Abichandani and Commissioner of Taxation (Taxation)

[2019] AATA 4296

Abichandani and Commissioner of Taxation (Taxation) [2019] AATA 4296 (1 October 2019)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2018/1734; 2018/1808

Re:Vandna Abichandani

APPLICANT

Manoj Abichandani

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe,
Senior Member Linda Kirk and

Member Robert Reitano

Date:1 October 2019

Place:Sydney

The decision under review is affirmed.

....................................[sgd]....................................

Bernard J McCabe, Deputy President

CATCHWORDS

TAXATION – deemed dividends for the purposes of section 109D of the Income Tax Assessment Act – whether loans were made to a partnership by a company – whether loans were made to shareholders by a company – applicant required to prove their case –  testimony of the applicants – lack of corroboration – no substantiation – whether the applicants were reckless – applicants had an understanding of the legislative provisions – applicants had financial backgrounds – decision affirmed

LEGISLATION

Income Tax Assessment Act 1936 (Cth) ss 109C, 109D, 109N, 109RB, 109ZD and 318

Taxation Administration Act 1953 ss 284-75 and 14ZZK

CASES

Imperial Bottleshops Pty Ltd Egerton v Commissioner of Taxation (1991) FCA 276

Re Dixon ATF the Dixon Holdsworth Superannuation Fund and Federal Commissioner of Taxation [2006] ATAA 130

Yazbek v Commissioner of Taxation [2014] AATA 423

REASONS FOR DECISION

Deputy President Bernard J McCabe,
Senior Member Linda Kirk and
Member Robert Reitano

1 October 2019

INTRODUCTION

1. This case illustrates how things can go wrong when people use companies to conduct both their business activities and their private affairs.

2. There are four issues concerning the 2012 and 2013 tax years. First, is whether there were loans, and if so in what amount, to a partnership known as M.K Abichandani V. Abichandani (the Partnership) and to the shareholders, Mr and Mrs Abichandani, by Abichandani Associates Pty Ltd (the Company). If there were loans, the deemed dividend provision found in s 109D of the Income Tax Assessment Act 1936 (Cth) (the Act) is engaged so that Mr and Mrs Abichandani are required to pay income tax on the amount of any loans. Second, is whether the transfer of units in a unit trust and some payments to Mr and Mrs Abichandani engaged the deemed dividend provisions in s 109C of the Act. It too would have the consequence that Mr and Mrs Abichandani would be required to pay income tax on those amounts. Third, is whether the Commissioner’s discretion under s 109RB of the Act was triggered so that he could disregard the deemed dividends, and if so, whether that discretion should be exercised in Mr and Mrs Abichandani’s favour. It was not clear at the conclusion of the hearing whether this remained an issue for consideration, but it will be considered. Fourth, is whether the administrative penalties imposed on Mr and Mrs Abichandani were excessive and whether any of the penalty should be remitted.

   HOW IS THE EVIDENCE TO BE EVALUATED?

3. It is necessary to say a few things about how the issues are to be dealt with. This is because during the hearing it was clear that Mr Abichandani, who represented both himself and his wife, did not grapple with the curiosities that are involved in matters like this one. The Commissioner is not required to prove his case: it is Mr and Mrs Abichandani that must prove that the Commissioner was wrong, or, more accurately, excessive, in his assessment and what would have been the correct result for the Commissioner to have arrived at.

4. To prove that the Commissioner was wrong, it is necessary for a taxpayer to bring proper evidence of the things she or he wishes to prove. Oral and written testimony of the taxpayer themselves without corroboration may not be enough. This is because evidence of a taxpayer themselves is not ‘disinterested’ in the sense that it is very unlikely that a taxpayer will give evidence that hurts their own case so that on its own it will often be difficult to uphold the taxpayer’s case. That is not to say that a taxpayer’s evidence cannot be accepted, even in its entirety, but generally that evidence will, as the case law tells, be approached with significant caution.

5. A taxpayer will generally be in a far better position if independent evidence is available to corroborate their case. This is particularly so when the evidence of the taxpayer itself raises questions about its accuracy or its believability.

6. It is no answer to this kind of issue to assert ‘I am an honest person’ as that statement is as self-serving as the assertions of the individual taxpayer themselves. Nor, even if it were relevant, is it an answer to say ‘everyone does it this way’ as that is not only self-serving, but if it were the case, it would only be capable of proof by calling everyone, or at the very least, someone other than the taxpayer themselves. When no one else is called to give that evidence the common sense approach is to suggest they would not have helped much in advancing the proposition contended for.

