Ahmad Nassar and Commissioner of Taxation
[2014] AATA 445
•4 July 2014
[2014] AATA 445
Division TAXATION APPEALS DIVISION File Number(s)
2013/2957-2959
Re
Ahmad Nassar
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms J L Redfern, Senior Member Date 4 July 2014 Place Sydney The decisions under review are affirmed.
..............[sgd]..........................................................
Ms J L Redfern, Senior Member
CATCHWORDS
TAXATION AND REVENUE – income tax – goods and services tax – burden of proof – whether business income was understated – whether business expenses were overstated – penalty – decisions affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 7-1, 9-5, 9-40, 11-5, 11-15, 11-20, 29-5, 29-10, 29-70
Income Tax Assessment Act 1936 (Cth) ss 159J, 170
Income Tax Assessment Act 1997 (Cth) ss 6-5, 8-1, 17-15Tax Administration Act 1953 (Cth) s 14ZZK; Sch 1, ss 105-5, 105-25, 284-75, 284-80, 284-90, 298-20
CASES
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Hart v Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203
Kelly v Commissioner of Taxation [2012] FCA 423; (2012) 88 ATR 409Re Necovski and Federal Commissioner of Taxation (2009) 75 ATR 152
SECONDARY MATERIALS
Miscellaneous Taxation Ruling MT 2008/1
Practice Statement Law Administration (PS LA) 2012/5
REASONS FOR DECISION
Ms J L Redfern, Senior Member
4 July 2014
BACKGROUND
Mr Ahmad Nassar is a sole trader operating as a tiler in the Canberra and Snowy Mountains region. He has been registered for goods and services tax (GST) since 2005 and lodges business activity statements with the Commissioner of Taxation (the Commissioner) quarterly. He is married with seven dependent children.
Mr Nassar was selected by the Australian Taxation Office (ATO) for audit of his business activity statements and income tax returns for the 2010 and 2011 financial years. As a result of this audit, Mr Nassar was issued with amended assessments in respect of his income tax for the years ended 30 June 2010 and 30 June 2011 which increased his liability by $21,533.95 and amended assessments for the net amount of GST payable for the period 1 July 2009 to 30 June 2011 which increased his liability for GST payable by $7,478. The Commissioner also issued penalty notices in respect of these assessments. The assessments were issued in May and June 2012.
The basis for these amended assessments was that Mr Nassar had transferred money overseas during this period totalling $70,778 which could not be explained by the income and sales disclosed by him for the relevant period. The Commissioner attributed these funds to Mr Nassar as additional undisclosed sales and/or income.
Mr Nassar objected to the assessments and penalty notices on the grounds that these monies comprised donations he had collected from other people for distribution to needy citizens of Jordan, although he conceded he had personally paid $1,000 towards the cause in 2010 and $7,000 in 2011. He had distributed this money by transferring the funds to an intermediary in Jordan and submitted that these funds did not comprise or evidence undisclosed sales or income.
The Commissioner requested further information from Mr Nassar and, in response, Mr Nassar provided copies of invoices said to have been paid and rendered by his tiling business in the period in question. Mr Nassar also completed, at the request of the Commissioner, personal living expense questionnaires for 2010 and 2011.
In considering the objection, a delegate of the Commissioner reviewed the taxable income and deductions claimed by Mr Nassar and the net amount payable by him in respect of GST. In summary, Mr Nassar’s objections were disallowed on the basis that the disclosed joint income of Mr and Mrs Nassar could not have been sufficient to cover the family outgoings or transfers to Jordan, there was insufficient evidence to verify the donations, Mr Nassar had improperly claimed private expenses as creditable acquisitions or deductions, he could not substantiate a number of the claims for expenses and the administrative penalties were therefore appropriate.
At the hearing, the Commissioner did not contest Mr Nassar’s contention he had received donations from third parties, but nonetheless contended the assessments were not excessive. According to the Commissioner, analysis of Mr Nassar’s financial and business records supported the assessments and were consistent with the findings of the audit that Mr Nassar had failed to disclose income and had made claims for expenses that were private or could not be substantiated. While Mr Nassar conceded he failed to disclose a small number of sales invoices for 2010 and 2011, he contended he had not otherwise failed to disclose income, his claims for deductions were business related and he did not realise he needed to keep such detailed records. He did not understand how the Commissioner had calculated the claim and, in any event, he could not pay the tax and penalty claimed.
