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The Administrative Review Tribunal has ruled that amended assessments that increased a taxpayer’s assessable income by around $920,000 were not excessive.
Taxpayer loses appeal in case involving unexplained bank deposits
07 June 2025
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11 minute read
A taxpayer has failed to prove that amended assessment and penalty assessments issued by the ATO were excessive in a decision handed down last week, HWFX and Commissioner of Taxation (Taxation) [2025] ARTA 680.
The amended assessments and penalty assessments were raised by the ATO following the conclusion of an audit it conducted into the applicant's financial affairs.
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The audit, which was commenced without notice, found that during the relevant years:
- Many deposits and fund transfers had flowed into a number of Australian bank accounts that the Applicant in the case held, controlled and operated;
- The combined amounts of those deposits and transfers far exceeded what the Applicant had reported as her assessable income in her income tax return for each year of the Relevant Years;
- The deposits and transfers were from sources unexplained and appeared (absent any other explanations) to have the character of assessable income; and
- the Applicant had deliberately refrained from including such amounts in her income tax returns in order to reduce her taxation liability.
The amended assessments and the penalty assessments, together with the applicable shortfall interest charge, led to an increase of the Applicant’s taxation liability for the relevant years in excess of $700,000.
The applicant lodged separate objections to the amended assessments and the penalty assessment. The ATO partially allowed the objection relating to the 30 June 2017 year. However the objections relating to amended assessments for the 30 June 2016, 2018, 2019, 2020 and 2021 were wholly disallowed as was the penalty assessment.
The audit by the ATO examined bank statements pertaining to 11 Australian bank accounts which were held and operated by the applicant.
An analysis of those statements revealed significant cash deposits had made their way into those accounts during the relevant years.
The amounts appeared to have come from both Australian and Chinese sources and, without obvious alternate explanations, seemed to be in the nature of income receipts. These amounts far exceed the amounts declared in the Applicant’s income tax returns.
The Commissioner of Taxation was therefore not satisfied that the returns represented the true depiction of her taxable income.
From this analysis, the Commissioner formed the view that the applicant had derived over the course of the relevant years, additional assessable income of $920,524. This led to a shortfall in the amount of tax the applicant would otherwise have been liable for of $350,909.
At the conclusion of the audit, the ATO formed the view that the applicant either knew or ought to have known that these additional unexplained amounts had an income character and should have been included in her tax returns.
The ATO noted that the applicant controlled these accounts, used the proceeds to fund her lifestyle and must have been aware that the amounts being received were significantly greater than what she had declared as income.
The applicant claimed that the underreporting of her income was done unwittingly in circumstances where she had been misled by her former accountant about her obligations to pay tax on all of her income. She claimed that the former accountant had advised her that she could simply choose an amount to return and advised her of the amounts upon which no tax would be payable.
She also stated that a number of the deposits identified in her accounts by the Commissioner as unexplained were attributable to gifts and financial assistance provided by various family members, including her son, often when those individuals were visiting from China.
She also said that a number of the deposits were were transfers from China and were either transferred gifts or capital sums which came from the sale of Chinese real property owned by the applicant prior to the relevant years.
The remaining ‘unexplained’ deposits, she said, represented her full assessable income comprised of amounts paid to her as payment for services she provided for clients either in cash (which she then deposited) or by bank transfers.
The applicant also claimed that she was entitled to a significant number of deductible expenses for amounts incurred gaining and producing her assessable income, which included amounts spent on hotels, flights, advertisements and phones in the course of her escort work.
To support her claims, the applicant lodged with the Tribunal a large number of documents which included some bank statements from her Chinese accounts and a number of written declarations from family members and associates supporting her claims that particular deposits were not to be characterised as income because they were gifts or other advances not in the nature of income.
As part of the applicant’s case, her accountant lodged a range of worksheets which were intended to provide the Tribunal with something of a reconciliation of the Applicant’s financial affairs culminating in an amount of income that the applicant said she had derived in each year of the relevant period.
Tribunal general member Michael Abode noted that the applicant was "operating a somewhat sophisticated endeavour, which at least required her to craft and organise advertising across multiple platforms, administer and arrange the booking of multiple jobs and to organise travel and accommodation to undertake such work over a number of years".
"Despite these complexities, she purports to have maintained no contemporaneous diaries, notes or formal records that might show the number of clients she had over the relevant years or, with a level of basic precision, how much income she may have produced," said Abood.
"It is self-evident that an applicant providing services on the scale described in this case will have significant difficulties discharging an onus where limited records have been retained."
The Tribunal also addressed the applicant's claims that she did not intend to disregard Australian taxation laws by under-declaring income and had been misled by her former accountant.
"Having regard to the extent and complexity of the applicant’s general commercial affairs, I am not persuaded that the applicant could have been unaware, irrespective of what advice she may or may not have received, of the most primary concepts of Australian tax law, that being that individuals in the Australian tax system have a basic obligation to declare the full amount of taxable income rather than an arbitrary or voluntary component," said Abood.
"I note that the concept of ‘total income’ is a concept she seemingly grasped when completing loan application forms in the years prior and when it was in her commercial interests to answer similar questions more fulsomely."
Abood concluded that the applicant must have known that she was under an obligation to declare and pay the appropriate amount of taxation on the entirety of her taxable income.
"Over the course of a period of six years the applicant, on my findings, made an intentional decision to declare a fraction of her earnings and pay a nominal amount of tax for each of those years. This evasion of tax did not involve some small or insignificant amount but the entire proceeds of a business."
The Tribunal determined that the applicant had failed to discharge her burden to show that the amended assessments and penalty assessments were excessive.
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