Vanuatuan matriarch’s $33m sent to brother not taxable, court rules

A taxpayer who received around $33 million over 10 years from his elder sister in Vanuatu has successfully fended off the ATO by proving the money was not taxable income but “gifts of capital”.

Rene Cheung, 80, emerged victorious in a long-running tax dispute that hinged on the nature of 99 overseas deposits from his sister Graziella Leong, owner of Au Bon Marche (ABM), a prominent Vanuatu-based supermarket chain.

The Federal Court ruled last week that the income tax assessments were “excessive” and that the ATO overlooked the family dynamics of the Cheung-Leong family unit and their cultural values.

“They were just gifts of capital voluntarily made by a loving sister who has an acute sense of family loyalty and responsibility and who has enjoyed good fortune in business for Rene, a loved brother respected for his business judgement and like sense of family loyalty and responsibility, to invest as he saw fit and to draw upon personally if he saw fit,” Justice Logan said.

“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.”

Leong and Rene are two of seven siblings. Their parents, originally from Fujian, China, settled in Vanuatu’s capital, Port Vila. After their parents died in the 1950s, they were raised by their older siblings John and Anna.

Leong married George Leong in 1961 and had three children. They inherited a small grocery that they would grow into the ABM business. In 1978, following their separation, Leong became the sole owner of ABM.

Justice Logan described Leong as “a respected, matriarchal figure in relation both to her descendants and the wider Cheung (including Leong) family”.

“In 1978, Mrs Leong was left with three young children and a business, which became solely her business, to run,” he said.

Following Leong’s divorce from her husband, he said her family “rallied around her”, with Rene assuming the role of ABM general manager.

When Rene retired in 2000, ABM had grown from a single store to the largest supermarket chain in the country. It now has six retail outlets, one wholesale operation, four fuel stations and employs around 600 employees.

Upon his retirement, Rene also took up permanent residence in Australia with his wife for their children’s education.

By that time, Leong was “frequently sending money generated by ABM to him for investment”.

The investments in Australia had begun as early as the 1970s, with Rene using an investment vehicle, Ah Pow Pty Ltd, to make purchases including a Condell Park shopping complex in 1980 and the Coogee Bay Hotel in 1991 for the Cheung-Leong family’s benefit.

But the Tax Office took issue with a series of 99 deposits totalling $32.8 million between 2005 and 2015, which was used to buy properties in the NSW suburbs of Double Bay and Narrabeen as well as Kangaroo Point in Queensland.

The ATO characterised the deposits as “income under ordinary concepts”, to which Rene objected.

In court, the ATO argued the payments were a reward to Rene for services rendered to ABM.

This was denied by Rene and Leong’s sons Andrew and Michael as witnesses.

“Rene is not the owner, it’s my mother,” Andrew told the ATO’s lawyers in cross-examination. “I’ve been going for a five couple hours now, he’s not the owner, sir, please, understand my feeling.”

Justice Logan found that “Andrew’s answers were given with considerable and obvious emotion and, to my observation, absolute and transparent honesty”.

He said that from Leong’s separation from George, “up to and including all the relevant period (and, as related above, beyond for a period), [ABM] was always her business”.

As a result, the funds sent to Rene by Leong were “not income in Rene’s hand in any sense”.

He characterised the deposits as “gifts of capital” made voluntarily by Leong as expressions of family loyalty, stemming from a long-standing practice of her entrusting family funds for investment.

“They were just her funds disposed of at her will to a brother trusted to invest them wisely and well for the wider Cheung/Leong family as, if and when occasion required, according to his value judgement but without any formal legal obligation,” he said.

He also criticised the ATO’s ignorance of family and cultural dynamics at play, calling the ATO’s objection decision an “uncritical rehearsal of cases divorced from an understanding of a family reality and a related absence, save for interest, of an income tax liability”.

“The importance in taxation administration of open-mindedness and detachment from assessment in decision-making in respect of objections cannot be over-emphasised.”