The issue for determination was whether the notices and assessments issued by the Commissioner were excessive. Mr Nassar bears the onus to establish his case. This necessarily involved a review of Mr Nassar’s business records and the financial records of Mrs Nassar. Mr Nassar was unable to explain the source of the money to fund his expenditure to my reasonable satisfaction. Nor was he able to explain the expenses claimed or the apparent inconsistencies in his records and evidence. As such, I was not satisfied the assessments were excessive and affirmed the decisions under review.
STATUTORY FRAMEWORK
The relevant legislation for consideration in this matter is A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act), the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Taxation Administration Act 1953 (Cth) (the TAA).
This legislation sets out the law relating to the imposition, assessment and collection of income and indirect tax and the administration of that law. As noted in Re Necovski and Federal Commissioner of Taxation (2009) 75 ATR 152 at 153 ([4] and [5]), the parliament has established a “self-assessment” income tax system which depends on the accuracy of the information provided by taxpayers. This applies equally to the GST regime. The Commissioner has the power to issue assessments and amended assessments in respect of income and indirect taxes. Administrative penalties may be imposed where the taxpayer, or their agent, provides inaccurate information. While a taxpayer may object to an assessment or penalty and thereafter seek a review to this tribunal or appeal to the Federal Court, the taxpayer bears the burden of proof in any proceedings.
The amended assessments and notices issued by the Commissioner relate to income tax payable by Mr Nassar for the 2010 and 2011 financial years and the net amount of GST payable during this period. There is a degree of overlap given the failure to disclose sales and to make excessive claims for expenses, as contended by the Commissioner, has an impact on both income tax and the net amount of GST payable by Mr Nassar in the relevant period.
The GST Act introduced a broad based indirect tax on the consumption of most goods and services in Australia effective from 1 July 2000, known as the “Goods and Service Tax”. This is achieved by imposing tax on supplies made by entities registered for GST (or required to be registered) but allowing those entities to offset the GST they are liable to pay on supplies they make against “input tax credits” for the GST that was included in the price they paid for their business inputs.
The central provisions underlying the GST scheme are in Chapter 2-1, Division 7 of the GST Act. Section 7-1 provides:
GST and input tax credits
(1) GST is payable on *taxable supplies and *taxable importations.
(2) Entitlements to input tax credits arise on *creditable acquisitions and *creditable importations.
For taxable supplies and creditable acquisitions, see Part 2-2.
For taxable importations and creditable importations, see Part 2-3
Section 9-40 of the GST Act provides that GST is payable on any taxable supply that is made. Section 9-5 defines a “taxable supply” as a supply for consideration where the supply is made in the course or furtherance of an enterprise and where the supplier is registered or required to be registered.
Section 11-20 of the GST Act provides that an entity is entitled to input tax credits for its creditable acquisitions. Section 11-5 defines a “creditable acquisition”. There is a creditable acquisition when: a person or entity acquires anything solely or partly for a creditable purpose; the supply is a taxable supply; there has been consideration for supply; or the person or entity is liable to provide consideration and the person or entity is registered or required to be registered, for GST. Section 11-15 defines a “creditable purpose” and provides that a person or entity acquires a thing for a creditable purpose to the extent it is acquired in carrying out an enterprise.
GST payable on a taxable supply will be attributable to the tax period in which any of the consideration is received for the supply or when an invoice is issued relating to the supply, if there is an invoice issued before the consideration is received (s 29-5 of the GST Act).
The entitlement to attribute input tax credits to creditable acquisitions is established by s 29-10. Relevantly, s 29-10(3) of the GST Act provides that input tax credits will not be attributable to a tax period unless the taxpayer holds a tax invoice for the acquisition by the end of the tax period. Section 29-70 sets out the requirements for a “tax invoice”. A tax invoice must be issued by a supplier in the approved form and must set out the ABN of the supplier, the price for the supply, the amount of the GST and enough information to enable such matters about what is being supplied and the extent to which each supply is a taxable supply to be clearly ascertained.
