Bosanac and Commissioner of Taxation (Taxation)
[2018] AATA 472
•16 February 2018
Bosanac and Commissioner of Taxation (Taxation) [2018] AATA 472 (16 February 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2016/3419
Re:Bernadette Bosanac
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President S Boyle
Date:16 February 2018
Place:Perth
The Tribunal varies the Objection Decision to the effect that there be no increase in the base penalty under s 284-220(1)(a) of the TAA and, accordingly, the shortfall penalty is reduced from 95% to 75% for the income tax year ending 30 June 2013.
.....[sgd]...............................................................
Deputy President S Boyle
Catchwords
TAXATION – capital gain tax – amended assessment notice – tax return – incidental cost – investment property – agency – base penalty – shortfall penalty – liability – expert opinion – false or misleading statement – took steps to prevent or obstruct
Legislation
Income Tax Assessment Act 1936 (Cth) – ss 169A(3), 264
Income Tax Assessment Act 1975 (Cth) – ss 116-30, 110-25, 110-35,
Taxation Administration Act 1953 (Cth) – ss 8G, 110-35, 284-25, 284-75, 284-80, 284-90, 284-220Cases
ACCC v Emerald Ocean Pty Ltd [2002] FCA 740
Dasreef Pty Ltd v Hawcher (2011) 243 CLR 588
Federal Commissioner of Taxation v Montgomery [1999] HCA 34
Jones v Dunkel (1959) 101 CLR 298
Langlois v Gragnon 123 La. 453 (La. 1909)
Makita (Aust) Pty Ltd v Sprowles [2001] NSWCA 305
Metaxoulis v McDonald’s Australia Ltd [2015] NSWCA 95
Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157Wagner v Nichols 5 A.D. 2d 191 (N.Y. App. Div 1st Dep’t 1958)
Weyers & Anor v Federal Commissioner of Taxation (2006) ATC 4523
Secondary Materials
Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
REASONS FOR DECISION
Deputy President S Boyle
16 February 2018
THE APPLICATION
This is an application for the review of a decision (the Objection Decision) of the Respondent (the Commissioner) dated 2 May 2016 (T2 and T21) on the Applicant’s objection to the Commissioner’s amended assessment of the Applicant’s tax liability for the year ended 30 June 2013.
The Objection Decision covered a large number of objections lodged by the Applicant against the Commissioner’s assessment of the Applicant’s tax liabilities for the income tax years ending 30 June 2006 to 30 June 2013. The only element of the Objection Decision relevant to the application to the Tribunal is the Commissioner’s rejection of the Applicant’s objection to the Commissioner’s amended assessment of the Applicant’s tax liability for the year ended 30 June 2013.
The Objection Decision resulted in the issue of a notice of amended assessment dated 10 May 2016 for the income tax year ending 30 June 2013 assessing the Applicant's taxable income as $330,398 (T38).
The Applicant claims that the Objection Decision is wrong as to the cost base of a capital gains tax (CGT) calculation and in the imposition of a shortfall penalty of 95%. It is these issues that come before the Tribunal for determination.
BACKGROUND
The Applicant purchased a unit in Hardy Street, South Perth, Western Australia, (Property) as an investment on 19 June 2000, for $750,000 (T2, paragraph 254).
The Property was sold to a company called Strategic Investment & Trading Pty Ltd (SIT) for $1,600,000. Landgate records show that the transfer of the Property to SIT was registered on 14 June 2013. The Transfer was dated 10 June 2013 and was signed by the Applicant (T27).
The Sale Agreement is not in evidence. The stamp duty record on the transfer of land document lodged at Landgate (T27, page 319) shows the “Transaction Date” as 17 May 2013. The Tribunal finds that, on the balance of probabilities, on or before 17 May 2013 the Applicant signed the Sale Agreement from which the Office of State Revenue took the transaction date for the purposes of stamping the transfer document.
Purchase of the Property by SIT was financed by the Applicant by non-receipt of sale proceeds in the sum of $335,141 (Vendor Finance) (T2, paragraph 257).
The Vendor Finance was secured by a mortgage. The mortgage was not put into evidence. The mortgage was not registered, however, a caveat claiming an interest as equitable mortgagee pursuant to a mortgage dated 12 June 2013, was registered over the Property. That caveat was dated 9 July 2013 and was lodged with Landgate on 10 July 2013. It was signed by the Applicant. The Applicant is the named caveator (T20).
On 23 July 2013 a receiver and manager was appointed over SIT (T2, paragraph 268).
On 31 October 2013 the Applicant’s tax return for the income year ending 30 June 2013 became due.
On 3 March 2014 the Commissioner issued to the Applicant a final notice to lodge income tax returns for the years ended 30 June 2005 to 30 June 2013 (T29).
By notice of intention to audit dated 28 March 2014 (T30) the Commissioner notified the Applicant that the ATO was conducting an examination of the Applicant’s tax affairs for the period 1 July 2005 to 30 June 2013. The first paragraph of that notice advised that the examination would, amongst other things, include the issue of “[c]apital gains on properties sold”. The notice also asked the Applicant to complete an enclosed questionnaire and return it to the ATO by 30 April 2014. The first part of that questionnaire was headed “Capital Gains Tax questionnaire” (T30, page 327) and asked for information relating to the purchase of properties, including the date of purchase, the purchase price, whether the properties were available for rent, the sale of the properties including the date of sale and the sale price and the cost base for the properties which was identified as the “total of all costs”. The Applicant did not return the questionnaire.
On 8 August 2014 accountants Barrack & Associates forwarded tax returns for the financial years 2005 to 2013 to the Applicant with the request that she print out the files, sign them where indicated and return the signed originals to its office (Exhibit 5). Those returns identified Barrack & Associates as the Applicant’s tax agent. The Applicant accepts that she signed those returns (Second Hearing Transcript,page 56).
The returns signed by the Applicant included a declaration by the Applicant as follows (Exhibit 5):
I declare that:
·the information provided to my registered tax agent for the preparation of this tax return is true and correct; and
·I authorise my registered tax agent to lodge this tax return
On 23 September 2014 Barrack & Associates electronically lodged the Applicant’s tax returns, including the tax return for the 2013 financial year (T4) (the 2013 Return).
The 2013 Return, amongst other things, stated that:
(a)the Applicant’s taxable income was $5,300 (T4, page 159); and
(b)the Applicant did not have a capital gains tax event during the year (T4, page 168, item 18).
On 1 October 2014 the Commissioner issued the Applicant a notice of assessment for the 2013 income year (T31) by which:
(a)the Applicant’s taxable income was assessed at $5,300; and
(b)the Applicant’s tax liability was assessed as nil.
On 7 November 2014 the ATO issued a notice under s 264 of the Income Tax Assessment Act 1936 (ITAA 1936) to David Thompson of Barrack & Associates (T32) (the s 264 Notice). That notice required Mr Thompson to produce to the Deputy Commissioner of Taxation all documents and working papers relating to the preparation of the Applicant’s income tax returns during the period 1 July 2004 to 30 June 2013 showing how the Applicant’s income earning activities and deductions were worked out.
Mr Thompson failed to respond to the s 264 Notice.
On 16 June 2015 the Commissioner issued a notice of amended assessment for the year ended 30 June 2013 (T35) by which:
(a)the Applicant’s amended taxable income was assessed as $498,903, the increase, in part, being a net capital gain on the Property assessed as $377,989;
(b)the applicant’s amended assessed tax payable was $198,053.35; and
(c)a shortfall interest charge (SIC) of $18,274.85 was imposed.
