FEATURE ARTICLE -
Advocacy, Issue 98: December 2024
In Cheung v Commissioner of Taxation [2024] FCA 1370 (29 November 2024), Logan J adjudicated an appeal by a tax payer from an assessment decision of the AAT (as the ART then was). A critical issue was whether the sums totalling approximately $23m, paid to the taxpayer by a relative in Vanuatu constituted income or a capital gift. Allowing the appeal, his Honour found such money was of the latter character. A portion of his Honour’s reasons which the writer found instructive – referable to modern family life – was the following:
[A] point made for the Commissioner was that the income tax legislation is agnostic in terms of what is or is not income under ordinary concepts. In relation to the meaning of “income” this is, unquestionably, true. That meaning does not vary according to cultural or family values. But whether, on particular facts, a sum received or paid by direction is income may fall for determination against taxable facts which reveal that the character of the payment in the hands of the recipient is a gift, because the occasion for its payment is wholly explained by a cultural or family norm, not an income producing activity….There is nothing unique to this case about such a phenomenon. For example, if by good fortune they can, many parents give money to children for a home deposit, grandparents give money for treats or extra clothes for grandchildren, sometimes for school fees. All this occurs as a matter of routine according to available financial resources and by reason of natural love and affection. Sometimes such payments may be a one-off, sometimes they may be made in varying amounts for years. Periodicity of receipt is an imperfect touchstone for whether a payment is income in the hands of a recipient. The ITAA 1997 does not bring to tax every receipt of money from a third party.
The relevant portions of the reasons of Logan J were as follows:
A Matriarch
1 In 1974, at Port Vila in what was then officially known as the New Hebrides Condominium, and since Independence in 1980 as the Republic of Vanuatu, Mrs Graziella Leong (née Cheung) and her then husband, Mr George Leong, established a modest supermarket business. They named that business “Au Bon Marche” (ABM). That business name is obviously in the French language but, as Mrs Leong related in her oral evidence, it has an idiomatic, not literal, meaning. Idiomatically, it means, “It’s not expensive” or “It’s cheap”.
2 Already by Independence, ABM had grown into the largest supermarket chain in Vanuatu. Half a century after its establishment, ABM comprises six retail supermarket outlets in Port Vila, a food wholesale facility and four fuel stations. The wholesale arm of ABM services numerous small retail businesses in Vanuatu. ABM is a profitable business.
3 Mrs Leong has been actively engaged in the conduct of the ABM business over all this time. I use the adverb “actively” deliberately. I had the benefit of observing her during a lengthy cross-examination on her affidavit evidence in chief. She gave her oral evidence in her first language, French, via an interpreter by video link from Vanuatu. Her fluency in French is a legacy of the pre-Independence, joint administration, by the United Kingdom and France, of the New Hebrides. Another legacy exemplified in the evidence were bi-lingual (English and French) official documents relating to ABM.
4 Mrs Leong was a most impressive witness. I accept her evidence without reservation. She is now elderly (born in Port Vila in 1942). However, an evident degree of physical frailty on her part was in no way indicative of any mental decline. She was, to my observation, polite, courteous, engaged, modest in relation to her considerable business achievements, possessed of a good sense of humour and, above all, possessed of a masterly knowledge of ABM and her family. I am well-satisfied her evidence was honest. I am likewise well-satisfied on the whole of the evidence that Mrs Leong has long been, and remains, a respected, matriarchal figure in relation both to her descendants and the wider Cheung (including Leong) family. From each of these familial perspectives, hers is and has long been the decisive presence in ABM, irrespective of any outward form. She was firm and resolute in her evidence that, until a recent corporatisation of the business in about July 2017, she, and only she, was the owner of ABM. Even after corporatisation, Mrs Leong retained ownership of all of the shares in the corporate owner until 31 December 2021. At that time, and because of her advanced age, Mrs Leong transferred her shares into two trusts. This was undertaken for estate planning purposes for the future generation of the wider Cheung/Leong family. The trusts are controlled by Mrs Leong’s eldest son, Mr Andrew Leong (“Andrew”). For family reasons detailed below, it is inherently likely that, as the eldest son, Andrew’s succession to this role of formal control is not coincidental. Further, Andrew offers, on the evidence, a paradigm example of a dutiful son.