The ITAA 1936 and the ITAA 1997 provide for the assessment of income tax payable. Section 6-5 of the ITAA 1997 Act provides that assessable income includes the ordinary income derived directly or indirectly from all sources, whether in or outside Australia, during the income year. Income from business activities is ordinary income. Taxpayers may deduct from assessable income any loss or outgoing, to the extent that it is incurred in gaining or producing assessable income or it is necessarily incurred in carrying on business for the purpose of gaining or producing assessable income (s 8-1 of the ITAA 1997). The GST component of sales and the input tax credit component of acquisitions are excluded from the calculation of assessable income (s 17-15 ITAA 1997). Section 170(1) of the ITAA 1936 provides that the Commissioner may amend an income tax assessment within two years of giving an assessment, unless there is fraud or evasion, in which case there is no limitation period.
The TAA provides for the administration of certain taxation legislation, including the GST Act, and relevantly contains provisions concerning reviews and appeals from decisions of the Commissioner, the recovery of GST and administrative penalties and their remission. The TAA also provides, pursuant to ss 105-5 and 105-25 of Schedule 1, that the Commissioner may, at any time, make an assessment of indirect tax or amend such an assessment.
Division 284 in Schedule 1 of the TAA deals with liability for administrative penalties. Division 298 deals with the machinery provisions for the imposition and remission of penalties.
A taxpayer is liable for an administrative penalty under s 284-75 in Schedule 1 of the TAA if the taxpayer, or their agent, makes a statement to the Commissioner that is false or misleading in a material particular because of “things in it or omitted from it”.
If there is a shortfall amount, the penalty will be calculated by reference to the shortfall. Section 284-80(1) defines a “shortfall amount” as an amount by which the taxpayer’s tax liability less, or credit more, as the case may be, than it would otherwise have been if the statement were not false or misleading. Section 284-90(1) provides for a base penalty of 25% on any shortfall amount if the shortfall, or part of it, resulted from a failure by the taxpayer, or his or her agent, to take reasonable care. A penalty of 50% may be imposed where the shortfall resulted from recklessness. Where there has been intentional disregard of a taxation law, a penalty of 75% may be imposed. The Commissioner has issued a ruling about his interpretation of the concepts of “reasonable care”, “recklessness” and “intentional disregard” in Miscellaneous Taxation Ruling MT 2008/1 (MT 2008/1).
The Commissioner may remit penalties under s 298-20(1) of Schedule 1 of the TAA and has issued guidelines as set out in Practice Statement Law Administration (PS LA) 2012/5 as to when this discretion may be exercised. PS LA 2012/5 recognises that the discretion is “unfettered”, but notes as follows:
The discretion to remit penalties should be approached in a fair and reasonable way, including ensuring that prescribed rates of penalty do not cause unintended or unjust results.
Part IVC of the TAA deals with taxation objections, reviews and appeals. Where an objection is lodged with the Commissioner within the required time, the Commissioner must make an “objection decision”. If a person is dissatisfied with the Commissioner’s objection decision, the person may apply to the tribunal for review. Division 4 of Pt IVC contains provisions which modify various provisions of the Administrative Appeals Act 1975 (the AAT Act) in relation to the review of objection decisions. Of particular importance is s 14ZZK(b), which provides that the taxpayer has the burden of proving the assessment is excessive or that the decision should have been made differently.
The approach that should be taken in these matters was conveniently summarised by Besanko J in Kelly v Commissioner of Taxation [2012] FCA 423; (2012) 88 ATR 409 as follows:
[The taxpayer] bears the burden of proving that the assessment is excessive: s 14ZZO of the TAA Act. In Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, Brennan J (as his Honour then was) (with whom Mason CJ, Gaudron and McHugh JJ agreed) made the point (at 621) that the taxpayer must show that the assessment is excessive and he or she does not necessarily do that by showing that the Commissioner erred in some way. In the ordinary case, to prove an assessment is excessive means the taxpayer must prove what the correct assessment should be. Unless the parties have agreed to confine the issues to a particular point of fact or law, the Commissioner is entitled to put the taxpayer to proof and to rely on any deficiency in proof in the taxpayer’s case (see Brennan J at 624).