On 16 June 2015 the Commissioner also issued a notice of assessment of shortfall penalty under the Taxation Administration Act 1953 (TAA) (T36) for the financial years 2011, 2012 and 2013.
The Commissioner assessed the 2013 shortfall penalty as follows (T2, paragraphs 323-324):
(a)a base penalty amount of 75% for the Applicant’s intentional disregard for her shortfall for the 2013 income year;
(b)an increase in the base penalty by 20% as, in not responding to the questionnaire referred to in paragraph 13 above, the Applicant prevented and obstructed the Commissioner from finding out about the shortfall; and
(c)that there were no grounds for a reduction or remission of penalty in the Applicant’s circumstances.
On 5 August 2015 Barrack & Associates ceased to act as the Applicant’s tax agent and at about this time the Applicant appointed PKF Mack to act as her tax agent.
On 10 and 11 August 2015 PKF Mack lodged objections to the 2013 amended assessment (T5) and the 2013 shortfall penalty (T37) (the Objections).
By the Objections the Applicant claimed that a sales commission of $124,000 was paid to SIT on 11 June 2013 in connection with the sale of the Property and that that should be taken into account in calculating the cost base for the purpose of calculating the capital gains tax (Respondent’s Statement of Facts, Issues and Contentions, paragraph 27).
In calculating the capital gain on the sale of the Property the Commissioner had included an amount of $22,500 for sales commission.
In the statement of reasons provided with the Objection Decision dated 2 May 2016 the Commissioner refused to allow the Applicant’s claim to include $124,000 in the cost base of the property for the purposes of calculating the capital gains tax (T2, paragraphs 265-271).
On 10 May 2016 the Commissioner issued to the Applicant a notice of amended assessment for the income tax year 2013 by which (T38):
(a)the Applicant’s amended taxable income was reduced from $498,903 to $330,398;
(b)the Applicant’s amended tax payable was reduced from $205,462.85 to $127,108.05; and
(c)the SIC payable was reduced by $7,331.26 from $18,274.85 to $10,943.59 because of the reduction in the shortfall amount; and
(d)because of the reduction in the shortfall amount the shortfall penalty was also reduced to an amount of $114,828.35.
On 30 June 2016 the Applicant lodged this application with the Tribunal for review of the Commissioner’s decision on the Objections (T1).
ISSUES FOR DETERMINATION
The Commissioner’s Statement of Facts, Issues and Contentions dated 12 December 2016 identified the issues as being (see page 5):
(a)Was the 2013 Amended Assessment excessive?
(b)In particular, can the Applicant establish that the capital gain from the sale of the Property included in the 2013 Amended Assessment was excessive?
(c)Was the 2013 Shortfall Penalty properly imposed:
i.as a base penalty amount of 75% for intentional disregard of a tax law by the applicant or her tax agent;
ii.with an increase of 20% of the base penalty amount?
(d)Should the 2013 Shortfall Penalty be remitted, in full or in part?
The Applicant’s Statement of Facts, Issues and Contentions dated 31 October 2016 identified the issues as being (see page 3):
21. In relation to substantive tax liabilities:
a. Whether the Respondent’s refusal to include the Commission in the Amended Assessment, affirmed in the Objection Decision, in the cost base of the CGT calculation in the year ended 30 June 2013 was correct, or whether that Commission should have been so included thereby reducing the net capital gain for the Applicant in the year ended 30 June 2013.
22. In relation to the administrative penalty assessment for the year ended 30 June 2013, affirmed in the Objection Decision:
a. The decision to impose upon the Applicant an administrative penalty under section 284-75 of the Tax Administration Act 1953 (“TAA”);
b. The decision to impose a base penalty amount of 75% of the Applicant’s shortfall amount pursuant to section 284-90 of the TAA
c. The decision to increase the Applicant’s base penalty amount by 20% pursuant to section 284-220 of the TAA; and
d. The decision not to remit all or any part of the above penalties pursuant to section 298-20 of the TAA,
in relation to:
a. The purported shortfall amount resulting from the Respondent’s refusal to include the Commission in the cost base of the CGT calculation (approximately $21,788 of the administrative penalty); and
b. The purported shortfall amount resulting from the residual CGT calculation, being a capital gain not reported in the original tax return filed by the Applicant for the year ended 30 June 2013 (approximately $92,886 of the administrative penalty).
The Applicant’s outline of submissions following the second hearing dated 20 November 2017 identified four questions for the Tribunal being (paraphrasing):
1.Is the claimed $124,000 commission part of the cost base for the Property to be taken into account in calculating the capital gain on the sale of the Property;
2.For the purposes of s 284-220 of the TAA, did the Applicant take steps to prevent or obstruct the Commissioner from finding out about the shortfall amount;
3.Was Mr Thompson acting as the Applicant’s tax agent in lodging her return for 2013 and if Mr Thompson was not acting as the Applicant’s agent, what level of culpability did the Applicant have for the purposes of s 284-90 of the TAA; and
4.Should any part of the penalty imposed under s 284-75 and s 284-220 be remitted?
Taking into account the Applicant’s and the Commissioner’s framing of the issues for determination and taking into account the evidence and issues as they emerged at the hearing, the Tribunal considers the fundamental issues for determination to be:
1.Was the claimed payment of $124,000 commission/fee an “incidental cost” for the purposes of s 110-35 of the ITAA?
2.Was Mr Thompson acting as the Applicant’s agent?
3.Was the base penalty amount under s 284-90(1)(a) of the TAA excessive?; and
4.Was the increase in the base penalty amount under s 284-220(1)(a) of the TAA justified?
THE EVIDENCE
Documentary evidence
The Tribunal had before it the following material and evidence:
·T documents and supplementary T documents (427 pages) (Exhibit 1);
·The Applicant’s Statement of Facts, Issues and Contentions dated 31 October 2016;
·The Commissioner’s Statement of Facts, Issues and Contentions dated 12 December 2016;
·Affidavit of Deborah Martens sworn 3 November 2016 (Exhibit 2);
·Affidavit of Applicant sworn 7 November 2016 (Exhibit 3);
·Affidavit of Applicant sworn 16 November 2016 (Exhibit 4);
·Transcript of hearing 28 April 2017 before Senior Member Walsh (original hearing);
·Applicant’s Outline of Submissions following original hearing, dated 19 May 2017;
·Commissioner’s submissions following original hearing, dated2 June 2017;
·Applicant’s outline of Responsive Submissions post original hearing, dated 26 June 2017 which also attached documents admitted into evidence in the hearing in November 2017 (second hearing) as Exhibit 5;
·Applicant’s Outline of Submissions post second hearing, dated 20 November 2017;
·Commissioner’s Submissions following second hearing, dated 4 December 2017;
·Applicant’s Reply Submissions to Commissioner’s Submissions following the second hearing, dated 11 December 2017; and
·Landgate Transfer form for the purchase of the Property dated 6 November 2000 (Exhibit 6).
The hearing of the Application
The application was originally heard by Senior Member Walsh on 28 April 2017 (the Original Hearing). The Applicant and Ms Martens gave evidence and were cross-examined. Senior Member Walsh resigned from the Tribunal without handing down a decision. The Applicant objected to the application being determined on the papers and transcript of the Original Hearing and the Tribunal was reconstituted to comprise Deputy President Boyle. The application came on for the second hearing before Deputy President Boyle on 1 November 2017 (the Second Hearing). Mr Fickling, instructed by Cove Legal, appeared for the Applicant and Ms Vernon with Mr Burrows appeared for the Commissioner. The same counsel appeared for the respective parties at the Original Hearing. Ms Martens and the Applicant also gave evidence and were cross-examined at the Second Hearing.
