TAXATION APPEALS DIVISION

Transcription

1 [2012] AATA 557 Division TAXATION APPEALS DIVISION File Number(s) 2009/4786; 2009/ ; 2011/5622 Re Harold Murray APPLICANT And Commissioner of Taxation (No 3) RESPONDENT DECISION Tribunal Deputy President P E Hack SC Date 24 August 2012 Place Brisbane In each application the decision under review is affirmed....[sgd]... Deputy President P E Hack SC Commonwealth of Australia 2012

2 CATCHWORDS TAXATION Income tax whether assessment excessive whether applicant presently entitled to income of a Liechtenstein Foundation applicant failed to show actual taxable income burden not discharged by applicant decision affirmed. TAXATION Residence whether applicant a resident continued occupation of property continuing involvement in companies incorporated in Australia decision affirmed. LEGISLATION Income Tax Assessment Act 1936 (Cth) ss 6(1)(a), 95(2) CASES Commissioner of Taxation v Dalco (1990) 168 CLR 614 Harmer v Commissioner of Taxation (1991) 173 CLR 264 Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 REASONS FOR DECISION Deputy President P E Hack SC 24 August 2012 Introduction 1. In November 2002, an employee of LGT Bank in Liechtenstein AG (LGT Bank), a financial institution in Liechtenstein, unlawfully took an electronic copy of a great number of records of a subsidiary of that bank, LGT Treuhand AG (LGT Treuhand). In October 2006 that employee, who has been called witness A in these proceedings, provided to the respondent, the Commissioner of Taxation, three compact discs that contained information about LGT Treuhand s procedures and financial and other information that related to Australian residents. PAGE 2 OF 29

3 2. One of those residents was Dr Harold Murray, the applicant 1 in these proceedings. 3. In June 2008, using the data obtained about the applicant s affairs from witness A and having made various assumptions in using that data, the respondent made assessments and amended assessments of the applicant s taxable income for each of the years ended 30 June 1999, 30 June 2000, 30 June 2001, 30 June 2002, 30 June 2003, 30 June 2004, 30 June 2005, 30 June 2006 and 30 June Those assessments and amended assessments increased the applicant s taxable income across that period by an amount in excess of $25 million. Additionally, the respondent imposed penalties in excess of $11 million. 4. The applicant objected to the assessments and amended assessments and the assessments of penalty. His objections were generally disallowed. He now seeks a review of the respondent s objection decisions. Some uncontroversial background 5. The applicant is an Australian citizen. He was born in Australia and is now aged 70 years. He undertook his professional training in Australia and postgraduate study in the United Kingdom. He practised his profession in Hong Kong for many years until the early 1990s when he sold his practice and retired from his profession. He then returned to Australia to enable his children to complete their education in this country. 6. The applicant has established a complex net of trusts and companies, some incorporated overseas, through which his financial affairs have been managed. The dealings with LGT Treuhand come within that category. In September 1995 LGT Treuhand was known as BIL Treuhand AG. In June 2009 it changed its name to Fiduco Treuhand AG. Unless necessary to distinguish between particular entities I shall use the title LGT Treuhand throughout. LGT Treuhand is a subsidiary of LGT Bank, based in Vaduz, 1 See Murray & Commissioner of Taxation [2011] AATA 837 and Murray & Commissioner of Taxation (No 2) [2012] AATA 450. I have used the same pseudonym. PAGE 3 OF 29

4 Liechtenstein. It has also had at least one change of name however again I will describe it as LGT Bank throughout. 7. In September 1995 the applicant instructed BIL Treuhand to set up the San Simeon Foundation (the Foundation). It was set up in Liechtenstein on 5 October 1995 with an initial endowment capital of CHF 30,000. It opened an account number with the LGT Bank. It is common ground 2 that central management and control of the Foundation was in Australia during each of the years in issue in these proceedings. On the applicant s own case 3 all or most decisions with respect to the investments of the Foundation s funds were made by him. 8. The applicant lodged income tax returns disclosing modest amounts of taxable income in each of the years between 1999 and He did not lodge returns in the 2004, 2005, 2006 and 2007 income years. The returns as lodged did not disclose any income attributable to the investments with the LGT Bank or income arising from the Foundation. 9. Witness A provided the LGT documents (as they have been described in the material) to the respondent in October The respondent commenced an audit of the applicant s activities in July The applicant was in Australia from 17 July 2007 however he departed Australia on 14 August 2007 and has not since returned. He says that he is now, and he has been from the 2007 income year, a resident of Singapore. 10. Included with the LGT documents were statements of the assets of the Foundation as at 31 December and as at 31 December The balance of account shown in the former was US $3,792,277.23; in the latter it was US $5,974, The respondent calculated (correctly) that the balance had increased by a little over 51% in that period of two years. He then treated that annual increase, an amount of just in Exhibit 18, page 3; exhibit 19, paragraph 12A. Exhibit 18, page 3, paragraph 1(b). Exhibit 1, page 293. Exhibit 1, page 301. PAGE 4 OF 29

