The Full Federal Court case of Commissioner of Taxation v Liang [2025] FCAFC 4 serves as a reminder that when challenging an Australian Taxation Office (ATO) decision at a court or tribunal, it is the taxpayer who carries the burden of proving that an assessment is excessive and what the assessment should have been.
We await the outcome of the taxpayer’s special leave application to the High Court with interest (and if granted, whether the High Court will elaborate upon how close family groups can discharge their burden of proof for transactions which are typically undocumented and informal).
Facts:
The taxpayers were husband and wife who were the controllers and beneficiaries of three discretionary trusts. Two of the three trusts ran restaurant and takeaway businesses. The third trust (Property Trust) conducted property investment activities and derived rent from its various investment properties.
In the 2017 and 2018 income years, the Property Trust received seven deposits of cash or bank cheques totalling $735,825 (Deposits).
The Commissioner of Taxation (Commissioner) assessed the Deposits as ordinary income of the Property Trust, with a consequential increase of the Property Trust’s net income under section 97 of the Income Tax Assessment Act 1936. The taxpayers, as presently entitled beneficiaries to a share of the net income of the Property Trust, were issued amended assessments and a 50% penalty for recklessness.
The taxpayers objected, arguing that the Deposits were a mix of debt and equity contributions to the Property Trust from the taxpayers’ parents.
Relevant law:
Paragraph 14ZZK(b)(i) of the Taxation Administration Act 1953 provides the following:
14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
the applicant is, unless the ART orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
the applicant has the burden of proving:
if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
in any other case—that the taxation decision concerned should not have been made or should have been made differently.
In tribunal proceedings, when there is an assessment, it is the taxpayer who has the burden of proving that the assessment is excessive and proving what the assessment should have been. This burden of proof stays with the taxpayer during any appeals, including appeals started by the Commissioner.
Section 14ZZO contains similar provisions for Federal Court appeals.
The standard of proof is the balance of probabilities. Although there is no inherent requirement for the taxpayer to provide independent or contemporaneous records, in practice it is difficult to convince a court or tribunal that it is more likely than not that the taxpayer’s narrative is the accurate one without such records.
Tribunal review:
At the Administrative Appeals Tribunal (Tribunal) (CVMW and Commissioner of Taxation [2023] AATA 4039), both taxpayers gave evidence to the Chinese culture of not discussing wealth with family members, not trusting banks, and not documenting transactions between family. Other evidence given included the death of the husband’s mother, leading to the husband’s father giving more money to the Property Trust.
The Tribunal did not accept the taxpayer’s evidence, noting:
the high level of abstraction in the taxpayers’ evidence;
the taxpayers’ refusal to answer certain questions; and
numerous inconsistencies including differing evidence given by the taxpayers and their tax agent, different evidence given at audit versus at the hearing, and evidence that was inconsistent with the Property Trust’s general ledgers and financial statements.
The Tribunal noted that “[t]he predicament for taxpayers is that, absent any independent corroboration of the alleged sources of the cash, the reliability of the evidence of the taxpayers becomes critical.” This led the Tribunal to apply the principles in Imperial Bottleshops Pty Ltd v Commissioner of Taxation (Cth) [1991] FCA 276 and conclude that the evidence given cannot be accepted because the taxpayers’ interests in the disputes were aligned and their statements were consequently self-serving.
Therefore, the Tribunal ruled in favour of the Commissioner as it concluded that the taxpayers did not discharge their burden of proving the assessments were excessive.
Federal Court primary judge appeal:
The primary judge in the Federal Court found that the Commissioner conceded at the Tribunal that the activities of the Property Trust consisted only of property investment activities, that only such property investment activities were those evidenced in the material before the Tribunal, and that the Deposits were not rent (Concession).
Using this framework, the primary judge concluded that the Deposits could not be ordinary income of the Property Trust because they were not income from services, not interest, not dividends, not opportunistic profit-making gains, and not rent.
The primary judge said at paragraph 52 that:
“In my view, the Tribunal has forgotten, with respect, that a rejection of the evidence of Mr Chen and Ms Li did not inexorably lead to a conclusion that the objection decision must be affirmed. That rejection did not relieve the Tribunal from its obligation to review, on the merits and on the material before it, the objection decision in light of the issue as refined and particular concessions. The question was always whether Mr Chen and Ms Li had proved the assessments to be excessive. It remained possible, and their submissions to the Tribunal embrace this, nonetheless for the assessments to be shown to be excessive just on other material before the Tribunal and what was common ground.”
In other words, the primary judge ruled that a rejection of the taxpayers’ evidence does not necessarily mean that the Commissioner’s objection decision must be affirmed; it was still possible for the taxpayers to show that the assessments were excessive.
In part because of the Concession, the primary judge also considered that the circumstances of the case made it “overwhelmingly” a case where the Federal Court should make a finding of fact.
Given the Concession, the primary judge decided that the Tribunal should have concluded that the Deposits were not income. Therefore, the primary judge allowed the appeal.
Full Federal Court:
The Commissioner successfully appealed the decision of the Federal Court.
In reaching this decision, the Full Federal Court reviewed the submitted documents and transcript of the Federal Court appeal and concluded that the Commissioner had not advanced the positive case that the Deposits were income as listed by the primary judge (income from services, interest, dividends, opportunistic profit-making gains, or rent). Instead, the Commissioner’s argument was that the source of the Deposits was a “mystery” and therefore the taxpayers had not discharged their onus of showing that the Deposits were not income.
The Full Federal Court also emphasised that the primary issue is how taxpayers can discharge the burden of proof. To do so, the Full Federal Court noted that “[a]s a general rule, a taxpayer proves an amount is not assessable as income under ordinary concepts by proving what the amount represents and demonstrating that what the amount represents is not ordinary income.”
Therefore, as the Tribunal rejected the written and oral evidence of the three witnesses (taxpayers and tax agent), the Tribunal did not err in concluding that the taxpayers had not discharged the onus of proving the Deposits were not ordinary income.
Takeaway
Although the outcome of the taxpayer’s special leave application to the High Court is unknown, the Liang litigation highlights that tax disputes are often won or lost based on the taxpayer’s evidence.
The ATO can, and often does, scrutinise transactions involving large sums of money between family members. While it may not be surprising that family dealings are often conducted informally, families can face significant challenges discharging the burden of proof (and incur significant litigation costs in the process) without evidence to support the source of funds and reasons underpinning a transaction.
Liang also potentially highlights the difficulties that individuals with Chinese backgrounds (as was the case for the taxpayers in Liang) face when satisfying the burden of proof. The Chinese cultural taboo of discussing money and wealth with family combined with the practice of parents sharing money with children (慈爱/ciai) and children sharing money with parents (孝/xiao) without repayment obligations or documentation can lead to insufficient records for tax purposes.
However, taxation laws require the retention of sufficient evidence to support the positions taken by taxpayers. Regardless of cultural attitudes, thorough documentation and retention of such documents is the best practice. Even without contemporaneous evidence, it is better late than never to gather evidence to give yourself the best chance of succeeding in a court of law.
Sladen Legal has extensive experience acting for individuals and private enterprises in reviews, audits, and disputes with the ATO. If you wish to discuss your record-keeping or the ATO has contacted you and you want assistance, please contact:
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au
Edward Hennebry
Special Counsel
T +61 3 9611 0113 | M +61 428 439 730
E ehennebry@sladen.com.au
James Gao
Lawyer
T +61 3 9611 0166
E jgao@sladen.com.au