Federal Court of Australia

Cheung v Commissioner of Taxation [2024] FCA 1370

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The respondent’s objection decision dated 10 September 2021 in respect of the applicant’s objection to income tax assessments in respect of the income years ended 30 June 2005 to 30 June 2015 (inclusive) (“the relevant period”) be set aside.

3.    In lieu thereof, the applicant’s objection be allowed and the matter remitted to the respondent for:

(a)    amendment and issuing of assessments in respect of the relevant period on the footing that, during the relevant period, the applicant’s taxable income comprised interest income in the total amount of $1,953,631 as referred to in paragraph 44 of the objection decision (upon which withholding tax of $74,591 was paid) and not otherwise; and

(b)    the making of all necessary and consequential adjustments to penalties and interest charges.

4.    Costs be reserved for consideration after publication of the Court’s reasons for judgment.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

LOGAN J:

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:

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.

Some observations about the case management of taxation appeals

15    This proceeding was initially docketed to another judge, who decided to delegate initial case management functions to a registrar. In addition, there was thought by the parties to be some virtue in mediation. For one reason or another, and necessarily that reason is not known to me, mediation did not yield a consensual outcome. As it was, the better part of a year passed before the proceeding was re-allocated to me as docket judge. Thereafter and necessarily, given the range of factual issues raised, a good deal of lead time needed to be allocated for the preparation and filing of evidence in chief before any trial period could be fixed. After trial, the combined impact of a need for supplementary submissions, other reserved judgements and commitments have been such that it has not been possible to deliver this judgment before now.

16    There doubtless are classes of case, or cases within such classes, within the myriads of jurisdictions exercised by the Court which lend themselves to case management by registrars. The Federal Court Rules 2011 (Cth) certainly contemplate registrars undertaking some such functions. And it is always a matter for the discretionary value judgement of a docket judge as to whether, if at all, to entrust a registrar with any such function. However, based on some four decades experience in either appearing in or adjudicating taxation appeals, it would be a rare taxation appeal that lent itself to such entrustment. It is a considerable step to challenge an objection decision in this Court, and not just financially. Almost inevitably, any such case will involve complex issues of law or fact, or both. The more routine cases are usually apt, at least for initial resolution, in review proceedings in the Administrative Review Tribunal. Retention of case management by a docket judge allows any provision for mediation readily to be integrated with the availability of the docket judge to conduct a trial, if need be. Certainty of a proximate trial can also be conducive to consensual outcomes at mediation. Further, direct association in case management between the docket judge and the parties and their legal representatives from the outset in this specialist area frequently challenges idiosyncratic notions held by a party either as to the merits or the conduct of a taxation appeal, often leading to a narrowing of issues. Given that the Commissioner will always be a respondent, such judicial involvement can also assist in highlighting model litigant obligations, upon which I make further observations below. However this may be, the upshot is that this appeal has fallen for judicial determination.

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.

The origins, ownership and operation of “Au Bon Marche”

32    Mrs Leong, Rene and John are three of seven children. They are of Chinese ethnic origin. Their parents were born in Fujian, China, but came to settle in Port Vila. There, they established a bakery known as Ah Pow Bakery.

33    Mrs Leong’s parents died in the 1950’s, her father in 1954 and her mother in 1950 (Rene put the date of her death as 1949 but he was then a very young child, whereas Mrs Leong was about two years older. At their then ages, ordinary experience of life is that such an age difference can be significant in terms of memory of events. So, while the difference in recollection is not material, I prefer that of Mrs Leong). She and Rene were therefore orphaned early in their lives. They and other siblings were cared for by their oldest brother, John, and their oldest sister, Anna. John inherited the Ah Pow Bakery business on the death of their father. Mrs Leong worked in that bakery business until she was 18. Rene also worked in that business during his childhood, as did other siblings.

34    When one views these childhood experiences of Mrs Leong and Rene in the context of the whole of the evidence, they are, in my view, formative of what have been, and continue to be, recurring features in their lives and those of the wider Cheung/Leong family. Those features are of a strong work ethic, loyalty to family and, related to that, an intense sense of familial responsibilities.

