Practical Tips on Satisfying the Burden of Proof in Appeals against Tax Assessments
Richard Schulte - 16 Quay Central Chambers - Hemmant's List
Tuesday 21st February, 2023
Practical Tips on Satisfying the Burden of Proof in Appeals against Tax Assessments
In tax appeals the Commissioner of Taxation enjoys an evidential advantage. The taxpayer must show that the “assessment is excessive or otherwise incorrect and what the assessment should have been.” There is much law on what this requires the taxpayer to demonstrate. Usually, the Commissioner will refrain from putting on any evidence and put the taxpayer to proof, relying on any deficiencies in proof. The salient reason taxpayers fail in their challenges to an income tax assessment is misunderstanding what the onus requires.
In Federal Commissioner of Taxation v Dalco the taxpayer established that the Commissioner’s default assessment of his personal income included income properly attributable to other entities. Below, the Full Federal Court had concluded that the taxpayer had shown the assessment was “excessive”, but the taxpayer had neither established his actual income nor even that it was less than the Commissioner’s assessment. The High Court determined that “excessive” meant the taxpayer had to establish the amount of their taxable income. This was not a new idea. Latham CJ in Trautwein v Federal Commissioner Taxation considered that the assessment was prima facie right—and it remained right until the taxpayer demonstrated that it was wrong. The taxpayer must, as a general rule, not only negatively show that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right.
The purpose of this note is to provide some broad practical tips on satisfying the onus. There is a gap between the legal explanation of the burden and its satisfaction found in the authorities as against the hard reality of putting the evidence in support of a taxpayer’s case together to meet that legal explanation.
So, what does it mean to show that the “assessment is excessive or otherwise incorrect and what the assessment should have been”? First, the taxpayer needs to show how they arrive at their taxable income. Second, the taxpayer needs to explain the difference between the figure that they assert is taxable income and the amount of the Commissioner’s assessment. Third, to be sure, the taxpayer will show that there is a high level of confidence in their calculation of the taxable income, by showing there are no other sources of income.
To demonstrate, let us assume that the Commissioner issues an assessment to a taxpayer based on an “assessable income” of $100,000. The taxpayer disagrees with the assessment because their assessable income is only $10,000.
To satisfy the onus, the taxpayer needs to show their “taxable income”. It will be recalled that: Taxable Income equals Assessable Income less Allowable Deductions. The taxpayer must then prove what they say is their “assessable income” and then prove their “allowable deductions”. Assessable income basically has two possible sources – personal exertion (eg. wages) or property (eg rent). Allowable deductions are broadly expenses incurred in gaining or producing assessable income. Assessable income can be proved by showing the source and receipt of the income by the taxpayer.
So, in our example, let us say that the taxpayer has assessable income derived from wages of $5,000 and rent of $5,000. Let us also say that there are $1,000 in allowable deductions, which will give a taxable income of $9,000.
If the taxpayer stopped there, in terms of proof, they would likely fail. This is because the taxpayer must also explain the difference between their figures and the Commissioner’s calculation. This means looking at any other receipts of money by the taxpayer and characterising those receipts as being from a “non-income” source. So, for example, the Commissioner might have identified a payment of $90,000 to the taxpayer and included it in their assessable income. In truth, the receipt is the repayment of a loan or a gift. The circumstances surrounding the transaction that gives rise to the receipt need to be proved to demonstrate its character as a loan or a gift. That exercise will explain the difference between the taxpayer’s figure and the Commissioner’s figure.
Again, if the taxpayer was to stop there, in terms of proof, there is still a risk of failure. That is because, for one reason or another, the taxpayer has doubtful credibility and will not be believed when they say “I have no other sources of income”. The cases recognised that there needs to be a “wide survey and an exact scrutiny of the taxpayer’s activities” to determine whether receipts are or are not assessable income. The “Rolls Royce” way to offer a Court or Tribunal confidence about the taxpayer’s calculations is to show that there are no other sources of income. This is a demanding and expensive audit exercise, ideally performed by an expert. One way this is done is by what is called an “asset betterment analysis.” That is a process of showing that the taxpayer assets have, for example, increased year by year by reference to known sources of income. There are no increases in the taxpayer’s assets that might have their provenance from unexplained income.