7. As will be seen one of the important difficulties that confront Mr and Mrs Abichandani is the lack of any corroborative or independent evidence. The case they make requires acceptance of the assertions they make in the books of account they rely on and in the evidence given by Mr Abichandani himself. For the reasons we have set out below we are unable to accept those assertions.

   DID THE COMPANY MAKE A LOAN TO THE PARTNERSHIP IN THE 2012 AND 2013 FINANCIAL YEARS?

8. There is no issue that the Company loaned money to the Partnership in each of the 2011, 2012 and 2013 tax years. The total amount of the loans from the Company to the Partnership on 30 June 2012 was $384,975.32, and on 30 June 2013 was $420,993.24. So much is agreed.[1]

   [1] Letter dated 6 January 2017 from Abichandani & Associates to Australian Taxation Office Exhibit 2 T21 -216; Exhibit 2 T22 – 211.

9. The issue is what was the amount of the loan on 30 June 2011? This is because once that is determined it is possible to work out whether there was any further money loaned and, if any, in what amount in each of the two later years. The difference between the balances at the end of each year determines the amount of any loan, if any, in the previous year.

10. Mr and Mrs Abichandani say that the amount of the loan from the Company to the Partnership on 30 June 2011 was $543,825. They simply assert that was the balance at that day.[2] The Commissioner says the loan was in the amount of $218,825 on that day. The difference between Mr and Mrs Abichandani and the Commissioner is $325,000. This is, perhaps not so co-incidentally, the same amount as a loan drawn down by the Partnership from the National Australia Bank on 1 June 2011.[3]

    [2] Exhibit 1 T1 – 7; Exhibit 2 T25 – 225.

    [3] Exhibit 1 T3 – 34; Exhibit 2 T4 – 29.

11. The Partnership tax return for the year ending 30 June 2011 records that the Partnership had total liabilities of $543,825.[4] Mr and Mrs Abichandani agree that this was the total liabilities of the Partnership on 30 June 2011. Sadly, the total liabilities were not broken down in the Partnership tax return. It is not possible from the 2011 Partnership tax return to work out to whom any amount or amounts were owed.

    [4] Exhibit 3, page 5.

12. No Partnership accounts, such as trial balances, ledgers, journals or anything like that, have been produced that show how the liabilities were divided, if they were, either before or on 30 June 2011.[5] This is curious given that Mr and Mrs Abichandani who are the applicants in each matter together make up the Partnership. It can be safely presumed they would have had access to those documents. No explanation has been offered for the non-production of those documents. It suggests that had those accounts been produced they would not have been helpful to their case.

    [5] Exhibit 1 T1 – 7; Exhibit 2 T25 – 225.

13. Fortuitously, the Commissioner discovered from his audit that there was a document that showed that on 1 June 2011, the Partnership drew down a loan from the National Australia Bank in the amount of $325,000.[6] That was a bank statement from the National Australia Bank for a loan to the Partnership. That loan remained drawn down in that amount at least until 31 December 2013.[7] That loan was used for the purchase of a property by Mr and Mrs Abichandani at the Ada Street Property, Harris Park which was purchased ‘sometime in 2011 for $520,000 plus transaction costs’.[8] The property was owned by the Partnership and not by the Company.

    [6] Exhibit 1 T3 – 34; Exhibit 2 T4 – 29.

    [7] Exhibit 1 T3 – 42; Exhibit T4 – 37.

    [8] Exhibit 1 T11 – 132; Exhibit 1 T11 – 133; Exhibit 2 T12 – 126; Exhibit 2 T12 – 127.

14. Mr Abichandani and Mrs Abichandani maintain that the loan to the National Australia Bank over the property at Ada Street, Harris Park was transferred to the Company (presumably between 1 June 2011 and 30 June 2011). There is no evidence that would enable a finding other than that the loan from the National Australia Bank to the Partnership was anything other than liability of the Partnership as at 30 June 2011.

15. If that loan had been transferred to the Company it would have been a simple task to produce documents evidencing that transaction, presumably an assignment of the debt with the consent of National Australia Bank. A transfer of a loan is not a just book entry. It is a real transaction that would require, amongst other things, consent of the borrower.

