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Two taxpayers have been successful in an appeal against a tribunal decision examining whether bank deposits were assessable income.
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Federal Court quashes AAT decision involving property trust
25 May 2024
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The Court ruled that the AAT had erred in law in a case involving deposits made into the bank account of a property trust.
The Federal Court of Australia has allowed an appeal from an earlier decision by the Administrative Appeals Tribunal in Liang v Commissioner of Taxation [2024] FCA 535.
The original dispute between two taxpayers and the Commissioner of Taxation related to deposits that were made to the bank of a discretionary trust controlled by the taxpayers. The discretionary trust was used to carry on property investment activities.
The deposits, totalling $735,825, were used to fund several property acquisitions during the 2017 and 2018 income years.
The Commissioner treated the deposits as ordinary income of the property trust, which led the ATO to conclude that there had been an understatement of the net income of the trust.
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Consequently, the Commissioner increased the assessable income for the taxpayers in amended assessments on the basis that they were presently entitled beneficiaries of the net income of the property trust.
Related to those amended assessments were penalties imposed on each of the taxpayers at the rate of 50 per cent for recklessness as to the operation of the tax laws. The Commissioner declined to exercise the discretion to remit the applicable penalties.
In the initial AAT decision, the tribunal rejected the applicants’ evidence that the deposits were loans or equity contributions from their respective parents.
After rejecting the applicants’ evidence about the deposits, the tribunal concluded that the applicants had not discharged their onus of proof under section 14ZZK of the Tax Administration Act 1953.
In his decision, Justice Logan noted that the Commissioner had accepted that the property trust company was only engaged in property investment and did not provide services to anyone.
It was also accepted that the despots did not constitute an opportunistic gain made with a profit-making purpose in the course of the carrying on of a business such that the gain could form part of the ordinary income of the property trust.
“These deposits were not income from services, were not interest, were not dividends, were not opportunistic profit-making gains. It is also conceded, as indeed the very amount of the deposits would suggest, that those deposits were not in the nature of rent in respect of the investment properties,” Justice Logan said.
“The material before the Tribunal ought, in my view, to have led the Tribunal inexorably to a conclusion that whatever these deposits might be, they were not, in the hands of the property trustee company, income.”
Justice Logan allowed the taxpayers appeal on the basis that the tribunal should have found the assessments to be excessive.
The court ordered that the objection by the applicants to their amended assessments for the income years ending 30 June 2017 and 30 June 2018 be allowed in full.
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