Against that background the exercise of discharging the onus should not proceed on any assumptions by the taxpayer as to what may be required by the Commissioner or what the Commissioner may concede. Do not rely on what the Commissioner has done in the past.
Absent an express concession by the Commissioner, the taxpayer must proceed on the basis that the Commissioner puts the taxpayer to proof of their assessable and taxable income. No reliance can be placed on the Commissioner’s reasons and findings of fact. Bosanac makes clear that a concession by the Commissioner that a particular amount is not assessable income does not demonstrate excessiveness.
Whilst the taxpayer should always review the power under which the assessment is made, the circumstances where the Commissioner has no authority to issue an assessment will be rare. Assuming authority to issue the assessment, when the taxpayer seeks to challenge an assessment, often from the outset taxpayers make a fundamental error in the way they seek to run their appeals. That occurs because, by virtue of misunderstanding the onus, taxpayers put their efforts into identifying errors in the Commissioner’s “judgement”. That is often an expensive and wasted task because it draws the taxpayer away from the real task of demonstrating that the assessment exceeded the taxpayer’s actual liability. Always run a positive case.
Whilst it is said that the Commissioner has no onus and sections 14ZZK and 14ZZO TAA make clear that the statutory onus never shifts from the taxpayer, little attention is given to the circumstances when the Commissioner must put on evidence to prove an allegation of fact that he wishes to advance. The Commissioner cannot allege a fact and then rely on the taxpayer’s failure to disprove that fact. Equally the Commissioner cannot wait until final submissions to make positive assertions aimed at the taxpayer’s failure of proof which are not apparent from the objection decision or the statement of facts issues and contentions.
So for example, if the Commissioner intends to contend that a trust has ceased to exist then he must put on evidence to prove that point. Absent evidence, the Commissioner’s allegation has no relevance or weight. Some earlier High Court authority tantalised with the proposition that the Commissioner has the onus where he contends a sham. However, the better view is that the onus, in respect of that fact, shifts from the taxpayer to the Commissioner. In effect, the taxpayer must first demonstrate the fact (for example that a particular contract is legitimate) on the balance of probabilities. If that burden is discharged by the taxpayer and the Commissioner wishes to maintain the allegation that the contract is a sham, or is some other transaction, then the Commissioner must positively show that to be the case. It may be that the onus then shifts back and forth between Commissioner and the taxpayer. If however, the taxpayer proves the fact then, absent evidence to the contrary from the Commissioner, any unsupported allegation from the Commissioner will fall away as irrelevant.
In summary, the taxpayer must put forward a positive case. The taxpayer should identify the components of what they contend is their assessable income and their allowable deductions. Each component needs to be proved by verifying the source and amount of the assessable income. This process needs to be performed on an item by item basis to establish what the taxpayer says is the taxable income. The taxpayer must then explain the difference between the assessment and the taxable income that has been verified. That means the taxpayer must identify the components of the difference and explain why those amounts are not income. This means leading evidence to show that the receipts are not of an income character. Ideally and if possible, the taxpayer should also employ an objective means of verifying they have no other sources of income.
 See s.14ZZ Taxation Administration Act 1953 (TAA).
 See also George v FCT (1952) 86 CLR 183 at 201 where the High Court said “the law has always been 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”.
Federal Commissioner of Taxation v Stone (2005) 222 CLR 289 at ; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663  citing Western Gold Mines NL v Commissioner of Taxation(WA) (1938) 59 CLR 729 at 740. Bosanac v Commissioner of Taxation FCA 946.
Bosanac v Commissioner of Taxation  FCAFC 116 at .
Bourne and Commissioner of Taxation  AATA 190.