In considering whether a taxpayer has discharged the burden of proving that the assessment is excessive, it is relevant to note that often (as in the present case) the facts are peculiarly within the knowledge of one party (i.e. the taxpayer) and to note that a taxpayer cannot take advantage of the inadequacies of his or her own record keeping: Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87 per Latham CJ.
BACKGROUND FACTS AND EVIDENCE
Mr Nassar lodged business activity statements for the period 1 July 2009 to 30 June 2010 disclosing sales of $99,150 and purchases totalling $68,798 Based on these statements, the net amount of GST payable was assessed for this period as $4,421. Mr Nassar lodged business activity statements for the period 1 July 2010 to 30 June 2011 disclosing sales of $121,371 and purchases totalling $99,437. Based on these statements, the net amount of GST payable was assessed for this period as $2,748.
Mr Nassar lodged income tax returns for the year ended 30 June 2010 disclosing income of $90,182, deductions of $73,610, with taxable income of $16,577. His return for the year ended 30 June 2011 disclosed income of $117,974, deductions of $94,164, with taxable income of $23,819.
Mrs Nassar received benefits from Centrelink for the relevant period and her income was $33,399.20 for 2010 and $49,551.85 for 2011.
Mr Nassar was selected for audit for 2010 because the ratio of his cost of goods sold to sales reported for this year was said to be 61% which was “significantly outside the benchmark” for his industry of 12-22%. Mr Nassar was notified of the audit by letter from the ATO dated 4 October 2011. The audit was expanded to include the following year and Mr Nassar was notified of this by letter dated the 8 March 2012.
An interim audit report was provided to Mr Nassar by letter dated 3 April 2012 for his comment. Relevantly, the audit report included the following findings:
(a)The family income, being the combined total of Mr Nassar’s income and the income of Mrs Nassar, was $49,976.20 for the period 1 July 2009 to 30 June 2010. Mr Nassar transferred a total of $24,949 overseas and given the family had an annual rental expense of $11,960, there was a balance of $13,067.20 available to cover additional living expenses for six dependent children and two adults.
(b)For the following year, Mr Nassar reported taxable income of $23,819 yet transferred $45,839 overseas. While Mr Nassar stated he was acting on behalf of Canberra Muslim Youth or the Islamic Society of Belconnen for charitable purposes, the fact that funds were transferred under Mr Nassar’s name was inconsistent with this assertion.
(c)The ATO had requested an original invoice book for the period 1 July 2009 to 30 June 2011 but Mr Nassar only provided copies of invoices. The invoice numbers were not in sequence and the amount on the invoices was changed. Mr Nassar explained the broken numbering sequence was the result of him throwing away invoices when they were completed incorrectly.
(d)Having regard to the information provided, the auditor concluded that the ATO could not rely on the records provided by Mr Nassar to ascertain his true level of sales.
(e)The level of joint income reported would have been insufficient to provide for living and other expenses and the funds remitted overseas and as such, the ATO found it “impossible to have any confidence” that Mr Nassar had correctly reported all of his income.
(f)It was therefore concluded that the monies remitted overseas totalling $70,788 should be attributed as income for each of the financial years audited. Mr Nassar’s business income was increased to $115,131 for the year ended 30 June 2010 and $163,813 for the year ended 30 June 2011. This also affected the net amount of GST payable by Mr Nassar for the relevant period and he was assessed as having a shortfall of $2,494 for the 2010 and a shortfall of $4,984 for the following year. The total shortfall amount was assessed as $29,011.95.
(g)Mr Nassar was reckless in relation to the preparation of his income tax returns and business activity statements for the relevant period and therefore penalty should be assessed 50% of the shortfall amount, namely $14,505.95.
There was no evidence of any response from Mr Nassar to this letter, and by letter dated 15 May 2012, he was advised that the audit had been completed and that amended assessments in respect of Mr Nassar’s income tax and GST in respect of the periods audited would be issued.
A notice of amended assessments of the net amount payable for the period 1 July 2009 to 30 June 2010 was issued on 15 May 2012. A notice of assessments and liability to pay penalty on the shortfall was issued on 16 May 2012. Notices of amended assessment and shortfall penalty for the year ended 30 June 2011 were issued on 29 May 2012. A further notice of amended assessment was issued on 27 June 2012, disallowing a spouse offset claimed by Mr Nassar, which was not in dispute. Notices of amended assessment and shortfall penalty for the year ended 30 June 2010 were issued on 20 June 2012.
