Court rules $30m gift not to be taxed

The matriarch of a Vanuatu supermarket chain who gifted her brother almost $30 million over a decade has taken on the Australian Tax Office over its assessment of the payments as income.

Vanuatu resident Graziella Leong, 82, gave the money to her Sydney-based brother Lin Jum Cheung, 80, over 99 payments between 2005 and 2015 from her Au Bon Marche (ABM) businesses.

The siblings challenged the Commissioner of Taxation’s assessment, and in a Federal Court judgment handed down in Brisbane on Friday, Justice Logan granted their appeal, ruling the payments did not constitute income according to “ordinary concepts” under the Income Tax Assessment Act 1997 (Cth).

Justice Logan described how Mrs Leong had grown ABM in Vanuatu from one supermarket in 1974 to six supermarkets, a food wholesale facility and four fuel stations.

He described her as a “most impressive witness” and accepted 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,” he said.

“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.”

The children of Chinese immigrants to Port Vila, Mrs Leong and her brother, also called Rene Ah Pow, were orphaned at an early age and cared for by older siblings.

“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,” Justice Logan said.

“Those features are of a strong work ethic, loyalty to family and, related to that, an intense sense of familial responsibilities.”

Mr Cheung had worked as a general manager at ABM in Vanuatu until he retired to Australia in 2000.

Justice Logan said it had long been convenient for Mrs Leong to have funds available in Australia for Mr Cheung to pay suppliers.

“He undertakes this role without financial reward or any expectation of any such reward. It is yet another matter of family duty,” he said.

He said it was clear Mr Cheung was not a trust beneficiary to the proceeds of the funds placed with him.

“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,” he said.

“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.”

Justice Logan said whether an amount was income under ordinary concepts depended on its quality in the hands of the recipient, and “the fact that the payments concerned came from income in Mrs Leong’s hands does not mean that they have that quality” in Mr Cheung’s.

He said the Commissioner’s case that the payments were returns in respect of an ownership interest in ABM failed on the facts. So too did the submissions that they were payments for services rendered, or for rent, or made in the nature of a pension for past services to ABM, he said.

“They were not income in Rene’s hands in any sense,” he said.

“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 judgment and like sense of family loyalty and responsibility, to invest as he saw fit and to draw upon personally if he saw fit.”

Justice Logan agreed with the Commissioner’s submission that income tax legislation was agnostic in terms of what constituted income under ordinary concepts.

“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,” he said.

“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.”

Justice Logan said to read the reasons given for the decision under appeal was “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-mindedness and detachment from assessment in decision-making in respect of objections cannot be over-emphasised,” he said.

He ordered that: the appeal be allowed; the decision made on 10 September 2021 be set aside; assessments be amended and issued to show taxable income of $1,953,631 (interest upon which withholding tax of $74,591 was paid) and not otherwise; and penalties and interest charges be adjusted accordingly.