Judgment summary
This was an appeal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision of the Administrative Appeals Tribunal (TBLX and ZSCM and Commissioner of Taxation (Taxation) [2023] AATA 2059) which had affirmed the Commissioner's decisions disallowing, in whole or part, Mr Hadzic's objections to notices of assessment for the 2017 financial year, and to an associated penalty assessment [1]-[4].
Mr Hadzic's notice of appeal raised ten questions supported by twelve grounds. Goodman J granted leave to add an eleventh question, alleging apprehended bias on the part of the Tribunal's senior member, based on audio recordings made during adjournments of the Tribunal hearing [3], [91]-[104].
The Court considered each question in turn, including the characterisation of $495,000 in deposits as a loan or income, other deposits totalling $514,921.19, PAYG withholding credits, the weight given to accountants' evidence, legal professional privilege over a document called the 'Subpoena Submission', burden of proof principles, and penalty tax. The Court found no error of law established on any ground and dismissed the appeal [4], [400].
Background
Mr Hadzic, a licensed electrician, was employed by Futureproof Electrical Pty Ltd during the 2017 financial year [6]. Mr Tristan Waters was a director of Waters Company Constructions Pty Ltd, which built a residential property in Canberra later purchased by the 'M Family' in April 2015 for $2,400,000, which turned out to be significantly defective [7]-[11].
On 14 September 2016, Barrallier Street Holdings Pty Ltd (the Company) was incorporated as trustee of the Barrallier Street Holdings Trust, with Mr Hadzic and Mr Waters as director/shareholders and unit holders respectively [12]-[13]. The Company purchased the Property from the M Family, with settlement due 24 March 2017 [14].
Between 31 March 2017 and 5 April 2017, five payments totalling $495,000 were transferred from Mr Waters's wife to the Trust's bank account, noted as 'TW' [15]. Whether these deposits were Mr Hadzic's income was a central issue before the Tribunal.
In 2018 the ATO conducted a covert audit of Mr Hadzic's affairs for the 2017 year, as neither he nor the Trust had lodged returns [23]-[24]. The Commissioner issued a default notice of assessment (Hadzic NOA) and a penalty assessment of $294,910.45 [25]-[26]. Mr Hadzic's objections were disallowed in part (as to the NOA) and in full (as to the penalty) [27]-[28]. Separately, in the Commissioner's proceeding against Mr Waters, the Commissioner sought freezing orders and a declaration that the Property was held on resulting trust for Mr Waters to the extent of his $495,000 contribution [20]. Mrs Waters also commenced a District Court proceeding in 2021 claiming she had lent Mr Hadzic $495,000 which remained unpaid [31].
The Tribunal hearing extended over five days and was interrupted by disputes concerning a document called the 'Subpoena Submission', produced by Mr Hadzic in answer to a subpoena in the Commissioner's proceeding, over which claims of a Harman undertaking and then legal professional privilege were raised [21]-[22], [33]-[55].
Core dispute
The appeal raised ten questions of law (later expanded to eleven) concerning the Tribunal's decision. These included: whether the Tribunal erred in concluding the $495,000 deposits were not a loan, including alleged failures to give full faith and credit under s 118 of the Constitution to matters agreed in the District Court proceeding; whether the Tribunal wrongly applied or cited irrelevant authorities on onus of proof; whether the Tribunal erred concerning deposits totalling $150,548 said to be wages, and PAYG withholding credits of $92,795; whether the Tribunal erred in giving little weight to the evidence of three accountants; whether the Tribunal erred in not determining a claim of legal professional privilege over the Subpoena Submission; whether the Tribunal erred concerning imposition and remission of penalty tax; and, following an application to amend the notice of appeal, whether the senior member who constituted the Tribunal was affected by apprehended bias, based on audio recordings made during hearing adjournments in which the senior member spoke with tribunal staff.
Court findings
Goodman J granted leave to amend the notice of appeal to add the apprehended bias question, finding the recordings and transcripts admissible, but held that none of the passages relied upon established a reasonable apprehension of bias; at most the senior member was explaining the issues to staff, and any views expressed were not shown to be so entrenched as to be incapable of alteration [104]-[165].
As to onus of proof (question 8), the Court held the Tribunal did not err in relying on authorities such as Imperial Bottleshops, Cassaniti, Bosanac and Anglo American, and that an explicit credit finding was not a necessary precondition to rejecting evidence [180]-[192].
As to legal professional privilege (question 9), the Court held the Tribunal was entitled to decline to determine the privilege and waiver questions once it found the Subpoena Submission lacked sufficient probative value, and there was no proper basis to infer the Tribunal nonetheless had regard to it [197]-[214].
As to the $495,000 deposits (questions 1 to 4), the Court held that s 118 of the Constitution did not require the Tribunal to treat agreed positions in the (undetermined) District Court proceeding as binding, absent a prior judicial determination of rights [267]-[278]; that the Tribunal's non-satisfaction that a loan existed was not legally unreasonable, given the absence of contemporaneous documents, lack of corroboration and commercial implausibility of the arrangement as found by the Tribunal [279]-[296]; that the Tribunal correctly addressed whether Mr Hadzic had discharged his onus of proving a loan rather than needing to consider alternative characterisations of the deposits as income [297]-[308]; and that the Tribunal was not obliged to have regard to evidence given in the separate Commissioner's proceeding concerning a resulting trust claim, as this was not a mandatory relevant consideration [309]-[324].
On PAYG credits (questions 5 and 6), the Court held that the Tribunal correctly found it lacked jurisdiction to determine entitlement to a PAYG credit of $92,795, following the reasoning in Price v Commissioner of Taxation [2019] FCA 543, and that a 2013 amendment to s 166 of the ITAA 1936 did not alter this position [325]-[359].
On the accountants' evidence (question 7), the Court held the Tribunal's approach to according little weight to the evidence of three Freewater Accountants witnesses, none of whom acted for Mr Hadzic during the 2017 year, was open to it and did not involve legal unreasonableness [360]-[383].
On penalty tax (question 10), the Court held the Tribunal did not err in finding Mr Hadzic made no submissions on the remission (as opposed to imposition) of penalty, and had properly addressed the imposition question [384]-[399].
Outcome
The appeal was dismissed in its entirety. The applicant was ordered to pay the respondent's costs of the proceeding, as agreed or taxed. Leave was granted for the applicant to file an amended notice of appeal (including question 11 on apprehended bias) within seven days of the orders, but this and all other questions raised failed [Orders 1-4], [400].
Major issues / areas of contention
- Whether the senior member of the Tribunal was affected by apprehended bias, based on audio recordings of conversations with tribunal staff during hearing adjournments (question 11).
- Whether the Tribunal erred in finding that $495,000 in deposits into the Trust's bank account were not a loan, including an alleged failure to give full faith and credit under s 118 of the Constitution to matters said to be agreed in a District Court proceeding (questions 1 to 4).
- Whether the Tribunal erred in its citation and application of authorities concerning the burden of proof under s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth) (question 8).
- Whether the Tribunal erred in declining to determine a claim of legal professional privilege, and an associated waiver claim, over the 'Subpoena Submission' document (question 9).
- Whether the Tribunal erred concerning deposits totalling $150,548 said to be wages, and in finding it lacked jurisdiction to determine entitlement to PAYG withholding credits of $92,795 (questions 5 and 6).
- Whether the Tribunal erred by giving little or no weight to the evidence of three accountants engaged after the 2017 income year (question 7).
- Whether the Tribunal erred in its treatment of the imposition and remission of administrative penalty tax (question 10).