You’re likely in the spirit of giving this Christmas, but how’s this for generosity …
Graziella Leong, an elderly supermarket matriarch in Vanuatu sent her Australia-based brother nearly $33 million in gifts over 10 years.
Australia’s tax office claimed the money was “income” and wanted its cut, but a federal court judge has found otherwise, smacking down the “excessive” assessment in a major win for the wealthy retiree.
Justice John Logan recently handed down a scathing decision in the long-running tax case. He ruled that the 99 deposits made by Mrs Leong to her younger brother, Lin Jum Cheung, between 2005 and 2015 were “not income in any sense”. Instead, he described them as “just gifts of capital, voluntarily made by a loving sister” for Mr Cheung “to invest … and to draw upon personally if he saw fit.”
“There is nothing unique to this case about such a phenomenon,” added Justice Logan, who indicated it was not uncommon for parents or grandparents to share their good fortune by giving money to their children and grandchildren for a home deposit, school fees, extra clothing or treats. “[It’s] a matter of routine according to available financial resources and by reason of natural love and affection.”
Mr Cheung, also known as Rene Ah Pow, was born in Port Vila in 1944. One of seven children, Mr Cheung’s parents moved to the Pacific nation from China where they opened a small bakery.
In 1974, Mrs Leong and her then husband George Leong founded Au Bon Marche (ABM) supermarket, having inheriting the small grocery business operated by Mr Leong’s parents. But in 1978, Mr Leong abandoned his family, leaving Mrs Leong to raise their three young children and run the supermarket.
Today Au Bon Marche is the largest supermarket chain in Vanuatu. It has six stores in Port Vila, a wholesale food facility and four petrol stations.
Since the late 1970s, Mrs Leong has sent much of the money generated by the family business to her brother, Mr Cheung — who was educated at Knox Grammar School in Sydney — for investment in Australia.
In 1980, the family investment vehicle, Simmattown, purchased a Condell Park shopping centre – and then in 1991, bought the Coogee Bay Hotel in Sydney’s east.
Justice Logan said that the tenor of Mr Cheung’s evidence made him certain that – albeit in a way not legally enforceable – Mr Cheung regarded himself as under a familial duty to deploy funds “for the benefit of the wider Cheung/Leong family.”
Mr Cheung had helped his sister after her divorce by working in the business, but then retired on health grounds in 2000.
In a 2021 decision, the ATO assessed Mr Cheung’s taxable income between 2005 and 2015 as $34,753,210. The amount was largely from 99 deposits made by his sister over the period, to a total of $32,799,580.
Simmattown purchased the Coogee Bay Hotel in 1991. Picture: Supplied
In 2010 alone, Mr Cheung received nearly $11 million from his sister.
He contended his taxable income should be just $1,953,631 from interest earned over the 10 years.
Mr Cheung — represented by Australia’s most expensive lawyer, Mark Robertson KC — filed a statutory appeal with the federal court seeking to overturn the eye-watering tax bill.
The case was heard over seven days in October 2023.
Justice Logan found in Mr Cheung’s favour and ordered the ATO to issue amended assessments to reduce Mr Cheung’s taxable income for the period to $1,953,631, upon which a withholding tax of $74,591 was paid, making “all necessary and consequential adjustments to penalties and interest charges”.
Justice Logan noted in his ruling that during the relevant period, the Au Bon Marche business operated and paid tax in Vanuatu, “as it always had”, and never in Australia, and that Mrs Leong was its sole owner.
During the hearing, counsel for the ATO applied pressure to Mrs Leong’s son, Andrew, under lengthy cross-examination, suggesting Mr Cheung had an ownership stake in the Au Bon Marche business.
An Au Bon Marche supermarket in Vanuatu. Picture: Supplied
“Rene is not the owner, it’s my mother,” Andrew told the court.
“I repeat all this morning it’s my mother and myself, my brother, and my sister. We are the grassroot[s] of this property and all this business … I’ve been going for a couple hours now he’s not the owner, sir, please, understand my feeling. I don’t have a dad since 12 years old.”
Justice Logan said it would be an understatement to describe the exchange as a dramatic moment in the trial.
“Andrew’s answers were given with considerable and obvious emotion and, to my observation, absolute and transparent honesty,” he said.
“Perhaps … an oldest son (George) walking away from [cultural] responsibilities towards family and business deepened the quality of the event but … Mrs Leong was left with three young children and a business, which became solely her business, to run. From then on, and up to and including all the relevant period … it was always her business.”
Justice Logan accepted that the meaning of “income” under tax law “does not vary according to cultural or family values”. And 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.
Justice Logan comprehensively rejected every one of the ATO’s arguments.
“The Commissioner’s case that the payments were returns in respect of an ownership interest by Rene in the ABM business fails on the facts,” he said.
“So, too, does an alternative submission that they were payments in the nature of a return for services rendered. It was … also submitted that some of the payments were in the nature of rent in respect of sites in which, directly or indirectly, Rene had an interest. On the facts, none were. Neither were the payments in the nature of a pension in respect of past services to the ABM business. They were not income in Rene’s hands in any sense.”
Justice Logan concluded, “It consequentially follows that related penalties are excessive.”
Determination on costs will be made at a later date.
The ATO said it was considering the decision of the federal court and whether there are any grounds for an appeal. A tax office spokeswoman said the ATO does not propose to make any further comment on the case at this time while it’s still in the appeal period.
Good news for anyone giving or receiving this Christmas!
May you and yours have a prosperous and joyful festive season.
If you’re seeking professional financial advice, call Align Financial on (02) 9913 9995.