16. Mr Abichandani said on the first day of the hearing that the Company had guaranteed the loan and that he would produce the guarantee document. He did not do that. He said that was because the bank would not give him a copy of the document. Aside from the fact that a guarantee is not a transfer of the loan, and that any guarantee is entirely irrelevant to the identity of the borrower and the lender, the statement he made suggesting that the Company had guaranteed the loan, serves only to confirm that the loan was in fact one between the Partnership and the National Australia Bank.

17. A copy of what was said to be the Ledger Entries Report for the year ending 30 June 2012 (2012 Ledger) belonging to the Company for the financial years ending June 2012 and the Ledger Entries Report for the year ending 30 June 2013 (2013 Ledger) record an account styled ‘Account Number 3084.19 – NAB 325K Loan (interest only) 19920 8174’. The numbers ‘19920 8174’ are the same numbers that identify the National Australia Bank loan to the Partnership for the same amount. Given the identity of the amount and of the two account numbers it is safe to assume the reference one to the other is a reference to the same thing.

18. There is no satisfactory explanation for why a loan to the Partnership is recorded in the accounts of the Company. The assertion that the loan was ‘transferred’ is not a satisfactory explanation where there is no evidence of any transfer except if the word ‘transfer’ is understood to mean ‘for bookkeeping purposes only’. Some of the other unsatisfactory aspects of the 2012 Ledger are dealt with a little later, but this is one of them.

19. That is not the end of the matter so far as the curiosity that is the 2012 Ledger is concerned. The 2012 Ledger records that there was a credit opening balance on 1 July 2011 for $325,000, but on 30 June 2012 there is a debit entry alongside the words ‘Loan Transfer to Partnership – Ada Stree (sic)’ in the amount of ‘$325,000’. That amount is the full amount of the loan. That would suggest that the loan was transferred back to the Partnership on 30 June 2012. That is contrary to Mr and Mrs Abichandani’s assertion that in the 2013 financial year the loan was a liability of the Company and not of them personally. The 2013 Ledger contains no obvious reference to the same loan. On this analysis the loan was transferred, for reasons that are not explained, back to the Partnership in the 2013 financial year.

20. It might be that the partners thought at one point in time or another that it would be convenient or useful to treat the loan for the purchase of the Ada Street Property, Harris Park as being owed by the Company to the National Australia Bank, but that does not alter the reality of the loan transaction. There is no evidence of any transaction that would support a finding that the loan was transferred to anyone at any time.

21. The most telling evidence about the liabilities of the Partnership at the end of the 2011 tax year and beyond, is the Comparative Trial Balance for the Partnership for the 2012 and 2013 tax years. It is the only accounting record of the Partnership that is in evidence and was, so it would appear, brought to light by the Commissioner’s audit.

22. That document records ‘NAB Loan – 325K- Ada Street’ with the amount ‘$325,000’ under the columns for each of the 2012 and 2013 financial years.[9] The same document separately records under the heading ‘Non-Current Liabilities’ the words ‘Abichandani and Associates Pty Ltd’ with the amount of ‘$420,993.24’ recorded for the year ending 30 June 2013 and ‘$384,975.32’ recorded for the year ending 30 June 2012.

    [9] Exhibit 1 T12 – 144; Exhibit 2 T13 – 139.

23. The Comparative Trial Balance according to the applicants and the Commissioner, accurately records that as at 30 June 2012, the Partnership had borrowed $384,975.32 from the Company and as at 30 June 2013, they had borrowed $420,993.24. The same document records that for those years the National Australia Bank Loan over the Ada Street Property was treated as something entirely separate.

24. The Comparative Trial Balance confirms that at the end of the 2012 and 2013 income tax years Mr and Mrs Abichandani were treating all of the transactions (the receipt of rent, the payment of expenses, depreciation and most importantly ownership) relevant to the Ada Street Property Harris Park as transactions relevant to the Partnership and not to the Company.[10] Mr Abichandani was unable to satisfactorily explain why the loan was shown as a liability of the Partnership in the Comparative Trial Balance and a loan of the Company in the 2012 ledger.[11]

    [10] Exhibit 1 T12 – 143; Exhibit 2 T 13 – 138.

    [11] Transcript P – 52 to P – 54.

