Grima and Commissioner of Taxation [2000] AATA 199; (2000) 44 ATR 1046; 2000 ATC 2005 (16 March 2000)

Last Updated: 7 October 2009

DECISION AND REASONS FOR DECISION [2000] AATA 199

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT 1998/268
TAXATION APPEALS DIVISION ) QT 1998/269

Re ANGELO GRIMA AND MARY GRIMA

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr K L Beddoe (Senior Member)

Date 16 March 2000

Place Brisbane
Decision The objection decisions under review are affirmed.

Decision No 199/2000 (Sgd) K L Beddoe
Senior Member
CATCHWORDS
TAXATION : Review of objection decisions – Allowable deduction through misappropriation – Co-mingling of money – Necessary and essential character of money – Nature of assessable income

Income Tax Assessment Act 1936 – s71

EHL Burgess Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4517
Case M9 80 ATC 66

REASONS FOR DECISION

16 March 2000 Mr K L Beddoe (Senior Member)

1. The applicants seek review of objection decisions in relation to the year of income ended 30 June 1997.
2. Section 71(1) of the Income Tax Assessment Act 1936 ("The Act") provides for an allowable deduction where a loss, incurred by a taxpayer through embezzlement, larceny, defalcation, or misappropriation, by a person, including an agent, employed by the taxpayer, not being a person employed solely for private or domestic purposes, of, or in respect of money that has been included in the taxpayer's assessable income which is ascertained in the year of income.
3. At the hearing Mr Logan SC appeared for the applicants and an officer of the Australian Taxation Office represented the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the T documents and further documents were tendered and marked as exhibits. Oral evidence was given by an accountant called by the applicants.
4. In the year of income ended 30 June 1997 and prior years the applicants derived rental income jointly in their capacity as landlords. They also derived some interest and other income but the rental income was their principal income being $173,498 for the year ended 30 June 1995 and $168,021 for the year ended 30 June 1996. I mean no disrespect that it appears that the first applicant was the controlling mind of the financial side of their affairs.
5. In early 1995 the applicants, acting through the first applicant and on the advice of the first applicant's son, engaged an accountant Mr Ripper to look after their accounting and taxation obligations. I am satisfied the first applicant has only a limited command of written and spoken English and relies on others when dealing with statutory obligations.
6. About April 1995 the first applicant saw Ripper about lodgment of tax returns. That caused Ripper to investigate the financial affairs of the applicants for, I presume, the overt purpose of preparing their income tax returns. It seems at least some financial records of the applicants are still retained by Ripper.
7. At that time the applicants had approximately $60,000 invested as a term deposit with a bank. Ripper advised the first applicant to withdraw the term deposit with a view to giving the proceeds to Ripper to be invested in a superannuation fund. The basis for this was advice from Ripper that the applicants would derive 20% interest on the funds and would save $20,000 income liability.
8. Apparently Ripper also said that the funds could be repaid to the applicants after three months if they needed the money.
9. On or about 26 April 1995 Ripper requested and received a cheque from the first applicant for $22,500 drawn on the applicants' personal cheque account in favour of Superannuation Consultants Pty Ltd. Ripper assured the applicants that the funds were invested with Citibank. The investment was acknowledged by a statement of investment in the name of Superannuation Consultants Pty Ltd in a format suggesting a term deposit by the applicants' superannuation fund.
10. A second personal payment of $30,000 was made on or about 25 May 1995. A statement of investment was also provided by Ripper for this transaction; the investors are noted as the applicants personally and not a superannuation fund.
11. Again, on or about 13 September 1995 Ripper arranged for a further payment, this time $25,000. This time the funds were drawn by a cheque on the applicants' company account. Ripper subsequently provided a statement of investment dated 13 September for $25,000 in favour of the applicants and without reference to the fact of payment from the company's account.
12. The fourth payment for superannuation occurred on or about 9 November 1995, this time an amount of $10,000 drawn by cheque on the company's account. The applicants were subsequently provided with a "statement of advance" in the name of Superannuation Consultants Pty Ltd. The statement was in the applicants' names and again made no reference to the company.
13. The fifth payment was also for an amount of $10,000 and was drawn by cheque on the company's account in February 1996. No receipt or other acknowledgment document was received by the applicants for this amount.
14. The sixth payment of $10,000 (or perhaps $11,000) was made in similar circumstances on or about 1 May 1996.
15. The first applicant subsequently requested repayment of moneys but these requests did not result in Ripper or anybody else making any repayments.
16. Enquiries conducted on behalf of the applicants by a bank officer failed to disclose the existence of a superannuation fund.
17. The superannuation fund is administered by a business known to the applicants as "Pro Super" and apparently conducted by Pro-Super Pty Ltd. In this regard the first applicant's affidavit refers to a letter dated 29 January 1997 from Pro Super but the document has not been exhibited to the Tribunal. Nor was there any explanation as to the relationship between Pro Super and Superannuation Consultants Pty Ltd.
18. Exhibit B is a report by investigating accountants which seeks to trace the source of the payments by the applicants to Ripper. To perform this task the accountants interviewed the applicants, reviewed the applicants' ledger accounts, bank accounts, reconstructed final balances for the years ended 30 June 1995 and 30 June 1996 and provided a cash flow analysis for those financial years.
19. The investigation by the accountants was based on the documents found in Exhibit C. These documents consist in part of copies of bank statements and accounts. I will identify these bank accounts by the last two numerals in the account number.
20. The applicants had a joint passbook account number 96 at all relevant times and a joint personal cheque account number 03 until 22 February 1996. The balance of that latter account was transferred on closing the account to a business cheque account in the name of Grima Investment Holdings Pty Ltd which was a new account and numbered 65. For present purposes those appear to be the relevant bank accounts. A further bank account described as an Access account in the trial balances has not been disclosed to the Tribunal.
21. The applicants' net cash inflow from their investments for the year ended 30 June 1995 is put at $127,121. $40,245 of this was outlaid for capital expenditure and financing activities resulted in a net outgoing of $30,000 because of repayment of a bank loan. Payments by and to the applicants by way of contributions and drawings was a net figure of $40,207 for drawings by the applicants and payment of the subject superannuation contribution totalling $52,500, leaving a cash outflow for the year of $35,831 calculated as follows:-

