[2012] aata 557 taxation appeals division 2009/4786; 2009 ... · 1. in november 2002, an employee...

© Commonwealth of Australia 2012

[2012] AATA 557

Division TAXATION APPEALS DIVISION

File Number(s) 2009/4786; 2009/5888-5894; 2011/5622

Re Harold Murray

APPLICANT

And Commissioner of Taxation (No 3)

RESPONDENT

DECISION Tribunal Deputy President P E Hack SC

Date 24 August 2012

Place Brisbane

In each application the decision under review is affirmed.

...............................[Sgd]................................

Deputy President P E Hack SC

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CATCHWORDS

TAXATION – Income tax – whether assessment excessive – whether applicant presently entitled

to income of a Liechtenstein Foundation – applicant failed to show actual taxable income –

burden not discharged by applicant – decision affirmed.

TAXATION – Residence – whether applicant a resident – continued occupation of property –

continuing involvement in companies incorporated in Australia – decision affirmed.

LEGISLATION

Income Tax Assessment Act 1936 (Cth) ss 6(1)(a), 95(2)

CASES

Commissioner of Taxation v Dalco (1990) 168 CLR 614

Harmer v Commissioner of Taxation (1991) 173 CLR 264

Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63

REASONS FOR DECISION Deputy President P E Hack SC 24 August 2012

Introduction

1. In November 2002, an employee of LGT Bank in Liechtenstein AG (LGT Bank), a

financial institution in Liechtenstein, unlawfully took an electronic copy of a great

number of records of a subsidiary of that bank, LGT Treuhand AG (LGT Treuhand).

In October 2006 that employee, who has been called witness A in these proceedings,

provided to the respondent, the Commissioner of Taxation, three compact discs that

contained information about LGT Treuhand’s procedures and financial and other

information that related to Australian residents.

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2. One of those residents was Dr Harold Murray, the applicant1 in these proceedings.

3. In June 2008, using the data obtained about the applicant’s affairs from witness A and

having made various assumptions in using that data, the respondent made assessments

and amended assessments of the applicant’s taxable income for each of the years ended

30 June 1999, 30 June 2000, 30 June 2001, 30 June 2002, 30 June 2003, 30 June 2004,

30 June 2005, 30 June 2006 and 30 June 2007. Those assessments and amended

assessments increased the applicant’s taxable income across that period by an amount in

excess of $25 million. Additionally, the respondent imposed penalties in excess of

$11 million.

4. The applicant objected to the assessments and amended assessments and the assessments

of penalty. His objections were generally disallowed. He now seeks a review of the

respondent’s objection decisions.

Some uncontroversial background

5. The applicant is an Australian citizen. He was born in Australia and is now aged

70 years. He undertook his professional training in Australia and postgraduate study in

the United Kingdom. He practised his profession in Hong Kong for many years until the

early 1990s when he sold his practice and retired from his profession. He then returned

to Australia to enable his children to complete their education in this country.

6. The applicant has established a complex net of trusts and companies, some incorporated

overseas, through which his financial affairs have been managed. The dealings with

LGT Treuhand come within that category. In September 1995 LGT Treuhand was known

as BIL Treuhand AG. In June 2009 it changed its name to Fiduco Treuhand AG.

Unless necessary to distinguish between particular entities I shall use the title

LGT Treuhand throughout. LGT Treuhand is a subsidiary of LGT Bank, based in Vaduz,

1 See Murray & Commissioner of Taxation [2011] AATA 837 and Murray & Commissioner of Taxation (No 2) [2012] AATA 450. I have used the same pseudonym.

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Liechtenstein. It has also had at least one change of name however again I will describe it

as LGT Bank throughout.

7. In September 1995 the applicant instructed BIL Treuhand to set up the San Simeon

Foundation (the Foundation). It was set up in Liechtenstein on 5 October 1995 with an

initial endowment capital of CHF 30,000. It opened an account number 0110396 with

the LGT Bank. It is common ground2 that central management and control of the

Foundation was in Australia during each of the years in issue in these proceedings.

On the applicant’s own case3 all or most decisions with respect to the investments of the

Foundation’s funds were made by him.

8. The applicant lodged income tax returns disclosing modest amounts of taxable income in

each of the years between 1999 and 2003. He did not lodge returns in the 2004, 2005,

2006 and 2007 income years. The returns as lodged did not disclose any income

attributable to the investments with the LGT Bank or income arising from the

Foundation.

9. Witness A provided the LGT documents (as they have been described in the material) to

the respondent in October 2006. The respondent commenced an audit of the applicant’s

activities in July 2007. The applicant was in Australia from 17 July 2007 however he

departed Australia on 14 August 2007 and has not since returned. He says that he is

now, and he has been from the 2007 income year, a resident of Singapore.

10. Included with the LGT documents were statements of the assets of the Foundation as at

31 December 19994 and as at 31 December 20015. The balance of account 0110396

shown in the former was US $3,792,277.23; in the latter it was US $5,974,321.51.

The respondent calculated (correctly) that the balance had increased by a little over 51%

in that period of two years. He then treated that annual increase, an amount of just in

2 Exhibit 18, page 3; exhibit 19, paragraph 12A. 3 Exhibit 18, page 3, paragraph 1(b). 4 Exhibit 1, page 293. 5 Exhibit 1, page 301.

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excess of 25%, as the rate of return on the account of the Foundation for each of the years

in question and made assessments, or amended assessments, of taxable income for each

of the income years from 1999 to 2007 on the basis that in each of the those years there

was undisclosed income of the applicant in an amount calculated by reference to that

assumed rate of return. Those assessments or amended assessments were evidenced by

notices dated 30 June 2008. On 31 July 2008 the respondent made assessments of

administrative penalty at the rate of 90%6.