25. There is no plausible objective evidence to support Mr Abichandani’s suggestion that that after 1 June 2011 the loan from National Australia Bank in the amount of $325,000 drawn down on 1 June 2011 became a debt owed by the Company to the National Australia Bank rather than a debt owed by the Partnership to the National Australia Bank. The evidence, the bank statements and the Comparative Trial Balance, is compelling to the contrary conclusion.

26. The loan by the National Australia Bank of $325,000 drawn down on 1 June 2011 was to the Partnership and not to the Company. That loan remained drawn down in that amount as at 30 June 2011, 30 June 2012 and 30 June 2013. In those circumstances as at 30 June 2011 there was loan from the Company to the Partnership in the sum of $218,825 and a loan from the National Australia Bank in the amount of $325,000 giving total liabilities of $543,825.

27. There is no issue that the loan from the Company to the Partnership was in the amount of $384,975.32 as at 30 June 2012 and $420,993.24 as at 30 June 2012.[12] It follows that the total amount of the loan from the Company to the Partnership increased by $166,150 in the financial year ending 30 June 2012 and by $36,018 for the financial year ending 30 June 2013.

    [12] Exhibit 1 T1 – 8 & 9; Exhibit 2 T25 – 226 & 227.

28. There is no suggestion that those loans were fully repaid in the relevant years such that would take them out of the reach of s 109D, or that the loans were in writing and that there was any rate of interest payable for the loans such that would engage the exception to s 109D found in s 109N.

29. The loans in the 2012 and 2013 tax years were dividends because of the operation of s 109D which deemed them so.

    DID THE COMPANY MAKE A LOAN TO THE SHAREHOLDERS IN THE 2012 AND 2013 TAXATION YEARS?

30. The issue is whether the Company made loans to the shareholders, Mr and Mrs Abichandani, in the 2012 and 2013 tax years. In short form the issue is whether personal expenditure by Mr and Mrs Abichandani on the Company’s account were loans, and if so, whether they were repaid, in whole or in part, in either of those years

31. Mr and Mrs Abichandani say that there should be a reconciliation of all credits and debits in the accounts of the Company so that the net position of any funds owing is determined at the end of each tax year. Mr and Mrs Abichandani claim that the Commissioner was wrong in his assessment because ‘… the ATO has only considered withdrawals for living expenses and for non concessional contributions and repayments of some personal loan (sic) and not given credit for contributing to the company for these living expenses such as Directors’ Fees/Distribution Income or proceeds from sale of Principal Place of Residence’.[13]

    [13] Letter dated 31 May 2019 to the Conference Registrar AAT.

32. To illustrate the argument Mr Abichandani suggested that the payments made by the Company for his and his wife’s groceries and other personal expenditure were directors’ fees. Mr Abichandani said that when he did the grocery shopping and paid for them using the Company credit card, he was paying himself, or the Company was paying him, directors’ fees. Aside from the fact that it is not common experience for directors’ fees to be paid at supermarket check-outs, that was not how the amounts were treated in the Company accounts. They were identified by the characterisation they bore – namely, as items of personal or household expenditure.

33. The 2012 Ledger and the 2013 Ledger both contain an account styled ‘Shareholder Loan Account’ which has a numerical code ‘3084’. It is obvious from that account that there were during the 2012 and 2013 financial years very many advances (loans) to the shareholders for the purpose of household or personal expenditure. Mr Abichandani confirmed in his evidence that this was the case when he said that when he did his grocery shopping, he paid for those groceries using the Company credit card. Those were obviously real transactions that involved advancing credit to the shareholders by the Company.

34. There are two aspects of those accounts, the 2012 and 2013 Ledgers that are important. First, other than for some minor amounts, which are likely to be refunds on grocery and similar items, there are no amounts recorded as credits that indicate repayments of the loaned amounts. There are other amounts found elsewhere in the accounts that are recorded as credits in favour of the shareholders, but these are not styled as repayments of any loan. They are credits against things like directors’ fees or other loans. Nowhere do the words ‘loan repayment’ appear in the account styled ‘Shareholders Loan Account’. Second, there is no account other than the account styled ‘Shareholders Loan Account’ that in any obvious way records any loans to the shareholders by the Company at all.

35. Mr and Mrs Abichandani say that the Commissioner failed to consider several ‘sub-accounts’ that they say are relevant to the loans to the shareholders. These ‘sub accounts’ bear numerical codes ‘3084.16’ to ‘3084.46’. It is not apparent from any of the ‘sub accounts’ that they record anything about any loan by the Company to the shareholders or any repayment of any such loan by the shareholders to the Company.