The applicant
5 It might seem odd to have commenced with these observations about Mrs Leong, because she is not the applicant in this taxation appeal. The applicant is a younger brother of hers, Mr Lin Jum Cheung, also known as Rene Ah Pow. Without in any way intending to be disrespectful, it is convenient hereafter to refer to Mr Lin Jum Cheung as “Rene”. Adopting that practice also assists in distinguishing him from other members of the Cheung family, notably including his and Mrs Leong’s oldest sibling, the late Mr John Chueng (“John”) whose business and family activities are also relevant to the determination of the taxation appeal.
6 Understanding the background to the establishment and ongoing operation of ABM and the dynamics of familial relationships between Mrs Leong and Rene, her descendants and the wider Cheung/Leong family lies at the heart of Rene’s endeavour to prove that the Australian income tax assessments he has encountered are excessive. My opening observations about Mrs Leong are reactive to that endeavour.
7 To describe Rene as a younger brother is but a relative description. That is because he turned 80 this year, having been born in Port Vila in 1944.
Assessments and Objection Decision
8 The respondent Commissioner of Taxation (Commissioner) has made assessments or, as the case may be, amended assessments of income tax on what he has assessed to be Rene’s taxable income for the 2005 to 2015 income years (inclusive) (the relevant period). The principal foundation for these assessments lies in a view formed by the Commissioner about the character of 99 deposits over the relevant period, mostly from bank accounts in Vanuatu associated with the ABM business, into Rene’s (or his and his wife’s) Australian bank account. The Commissioner considers these deposits to constitute income under ordinary concepts.
9 Other foundations for the assessments are to be found in interest income in the total amount of $1,953,631 received by Rene over the relevant period and in deposits by ABM to entities associated with Rene over the relevant period in the total amount of $2,524,095.
10 Rene accepts that the interest income formed part of his assessable income.
11 The other deposits, also said to be income under ordinary concepts of Rene, were:
(a) a deposit of $1,624,155 made directly by ABM to the Simmertown Unit Trust (Simmertown UT) in the 2015 income year, said to have been at Rene’s direction; and
(b) a deposit of $899,940 made directly by ABM to Qikid Pty Ltd (Qikid) in the 2015 income year, said to have been at Rene’s direction.
(collectively, the 3P Deposits)
12 Rene objected to these several assessments. That objection was successful in part. The conclusion reached by the Commissioner in his objection decision of 10 September 2021 may be summarised in the following table:
YearInterest ($)Deposits ($)Taxable Income ($)200517739,900739,9172006461879,477879,93820072,3995,164,5695,166,96820086,4152,363,8402,370,2552009608,8621,739,5472,348,4092010572,81910,883,59911,456,4182011338,9924,929,9225,268,9142012165,1781,492,3751,657,5532013123,864949,9071,073,7712014107,684299,970407,654201526,9393,356,4743,383,413Total1,953,63032,799,58034,753,210
Note: There is a $2 discrepancy between the total of the deposits in the above table and the amount in dispute ($32,799,582). I will refer to the higher amount in these reasons.
13 Rene has appealed to this Court against that objection decision pursuant to the right conferred by s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) (TAA).
14 Rene’s statutory appeal was instituted within the time prescribed in the TAA. Given this, it is desirable to offer a brief explanation as to why some three years have passed until the determination of that appeal.
…
Onus and standard of proof
17 As with any taxation appeal, the onus of proving the assessments excessive and what they should have been lies on Rene as the applicant: s 14ZZO(b), TAA. That does not mean proof to demonstration, only proof on the balance of probabilities: s 140(1), Evidence Act 1995 (Cth).
18 Further, as Brennan J (as his Honour then was) observed in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 (Dalco), at 624, “The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point.”
19 This is one of those taxation appeals where there has been an agreement between the Commissioner and a taxpayer (Rene) to confine it to particular points of law and fact. The agreement was made after the objection decision and as a result of further discussions between the parties.
20 Thus, at one stage, certain payments in the total amount of $1,162,023 to suppliers of the ABM business were included in Rene’s assessable income. By express concession, accepted by Rene, the Commissioner now agrees that the amount of these payments to suppliers does not form part of Rene’s assessable income during the relevant period. These had hitherto been added to deposits by ABM directly into Rene’s (or his and his wife’s) bank account to yield a total of $31,437,510. The parties agree that the total of these supplier payments should be deducted from this amount. To the sum so derived (said by the Commissioner to be income under ordinary concepts) should be added, in terms of what is agreed to be in dispute, the total amount of the 3P Deposits, said by the Commissioner to have been paid at Rene’s direction and likewise said to be his income according to ordinary concepts. Rene’s position is that none of these payments constituted income under ordinary concepts.
