The taxpayer’s burden
In any tax dispute, the taxpayer has the ‘burden’ of proving that the relevant assessment is excessive and what it should have been. The way a taxpayer goes about proving this varies.
Where an assessment is a default assessment, and the ATO has calculated an estimate of a taxpayer’s taxable income, the burden can be difficult to overcome – a taxpayer must prove what their taxable income was during the relevant years, and that their actual taxable income was less than the default assessment. In a lot of cases, this involves the taxpayer leading evidence about their entire lives over a long time period.
The task can be different where the ATO issues a general ‘amended’ assessment, which rather than estimating a taxpayer’s taxable income, either includes specific amounts in a taxpayer’s assessable income or disallows specific deductions, which then changes the taxpayer’s taxable income.
In Liang, the substantive issue was whether deposits into a bank account totaling approximately $735,000 were part of the taxpayers’ trust’s ordinary income.
What happened in Liang
The facts of Liang are reasonably simple.
- The taxpayers (through a trust) purchased properties for investment purposes.
- In FY2017 and FY2018, the trust received deposits from the taxpayers totaling $735,825.
- The Commissioner increased the trust’s net income by the value of the deposits and issued amended assessments to the taxpayers (as the beneficiaries who were presently entitled to the trust’s income).
Before the Tribunal, the taxpayers argued that the deposits were loans or equity contributions from their parents to the trust. The Tribunal did not accept the taxpayers’ evidence and, without a satisfactory explanation as to the source of the deposits, concluded that the taxpayers had not discharged their burden of proof.
What did the Federal Court decide at first instance?
The taxpayers appealed the Tribunal’s decision, arguing that the rejection of their evidence did not automatically lead to the conclusion that the Commissioner’s assessment should stand.
In the Federal Court, Justice Logan agreed with the taxpayers, deciding that the Tribunal was required to consider whether, on the evidence that remained, the taxpayers had discharged their burden. His Honour stated:
Given the way in which the parties had confined the issue, if that material admitted of, and only of, a conclusion that whatever the Deposits were, they were not ordinary income, the Tribunal was obliged to set aside the objection decision. And that was so even though the Tribunal had rejected the descriptions offered by Mr Chen and Ms Li as also reproduced in the books of account.
His Honour concluded that the Tribunal ought to have found that the deposits were not ordinary income in the hands of the trust. Justice Logan came to that conclusion on the basis that the Commissioner had accepted that:
- the trust was only involved in property investment activities (and no other activities); and
- the deposits were not income related to those investment activities.
Within that realm of possibilities then, it followed that the deposits were not ordinary income.
What did the Full Court decide on appeal?
The Full Court overturned Justice Logan’s decision on appeal, on the basis that the Commissioner did not make any concessions in relation to the trust’s business but rather limited the case to whether the deposits were ordinary income.
In the case of unexplained deposits, the Full Court said:
It would be a very rare instance where a taxpayer was able to prove an amount was not income under ordinary concepts without positively establishing the source and character of the amount. As a matter of logic, it is difficult to prove a negative by proving a series of other negatives unless those other negatives represent the entire universe of possibilities.
When the Tribunal rejected the evidence about the source of the deposits (being contributions from their parents), the taxpayers had not discharged their burden of proof.
How a taxpayer goes about discharging their burden of proof will depend on each case. What is important is that taxpayers:
- consider their case theory and strategy from the outset of a tax dispute – often from the objection
- lodge sufficient probative evidence of the facts and circumstances relevant to meeting their burden.
Need help?
In tax litigation, proving your case can be burdensome, but it is not insurmountable. We are here to help you navigate this. If you would like assistance on navigating these issues, please contact a member of our team or send us a confidential enquiry to discuss.
