amended assessment of taxation on her income for the year ended 30 June 1992 issued on 11 November 1996 be varied by substituting for the sum of $45993 (including income declared by her of $26250) taxable income the sum of $42993 as taxable income; the basis upon which additional tax was imposed is confirmed, but the amount payable for additional tax will have to be recalculated.
I certify that this and the preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Mansfield.
Associate:
Dated:
Appellants appear in person
Counsel for the Respondent : Mr S Cole
Solicitors for the Respondent : Australian Government
Solicitor
Hearing Dates : 2-4 December 1996
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