11. On 29 August 2008 the applicant objected to the assessments and amended assessments

for the 1999 to 2006 income years and to the assessments of administrative penalty.

By and large his objections were disallowed by letter dated 4 August 2009 however

certain arithmetic errors were detected and corrected by notices of amended assessment

all dated 16 September 2009. He objected to the 2007 assessment by notice dated

7 December 2009. That objection was disallowed on 29 June 2011. It is the respondent’s

objection decisions of 4 August 2009 and 29 June 2011 that are the subject matter of

these proceedings.

12. In the result, the increase in taxable income and the penalties imposed are as follows:

Income year Increase in taxable income Penalties

1999 $1,049,939 $455,977.26

2000 $1,452,120 $628,076.65

2001 $2,149,797 $930,017.54

2002 $2,424,560 $1,049,581.44

2003 $2,575,347 $1,115,399.95

2004 $3,131,555 $1,383,234.00

2005 $3,545,583 $1,566,697.95

2006 $4,572,362 $2,022,182.25

2007 $5,026,258 $2,131,040.25

Total $25,927,521 $11,282,207.29

6 The “intentional disregard” rate of 75% was imposed and then increased by 25% by reason of aggravating

factors.

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The applicant’s evidence

13. The applicant made two applications to give his evidence at the hearing other than in

person. For the reasons I gave on those occasions7 I refused both applications. At the

outset of the hearing, counsel for the applicant tendered various statements and affidavits

of the applicant that had been lodged in the Tribunal in accordance with its usual practice

of requiring evidence in chief of represented parties to be put on in writing. I overruled

the respondent’s objection to the tender, ruling, in effect, that on matters that were

controversial the applicant’s absence from the witness box would affect the weight to be

given to his evidence on such matters.

14. But it is not merely the absence of the applicant that is remarkable; there is a remarkable

absence of critical documents produced by him. His counsel produced and tendered five

lever arch volumes of documents – 1,559 pages of trust deeds, minutes of meetings,

statements of Australian bank accounts, tax returns and the like – to demonstrate, so it

was said, all the documents that the applicant could produce. But what was not produced

by the applicant were documents that evidence the nature of the relationship between him

and LGT Treuhand including, relevantly, the documents by which the Foundation was

set up. And, with one exception, the applicant did not produce any documents that

record the financial affairs of the Foundation.

15. The respondent invites me to draw inferences, adverse to the applicant, from his failure

to produce relevant documents. That submission needs to be considered in the context of

the evidence that is before me about the relationship between the applicant and the

Foundation and, equally importantly, what the applicant has said over time of that

relationship.

16. Some further reference needs to be made to uncontroversial background matters.

The first overt dealing between the applicant and the respondent occurred on

30 May 2007 when the respondent’s officers, using statutory powers, obtained access to

7 See [2011] AATA 837 and [2012] AATA 450.

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documents at the residence in Pullenvale owned by the applicant’s spouse (as trustee)

where the applicant and his family ordinarily resided when he was in Australia.

That access involved8 scanning and removing relevant hardcopy documents, imaging of

hard drives on a personal computer and extracting and making copies of relevant files

and documents from two computers. Then, by letter of 13 July 2007, the respondent

informed the applicant of an intention to audit his taxation affairs. He was asked to have

available,

… all accounting information including documentation pertaining to any international funds transfer.

17. On 23 July 2007 the applicant’s solicitors were provided with the statement of the

respondent’s reasons for exercising statutory powers to obtain access to documents.

Those reasons included the following9,

7. [The applicant] appears to have used the services of international promoters, including LGT Bank in Liechtenstein AG (LGT), located in Liechtenstein, to establish, amongst other things, a foundation in Liechtenstein and entities in the British Virgin Islands.

…

11. One international entity, the San Simeon foundation appears to have been established in a manner that keeps secret the economic ownership of that foundation by [the applicant].

18. The applicant was interviewed by officers of the respondent, in the presence of his

solicitors and at their premises, on 2 August 2007. The notes of that meeting10 taken by

the respondent’s office record, relevantly,

Investments Overseas

[The applicant] advised that he had cashed in all his investment overseas prior to returning to Australia including;

LGT account – [the applicant] referred this LGT account as an account that he held with Grant Thornton in Hong Kong. Grant Thornton was an investment adviser in Hong Kong dealing in the futures market. In the crash of 1987, the Liechtenstein bank purchased Grant Thornton very cheap and it became “LGT”.

8 Exhibit 1, pages 166 – 7. 9 Exhibit one, page 172. 10 Exhibit 1, page 179.

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[The applicant] advised that he cashed all his investments ($200 K) with LGT in 1992 prior to returning to Australia due to the operation of the FIF and CFC provisions in Australia.

Other interest-bearing accounts cashed in include HSBC and Standard Charter Accounts (not much).

19. By letter of 9 August 200711 the respondent posed a series of questions to the applicant

about the Foundation. He provided a signed response through his solicitors12.

The relevant questions, with the applicant’s answers in bold, are as follows:

1. What can you tell us about the establishment of The San Simeon Foundation, Vaduz, established in October 1995?

Answer – I have no recollection of the establishment of an entity called the ‘San Simeon Foundation’.

2. Endowment capital of $30,000 [sic] Swiss Francs was paid to establish this foundation. From which bank account was this amount paid?

Answer – I have no recollection of this matter.

3. Documents held by the ATO suggest that you were the sole primary beneficiary of the San Simeon Foundation, Vaduz. What distributions have you received from this foundation for the years 1996 to 2007?