21 In this way, the parties have confined the issue in the case as to whether Rene can prove that a total over the relevant period of $32,799,582 should not have been included in his assessable income, because it was not income under ordinary concepts. He must therefore prove that none of the direct deposits and neither of the two payments said to have been made at his direction were his income under ordinary concepts.
22 Another express agreement between the parties stems from a concession made by Rene. That is that, during the relevant period, he had no allowable deductions.
23 In effect therefore, the issue has been confined to whether Rene can prove that the sums so identified were not his income under ordinary concepts. If he does this, it is accepted that he will have proved the assessments to be excessive and what they should have been.
24 In these circumstances, it is not necessary to consider the plethora of cases in which meaning has sought to be given to what is, in relation to taxation appeals, presently s 14ZZO(b), TAA.
25 It is, however, apt to observe that the confining of issues in taxation appeals (and taxation reviews for that matter) is a desirable practice. It is always for the Commissioner in the responsible administration of taxation legislation to make a considered value judgement as to whether it is apt to agree to confine issues. Absent such agreement, and as Brennan J also stated in Dalco, at 624, with reference to observations made by Mason J (as his Honour then was) in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, at 89 (in what has come to be regarded as a definitive exposition), the Commissioner is entitled to rely on any deficiency of proof by a taxpayer in proving, by reference to the grounds of objection, that an assessment is excessive.
26 No onus is cast on the Commissioner to prove that an assessment is not excessive. However, putting a taxpayer to proof on issues of fact and law which are truly not controversial is antithetical to the “traditional, and almost instinctive, standard of fair play to be observed by the Crown in dealing with subjects” to which Griffith CJ referred in Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333, at 342. That standard is not confined to taxation appeals but is pervasive in public administration. The vast resources at the command of the Executive can become an instrument of oppression if that standard is not observed. A recollection of our history in the terrible civil war and related regicide and period of military dictatorship in the mid-17th century, grounded in tyrannical behaviour by the then King, should underpin an understanding of why it is so important to observe this standard. Observing this standard in public administration had long become, even by 1912 when Griffith CJ made those comments, a prudent and proven means of preventing tendencies to repeat such awful events. Lapses in observance of the standard are also wasteful of limited judicial resources. In relation to the latter, this standard applicable to the Crown and its emanations has been augmented by a general obligation cast on parties to conduct litigation in accordance with an overarching purpose of civil practice and procedure specified in s 37M of the Federal Court of Australia Act 1976 (Cth). That requires parties to conduct litigation in a way which facilitates the just resolution of disputes not just according to law but also as quickly, inexpensively and efficiently as possible.
Summary of conclusions
27 There are some key factual conclusions in this taxation appeal from which flow particular applications of the income tax legislation.
28 During the relevant period, as it always had been, the ABM business was carried on in Vanuatu, never in Australia. Related to that, the income of that business was derived in Vanuatu, never in Australia. The source of that income was in Vanuatu, not in Australia. Moreover, flowing from my acceptance of Mrs Leong’s evidence, as well as that of Rene and other family members, upon which I elaborate below, that income was derived, during the relevant period, by Mrs Leong, as the then sole owner of the ABM business.
29 Also during the relevant period, Rene was a resident of Australia. As an Australian resident, Rene’s assessable income included the “ordinary income” he derived “directly or indirectly from all sources, whether in or out of Australia, during the income year”: s 6-5(2), Income Tax Assessment Act 1997 (Cth) (ITAA 1997). “Ordinary income” is income according to ordinary concepts: s 6-5(1), ITAA 1997.
30 From s 6-5(2) of the ITAA 1997 and his residency in Australia, it follows that the fact that the source of payments to Rene was in Vanuatu does not mean that those payments cannot form part of his assessable income. Given my conclusion that it was Mrs Leong alone who owned the ABM business during the relevant period, it follows that Rene did not derive income from an ownership interest in that business.
31 My further conclusion is that none of the payments were a reward to Rene, either formally or informally, for services rendered to that business. In themselves, these conclusions do not mean that any of the payments did not constitute income under ordinary concepts. However, my further conclusion is that none of the payments were otherwise income under ordinary concepts. Thus, the assessments concerned have, to that extent, been proved to be excessive. As, by agreement, the issues in the taxation appeal have been confined in the way already described, it follows that Rene’s appeal must be allowed.