Mr Nassar objected by letter dated 14 December 2012. He provided further particulars of the funds transferred overseas together with statutory declarations from persons said to be the donors of the funds. The objection was lodged on his behalf by lawyers. The ATO requested further information from Mr Nassar including Centrelink statements, cash books, tax invoices, bank statements and documents relating to the donations claimed to have been transferred overseas by Mr Nassar as a facilitator. Mr Nassar was also asked to complete a Personal Living Expense Questionnaire for each financial year. This information was provided by Mr Nassar’s lawyers on 18 February 2013. It was noted that there was no documentation in respect of the donations paid to him such as receipts.
Mr Nassar’s objections were considered by a delegate of the Commissioner, who concluded that the assessments of the GST net amount for the periods from 1 July 2009 to 30 June 2011 were not excessive, nor were the amended assessments for the income tax liability for the years ended 30 June 2010 and 30 June 2011. Similarly, it was concluded that the assessment of penalty in respect of the shortfall amounts demonstrated recklessness and was therefore not excessive. In particular, the objection officer concluded:
(a)the invoices produced by Mr Nassar could not be relied on as a complete record of his business activities;
(b)Mr Nassar’s reported income was insufficient to cover outgoings;
(c)the explanation that the monies transferred overseas were from third party donors could not be substantiated because checks undertaken to determine the veracity of the information found either incorrect addresses or incorrect spelling of the names and surnames of the individuals who provided in the statutory declarations;
(d)review of Mr Nassar’s bank records confirm that a number of expenses were private in nature and therefore were not properly claimed as deductible expenses or as input tax credits;
(e)Mr Nassar could not provide valid tax invoices to substantiate all of his claims; and
(f)Mr Nassar had been reckless in respect of his tax affairs because he had been operating his business since 2005 yet was unable to demonstrate he had adequate controls in place to ensure his business income was correctly recorded and he was unable to provide a plausible explanation for how he funded the significant overseas funds transfers.
Mr Nassar lodged an application for review to the tribunal on 20 June 2013 and as part of the pre-hearing conferencing process, provided further information in support of his claim. This information comprised bank statements for Mr Nassar and for Mrs Nassar and invoices for purchases made by Mr Nassar during the period, including a summary of the purchases that were said to be business-related. Mr Nassar also provided statements setting out his assessment of the tax payable in respect of the 2010 and 2011 financial years. Mr Nassar accepted that he had failed to disclose $1,276 worth of sales invoices for 2010 and $6,578 for 2011, but otherwise maintained that the assessments were excessive.
Mr Nassar was not represented by a lawyer at the hearing and presented his own case. He gave evidence and was extensively cross-examined by the Commissioner’s legal representative. This matter was listed for hearing over two days but during the course of the second day of the hearing, Mr Nassar advised the tribunal he needed to leave the hearing early to return to Canberra. He did not provide any specific explanation as to why he could not remain to present his case, other than that he needed to return by the afternoon. Mr Nassar was warned his failure to proceed with the hearing and to make himself available for further cross-examination may result in the tribunal drawing negative inferences about the strength of his case. Mr Nassar said that he understood this but did not wish to remain to explain the inconsistencies in his evidence and records raised by the Commissioner in the opening oral submissions and written outline of submissions served prior to the hearing. At the conclusion of the hearing directions were made about written final submissions which were provided by the Commissioner on 28 March 2014 and by Mr Nassar, after requesting and obtaining an extension by consent, on 12 May 2014.
Mr Nassar gave evidence that he had no income other than from his tiling business. He worked alone most of the time but sometimes used subcontractors, in particular, Mr Salousa. He received cash gifts from his grandfather in the period, namely about $8,000 in early 2009 (prior to the 2010 financial year) and $3,000 in the following year. Mr Nassar said that he had provided a complete list of sales made and expenses incurred in respect of his business and details were set out in schedules provided by him prior to the hearing. These documents were admitted into evidence as “Exhibit C”. Mr Nassar said that he prepared this list by reference to his invoices. He understood that he could only claim business expenses as deductions and while he agreed that he may have included a small number of personal expenses in error, he maintained that most of the expenses claimed were business-related. He maintained two motor vehicles. One was a work van and the other was primarily used as a family car, although he used this car from time to time when he was giving quotes to customers. He did not maintain log books or records of his business-related mileage but agreed he claimed some of the expenses for the family car as deductions.