Answer – I have no recollection of receiving any money from the ‘San Simeon Foundation’.

4. What deposits have you made to the San Simeon Foundation during the period of its establishment to 30 June 2007?

Answer – I have no recollection of making any deposits to the ‘San Simeon Foundation’.

The same letter requested bank statements or statements of assets for the San Simeon

foundation for the period October 1995 to June 2007. The applicant’s response to that

request was,

I do not possess any documents matching this description.

20. These proceedings were commenced with the lodgement of an application on

2 December 2009 by solicitors who acted, and who have continued to act, on his behalf.

The reasons for application include the following,

11 Exhibit 1, pages 181-183. 12 Exhibit 1, pages 184-187.

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… the applicant says he has no interest in the alleged trust, is not a beneficiary of the alleged trust, is not entitled to income of any such trust, does not understand that there is any such trust, and that the ATO wrongly attributes income to him including two alleged deposits.

I have no reason to consider that the information in the application came otherwise than

from the applicant’s instructions.

21. The first statement of the applicant lodged in these proceedings was one dated

1 April 201013. It was not tendered by the applicant at the hearing; rather it was tendered

by the respondent, not as evidence of the truth of its contents but as going to the

applicant’s credit. By the time that the applicant came to make this statement he, or his

advisers, had had a considerable period of time to understand the relatively simple basis

on which the respondent’s assessments proceeded. And they were in possession of the

documents lodged by the respondent pursuant to section 37 of the Administrative Appeals

Tribunal Act 1975 (Cth). Those documents included those that had been provided to the

respondent by witness A.

22. In the statement of 1 April 2010 the applicant said this,

11. I deny having seen (or otherwise been aware of) any of the documents which the Deputy Commissioner of Taxation claims to have obtained from LGT Bank (save for a copy of an old passport that I no longer possess, or have a clear memory of) prior to receiving copies from the Australian Taxation Office.

12. I deny that the documents produced by the Deputy Commissioner of Taxation (which I understand the Deputy Commissioner of Taxation alleges were obtained from the LGT Bank) are accurate.

13. I deny having any control over the “San Simeon Foundation” as alleged by the Deputy Commissioner of Taxation.

14. I have not received any benefit whatsoever from the alleged “San Simeon Foundation”. I deny the Deputy Commissioner of Taxation’s allegations that I was entitled to, or exercise control over, any funds held in the alleged “San Simeon foundation”.

13 Exhibit 39.

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23. The applicant’s first acknowledgement of an involvement with LGT Bank came in his

statement dated 20 October 2011. Under the heading “Relationship with LGT Bank” he

says as follows14,

169. While in Hong Kong, prior to becoming a resident of Australia, I was a client of the LGT Bank of Hong Kong

170. Between 1997 to 1998, I marketed East Coast Traders Pty Ltd to the LGT Fund of Funds to their Hong Kong Office and at Hedge Fund Conferences.

171. During the Relevant Period [the financial years ending 30 June 1999 to 30 June 2006]:

a. I was the investment manager of account with LGT Bank (“the account”) bearing the account number “303.1”.

b. The Account held various investments, mainly hedge funds, but also included equities, term deposits and cash.

c. As the investment manager of the Account, I would review performance of the hedge funds and currency exposure of the Account on a quarterly basis.

d. As a result of those quarterly reviews, I would regularly communicate advice to LGT Bank in Hong Kong with respect to buying and selling positions of the Account.

e. I never received any distribution from the Account.

f. I never deposited any funds into the account.

172. I only received statements for the Account on my request to LGT Bank in Hong Kong. I did not request statements often as they were delayed by months by the time that I receive them.

173. In my role as investment manager of the Account, I usually arranged direct report from the various fund managers that the Account had invested in.

174. I only ever used the reference number “303.1” in communications with LGT Bank in Hong Kong.

175. In dealing with the Account, I only dealt with LGT Bank in Hong Kong, and did not deal with LGT Bank in Liechtenstein.

176. From my dealings as investment manager of the Account and the Kingston Fund, I know that the Account was a major investor in The Kingston Fund.

The applicant then went on to make comment about each of the documents from the

LGT Bank which had been reproduced in the section 37 documents. He had apparently

obtained copies of these documents from the respondent on 15 October 2008.

14 Exhibit 2, page 22.

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24. His comments were generally noncommittal. Of a document which appears to be an

agreement between the applicant and BIL Treuhand AG he said,

I… note that the document appears to have my signature on it. I do not recall having seen this document prior to receiving a copy of the LGT Documents from the Australian Taxation Office on or about 15 October 2008.

No explanation was given about the circumstances under which his signature came to be

on the document nor did he suggest that he had no recollection of those circumstances.

He made reference to a copy of a passport issued to him which was contained within

those documents. He did not put forward any explanation as to why a copy of his

passport may have ended up with the LGT Bank in Liechtenstein.

25. Pages 290 to 292 appear to be the By-Laws of the Foundation. They name the applicant

as the “Sole primary Beneficiary for life”, his spouse (with her date of birth given) as the

“sole second beneficiary” and his three children (giving their birthdates and full names)

as “third Beneficiaries”. The applicant said of those pages,

I do not recall having seen these documents prior to receiving a copy of the LGT Documents from the Australian Taxation Office in or around 15 October 2008.

No explanation of the document was otherwise provided.

26. Page 294 of the section 37 documents, on its face, was a resolution of the Board of the

Foundation noting that the assets as at 31 December 1999 were in the total amount of

USD 3,792,278.23. On the foot of the page, contained within a stamp denoting approval,

were the applicant’s handwritten initials. He said of that document,

I refer to page 294 of the T Documents and note that the document appears to have my signature on it. I do not recall having seen this document prior to receiving a copy of the LGT Documents from the Australian Taxation Office in about 15 October 2008.

