Receipts, records and responsibility – Understanding the onus of proof in tax matters

Amanda Guruge, CTA, Senior Associate at Tax Controversy Partners, reflects on the Full Federal Court’s decision in McPartland v Commissioner of Taxation [2025] FCAFC 23 (McPartland) and discusses how the onus of proof is important in tax matters.  

McPartland v Commissioner of Taxation 

Daryl and Kathleen McPartland (the Taxpayers) have an interesting history through the Tribunal and Court systems in their dispute with the Commissioner. The series of McPartland cases (Tribunal ([2022] AATA 686), Federal Court ([2023] FCA 1260) and now, Full Federal Court) is a useful reminder of the importance of record keeping to ensure taxpayers can meet the reversed onus of proof. 

Notably, in contrast to criminal law, where the prosecution is required to prove its case ‘beyond reasonable doubt’, the reverse onus of proof exists in tax law. Taxpayers are required to prove their case to the Commissioner, the Administrative Review Tribunal (ART) (formerly the Administrative Appeals Tribunal (AAT)) which stands in the Commissioner’s shoes when reviewing decisions of the Commissioner, and the courts to which decisions are appealed. 

The basic facts and decision 

Mr and Mrs McPartland’s circumstances are not unique — they mirror audit facts commonly seen by tax practitioners across the country: 

1. the Taxpayers failed to lodge tax returns in a timely manner; 

2. they intermingled their personal and business affairs; 

3. they failed to keep accurate records of transactions to prove non-taxable sources of funds; and 

4. they believed that: 

• they landed in this situation because of the actions of their previous tax agent; and 

• the model litigant requirements imposed on the Commissioner meant he should not require the taxpayers to prove their position.  

The Taxpayers did not file their tax returns for the 2014–15, 2015–16, or 2016–17 financial years on the basis that they each had nil taxable income, and their only income was disability support pension payments from Centrelink. Together, they were also directors and shareholders of two companies involved in the motorcycle industry. Like many unexplained wealth and lifestyle audits, the Taxpayers intermingled their personal and business banking affairs, relying on loans from the company as well as occasionally paying for business expenses on their personal credit card.  

Unsurprisingly, after an audit of the Taxpayers and their company affairs, the Commissioner issued default assessments under section 167 of the Income Tax Assessment Act 1936 (ITAA 1936). After their objection to the default assessments was unsuccessful, the Taxpayers appealed the Commissioner’s objection decision to the Tribunal. 

The decision 

The Tribunal affirmed the objection decision, stating the Taxpayers had failed their onus of proving the assessments were excessive, and what their taxable income should be instead. On further appeal, the Federal Court dismissed the Taxpayers’ appeal on the basis that further review of the application for review by the Tribunal would be ‘futile’. Finally, in the recent appeal to the Full Federal Court, the McPartlands provided a ‘miscellany of … submissions’ regarding their conduct, that of their previous accountants, the Commissioner as a model litigant, and the Tribunal’s part in hearing the application, in addition to submissions on their specific grounds of appeal. 

Ultimately, the Taxpayers were unsuccessful in their appeal and were reminded of the heavy onus to disprove default assessment with solid evidence.  

Importance of record keeping 

‘Where the funds come from, I don’t know. It might have come out of one of the other accounts. We haven’t cross-referenced anything…’. This is what Mr McPartland said in 2023 before the Federal Court when asked to explain the source of funds for the payments he was making to maintain his lifestyle. Gone are the days where taxpayers have shoe boxes packed full of unordered receipts. In the contemporary digital world, clients send hundreds of emails without comment or guidance on the relevance of the information.  

As a tax practitioner, part of our job is to educate clients on good record keeping. This includes informing them on how they can best provide you with information to prepare their tax returns accurately and efficiently. Fundamental to good record keeping is understanding the importance of a clear separation between business and personal affairs. Where this is not possible, keeping accurate records to easily identify the source of, and reasons for, transactions will ensure a smoother experience during an audit.  

Best practice for recording keeping can be summarised as follows: 

Strategies for managing unexplained wealth/lifestyle audits 

Where you have the opportunity, it is sensible to engage with the ATO during an audit. It is also important to set the client’s expectations about interactions with the ATO, which includes responding to the ATO’s enquiries in a respectful and truthful manner. Similarly, clients can expect respectful interactions from the ATO, including clear communication of the audit’s intention and the ATO’s specific concerns. 

Understanding the risk hypothesis for an audit can set the tone for your responses and the information required to support your client’s position. For lifestyle or unexplained wealth issues, documentation is usually required to explain, among other things, gifts, the use of borrowed funds, capital gains that have arisen outside the Australian tax system, the source of pre-existing offshore wealth and other non-taxable income.  

The key to managing an audit focused on unexplained wealth or lifestyle is providing information to the ATO in a digestible format, where that information is available. Where documents are not available, options include reconstructions of movements in bank accounts and third-party information or statutory declarations. During such audits, the ATO may use its formal information gathering powers, including access to information from third parties. 

Closing comments 

Failing to keep adequate records can result in penalties, interest charges, inclusion of additional assessable income and disallowed claims for deductions. This means that documentation is a legal necessity and also provides a strategic advantage. Reminding your clients at the start of a new financial year to keep those neat receipts and logs could mean the difference between a refund and a regret. Importantly, remind them to channel their inner Marie Kondo — if they enter into a tax transaction, keep a record!  

Join the conversation and share your thoughts and ideas on the onus of proof and record keeping requirements. You can provide your feedback here. 

Kind regards, 

Amanda Guruge, CTA 

Tax Controversy Partners