Section 14ZZK and the burden of proof for taxpayers on appeal to the Administrative Appeals Tribunal and Federal Court of Australia

In brief - Decision in Commissioner of Taxation v Ross [2021] FCA 766 affirms importance for taxpayers to obtain legal advice prior to lodging objections or appeals under Part IVC of the Tax Administration Act. 

In Commissioner of Taxation v Ross [2021] FCA 766, Justice Derrington considers the burden of proof imposed on taxpayers by section 14ZZK of the Tax Administration Act 1953 (Cth) (TAA) in appeals to the Administrative Appeals Tribunal and the Federal Court of Australia under section 14ZZ of the TAA.

The judgment analyses the extent of the burden of proof in the context of amended assessments issued by the Commissioner that utilise the "asset betterment method".

In summary, the decision confirms that a taxpayer has the burden of proving that the assessment is excessive in relation to their actual taxable income. This requires a considered analysis of the evidence that is sufficient to justify their claimed levels of income. It is not sufficient for the taxpayer to identify a defect in the Commissioner's methodology in calculating the assessments.

This affirms the importance for taxpayers to obtain legal advice prior to lodging objections or appeals under Part IVC of the TAA.

Background

The proceedings were an appeal pursuant to section 14ZZ of the TAA from the decision of the Deputy President of the Administrative Appeals Tribunal in Re v MJPV and Commissioner of Taxation [2020] AATA 1527 (Tribunal Decision).

The substance of the Tribunal Decision related to objections by Mr and Mrs Ross (Taxpayers) to the decision of the Commissioner in respect of default and amended income tax assessments. Penalties had been imposed pursuant to subsection 284-220(1)(c) of Schedule 1 of the TAA. 

The amended assessments were issued pursuant to section 170 of the Income Tax Assessment Act 1936 (Cth) utilising the "asset betterment test" following a "covert" audit by the Commissioner which identified a failure by the Taxpayers to disclose the entirety of their assessable income over a number of years.

The Federal Court decision considers, amongst other things, the burden of proof on taxpayers pursuant to section 14ZZK of the TAA when appealing a decision of the Commissioner to the Tribunal or the Federal Court of Australia under Part IVC of the TAA.

Section 14ZZK - Burden of proof

The central issue for determination in the Federal Court was the interpretation and application of section 14ZZK of the TAA.

This section provides that taxpayers bear the burden of proving, on the balance of probabilities, that:

• the assessment is excessive; and

• what the assessment should have been in order to be correct or "more nearly right"¹.

The burden of proof is a well-established principle in the general law, but what arose for assessment in this decision was how the burden is to be applied in the context of a default assessment that was founded upon the "asset betterment method".

The "asset betterment method" can be summarised as a comparison by the Commissioner of the taxpayers' net assets at the end of an income year with the income disclosed in their income tax returns. The Commissioner may use a disparity for the purpose of estimating the taxpayers' assessable income. The Courts have acknowledged that this involves an "amount of guesswork", but is it is nonetheless a legitimate form of assessment (See Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 86-87, 99-100 and 105).

The Taxpayers submitted to the Court, with reference to the decision of the Full Federal Court in Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315, that it is sufficient to discharge the burden of proof by identifying the "elements of the Commissioner's assessment that were incorrect or partially incorrect and, to the extent error is shown, the taxpayer's taxable income is revealed by the remaining amount". 

Specifically, the Taxpayers submitted that they can succeed by establishing that the assessments are incorrect as a result of an error in the Commissioner's methodology.

The Federal Court rejected the Taxpayers' submission on the basis that it would assume that the Commissioner's calculation was an actual calculation of their taxable income, which would be contrary to the Full Court decisions of Gashi and Rigoli v Commissioner of Taxation [2014] FCAFC 29; (2014) 141 ALD 529, and earlier High Court authorities in Dalco and Trautwein. 

The amended assessments are to be considered a judgment of what their income should be and, as a result, it establishes their taxation liability.

It follows that for a taxpayer to succeed in discharging their burden of proof in an appeal under Part IVC of the TAA, they must show that the assessment is excessive in relation to their actual taxable income. This requires evidence that is sufficient to justify the levels of income claimed by the taxpayer. It is not sufficient for the taxpayer to rely upon the Commissioner having no evidence to prove the amount of the estimated income that is applied in the amended assessment. 

1. Commissioner of Taxation v Ross [2021] FCA 766 at [46]; Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 (Trautwein) at 88 per Latham CJ; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623-625 per Brennan J and at 632-634 per Toohey J; Gashi v Commissioner of Taxation (2013) 209 FCR 301 at [61]-[67].