Bey and Commissioner of Taxation [2002] AATA 117; (2002) 49 ATR 1087; 2002 ATC 2037 (25 February 2002)

Last Updated: 5 October 2009

DECISION AND REASONS FOR DECISION [2002] AATA 117

ADMINISTRATIVE APPEALS TRIBUNAL ) Nos NT2000/283-286 and
) NT2000/287-290
TAXATION APPEALS DIVISION )
Re SAM and SALAM BEY
Applicants'
And COMMISSIONER OF TAXATION
Respondent

DECISION

Tribunal Senior Member M D Allen

Date 25 February 2002

Place Sydney
Decision The decisions under review are affirmed.
(Sgd) M D Allen ..............................................

Senior Member
CATCHWORDS
INCOME TAX - Alleged understatement of income. Credibility of Applicants. Method of calculating stock on hand. Whether circumstances mitigated penalty provisions.

Income Tax Assessment Act 1936 s31, s226J
Taxation Administration Act 1953 s14ZZK

R124 84 ATC 793
Federal Commissioner of Taxation v DALCO [1990] HCA 3; 168 CLR 614
Martin v Federal Commissioner of Taxation 93 ATC 5200

REASONS FOR DECISION

Senior Member M D Allen

1. By applications lodged with the Tribunal on 14 June 2000 the Applicants sought review of decisions by the Respondent on the 13 April 2000 disallowing objections by the Applicants to amended assessments of income issued by the Respondent to the Applicants respecting the tax years ended 30 June 1994, 1995, 1996 and 1997.
2. The amended assessments issued after officers of the Respondent conducted an audit into the affairs of the Applicants and the business carried on by them, which traded under the name of "Sam's Power Tools".
3. Because limited information was provided to the Respondent by the Applicants and by their then tax agent, a Mr Sindas, the audit was conducted using the "Asset Betterment" method.
4. A discussion of the "Asset Betterment" method is found in the decision of member Mr Roach in the Taxation Board of Review decision of Case R124 84 ATC 793 at 806. In particular the learned member said at page 806 para 10:

"Now if a Court or a Board of Review is to be persuaded that the Commissioner's assessment is excessive in any, or all, years it must first be borne in mind that the burden of proof lies with the tax payer. That burden of proof cannot be discharged simply by establishing that the Commissioner erred in some respect. The taxpayer must go further and proof 'what is right'. The point is well illustrated in F.C. of T. v Trautwein [1936] HCA 77; (1936) 56 CLR 63 & 196. There the Commissioner had calculated an increase in net assets over a span of seven years and treated it as having been derived equally in each of those seven years. Both the trial judge and the Full Court considered the possibility of the increase being precisely the same in all years as being so remote that the Commissioner must have been in error. The significance of the point is that while logically the Commissioner may have over stated income in one year only, it would have followed that the Commissioner had understated income in the same amount over the other six years. Conversely, the Commissioner may have overstated income in four years with the logical consequence that he had understated income in the same total amount over three years."

and cf Toohey J in Federal Commissioner of Taxation v DALCO [1990] HCA 3; 168 CLR 614 at 621 namely:

"...Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to proof that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment."