5 excess of 25%, as the rate of return on the account of the Foundation for each of the years in question and made assessments, or amended assessments, of taxable income for each of the income years from 1999 to 2007 on the basis that in each of the those years there was undisclosed income of the applicant in an amount calculated by reference to that assumed rate of return. Those assessments or amended assessments were evidenced by notices dated 30 June On 31 July 2008 the respondent made assessments of administrative penalty at the rate of 90% On 29 August 2008 the applicant objected to the assessments and amended assessments for the 1999 to 2006 income years and to the assessments of administrative penalty. By and large his objections were disallowed by letter dated 4 August 2009 however certain arithmetic errors were detected and corrected by notices of amended assessment all dated 16 September He objected to the 2007 assessment by notice dated 7 December That objection was disallowed on 29 June It is the respondent s objection decisions of 4 August 2009 and 29 June 2011 that are the subject matter of these proceedings. 12. In the result, the increase in taxable income and the penalties imposed are as follows: Income year Increase in taxable income Penalties 1999 $1,049,939 $455, $1,452,120 $628, $2,149,797 $930, $2,424,560 $1,049, $2,575,347 $1,115, $3,131,555 $1,383, $3,545,583 $1,566, $4,572,362 $2,022, $5,026,258 $2,131, Total $25,927,521 $11,282, The intentional disregard rate of 75% was imposed and then increased by 25% by reason of aggravating factors. PAGE 5 OF 29

6 The applicant s evidence 13. The applicant made two applications to give his evidence at the hearing other than in person. For the reasons I gave on those occasions 7 I refused both applications. At the outset of the hearing, counsel for the applicant tendered various statements and affidavits of the applicant that had been lodged in the Tribunal in accordance with its usual practice of requiring evidence in chief of represented parties to be put on in writing. I overruled the respondent s objection to the tender, ruling, in effect, that on matters that were controversial the applicant s absence from the witness box would affect the weight to be given to his evidence on such matters. 14. But it is not merely the absence of the applicant that is remarkable; there is a remarkable absence of critical documents produced by him. His counsel produced and tendered five lever arch volumes of documents 1,559 pages of trust deeds, minutes of meetings, statements of Australian bank accounts, tax returns and the like to demonstrate, so it was said, all the documents that the applicant could produce. But what was not produced by the applicant were documents that evidence the nature of the relationship between him and LGT Treuhand including, relevantly, the documents by which the Foundation was set up. And, with one exception, the applicant did not produce any documents that record the financial affairs of the Foundation. 15. The respondent invites me to draw inferences, adverse to the applicant, from his failure to produce relevant documents. That submission needs to be considered in the context of the evidence that is before me about the relationship between the applicant and the Foundation and, equally importantly, what the applicant has said over time of that relationship. 16. Some further reference needs to be made to uncontroversial background matters. The first overt dealing between the applicant and the respondent occurred on 30 May 2007 when the respondent s officers, using statutory powers, obtained access to 7 See [2011] AATA 837 and [2012] AATA 450. PAGE 6 OF 29

7 documents at the residence in Pullenvale owned by the applicant s spouse (as trustee) where the applicant and his family ordinarily resided when he was in Australia. That access involved 8 scanning and removing relevant hardcopy documents, imaging of hard drives on a personal computer and extracting and making copies of relevant files and documents from two computers. Then, by letter of 13 July 2007, the respondent informed the applicant of an intention to audit his taxation affairs. He was asked to have available, all accounting information including documentation pertaining to any international funds transfer. 17. On 23 July 2007 the applicant s solicitors were provided with the statement of the respondent s reasons for exercising statutory powers to obtain access to documents. Those reasons included the following 9, 7. [The applicant] appears to have used the services of international promoters, including LGT Bank in Liechtenstein AG (LGT), located in Liechtenstein, to establish, amongst other things, a foundation in Liechtenstein and entities in the British Virgin Islands. 11. One international entity, the San Simeon foundation appears to have been established in a manner that keeps secret the economic ownership of that foundation by [the applicant]. 18. The applicant was interviewed by officers of the respondent, in the presence of his solicitors and at their premises, on 2 August The notes of that meeting 10 taken by the respondent s office record, relevantly, Investments Overseas [The applicant] advised that he had cashed in all his investment overseas prior to returning to Australia including; LGT account [the applicant] referred this LGT account as an account that he held with Grant Thornton in Hong Kong. Grant Thornton was an investment adviser in Hong Kong dealing in the futures market. In the crash of 1987, the Liechtenstein bank purchased Grant Thornton very cheap and it became LGT Exhibit 1, pages Exhibit one, page 172. Exhibit 1, page 179. PAGE 7 OF 29

