Background

Commissioner of Taxation v Cheung [2026] FCAFC 75 concerned the income tax treatment of more than $30 million received by Mr Lin Jum Cheung over the 2005 to 2015 income years.

Mr Cheung was an Australian tax resident. He had not lodged tax returns for the relevant years. The Commissioner issued default assessments that included interest and deposits sourced from a Vanuatu business trading as Au Bon Marche. The Commissioner treated the deposits as ordinary income derived from Mr Cheung’s association with that business, whether through an ownership interest or services provided to it.

Mr Cheung’s case was that the deposits were not income. He contended that his sister, Mrs Graziella Leong, was the sole owner of the business and that the payments were gifts of capital made in the context of family obligations and Chinese cultural traditions. He said the funds were to be invested for the benefit of the wider family, although he was not legally obliged to use them in that way.

At first instance, Mr Cheung succeeded. The primary judge (Logan J) held that the deposits were not ordinary income and that Mr Cheung’s assessable income should be limited to the interest amounts. The Commissioner appealed to the Full Federal Court.

The Full Court allowed the appeal and restored the objection decision, subject to a $1.16 million reduction for amounts used to pay suppliers of the ABM business.

Key Issues

1. Had Mr Cheung discharged his onus under s 14ZZO of the Taxation Administration Act 1953 to prove that the assessments were excessive and what the assessments should have been?
2. Did the primary judge err by accepting the taxpayer’s factual narrative without adequately testing it against documentary evidence and inconsistencies?
3. Were the payments properly explained as capital gifts, or had Mr Cheung failed to prove that they were not ordinary income?

Key Findings

The Full Court’s starting point was the taxpayer’s onus. In default assessment and unexplained income matters, the Commissioner does not need to prove that the assessment is correct. The taxpayer must positively prove that the assessment is excessive and what the correct taxable income should be. Thus, the central question was whether the evidence sufficiently supported Mr Cheung’s contention that the payments were gifts of capital made for family reasons.

The Full Court held that the primary judge’s fact-finding process had miscarried. Although the primary judge had accepted the key witnesses as honest, the Full Court found that the evidence had not been assessed as a whole. In particular, the primary judge had not sufficiently grappled with documentary records and prior statements that contradicted or undermined the taxpayer’s narrative. Those matters included:

1. statements suggesting Mr Cheung had received a share of profits;
2. statements suggesting he had previously held an interest in the business;
3. records describing him as owner, founder or managing director; and
4. evidence about land and business structures that did not sit comfortably with the case that Mrs Leong (his sister) alone owned the business and simply gifted profits to him.

The regularity and scale of the payments also mattered. The Court noted that the payments were made over many years, often in recurring amounts, and were drawn from profits of a business to which Mr Cheung had contributed over a long period. On these facts, the proposition that more than $30 million was gifted to him, entirely unconnected with his contribution to that business, was not proved.

The Court did not say that family payments, cultural obligations or gifts can never explain a receipt. The point is narrower and more practical: where a taxpayer relies on that context to explain large, regular business-funded payments, the evidence must be coherent, consistent, corroborated and complete. The Full Court held that Mr Cheung’s evidence did not meet that standard.

Takeaways

• Large and/or recurring payments or deposits will likely attract close scrutiny from the ATO and the Courts, particularly where they are sourced from business profits.
• Without contemporaneous documentation or third-party evidence, explanations of the nature of the deposits (e.g. gifts from family members) are difficult to substantiate. If a taxpayer cannot prove what an unexplained amount represents, the ATO assessment may be difficult to displace.
• Prevention is better than reconstruction. Clear records should be kept at the time funds are transferred, especially for family, offshore or informal arrangements.
• A key feature of the unexplained deposits cases is that the burden of proof rests with the taxpayer. The assessments are difficult to challenge because the taxpayer must prove the correct position, not merely identify problems in the ATO’s approach (see also our other article on unexplained income).

For advice on ATO audits, tax disputes or unexplained income issues, contact Velocity Legal’s Tax team.