5. In these proceedings a large part of the Applicants' case was an attempt to shift blame onto their former tax agent Mr Sindas. Although the Applicants were under some disadvantage in that Mr Sindas was called as their witness, I am not satisfied that the Applicants' current position was primarily the fault of Mr Sindas, although I accept that his performance in this matter merits review.
6. At the outset however, I must state my conclusion that neither of the Applicants is to be believed upon their affirmations.
7. During the process of the audit conducted by officers of the Commissioner, the Applicants were interviewed. The first interview with Mr Sam Bey was at the Parramatta Tax Office and Mr Bay attended together with Mr Sindas. The officers conducting the interview were Messrs Patavir and McPherson and both made notes of their conversation with Mr Bey. Later, a report of that conversation was written up by Mr Patavir after consultation with Mr McPherson. In addition, the notes made at the time of the interview of the answers given by Mr Bey were read by Mr Sindas to Mr Bey and acknowledged as a correct record of the answers given to the questions asked.
8. Having seen both Mr Patavir and Mr McPherson give evidence and be cross-examined, I accept that they gave a truthful account of conversations with the partners and Mr Sindas. Additionally, although I accept that the Applicants required the use of an interpreter for these proceedings, I consider that the male Applicant understands far more of the English language than he was prepared to admit. I cannot accept that a man who has engaged in the business of buying and selling second-hand goods and on selling them direct to the public for a number of years, has no concept of or ability in spoken English.
9. At times during cross-examination, Mr Bey answered a question directly without using the interpreter.
10. When cross-examined as to his witness statement, Mr Bey stated he did not read English but agreed that the statement had been read to him. His reply was "for sure, otherwise I would not have signed it". This answer corroborates the Respondent's witnesses who stated, that the notes of the interviews were read to Mr Bey by Mr Sindas before he signed them.
11. At an interview on 19 May 1998 Mr Bey was asked questions regarding the building by him of a house at 9 Mons Street, Canterbury. He stated that he borrowed the money to build the house. He later stated that he had taken loans from banks to construct the house and also to buy his shop premises. He was specifically asked "have you, or your spouse or any of your children sent any money overseas during the period 1/7/92 to 30/6/97" to which he answered "no". He was then asked "have you or your spouse or any of your children received any money from overseas during the period 1/7/92 to 30/6/97" to which he replied "not sure – father had some land in Lebanon and sold before 1992".
12. During the hearing of this matter both Applicants alleged that the sum of $US130,000.00 had been received from Mr Bey's uncle in Lebanon in order to build the house at 9 Mons Street, Canterbury. According to Mr Bey's evidence, the money was apparently transmitted by hand and handed over to him at Sydney Airport, where he exchanged US Dollars to Australian dollars. He was unable to remember how much he received each time money was sent or the names of the couriers.
13. Mr Bey was quite vague as to exactly when he started to repay to his uncle the monies advanced to him. As to the evidence of how the money was transmitted to Lebanon, it beggars credulity. According to Mr Bey, whenever he had some money, being in lots of $150 to $300, he would go to the airport and find someone who was travelling to an area near his uncle's village and would hand them the money to give to his uncle. He did not know the names of the people to whom he gave the money. According to Mr Bey the money to pay back his uncle was obtained by borrowing from friends and on one occasion, his brother. He has not paid these people back and does not know when he will do so.
14. Mrs Bey's evidence as to the repayment of the loan was contradictory. She started off by saying that she borrowed from people here to repay the loan to Mr Bey's uncle. She then said that the house at 9 Mons Street had been sold to repay these debts, but later in her evidence she stated that the monies from the sale of the house had been paid to two of her children, namely Elvis and Ranya.
15. Exhibit A2 purports to be a letter of demand to the Applicant from Mr Bey's uncle, dated 5 August 2000. Suffice it to say that following cross-examination of the Applicants, I regard that document as nothing more than a sham designed to bolster the Applicants' claim that they receive monies from Lebanon. For example, the letter refers to a telephone call by the uncle's lawyer in Lebanon to the Beys. In cross-examination, Mr Bey specifically denied receiving any telephone call from a solicitor in Lebanon.
16. Cross-examined as to why he had not told the interviewing tax officers about receiving money from his uncle in Lebanon, Mr bey said "No I didn't tell them. There was no need for me to tell them about that it was not necessary. If somebody give you $10 and says here are $10 to help you with you are not gonna go and tell them all this." In answer to a further question he said "I say that the borrowing as I understood was from Lebanon, it was money from Lebanon so I thought it was nothing to do with them."