Mr Nassar said he paid the invoices for suppliers with cash but could not explain, by reference to his bank statements, the source of the cash payments given the balances in his bank accounts at the relevant time. Mr Nassar relied on hand written schedules prepared by him listing invoices rendered for the period 1 July 2009 to 30 June 2011. He said that he did not render any sales invoices over and above these invoices or receive payment for services other than as disclosed. In the questionnaires completed by Mr Nassar, he estimated his personal living expenses as just over $40,000 for the financial year ended 30 June 2010 and just over $43,000 for the year ended 30 June 2011. Relevantly, the clothing and personal care expenses for the family were estimated at only $1,250 for 2010 and $1,500 for 2011.
Mr Nassar was cross-examined about the information provided, principally in respect of the 2010 financial year. He said that he usually worked six days a week but did not work every week, depending on the availability of work. Mr Nassar was not able to estimate how many weeks or days he worked during 2010 and 2011. He was cross-examined about the days worked in respect of each invoice provided for 2010 and estimated that he worked about 112 days in respect of the services detailed in those invoices. Mr Nassar was unable to explain how he accounted for the balance of the potential working days in the year but denied he had failed to disclose sales or additional days worked.
Mr Nassar was also cross-examined about the materials required for the work undertaken for 2010. He estimated that he required about 344 bags of glue for the work invoiced. Examination of the invoices from suppliers revealed that, given the cost of the glue as estimated by Mr Nassar, he may have purchased as many as 1,620 bags of glue for 2010. Mr Nassar was questioned about this. He said he purchased other materials such as grout and angles. If adjustments were made to reduce this figure by half, the bags purchased in 2010 would have been in the vicinity of 800 bags of glue. Mr Nassar could not explain these purchases and said he did not keep invoices detailing the supplies purchased. Mr Nassar instead produced his own summaries based on running account balance invoices. It was therefore impossible to examine the detail of the purchases made. Mr Nassar said he did not realise he needed to keep these records.
Mr Nassar claimed deductions for work performed by a subcontractor, Khaled Salousa, for $4,070 during the 2010 financial year. When questioned, Mr Nassar could not identify any documents recording where he had invoiced a client for this work.
In 2011, Mr Nassar claimed deductions of over $20,000 in respect of invoices rendered by Calibre Tiling and $3,850 for an invoice rendered by Mr Salousa. It was unclear whether these invoices were included in any sales ultimately invoiced to a client. As Mr Nassar did not make himself available for questioning in respect of his claims in 2011, this issue could not be clarified.
Mr Nassar agreed that the family car was only occasionally used for business purposes, but agreed he had claimed all maintenance expenses for the car in 2010, which were in the vicinity of $1,200. Examination of the purchases claimed for 2010 revealed the purchase of a kitchen from Bunnings for $2,440.15. When questioned about this purchase, Mr Nassar could not explain the invoice or demonstrate it had been used as part of services rendered to a client.
The bank statements for Mr and Mrs Nassar for the period 1 July to 30 September 2009 revealed that personal outgoings, excluding business expenses, of approximately $37,000. A review of the bank statements for the family for the balance of the 2010 financial year and the 2011 financial year reveals significant personal outgoings. The Commissioner contended the outgoings for the first quarter of 2009 were representative of the family’s personal spending for 2010 and 2011. Mr Nassar denied this but did not give evidence or provide any analysis about these outgoings. I was therefore satisfied by the available evidence that it was more likely than not that personal outgoings for the Nassar family for 2010 and 2011 exceeded the personal expenses estimated by Mr Nassar in the questionnaires provided to the ATO as part of the objection process.