35    Mrs Leong married her husband, Mr George Leong (“George”), in about 1961. So, she was then about 19. At that time, George’s parents were operating a very small grocery business in Port Vila on what became, in 1974, the first site on and from which the ABM business was conducted. That area of Port Vila was and is known as “Nambatu”. “Nambatu” is a pidgin English word. Rendered into English, it means “Number Two”.

36    George’s family were British citizens. In those colonial times, that meant they were able, in the then New Hebrides, to acquire freehold title to land. The land at Numbatu on which the grocery shop was situated was then freehold land owned by George’s parents. Mrs Leong also explained in her evidence that the land tenure system in what became Vanuatu changed in the aftermath of Independence, with freehold land becoming leasehold land.

37    Mrs Leong and George assumed the conduct of this small grocery business from his parents in 1962, shortly after they married. The business was situated in a compound on which Mrs Leong and her husband also lived. George was the oldest of four siblings. While operating this business, George always looked after these younger siblings. Looking back over Mrs Leong’s long life, one therefore sees that her experience of working in business and responsibility for looking after younger siblings was carried over into her married life and beyond.

38    Rene put John’s inheritance of the Ah Pow Bakery business on the death of their parents down to Chinese culture. He also attributed the succession in turn in the ownership of this still operating business by John’s oldest son, Mr Charlie Cheung, to this same cultural tradition. Rene, too, was, I thought, an honest witness. I accept his explanation.

39    It may perhaps therefore also be no coincidence that George came to be a successor to the operation of the grocery business. Succession to the oldest sibling would not wholly explain Mrs Leong’s additional inclusion as an owner. Likewise, it may perhaps also be no coincidence that, upon the death of George’s parents, the particular part of the freehold land on which the grocery business was situated passed to George and to Mrs Leong. Apparently, the land was able to be divided such that other plots passed to George’s siblings but the plot on which the grocery business was situated (“the property in front” as Mrs Leong put it) passed to George and her.

40    What is clear is that, by 1978, Mrs Leong was the sole owner of both the ABM business and the land at Nambatu and then improvements upon which that business was operating. That was because, in 1978, Mrs Leong and George separated. Mrs Leong’s sole ownership of ABM was a sequel to that separation. From then on, George had no further involvement with ABM.

41    At the time of their separation, Mrs Leong and George had three children – Andrew, who was born in Port Vila in 1966, his younger brother, Michael Leong (“Michael”), who was born in Australia in 1968, and their younger sister, Muriel. This separation was, truly, a watershed event in the life of that family. Andrew and Michael also gave evidence both by affidavit and orally in the case. I thought they gave honest evidence.

42    One gets a sense of the watershed quality of the separation from reading, in conjunction, the affidavit evidence in chief of each of Mrs Leong, Rene, Andrew and Michael. However, that quality was, I thought, starkly exposed by Andrew in the course of a cross-examination in which, consistent with the assessing foundation, it had been quite properly put in various ways to him by counsel on behalf of the Commissioner that Rene had an interest, and an ongoing interest, in the ABM business, to which the payments to him over the relevant period were referable. Against the background of a business ownership structure adopted after the relevant period, this exchange occurred, at T319-320:

And I want to suggest to you that your ownership of those shares was also representative of the true position that Mr Cheung had an interest in the ABM business since at least the 1990s; agree with that?---What do you mean by interest? What do you mean by that, interest?

He owned the property?---No, he doesn’t own it. I tell you the story, sir.

…

HIS HONOUR: If he’s – anything else you want to add about that, Mr Leong?---Yes, please, my Honour.

On you go?---I mean, if you read the history, Bon Marche used to own by my grandfather and he gave it to my dad and my mother. They’re the one to run the business. In 1973, they took over. When I was 12, my dad divorce my mum and my mum, she was a very hard person to work and all the family work. So I don’t understand today and I’ve got the right to talk that Rene is not the owner, it’s my mother. So, please, don’t force me. I repeat all this morning it’s my mother and myself, my brother, and my sister. We are the grassroot of this property and all this business, and I feel sad today that you are forcing me. And I’ve been going for a 5 couple hours now he’s not the owner, sir, please, understand my feeling. I don’t have a dad since 12 years old. And I’m blessed today who I am today, sir, because if you know me, I’m the very ..... respected back home. And you are forcing me to say that Rene – no, sir. My mum – my mother and I blessed today. And you can go to Vanuatu with the – the plane tomorrow and you ask everyone who’s Andrew, who’s Michael, who’s Muriel, who’s Ms – who’s Ms Graziella Leong, who’s the owner. I’m a very respected person. I wouldn’t lie to you, sir. The government gave me a diplomatic passport and the consulate. I represent Vanuatu in a few country. So, please, don’t force me because my heart is already sore here. And I get advice from my lawyer. My mum is getting old and one day if she’s not here ..... come back to us everyone, and I’m blessed for that. Thank you.

