This was an appeal to the Federal Court from an Administrative Appeals Tribunal review regarding tax assessments that were issued on the basis of an ‘asset betterment’ analysis. At the Tribunal, the taxpayers’ case was largely rejected on the basis of adverse credit findings, although the Tribunal made some adjustments to the assessments in favour of the taxpayers (see NGFZ and Commissioner of Taxation  AATA 5410).
The taxpayers appealed on the basis that the Tribunal had failed to consider and deal with a substantial argument they had made to explain why certain amounts attributed to them as taxable income were not in fact income. Among other grounds, they also argued that there was an illogical inconsistency in the Tribunal’s reasons, because the Tribunal had concluded that certain transactions resulted in the taxpayers receiving interest income, whilst simultaneously concluding that it was not satisfied that the same transactions were loans (in circumstances where the transactions being loans would have served to explain why certain amounts were not taxable income).
The Commissioner of Taxation cross-appealed on the basis that it was wrong for the Tribunal to have made any modifications to the challenged assessments when the adverse credit findings meant that the Tribunal was not satisfied that the taxpayers had proved what their actual taxable income was in each year.
Ultimately, the Court upheld the taxpayers’ appeal and dismissed the Commissioner’s cross-appeal.
In upholding the taxpayers’ appeal, Logan J found that the Tribunal had failed to consider one of the substantial arguments made by the taxpayers, and that this was an error of law which could either be characterised as a failure by the Tribunal to discharge its statutory review function, or a failure to provide procedural fairness. Logan J also found that the inconsistent findings as to interest and loans gave rise to an error of law involving illogical or irrational reasoning, leading to the kind of legal unreasonableness recognised in Minister for Immigration and Citizenship v Li (2013) 249 CLR 332.
The Court dismissed the Commissioner’s cross-appeal because the success of the taxpayers’ appeal meant that a new trial would be required in any event.
Michael May appeared for the Applicants, instructed by Cooper Grace Ward.
The judgment is published here.