In written submissions provided by Mr Nassar after the hearing, he stated that he did not understand the basis for the assessments and amended assessments made by the Commissioner, the supplies claimed for deductions included other materials not just glue, he denied that the expenses referred to by the Commissioner in their written submissions were representative of his personal outgoings for 2010 and 2011 and denied claiming deductions for the family car for all expenses, such as services. Mr Nassar stated that he had clarified every detail to the best of his knowledge and provided all relevant documents and receipts in his possession. He could not pay the money now claimed by the Commissioner.
CONSIDERATION
Were the assessments and amended assessments excessive?
This question turned on the critical issue of whether Mr Nassar was able to establish that his taxable income and net amount for GST payable for 2010 and 2011 did not include the additional amounts assessed by the Commissioner and were therefore excessive. It is not enough for Mr Nassar to challenge the assessments on the grounds that he does not understand how they have been calculated. As noted in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623, citing Kitto J in George v Federal Commissioner of Taxation (1952) 86 CLR 183, to discharge the burden of proving that an assessment is excessive the taxpayer must:
... necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source of taxable income to the amount of the assessment.
As contended by the Commissioner, in practical terms Mr Nassar must satisfy me, on the balance of probabilities, that he did not have taxable income of $41,526 for the financial year ended 30 June 2010 and that he did not have taxable income of $69,658 for the financial year ended 30 June 2011. Mr Nassar faces a similar task in respect of the amended assessments for the net amount for the relevant period.
I am not so satisfied for the following reasons:
(a)Mr Nassar provided copies of invoices for his sales and purchases, together with bank statements, hand written and typed schedules, in support of his case. He gave evidence and was questioned extensively in respect of the income earned and the expenses incurred for 2010. However, Mr Nassar was unable to explain his records, including inconsistencies, on a number of occasions and stated that he had not retained copies of all records relating to his purchases. As such, he was unable to establish, to my reasonable satisfaction, that certain expenses were business-related or that the invoices provided was a complete record of his sales in the relevant period.
(b)For the financial year ended 30 June 2010, the combined income for the Nassar family was approximately $57,800, which included gifts from family members and Mrs Nassar’s Centrelink payments. Mr Nassar said that the family’s personal living expenses were approximately $40,000, which does not take into account any tax liabilities. I am satisfied that the family’s expenses exceeded this amount, taking into account the personal expenses outlined in the bank statements for the relevant period and other liabilities that were likely to have been incurred which Mr Nassar did not include in the questionnaire. It is therefore unlikely that the Nassar family would have been able to fund expenses on the basis of the income disclosed by Mr Nassar for 2010.
(c)For the financial year ended 30 June 2011, the combined income for the Nassar family was approximately $76,000, which included gifts from family members and Mrs Nassar’s Centrelink payments. Mr Nassar said that the family’s personal living expenses were approximately $43,000, which does not take into account any tax liabilities. For the same reasons as outlined in respect of 2010, I am satisfied it is likely the family expenses exceeded this amount. It is questionable as to whether the Nassar family would have been able to fund all expenses on the basis of the income disclosed by Mr Nassar for 2011.
(d)I am not satisfied Mr Nassar disclosed all his income for 2010 and 2011. In this regard, I accept the submissions of the Commissioner that the evidence of the volume of supplies purchased by Mr Nassar during 2010 and 2011 is consistent with a finding that these supplies were used to earn income over and above that disclosed in his tax returns and business activity statements.
(e)For 2010, the Commissioner estimates that Mr Nassar was likely to have purchased at least 800 bags of glue which is more than double the amount he estimated was used for the work undertaken during this period. Mr Nassar did not give evidence in relation to 2011 and the Commissioner has made estimates based on his evidence for the previous year. The Commissioner contended that, based on the evidence of purchases from suppliers, it is likely Mr Nassar would have purchased approximately 750 bags of glue in the first three months of the financial year ended 30 June 2011. Even if an adjustment is made to take into account other materials purchased and the possibility Mr Nassar may have purchased bags of glue for a later period, I am satisfied that the number of bags of glue purchased for 2011 significantly exceeded the amount required to complete the work undertaken in 2011 as disclosed.
(f)I am not satisfied that Mr Nassar only worked 112 days in 2010. Mr Nassar conceded that his invoices for this year disclosed the days he spent earning income but was unable to explain how he spent the rest of his time. While I accept that days worked will depend on the availability of work, if weekends are excluded and Mr Nassar’s invoices are accepted as a true record of his income, less that 50% of Mr Nassar’s time was spent working. Mr Nassar was given the opportunity to explain this but his evidence was vague and unconvincing.