Mr Leong, at the heart of what the Commissioner has been putting to you is that the way the shares came to be held when ABM business was transferred to the company, ABM Limited, mirrored the way in which the ABM business was owned before the transfer to the company. That’s what the Commissioner is putting. Do you have anything you want to say about that?---No, my Honour.

[Emphasis added]

43    To describe this exchange as a dramatic moment in the trial would be an understatement. Andrew’s answers were given with considerable and obvious emotion and, to my observation, absolute and transparent honesty. Perhaps, subversion of Chinese cultural tradition by an oldest son (George) walking away from responsibilities towards family and business deepened the quality of the event but the long and the short of it is that, in 1978, Mrs Leong was left with three young children and a business, which became solely her business, to run. From then on, and up to and including all the relevant period (and, as related above, beyond for a period), it was always her business. Which is not to say that her family did not then, and have not since, rallied around her. Initially, Rene was conspicuous in this. But he retired on health grounds in 2000. Thereafter, Andrew, Michael and their sister, Muriel, have been conspicuous in their involvement in the conduct of the ABM business but always against the clear understanding that, during the relevant period, it was their mother, Mrs Leong, who owned that business.

44    That is not to say that business licences issued by the government of Vanuatu or value added tax (VAT) returns in relation to ABM before or during the relevant period consistently recorded only Mrs Leong as the owner of ABM. Accepting as I do the evidence of Mrs Leong, Rene, Andrew and Michael, I find that a degree of expediency attended applications for business licences or the submission of VAT returns in relation to outward manifestations of who conducted an ABM business at a particular site.

45    Some examples of this expediency were offered in Michael’s evidence.

46    Annexed to his affidavit was a bundle of business licences for 2015 and 2016 in respect of the ABM business located at Tassiriki (a butchery). These record Mrs Leong as the sole proprietor. A covering government letter dated 25 November 2015 in respect of the 2015 licence is addressed to Rene at the ABM supermarket in Port Vila. Yet Rene had ceased to be General Manager of ABM or even to reside in Vanuatu since 2000. Another bundle of documents annexed to Michael’s affidavit comprised VAT returns from January 2011 to December 2015 which Michael related (and I accept) were in respect of the operation of one of ABM’s petrol stations. The returns are in the name of a Mr Jean-Marie Duffau. Michael related, and I accept, that Mr Deffau was once the partner (de facto, as they never married) of his sister, Muriel. Mr Duffau and Muriel moved to Vanuatu from New Caledonia in 1990. To facilitate Mr Deffau’s obtaining a work permit in Vanuatu, Mrs Leong and Michael arranged for him to apply for and receive a licence in his name for a new ABM petrol station. However, this was but a nominal ownership with all expenses of that business being met by Mrs Leong and the VAT payments being made by her from ABM funds. It was not put to Michael in cross-examination that this evidence was false.

47    A similar example emerged during Michael’s cross-examination. He related (and I accept as true) how, in 1991, when he was 23, he was “recalled” to Vanuatu by his mother to take over the management of ABM’s “Tropical Market” business, then in some jeopardy from a bank. Mrs Leong arranged for the business licence in respect of that business to be issued in her and Michael’s name to facilitate the issuing to Michael of a work permit and related visa to live in Vanuatu. It was not put to him that this evidence was false.