Again no explanation was given of the circumstances under which his signature (or his

initials) came to appear on the document.

27. The applicant provided a further statement on 4 May 2012. Whilst that statement sets out

the applicant’s considerable activity in managing the investments of what he describes as

“client # 301.1” he provides no evidence of the circumstances under which the account

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was set up. Having made reference to his belief in maintaining records electronically the

applicant goes on to say,

I took my Computer with me to Singapore in 2006. Unfortunately whilst there, I had Hard Drive failure and then discovered that my backup Drive was corrupted and the data for the relevant period was lost.

So far as I can glean from the material this was the first occasion this explanation for the

absence of documents was given.

28. The statement of 20 October 2011 was intended to be the evidence in chief of the

applicant in the proceedings. What is plainly missing from it is any explanation of the

circumstances under which the San Simeon Foundation was set up or the applicant’s

knowledge of it or its affairs. The first detail provided by the applicant came in his

affidavit of 5 July 201215. Having spoken of his desire to “set up an asset protection

structure” the applicant detailed the circumstances under which the San Simeon

Foundation was set up in these terms,

8. I was advised that a Liechtenstein Foundation (and where I had divested myself of any control over the Foundation Board) would achieve my desire to set up a secure asset protection structure. I believed that this achieved my goal of creating a protected fund for My Children and my wife as the Liechtenstein Foundation was offshore and asset protected from any adverse liability exposure in Australia.

9. Accordingly, I made arrangements with the LGT Bank in Hong Kong to establish a Foundation, and I specifically directed the LGT bank that I did not want to have any entitlement to the capital (or interest upon the capital). They agreed and said that the Foundation would be set up in accordance with these instructions.

10. My wife was aware that I was setting up the Foundation with the LGT Bank in Hong Kong, but she did not know the precise details of the Foundation or the nature of its investments.

…

15. I confirm that I did not received [sic] any payments from the account 303.1 or the San Simeon Foundation.

The applicant, of course, was not available to be cross-examined on the

“arrangements with the LGT Bank”, the manner in which he “specifically directed” the

15 Exhibit 7.

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Bank or how the Bank “agreed” to his direction. But they are matters that one would

ordinarily expect to be evidenced in writing.

29. It is, as well, relevant to note that despite the applicant knowing from at least

October 2007 that the respondent was seeking the statements of the LGT Bank account,

no documents, with one exception, were produced. And, of course, when requested in

August 2007 to produce statements he claimed not to have any in his possession.

The explanation about the computer malfunction emerged only in May 2012.

The exception relates to some documents which the applicant says were located by him

in the circumstances set out in his affidavit of 13 June 201216. He does not say, so far as

I can tell, when those documents were located but he “disclosed” them in the proceedings

on 14 March 2012. The applicant’s more recent affidavits provide details of what are

said to be his efforts to obtain these documents from LGT Treuhand. I remain

unpersuaded that the applicant has taken timely or proper steps to obtain the full details

of the transactions on the Liechtenstein bank account.

30. The respondent submits that there is an inference available that the applicant’s reticence

to produce records was due to a desire not to disclose that which might adversely affect

him and that his failure to do so reflects on his credit. In the circumstances I am certainly

prepared to draw that inference although, ultimately, I think it unnecessary to do so.

The issues

31. In his final submissions the applicant confined his case to three contentions:

(a) he was not presently entitled to any of the income of the Foundation during any of

the income years in issue;

(b) the assessments for each of the years are demonstrated to be excessive,

(i) generally, by reference to the evidence of Mr Steven Ponsonby;

16 Exhibit 5.

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(ii) in particular, by reference to what is said to be the balance of the

Foundation’s account as at 22 July 2002;

(c) the applicant was not a resident of Australia, and thus not liable to pay income tax

on foreign source income, in the 2007 income year.

The applicant did not challenge the correctness of the penalties imposed nor put in issue

the respondent’s entitlement to make amendments to his earlier assessments.

Not presently entitled

32. The applicant accepts17 that the Foundation is a resident trust estate for the purposes of

s 95(2) of the Income Tax Assessment Act 1936 (Cth) (the ITA Act 1936). That is the

premise of the assessments. And it is common ground that the applicant was liable to

pay tax on the income of the Foundation (subject to the residence argument in the

2007 income year) if he had been then “presently entitled” to the income of the

Foundation.

33. In Harmer v Commissioner of Taxation18 the Court said:

The parties are agreed that the cases… establish that a beneficiary is “presently entitled” to a share of the income of a trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b)the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

34. The applicant says that he was not then presently entitled because he was “neither vested

in interest or vested in possession relative to the [Foundation’s] income”19. For his part,

the respondent contends either that the evidence demonstrates that the applicant was

presently entitled or, in the alternative, the applicant does not discharge the onus of

showing that he was not then presently entitled.

17 Exhibit 43, page 4, paragraph 8A. 18 (1991) 173 CLR 264, 271. 19 Exhibit 43, page 5, paragraph 10B.

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35. Consideration of this question requires reference to the documents that are available and

to the evidence of the two Liechtenstein lawyers who gave evidence about the law of that

country – Mr Florian Zechberger (called by the applicant) and Mr Gerd Jelenik (called by

the respondent).

