Alexander Lakatos and Commissioner of Taxation

[2013] AATA 712

[2013] AATA  712

Division

TAXATION APPEALS DIVISION

File Numbers

2011/5209

2011/5210
2011/5211
2011/5212

2011/5213

Re

Alexander Lakatos

APPLICANT

And

Commissioner of Taxation

RESPONDENT

DECISION

Tribunal	Senior Member Bernard J McCabe
Date	4 October 2013
Place	Brisbane

The objection decisions under review are affirmed.

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Senior Member Bernard J McCabe

CATCHWORDS

TAXATION – Goods and Services Tax – Entitlement to input tax credits – Calculation of penalty based on tax shortfall – Penalty correctly imposed – Not appropriate to remit penalty – Objection decision affirmed

LEGISLATION

A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 11-5, 11-15, 29-10, 29-70

Taxation Administration Act 1953 (Cth) s 14ZZK, Sch 1 ss 284-75, 284-90, 284-220

CASES

Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50

REASONS FOR DECISION

Senior Member Bernard J McCabe

4 October 2013

1. The applicant is a used-car dealer with a tax problem. He registered to pay Goods and Services Tax (“GST”) under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“the GST Act”). He did not sell many vehicles, but he made regular claims for input tax credits over a 51-month period. He banked the refunds he received from the Commissioner. But the Commissioner became curious. He audited the applicant’s affairs. The Commissioner concluded the applicant had a much greater liability to pay GST and a much smaller entitlement to claim input tax credits. The Commissioner identified a shortfall amount and imposed swingeing penalties.

2. The applicant originally dealt with the Commissioner through an accountant. The accountant was able to persuade the Commissioner that some of the claims for input tax credits could be substantiated. The accountant also explained how the applicant came to report a relatively low liability to pay GST: the accountant said in a letter to the Commissioner that the applicant had wrongly assumed the sales in question did not attract GST unless they were sold to commercial buyers (see exhibit one at p 133). The Commissioner reduced the amount of the shortfall and reduced the rate of administrative penalty. But the applicant was not satisfied. He dispensed with the services of his accountant and criticised some of the figures that had been provided to the respondent. At the hearing, he resiled from the apparent concession about the liability to GST, arguing the Commissioner was wrong to calculate the amount of GST with respect to the sale price of the vehicles because the vehicles were sold on consignment.

   SECTION 14ZZK OF THE TAXATION ADMINISTRATION ACT 1953 (CTH)

3. Section 14ZZK of the Taxation Administration Act 1953 (Cth) (“the Administration Act”) should be mentioned at the outset for two reasons. The first reason relates to the grounds of objection. Mr Ó Seighin, for the Commissioner, explained there was some doubt over whether the applicant’s original objection had squarely addressed the question of penalty and remission even though those issues were obviously an important part of the applicant’s concern. To remove doubt, I gave leave under s 14ZZK(a) of the Administration Act for the applicant to extend his grounds of objection to the question of penalty and remission. The second reason for mentioning s 14ZZK relates to the burden of proof. Section 14ZZK(b) imposes an evidentiary burden on an applicant. Where the Commissioner makes an assessment in a case like this, the applicant must prove the assessment is excessive or should have been made differently. As a practical matter, it is not enough for the applicant to establish the Commissioner is wrong; the assessment will often be wrong, because the Commissioner may not be aware of all the relevant information. The applicant must go further and offer an explanation that is right, or more nearly right, than the explanation offered by the Commissioner. That is fair enough, because the applicant is presumably best placed to know about his own affairs and establish the true position.

   THE AMOUNT IN DISPUTE

4. The dispute relates to the period 1 July 2006 through 30 September 2010 (“the relevant period”). During that time, the applicant said he was only liable to $11,288 in GST but claimed input tax credits in the amount of $178,246. He actually received a net refund of $166,958. The Commissioner says the applicant:

   ·     was not entitled to the refund of $166,958, which must be repaid;

   ·     owes an additional $16,176.66 because taxable supplies were not accounted for in the Business Activity Statements (“BASs”);

   ·     is liable to an administrative penalty at the rate of 25% on the shortfall because the shortfall came about as a result of a false or misleading statement that was the product of a failure to take reasonable care;

   ·     is liable to a 20% uplift in the penalty in light of the applicant’s poor compliance history. 

   THE CLAIMS FOR INPUT TAX CREDITS IN THE AMOUNT OF $178,246

5. I will deal firstly with the applicant’s entitlements to claims for input tax credits. Firstly, there is no serious dispute the applicant claimed input tax credits in the amount of $178,246 during the period under review. Those claims are recorded in the BASs and set out in schedules B and C to the Commissioner’s statement of facts, issues and contentions.

6. The applicant was uncooperative when asked to verify these claims in the course of cross-examination. He was also reluctant to admit he had received refunds totalling $166,958 during the relevant period. Mr Ó Seighin, for the Commissioner, took the applicant through a sample of the BASs (which are all reproduced in exhibit one) and the running balance account (in exhibit two at pp 247-283). Mr Ó Seighin also referred to the applicant’s bank statements and provided copies to the applicant of schedules B and C to the Commissioner’s statement of facts, issues and contentions.