48    Until his retirement in 2000, Rene had a lengthy working history. As with his siblings, and as he related in evidence, his working life began in childhood. He and his siblings were expected to, and did, work in the bakery business. This business was a source of support for him and his siblings. Inferentially, Rene worked in the bakery business while undergoing his primary education in the then New Hebrides. In 1956, his elder brother, John, sent him to Australia to undergo secondary education as a boarder at Knox Grammar School. He remained there for three years, returning to the New Hebrides in about 1959, when he was fifteen. Upon his return, he resumed employment in the bakery business.

49    In my view, John’s deployment of funds from the bakery business to support Rene’s secondary education in Australia is, on the whole of the evidence, a marker for a disposition within the wider Cheung/Leong family, later manifested on a grand scale by Mrs Leong, voluntarily to support family members from business proceeds.

50    In or about 1964, Rene secured employment with the historic, great South Pacific trading house, Burns Philp. Burns Philp then operated a wholesale, retail and hardware business in Vanuatu. Initially, and for about a decade thereafter, Rene was employed as a clerk in Burns Philp’s costing department. Later, he transferred into Burns Philp’s hardware department and later yet into its wholesale department. The latter gave him experience in import operations. During his early years with Burns Philp, Rene continued to work at the family bakery. He also worked in the evenings as a taxi driver to gain extra income to support his own immediate family (he married his wife, Sit Lee Cheung (nee Wu), an Australian citizen, in February 1975). Rene came to work in ABM in 1978 as a sequel to the separation of George and Mrs Leong and in response to a related need for assistance.

51    I do not consider that Rene’s departure from secondary school in Australia in about 1959 at the request of John to work in the bakery, his later assumption of work at ABM at the request of Mrs Leong in 1978 or Michael being recalled in 1991 at age 23 to work in ABM were coincidental events. Viewed as a whole, they indicate a depth and strength of intra-familial loyalty, duty and support keenly felt within the extended Cheung/Leong family that is inter-generational. When a need arises, that sense of loyalty, duty and support is manifested by service within a family business.

52    Another marker of this emerged from Rene’s evidence. His and Mrs Leong’s brother “Jacko” also worked in the ABM business. Jacko worked in ABM for approximately 10 years after which he set up in his own business with financial assistance from Mrs Leong (via the profits she derived from ABM).

53    The ABM business which Rene joined in 1978 was very different to that business today. In addition to Mrs Leong, him and another sister, its staff included only one or two others, indigenous New Hebrideans. No-one then had any job titles. The ABM business’ then sole shop was on the ground floor of a small two-storey building in the compound at Nambatu. Mrs Leong lived with her family above the shop, as did some extended family (nieces and nephews of Mrs Leong and Rene). Later, a third floor, used for shop storage, was added to this building. Later yet, these premises had to be rebuilt after the 2002 earthquake in Vanuatu damaged them.

54    The decade following Vanuatu’s independence in 1980 was one of remarkable growth for the ABM business. By 1990, the business operated the largest supermarket in Vanuatu and had over 200 employees. Over that period, Rene’s role evolved into that of general manager of the business. In that role, Rene had operational involvement in the conduct of the business, seeing and consulting with Mrs Leong daily. Mrs Leong’s role was financial management of the ABM business, which included paying all the suppliers and administration staff and managing the daily administration of the business.

55    Also in 1990, Rene and his wife decided that she should take up residence in Australia in preparation for the furtherance in Grade 6 of their daughter Cynthia’s (Cynthia McCollum, nee Cheung) education. To this end, Rene and his wife purchased a house in Maroubra, New South Wales in which his wife and daughter and, on his visits to Australia, Rene lived. Later, the family moved to Rose Bay before what became their main residence at Marine Parade, Maroubra (Marine Parade) was acquired in 1991. Thereafter, and for the balance of the time in which Rene was employed within the ABM business, Rene commuted frequently between a residence which he maintained in Vanuatu and Marine Parade in Australia.

56    In the late 1990’s, Rene’s health deteriorated. He was diagnosed as suffering from a number of medical conditions, the nature of which need not be detailed. By 2000, these conditions were such that they necessitated his retirement from his role as general manager of ABM and his making Marine Parade in Australia his principal place of residence. This also presented the advantage of giving him more ready access to his Australia–based treating medical practitioners. At Marine Parade, Rene lives a modest lifestyle.

