Mixing of funds and evasion – a warning to SME taxpayers and their advisers of certain principles of tax litigation
The Administrative Appeal Tribunal (AAT) upheld the tax commissioner’s objection rulings regarding unexplained bank deposits and loan account credits involving the subject taxpayer, Mr. Buzadzic: Buzadzic & Anor v FC of T 2021 ATC ¶10-606;  AATA 4820, December 24, 2021.
The case highlights the serious difficulties faced by a taxpayer seeking to discharge the burden of proof and demonstrate that contributions are excessive, where private and professional funds are mixed and where the records kept and procedures adopted do not allow effective “untangling”. to treat. Mere assertions or speculations are insufficient to satisfy the burden of proof. The onus is on the taxpayer to produce sufficient evidence to support their arguments.
The overall shortfall for Mr. Buzadzic was $1.8 million, with penalties and deficit interest charges totaling $2.3 million.
The decision is instructive for small business taxpayers and their advisers as to some of the principles that apply in tax litigation, audits, objections or other tax controversies.
1. Burden of proof
the Tax Administration Act 1953 (Cth) provides that the onus is on the taxpayer to prove that the amended assessment is excessive.
This burden is not discharged by showing an error in the basis on which the amended valuations were issued. Rather, it is up to the taxpayer to demonstrate what his real taxable income is and that the amount determined by the opposition decision is excessive.
The taxpayer must meet the burden of demonstrating, on a balance of probabilities, the actual amount of his taxable income and, therefore, the amount determined by the objection decision is excessive (see Nettle J in Bosanac against FC de T.  HCA 41).
The AAT [at para 128] noted that in a case where there were unexplained deposits and an unexplained reduction in liabilities, the onus is on the taxpayer to present evidence that explains how these distributions and dividends were paid (whether in cash or by book entry) , how the distributions were reflected in their taxable income as returned, and how these dividends and distributions account for the decrease in personal debt.
In the end, the AAT was not convinced that the dues were excessive. In part, the AAT considered Mr. Buzadzic’s oral testimony regarding the filings to be, for the most part, “speculative and unreliable.” [para 150].
2. Reasonableness of evidence required / absence of documents
The taxpayer argued that it was unreasonable to expect a person to retain records for an indefinite period of time and that no adverse inference should be drawn simply because the taxpayer was not in able to produce contemporary records [para 108].
The AAT noted that while this proposal may have some influence in some cases, the obligation to keep, and the expectation to keep appropriate records, depends on the nature of the transaction and whether it is of a type which would result in the preservation of documents in the circumstances [para 109].
The case included 3 trusts and 16 companies with which Mr. Buzadzic was associated, a repeated mixture of substantial volume and value of commercial transactions with private agreements, a repeated mixture of funds from separate companies and their owners and an apparent reluctance to do what the group’s external accountants typically ask their clients.
The above circumstances suggest that there might be a record or trade lead indicating the source of the deposits and credits and thus determining whether the deposits and credits revealed or were the product of a source of income not disclosed. [para 109].
The AAT noted that the use of available funds and credit cards and the mixing of money from various entities (including personal money) is not in itself inappropriate and that there may be various reasons for managing money this way. [para 104].
However, the AAT said the circumstances of the case necessitated a degree of record keeping to ensure that amounts transferred between accounts of different entities and for different purposes were properly accounted for and could be explained if the need arose. felt (as it did).
By merging his professional and personal affairs as he did, Mr. Buzadzic created a situation that made these tasks difficult, reflecting Davidson AJ’s warning in Sabiel vs FC of T  ITDA 87 where His Honor said:
Although a person is not required to keep the best books or the best system of accounts available, nevertheless, if, for lack of such records, he falls into a situation hostile to him, he must come to terms with unless he can establish from other facts put in evidence that the thesis he puts forward is correct.
Failure to create and retain records can have consequences for a taxpayer seeking to meet their burden of proof. In this case, the AAT considered Mr. Buzadzic’s vague and inconsistent recollections to be nothing more than speculation and not evidence to which any weight could be attributed. [para 107].