LEGISLATIVE FRAMEWORK
Subsections 110 - 25(1), (2) and (3) of the Income Tax Assessment Act 1997 (Cth) (ITAA) relevantly provide (notes omitted):
General rules about cost base
(1) The cost base of a *CGT asset consists of 5 elements.
5 elements of the cost base
(2) The first element is the total of:
(a)the money you paid, or are required to pay, in respect of *acquiring it; and
(b)the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).
(3) The second element is the *incidental costs you incurred. These costs can include giving property: see section 103-5.
Section 110.35 of the ITAA provides (notes and examples omitted):
Incidental costs
(1) There are a number of incidental costs you may have incurred. Except for the ninth, they are costs you may have incurred:
(a)to *acquire a *CGT asset; or
(b)that relate to a *CGT event.
(2) The first is remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, *agent, consultant or legal adviser. However, remuneration for professional advice about the operation of this Act is not included unless it is provided by a recognised tax adviser.
(3) The second is costs of transfer.
(4) The third is stamp duty or other similar duty.
(5) The fourth is:
(a)if you *acquired a *CGT asset – costs of advertising or marketing to find a seller; or
(b)if a *CGT event happened – costs of advertising or marketing to find a buyer.
(6) The fifth is costs relating to the making of any valuation or apportionment for the purposes of this Part or Part 3-3.
(7) The sixth is search fees relating to a *CGT asset.
(8) The seventh is the cost of a conveyancing kit (or a similar cost).
(9) The eighth is borrowing expenses (such as loan application fees and mortgage and discharge fees)
(10) The ninth is expenditure that:
(a)is incurred by the *head company of a *consolidated group or *MEC group to an entity that is not a *member of the group; and
(b)reasonably relates to a *CGT asset *held by the head company; and
(c)is incurred because of a transaction that is between members of the group.
(11) The tenth is termination or other similar fees incurred as a direct result of your ownership of a *CGT asset ending.
Is not disputed by the Applicant that the Property was a CGT asset or that the sale of the Property was a CGT event.
Section 284-75 of the Taxation Administration Act 1953 (TAA) (Schedule 1) relevantly provides as follows:
284-75 Liability to penalty
(1) You are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.
…
(6) You are not liable to an administrative penalty under subsection (1) or (4) if:
(a)you engage a *registered tax agent or BAS agent; and
(b)you give the registered tax agent or BAS agent all relevant taxation information; and
(c)the registered tax agent or BAS agent makes the statement; and
(d)the false or misleading nature of the statement did not result from:
i.intentional disregard by the registered tax agent or BAS agent of a *taxation law (other than the *Excise Acts); or
ii.recklessness by the agent as to the operation of a taxation law (other than the Excise Acts).
(7) If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph (6)(b).
Section 284-25 of the TAA provides;
284-25 Statements by agents
This Division applies to a statement made by your agent as if it had been made by you.
Section 284-80 of the TAA relevantly provides:
284-80 Shortfall amounts
(1)You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Item 1 of the table in s 284-80 is:
A *tax-related liability of yours for an accounting period, or for a *taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading.
Relevantly s 284-90 of the TAA provides:
284-90 Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table and subsections (1A) to (2), and section 284-224 if relevant:
Base penalty amount
Item
In this situation:
The base penalty amount is:
1
You have a * shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a * taxation law (other than the * Excise Acts) by you or your agent
75% of your * shortfall amount or part
2
You have a * shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a * taxation law (other than the * Excise Acts)
50% of your * shortfall amount or part
3
You have a * shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a * taxation law (other than the * Excise Acts)
25% of your * shortfall amount or part
Section 284-220(1)(a) of the TAA relevantly provides:
284-220 Increase in base penalty amount
(1) The *base penalty amount is increased by 20% if:
(a)you took steps to prevent or obstruct the Commissioner from finding out about a *shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty amount was calculated; or
(b)you:
i.became aware of such a shortfall amount after a statement had been made to the Commissioner about the relevant *tax-related liability; or
ii.became aware of the false or misleading nature of a statement made to the Commissioner or another entity after the statement had been made;
and you did not tell the Commissioner or other entity about it within a reasonable time
CONSIDERATION
Was the claimed payment of $124,000 commission/fee an “incidental cost” for the purposes of s 110-35 of the ITAA?
At the core of the dispute between the parties is the status and characterisation of the $124,000 claimed by the Applicant to have been paid to SIT. As the Applicant puts it in question 1 in her outline of submissions after the Second Hearing, “…does the Tribunal …conclude that the $124,000 paid to Strategic Investment & Trading Pty Ltd…is part of the cost base concerning the sale of 8/10 Hardy Street, South Perth?”.
The Applicant relies on a letter purporting to be from SIT’s sole director, Robert Carlshausen, dated 20 November 2015 (T16), a document purporting to be a tax invoice from SIT dated 12 June 2013 (T23) and a bank statement showing a transfer of $124,000 on 12 June 2013 to establish this cost (T3, page 151).
The Commissioner, in his submissions after the Second Hearing, puts his position in relation to the evidence put forward by the Applicant to establish the fact of and purpose of the claimed payment of $124,000 as follows;
48. The Applicant relies on a letter purporting to be from SIT's sole director, Robert Carshausen [sic] dated 20 November 2015 (Letter) and a document purporting to be a Tax Invoice from SIT dated 12 June 2013 (Invoice). The Invoice was produced for the first time after the Objection Decision and under cover of an email dated 11 May 2016 from the Applicant's accountant, Chris Roos (Mr Roos' email).
49. Even taken at face value, the documentary evidence is inadequate to meet the Applicant's burden. In particular:
(a)The Letter says only that the fee was "for assistance in the sale of the property”, without identifying what that 'assistance' was;
(b)The Invoice says only that the fee was, as to $50,000, for "consulting on sale of [the Property]”, and, as to $74,000, for "completion fee on sale of [the Property]”;
(c)There is no evidence that SIT was a surveyor, valuer, auctioneer, accountant, broker, agent or legal advisor;
(d)There is no description in the Invoice as to the nature of "consulting" services SIT claims to have provided to the Applicant or what is meant by a "completion fee";
(e)The contents of the Letter and the Invoice are inconsistent, in that the Letter refers to a single fee and the Invoice to two fees.
50. For the reasons set out in paragraphs 52 to 64 below, the Tribunal should not give any evidentiary weight to the matters relied on by the Applicant in support of the alleged payment in any event.
51. The Applicant does not claim to have any personal knowledge of the payment, and has not called any witness who might be expected to have such knowledge, namely Mr Bosanac and Mr Robert Carlshausen. This is despite having another opportunity to do so at the November hearing, after service of the Respondent's previous written submissions following the April hearing.
52. The Applicant agreed that, if anyone could tell the Tribunal any of the details about the sale of the Property, it would be Mr Bosanac. She also said that she had an amicable relationship with her husband, and believed he would have given evidence had she asked him. There is no satisfactory explanation for the failure to call Mr Bosanac and the Tribunal should infer that his evidence would not assist the Applicant's case.
53. In the Letter, Mr Carlshausen says, "I am happy to supply this information in an affidavit should this be required". Despite that, no affidavit was filed and Mr Carlshausen was not called as a witness. The Applicant said that she did not know who he was. Her failure to call him as a witness was not explained. In those circumstances, the Tribunal should infer that Mr Carlshausen's evidence would not have assisted the Applicant's case.