8 [The applicant] advised that he cashed all his investments ($200 K) with LGT in 1992 prior to returning to Australia due to the operation of the FIF and CFC provisions in Australia. Other interest-bearing accounts cashed in include HSBC and Standard Charter Accounts (not much). 19. By letter of 9 August the respondent posed a series of questions to the applicant about the Foundation. He provided a signed response through his solicitors 12. The relevant questions, with the applicant s answers in bold, are as follows: 1. What can you tell us about the establishment of The San Simeon Foundation, Vaduz, established in October 1995? Answer I have no recollection of the establishment of an entity called the San Simeon Foundation. 2. Endowment capital of $30,000 [sic] Swiss Francs was paid to establish this foundation. From which bank account was this amount paid? Answer I have no recollection of this matter. 3. Documents held by the ATO suggest that you were the sole primary beneficiary of the San Simeon Foundation, Vaduz. What distributions have you received from this foundation for the years 1996 to 2007? Answer I have no recollection of receiving any money from the San Simeon Foundation. 4. What deposits have you made to the San Simeon Foundation during the period of its establishment to 30 June 2007? Answer I have no recollection of making any deposits to the San Simeon Foundation. The same letter requested bank statements or statements of assets for the San Simeon foundation for the period October 1995 to June The applicant s response to that request was, I do not possess any documents matching this description. 20. These proceedings were commenced with the lodgement of an application on 2 December 2009 by solicitors who acted, and who have continued to act, on his behalf. The reasons for application include the following, Exhibit 1, pages Exhibit 1, pages PAGE 8 OF 29

9 the applicant says he has no interest in the alleged trust, is not a beneficiary of the alleged trust, is not entitled to income of any such trust, does not understand that there is any such trust, and that the ATO wrongly attributes income to him including two alleged deposits. I have no reason to consider that the information in the application came otherwise than from the applicant s instructions. 21. The first statement of the applicant lodged in these proceedings was one dated 1 April It was not tendered by the applicant at the hearing; rather it was tendered by the respondent, not as evidence of the truth of its contents but as going to the applicant s credit. By the time that the applicant came to make this statement he, or his advisers, had had a considerable period of time to understand the relatively simple basis on which the respondent s assessments proceeded. And they were in possession of the documents lodged by the respondent pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (Cth). Those documents included those that had been provided to the respondent by witness A. 22. In the statement of 1 April 2010 the applicant said this, 11. I deny having seen (or otherwise been aware of) any of the documents which the Deputy Commissioner of Taxation claims to have obtained from LGT Bank (save for a copy of an old passport that I no longer possess, or have a clear memory of) prior to receiving copies from the Australian Taxation Office. 12. I deny that the documents produced by the Deputy Commissioner of Taxation (which I understand the Deputy Commissioner of Taxation alleges were obtained from the LGT Bank) are accurate. 13. I deny having any control over the San Simeon Foundation as alleged by the Deputy Commissioner of Taxation. 14. I have not received any benefit whatsoever from the alleged San Simeon Foundation. I deny the Deputy Commissioner of Taxation s allegations that I was entitled to, or exercise control over, any funds held in the alleged San Simeon foundation. 13 Exhibit 39. PAGE 9 OF 29

10 23. The applicant s first acknowledgement of an involvement with LGT Bank came in his statement dated 20 October Under the heading Relationship with LGT Bank he says as follows 14, 169. While in Hong Kong, prior to becoming a resident of Australia, I was a client of the LGT Bank of Hong Kong 170. Between 1997 to 1998, I marketed East Coast Traders Pty Ltd to the LGT Fund of Funds to their Hong Kong Office and at Hedge Fund Conferences During the Relevant Period [the financial years ending 30 June 1999 to 30 June 2006]: a. I was the investment manager of account with LGT Bank ( the account ) bearing the account number b. The Account held various investments, mainly hedge funds, but also included equities, term deposits and cash. c. As the investment manager of the Account, I would review performance of the hedge funds and currency exposure of the Account on a quarterly basis. d. As a result of those quarterly reviews, I would regularly communicate advice to LGT Bank in Hong Kong with respect to buying and selling positions of the Account. e. I never received any distribution from the Account. f. I never deposited any funds into the account I only received statements for the Account on my request to LGT Bank in Hong Kong. I did not request statements often as they were delayed by months by the time that I receive them In my role as investment manager of the Account, I usually arranged direct report from the various fund managers that the Account had invested in I only ever used the reference number in communications with LGT Bank in Hong Kong In dealing with the Account, I only dealt with LGT Bank in Hong Kong, and did not deal with LGT Bank in Liechtenstein From my dealings as investment manager of the Account and the Kingston Fund, I know that the Account was a major investor in The Kingston Fund. The applicant then went on to make comment about each of the documents from the LGT Bank which had been reproduced in the section 37 documents. He had apparently obtained copies of these documents from the respondent on 15 October Exhibit 2, page 22. PAGE 10 OF 29