36. At the outset I note that only a limited number of documents were available from which

an understanding of the nature of the relationship between the applicant and the

Foundation (and LGT Treuhand) may be gained. As I have noted, the applicant has

produced no documents that evidence the nature of that relationship; all that exists are

copies of documents that have been produced by witness A. The absence of documents,

and the absence of an explanation for that absence, is surprising given the applicant’s

evidence of his involvement with LGT20 and his Statement of Facts, Issues and

Contentions21.

37. It is clear that Mr Zechberger does not disagree with Mr Jelenik’s conclusions,

(a) that the applicant was the “economic founder” of the Foundation;

(b) that the applicant was the sole primary beneficiary of the Foundation for life and

thus, during his lifetime, he was “the entitled sole beneficiary to receive any

distributions coming from the assets or income of the Foundation”;

(c) that the applicant was a discretionary beneficiary because the Board of the

Foundation was entitled to decide “the volume of beneficiary right”.

38. Where there is disagreement is on the question whether the applicant could compel any

payment from the Foundation. Mr Jelenik came to the conclusion that the documents

allow for an inference to be drawn that the applicant could direct the Board of the

Foundation. His conclusion is expressed in this way22:

20 Exhibit 2, paragraphs [169] – [172]. 21 Exhibit 18, pages 3-4. 22 Exhibit 27, page 14.

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… although [the applicant] did donate the assets to the Foundation he has reserved himself rights as a principal to give instructions toward the trustees and that the trustees had to act in trust on behalf of the principal…

Mr Zechberger was of the opinion that the applicant had23,

… no right to demand and receive distributions of the Foundation and had no such right at any time from 1 July 1998 to present.

39. What does emerge clearly is that not all the relevant documents are available. One page

exists of a document described as an “Agency Agreement”.24 The document is undated

however it obviously dates from the time of the creation of the Foundation. It is an

agreement between the applicant (described as “Principal”) and BIL Treuhand AG (as

LGT Treuhand was then known). It reads,

2. Assignment

The Principal herewith instructs BIL Treuhand

to establish a Liechtenstein foundation in its name but for the account of the Principal as stated below under point 3;

to accept the legal representation of this Foundation;

to delegate one or more members to the Foundation Board of this Foundation as stated below under point 4;

to administer this Foundation pursuant to the provisions of this Agency Agreement

BIL Treuhand herewith accepts this assignment. BIL Treuhand and its delegates shall act in trust on behalf of the Principal.

I readily infer that there are other pages to the document – that is obvious from the

content of what appears on the only page available which bears the number 1. And I

accept the evidence of Mr Jelenik that it is likely that the additional pages of the

document signed by the applicant contained provisions along the lines of the pro forma

agency agreement located amongst electronic copies provided by witness A.

40. What Mr Jelenik says on this topic, based on his experience, is as follows25,

23 Exhibit 16, page 3. 24 Exhibit 1, page 287. 25 Exhibit 27, page 9.

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4.3.5 Although I didn’t have any written documentation about the rights of the Principal towards the board council and I do not know the context of the complete Agency Agreement, I am of the opinion, that LGT Treuhand AG would not have refused the wish or instruction by the economic founder [the applicant] and first beneficiary [the applicant] to distribute monies to him. An Agency Agreement (or contract of mandate) in general regulates the relationship between an economic founder (in our case [the applicant]) and the trustee representing the established company to third parties and towards the authorities here in Liechtenstein.

4.3.6 Agency Agreements are often used by professional trustees in Liechtenstein. The[y] mainly have the purpose that the foreign donator of assets to such a company or foundation secures his rights to be the principal over such a company or foundation in which his assets are deposited. On the other hand the trustee secures that he will be kept indemnified for his trust function in the name of the Principal.

4.3.7 With an Agency Agreement the economic founder of a Liechtenstein Foundation intends to cover two aspects: firstly, a contractual security that the Liechtenstein trustee does only make use of his rights according to the Statutes in favour of the principal and, secondly, that the Board Council is bound to instructions given by the principal. Such a contractual obligation to fulfil the wish of an economic founder is in general not in conflict with the law as long as the fulfilment of such instruction is in accordance with Statutes and By-laws and also with the other legal provisions being valid for the Foundation.

41. Mr Jelenik’s experience is apt to qualify him to give this evidence and I accept it.

There is logic in the notion that the economic founder of a mechanism such as the

Foundation would desire to retain some degree of control over the distribution of the

assets of such a foundation. Conversely, it defies logic to think that the applicant would

confer enormous financial benefit on the Foundation without retaining the capacity to

control the trustee about the use to which those funds were to be put. The risk of losing

control over the funds, or losing control over the funds themselves, was enormous.

42. Mr Zechberger did not take issue with the statements set out in paragraph 40 above

although he did express his disagreement with other passages in the report of Mr Jelenik.

43. Whilst there is no direct evidence that a document in this form was executed such

documents as exist, referable to the Foundation, demonstrate that the execution of a

document of this nature was contemplated by the parties at some stage. The client

relationship form (document number 603488) contains a reference to “Agreement of Fid.

Trusteeship”.

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44. The pro forma agency agreement contains the following clause:

LGT Treuhand as well as the persons appointed by it undertake to act expressly in accordance with the instructions issued by the Principal or by persons authorised to act on behalf of the Principle.

If, as I conclude is likely, the applicant executed an agency agreement containing such a

clause there is no doubt that he was presently entitled. I did not understand him to

submit to the contrary if that were the conclusion that I reached.

45. I did not find helpful the applicant’s cross-examination of Mr Jelenik by which it was

sought to establish a hierarchy of importance of the documents governing the

Foundation. I do not accept that the Statutes and By-laws establish that the applicant did

not have the right to demand immediate payment of the whole or any part of the income

of the Foundation. I think the likelihood is to the contrary.

