$33 MILLION OF INBOUND CASH TRANSFERS FOUND TO BE GIFTS, NOT INCOME

On 27 November 2024, we posted about evidentiary matters dominating tax disputes and a body of case law in relation to courts accepting the evidence of a taxpayer (even if the documentary evidence is lacking or non-existent). Serendipitously, on 29 November 2024, the Federal Court handed down a taxpayer favourable decision in Cheung v Commissioner of Taxation [2024] FCA 1370.

In Cheung, the Commissioner had assessed an amount of nearly $33 million, identified in 99 deposits into bank account controlled by the taxpayer over an 11-year period, as income. The Commissioner also impugned interest components related to those deposits (which the taxpayer did not dispute at the Federal Court). Interestingly, this was a case where the parties agreed to narrow the issues in dispute so as to effectively reduce the burden of proof on the Taxpayer to prove his case.

The Taxpayer’s argument was that the deposits were gifts of capital from his older sister, who was intimately involved in the family’s successful supermarket business in Vanuatu. Despite cross-examination by the Commissioner’s counsel, it was held that the Taxpayer had no ownership interest in that income-generating business, he was not being paid rent, he was not receiving a return for services rendered, or any form of pension or ex gratia payment. Accordingly, the appeal was successful.

The Judge presiding, Logan J, on the basis of the evidence given at trial, held there was nothing unique about family gifting each other money or assets. His Honour held that the objection decision by the Commissioner was “uncritical view of cases divorced from an understanding of a family reality and a related absence, save for interest, of an income tax liability.” His Honour stressed that “The importance in taxation administration of open-mindness and detachment from assessment in decision-making in respect of objections cannot be over-emphasised.”

As a matter of general comment, it is not surprising the Commissioner took issue with large amounts of funds being transferred into the taxpayer’s bank account from a foreign jurisdiction. It is incumbent on the Commissioner to review such transactions. However, it was clear the determinative factor here was the cogent, accepted evidence of the taxpayer’s witnesses. Whether this matter could have been resolved prior to the formalities and structure of a Federal Court appeal is unclear.

Cheung is a classic example of the effect of various key components of tax litigation. The formulation of affidavit material setting out the relevant facts and documents, the calling of relevant witnesses who in this case gave honest and impressive oral testimony and the narrowing of the dispute to key issues which the Taxpayer was able to prove their case on.

Smailes Krawitz acts and advises in taxation disputes.

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Lyn Hawkins11 December 2024Smailes Krawitz