54. No explanation for the late production of the Invoice has been given other than Mr Roos' email which says only that, "the taxpayer felt that the evidence provided was sufficient” This appears to be a reference to the document apparently signed by Mr Carlshausen. It is entirely incredible that, if the Invoice was genuine, it would not have been produced during the objection process. It is addressed to the Applicant's home address, however, the Applicant said she had never seen that document and didn't know where it had come from. The Applicant did not give that document to PKF Mack and has no knowledge about what it represents.
55. In light of the Applicant's evidence concerning her lack of knowledge of the document, the failure to call Mr Carlshausen to identify the document, its unexplained appearance at a late stage in the consideration of the Sales Commission Claim, and the lack of detail as to how it relates to the sale of the Property, the Invoice should not be given any weight.
The Applicant seeks to run a number of arguments basically to the effect that the Tribunal must accept the authenticity of the purported tax invoice and, presumably, therefore that any payment made pursuant to that invoice, is an incidental cost. The first argument, set out in paragraph 20 of the Applicant’s closing submissions dated 20 November 2017, is that Mr Roos is somehow an expert and that therefore the Tribunal should accept his opinion on what should be accepted by the Commissioner, and therefore presumably the Tribunal, as establishing a legitimate incidental cost for the purposes of s 110-35 of the ITAA. Paragraph 20 of those submissions states:
At hearing, the Tribunal was taken to Mr Chris Roos communication to the Respondent after the date of the objection decision, where Mr Chris Roos, accountant for the Applicant, provided the copy of the tax invoice from Strategic. This was at page [301] of the T-Documents. That communication also confirmed Mr Roos’ opinion, as an accountant with expertise in such matters, that the information and documents concerning the commission payment submitted to the Respondent were already considered sufficient for the purposes of the payment being included in the cost base. It was Mr Roos’ view, as an expert, that the Respondent was already stepping outside of his ‘standard’ practices and procedures with respect to the evidence usually required in support of transactions.
That submission is rejected. For a start, it is not clear on what subject of relevance it is claimed that Mr Roos is an expert. The closest that the Applicant gets to identifying a claimed area of expertise upon which Mr Roos is supposedly qualified to give expert evidence is the reference to “Mr Roos’ opinion, as an accountant with expertise in such matters, that the information and documents concerning the commission payment submitted to the Respondent were already considered sufficient for the purposes of payment being included in the cost base. It was Mr Roos’ view, as an expert, that the Respondent was already stepping outside his “standard” practice and procedures”. The proposition seems to be that because, supposedly, Mr Roos had formed the view (of which there is no evidence) that the documents that had been provided to the Commissioner “were already considered sufficient” if the Commissioner were to adhere to what Mr Roos claims to be the Commissioner’s “standard” practice, the Commissioner, and presumably therefore this Tribunal, had to accept the tax invoice as establishing a claimable incidental cost for the purpose of s 110-35 of the ITAA. That proposition is baseless.
Secondly, there was no attempt by the Applicant to qualify Mr Roos as an expert on any legal basis and Mr Roos was not put forward as an expert either at the hearing or before the hearing. (See Makita (Aust) Pty Ltd v Sprowles [2001] NSWCA 305 (Makita) per Heydon J at paragraph [85] which sets out when expert opinion evidence is admissible.[1] This test has been adopted in most jurisdictions. See cases of Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 at [31] – [43] and Metaxoulis v McDonald’s Australia Ltd [2015] NSWCA 95 at [31] - [33]).
[1]The relevant test of when expert opinion evidence is to be admissible is set out as follows: “… it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight.”
Even if there had been some attempt by the Applicant to qualify Mr Roos as an expert, Mr Roos did not give evidence. Obviously if a party is going to seek to lead expert evidence, not only must the witness be qualified as an expert, but the other party must be given the opportunity to test the witness’s qualification as well as his evidence. Even if it were apparent, which it is not, in what area Mr Roos is supposedly an expert, the Commissioner was not given any opportunity to test his claimed qualification as an expert or to lead its own expert evidence.
Even if the supposed expert evidence is not excluded because of its failure to qualify under the test set out in Makita, it can be given no weight because of the failure to qualify Mr Roos as having any particular expertise in any relevant period. (See ACCC v Emerald Ocean Pty Ltd [2002] FCA 740 and Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157.)
The other fundamental flaw with the argument put forward in paragraph 20 of the Applicant’s closing submissions is that even if one were to accept that Mr Roos was an expert in some identifiable field of expertise relevant to the matter in issue, namely the authenticity of an invoice and whether it establishes a claimable incidental cost for a CGT event, the document identified by the Applicant as putting forward Mr Roos’ expert opinion does not express any opinion of Mr Roos. Relevantly the letter (T22) says:
The taxpayer has particular concern regarding the reasons behind your decision to disallow the $124,000 fee paid in relation to the sale of the property in the 2013. (sic) The taxpayer felt that the evidence provided was sufficient.
At its highest, the communication is purporting to convey an opinion of the taxpayer, the Applicant, who, as she conceded in cross-examination, had never seen the invoice, knew nothing about or what it was for and did not know Mr Carlshausen. Her evidence in this regard was (Second Hearing Transcript, pages 42-44);
With respect to that sale, you've said in your evidence that you didn't - sorry, I will start that again. In paragraph of your affidavit you say you were not actively involved in the sale of the Hardy Street property and you did not know any specific details about the transaction?---M'mm.
You didn't have any involvement in putting the property on the market, did you?---No.
And you didn't negotiate the sale with the purchaser?---No.
And you didn't know the purchaser, Strategic Investment and Trading Pty Ltd?---I still don't know who they are. Yes, I don't know.
If you look at the document at page 304 of that small bundle of documents that you have - sorry, it's in the large one - you, prior to the last hearing, had never seen that document before, had you? This is an invoice headed Strategic Investment and Trading Pty Ltd?---No, I haven't seen this.
You did see it at the last hearing. Do you recall?---I haven't seen it before then.
You don't know where it came from? You've actually - - -?---I'm not even familiar with that type of document. I don't know what it is.
And you didn't give it to Mr Roos, did you?---No.
Mr Roos is the accountant who is assisting to you and your husband with your tax affairs currently?---Yes. No.
If you look at page 301 of that volume, which is T document 22, see there's an email from Mr Roos?---M'mm.
And he says, in the middle of the middle paragraph:
The taxpayer felt the evidence provided was sufficient to avoid having this issue taken to the AAT. I attach a copy of the tax invoice issued to the taxpayer confirming the nature of the payment.
Just to be clear, you had nothing to do with providing that document ?---No.
to Mr Roos?---No.
…
If you could have a look at page 241 of the T documents, it's T document number 16?---M'mm.
You see that, on the face of it, appears to be a letter from Robert Carlhausen, who says he is the director and shareholder of Strategic Investment and Trading Pty Ltd. You hadn't seen that before the last hearing, had you?---No, I had not.
You don't know Mr Carlhausen, do you?---No, I don't know him.
I think you said on the last occasion the first time you had heard his name or you had seen his name was during the hearing last time?---That's correct.
You didn't ask him to give evidence?---No.
The end result is that the Applicant could give no evidence whatsoever about the authenticity of the invoice on which she critically relies and no-one who could give evidence, in particular Mr Bosanac or Mr Carlshausen, was called by the Applicant to verify the authenticity of the invoice or the reason for the claimed payment made to SIT (the purchaser of the Property) for services supposedly rendered by the purchaser to the vendor in connection with the sale of the Property.