36. There is no identifiable relationship between these sub-accounts and the Shareholders Loan Account. There is certainly no evidence about the actual underlying transactions which those so called ‘sub-accounts’ are intended to evidence.

37. This concern is greater where the accounts record matters as being relevant to the Company, but they are clearly not. For example, account 3084.20 concerns a particular National Australia Bank Loan Account.[14] That account concerns the purchase of a property at Glenhaven in the name of the Partnership.[15] The bank statement[16] relevant to that loan records transactions that are said to be reflected in the 2012 and 2013 Ledger.[17] This rather suggests that transactions personal to Mr and Mrs Abichandani are recorded in the accounts of the Company. It is not obvious why that should be so. Another example arises with respect to the loan over properties in Harris Park referred to earlier. There is no satisfactory explanation as to why a Partnership transaction or transaction personal to the partners finds its way into the accounts of the Company.

    [14] Pg 187 of 282 2013 Ledger.

    [15] Exhibit 1 T11 – 132; Exhibit 2 T12 – 126.

    [16] Exhibit 1 T5 – 49-54; Exhibit 2 T6 – 44-49.

    [17] Pg 165 of 2018 2012 Ledger; pg 187 of 282 2013 Ledger.

1. The more compelling concern about the 2012 and 2013 Ledgers is whether they are evidence of anything more than the assertions made by Mr and Mrs Abichandani. There are no primary documents produced or tendered in evidence that would allow any conclusion to be drawn about the accuracy of the accounts or the information in the 2012 and 2013 Ledger. The accounts are not audited. There was no suggestion that they were independently prepared. This was in the face of the Commissioner putting Mr and Mrs Abichandani squarely on notice that the Commissioner relied upon his evidentiary advantage in s 14ZZK of the Taxation Administration Act 1953 (Cth)[18] and required strict proof of the underlying transactions.[19]

   [18] Respondent’s Statement of Facts, Issues and Contentions at [1].

   [19] Respondent’s Outline of Submissions at [10].

2. In ordinary circumstances it would be difficult to rely upon Mr Abichandani’s assertions alone simply because his self-serving statements need to be examined carefully and treated with caution.[20] Here there is not only a lack of corroborative evidence and a lack of explanation for the failure to produce primary records, but also a complete lack of any explanation for why matters personal to the partners have been incorporated into the Company accounts.

   [20] Imperial Bottleshops Pty Ltd Egerton v Commissioner of Taxation (1991) FCA 276 at [31].

3. Further, Mr Abichandani’s evidence was in many respects unsatisfactory. His inability to deal directly and responsively to questions asked of him, as well as his unease at dealing with discrepancies in his evidence and in the accounts, make it difficult to accept his evidence in the absence of any corroboration.

4. His evidence about his letter to the Australian Taxation Office of 31 July 2017 illustrates why in the absence of corroboration we would not accept his evidence or the accuracy of the 2012 and 2013 Ledgers in so far as they are said to evidence transactions. In that letter he said “On 1^st July 2013 Div 7A loan agreement was drawn up for $400,000…”.[21] Likewise, he claimed in the letter of 31 July 2017 that “The company also paid fully franked dividends of ‘$488,398 on 1^st July 2013 to shareholders”. Yet in his evidence he was emphatic that these things had both been done after the audit (which was in 2016) and, at the same time, that the transactions had not been back dated. In short, he saw no difficulty with ‘creating’ a loan agreement and transaction in 2016 or 2017 that were both dated 1 July 2013.

   [21] Exhibit 1 T24 – 235; Exhibit 2 T25 – 230.

5. Absent corroboration and production of primary records demonstrating that the transactions in the 2012 and 2013 Ledgers that Mr and Mrs Abichandani rely on, we would not accept the 2012 and 2013 Ledgers as evidence of transactions. In the same way we would reject his self-serving evidence, in the absence of corroboration, that the Shareholders Loan Account and other accounts identified by Mr Abichandani all bore some relationship one to the other having regard to a common theme of ‘shareholders loans’. The titles of the accounts or ‘sub-accounts’ do not support that conclusion.

