Barrie Harbutt and Commissioner of Taxation
[2013] AATA 8
•11 January 2013
[2013] AATA 8
Division TAXATION APPEALS DIVISION File Number(s)
2011/3485-3487
Re
Barrie Harbutt
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 11 January 2013 Place Sydney The objection decision is affirmed.
........[sgd DP Frost].....................................................
Deputy President S E Frost
CATCHWORDS
TAXATION AND REVENUE – income tax – rental income and deductions – where tax payer is sole registered proprietor – whether net rental income can be split between husband and wife on basis the property is an asset of a tax law partnership between them – whether income received jointly – distinction between receipt and disposition of income – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1936 s 91
Income Tax Assessment Act 1997
CASES
Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149
Davis v Commissioner of Taxation [2000] FCA 44; (2000) 44 ATR 140
Jolley v Commissioner of Taxation (1989) 20 ATR 335REASONS FOR DECISION
Deputy President S E Frost
11 January 2013
INTRODUCTION
Barrie Harbutt is the registered proprietor of a commercial property in Dee Why. Over a period of time, including for the income years 2003, 2004 and 2005 inclusive (which are the years in issue in these proceedings – the “relevant years”), the property has been leased to two companies that carry on retail businesses.
Mr Harbutt lodged his income tax returns for the relevant years on the basis that the rental income derived in respect of the property was shared equally between himself and his wife. The Commissioner reviewed Mr Harbutt’s tax affairs and formed the view that the rental income from the property belonged to Mr Harbutt alone. The Commissioner made amended assessments for Mr Harbutt for each of the relevant years, attributing to him all the rental income, but also increasing his allowable deductions to 100% of the amounts incurred. Once corresponding adjustments were made to Mr Harbutt’s wife’s assessments (removing both the 50% income she had declared and the 50% deductions she had claimed), Mr Harbutt became liable to tax on the entire net rental income from the property, and Mrs Harbutt became liable to tax on none of it.
Mr Harbutt says the amended assessments are wrong. He wants the original assessments reinstated.
For the reasons that follow, I am not satisfied that the amended assessments are wrong. They are affirmed.
MR HARBUTT’S CONTENTIONS
Mr Harbutt contends that the property was the asset of a so-called “tax law partnership” between himself and his wife, on the basis that the two of them constituted “an association of persons ... in receipt of ordinary income or statutory income jointly”: Income Tax Assessment Act 1997 (“ITAA 1997”), s 995-1, definition of “partnership”. It follows, according to that contention, that the net rental income from the property could be split between the two of them. (Mr Harbutt specifically disavows any reliance on a contention that he and his wife were involved in a general law partnership: Applicant’s Statement of Facts and Contentions (“ASFC”) at [2.3] and [2.4].)
He submits (ASFC at [2.12]) that the mutual intention of himself and his wife was for the property to be a joint marital asset, held beneficially by Mr and Mrs Harbutt on a 50/50 basis. In support of that proposition he relies on the following:
·the property was purchased from joint marital funds;
·financial statements had been prepared since 1990 on the basis that the property was a jointly held asset;
·tax returns had been prepared since 1990 on the basis that the property was a jointly held asset;
·Mr and Mrs Harbutt became registered for GST as a partnership in 2000; and
·income from the property was applied for the use of both Mr and Mrs Harbutt.
THE EVIDENCE
In circumstances where a person is the registered proprietor of a rental property, receives the rental income for that property into an account in his name alone, and pays the expenses for the property from that same bank account[1], a presumption is created that the income from the property belongs to that person alone, and that any deductions are allowable to that person alone.
[1] Transcript p. 60
A statement by that person that the income is not entirely his, but is shared with someone else, is a self-serving statement which, while it should not be rejected out of hand, is to be approached critically[2] and must be subjected to careful scrutiny[3].
[2] Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149 at [82]
[3] Davis v Commissioner of Taxation [2000] FCA 44; (2000) 44 ATR 140 at [47]
If I accepted Mr Harbutt’s assertion that 50% of the income from the property belongs to his wife, then his tax liability would be significantly reduced. There would be a corresponding (although probably not equivalent) increase in Mrs Harbutt’s tax liability. That circumstance would make any evidence that Mrs Harbutt might be able to give about the existence of a tax law partnership absolutely critical. Unfortunately there is no such evidence. Mr Harbutt explained that he and his wife are currently separated. But it is not the case that they have lost contact with each other. He knows where she lives. And although she “doesn’t keep in touch too often”, he said that he had bought her a new car when she wanted one[4]. Ms Hirschhorn, who appeared for the Commissioner, asked Mr Harbutt:
MS HIRSCHHORN: Did you contact her about these proceedings at all?