17. As pointed out above, the question asked of him at the interview was specific, namely, had he, his wife or children received any money from overseas in the period 1 July 1992 to 30 June 1997. Mr Bey's unequivocal answer was "No". I would have thought that given the nature of the investigation, if money had in fact been received from Lebanon, even if a gift, the Applicant would have understood the question and at least given a qualified answer.
18. The Applicants' objection to the amended assessments was lodged by a firm of accountants experienced in taxation matters. On the first days of these proceedings, the Applicants were represented by the principal of that firm who has legal as well as accounting qualifications. Neither in the Applicants' notice of objections nor in the statement of facts and contentions prepared for the hearing in this Tribunal is any mention made of the receipt of monies from an uncle in Lebanon.
19. Later in his cross-examination, on being questioned by me, Mr Bey twice emphatically denied that he had been asked the question regarding the receipt of monies from overseas. On this point I prefer the evidence of the two tax officers and the notes made at the time. I accept that the question was asked and that Mr Bey replied "No". I further find that the reason he said no was that in fact no money had been received from an uncle in Lebanon or anywhere else.
20. Mr Bey did claim that he had received money from his father in Lebanon. According to Mr Bey, his father whilst on a visit, gave him US$10,000 cash. This amount was exchanged for Australian Dollars by Mr Bey making five separate trips to the airport to use the money exchange facilities there. He claimed he had to make five separate trips as all the $10,000 would not fit into his pocket and that he could not use his local bank to exchange the money, as by the time he had finished work the bank had closed. Why Mrs Bey or their eldest son could not have gone to the bank or the money exchanged when doing the normal banking for the business was not explained. Although Mr Bey said he deposited the amount received into the business account, he was unable to produce bank statements showing any deposits. Again I find I do not believe Mr Bey in this matter.
21. Early in his cross-examination, Mr Bey was asked if he would consider selling his family home in order to repay persons from whom he had borrowed money so as to repay his uncle in Lebanon. He stated in effect that he was not prepared to sell his home unless pressed by his creditors. He also denied considering whether to sell his shop premises (Transcript pp100-101). Later in cross-examination (Transcript p114) he admitted he had sold his home although he did not know the selling price.
22. Asked what he did with the money from the sale of his house Mr Bey stated (Transcript p122) that he had repaid his debts to the bank. From the evidence of Mrs Bey it would seem that the sale of the house and shop were a "round robin" transaction whereby the purchase price of the properties was lent to Elvis and Ranya Bey from the proceeds of sale (see Transcript pp310-311).
23. At transcript p128 Mr Bey stated that out of the money paid to him by his son for the sale of his house he had paid his debts. This is to be contrasted with the evidence of Mrs Bey quoted above. Mr Bey was unable or unwilling to say whether these monies had been used to repay the loan from his uncle. These passages of evidence convince me that Mr and Mrs Bey are not witnesses whose evidence I can accept.
24. So far as Mr Bey's statement is concerned (Exhibit A2), he conceded that he had in reality no idea of the contents of that statement but simply signed it on the basis that it had been prepared by his accountant and after it had been read to him, he agreed with it.
25. In re-examination, Mr Bey was asked if he agreed with the figure of $527 per week in 1997 which was the figure allocated by the Respondent for living expenses for the Bey family. He stated "the living expenses, $1000 a week is not enough".
26. Mr Bey was questioned in re-examination regarding the first interview with Messrs Patavir and McPherson at the Australian Tax Offices Parramatta Office. He stated that his tax agent Mr Sindas simply told him to sign the record of interview. The answers had been provided by Mr Sindas who had not the translated the questions to him.
27. The evidence of Mr Sindas is contrary. He stated he translated the questions to Mr Bey in Arabic and that some of the questions were answered by Mr Bey in English. If Mr Bey could not understand the question he would ask him what it meant. Mr Sindas stated in examination-in-chief that the notes produced by him of answers given matched exactly the answers given by Mr Bey.
28. Given the evidence of Mr Sindas I reject the assertion that the questions said to have been asked of Mr Bey were not asked and I find Mr Sindas' evidence corroborates that of Messrs Patavir and McPherson as to the accuracy of the record of interview.
29. It was submitted by the Respondent's counsel that notwithstanding the provisions of 14ZZK of the Taxation Administration Act 1953 I must proceed to arrive at an assessment of income tax see Davies J in Martin v Federal Commissioner of Taxation 93 ATC 5200 at 5204 citing Krew v Federal Commissioner of Taxation 71 ATC 4213 at 4219. I reject the broad trust of this submission. I do agree that even though I do not accept the Applicants as truthful, I must proceed to consider whether on the whole of the evidence before me the Applicants have persuaded me that the assessments made by the Commissioner are excessive. This is a different concept to saying that the Tribunal itself must make an assessment of the tax payable.
30. In this regard I propose to deal firstly with the cost of living expenses attributed to the Applicants. The Applicants' statement of facts and contentions paragraph 3 reads:

