15 February 2017

An opinion of ‘fraud’ or ‘evasion’ means the ATO is not subject to the usual two or four year periods it otherwise has to amend an income tax assessment. Instead, the amendment period is unlimited which can result in amended assessments over many years, and potentially a significantly higher tax liability as a result.

But how should a taxpayer respond when the ATO has formed an ‘opinion’ of either ‘fraud’ or ‘evasion’? Recent decisions in the Full Federal Court and Administrative Appeals Tribunal highlight the rules for taxpayers challenging assessments issued following a finding of ‘fraud’ or ‘evasion’.

Who needs to prove what?

The recent decision of Binetter v Commissioner of Taxation [2016] FCA FC163 sets out the following principles.

  1. The taxpayer has the onus of disproving fraud or evasion.
  2. The ATO does not have to prove anything.
    ATO officers will often give reasons for why an opinion of ‘fraud’ or ‘evasion’ was formed, but they do not have to. The taxpayer will not have done enough by simply showing the ATO’s reasons were insufficient or inadequate. The taxpayer must actually prove there was no fraud or evasion.
  3. The taxpayer has to do this on the balance of probabilities.
  4. Evidence from the taxpayer is a start, but corroborating evidence is critical.

‘Unexplained deposits’

Particular problems arise for ‘unexplained deposits’. These are amounts the ATO often identifies as deposits in a taxpayer’s bank account that are assumed to be income – unless there is a credible explanation for why the amounts are not income.

The decision in Binetter gives the taxpayer some problems if the taxpayer cannot remember what the deposit represents. If the ATO forms an opinion of ‘evasion’, the taxpayer has to prove there was no evasion, which generally requires an explanation of the deposit.

In the reported cases, the ‘unexplained deposits’ are significant sums of money, where it seems reasonable to expect an explanation from the taxpayer as to why these amounts are not income in the circumstances.

Hopefully common-sense prevails so that a relatively small deposit received many years ago does not support an amended assessment issued following an opinion of ‘evasion’. Otherwise, this type of amended assessment would effectively be unchallengeable if the taxpayer cannot recall what the deposit was for. This was noted in the AAT decision Nguyen v Commissioner of Taxation [2016] AATA 1041.

Taxpayers’ circumstances will vary significantly and it would not be unusual to see taxpayers receiving sums of money outside the four year amendment period that the taxpayer cannot explain. The further into the past, the more likely that the taxpayer’s memory will be fallible and that corroborating evidence will be unavailable.

How do you respond in an audit context?

If the ATO proposes a finding of fraud or evasion, it is important to respond:

  • promptly – before the ATO works through its internal process to form the ‘opinion’ of ‘fraud’ or ‘evasion’
  • with evidence from the taxpayer, which is corroborated by other sources
  • by applying the evidence to the actual tests of either ‘fraud’ or ‘evasion’.

We often see a taxpayer or their advisers not provide a comprehensive response in the first instance. If evidence is later provided, the ATO often looks at it sceptically – particularly if the ATO earlier invited the taxpayer or adviser to provide evidence and they chose not to for some reason.

What is evasion?

We have seen the ATO form opinions of ‘evasion’ because there was a ‘blameworthy act’. This is not the test. The ‘blameworthy act’ must be a type of act or omission in the sense used in Denver Chemical Manufacturing Co. v Commissioner of Taxation (NSW) [1949] ACA 25.

In that case, the High Court provided the following guidance:

I think it is unwise to attempt to define the word ‘evasion’. The context of s.210(2) show that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.

‘Evasion’ therefore requires something more than a mere ‘blameworthy act’. It is important that the evidence meets the explanation of ‘evasion’ as set out by the High Court.

Please contact a member of our team if you would like to discuss.

After more details on the recent cases? You can click on the case names below.

Mrs Binetter lodged her income tax returns for the 2002 to 2007 income years. In 2010, the ATO identified amounts that had been deposited into her and her husband’s joint bank account and concluded these amounts were income.

The Commissioner formed the opinion that there was evasion. The Commissioner was therefore able to issue amended assessments back to the 2002 income year.

After having her objections disallowed by the Commissioner, Mrs Binetter then appealed to the Tribunal.