Cash at beginning of year $60,251

Net Cash Inflow $127,121

Less outgoings $40,245

30,000

40,207

52,500 162,952

Decrease in cash 35,831

Cash at end of year $24,421

22. The payment of $22,500 for superannuation from the joint personal cheque account on 26 April 1995 was financed by a deposit of $20,000 on 7 April 1995 to the passbook account increasing the account balance to $22,244 and withdrawal of $20,000 from that account and deposit in the cheque account increasing the balance to $37,053.98. On the evidence the initial $20,000 deposit came from a withdrawal from the term deposit. There was no explanation as to why it was transferred through the passbook account.
23. The payment of $30,000 for superannuation made on 25 May 1995 was debited to the personal cheque account 03 on 26 May 1995 being cheque number 500376. At 19 May 1995 the credit balance of that account was $22,661. On 22 May 1995 an amount of $44,144.07 was transferred to the credit of the account from account 34 which on the material was the term deposit. Debits to the account from 22 May 1995 to 29 May 1995 total $34,524.42. It is apparent that the cheque for $30,000 was at least in part financed by the transfer of the amount of $44,144.07 from the term deposit.
24. It is apparent that both payments for superannuation in the year ended 30 June 1995 were financed in whole or in part by withdrawal of funds from the term deposit.
25. The payment of $25,000 made on 13 September 1995 was withdrawn from the personal cheque account number 03. From the time of the previous withdrawal on 26 May 1995 regular deposits had been made to the account which it might be reasonable to infer were made up mainly of derived assessable income. There is however no evidence before the Tribunal as to the source of the deposits except for the Ledger which shows details of rents received for the year ended 30 June 1996 but does not disclose when the amounts were received.
26. I have therefore sought to reconcile the Ledger with Bank deposits. Rent received for the year is recorded as $168,021.47. Deposits to the personal cheque account for the period 3 July 1995 to 22 February 1996 when the account was closed total $110,244.86. Deposits in the company's account number 65 for the period 7 February 1996 to 30 June 1996, but not including the deposit of the closing balance of the personal account, totalled $73,424.70. The total deposits for the year, ignoring the transfer between accounts, was $183,669.56. That compares with rent received of $168,021.47 and interest received of $7,267.92. The interest received does not appear to have been credited to the joint personal cheque account number 03 or the company cheque account number 65. There is therefore a discrepancy of $15,648.09 between deposits and reported income from rentals. While the discrepancy may well be explained by balance day adjustments, I am unable to determine the reason for the discrepancy and will not speculate.
27. Funds were also derived from a superannuation fund paid to the first applicant on 14 March 1995 of an amount of $23,916.
28. On 5 January 1995 the applicants received $100,000 in reduction of their vendor loan on sale of their farm. These funds together with $30,000 of their own funds were applied to reduce a bank loan from the ANZ Bank from $160,000 to $30,000 being the balance at 30 June 1995. That loan was further reduced to $26,817 at 30 June 1996.
29. Ripper was paid fees for his services as the accountant for the applicants. These services appear to have gone beyond preparation of tax returns but it is unclear as to the exact services provided by Ripper and for which he charged substantial fees.

The Contentions
30. The applicants submit that they incurred a loss through misappropriation by their professional accountant in respect of money that had been included in their assessable income. They rely on the decision of the Federal Court (Woodward, Davies and Burchett JJ) in EHL Burgess Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4517.

31. While the applicants concede that providing advice to invest in a superannuation fund could be characterised as being for a private purpose they submit that Ripper, as a Certified Practicing Accountant, was employed for wide ranging business, financial and taxation advisory services.
32. The applicants also submit that "money" includes receipts which are to be characterised by their source.
33. The respondent submits that there has been a mixing of moneys and in particular refers to the receipt of a superannuation payment and funds from the sale of the farm. Also relying on the Burgess Case the respondent says that section 71 only operates where it can be shown that the funds misappropriated have been included in assessable income. Once there has been a mingling or mixing of funds then section 71 does not allow deductions for a misappropriation of moneys from the mixed fund.