11 24. His comments were generally noncommittal. Of a document which appears to be an agreement between the applicant and BIL Treuhand AG he said, I note that the document appears to have my signature on it. I do not recall having seen this document prior to receiving a copy of the LGT Documents from the Australian Taxation Office on or about 15 October No explanation was given about the circumstances under which his signature came to be on the document nor did he suggest that he had no recollection of those circumstances. He made reference to a copy of a passport issued to him which was contained within those documents. He did not put forward any explanation as to why a copy of his passport may have ended up with the LGT Bank in Liechtenstein. 25. Pages 290 to 292 appear to be the By-Laws of the Foundation. They name the applicant as the Sole primary Beneficiary for life, his spouse (with her date of birth given) as the sole second beneficiary and his three children (giving their birthdates and full names) as third Beneficiaries. The applicant said of those pages, I do not recall having seen these documents prior to receiving a copy of the LGT Documents from the Australian Taxation Office in or around 15 October No explanation of the document was otherwise provided. 26. Page 294 of the section 37 documents, on its face, was a resolution of the Board of the Foundation noting that the assets as at 31 December 1999 were in the total amount of USD 3,792, On the foot of the page, contained within a stamp denoting approval, were the applicant s handwritten initials. He said of that document, I refer to page 294 of the T Documents and note that the document appears to have my signature on it. I do not recall having seen this document prior to receiving a copy of the LGT Documents from the Australian Taxation Office in about 15 October Again no explanation was given of the circumstances under which his signature (or his initials) came to appear on the document. 27. The applicant provided a further statement on 4 May Whilst that statement sets out the applicant s considerable activity in managing the investments of what he describes as client # he provides no evidence of the circumstances under which the account PAGE 11 OF 29

12 was set up. Having made reference to his belief in maintaining records electronically the applicant goes on to say, I took my Computer with me to Singapore in Unfortunately whilst there, I had Hard Drive failure and then discovered that my backup Drive was corrupted and the data for the relevant period was lost. So far as I can glean from the material this was the first occasion this explanation for the absence of documents was given. 28. The statement of 20 October 2011 was intended to be the evidence in chief of the applicant in the proceedings. What is plainly missing from it is any explanation of the circumstances under which the San Simeon Foundation was set up or the applicant s knowledge of it or its affairs. The first detail provided by the applicant came in his affidavit of 5 July Having spoken of his desire to set up an asset protection structure the applicant detailed the circumstances under which the San Simeon Foundation was set up in these terms, 8. I was advised that a Liechtenstein Foundation (and where I had divested myself of any control over the Foundation Board) would achieve my desire to set up a secure asset protection structure. I believed that this achieved my goal of creating a protected fund for My Children and my wife as the Liechtenstein Foundation was offshore and asset protected from any adverse liability exposure in Australia. 9. Accordingly, I made arrangements with the LGT Bank in Hong Kong to establish a Foundation, and I specifically directed the LGT bank that I did not want to have any entitlement to the capital (or interest upon the capital). They agreed and said that the Foundation would be set up in accordance with these instructions. 10. My wife was aware that I was setting up the Foundation with the LGT Bank in Hong Kong, but she did not know the precise details of the Foundation or the nature of its investments. 15. I confirm that I did not received [sic] any payments from the account or the San Simeon Foundation. The applicant, of course, was not available to be cross-examined on the arrangements with the LGT Bank, the manner in which he specifically directed the 15 Exhibit 7. PAGE 12 OF 29

13 Bank or how the Bank agreed to his direction. But they are matters that one would ordinarily expect to be evidenced in writing. 29. It is, as well, relevant to note that despite the applicant knowing from at least October 2007 that the respondent was seeking the statements of the LGT Bank account, no documents, with one exception, were produced. And, of course, when requested in August 2007 to produce statements he claimed not to have any in his possession. The explanation about the computer malfunction emerged only in May The exception relates to some documents which the applicant says were located by him in the circumstances set out in his affidavit of 13 June He does not say, so far as I can tell, when those documents were located but he disclosed them in the proceedings on 14 March The applicant s more recent affidavits provide details of what are said to be his efforts to obtain these documents from LGT Treuhand. I remain unpersuaded that the applicant has taken timely or proper steps to obtain the full details of the transactions on the Liechtenstein bank account. 30. The respondent submits that there is an inference available that the applicant s reticence to produce records was due to a desire not to disclose that which might adversely affect him and that his failure to do so reflects on his credit. In the circumstances I am certainly prepared to draw that inference although, ultimately, I think it unnecessary to do so. The issues 31. In his final submissions the applicant confined his case to three contentions: (a) (b) he was not presently entitled to any of the income of the Foundation during any of the income years in issue; the assessments for each of the years are demonstrated to be excessive, (i) generally, by reference to the evidence of Mr Steven Ponsonby; 16 Exhibit 5. PAGE 13 OF 29