(g)I am similarly not satisfied that Mr Nassar only worked 104 days in 2011, which is the estimate made by the Commissioner based on Mr Nassar’s invoices and his evidence for 2010.
(h)There is evidence that deductions claimed by Mr Nassar for 2010 and 2011 cannot be substantiated. I accept the contentions of the Commissioner that the claims made in respect of Calibre Tiling and Mr Salousa should be rejected. Even if it could be established by Mr Nassar that these payments were properly incurred as expenses in generating income, he was not able to refer to the invoices generated in respect of these expenses. As such, there is an inference that additional income was earned relating to these expenses during the relevant period.
(i)There is evidence Mr Nassar has claimed private expenses as deductions and creditable acquisitions and has not kept adequate financial records, or tax invoices, to document his deductions and purchases.
In summary, Mr Nassar has failed to discharge his onus to establish that the additional taxable income attributed to him by the Commissioner for 2010 and 2011 should not have been so attributed. It therefore follows that Mr Nassar has also failed to discharge the onus in respect of the net amount assessed for GST for the relevant period. The only evidence provided by Mr Nassar was invoices for his sales, incomplete records of his purchases and his own evidence that these records were accurate and complete. On closer scrutiny, and testing, thorough cross-examination, I was not satisfied that his records or account was complete and accurate. There were too many unexplained inconsistencies.
I therefore find that the assessments and amended assessments for income tax and the net amount of GST payable were not excessive.
Was the penalty imposed excessive or should it be remitted?
Mr Nassar’s submissions primarily focussed on his challenge of the assessments. He did not address the question about whether the penalty was excessive, other than to submit he could not afford to pay the tax and penalties imposed. No evidence was proffered as to why this was the case or whether there were special circumstances.
The penalty imposed was 50% of the shortfall in income tax and GST liability, based on the assessment that Mr Nassar’s conduct, in failing to disclose income and/or claim deductions for expenses which could not be substantiated, demonstrated recklessness.
The Commissioner contended that the shortfall resulted from recklessness. It was submitted that the preponderance of evidence suggests Mr Nassar has failed to disclose a significant amount of his income. This is either because he did not keep appropriate or adequate records to be able to identify with certainty his sales and deductions (consistent with the principles established in Hart v Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203) or because he deliberately failed to disclose his sales income (which would evidence intentional disregard). The penalty imposed is therefore warranted and appropriate.
I accept these submissions. There was no evidence from Mr Nassar to explain why there was a shortfall, essentially because Mr Nassar did not concede this point. In the absence of any evidence to the contrary about the appropriateness of the 50% penalties imposed, I am not satisfied they are excessive.
The question therefore arises as to whether the penalties, or part thereof, should be remitted under s 298-20(1) of Schedule 1 of the TAA. As noted in PS LA 2012/5 the particular circumstances of the case should be considered to assess whether it would be unjust to maintain the penalty. The Commissioner submitted that there was no evidence of mitigating circumstances to warrant remission of penalties. There was no evidence that Mr Nassar took particular steps to prevent the shortfall occurring or that he took advice where he was unsure about his tax obligations.
I am not satisfied that the imposition of penalties would produce an unjust outcome in the circumstances of this case. Administrative penalties are an important tool in not only deterring taxpayers and their agents from making false and misleading statements, but in ensuring they take reasonable care when making statements and lodging tax returns.
Based on the evidence and having regard to these matters, I am not satisfied that the penalty assessments are excessive or that the decision not to remit the penalties should have been made differently and Mr Nassar has failed to discharge his onus to establish otherwise.
CONCLUSION
Having regard to my findings in this matter, I affirm the objection decisions under review.
I certify that the preceding 58 (fifty-eight) paragraphs are a true copy of the reasons for the decision herein of Ms J L Redfern, Senior Member ...............[sgd].........................................................
Associate
Dated 4 July 2014
Dates of hearing 20-21 March 2014 Applicant In person Solicitor for the Respondent Ms V Hammond, Review and Dispute Resolution Group, Australian Taxation Office
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