57    By the time of Rene’s retirement from his position with ABM, the retail business was conducted not only at Numbatu, but also sites at Port Vila known as Downtown and Manples. In addition, ABM then had a fuel station at Numbatu and a wholesale arm being conducted from the rear of the Numbatu location. It may well be that ABM’s expansion over the decade preceding Rene’s retirement filled a vacuum, or perhaps exploited a business opportunity, in Vanuatu occasioned by the cessation of trading there by Burns Philp. Mrs Leong recalled that Burns Philp’s historic (from the early 1900’s) wholesale, retail and hardware business in Vanuatu ceased in about 1991.

58    Upon Rene’s retirement, Andrew succeeded to the role of general manager of ABM with Michael undertaking an operational role in the business. Muriel came to undertake financial and administration duties in the business. Each of these roles was undertaken under the overall direction of Mrs Leong, the sole owner of the ABM business throughout the relevant period. Since 2000, ABM has continued to expand its operations in Vanuatu. ABM now has about 600 employees. It now comprises a chain of six retail supermarkets in Port Vila, a food wholesale facility and four fuel stations. Ownership of the interests in land on which these various arms of the business is conducted is something of a smorgasbord of individuals or entities associated with the wider Cheung/Leong family. It is not necessary, in my view, to detail the various holdings. That is because, on the basis of the evidence of Mrs Leong, Rene, Andrew and Michael as a whole, I am satisfied that nothing in the various payments to Rene over the relevant period was, directly or indirectly, in the nature of rent by Mrs Leong, as the owner of ABM, for the use of any land.

59    Rene did not cease all connection either with Vanuatu or his wider family resident there upon his taking up permanent residence in Australia in 2000. On the evidence, he was then, and remains, well-respected within the wider Cheung/Leong family for his business knowledge and experience. He has also long been trusted by Mrs Leong to invest and manage funds at her disposal from the ABM business. He performed a like role for his brother John and the latter’s family. Also on the evidence, although there are family investments in Vanuatu, Mrs Leong has long viewed Australia as a safe haven in which to deploy her surplus funds. Such investment of trust by her in Rene and this view of Australia as a safe haven were manifest prior to the relevant period. It has also long been convenient to Mrs Leong to have funds available in Australia for the payment, as occasion requires, of suppliers to her ABM business. Rene has paid, and is trusted by Mrs Leong to pay, as and if required, suppliers from funds placed at his disposal in Australia and sourced from Vanuatu. He undertakes this role without financial reward or any expectation of any such reward. It is yet another matter of family duty.

60    After 2000 and throughout the relevant period and beyond (until prevented by a departure prohibition order in 2018), Rene travelled frequently between Australia and Vanuatu. In Vanuatu, he spent time mainly with his extended family and occasionally friends at their homes and their businesses. He provided advice about various family businesses. None of this advice was, even informally, on the basis of a paid consultancy. It is nothing more and nothing less than the sought after provision of wisdom and experience by a respected family elder, which is freely and voluntarily given without expectation or any arrangement, formal or otherwise, in respect of financial reward.

61    As far back as 1979, Rene was involved in making investments in Australia using funds provided by the wider Cheung/Leong family for the benefit of that wider family. Rene related (and I accept) that, in 1979, he and his wife received advice that a company was an appropriate vehicle to use for the purposes of making investments in Australia. As a result, in August 1979, Ah Pow Pty Ltd (Ah Pow) was incorporated Rene has been a director of Ah Pow since its incorporation. At that time, he and his wife were each allotted 1 ordinary share in that company. In or about 2000, Rene acquired a further two ordinary shares in Ah Pow.

62    Neither before nor after the relevant period has Ah Pow ever paid either a dividend or director’s fees. On the evidence, I find Rene never had any expectation of any such reward, as this would be antithetical to deeply entrenched family values.

63    I have also reflected on whether various payments from Vanuatu made to Ah Pow, to Rene (or to him and his wife) directly, or to other entities might be characterised as held on trust terms akin to those described in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. Although there are some similarities, the familial bonds and understandings within the wider Cheung/Leong family with respect to funds passed to Rene were and are truly sui generis and do not admit even of such characterisation. What is clear is that Rene has never had anything in the nature of a present entitlement as a trust beneficiary to the proceeds of funds placed with him. He has been regarded by Mrs Leong as fully entitled to the interest income which such funds have from time to time generated. Once again, the tenor of Rene’s evidence makes me sure that, albeit in a way not legally enforceable, he regarded himself as under a familial duty to deploy such interest earnings and the principal of funds given to him as, if and when required for the benefit of the wider Cheung/Leong family. It has never been controversial that the interest earnings formed part of Rene’s ordinary income in the income year in which they were derived.