The argument that somehow Mr Roos’ “expert evidence” that the tax invoice should have been accepted by the Commissioner as being sufficient to establish the amount supposedly paid under the invoice as being an incidental cost for the purposes of s 110-35 of the ITAA, is rejected. Mr Roos did not give evidence, let alone expert evidence. Secondly, the document relied on (T22) does not express the opinion contended by the Applicant. Thirdly, the proposition that for some reason the Commissioner must accept a document purporting to be a tax invoice as establishing an incidental cost for the purposes of the ITAA in the absence of any evidence as to the substance or veracity of the invoice or the arrangement or agreement underlying the invoice because a supposed expert says that, in his experience, the Commissioner would normally accept that as sufficient, is baseless.
The Applicant also seeks to argue that in order for the Tribunal to find that the invoice does not establish a legitimate payment of a commission by the Applicant to SIT for “consulting on sale” and payment of a “completion fee”, being the bases for the payments identified in the tax invoice (T23), the Tribunal would have to find that the Applicant has engaged in fraud (paragraph 23 of the Applicant’s closing submissions).
Not only is that a dangerous proposition for the Applicant, but it is simply wrong. As the drafter of the Applicant’s closing submissions would know, the Applicant’s own evidence identified above and at the Original Hearing was that she had nothing to do with the tax invoice; she had not even seen it before these proceedings, did not know what it was and had not even heard of Mr Carlshausen before these proceedings.
Notwithstanding that the Applicant had the opportunity in the Second Hearing to address the identified evidential deficiencies in her case after the Original Hearing by calling witnesses who could give relevant evidence, the Applicant chose not to. After the original hearing the Commissioner submitted in his written submissions dated 2 June 2017 that:
38. The Applicant does not, by the production of documents unsupported by the evidence of any person with knowledge as to the contents or creation of those documents, meet her obligation to produce credible evidence on which the Tribunal may be satisfied of the matters she is required to prove, either on the balance of probabilities or at all. In the circumstances, the Respondent has no obligation to produce evidence rebutting the validity of the Applicant’s claims.
39. For the reasons set out in paragraphs 40 to 52 below, the Tribunal should not give any evidentiary weight to the matters relied on by the Applicant in support of the alleged payment.
40. The Applicant does not claim to have any personal knowledge of the payment of the alleged sales commission and has not called any witness who might be expected to have such knowledge, namely Mr Bosanac and Mr Robert Carlshausen.
41. The Applicant agreed that, if anyone could tell the Tribunal any of the details about the sale of the Property, it would be Mr Bosanac. She also said that she had an amicable relationship with her husband, and believed he would have given evidence had she asked him. There is no satisfactory explanation for the failure to call Mr Bosanac and the Tribunal should infer that his evidence would not assist the Applicant’s case.
42. The ATO was provided, during the objection process, with a letter purported to be from the sole director at the time of SIT, Robert Carlshausen. In that letter, Mr Carlshausen says that “I am happy to supply this information in an affidavit should this be required”. Despite that, no affidavit was filed and Mr Carlshausen was not called as a witness. The Applicant said that she did not know who he was. Her failure to call him as a witness was not explained. In those circumstances, it should be presumed that Mr Carlshausen’s evidence would not have assisted the Applicant’s case, and the contents of the letter should be given no evidentiary weight.
The Commissioner’s submissions made after the Original Hearing had considerable force then. Given that the Applicant, despite a further opportunity to address the evidential hole in her case, still chose not to call the witnesses who could give evidence to substantiate the veracity of the tax invoice and the underlying arrangement or transaction supposedly evidenced by the tax invoice, those submissions are even more compelling now.
The Commissioner’s closing submissions dated 4 December 2017 also address this proposition of the Applicant and the argument by the Applicant that somehow the Commissioner bore the onus of calling witnesses to challenge the veracity of the tax invoice and the underlying transaction or arrangement claimed to be reflected by the tax invoice. In that regard the Commissioner submits:
56. With respect to the Applicant's submissions at paragraphs 6 and 23, that the Respondent has not, and could not properly without evidence, allege that the Invoice was fraudulent:
(a)The suggestion that the Respondent was required to lead evidence to prove fraud impermissibly attempts to reverse the onus of proof. The Applicant does not, by the production of inherently improbable documents, unsupported by the evidence of any person with knowledge as to the contents or creation of those documents, meet her obligation to produce credible evidence on which the Tribunal may be satisfied of the matters she is required to prove, either on the balance of probabilities or at all;
(b)The respondent does not allege that the Applicant fraudulently produced the Invoice. Her evidence, which the Respondent accepts in this respect, was that she knew nothing about the Invoice or the alleged payment to SIT; and
(c)The Respondent could not test the providence of the Invoice in cross examination, given that the only people who appear to have known anything about Invoice [sic] were not called by the Applicant.
57. With respect to the Applicant's apparent submission, at paragraphs 21 and 30, that the Applicant's failure to call the witnesses who could be expected to know something about the alleged payment to SIT, was justified because to do so would be 'waste of resources' [sic] there was no evidence of any particular difficulty or expense in calling either witness, that might provide a basis for this submission.
The Tribunal agrees with the Commissioner’s submissions. The reply submissions dated 11 December 2017 filed by the Applicant after the Second Hearing characterise the Commissioner’s submissions which set out the evidential deficiencies in the Applicant’s case, as “nit picking” and argue that the onus was on the Commissioner to put on “contrary evidence”. At paragraph 1(d) of the Applicant’s reply submissions, the claim is made that:
Fourth, as to the Sales Commission, the Commissioner, in addressing a single substantive issue and without offering any contrary evidence, takes us all the way through to page 16 of his submissions. If there was a clear and concise point why the Applicant’s prima facie evidence establishing the veracity of the sales submission should not be adopted by the Tribunal in its duty to “do over again” the objection decision of the Commissioner, the Commissioner does not have one. Rather, the Commissioner gets himself to page 16 of the submissions by nit picking We believe Gordon J has an answer to this which we present below.
The matters raised by the Commissioner as to the provenance, meaning and effect of the tax invoice are substantial and legitimate. The Commissioner invited the Tribunal to draw an adverse inference from the Applicant’s failure to call any witness who could give evidence as to the provenance, meaning and substance of the tax invoice and the existence of the arrangement to which the tax invoice related under the principles enunciated in Jones v Dunkel (1959) 101 CLR 298. The Tribunal does so.
The evidence put forward by the Applicant to establish the incidental cost was the letter from Mr Carlshausen dated 20 November 2015 (T16), the tax invoice dated 12 June 2013 (T23) and the Westpac bank statement for the joint account of the Applicant and Vlado Bosanac (T3, page 151) which indicated transfers from that account on 12 June 2013 for $112,000 and $124,000 both described as “Transfer/Replenishment by authority 120613”. As noted above the Applicant’s evidence was that she had never seen the tax invoice prior to these proceedings, she still did not know what the tax invoice was for and she had never heard of SIT or Mr Carlshausen before these proceedings. Other than the cryptic description on the tax invoice (T23) of the total of $124,000 being claimed for “Consulting on sale of 8/10 Hardy Street South Perth - $50,000” and “Completion fee on sale of 8/10 Hardy Street South Perth $74,000” nothing is known of the “consulting” supposedly provided or the basis upon which a “completion fee” was supposedly payable.