14 (ii) in particular, by reference to what is said to be the balance of the Foundation s account as at 22 July 2002; (c) the applicant was not a resident of Australia, and thus not liable to pay income tax on foreign source income, in the 2007 income year. The applicant did not challenge the correctness of the penalties imposed nor put in issue the respondent s entitlement to make amendments to his earlier assessments. Not presently entitled 32. The applicant accepts 17 that the Foundation is a resident trust estate for the purposes of s 95(2) of the Income Tax Assessment Act 1936 (Cth) (the ITA Act 1936). That is the premise of the assessments. And it is common ground that the applicant was liable to pay tax on the income of the Foundation (subject to the residence argument in the 2007 income year) if he had been then presently entitled to the income of the Foundation. 33. In Harmer v Commissioner of Taxation 18 the Court said: The parties are agreed that the cases establish that a beneficiary is presently entitled to a share of the income of a trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b)the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. 34. The applicant says that he was not then presently entitled because he was neither vested in interest or vested in possession relative to the [Foundation s] income 19. For his part, the respondent contends either that the evidence demonstrates that the applicant was presently entitled or, in the alternative, the applicant does not discharge the onus of showing that he was not then presently entitled Exhibit 43, page 4, paragraph 8A. (1991) 173 CLR 264, 271. Exhibit 43, page 5, paragraph 10B. PAGE 14 OF 29

15 35. Consideration of this question requires reference to the documents that are available and to the evidence of the two Liechtenstein lawyers who gave evidence about the law of that country Mr Florian Zechberger (called by the applicant) and Mr Gerd Jelenik (called by the respondent). 36. At the outset I note that only a limited number of documents were available from which an understanding of the nature of the relationship between the applicant and the Foundation (and LGT Treuhand) may be gained. As I have noted, the applicant has produced no documents that evidence the nature of that relationship; all that exists are copies of documents that have been produced by witness A. The absence of documents, and the absence of an explanation for that absence, is surprising given the applicant s evidence of his involvement with LGT 20 and his Statement of Facts, Issues and Contentions It is clear that Mr Zechberger does not disagree with Mr Jelenik s conclusions, (a) that the applicant was the economic founder of the Foundation; (b) that the applicant was the sole primary beneficiary of the Foundation for life and thus, during his lifetime, he was the entitled sole beneficiary to receive any distributions coming from the assets or income of the Foundation ; (c) that the applicant was a discretionary beneficiary because the Board of the Foundation was entitled to decide the volume of beneficiary right. 38. Where there is disagreement is on the question whether the applicant could compel any payment from the Foundation. Mr Jelenik came to the conclusion that the documents allow for an inference to be drawn that the applicant could direct the Board of the Foundation. His conclusion is expressed in this way 22 : Exhibit 2, paragraphs [169] [172]. Exhibit 18, pages 3-4. Exhibit 27, page 14. PAGE 15 OF 29

16 although [the applicant] did donate the assets to the Foundation he has reserved himself rights as a principal to give instructions toward the trustees and that the trustees had to act in trust on behalf of the principal Mr Zechberger was of the opinion that the applicant had 23, no right to demand and receive distributions of the Foundation and had no such right at any time from 1 July 1998 to present. 39. What does emerge clearly is that not all the relevant documents are available. One page exists of a document described as an Agency Agreement. 24 The document is undated however it obviously dates from the time of the creation of the Foundation. It is an agreement between the applicant (described as Principal ) and BIL Treuhand AG (as LGT Treuhand was then known). It reads, 2. Assignment The Principal herewith instructs BIL Treuhand to establish a Liechtenstein foundation in its name but for the account of the Principal as stated below under point 3; to accept the legal representation of this Foundation; to delegate one or more members to the Foundation Board of this Foundation as stated below under point 4; to administer this Foundation pursuant to the provisions of this Agency Agreement BIL Treuhand herewith accepts this assignment. BIL Treuhand and its delegates shall act in trust on behalf of the Principal. I readily infer that there are other pages to the document that is obvious from the content of what appears on the only page available which bears the number 1. And I accept the evidence of Mr Jelenik that it is likely that the additional pages of the document signed by the applicant contained provisions along the lines of the pro forma agency agreement located amongst electronic copies provided by witness A. 40. What Mr Jelenik says on this topic, based on his experience, is as follows 25, Exhibit 16, page 3. Exhibit 1, page 287. Exhibit 27, page 9. PAGE 16 OF 29