6. In any event, much of the answer to Mr and Mrs Abichandani’s case is to be found in s 109D itself. Section 109D applies where a private company ‘makes a loan to the entity during the current year’[22] and ‘the loan is not fully repaid by the end of the year’.[23] The object of the section is ‘the loan’. It is engaged once ‘the loan’ is not fully repaid. That this is so is confirmed by s 109D(2) which refers to the amount of the dividend as being taken to be ‘the amount of the loan that has not been repaid at the end of the current year…’.

   [22] ss 109D(1)(a).

   [23] ss 109D(1)(b).

7. The section does not direct attention to an accounting exercise of assembling debits and credits to determine the net position of a shareholder’s indebtedness or contribution to a company at the end of any financial year. The section does not provide at all for the crediting of contributed amounts against loans for the purpose of calculating deemed dividends. The only amount relevant so far as the section is concerned is the amount of the loan and the amount of any repayment of the loan. A shareholder’s equity or contribution to a company is entirely irrelevant to the exercise required under s 109D.

8. The section directs attention to ‘loans’ as they are defined in s 109D(3) and the repayment of those loans as referred to in s 109D(2). The amounts used to pay for personal items were advances of money or the provision of credit in the language of s 109(3). They were not ‘directors’ fees’ either at the time Mr and Mrs Abichandani did their shopping or, in fact, at any time.

9. The word ‘repaid’ is also an ordinary English word and refers to the paying back of monies that have been borrowed. It is necessary then to look at whether there is anything in the accounts that suggests any of the advances made for the purchase of groceries and personal items have been repaid to the Company by the shareholders.

10. If the amounts deposited into the Company accounts such as ‘3084.33 Sale of Tax Practice’ or ‘3084.29 Directors Fees’ were intended to be reductions or repayments of the loan made to the shareholders, there is no reason for the sums to remain in those accounts. They were not applied in reduction of the Shareholders Loan Account. It would have been a remarkably simple task for the accounts, ‘Shareholders Loan Account’, to have reflected any repayment by providing a credit for amounts repaid if the intention were to repay the loan(s).

11. There were no amounts repaid by the shareholders in reduction of their loan account in the 2012 and 2013 years. True it is, on the face of the 2012 and 2013 Ledgers that the shareholders made contributions to the Company in those years. Those amounts were not repayments of the loans to them any more than an amount held in a bank account by a depositor into a savings account is a repayment of that depositor’s home loan with the same bank. The suggestion to the contrary is fanciful.

12. In the view we take, the amounts referred to in the numbered accounts 3084.16 to 3084.34 do not evidence real transactions. If they did we do not consider, in the absence of corroboration by witness evidence or by documents, that there is sufficient to persuade us that the accounts in question in any way evidence repayments of any of the loaned amounts.

13. Using the opening and closing balances from the Shareholders Loan Account it is possible to determine that the amount loaned to the shareholders in 2012 was $106, 512 and in 2013 $80,350. The Commissioner was correct to treat those amounts as deemed dividends under s 109D.

    DID THE COMPANY PAY MONEY TO AN ASSOCIATED ENTITY

14. In an email dated 18 March 2016 to the Commissioner, Mr and Mrs Abichandani advised him that they had made non-concessional contributions to their self-managed superannuation fund. These were by way of transfer of units in a unit trust which were valued at $68,370 to their self-managed super fund.

15. Mr Abichandani claimed that this amount should not be treated as a deemed dividend because they were not amounts paid in cash and they were transfers to a self-managed super fund. Mr Abichandani claimed that the transfer of the units should have been treated in the process he contended for in relation to the netting out of various accounts referred to above.

16. Section 109C(3) makes clear that for the purpose of that section a transfer of property is to be regarded as a payment. Sections 109ZD and 318(1)(d) of the Act make clear that an associate includes the trustee of a trust under which there is a benefit to the shareholder. Once those two definitions are met, the transaction is one that is the object of the section and nothing else in the accounts can operate to change that.

17. Section 109C applied to the transfer of the units in the unit trust. Whatever may have been provided for in other parts of the accounts, the process of netting off credits and debits could not operate to deprive transfer of the units in the trust as being one within the reach of s 109C(3). This serves again to confirm that the approach contended for by Mr Abichandani has no place in s 109C (or 109D).

18. The transfer of the units in the unit trust were payments that were caught by the operation of s 109C. They were therefore deemed dividends. The transfer to the unit trust was properly treated a payment of a dividend.