7. The applicant suggested he did not authorise the amounts claimed in the BASs. It is unclear why the accountant would have taken it upon himself to claim different figures, but it does not matter for present purposes as the BASs were lodged on the applicant’s behalf. The evidence I have referred to clearly establishes claims totalling $178,246 were made and $166,958 was refunded as noted in schedules B and C to the Commissioner’s statement of facts, issues and contentions.

8. The applicant conceded he could not substantiate the full amount of input tax credits that were claimed. He said there was difficulty locating some invoices because of the delay. He added his accountant and bookkeeper had let him down: they lost many of the documents he provided, and he was forced to reconstruct his accounts. Even so, he said he was confident all but about $30,000 or so in claims could be substantiated.

9. The Commissioner disagreed. Mr Ó Seighin referred to schedule B to the Commissioner’s statement of facts, issues and contentions which set out a detailed analysis of the applicant’s claims for input tax credits. Copies of the source documents were included in exhibits L1-L4. I was told there were many shortcomings in the various claims. In some cases, the invoices were missing. That is a problem because a claim cannot be attributed to a particular period in the absence of a tax invoice: s 29-10(3) of the GST Act. Other invoices did not comply with the requirements of a valid invoice set out in s 29-70(1) of the GST Act. There were also instances of double counting. A number of invoices related to transactions that did not appear to have anything to do with the applicant’s business: for example, there are a number of invoices recording transactions with “Global Horse Sales” and others that relate to payments made by the applicant to a firm of solicitors who were defending his son on a criminal charge. When questioned during cross-examination about how the solicitors’ fees related to the business, the applicant explained it as a form of succession planning: he needed to keep his son out of gaol because he hoped his son would one day take over the business. It is unclear how that amounts to a creditable purpose within the meaning of s 11-15 of the GST Act, which means it is not a creditable acquisition within the meaning of s 11-5 of the GST Act.

10. The Commissioner acknowledged the applicant had a substantiated entitlement to only $88,163.61 in input tax credits. The applicant said the source documents showed he was entitled to much more, but he was unable to be specific about the amount. While it is clearly possible to quibble over what I should make of individual invoices, I am not satisfied the applicant was able to offer a superior explanation that would displace the amount the Commissioner identified as being substantiated. Given the evidentiary burden imposed under s 14ZZK(b) of the Administration Act, I must accept the Commissioner’s assessment on this point.

    THE LIABILITY TO GST

11. The applicant originally claimed his GST liability was $11,288. I have already noted his accountant conceded that claim was mistaken: the accountant said the applicant had misunderstood his obligations because he thought GST was only levied on the sale of vehicles to commercial purchasers. Mr Ó Seighin pointed out (and the accountant implicitly accepted) that is not a relevant distinction for the purposes of the GST legislation. The Commissioner totalled the value of the applicant’s sales in the relevant period and concluded he was liable to pay GST in the amount of $104,340.27.

12. At the hearing, the applicant took an unexpected tack. He said the sales were actually consignment sales. In those circumstances, he argued, GST was only applicable to the 10% commission he charged on each sale. He argued that any GST payable on the sale price should be paid by the vendor.

13. It is difficult to know what to make of this argument. The applicant did not explain how it fitted with the other evidence. I am not satisfied he has made out his criticism of the Commissioner’s assessment, but even if I were persuaded there was substance to the argument it does not change the fact there is a substantial and essentially unbridgeable gap between the applicant’s original (or revised but non-specific) claims with respect to input tax credits and the amount the Commissioner has allowed.

    IS THERE A TAX SHORTFALL?

14. The applicant originally claimed he was required to pay $11,288 in GST; the Commissioner says the applicant is really liable to pay $104,340.27. I have already explained I accept the Commissioner’s assessment must stand in this respect. I have also accepted the Commissioner’s assessment that the applicant was only entitled to claim input tax credits in the amount of $88,163.61, whereas the applicant had originally claimed $178,246 and has received $166,958. He must therefore repay the amount he was refunded and pay an additional amount of $16,176.66 being the difference between his GST liability and input tax credits. It follows the applicant has a tax shortfall of $183,134.66.

    PENALTY

15. Given I am satisfied there was a tax shortfall, I must consider whether an administrative penalty should be imposed pursuant to s 284-75(1) of Sch 1 to the Administration Act. I will say at once I am satisfied the taxation shortfall arose because the BASs were false or misleading in a material particular in that they incorrectly stated the applicant’s liability to GST and his entitlement to input tax credits.

16. The Commissioner originally imposed a penalty at the rate of 75% of the shortfall amount on the basis there was an intentional disregard of a taxation law by the applicant or his agent: s 284-90(1), item 1 of Sch 1 to the Administration Act. The Commissioner subsequently reduced the penalty to 50% (the rate applicable to recklessness on the part of the applicant or his agent as to the operation of a taxation law: s 284-90(1), item 2 of Sch 1 to the Administration Act). He subsequently reduced the rate of penalty to 25% on the basis the applicant or his agent had failed to take reasonable care to comply with a taxation law: s 284-90(1), item 3 of Sch 1 to the Administration Act.