Consideration
34. I am satisfied that Ripper, in his capacity as a public accountant, was engaged by the applicants to advise and attend to their business and financial affairs and for which he was paid fees as a practicing accountant. He was not engaged solely for private or domestic purposes. It is, therefore, not necessary to consider whether the advice that Ripper gave the applicants about superannuation should be characterised as being of a private nature.

35. I am also satisfied, on the balance of probabilities that Ripper misappropriated moneys handed to him by the applicants for the purpose of investment in a superannuation fund. In this regard I am satisfied that the applicants' motives in deciding to invest in the superannuation fund are irrelevant. Ripper advised them to do so and they decided to follow his advice thereby enabling Ripper to appropriate their moneys with, it is alleged, the intent of depriving the applicants of their money.
36. In this case it is necessary to take into account the fact that the misappropriations by Ripper followed appropriations of their funds by the taxpayers. Ripper was given the funds for a purpose. What happened to those funds is not apparent to the Tribunal but there is no dispute that a misappropriation occurred after the funds were appropriated by the applicants to Ripper. In that respect this case is similar to the facts in Case M9 80 ATC 66. In that case the taxpayer had placed funds with a solicitor to be on lent to clients of the solicitor. An employee of the solicitor misappropriated some of the funds to his own use.
37. However the claim in Case M9 arose out of a voluntary settlement of a claim by the solicitor's receiver for an overpayment. The claim under section 71 did not succeed. The Board of Review did not find a causal connection between the misappropriation of the solicitor's employee and the settlement of the receiver's claim. The decision is therefore of little assistance in the present case. However for reasons which follow I agree with the following dicta of Dr Gerber at page 73:

"....a taxpayer will only succeed if he can show an identity between the money embezzled and the money included in earlier returns. In this case, no attempt was made to resolve this identity crises, and the claim must therefore fail under sec.71."
38. In Burgess at 80 ATC 4521 the Federal Court set out the criteria to be satisfied so that an amount is an allowable deduction within the terms of section 71. The elements identified by the Court are as follows:

(a) The taxpayer must incur loss;

(b) the loss must result from embezzlement, larceny, defalcation or misappropriation (here generally referred to as "misappropriation");

(c) the misappropriation must be by a person (including an agent) employed by the taxpayer, not being a person employed solely for private or domestic purposes;

(d) the misappropriation must be of or in respect of money that is or has been included in the assessable income of the taxpayer; and

(e) the loss must be ascertained in the year of income.

39. Criteria (a), (b) and (c) are satisfied on the facts of this case and I so find. Difficulties arise with criteria (d) and (e).
40. Putting aside the issue raised by the respondent in relation to the mixing of funds and accepting for present purposes that the funds appropriated by the applicants for the superannuation payments did have the necessary character of money which is, or has been, included in the applicants' assessable income, I am satisfied they ceased to have that character when appropriated as the superannuation payments. The funds applied by the applicants for payment for superannuation benefits must be characterised as that. What was lost was contributions to the superannuation fund because that was the character of the money when it was paid to Ripper and, I infer, when the moneys were misappropriated. Certainly the moneys had lost their character of money that is or has been included in the assessable income of the applicants.
41. In any event I am satisfied that the rentals received and interest received which formed the assessable income of the applicants had been dealt with in such a way that it became mingled in the general finances of the applicants. Notwithstanding the valiant attempt of Mr Daley I am not satisfied that there is any basis for tracing the moneys so that the essential character of the funds applied for the superannuation payments can be said to retain the character as assessable income. The essential nexus was lost once the amounts of interest and rent were paid into the bank accounts of the applicants and the company. Further issues arise as to the position of the company but I need not pursue those issues for present purposes.
42. Furthermore, as Mr Daley's tracing of funds shows, payments for superannuation in the year ended 30 June 1995 at least in part were financed by withdrawal of the term deposit. The source of the funds placed on term deposit is unclear but in my view is also irrelevant.
43. There is a paucity of evidence as to when the loss was ascertained but it seems to be accepted that it was ascertained in the year of income. I do not need to decide the point.
44. I am satisfied that the misappropriation by Ripper was in respect of payments made by the applicants to a superannuation fund. I am satisfied those payments cannot be characterised as money that is or has been included in the assessable income of the applicants. The funds had ceased to have that essential character.

45. For these reasons the objection decisions under review will be affirmed.

I certify that the 45 preceding paragraphs are a true copy of the reasons for the decision herein of Mr K L Beddoe (Senior Member).

Signed:

T G Lowther

Associate

Date of Hearing 2 September 1999

Date of Decision 16 March 2000

Counsel for Applicant Mr J A Logan SC

Solicitor for Applicant McCullough Robertson

Respondent An officer of the Australian Taxation Office