46. I am not dissuaded from reaching that conclusion by the applicant’s evidence that he had

never sighted or signed any document of the nature of the pro forma agency agreement

and that he would not sign a document empowering him to compel any payment from the

Foundation. I find the applicant’s evidence on the point quite improbable and illogical.

47. It follows that I am satisfied that the applicant was, at all times material, presently

entitled to the income of the Foundation. But even without reference to Mr Jelenik’s

opinion I would not have been satisfied that the applicant was not presently entitled to

that income. Given that he bears the onus of showing that the assessments are excessive

I do not consider him to have discharged that burden when he does not produce the

documents that explain the nature of the relationship between him and the Foundation

(nor explain that there are none).

Were the assessments excessive?

48. The respondent’s assessments were undertaken on a fairly unsophisticated basis.

The increase in the assets of the Foundation between 31 December 1999 and

31 December 2001 was taken to be entirely attributable to income earned by the

Foundation. The increase in “income” over that two year period was then applied on a

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compounding basis across each of the income years from 1998 to 2007. The effect of

this, as the applicant’s submissions observe, is that the assets of the Foundation were

assumed to have increased from US $5.9m in December 2001 to US $20.9m by

30 June 2007, obviously an extraordinary increase.

49. The applicant called evidence from Mr Steven Ponsonby, a chartered accountant, to

demonstrate that the respondent’s calculations could not possibly be correct.

Mr Ponsonby concluded that the respondent’s methodology was flawed. That was so, he

said,

(a) because it assumed a consistent annual rate of return in excess of 25% which

could only be true in a rising investment market;

(b) because it assumed that any future capital contributed was income;

(c) because it did not consider capital losses or withdrawals; and

(d) because reference to benchmarks demonstrated that the average rate of return

over those years was 7.23%.

50. Additionally, the applicant relied on a document produced by witness A26 which that

witness said records that the Foundation had asset values as at 22 July 2002 of

CHF 1,910,178 (US $1,324,689). This amount of the “real assets” of the Foundation was

contrasted with the respondent’s assumed value on that day of US $6,829,390.

51. All of this may be accepted. It is certain that the respondent’s assessments are not

correct. But the cases demonstrate that it is not enough for a taxpayer to show error in

the respondent’s assessment; the taxpayer must also show what the actual taxable income

was. That was a burden that the applicant here did not discharge.

26 Exhibit 24, paragraph 34.22 & page 90 of exhibit HK-1 to that affidavit.

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52. The convenient starting point with the cases is the decision in Trautwein v Federal

Commissioner of Taxation27. In that case the taxpayer, who had not kept proper records

or books of accounts, objected to assessments made by the Commissioner.

The Commissioner assessed on the basis of a mathematical calculation which, it appears

to have been accepted, could not have been. The taxpayer was unable to prove the

precise amount of assessable income in each year. Sir John Latham said this28,

Sec. 39 of the Income Tax Assessment Act 1922-1934 provides (inter alia) that the production of any notice or copy notice of assessment under the hand of the Commissioner shall be conclusive evidence that the assessment has been duly made and that the amount and all the particulars of the assessment are correct, except in proceedings on appeal against the assessment, when it shall be prima facie evidence only. Isaacs J. said in Moreau v. Federal Commissioner of Taxation … that sec. 39 “throws the burden on the appellant to establish his right to the benefit he claims.” This statement, if strictly construed, means that the taxpayer appellant does not rebut the presumption created by sec. 39 merely by showing that there is an error in it – and thereby “creating a blank” – he must go further and show either that there ought to be a “blank” – a complete omission of the item in question – or that something else should be substituted for that item. The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. … Obviously the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer.

In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.

The application of sec. 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right – and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say “as a general rule” because, conceivably, there might be a case where it appeared that the assessment had been made upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the Commissioner for further consideration.

27 (1936) 56 CLR 63. 28 (1936) 56 CLR 63, 87-88.

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53. In Commissioner of Taxation v Dalco29 a majority of the Full Federal Court had

concluded that the Commissioner’s assessments had preceded on a wrong basis but that

there was no error in the factual findings of the learned trial judge that the applicant had

not shown that in fact his income for each of the tax years was less than the figure arrived

at by the Commissioner. But the Full Court allowed the taxpayer’s appeal and ordered

the Commissioner to make reassessments. Brennan J described the question of the

determination by the Court in these terms30,

In proceedings on appeal to a court pursuant to Div. 2 of Pt V of the Act against an assessment made under s.167 (b), does the taxpayer discharge the burden of proving that the assessment is excessive where (a) he does not prove that the amount assessed as his taxable income in fact exceeds his taxable income, but (b) he shows that the Commissioner formed a judgement as to the amount of his taxable income on a wrong basis?

It was not suggested by the applicant that the question is any different on a review in the

Tribunal. Brennan J answered that question in this way31,

The majority of the Full Federal Court in the present case treated the error which they held to infect the Commissioner’s assessment of the amount of the taxpayer’s taxable income as concluding the question whether that amount was excessive. It did not. If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessed taxable income an amount which, on those facts, ought not to have been included. But where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer’s taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. If it were not for s.190(b), the process of assessment might have to be repeated whenever on appeal an error affecting the amount assessed were found. But s.190(b), coupled with s.200, brings to finality the ascertainment of the taxpayer’s liability in respect of the income period to which the assessment relates. Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.

Justice Toohey put the matter in this way,

I agree with Wilcox J. in the Federal Court that “the task for the taxpayer, upon an appeal or a review under Pt.V of the Act, is to show that the amount of money for which

29 (1990) 168 CLR 614. 30 (1990) 168 CLR 614, 619. 31 (1990) 168 CLR 614, 625.