17 4.3.5 Although I didn t have any written documentation about the rights of the Principal towards the board council and I do not know the context of the complete Agency Agreement, I am of the opinion, that LGT Treuhand AG would not have refused the wish or instruction by the economic founder [the applicant] and first beneficiary [the applicant] to distribute monies to him. An Agency Agreement (or contract of mandate) in general regulates the relationship between an economic founder (in our case [the applicant]) and the trustee representing the established company to third parties and towards the authorities here in Liechtenstein Agency Agreements are often used by professional trustees in Liechtenstein. The[y] mainly have the purpose that the foreign donator of assets to such a company or foundation secures his rights to be the principal over such a company or foundation in which his assets are deposited. On the other hand the trustee secures that he will be kept indemnified for his trust function in the name of the Principal With an Agency Agreement the economic founder of a Liechtenstein Foundation intends to cover two aspects: firstly, a contractual security that the Liechtenstein trustee does only make use of his rights according to the Statutes in favour of the principal and, secondly, that the Board Council is bound to instructions given by the principal. Such a contractual obligation to fulfil the wish of an economic founder is in general not in conflict with the law as long as the fulfilment of such instruction is in accordance with Statutes and By-laws and also with the other legal provisions being valid for the Foundation. 41. Mr Jelenik s experience is apt to qualify him to give this evidence and I accept it. There is logic in the notion that the economic founder of a mechanism such as the Foundation would desire to retain some degree of control over the distribution of the assets of such a foundation. Conversely, it defies logic to think that the applicant would confer enormous financial benefit on the Foundation without retaining the capacity to control the trustee about the use to which those funds were to be put. The risk of losing control over the funds, or losing control over the funds themselves, was enormous. 42. Mr Zechberger did not take issue with the statements set out in paragraph 40 above although he did express his disagreement with other passages in the report of Mr Jelenik. 43. Whilst there is no direct evidence that a document in this form was executed such documents as exist, referable to the Foundation, demonstrate that the execution of a document of this nature was contemplated by the parties at some stage. The client relationship form (document number ) contains a reference to Agreement of Fid. Trusteeship. PAGE 17 OF 29

18 44. The pro forma agency agreement contains the following clause: LGT Treuhand as well as the persons appointed by it undertake to act expressly in accordance with the instructions issued by the Principal or by persons authorised to act on behalf of the Principle. If, as I conclude is likely, the applicant executed an agency agreement containing such a clause there is no doubt that he was presently entitled. I did not understand him to submit to the contrary if that were the conclusion that I reached. 45. I did not find helpful the applicant s cross-examination of Mr Jelenik by which it was sought to establish a hierarchy of importance of the documents governing the Foundation. I do not accept that the Statutes and By-laws establish that the applicant did not have the right to demand immediate payment of the whole or any part of the income of the Foundation. I think the likelihood is to the contrary. 46. I am not dissuaded from reaching that conclusion by the applicant s evidence that he had never sighted or signed any document of the nature of the pro forma agency agreement and that he would not sign a document empowering him to compel any payment from the Foundation. I find the applicant s evidence on the point quite improbable and illogical. 47. It follows that I am satisfied that the applicant was, at all times material, presently entitled to the income of the Foundation. But even without reference to Mr Jelenik s opinion I would not have been satisfied that the applicant was not presently entitled to that income. Given that he bears the onus of showing that the assessments are excessive I do not consider him to have discharged that burden when he does not produce the documents that explain the nature of the relationship between him and the Foundation (nor explain that there are none). Were the assessments excessive? 48. The respondent s assessments were undertaken on a fairly unsophisticated basis. The increase in the assets of the Foundation between 31 December 1999 and 31 December 2001 was taken to be entirely attributable to income earned by the Foundation. The increase in income over that two year period was then applied on a PAGE 18 OF 29

19 compounding basis across each of the income years from 1998 to The effect of this, as the applicant s submissions observe, is that the assets of the Foundation were assumed to have increased from US $5.9m in December 2001 to US $20.9m by 30 June 2007, obviously an extraordinary increase. 49. The applicant called evidence from Mr Steven Ponsonby, a chartered accountant, to demonstrate that the respondent s calculations could not possibly be correct. Mr Ponsonby concluded that the respondent s methodology was flawed. That was so, he said, (a) (b) (c) (d) because it assumed a consistent annual rate of return in excess of 25% which could only be true in a rising investment market; because it assumed that any future capital contributed was income; because it did not consider capital losses or withdrawals; and because reference to benchmarks demonstrated that the average rate of return over those years was 7.23%. 50. Additionally, the applicant relied on a document produced by witness A 26 which that witness said records that the Foundation had asset values as at 22 July 2002 of CHF 1,910,178 (US $1,324,689). This amount of the real assets of the Foundation was contrasted with the respondent s assumed value on that day of US $6,829, All of this may be accepted. It is certain that the respondent s assessments are not correct. But the cases demonstrate that it is not enough for a taxpayer to show error in the respondent s assessment; the taxpayer must also show what the actual taxable income was. That was a burden that the applicant here did not discharge. 26 Exhibit 24, paragraph & page 90 of exhibit HK-1 to that affidavit. PAGE 19 OF 29