"The Applicant disputes he indicated or advised the officers, interviewing him, that all his children were dependent on him."

In the notes of the interview of 19 May 1998 Mr Bey is recorded as stating that three of his children were dependent upon him and that his son Elvis had been dependent until he started work in July 1997. The note regarding Ranya Bey is that her dependency was to be advised. I find that at least until July 1997 four children were dependent upon the Applicants' for their maintenance and support. No evidence was adduced as to the amount of any board paid by Ranya although in exhibit A4 she states, she commences work from the beginning of the 1996 financial year.
31. Mr Bey's original estimate for living expenses for his family was $40 per week. A cost of living statement was provided to Mr Bey to be completed (see annexure JP3 to Exhibit R2) but it was not returned to the tax office. When it was pointed out to the Applicants' tax agent that if the cost of living statement was not based on figures considered reasonable then the household living expenditures published by the Australian Bureau of Statistics would be used he replied, according to Mr Patavir words to the effect "go ahead and use them".
32. That these words were never used by Mr Sindas was not put to him when called.
33. In the event the Respondent used figures for a family of two adults and three dependent children, which is of course favourable to the Applicants. The Applicants' counsel in his submissions conceded that it may be the use of these figures is fair. The amounts used range from a low of $453 for the 1995 year to $527 for the 1997 year after adjustments had been made. These figures can be contrasted with Mr Bey's evidence that $1000 per week would not be enough.
34. Having regard to all the material placed before me, I am not satisfied that the estimates by the Respondent's officers as to the Applicants' living expenses should be set aside in favour of some other amount or amounts.
35. The Applicants' dwelling at 9 Mons Street, Canterbury was originally purchased by Mr Bey and two of his brothers. Mr Bey subsequently purchased the share of his two brothers, demolished the existing dwelling on the land and rebuilt.
36. In 1993 a building application was lodged with Canterbury Municipal Council signed by Mrs Bey and that application stated that the construction cost for a five bedroom house of two storeys plus basement was $220,000.00.
37. Enquires by the Respondent's officers to the Commonwealth Bank of Australia revealed that it was estimated that a total sum of $258,300.00 was required for the construction of the dwelling house and this was the figure used in the Assets Betterment Statement.
38. During interviews with Messrs Patavir and McPherson various figures were provided by Mr Bey regarding the costs of construction, none of which were accepted because of obvious omissions. Also when questioned Mr Bey had stated that the construction costs had been met by borrowing money.
39. According to the notes taken by Mr Patavir in his interview with Mr Bey on 19 May 1998, the Applicants' borrowed money to construct the new house and all loans were from banks only. As stated above I reject the later evidence of the Applicants that monies were received from Lebanon to assist in the construction of the house. At no time was the existence of the alleged loan from Mr Bey's uncle revealed to the investigating tax officers.
40. I find that the Applicants' evidence as to the construction costs of the house and the source of those funds is still vague and unsatisfactory and have no hesitation in stating that the Applicants have failed to satisfy me that the figures adopted by the Respondent should be varied in any way.
41. At page 4 of his witness statement (Exhibit A2) Mr Bey claims that his son Elvis was paid wages at the rate of $300 per week in all relevant years. Suffice it to say Mr Sindas made no adjustment for this in the returns prepared by him nor was any tax return lodged by or on behalf of Elvis Bey until the 1998 tax year. In his second interview Mr Bey stated that Elvis had commenced working in the business in July 1997. In his statement (Exhibit A5) Elvis Bey says:

"I commenced work in Sam's Power Tools since July 1997."

