Why Good Records Matter – A Cautionary Tale from the McPartland Case
- Josh Tilley
- Sep 23
- 3 min read
The recent Full Federal Court decision in McPartland v Commissioner of Taxation [2025] FCAFC 23 is a powerful reminder that in tax disputes, the burden of proof lies squarely with the taxpayer — not the ATO.
What Happened?
Daryl and Kathleen McPartland didn’t lodge tax returns for three years, believing their only income was from Centrelink. However, they were also directors of two companies in the motorcycle industry and had significant unexplained lifestyle spending.
The ATO reviewed their affairs and issued default assessments — estimates of income based on available data — under section 167 of the Income Tax Assessment Act 1936. The McPartlands objected, and when that failed, they appealed to the Tribunal and eventually the Full Federal Court.
They lost at every level.
Why They Lost
The McPartlands:
Didn’t lodge returns on time
Mixed personal and business finances
Couldn’t prove the source or nature of income
Tried to blame their former accountant
Argued about fairness instead of presenting solid evidence
In tax disputes, the onus of proof is reversed — you must prove the ATO’s assessments are excessive. Without records to support your position, the courts will uphold the ATO’s view.
Are Bank Statements Enough? Usually Not.
Many taxpayers believe that bank transactions are sufficient proof. They are not.
Bank statements can show that money came in or out, but not what it was for. For example:
A deposit could be income, a loan, a gift, or a return of capital — but without documentation, the ATO may treat it as taxable.
An expense might be business-related — but without an invoice, it might not be deductible.
In Mr McPartland’s case, he told the court: “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…”
That lack of clarity and documentation left the court with no choice but to uphold the ATO’s assessments.
To prove your position, you need proper supporting documents — receipts, loan agreements, contracts, or contemporaneous notes. Bank transactions are only one piece of the puzzle.
What You Should Do
Keep Proper Records — Always.
Best practice includes:
Keep both digital and physical copies – Protects against data loss and speeds up responses to ATO queries
Organise by transaction or asset – Makes audits and reviews more efficient
Retain records for at least 5 years – Some documents (like asset purchases) need to be kept even longer
Maintain contemporaneous notes – Quick memos on unusual transactions are invaluable later
Use tools like Hubdoc (free with Xero) or DEXT – Automatically match receipts to bank transactions and invoices — making your records complete, accessible, and audit-ready
Using Hubdoc or DEXT is an excellent way to ensure every transaction has supporting documentation. These tools allow you to take photos of receipts or forward invoices via email, and they’ll extract the data and attach it to the matching bank feed in Xero.
That means:
No more hunting for receipts come tax time
Your accountant has what they need
You’re better protected if the ATO ever asks questions
Separate Personal and Business Finances. Intermingling accounts makes it harder to justify claims and easier for the ATO to question everything. Even if you’re a sole trader, using dedicated business accounts is best practice.
Engage Early if Audited. If you’re contacted by the ATO, respond respectfully and honestly. Understand the audit’s focus and prepare your evidence accordingly. For lifestyle or “unexplained wealth” audits, expect to explain:
Gifts or loans received
Offshore income or assets
Non-taxable capital gains
Spending inconsistent with declared income
If records are missing, reconstructions using bank movements, third-party statements, or statutory declarations may help — but they’re no substitute for good records in the first place.
Final Thoughts
Failing to keep adequate records can lead to higher assessments, penalties, and disallowed deductions. It’s not just a matter of compliance - documentation is your strongest defence in a tax dispute.
If you’d like help reviewing your records, understanding your risks, we’re here to help.
Good records don’t just satisfy the ATO - they protect you.