19. The Commissioner also identified two payments to Mr and Mrs Abichandani by the Company that were made to them on 30 April 2013 and 9 May 2103 in the amounts of $20,000 and $10,000 respectively. Again once these payments were made to them by the Company whether in cash or to their joint bank account they were caught by s 109C. There is nothing in the section that would permit the offsetting of the amount paid in the manner contended for by Mr Abichandani. Section 109ZD and ss 318(1)(d) of the Act make clear that an associate includes the trustee of a trust under which there is a benefit to the shareholder.

20. These payments were deemed dividends for the purpose of 109C. The Commissioner was correct to treat them as such.

    IS THE DISCRETION UNDER S 109RB ENGAGED?

21. The issue is whether in this case the operation of Division 7A should be dispensed with because of an honest mistake or because of an inadvertent omission in the way those expressions are used in ss 109RB(1)(b) of the Act.

22. It was not clear by the time the hearing concluded whether Mr Abichandani relied on ss 109RB(1)(b), but this was later made clear in a letter to the Tribunal after the hearing had concluded.[24] We have considered its application in the light of the material and the references in it to reliance upon the section.[25]

    [24] Letter from Abichandani & Associates to AAT dated 3 July 2019 (noting that the Respondent was afforded an opportunity to respond to the letter but elected not to)

    [25] Exhibit 1 T24 – 235; Exhibit 1 T14 – 163; Exhibit 2 T25 – 230; Exhibit 2 T15 – 159.

23. The starting point is to identify what it is that is the claimed honest mistake or inadvertent omission. In the letter to the Commissioner dated 15 September 2016 written by the legal representatives for Mr and Mrs Abichandani, it was claimed that there was an ‘honest mistake’ or ‘inadvertent omission’ because Mr and Mrs Abichandani were busy they ‘did not turn their minds to preparing written loan agreements for the payments or loans they obtained from their company’ and that they ‘misunderstood this complex area of the law, believing that the partnership was a separate entity for the purpose of the ITAA 1936 Div 7A’.[26]

    [26] T14 – 163.

24. It should be noted that one way out of the application of s 109D is the execution of a written loan agreement containing benchmark rates.[27] No doubt this is the kind of written loan agreement to which the legal representatives were referring. It should also be noted that a partnership is in fact a separate entity for the purpose of Division 7A.[28] It is not at all clear what the mistake was in relation to the partnership because whether it was a separate entity or not does not affect the operation of Division 7A.

    [27] ss.109N.

    [28] ss.109ZD which defines ‘entity’ by reference to s 960-100 of the Income Tax Assessment Act 1997 (Cth).

25. The ‘honest mistake’, or in truth what is really an inadvertent omission, relied upon so it would seem, is a simple oversight on Mr and Mrs Abichandani’s part. This would, of course, carry with it some knowledge of Division 7A and its operation; the implication in an oversight is that they were aware of the Division, but simply forgot about it over the period of about 2 years when they were borrowing large amounts of money from the Company as partners and as shareholders.

26. The other ‘honest mistake’ is a mistaken belief that the partnership was a separate entity for the purpose of Division 7A. This too, it follows, would require some knowledge of the existence of Division 7A. But again, whether or not the partnership was or was not a separate entity matters not for the application of Division 7A and, in fact, the partnership was a separate entity for the purpose of the Division in any event.

27. One serious difficulty that confronts the submission that what happened was an honest mistake or inadvertent omission of the kinds referred to is the fact that Mr and Mrs Abichandani are taxation agents and accountants of very many years standing. Another is that they both had some involvement in a company called Deed Dot Com Dot Au Pty Ltd that had, rather astonishingly, as part of its business the marketing of, amongst other things, ‘Division 7A loan agreements’.

28. The circumstance that presents is of two experienced tax agents and accountants who, both by reasons of their lawyer’s letter had some knowledge of Division 7A but failed to even consider its application in what were reasonably obvious circumstances. It is impossible to accept that neither Mr and Mrs Abichandani realised that payments to them over a very long period would not be caught by Division 7A, or that it did not occur to them over such a long period that Division 7A was at least potentially in play so that they would look into its potential application.

