CHEUNG APPEAL: OFFSHORE FUNDS, FAMILY EVIDENCE AND EARLY TAX DISPUTE STRATEGY

In late 2024, we summarised the Federal Court’s decision in Cheung v Commissioner of Taxation [2024] FCA 1370, where the taxpayer succeeded in challenging assessments on nearly $33 million said to be income from Vanuatu-sourced deposits over 11 years.

The taxpayer’s case was that the deposits were capital gifts from his sister, who was involved in the family’s Vanuatu supermarket business.

That outcome has now been emphatically reversed by the Full Federal Court.

On appeal, the Full Court held that important findings made at first instance were not open on the evidence. In particular, inconsistencies between the taxpayer’s explanations during the audit and objection process and the case ultimately run at trial proved fatal.

The Court described aspects of the taxpayer’s position as “glaringly improbable”, including the findings about his involvement in the Vanuatu business and the character of the funds. It also noted evidence from the business website describing him as founder and managing director.

A key issue which was not addressed at trial but was a key focus at the appeal stage was the inconsistency of statements made and evidence rendered during the audit and objection stage prior to the legal proceedings being brought.

The take-away is that the need for on-going strategic legal advice (including consideration of case strategy, available evidence and submissions that could (or should) be made) can arise far earlier than when an objection is disallowed.

Here, the seeds were sown many years before the barristers prepared their opening statements. The Full Federal Court is presented with all relevant materials in forming their decision and that includes all audit and objection materials. As the Court observed at [73], “the inconsistencies in the evidence could not be resolved by simply preferring the evidence of Mrs Leong over [the taxpayer]”.

Smailes Krawitz assists with all taxpayer engagements with the ATO, including audits and objections through to legal proceedings.

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