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tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer”. As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. He or she may also do so by pointing to some error of computation or, as suggested by McAndrew, by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.

In George the Court said at p 201:

“… the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income”.

There can be no quarrel with that statement.

54. All other members of the Court (Mason CJ, Deane, Dawson, Gaudron and McHugh JJ)

agreed with the reasoning of Brennan J and Toohey J.

55. The same reasoning applies to the present applicant. It is certain that the respondent’s

assessments are not correct; but the applicant has not shown what his taxable income

actually was. On the view I take of the matter he was presently entitled to the income of

the Foundation. He has made no attempt to show what the actual income of the

Foundation was during any of the relevant years. This is not a case where all the relevant

facts are known and the resolution of the proceedings depended upon the legal analysis

of those facts. It is a case where the respondent has proceeded upon an intelligible basis

to make an estimate of taxable income on the material available to him in circumstances

where the applicant has chosen not to provide any information about the actual income of

the Foundation. It is undoubtedly the case that the respondent’s assessments are not

correct but the applicant has not shown the taxable income on which tax ought to have

been levied. It follows that he has not shown that the assessments are excessive.

Was the applicant a non-resident in the 2007 income year?

56. The respondent assessed the applicant in the 2007 income year on the footing that he was

an Australian resident in that year. The applicant says that he was not an Australian

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resident in that year; he departed Australia with the intention of residing in Singapore on

28 June 2006.

57. The parties are in agreement about the operation of the statute. By virtue of s 6-10(4) of

the Income Tax Assessment Act 1997 (Cth) if the applicant was an Australian resident, his

assessable income included his statutory income from all sources, whether in or out of

Australia. Section 995-1(1) of the same Act provides that a person is an Australian

resident if the person is a resident of Australia for the purposes of the ITA Act 1936.

Section 6(1)(a) of that Act defines “resident of Australia” in these terms,

resident or resident of Australia means:

(a) a person, other than a company, who resides in Australia and includes a person:

(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

(iii) who is:

(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B); and

(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

The respondent, in assessing and at the hearing, relied only on the notion of “a person…

who resides in Australia” i.e. a resident according to ordinary concepts. He did not, and

does not, rely upon the words of extension “domicile… in Australia”, the 183 day test in

s 6(1)(a)(ii) of the ITA Act 1936 or the superannuation test in s 6(1)(a)(iii) of that Act.

58. The word “resides” takes its ordinary English meaning; it is unnecessary to put any gloss

on it. In support of his contention that he did not reside in Australia during the 2007

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income year the applicant emphasises the following matters32. Except where I indicate

otherwise, they are not controversial.

59. The applicant was born in Australia, is an Australian citizen and his domicile of origin is

Australia. He has spent the majority of his adult life living outside Australia, particularly

in Hong Kong. He returned to Australia from Hong Kong for the purpose of educating

his children although it is not clear precisely when that occurred. It seems to have been

some years prior to the time relevant to these proceedings. As at 28 June 2006 the

applicant’s children were all adults and were aged 24, 20 and 19 years. Each of them

had, by that time, completed high school.

60. The applicant places particular reliance on his immigration departure card completed on

28 June 2006 which he completed as an “Australian resident departing permanently”.

On incoming and outgoing cards thereafter during the 2007 income year the applicant

consistently described himself as a resident of Singapore. In the course of that year the

applicant made five trips to Australia – 9 August 2006 to 3 September 2006,

22 September 2006 to 31 October 2006, 8 December 2006 to 13 January 2007,

14 March 2007 to 20 April 2007 and 23 May 2007 to 10 June 200733. The applicant’s

submissions calculate, on the basis of those visits, that the applicant was physically

present in Australia for 155 days of the 2007 income year34. The purpose stated by the

applicant on his incoming immigration card for the first four of those visits was

“visiting friends or relatives”; for the final visit the stated purpose was “business”, said to

be occasioned by an attendance at the Sanctuary Cove Boat Show35. On each incoming

passenger card the applicant recorded his intended address in Australia as the Pullenvale

address. The applicant’s spouse went backwards and forwards between Australia and

Singapore with him.

32 I have not attempted to list all of the matters relied on by the applicant; they are listed between pages 16-22

of Exhibit 43. 33 Exhibit 1, page 410-412. 34 Exhibit 43, page 19. 35 Exhibit 12, page 412.

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61. On 4 July 2006 the applicant executed an option to purchase residential property in

Singapore. Settlement of the purchase of that property was completed on

31 October 2006 and the title transferred to the applicant and his spouse.

62. For his part, the respondent places emphasis upon the following matters36. Again, that

the applicant was born in Australia and is an Australian citizen. That at the time in issue,

and as recently as April 2011 when he objected to the 2007 assessment, the applicant had

not obtained permanent residency in Singapore37. At the date of his notice of objection

to that assessment he was still “in the process of obtaining permanent residency in

Singapore”.

63. The respondent points, as well, to the fact that the Pullenvale property was owned by the

applicant’s spouse as trustee for a family trust bearing the applicant’s name and that the

applicant lived at that property with his spouse and three children when he was present in

Australia38.

64. Next, the respondent points to various documents located in the course of the access visit

to the Pullenvale address. The documents come from a variety of sources that all post-

date June 2006 and are addressed to the applicant at the Pullenvale address, or show the

Pullenvale address, rather than any address in Singapore. The respondent places

considerable emphasis on one document, a letter from lawyers in Singapore enclosing an

invoice39. The invoice details the fact of a meeting with the applicant in Singapore on

6 December 2006, that is, after completion of the purchase of the Singapore property, but

the letter was sent to the applicant at the Pullenvale address. The respondent’s

submissions point out that the absence of the applicant from the witness box has deprived

the Tribunal of being able to hear any explanation for the curiosity of that letter being

sent to Australia rather than to what, on the applicant’s case, was by then his residence.

