The Full Federal Court overturned an earlier decision by the Federal Court in Commissioner of Taxation v Liang [2025] FCAFC 4. It ruled that unexplained cash deposits made into a trust should be treated as taxable income. This decision supported the Australian Taxation Office (ATO) in a dispute over whether the deposits should be taxed.
A married couple, Mr. Chen and Ms. Li (not their real names), operated several restaurant and takeaway businesses through two trusts. They also had a third trust for property investments. The couple controlled all three trusts, acted as trustees, and were the beneficiaries.
In 2017 and 2018, Ms. Li deposited $735,825 into the bank account of their property trust. This money was later used to buy real estate. When the ATO reviewed the deposits, it decided the funds should be included in the taxable income of the trust.
Since Mr. Chen and Ms. Li were entitled to receive income from the trust, the ATO also changed their personal tax assessments. This meant they had to pay tax on their share of the trust’s income. Additionally, the ATO imposed a 50% penalty for recklessness, arguing they failed to properly report the deposits.
The couple objected to the ATO’s decision and challenged it in the Administrative Appeals Tribunal (AAT). They argued that the deposits were either loans or financial help from their parents. However, the Tribunal was not convinced. There were no loan agreements or documents proving the funds came from their parents. Because of this, the Tribunal ruled the couple had not provided enough evidence to show the ATO’s tax assessments were incorrect.
The couple then appealed to the Federal Court, which ruled in their favor. The judge decided the deposits did not count as taxable income. The ruling explained that the money was not earned through business activities, investments, or profit-making ventures. Since the exact nature of the deposits was unclear, the judge concluded they should not be treated as taxable income.
However, the ATO appealed to the Full Federal Court, which overturned the earlier decision. The Full Federal Court explained that if a taxpayer wants to prove money is not taxable, they must provide clear evidence of its source and purpose. It is not enough to simply claim the funds were gifts or loans without documentation.
In this case, the couple only showed that Ms. Li physically deposited the cash into the trust’s bank account. They failed to explain where the money originally came from or provide a legal reason why the trust received it. Because of this, the Full Federal Court ruled the couple had not proven that the ATO’s tax assessments were incorrect.
As a result, the deposits were treated as taxable income, and the couple remained responsible for paying the additional tax and penalties.
This case highlights the importance of keeping proper financial records, especially when dealing with family or large cash transactions. Without clear documentation, taxpayers may struggle to prove the true nature of financial dealings, leading to unexpected tax liabilities.
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By Angela Abejo @ Pitt Martin Tax