20 52. The convenient starting point with the cases is the decision in Trautwein v Federal Commissioner of Taxation 27. In that case the taxpayer, who had not kept proper records or books of accounts, objected to assessments made by the Commissioner. The Commissioner assessed on the basis of a mathematical calculation which, it appears to have been accepted, could not have been. The taxpayer was unable to prove the precise amount of assessable income in each year. Sir John Latham said this 28, Sec. 39 of the Income Tax Assessment Act provides (inter alia) that the production of any notice or copy notice of assessment under the hand of the Commissioner shall be conclusive evidence that the assessment has been duly made and that the amount and all the particulars of the assessment are correct, except in proceedings on appeal against the assessment, when it shall be prima facie evidence only. Isaacs J. said in Moreau v. Federal Commissioner of Taxation that sec. 39 throws the burden on the appellant to establish his right to the benefit he claims. This statement, if strictly construed, means that the taxpayer appellant does not rebut the presumption created by sec. 39 merely by showing that there is an error in it and thereby creating a blank he must go further and show either that there ought to be a blank a complete omission of the item in question or that something else should be substituted for that item. The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. Obviously the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer. In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books. The application of sec. 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say as a general rule because, conceivably, there might be a case where it appeared that the assessment had been made upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the Commissioner for further consideration (1936) 56 CLR 63. (1936) 56 CLR 63, PAGE 20 OF 29

21 53. In Commissioner of Taxation v Dalco 29 a majority of the Full Federal Court had concluded that the Commissioner s assessments had preceded on a wrong basis but that there was no error in the factual findings of the learned trial judge that the applicant had not shown that in fact his income for each of the tax years was less than the figure arrived at by the Commissioner. But the Full Court allowed the taxpayer s appeal and ordered the Commissioner to make reassessments. Brennan J described the question of the determination by the Court in these terms 30, In proceedings on appeal to a court pursuant to Div. 2 of Pt V of the Act against an assessment made under s.167 (b), does the taxpayer discharge the burden of proving that the assessment is excessive where (a) he does not prove that the amount assessed as his taxable income in fact exceeds his taxable income, but (b) he shows that the Commissioner formed a judgement as to the amount of his taxable income on a wrong basis? It was not suggested by the applicant that the question is any different on a review in the Tribunal. Brennan J answered that question in this way 31, The majority of the Full Federal Court in the present case treated the error which they held to infect the Commissioner s assessment of the amount of the taxpayer s taxable income as concluding the question whether that amount was excessive. It did not. If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessed taxable income an amount which, on those facts, ought not to have been included. But where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer s taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. If it were not for s.190(b), the process of assessment might have to be repeated whenever on appeal an error affecting the amount assessed were found. But s.190(b), coupled with s.200, brings to finality the ascertainment of the taxpayer s liability in respect of the income period to which the assessment relates. Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal. Justice Toohey put the matter in this way, I agree with Wilcox J. in the Federal Court that the task for the taxpayer, upon an appeal or a review under Pt.V of the Act, is to show that the amount of money for which (1990) 168 CLR 614. (1990) 168 CLR 614, 619. (1990) 168 CLR 614, 625. PAGE 21 OF 29

22 tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer. As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. He or she may also do so by pointing to some error of computation or, as suggested by McAndrew, by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment. In George the Court said at p 201: the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income. There can be no quarrel with that statement. 54. All other members of the Court (Mason CJ, Deane, Dawson, Gaudron and McHugh JJ) agreed with the reasoning of Brennan J and Toohey J. 55. The same reasoning applies to the present applicant. It is certain that the respondent s assessments are not correct; but the applicant has not shown what his taxable income actually was. On the view I take of the matter he was presently entitled to the income of the Foundation. He has made no attempt to show what the actual income of the Foundation was during any of the relevant years. This is not a case where all the relevant facts are known and the resolution of the proceedings depended upon the legal analysis of those facts. It is a case where the respondent has proceeded upon an intelligible basis to make an estimate of taxable income on the material available to him in circumstances where the applicant has chosen not to provide any information about the actual income of the Foundation. It is undoubtedly the case that the respondent s assessments are not correct but the applicant has not shown the taxable income on which tax ought to have been levied. It follows that he has not shown that the assessments are excessive. Was the applicant a non-resident in the 2007 income year? 56. The respondent assessed the applicant in the 2007 income year on the footing that he was an Australian resident in that year. The applicant says that he was not an Australian PAGE 22 OF 29