The issue was whether Mrs Binetter had met her burden of proof under s 14ZZK of the Taxation Administration Act 1953. The Tribunal affirmed the decision of the Commissioner on the basis that Mrs Binetter had failed to discharge the onus of proof on her. She had not demonstrated that she had not engaged in fraud or evasion during the relevant years.

Mrs Binetter appealed the decision to the Full Federal Court. She argued that the Tribunal should have stepped into the shoes of the Commissioner and sought to form its own opinion as to whether fraud or evasion had occurred.

The Full Federal Court held that, while the Tribunal re examines the evidence before it and may substitute the Commissioner’s opinion with its own, the taxpayer has the onus of showing that the opinion of the existence of fraud or evasion should not have been made.

Please contact a member of our team if you would like to discuss.
In the same judgment, the Full Federal Court considered the facts in Commissioner of Taxation v Tao Bai. The taxpayers were unrelated but the issues were similar.

During the 2005 income year, Mrs Bai reported assessable income of $13,790.

After an audit, the Commissioner formed the opinion that there had been fraud or evasion. The Commissioner issued an amended assessment of $1,183,398. The amended assessment was a result of a several large payments being made into Mrs Bai’s bank account.

Mrs Bai explained that the deposits had come from a property development in Cronulla carried on by her ex-husband’s company High Trade Company Pty Ltd, but in the name of Brightfull Pty Ltd, a company associated with Mrs Bai. Mrs Bai’s evidence was ultimately rejected by the Tribunal on the basis that it was not supported by written documentation.

Mrs Bai appealed to the Full Federal Court. She complained that there was documentary evidence – a loan agreement – that supported her position, but that it had been seized. Mrs Bai contended that the Commissioner had that document at the time of the Tribunal hearing, but did not bring it to the Tribunal’s attention.

Siopsis J held that there had been a denial of procedure fairness, but Perram and Davies JJ held that it was Mrs Bai’s evidence, where she only mentioned the loan agreement for the first time in the witness box, that caused the Commissioner to not produce the loan agreement.

All of the judges agreed that the onus was on the taxpayer to show that the Commissioner’s opinion of fraud or evasion should not have been made.

Please contact a member of our team if you would like to discuss.
Mrs Nguyen presented approximately $2.4m in cash at casinos in the 2008 to 2012 income years.

The Commissioner amended Mrs Nguyen’s assessments to include that amount, after forming the opinion that there had been fraud or evasion.

Mrs Nguyen claimed that the unexplained deposits came from $2.555m that she borrowed from a Mr Morris, who resided in Victoria. Mrs Nguyen occasionally gambled in Melbourne, but most of the time in Brisbane and Perth.

Mr Morris did not attend the Tribunal in person so was not cross-examined. Mr Morris’ statutory declaration was also criticised by the Commissioner on a number of grounds.

The Tribunal concluded that none of Mr Morris’ evidence could be accepted. That left Mrs Nguyen with an uncorroborated account. The Tribunal concluded that Mrs Nguyen had failed to discharge her burden of proof.

The Tribunal set out how a taxpayer could meet its burden of proof, stating:

The manner in which a taxpayer would achieve such a goal in an income case depends on the particular circumstances. A taxpayer could demonstrate there was no omission of income and therefore no avoidance of tax. Alternatively a taxpayer could demonstrate that the amounts, while assessable, were not included in assessable income returned for a reason that shows that while there was a shortcoming, it was a shortcoming that fell short of a blameworthy act in the Denver Chemical[38] sense.

Provided the Commissioner has formed the requisite opinion, in an income case, the effect of the Binneter decision, and those on which it is based, may well be to make a fraud or evasion finding unchallengeable independently of the challenge to the assessability of the relevant amount. If that is so that is not a matter that the Tribunal can alter…

The Tribunal then warned:

Where the character of an amount remains unestablished, the taxpayer has not proven the amount is not assessable, it is difficult, if not impossible to:

(a) form any view as to the level of shortcoming, if there be one;

(b) form a view as to whether there has been an innocent mistake or a blameworthy act; and

(c) say that the taxpayer has demonstrated that there was not fraud or evasion.

Please contact a member of our team if you would like to discuss.
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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.