FCT v Liang: Full Federal Court reaffirms taxpayer burden of proof

The Full Federal Court case of Commissioner of Taxation v Liang [2025] FCAFC 4 serves as a critical illustration of the evidentiary burden taxpayers carry when disputing an assessment by the Australian Taxation Office (ATO). In essence, it is not enough to merely deny a tax liability; the taxpayer must go further and demonstrate not only that the ATO’s assessment is incorrect but also what the correct figure should be.

The case also drew attention to how deeply rooted cultural norms, particularly within Chinese communities, can complicate evidentiary requirements. Informal financial arrangements between generations, often go undocumented. In the eyes of the tax law, however, undocumented transactions are difficult to verify and may be treated as income unless proven otherwise.

The law demands that individuals retain sufficient documentation to substantiate their claims, irrespective of cultural sensitivities. While contemporaneous records are ideal, collecting corroborating evidence after the fact is still better than offering none at all.

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Case Background

The taxpayers in this matter, a married couple, controlled and benefited from three discretionary trusts. Two were involved in food businesses, while the third (the Property Trust) held real estate and derived rental income.

In the 2017 and 2018 financial years, the Property Trust received seven cash and bank cheque deposits totalling $735,825. The ATO classified these as assessable income, increasing the trust’s net income under section 97 of the Income Tax Assessment Act 1936. The couple received amended assessments and penalties for recklessness.

They objected, claiming the funds were family contributions (a mix of loans and equity injections) from their parents.

Key Legislative Framework

Under section 14ZZK of the Taxation Administration Act 1953, when a taxpayer challenges an assessment, they bear the burden of proving:

• the assessment is excessive or incorrect; and

• what the correct assessment should be.

This onus remains even if the Commissioner initiates a further appeal. Section 14ZZO mirrors these rules for Federal Court matters. The required standard of proof is on the balance of probabilities. While formal records are not strictly necessary, in reality, courts are unlikely to accept unsupported claims without corroborative documentation.

Tribunal findings:

During proceedings before the Administrative Appeals Tribunal, the couple pointed to cultural norms as the reason for a lack of documentation, including distrust of banks and familial informality around financial transactions. They also cited the passing of a parent as context for the transfers.

However, the Tribunal was not persuaded. It noted inconsistencies in their statements, differences between their testimony and financial records, and a general lack of reliability. Their evidence was described as abstract and self-serving. With no independent verification of the origin of the funds, the Tribunal applied the principles from Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276 and sided with the ATO.

Federal Court primary judge appeal:

The couple appealed to the Federal Court. The judge found that the Commissioner had conceded the trust was only involved in property investment, and that the deposits in question were not rental income. On that basis, the judge ruled the deposits could not be considered ordinary income and allowed the appeal.

Importantly, the judge noted that the failure to accept the taxpayers’ version of events did not automatically validate the ATO’s assessment. The court could still independently determine whether the assessment was excessive, particularly given the Commissioner’s concession.

Full Federal Court:

The ATO challenged the Federal Court’s decision and succeeded.

The Full Federal Court found the earlier ruling flawed. It held that the Commissioner had not formally conceded the deposits’ nature but had simply argued that the deposits’ source remained unexplained a “mystery.” Without credible evidence from the taxpayers, the burden of proof had not been met.

The Full Court reaffirmed that taxpayers must positively establish the nature of any unexplained deposits if they want to avoid having them treated as income. In the absence of acceptable evidence, the Tribunal’s conclusion that the deposits were taxable income was upheld.

Practical Implications for Taxpayers

The outcome in Liang reinforces a key principle in tax disputes: the evidentiary burden lies squarely with the taxpayer. Personal or cultural explanations do not override the need for clear, consistent documentation.

Transactions involving large sums, particularly within families, must be documented with care. Otherwise, taxpayers risk assessments being made on incomplete or incorrect assumptions, which can be difficult and costly to overturn..

Fortuno Lawyers has extensive experience acting for individuals and private enterprises in reviews, audits, and disputes with the ATO. If you wish to discuss your record-keeping or the ATO has contacted you and you want assistance, please submit an enquiry

today, or book your appointment directly through the link below.

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