Talking Tax – Issue 201

The taxpayer failed to lodge tax returns for the 2015, 2016 and 2017 income years. Subsequently, following an audit, the Commissioner issued a default assessment which comprised a total of $853,000 included in the taxpayer’s assessable income in relation to unexplained deposits received in the taxpayer’s bank account. The taxpayer objected to the assessments and later appealed to the Administrative Appeals Tribunal (AAT).

The primary issue before the Tribunal was whether the taxpayer had discharged their burden of proof pursuant to section 14ZZK(b)(i) of the Tax Administration Act 1953 (Cth) with respect to the explanations offered regarding the unexplained bank deposits.

AAT decision

The Tribunal found that the taxpayer’s self-serving statements explaining the nature of the $853,000 deposits were insufficient to discharge the taxpayer’s burden of proof, especially in the absence of producing corroborating documentation and evidence. In doing so, the Tribunal held that:

‘The burden of proof is not discharged by simply showing that the methodology or aspects of the content of the assessment undertaken by the Commissioner was or were flawed or wrong…’

The burden of proof requires the taxpayer to prove, on the balance of probabilities, what their actual taxable income was in order to justify that the Commissioner’s assessment is excessive or incorrect.

The High Court was asked to consider whether the imposition of a 15% tax on the first $37,000 earned by working holiday visa workers imposed a more burdensome taxation requirement on the taxpayer by reason of their nationality and in contravention of article 25 of the DTA.

Article 25(1) of the DTA states that:

‘Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.’

The primary issue was whether the burden of the ‘backpacker tax’ was connected to the taxpayer’s UK nationality.

The Commissioner argued that the backpacker tax was imposed because of the taxpayer’s type of visa and not their nationality. Given that Australian nationals could not hold a working holiday visa, they could not be in the same circumstances as the taxpayer, meaning that Article 25 did not apply.

The High Court rejected this submission and held that a relevant comparison for the purposes of Article 25, was a hypothetical Australian national in the same circumstances as the taxpayer, excluding the criterion, which the allegation of discriminatory taxation was based on.

The High Court held that the circumstances being compared must not include the factor of being or not being a working holiday visa holder, as that would depend on nationality, which is potentially discriminatory.

For a more in-depth coverage into the facts of this case, see Talking Tax – Issue 177.