36 Again, I have not sought to list all of the matters relied upon; they are listed in Exhibit 45, paragraphs 81-87. 37 Exhibit 1, page 408, paragraph 6.1. 38 Exhibit 1, page 413, paragraph 12.1. 39 Pages 77-78 of the attachments to exhibit 38.

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65. The respondent relies on the continued occupation of the Pullenvale property by the

applicant and his spouse during the 2007 income year whenever they were in Australia,

with the exception of some few days when he was attending the Sanctuary Cove Boat

Show. And, it is said, attendance at that Boat Show would account for no more than

three to four days of the 18 day stay. The respondent says that the applicant has an

indirect interest in the Pullenvale property as a beneficiary of the trust on whose behalf

his spouse owns that property.

66. Reliance was placed by the respondent on the applicant’s continuing involvement in

companies incorporated in Australia, that he benefited from Australian assets owned on

behalf of trusts of which he was a beneficiary, that he was covered under a private health

insurance policy issued by an Australian insurer and that he maintained an Australian

bank account.

67. The respondent submits that little weight can be given to the applicant’s evidence of his

intention of ceasing residence or to the notations he made on incoming and outgoing

passenger cards because he has not been able to be cross-examined on these matters.

Moreover, says the respondent, the objective circumstances tell against the notion of a

cessation of residence.

68. I am, in the end, not satisfied that the applicant has discharged the burden of showing that

he was not a resident of Australia during the 2007 income year. As it seems to me one

way of looking at the question is to compare what is known about the position prior to

the end of June 2006 and the position that is demonstrated thereafter. The applicant

appears to accept that prior to 28 June 2006 he was a resident of Australia, at least that is

how he described himself on incoming and outgoing passenger cards prior to that date.

All that appears to have changed thereafter are the notations made by the applicant on

passenger cards and the fact of the acquisition of a residential property in Singapore.

69. As to the first of those matters I accept, as the respondent submits, that the applicant’s

absence from the witness box means that he has not been able to be cross-examined on

the motivation behind the change in his description of his residence and all other material

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that would tend to point to a contrary conclusion. And, as to the second, the fact of

acquisition of a residential property in Singapore did not prevent the applicant from

occupying a residential property in Australia for a period, in total, in the order of five

months of that year in exactly the same way that he had during the period when he

accepts that he was a resident of Australia. The fact of the applicant’s continuing

business activities in Australia, the fact that documents concerning his business affairs

continued to be addressed to him at the Australian residence where he had lived for many

years and to describe his Australian address as his residence, the fact that so little

changed after June 2006, lead me to the conclusion that I am not satisfied that the

applicant has discharged his onus.

70. I should also add that I found the evidence of the applicant’s spouse unhelpful.

She seemed intent on asserting conclusions that I imagine she believed assisted her

husband’s case rather than the question directed to her. I do not consider that I am able

to place any reliance on her evidence on critical aspects of the matter.

71. It follows that in this respect, the applicant has not satisfied me that the 2007 income year

assessment was excessive because he was not a resident.

A late breaking argument

72. The evidence in this matter was heard over five days in July 2012 and the matter then

adjourned for the hearing of submissions on 3 August 2012. Directions were made for

the lodgement and exchange of written submissions prior to the resumption of the

hearing on that date. Written submissions were lodged and exchanged in accordance

with those directions however, at the hearing, counsel for the applicant obtained leave to

rely on supplementary submissions provided at the hearing (and, I gather, provided to

counsel for the respondent a short time before the resumption of the hearing).

73. The content of much of the applicant’s supplementary submissions was unremarkable

however one aspect of those submissions warrants comment. In paragraph 6 and

following of the supplementary submissions the applicant develops an argument that if,

contrary to his primary submission, it be found that he was a resident of Australia for the

OF 29

year ended 30 June 2007, then the provisions of the Singapore and Australia Tax

Agreement govern his liability to taxation in that year.

74. I do not propose to allow the applicant to rely upon this argument. It is not the subject of

his objection40, nor was it articulated in a very lengthy Statement of Facts, Issues and

Contentions dated 10 February 201241. By virtue of s 14ZZK (a) of the

Taxation Administration Act 1953 (Cth) the applicant is limited to the grounds stated in

his objection “unless the Tribunal orders otherwise”. I would not “order otherwise” to

allow the applicant to raise for the first time an argument that relies upon the making of

findings of fact – whether the applicant did not have a permanent home or habitual abode

available to him in Australia and whether he did have a permanent home or habitual

abode available to him in Singapore – where the particular circumstances of the

applicant’s residence in Singapore have not been the subject of any particular attention in

the evidence and where no explanation is given for the argument being raised so late in

the proceedings.

Conclusion

75. In each application I would affirm the decision under review.

I certify that the preceding 75 (seventy-five) paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC.

..............................[Sgd]....................................

Associate

Dated 24 August 2012

40 Exhibit 1 at page 402 and esp. at 407. 41 Exhibit 18.

OF 29

Date(s) of hearing 16, 17, 18, 19 & 20 July 2012; 3 August 2012

Date final submissions received Counsel for the Applicant Solicitors for the Applicant

14 August 2012 Mr RB Dickson & Mr AW Smith Irish Bentley Lawyers

Counsel for the Respondent

Dr KA Mellifont SC & Mr PA Looney

Solicitors for the Respondent

Australian Government Solicitor