3. Companies Act s 1305 and double-entry bookkeeping
Under section 286 of the Companies Act 2001 (Cth), all proprietary companies must maintain financial records that properly record and account for their transactions.
The taxpayer relied on section 1305 of the Corporations Act to support an assertion that an entity’s final accounts constitute prima facie evidence of the matters recorded therein.
The AAT considered Section 1305 of the Companies Act to provide very limited assistance to the taxpayer, and the section only provides that these books are prima facie, but not conclusive evidence of the matters recorded therein.
The auditor was therefore entitled to question the accounts, with the AAT noting that the accuracy of the records depended on the accuracy and completeness of the information provided to the accountant. Ultimately, the AAT was not satisfied that all information relating to Mr. Buzadzic’s transactions had been properly provided to the accountants.
The AAT also noted that the entries in the double-entry accounting system under which each debit must have a corresponding credit should only be taken at face value and cannot be taken as explaining the transactions giving rise to certain entries. unless supported by forensic medical examination. [paras 118 / 119].
4. Use of estimates by the statutory auditor
The AAT suggested that even when the commissioner relied on inaccurate evidence to establish the assessments, the role of estimates was very limited and, in any event, the commissioner had identified particular events that required an explanation that the taxpayer was unable to provide.
5. Fraud or evasion
The taxpayer argues that the amended assessments are excessive because they were issued outside the time limits (generally four years) provided for in section 170 of the Income Tax Assessment Act 1936 (Cth) and the commissioner had no reason to form an opinion that there had been fraud or evasion [ para.197].
The AAT observed that the onus is on the taxpayer to prove that there was no fraud or evasion or that the commissioner failed to form the required opinion. It is not up to the commissioner to demonstrate that the assessment was properly carried out [para.198] [Refer to Binetter v F. C. of T.  FCAFC 163; 249 FCR 534 to ; Nguyen against FC de T.  CIF 1420; 265 FCR 355].
There is no dispute that the Commissioner had formed the opinion that there had been an evasion, the question before the Tribunal was whether he was satisfied that the taxpayer had discharged the obligation to show that the opinion that the escape should not have been formed.
“Escape” for these purposes means more than simply withholding information or simply providing misleading information. A culpable act or omission on the part of the taxpayer or those for whom he is responsible is required [para. 200 [Refer to Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW)  HCA 25; 79 CLR 296-313].
A taxpayer can demonstrate that there was no fraud or evasion by showing that no amount omitted was from taxable income; for example, by demonstrating that the amounts were not taxable as they were Binette vs. FC of T  FCAFC 163. Alternatively, a taxpayer could demonstrate that amounts, although subject to assessment, but which have not been included for a reason which shows that although there was a shortfall, there is not a blameworthy act in the Denver Chemicals sense. For example, there will be no fraud or evasion if the taxpayer can show a reasonable excuse for omitting the amount [Wilson v Chambers & Company Pty Ltd  HCA15; 38 CLR 131].
To satisfy the charge of fraud and evasion, Mr. Buzadzic had to provide evidence as to the origin of the sums deposited in the bank accounts. The AAT found that Mr. Buzadzic failed to demonstrate that the omission of the relevant amounts from his taxable income was not attributable to wrongdoing.
Mr. Buzadzic also argued that there was no reason he engaged in fraud or evasion because he was a billboard beater with a limited education who relied on his employees and external accountants to comply with its tax obligations. He was unaware of the provisions of the Income Tax Assessment Act 1936 and could not understood that unverified credit entries including discrepancies in loan accounts with various companies and discrepancies between the closing and opening balances of certain loan accounts were taxable income.
The AAT [para 204] had a number of difficulties with this submission:
- the submission failed to establish a basis for concluding that there was no wrongdoing;
- a taxpayer is responsible for the acts of its employees and agents. The blameworthy act may be that of the taxpayer personally or of those for whom he is responsible; and
- a taxpayer fails to discharge his obligation to demonstrate the absence of evasion based on a claim about his subjective level of understanding of the operation of income tax law. To admit otherwise would be to reward fiscal naivety.