17. Mr Ó Seighin said in his submissions that the Commissioner remained of the view that a base penalty of 25% was appropriate, although there was some uncertainty as to the basis on which the Commissioner had reached the view. Mr Ó Seighin acknowledged the Tribunal had the power to impose a different, higher rate. Given the way the evidence had unfolded, I was careful to warn the applicant that I would consider increasing the rate of the penalty on any shortfall. I offered him that explicit warning so he would have the opportunity to consider whether he wanted to withdraw his application to avoid the risk of me taking a less generous view of his conduct, or the conduct of his agent.

18. There is no doubt the applicant or his agent failed to take reasonable care in relation to the taxation laws. The applicant significantly underreported his liability to pay GST and seriously overestimated his entitlement to input tax credits in circumstances where he did not have appropriate means of substantiation. The applicant did not maintain proper records that would enable him to meet his substantiation obligations: the fact the records were entrusted to his accountant who supposedly lost them does not assist the applicant. The applicant is an experienced businessman, and he had professional advisers to assist him. No reasonable taxpayer in his position would have made those claims. But was he (or his accountant) reckless?

19. The applicant suggested his accountant acted without authority and supplied information and made representations (including the representation in the accountant’s letter in exhibit one at p 133) that were false and inexplicable. If I accept that evidence, I am satisfied it would amount to reckless conduct which would be sheeted home to the applicant. But I did not have the benefit of hearing from the accountant. I am not sure what to make of the applicant’s criticisms of the accountant. In the circumstances, I do not think I should go so far as to make a finding that the applicant or his accountant was reckless. The Commissioner’s decision on this point has not been shown to be incorrect, so it should stand.

20. I note the Commissioner increased the base penalty amount by 20% pursuant to s 284‑220(1)(c) of Sch 1 to the Administration Act. That sub-section provides the base penalty is automatically increased where the base penalty was worked out under items 1, 2 or 3 of s 284-90(1) of Sch 1 to the Administration Act and the applicant had a penalty imposed on this basis in the past. In this case, the applicant’s base penalty on the shortfall amount identified in respect of the first monthly period was calculated with reference to item 3; each subsequent period was therefore subject to an uplift. In those circumstances, the Commissioner’s decision to impose an uplift must be affirmed.

    REMISSION OF PENALTY

21. That leaves only the question of whether it is appropriate to remit the penalty, or part of it, under s 298-20(1) of Sch 1 to the Administration Act. The question of remittal was recently considered by the Full Federal Court in Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50. In that case, Griffiths J explained (at [249]):

    …the correct question which arises under s 298-20 should not be expressed in terms of “harshness”. Rather, the question is simply whether the decision-maker is satisfied having regard to the taxpayer’s particular circumstances that it is appropriate to remit penalty in whole or in part. For example, a decision-maker might determine that it is appropriate to remit penalty in whole or in part because otherwise the outcome for a particular taxpayer would be unreasonable or unjust (and therefore inappropriate), as opposed to harsh (see the observations of McHugh and Gummow JJ in Byrne v Australian Airlines Limited [1995] HCA 24; (1995) 185 CLR 410 at 465 on the different meanings of the individual words “harsh”, “unjust” and “unreasonable” in a different context concerning unfair dismissal and the collocation of those words in both legislation and an industrial award). In my view, there is no warrant for confining the otherwise broad discretion in s 298-20 to circumstances where the outcome of imposing administrative penalty would otherwise be “harsh”.

22. The applicant in this case says he has been persecuted by the Commissioner, although I do not think there is any substance to that complaint. (He referred to a previous encounter with the Commissioner which resulted in bankruptcy during the 1990s over a tax debt, but I do not think anything turns on that.) He also spoke of his attempts to establish a new business which has incurred significant losses that should be offset against his tax debts. He said he had lost around $1 million which would be deductible as business outgoings or expenses, and those deductions should be offset against his GST debts. I do not think there is anything to this argument. He added he would probably be bankrupted if he were forced to pay taxes and penalties in accordance with the Commissioner’s assessment.

23. None of those matters suggests to me that it is appropriate to remit the penalty. The only matter which was relevant to that decision was the evidence about the applicant’s health. He was treated for leukaemia in 2010 and 2011. It appears he is now in remission, and he has resumed doing business. I was not provided with any medical evidence that would persuade me it was appropriate to remit the penalty.

    CONCLUSION

24. The objection decisions under review must be affirmed.

25.       I certify that the preceding 24 (twenty -four) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe

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Associate

Dated  4 October 2013

Date of hearing	30 September 2013
Applicant	In Person
Advocate for the Respondent	Mr K. Ó Seighin
Solicitor for the Respondent	Mr A. Yeh