64    Since 1980, Ah Pow has been the primary but not only vehicle via which investment in Australia ultimately sourced in Cheung/Leong family money from Vanuatu has been undertaken.

65    In or about 1980, Ah Pow became a minority unitholder in a unit trust known as Simmattown UT. Simmattown Pty Ltd was and is the trustee of the Simmattown UT. Ah Pow eventually came to own 17.5% of the units on issue in the Simmattown UT.

66    From time to time, including throughout the relevant period, Rene loaned funds to Simmattown Pty Ltd as trustee of the Simmattown UT, as well as to other related entities. These funds were provided on interest-free terms. The source of the funds Rene lent was funds given to him periodically by Mrs Leong. In turn, these funds were those available to her as owner of the ABM business.

67    In about 1980, the Simmattown UT purchased a shopping complex at Condell Park. Rene related, and I accept, that this shopping complex generates a steady rental income stream.

68    In 1991, the Simmattown UT acquired the Coogee Bay Hotel as another investment.

69    Rene related, and I accept, that, by the time he retired from ABM in 2000, Mrs Leong was frequently sending money generated by ABM to him for investment in Australia. This money was received, in various amounts, by various ANZ Australia bank accounts held in Rene’s name or in his and his wife's name. In keeping with a by then long settled practice, Rene then lent these funds to various family entities in Australia for the purpose of making investments in Australia for the benefit of the family. He did so based on the advice he received about how appropriately to structure these investments. Occasionally, instead of being paid to Rene directly, some payments were made by Mrs Leong at his direction to a particular investment vehicle.

70    All such payments, be those directly to him or otherwise were entirely voluntary on Mrs Leong’s part. They were just her funds disposed of at her will to a brother trusted to invest them wisely and well for the wider Cheung/Leong family as, if and when occasion required, according to his value judgement but without any formal legal obligation. They were gifts of capital.

71    Also from time to time, Mrs Leong placed funds with Rene for use in paying external to Vanuatu suppliers of ABM in foreign currency. In this regard, the practice was that either Mrs Leong directly or Muriel would provide Rene with lists of the suppliers concerned and the amounts required to be paid.

72    Apart from those funds used for the payment of suppliers, the funds sent to Rene by Mrs Leong or paid at his direction were used or invested to the end of benefiting the broader Cheung/Leong families, including Rene’s children, grandchildren, nieces and nephews, as needs arose, and also for living expenses for Rene and his wife. Rene’s living needs in his retirement were and are modest and remained so notwithstanding the extent of funds at his disposal. I find it would be completely antithetical to his deeply held values for this to be otherwise. Moreover, while the evidence as to Rene’s living needs is at a general level of abstraction, the sums sent by Mrs Leong are, objectively, far in excess of what might be needed to support a modest lifestyle.

73    From funds provided by Mrs Leong, Rene has made loans to various entities associated with him (on interest-free terms) which have acquired the following properties:

(a)    315, 317, 321 and 327 New South Head Road, New South Wales (acquired by the Double Bay Properties Unit Trust);

(b)    40 Ocean St / 1260 Pittwater Road, Narrabeen, New South Wales (acquired by the Narrabeen Unit Trust); and

(c)    Ferry Street, Kangaroo Point, Queensland (acquired by Oakstand Fund No. 12 Kangaroo Point Trust).

74    The account just given is wholly explanatory of the succession of funds paid to Rene, or paid at his direction, by Mrs Leong over the relevant period.

75    Rene stated, and - on the basis of his and all of the other evidence led - I accept, that he has no sources of income which he has not disclosed to the Commissioner. He has disclosed his receipt of interest income to the Commissioner.

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.

91    Costs will fall for determination after publication of these reasons for judgment.

Associate:    

Dated:    29 November 2024