…
Income under ordinary concepts?
76 Long ago now, in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 (Scott), at 219, Jordan CJ stated:
The word ‘income’ is not a term of art and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to [be applied].
77 Much more recently, and having cited this passage from Scott, Gaudron, Gummow, Kirby and Hayne JJ observed in their joint judgment in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 (Montgomery), at [64]:
Because the distinction between income and capital has so often been considered by the courts, attempts to classify a particular receipt often proceed by seeking to draw analogies with decided cases. That approach is often helpful, but resort to analogy should not be permitted to obscure the essential nature of the inquiry which is to determine whether “in ordinary parlance” the receipt in question is to be treated as income. As Jordan CJ made plain, the references to “ordinary parlance” and to the “ordinary concepts and usages of mankind” are no mere matters of ritual incantation; they identify the essential nature of the inquiry.
[footnote reference omitted]
78 Having made this observation, their Honours opined, at [65], that the “core” of the meaning of “income” as used in the former s 25(1) of the Income Tax Assessment Act 1936 (Cth) was to be found in a statement by Pitney J of the United States Supreme Court in an opinion in Eisner v Macomber (1920) 252 US 189 (Eisner v Macomber), at 206 – 207, a case concerning the meaning of the word “income” in the Sixteenth Amendment to the United States Constitution (which confers on Congress a power to tax incomes):
The fundamental relation of ‘capital’ to ‘income’ has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term ‘income,’ as used in common speech, in order to determine its meaning in the amendment and, having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue.
After examining dictionaries in common use (Bouv. L. D.; Standard Dict.; Webster’s Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act 1909, ‘Income may be defined as the gain derived from capital, from labor, or from both combined,’ provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case.
Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word ‘gain,’ which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. ‘Derived-from-capital’; ‘the gain-derived-from capital,’ etc. Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being ‘derived’ – that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal – that is income derived from property. Nothing else answers the description.
[Emphasis by Pitney J in Eisner v Macomber, internal case and footnote references omitted]
79 Later, in Federal Commissioner of Taxation v Stone (2005) 222 CLR 289 (Stone), at [8], a majority of the High Court (Gleeson CJ, Gummow, Hayne and Heydon JJ) concluded that the reference in s 6-5 of the ITAA 1997 to income under ordinary concepts was an “evident reference” to Sir Frederick Jordan’s statement in Scott. It is also clear from Stone that the statements quoted above from Montgomery in relation to the meaning of income remain authoritative for the purposes of s 6-5 of the ITAA 1997. Justice Pitney’s statement of principle in Eisner v Macomber, concerning the meaning of “income” as adopted in Montgomery, was later cited with approval in Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656, at [21] (Gummow ACJ, Hayne, Heydon and Crennan JJ).
80 Sir Frederick Jordan’s statement in Scott and contemporary judgments of the High Court concerning the meaning of income have been the subject of a helpful and thought-provoking analysis by Associate Professor Mark Burton of Melbourne Law School in his article, ‘Interpreting the Australian income tax definition of ‘ordinary income’: ritual incantation or analysis, when examined through the lens of early twentieth century linguistic philosophy?’ (2018) 16(1) eJournal of Tax Research 2. In truth, however, and with respect, it is possible to over-analyse that statement.
81 In terms of ready comprehension and public administration, concept-based drafting has much to recommend it over highly prescriptive drafting. Sir Frederick Jordan’s statement in Scott, like Justice Pitney’s statement of principle in Eisner v Macomber, is nothing more or less than a well-intentioned judicial endeavour to assist in the understanding of an ordinary English word expressing a concept. To expect greater precision of explanation is to engender an exasperation similar to that pregnant in Justice Potter Stewart’s statement in Jacobellis v. Ohio, 378 U.S. 184 (1964) to describe his threshold test for what constituted obscenity, at 197:
I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.
82 That does not mean that what constitutes income under ordinary concepts is a matter of subjective whimsy. For it is quite clear that the subject is one for objective determination: Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 (Hayes), at 55 (Fullagar J). Nor, with respect, does it mean that the meaning of income under ordinary concepts is “buried in the cases”: cf, writing extrajudicially, The Hon R S French AC, ‘Law – Complexity and Moral Clarity’ (2013) 40(6) Brief 25. Rather, cases offer endeavours of the kind mentioned and examples of whether, on particular facts, a payment falls within or outside the meaning of an ordinary English word expressing a concept.