29. But the issue does not end there. The other obstacle in the way of accepting that there was an honest mistake or inadvertent omission is that Mr Abichandani’s evidence was that he was unaware of Division 7A until he received the first letter after the Commissioner’s audit.[29] Yet his lawyers on instructions told the Commissioner the matter was one of oversight or misunderstanding, rather than ignorance.[30] In fairness, Mr Abichandani did change his evidence from having no knowledge of Division 7A to having little knowledge of it, but that probably does not assist him in having his evidence accepted on oath; rather it leaves one wondering.

    [29] Transcript P – 27.35-40.

    [30] Exhibit 1 T14 – 163; Exhibit 2 157.

30. Mr Abichandani also says he had no relevant knowledge about partnerships, having only dealt with five or so partnerships in his time as a tax agent and accountant. It is difficult to accept that an accountant and tax agent would not have even the most rudimentary understanding that a partnership was not a legal entity, and that therefore payments to the partners who were shareholders themselves might confront difficulties from Division 7A.

31. It follows from this analysis that we are not satisfied that there was an honest mistake or inadvertent omission about matters relevant to Division 7A, its operation or matters affecting its operation. In those circumstances it is unnecessary to consider whether we would exercise any discretion in Mr and Mrs Abichandani’s favour so that the operation of Division 7A could be disregarded or so that the dividends could be regarded as being franked.

    WHAT IS THE CORRECT ADMINISTRATIVE PENALTY TO BE IMPOSED?

32. Again, in relation to this issue it was not at all clear by the conclusion of the hearing whether Mr and Mrs Abichandani sought remittal of any penalty. Again, we have considered the issue because of some references in the material to it.

33. The issue is whether the Commissioner was wrong to impose an administrative penalty of 50% of the shortfall amount because he considered that the shortfall arose because of Mr and Mrs Abichandani’s recklessness in relation to the operation of a taxation law. There is no evidence as to what material Mr and Mrs Abichandani gave to their registered tax agent to engage the exception in ss 284-75(6)(b) of the Taxation Administration Act 1953 (Cth) so that issue does not arise.

34. The question of recklessness is to be considered in all the circumstances. The question is whether an ordinary person would describe the conduct as reckless; in particular the question is did the taxpayer knowing the true position and the real risks involved, simply take ‘the punt’ that she, he or they might get away with it or simply not care whether she, he or they would in fact get away with it.[31]

    [31]Yazbek v Commissioner of Taxation [2014] AATA 423 at [93] – [94]; Re Dixon ATF the Dixon Holdsworth Superannuation Fund and Federal Commissioner of Taxation [2006] ATAA 130 at [24] – [25].

35. The circumstances here involve two registered tax agents and accountants of many years standing who had a business that included the marketing of agreements under Division 7A, the very Division of the Act that is the reason for the shortfalls. The inference is there must have had some awareness of the operation of Division 7A and what follows from its operation. Mr Abichandani’s evidence that suggested otherwise has been rejected earlier in this Decision.

36. These matters are even more significant when the intermingling of personal and business expenses in corporate accounts is concerned. A reasonable person, even more so one with registered tax agent’s status and accounting qualifications, would well know that such things have rather obvious tax consequences. Added to this is the failure to record these matters properly in the relevant accounts to disentangle them.

37. Those circumstances strongly suggest that Mr and Mrs Abichandani would have understood there was a very real risk that their tax would not be correctly assessed if those matters were not properly disclosed.

38. There is little here that points against a finding of recklessness. The suggestions that Mr and Mrs Abichandani were ‘busy’ and had personal issues concerning their family does not explain why such large discrepancies in the amounts disclosed to the Commissioner arose over two income taxation years. Nor does it explain the intermingling of personal expenses with business expenses. The failure to prove relevant matters concerning the underlying transactions behind the supposed ‘set off’ amounts in the 2012 and 2013 Ledgers leads inexorably to the conclusion that the conduct in this case was reckless such as to attract the 50% shortfall penalty. The Commissioner was correct in applying that penalty in all the circumstances.

    CONCLUSION

39. The Commissioner’s decision is affirmed.

I certify that the preceding 76 (seventy -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe, Senior Member Linda Kirk and Member Robert Reitano

.....................................[sgd]...................................

Associate

Dated: 1 October 2019

Date(s) of hearing:	11 and 21 June 2019
Date final submissions received:	3 July 2019
Applicant:	In person
Counsel for the Respondent:	Ms L McGovern
Solicitors for the Respondent:	Australian Taxation Office