In relation to the transfers of funds identified in the bank statement (T3), which do not identify to whom the money was being transferred, the Applicant’s evidence was that she “had no knowledge of the transfers” (Second Hearing Transcript, page 45 at 15).
Notwithstanding the Applicant having over a year to provide a witness statement or affidavit from Mr Bosanac or Mr Calshausen to explain the basis for the claimed payments, what services were provided and why a “completion fee” was payable by the Applicant to the purchaser of the Property and notwithstanding that there were two hearings at which Mr Bosanac and Mr Carlshausen could have given evidence in relation to these matters, the Applicant led no such evidence.
At the hearing the Tribunal raised with counsel for the Applicant the issue of a need, or potential need, to establish some proper basis for a payment claimed to be treated as an incidental cost for the purposes of s 110-35 of the ITAA. The following exchange took place at the Second Hearing (Second Hearing Transcript, pages 13-16):
MR FICKLING: So that - those are the materials before you. Obviously the documentary materials we say are the invoice that has now been provided, the letter from Robert Carlhausen and the material in the objection decision as well as the submissions of Mr Roos. We say that is the material before you. We say on the basis of section 33 of the AAT Act and section 2A, we say that should be sufficient to satisfy the tribunal that that 124,000 was indeed - should have indeed been included in the cost base of the capital gain calculation.
Deputy President, if you find that amount should be duly included in the cost base then I believe it is agreed that that resolves the question.
DEPUTY PRESIDENT: Is there evidence, Mr Fickling, as to what it is that Strategic - SIT did given that they were the purchaser as well weren’t they? Or that company was. For instance, are they a licensed real estate agent for the purposes of receiving a commission on a sale? Is there any evidence before us that would assist in working out whether - what it is that they did for their 124,000 or do you say that that doesn’t really matter?
MR FICKLING: Firstly, to answer your first question we say that is the evidence before us. So the answer is no. The second point I make is this. That there is no - that parties at arm’s length do interesting things all the time where there is rebates and paybacks. I’m tempted to use the word kickback but I won’t. The most prominent example of this was - if Deputy President, you may recall the service station cases where there’s payment going this way and there’s payment going that way or there’s a lease going this way and a lease going that way and here what it looks like has been obtained - is a hire purchase price has been obtained - - -
MS VERNON: I object. If this is evidence that is being led from the bar table because there is in fact no evidence of the background of the creation of these documents and this is with great respect to my friend, mere speculation. If he is purporting to put it forward as evidence then I object to that being put forward from the bar table.
DEPUTY PRESIDENT: That’s a fair enough objection. What I am really exploring is the proposition seems to be - and there was some brief discussion about this issue I think at the previous hearing and I’m just really exploring with you - the proposition seems to be that for some unspecified potentially nefarious - I don’t know - purpose there was a falsification of the actual sale price achieved. If that is the case, is this a legitimate cost that is incurred which is to be properly considered as a cost of the - base cast of the holding and sale of the property?
MR FICKLING: We don’t suggest it was nefarious or we don’t suggest it was illegitimate. We just say that - and to take my friend’s point, I don’t wish to speculate but what is here on the common knowledge is that the purchaser and the recipient is one and the same person.
DEPUTY PRESIDENT: Yes.
MR FICKLING: So you’ve got a payment from Strategic to the applicant which is a payment to purchase a property and then you’ve got a payment back which has been labelled a commission. In the circumstances I would submit that the ordinary understanding of that is effectively a net purchase price because you don’t usually pay a commission to the purchaser. It’s a bit odd but - - -
DEPUTY PRESIDENT: But does that - I’m just exploring and you might be able to enlighten me. Is there any threshold test for the legitimacy of a cost that is claimed to be established? In other words, what if it is just a gratuitous payment made for another purpose? The purpose we don’t know. We don’t know what the payment was actually for. This talks about consulting on sale and completion fee in circumstances where - does there have to be any legal obligation to make this payment before it can be properly considered to be a fee? Sorry, before it can be property considered to be a cost which will be taken into account as the base cost of the asset for the purposes of CGT calculation?
MR FICKLING: It is a circumstance where 104-10 is - CGT event A1 which says work out what the capital proceeds are.
…
DEPUTY PRESIDENT: My point is, is there any threshold test or qualitative test for the cost base? In other words, if it’s just a gratuitous payment, is that legitimately to be considered a cost for the purposes of calculating the cost base for CGT?
MR FICKLING: I am not aware of anything specifically on point but if we were to read the legislation, the question is - and this goes to question before CGT is a statutory code. This goes to a question of whether to - it’s an incidental cost or a necessary cost within the five elements of the cost base. I’m looking for the section. It’s 120-25(3) which provides the second element of the cost base is the incidental cost you incur and these costs can include giving property.
Then 110-35 of the Income Tax Assessment of 1997 says that one of the incidental costs is the cost of transfer. The applicant says here that this was a cost of transfer of a cost of selling the property. This is where we got into a bit of a discussion last time where the costs that were incurred weren’t, say, (indistinct) what an ordinary person would have incurred then you get into questions of market value substitution because this is a payment - because we have a purchase price from Strategic to the applicant paid and then we have a payment back, we may get into the territory of the transaction not being an arm’s length transaction between the two parties, in which case the market value substitution could apply.
DEPUTY PRESIDENT: I suppose mine is a slightly different point though isn’t it? It’s whether looking at the CGT legislation - you certainly deduct costs and things like stamp duty, sales commissions paid to a real estate agent for the sale, costs paid to the settlement agents and so on, they’re all costs that are normally considered but we don’t really have any evidence as to this being - other than the face of the invoice which is a little bit ambiguous - we don’t have any knowledge of what the substance of this payment was for or what this payment was actually for. So my question really is, is in looking at the CGT legislation cost incurred, can it be said that a gratuitous payment or a payment, the basis of which we really don’t know is a properly cost incurred for the purposes of that calculation?
MR FICKLING: I think that the simple answer to that is that does it on the face satisfy the statutory provisions in 110-25 and 110-35 of an incidental cost. But that is - it either does or it doesn’t but if it doesn’t then we may well find ourselves in a non-arm’s length transaction in which case the net value is the correct purchase price. Now, what I don’t have here is - what I don’t have here in front of me is - there is a short passage from one of the Federal Court decisions on what is a non-arm’s length transaction but broadly stated it is not - you don’t look at the two individuals or the entities involved per say and ask if they’re arm’s length. You rather look at the particular transaction and the way it was conducted.
For instance, you may have a total - a transaction between two totally arm’s length parties but the way in which they conduct the transaction - for instance, the way they allocate - choose to allocate payments going either way - - -
DEPUTY PRESIDENT: It will be the circumstances of each transaction to work it out.
MR FICKLING: Yes. So we may find ourselves in a situation where it is a non-arm’s length transaction in which case the tribunal may exercise its own discretion in applying the Act and may decide to decide that it is appropriate to apply the market value substitution rule.