42. Although he commenced work in 1997 Elvis Bey owns a house, which he purchased in 1998 for the sum of $199,000.00. Of the purchase price he borrowed $12,000.00 from the Commonwealth Bank of Australia and $25,000.00 from Ranya Bey. The Applicants advanced him from the business the sum of $19,000.00 but the source of the balance funds is unknown. Notwithstanding that the Applicants advanced to Elvis Bey the sum of $19,000.00, Mr Bey in cross-examination purported not to know where Elvis' house was located.
43. The Applicants also took issue with the Respondent's calculation of stock levels and cost.
44. Cross-examined Mr Bey agreed that there had been no inflation by him of stock figures as the police regularly checked his second-hand dealer's books.
45. The Australian Tax Office used stock figures proved by the Applicants' agent Mr Sindas. Mr Sindas' evidence was that he used figures given to him by the Applicants either verbally or in writing. He had expressed to them the opinion that the stock may have been overestimated but they said it was the best they could do to have a stocktake figure.
46. Whereas the Applicants' submission criticised the Respondent's use of mark-up figures supplied by Mr Bey in his record of interview, no evidence was tendered by the Applicants to show what the average mark-up was nor was it sought to prove it through the books required to be kept by the Applicants pursuant to the Pawnbrokers and Second-hand Dealers Act 1996.
47. A stock level different to that calculated by the Respondent for the relevant years was suggested by the Applicants' witness Mr Woo. The starting point for his analysis was a stocktake conducted by a firm of professional stocktakers on the instruction of Mr Elvis Bey. That stock take is wrong in that it used a "wholesale", not "cost" price even though the Applicants did not sell in a wholesale but in a retail market, and it did not explain the profit margins.
48. As Mr Woo conceded in cross-examination to make sense of the calculations based on the Applicants' stocktake figures, the term "at wholesale value" must be read as "at cost value". When asked as to profit margins he replied "you are asking the wrong person".
49. As to the Respondent's method of calculating closing stock, Mr Woo conceded that the method used was a valid one albeit not as good as a proper stock take.
50. Exhibit R4 is the affidavit of Mr Burns, an officer of the Respondent who with other officers undertook the task of analysing the sales journals produced by the Applicants. The method of calculation is set out in Mr Burn's affidavit. As admitted in evidence by Mr Burns, the exercise was undertaken as a check and where doubts existed the lowest figure was chosen or the item excluded (for example transactions involving "trade-ins" were excluded). After completion of the exercise Mr Burns was able to state that "in the case of a uniform mark-up the cost price of the stock would have at least been for the years ended 30 June 1994 $211,686.00 and 1995 $196,968.00".
51. The figures calculated by Mr Burns can be compared to the claim lodged with FAI Insurance in relation to a burglary on 10 July 1994, where the total contents of the premises were listed as $120,000.00. A policy of insurance with Sauvguard International Insurance for the period 27 January 1997 – January 1998 had the stock insured for $210,000.00.
52. I am not satisfied that the methodology adopted by Mr Woo regarding stock take figures is accurate nor does it to my mind cast sufficient doubt upon the figures calculated by the Respondent to satisfy me that some other figure should be adopted.
53. The penalties in this matter were imposed pursuant to section 226J of the Income Tax Assessment Act 1936, which reads inter alia:

"If:

(a) ...

(b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part."

54. In this matter the exact source of all understated income is not known. However, it seems clear that the Applicants did take money from the daily business takings and applied them to their own use or benefit without bringing them into account for taxation purposes. Much blame was sought to be directed towards the tax agent Mr Sindas. It may well be that the taxpayers were not well served by Mr Sindas, however, I am satisfied that he at all times acted upon information provided to him by Mr and Mrs Bey.
55. Prior to the imposition of the penalty, the taxpayers were asked if there were any mitigating circumstances, however, no submissions were received by the Respondent. On the other hand the Respondent has not sought to increase penalty for non-cooperation in the audit of the Applicants' affairs.
56. I have previously expressed my opinion as to the Applicants' credibility. So far as I can see on the material placed before me, and so find, the Applicants intentionally set out to understate their income in order to minimise the tax payable by them and there are no circumstances sufficient to mitigate against the penalty provided by law, mainly 75% of the amount shortfall in tax payable.
57. The Applicants' have failed to satisfy me that the assessments under review are excessive, therefore the decisions under review will be affirmed.

I certify that the 57 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member M D Allen

Signed: (Kwai-Ling Wong) .....................................................................................

Associate

Date/s of Hearing 27, 28, 29, 30 August and 18, 19, 20, 21 December 2001

Date of Decision 25 February 2002

Representative for the Applicants Mr R Bobb, Richard Bobb Chartered

on 27 – 30 August 2001 Accoutants

Counsel for the Applicants Mr D Raphael

Counsel for the Respondent Mr D B McGovern

Solicitor for the Respondent Australian Government Solicitor