MR HARBUTT: No.
MS HIRSCHHORN: Does she know about them?
MR HARBUTT: None of her business.
MS HIRSCHHORN: Right. Even though insofar as adjustments have actually affected her tax returns as well?
MR HARBUTT: Yes, she knows all that side of it, but she doesn’t know that I’m here today if that’s what you mean.
MS HIRSCHHORN: Right. So no one has told her?
MR HARBUTT: No, no.
[4] Transcript p. 72
Mr Harbutt said that the property was purchased in about 1990 with the use of funds that came from the sale of a home unit development undertaken by Mr and Mrs Harbutt in the 1970s and 1980s. It is submitted on his behalf as follows:
The oral evidence from Barrie Harbutt stated that these net proceeds were the product of a joint effort by Barrie & Mrs Harbutt to produce income throughout their married lives. It is Barrie Harbutt’s oral evidence that states that, when these funds were put into the Dee Why property, that property was a joint marital asset of both Barrie & Mrs Harbutt and that, in Barrie Harbutt’s mind, Mrs Harbutt always knew that she was entitled to half of it.
An assertion that, in Mr Harbutt’s mind, Mrs Harbutt knew what she was entitled to is a poor substitute for evidence from Mrs Harbutt herself as to her own state of mind.
Added to the lack of any evidence from Mrs Harbutt as to whether she and her husband were “in receipt of … income … jointly” from the property is the lack of any written partnership agreement between them. George Henderson, Mr Harbutt’s accountant, said that he had formed an opinion that a partnership existed for tax purposes[5], and this was despite his awareness that the property was in Mr Harbutt’s name only. He said that he had been told at one point – “by someone, I don’t know whether it was the solicitor or someone in the family” – that there was a partnership agreement, and he had asked either Mr or Mrs Harbutt if he could see it, but it had never been shown to him[6]. On the contrary, according to ASFC at [1.6], “[t]here is no partnership agreement”.
[5] Transcript p. 128
[6] Transcript p. 129
Despite the requirement in s 91 of the Income Tax Assessment Act 1936 (“ITAA 1936”), no partnership return was lodged for the relevant years. In ASFC at [2.6] it is contended that this non-lodgment was “in accordance with accepted practice”. That is a reference to a page (identified by Mr Harbutt’s representative as “Exhibit A4-1” and annexed to the Applicant’s Closing Submissions) from the ATO website which says:
Do not lodge a partnership tax return where you were not in a partnership carrying on a business and the only income derived jointly (or in common) with another person was:
·rent from a jointly owned property
·interest from a jointly held account
·dividends from jointly held shares.
In these three instances, each person shows their share of the income and expenses at the appropriate items on their own tax return.
That concession does not apply where, as here, the property is not “jointly owned”.
Mr Harbutt said that his wife was authorised to withdraw money from his bank account and that she did that regularly. However, he has not produced (as he could easily have done) any document from the bank to support his claim that Mrs Harbutt had any such authorisation. In any event, it seems to me that even if Mrs Harbutt was indeed entitled to withdraw money from Mr Harbutt’s bank account, that does not show that Mr and Mrs Harbutt were in receipt of income jointly; only that Mr Harbutt (who derived the income) chose to dispose of it by allowing Mrs Harbutt to spend it: see the discussion of the distinction between the receipt of income and its disposition in Jolley v Commissioner of Taxation (1989) 20 ATR 335 at 346.
ANALYSIS
Mr Harbutt’s case rises no higher than an assertion that the rental income, derived in relation to a property that he alone owned, and purchased with the proceeds of the sale of a previous property that he alone owned, and which income was paid into an account in his name alone, was nevertheless derived by him and his wife, as to 50% each. This assertion, which, if accepted, would reduce his tax liability but increase that of his wife, is not supported by any statement from his wife, the person most disadvantaged by its acceptance. It is not supported by evidence of any written agreement between the two people.
I am left with the impression that Mr Harbutt assumed he was in a tax law partnership with his wife (although it is unlikely that he fully understands what a tax law partnership is). It is also quite plain that Mr Henderson, the accountant, also thought that a tax law partnership existed. But on the evidence I have seen, I cannot come to the same conclusion.
Mr Harbutt has failed to satisfy me that the amended assessments are excessive, and so I must affirm the Commissioner’s objection decision.
I certify that the preceding 18 (eighteen) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost
...........[sgd].............................................................
Associate
Dated 11 January 2013
Dates of hearing 3, 4 September 2012 Date final submissions received 24 September 2012 Advocate for the Applicant Mr M Hendriks, Bentleys Counsel for the Respondent Ms M Hirschhorn Solicitor for the Respondent Mr R Pandey, ATO Legal Services Branch
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