83 Whether an amount is income under ordinary concepts depends upon its quality in the hands of the recipient: Scott v Federal Commissioner of Taxation (1966) 117 CLR 514, at 526 (Windeyer J); Hayes, at 55 (Fullagar J); Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375, at 402 (Brennan J, as his Honour then was). The motive of the person making the payment is not necessarily irrelevant, but it is not determinative: Hayes, at 56 (Fullagar J).
84 The source of the payments to Rene was income derived in Vanuatu by Mrs Leong from the conduct of the ABM business. But “[i]t is … wrong to assume exact congruence between the character of a sum when received or paid by one taxpayer and its character when received or paid by another”: Montgomery, at [99] (Gaudron, Gummow, Kirby and Hayne JJ). Indeed, to describe Mrs Leong as a “taxpayer” requires clarification. On the evidence, there is a ‘value added tax’ in Vanuatu, which is paid by her business, but no income tax. Thus, the fact that the payments concerned came from income in Mrs Leong’s hands does not mean that they have that quality in Rene’s.
85 The Commissioner’s case that the payments were returns in respect of an ownership interest by Rene in the ABM business fails on the facts. So, too, does an alternative submission that they were payments in the nature of a return for services rendered. It was, I apprehended, also submitted that some of the payments were in the nature of rent in respect of sites in which, directly or indirectly, Rene had an interest. On the facts, none were. Neither were the payments in the nature of a pension in respect of past services to the ABM business. They were not income in Rene’s hands in any sense. They were just gifts of capital voluntarily made by a loving sister who has an acute sense of family loyalty and responsibility and who has enjoyed good fortune in business for Rene, a loved brother respected for his business judgement and like sense of family loyalty and responsibility, to invest as he saw fit and to draw upon personally if he saw fit.
86 More particularly, none of the payments was in the nature of an ex gratia payment to a former employee: cf Federal Commissioner of Taxation v Blake [1984] 2 Qd R 303. Nor was Rene a “remittance man” supported in a foreign land by a stipend from abroad, a forlorn example of whom is described by Judith Wright in her poem of that name. The sums sent are, objectively, inconsistent with such a conclusion on the evidence.
87 During submissions, a point made for the Commissioner was that the income tax legislation is agnostic in terms of what is or is not income under ordinary concepts. In relation to the meaning of “income” this is, unquestionably, true. That meaning does not vary according to cultural or family values. But whether, on particular facts, a sum received or paid by direction is income may fall for determination against taxable facts which reveal that the character of the payment in the hands of the recipient is a gift, because the occasion for its payment is wholly explained by a cultural or family norm, not an income producing activity.
88 There is nothing unique to this case about such a phenomenon. For example, if by good fortune they can, many parents give money to children for a home deposit, grandparents give money for treats or extra clothes for grandchildren, sometimes for school fees. All this occurs as a matter of routine according to available financial resources and by reason of natural love and affection. Sometimes such payments may be a one-off, sometimes they may be made in varying amounts for years. Periodicity of receipt is an imperfect touchstone for whether a payment is income in the hands of a recipient. The ITAA 1997 does not bring to tax every receipt of money from a third party.
89 My role is not to critique an objection decision but rather to determine, having regard to the evidence adduced and the onus of proof mentioned, whether assessments have been proved to be excessive and what the assessments should have been. However, the longstanding practice in taxation appeals is that the objection decision, related reasons and material before the Commissioner is transmitted to the Court upon the filing of a notice of appeal. Hindsight can of course lend a certainty to that which is conjectural in prospect. Even so, and while I do not doubt that the objection decision was made in good faith, to read the reasons in light of what even then, had been placed before the Commissioner by or on behalf of Rene is, with respect, to read an uncritical rehearsal of cases divorced from an understanding of a family reality and a related absence, save for interest, of an income tax liability. The importance in taxation administration of open-mindness and detachment from assessment in decision-making in respect of objections cannot be over-emphasised.
90 What follows is that Rene has discharged his onus of proving the assessments to be excessive. None of the payments constituted income under ordinary concepts. The objection decision must be set aside. In lieu thereof, the objection must be allowed and Rene falling for assessment in the relevant period on the footing that his assessable income during the relevant period constituted the amounts of interest derived by him. It consequentially follows that related penalties are excessive.
(emphasis added)