The shortcoming the applicant faces in that respect is that presently before you there is no market valuation evidence but in the circumstances I would ask that if the tribunal was inclined to exercise that section of the Act to apply the market value substitution rule, then that we be allowed to tender some form of evidence as to what might have been the arm’s length value at the time or market value at the time. (Indistinct)
In the Applicant’s closing submissions dated 20 November 2017 made after the hearing the following argument was put forward that:
(a)In commercial transactions there are often payments in multiple directions. There are many reasons why this might occur such as financing or generating a higher face value for the sale (paragraph 25);
(b)The present case was similar or comparable to cases of rental incentives being given by landlords which have been recognised by courts as legitimate as being a “more complicated arrangement than the simple agreement to pay rent for the lease of premises; it produced an arrangement under which the lessee agree to pay rent and the lessor agreed to pay an incentive” the overall effect of which was not to reduce what should properly be considered the “market rent” for the premises (Commissioner of Taxation v Montgomery [1999] HCA 34; 198 CLR 639; 164 ALR 435; 73 ALJR 1160) (paragraph 25); and
(c)It is open to the Tribunal to exercise the power that the Commissioner has under s 169A(3) of the ITAA 1936 and that that would include the power to find that (paragraph 27):
(i)the “proper capital proceeds” of the sale were actually $1,476,000 (i.e. $1,600,000 - $124,000) for the purposes of calculating the capital gain; or
(ii)the “proper capital proceeds” are to be determined pursuant to s 116-30 of ITAA as that market value and that the evidence before the Tribunal, being the net effect of the payments made each way as identified in (i) above, establishes the market value for the purposes of s 116-30 as being $1,476,000, or, in the alternative, the Applicant should be invited to submit a valuation to be adopted.
Section 116-30 of the ITAA is as follows:
Market value substitution rule: modification 1
No capital proceeds
(1) If you received no *capital proceeds from a *CGT event, you are taken to have received the *market value of the *CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)
Example: You give a CGT asset to another entity. You are taken to have received the market value of the CGT asset.
There are capital proceeds
(2) The *capital proceeds from a *CGT event are replaced with the *market value of the *CGT asset that is the subject of the event if:
(a)some or all of those proceeds cannot be valued; or
(b)those capital proceeds are more or less than the market value of the asset and:
i.you and the entity that *acquired the asset from you did not deal with each other at *arm's length in connection with the event; or
ii.the CGT event is CGT event C2 (about cancellation, surrender and similar endings
(The market value is worked out as at the time of the event.)
There are a number of problems with the Applicant’s argument based on s 116-30 of the ITAA. Firstly, the argument is self-fulfilling in that it says no more than the evidence of the market value is what the Applicant paid for the Property. If that argument were accepted it would largely render s 116-30 inoperative in that the purpose of that section is to substitute a “market value of the CGT asset” for the consideration for which the CGT asset was actually sold. The Applicant’s argument proceeds on the premise that they are one and the same. Secondly, s 116-30(2), upon which the Applicant presumably relies given that there clearly were capital proceeds received from the CGT event, only applies if “you and the entity that acquired the asset from you did not deal with each other at arm’s length”.
The Applicant chose to lead no evidence from which any conclusion could be reached as to whether SIT and the Applicant dealt with each other at arm’s length or otherwise. The only evidence, that of the Applicant herself, is that prior to these proceedings she had not even heard of SIT or Mr Carlshausen.
Given that the substitution of market value under s 116-30 of the ITAA is only relevant where the parties to the CGT event were not acting at arm’s length, and there was no evidence led by the Applicant as to the relationship between SIT and her or even her husband, other than the fact that she had not even heard of SIT and that her husband organised the sale (Second Hearing Transcript at page 42 at 45 and page 43 at 1-4), there is no basis to argue that market value should be substituted for the sale value as stated on the transfer, namely $1,600,000.
The end result of these considerations is that, based on the evidence presented, the Tribunal is not satisfied that the $124,000 claimed payment for “consulting” or “completion fee” is an incidental cost to be included in the cost base under s 110-25 of the ITAA.
Was Mr Thompson acting as the Applicant’s agent?
In the Applicant’s closing submissions made after the Second Hearing, this issue was expressed as follows:
Question 3: in properly weighing up the evidence before the Tribunal, does the Tribunal conclude that Mr Thompson was not acting as the Applicant’s “agent” when the income tax return for the year ended 30 June 2013 was filed on 23 September 2014. If the Tribunal so concludes that Mr Thompson was not acting as the Applicant’s “agent”, then the Applicant did not have an agent for the purpose of s.284-90(1), and so the Tribunal must determine based on the properly weighed up evidence what was the level of the Applicant’s own culpability in Item 1, 2 or 3 in s.284-90(1) Schedule 1 TAA (Applicant’s closing submissions, paragraph 7(c)).
Paragraph 57 of the Applicant’s submissions refers to the transcript of a hearing on 27 February 2015 before Magistrate Maughan in the Perth Magistrates Court on the entry of pleas and sentencing of Mr Bosanac in a prosecution brought by the Commissioner against Mr Bosanac for his failure to comply with an order made under s 8G of the TAA. The order had required Mr Bosanac to file tax returns for the years ended 30 June 2005 to 30 June 2013.
The main thrust of the submissions in mitigation made by Mr Bosanac’s lawyer at that hearing was that the failure by Mr Bosanac to comply with the order under s 8G of the TAA to file tax returns was caused by the failure of his accountant, Mr Thompson, to file the returns notwithstanding instructions from Mr Bosanac for him to do so. According to the story provided by Mr Bosanac’s lawyer to the Magistrate, Mr Thompson had told Mr Bosanac that he had “pushed the button” to electronically file the returns on 27 January 2015. Apparently Mr Thompson had provided an affidavit to that effect (that affidavit was not produced in this application). The returns, however, had not been received by the ATO. From the summary given to the Court by Ms Arif for the prosecution, it seems that there was some question as to whether Mr Thompson had actually attempted to file the returns for Mr Bosanac on 27 January 2015, the last day for compliance with the order. Counsel for Mr Bosanac made comments to the effect that his client was not happy that Mr Thompson had put him in the position of being liable for further prosecution by failing to file the returns by 27 January 2015. The assertion was made that Mr Bosanac had been misled by Mr Thompson as to the filing of the returns on 27 January 2015.
