The Commissioner has the power to amend a taxpayer’s income tax assessments outside the standard two or four year amendment periods if he forms the opinion that there has been fraud or evasion. The decision in Kirtlan and Commissioner of Taxation (Taxation) [2025] ARTA 539 provides a rare example of a taxpayer proving the Commissioner’s evasion opinion should not have been formed. There are good lessons to be learned.
What happened in Kirtlan?
By the income years in question, Mr Kirtlan was an experienced businessman, providing corporate advisory and capital raising services with a particular interest in the mining industry.
In April 2005, Mr Kirtlan moved to the UK with his wife and young daughter, to help advance Mr Kirtlan’s business interests. As it turned out, Mrs Kirtlan was unhappy in the UK, and with strains in their marriage, she moved back to Perth about seven months after she and daughter arrived in London. Mr Kirtlan continued to live in London, but spent an approximately equal amount of time in and out of Australia. In May 2008, Mr Kirtlan surrendered his lease in London and returned to Perth where he lived with his wife and young daughter.
Mr Kirtlan’s tax agent, Mr Spence, was an experienced accountant and long-term friend. He advised Mr Kirtlan that he became a non-resident in April 2005 when the family moved to London. Mr Spence then lodged Mr Kirtlan’s income tax returns that had been approved on that basis.
Mr Kirtlan’s Australian income tax returns, prepared on the basis of his non-residency, excluded significant amounts of foreign sourced income. One particular difficulty was that Mr Kirtlan’s UK income tax returns were also prepared on the basis that he was a non-resident for UK purposes.
The findings of the Tribunal
The Tribunal noted that evasion requires more than merely avoiding tax, withholding information or providing misleading information. There must be some blameworthy act or omission. In this context, intentionally omitting income without a credible explanation would constitute evasion.
The question was then whether Mr Kirtlan had a credible explanation for lodging his income tax returns as a non-resident for the period from April 2005 to May 2008, and consequently, omitting the foreign source income.
The Tribunal accepted that Mr Spence was well informed about Mr Kirtlan’s business activities and personal life. Mr Spence then provided advice to Mr Kirtlan about his tax residency status, including whether it changed when Mrs Kirtlan returned to Australia. Mr Kirtlan’s income tax returns were prepared on the basis of that advice.
As a result, the Tribunal concluded that there was a credible explanation for Mr Kirtlan filing his returns as a non-resident. Mr Kirtlan had met his burden of proving that any misstatements were not a result of evasion (and there was no allegation of fraud). Mr Kirtlan’s amended assessments were excessive.
Lessons
The task for taxpayers in these types of cases is to prove that the Commissioner’s opinion that there was evasion (or fraud) should not have been formed. As the history of case law shows, proving that the Commissioner should not have formed the evasion opinion – that there was an absence of a blameworthy act or omission – can be a difficult task. This is particularly in cases like Mr Kirtlan’s, where the hearing was held in December 2024, almost 20 years after the start of the relevant period.
Mr Kirtlan argued his case on the basis that there was no evasion, which required a credible explanation for why he made the statements in his income tax returns that he was a non-resident between April 2005 and May 2008. Facts relating to his residency were critical, together with the unchallenged evidence of Mr Spence that he formed the view and advised Mr Kirtlan that he was a non-resident.
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