23 resident in that year; he departed Australia with the intention of residing in Singapore on 28 June The parties are in agreement about the operation of the statute. By virtue of s 6-10(4) of the Income Tax Assessment Act 1997 (Cth) if the applicant was an Australian resident, his assessable income included his statutory income from all sources, whether in or out of Australia. Section 995-1(1) of the same Act provides that a person is an Australian resident if the person is a resident of Australia for the purposes of the ITA Act Section 6(1)(a) of that Act defines resident of Australia in these terms, resident or resident of Australia means: (a) a person, other than a company, who resides in Australia and includes a person: (i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia; (ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or (b) (iii) who is: (A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or (B) an eligible employee for the purposes of the Superannuation Act 1976; or (C) the spouse, or a child under 16, of a person covered by subsubparagraph (A) or (B); and a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. The respondent, in assessing and at the hearing, relied only on the notion of a person who resides in Australia i.e. a resident according to ordinary concepts. He did not, and does not, rely upon the words of extension domicile in Australia, the 183 day test in s 6(1)(a)(ii) of the ITA Act 1936 or the superannuation test in s 6(1)(a)(iii) of that Act. 58. The word resides takes its ordinary English meaning; it is unnecessary to put any gloss on it. In support of his contention that he did not reside in Australia during the 2007 PAGE 23 OF 29

24 income year the applicant emphasises the following matters 32. Except where I indicate otherwise, they are not controversial. 59. The applicant was born in Australia, is an Australian citizen and his domicile of origin is Australia. He has spent the majority of his adult life living outside Australia, particularly in Hong Kong. He returned to Australia from Hong Kong for the purpose of educating his children although it is not clear precisely when that occurred. It seems to have been some years prior to the time relevant to these proceedings. As at 28 June 2006 the applicant s children were all adults and were aged 24, 20 and 19 years. Each of them had, by that time, completed high school. 60. The applicant places particular reliance on his immigration departure card completed on 28 June 2006 which he completed as an Australian resident departing permanently. On incoming and outgoing cards thereafter during the 2007 income year the applicant consistently described himself as a resident of Singapore. In the course of that year the applicant made five trips to Australia 9 August 2006 to 3 September 2006, 22 September 2006 to 31 October 2006, 8 December 2006 to 13 January 2007, 14 March 2007 to 20 April 2007 and 23 May 2007 to 10 June The applicant s submissions calculate, on the basis of those visits, that the applicant was physically present in Australia for 155 days of the 2007 income year 34. The purpose stated by the applicant on his incoming immigration card for the first four of those visits was visiting friends or relatives ; for the final visit the stated purpose was business, said to be occasioned by an attendance at the Sanctuary Cove Boat Show 35. On each incoming passenger card the applicant recorded his intended address in Australia as the Pullenvale address. The applicant s spouse went backwards and forwards between Australia and Singapore with him I have not attempted to list all of the matters relied on by the applicant; they are listed between pages of Exhibit 43. Exhibit 1, page Exhibit 43, page 19. Exhibit 12, page 412. PAGE 24 OF 29

25 61. On 4 July 2006 the applicant executed an option to purchase residential property in Singapore. Settlement of the purchase of that property was completed on 31 October 2006 and the title transferred to the applicant and his spouse. 62. For his part, the respondent places emphasis upon the following matters 36. Again, that the applicant was born in Australia and is an Australian citizen. That at the time in issue, and as recently as April 2011 when he objected to the 2007 assessment, the applicant had not obtained permanent residency in Singapore 37. At the date of his notice of objection to that assessment he was still in the process of obtaining permanent residency in Singapore. 63. The respondent points, as well, to the fact that the Pullenvale property was owned by the applicant s spouse as trustee for a family trust bearing the applicant s name and that the applicant lived at that property with his spouse and three children when he was present in Australia Next, the respondent points to various documents located in the course of the access visit to the Pullenvale address. The documents come from a variety of sources that all postdate June 2006 and are addressed to the applicant at the Pullenvale address, or show the Pullenvale address, rather than any address in Singapore. The respondent places considerable emphasis on one document, a letter from lawyers in Singapore enclosing an invoice 39. The invoice details the fact of a meeting with the applicant in Singapore on 6 December 2006, that is, after completion of the purchase of the Singapore property, but the letter was sent to the applicant at the Pullenvale address. The respondent s submissions point out that the absence of the applicant from the witness box has deprived the Tribunal of being able to hear any explanation for the curiosity of that letter being sent to Australia rather than to what, on the applicant s case, was by then his residence Again, I have not sought to list all of the matters relied upon; they are listed in Exhibit 45, paragraphs Exhibit 1, page 408, paragraph 6.1. Exhibit 1, page 413, paragraph Pages of the attachments to exhibit 38. PAGE 25 OF 29