No mention is made to the Applicant in the transcript of the proceedings before the Magistrate on 27 February 2015. The argument put by the Applicant that Mr Thompson (presumably Barrack & Associates) was not acting as the Applicant’s agent for the filing of the 2013 Return when it was lodged by Barack & Associates on 23 September 2014 is difficult to understand, but seems to be based on the following (paragraphs 57 to 65 of the Applicant’s closing submissions of 20 November 2017):
(a)in January 2015 Mr Thompson had failed to file Mr Bosanac’s returns;
(b)despite Mr Thompson having provided an affidavit to the effect that he had tried to file Mr Bosanac’s returns as required on 27 January 2015, the ATO systems did not reflect that there had been any attempt to file the returns (paragraph 57);
(c)Mr Thompson had advised the ATO prosecutor that the tax returns had been filed on 27 January 2015 but declined to answer any further questions until he had spoken to his lawyer (paragraph 57);
(d)the Applicant’s submission apparently is that, therefore, Mr Thompson had lied;
(e)“As a result of the exchange in Court on 27 February 2015, the Respondent was patently on notice that Mr Thompson was not acting as the bona fide agent of Mr Bosanac (and by inference the Applicant)” (paragraph 58);
(f)Mr Thompson had concealed his failure to lodge “the Bosanac’s [sic] tax returns in accordance with arrangements that he had personally reached with the ATO” (paragraph 58);
(g)the law of agency is such that Mr Thompson was the Applicant’s agent “unless the Respondent was on notice at or before the time of filing the tax return on 23 September 2014 that Mr Thompson was ‘self-acting’, ‘self-dealing’ or not acting as a bona fide agent. The Applicant cites two United States cases as authority for that proposition (paragraph 59);
(h)the evidence of 27 February 2015 (presumably the transcript of the Magistrates Court hearing) “clearly shows that Mr Thompson was ‘self-acting’” and that “he was not Mr Bosanac’s agent, and by implication not the Applicant’s agent” (paragraph 60);
(i)Mr Thompson failed to respond to the ATO’s information request in the audit notice issued to Mr Thompson on 30 April 2014 and therefore the Commissioner was also on notice (presumably as at 30 April 2014) that “Mr Thompson was not the Applicant’s agent by the time of the filing of her tax Return on 23 September 2014” (paragraph 61);
(j)the ATO’s audit team had by 5 June 2014 “given up on Mr Thompson as being of any useful purpose in the execution of their duties”. The “un-contradicted evidence of the ATO audit team giving up on Mr Thompson of being any use amounts to compelling evidence that the Respondent was on notice by 5 June 2014 that Mr Thompson was not acting in the Applicant’s interests but instead ‘self-dealing’ and therefore not pursuant to the law of agency, the Applicant’s ‘agent’ for the purposes of s 284-90(1) Item 1, 2 or 3.” (paragraph 62);
The above argument is without merit. It is non-sequitur, relies on unproved facts and makes unsustainable leaps of “logic”. The proposition that because Mr Thompson supposedly failed to lodge Mr Bosanac’s tax returns in January 2015 (at which time he was clearly still acting as Mr Bosanac’s agent) and supposedly lied (of which there is no proper evidence) about efforts to lodge the returns electronically on 27 January 2015 (they were subsequently lodged by Mr Thompson) somehow puts the Commissioner on notice that in September 2014 when Barrack & Associates filed the Applicant’s 2013 Return as the Applicant’s agent it was not acting as the Applicant’s agent, is patently illogical. It is not explained by the Applicant how events in January and February 2015 relating to Mr Bosanac’s tax returns should have or could have caused the Commissioner six months earlier to draw the conclusion that Barrack & Associates was not acting as the Applicant’s agent when it filed her tax returns.
Similarly, the proposition that Mr Thompson’s failure to respond to the ATO’s information request in April 2014 (no evidence of the reason for that failure was put forward by the Applicant) somehow put the Commissioner on notice that when Barrack & Associates filed the Applicant’s 2013 Return on 23 September 2014 as the Applicant’s agent, it was not the Applicant’s agent, is unsustainable.
The argument that the Commissioner was on notice at some time prior to the filing of the 2013 Return in September 2014 that Mr Thompson was “self-acting”, and therefore not the Applicant’s agent, is further undermined by the fact that it appears that the Applicant herself (or those representing her) did not appear to be on notice of that fact until sometime after the Original Hearing of this application in April 2017. The Applicant’s Statement of Facts, Issues and Contentions makes no reference to an argument or contention that Mr Thompson was not the Applicant’s agent. Further, as noted by the Commissioner in his submissions after the Second Hearing, in opening at the Original Hearing in April 2017, Mr Fickling for the Applicant advised the Tribunal (Original Hearing transcript P-3 at 1-7):
But the legislation is such that if you’re still of the view that the tax agent was of the highest level of culpability, the intention of disregard (sic), then the applicant is still liable, if a proper agency relationship existed. And it appears to me that there’s no, just my way of informing the tribunal, as a matter of the duty to the tribunal, I cannot see an issue as to agency arising. Mr Thompson was acting as the purported agent so we have to accept that.
As it appears that Mr Fickling was not on notice in April 2017 that Mr Thompson was not the agent of the Applicant in September 2014, then it is difficult to see how it can be argued that the Commissioner should have been on notice that Barrack & Associates was not the Applicant’s agent at the time of the filing of the Applicant’s tax returns in September 2014.
The argument also ignores the Applicant’s own evidence which included the following:
MR FICKLING: Then we know that Mr Thompson filed your tax returns. Can you just take the Deputy President through what happened between those two - really, from the time you spoke to Valdo to the point where Mr Thompson filed your tax returns?‑‑‑Yes. Well obviously I didn't have the information that was needed for Ms Martens. I was quite upset at Vlado for not having done my tax returns when he'd told me not to worry, that there was nothing to worry about. So he had said to me, "Listen, I'm going to get them done and I'm going to use David, so don't worry about using Deborah, I'll get them done through David." So - because that was his tax accountant. So I said "Okay, not a problem." Like, "Get them done."
(Second Hearing Transcript pages 34 and 35)
…
MS VERNON: And then Mr Thompson did your returns because your husband hadn't actually done your returns?‑‑‑Mm.
Or at least for a period of time he hasn't?‑‑‑For a period of my marriage, yes.
…
Now, your evidence this morning was you recalled meeting with Mr Thompson - if you just put that document to one side for a second?‑‑‑Mm.
You recalled meeting Mr Thompson on one occasion and going through some papers with him?‑‑‑Yes
Sorry, your evidence this morning was you recalled meeting Mr Thompson on one occasion?‑‑‑On one occasion.
If you look at page 22 of the transcript, it's about line 25?‑‑‑25, yes.
Page 22. Sorry, I'm misleading you, it's about line 35. You were asked a question by Mr Fickling about a meeting and you said:
I recall David had come to my house on one occasion and I remember going through some papers with him but that's all I remember really. I don't remember what those papers were.
…
So weren't those papers to do with your tax returns?‑‑‑Yes, I assume they would be as David is an accountant and Vlado's accountant, I would assume those papers were to do with tax returns.
Weren't they, in fact, your tax returns? Didn't Mr Thompson come to you to go through your tax returns with you?‑‑‑I can't remember exactly. I could not remember exactly.
Could you look at page 40 of the transcript. About line 25 I put that same question to you that he was talking to you about your tax returns and you said, "I'm assuming it would be."?‑‑‑M'mm.
And that was true, you did assume it would be because why else would Mr Thompson be coming to talk to you?‑‑‑M'mm.
Do you agree with that, what I've just said?‑‑‑I thought I just said I assume it was about tax that he came over for. I don't know what - exactly what the papers were that he was talking about. I assume he was getting my affairs in order.
(Second Hearing Transcript, pages 54-55)
The most obvious evidence of Mr Thompson, more accurately Barrack & Associates, being the Applicant’s agent, and it is not disputed, is that fact that the Applicant signed the nine Electronic Lodgement Declaration forms (Exhibit 5), including that for the 2013 Return, which contained the declaration authorising Barrack & Associates to file her returns (see paragraph 15 above).
The fact is that on any assessment of the evidence Barrack & Associates (Mr Thompson) was the Applicant’s agent for the purpose of filing her tax returns in September 2014 including the 2013 Return.
The Applicant seeks to run an argument based on a legal principle supposedly emerging from United States authorities of Wagner v Nichols, 5 A.D. 2d 191 (N.Y. App. Div 1st Dep’t 1958) and Langlois v Gragnon, 123 La. 453 (La. 1909). As the Commissioner points out in his submissions made after the Second Hearing, even if the US cases were of binding or even of persuasive value (which they are not), the “principle” that emerges from those cases is merely that an agent cannot bind a principal to an agreement with a third party if the third party is aware that the agent is acting for himself rather than the principal (Commissioner’s submissions, paragraph 91). That is hardly a novel principle but is not relevant in the present circumstances.
The Tribunal finds that, for the purposes of the TAA, Barrack & Associates, through Mr Thompson, was the Applicant’s agent for the purposes of preparing and filing the Applicant’s tax returns including the 2013 Return.
Was the base penalty amount under s 284-90(1)(a) of the TAA excessive?;
As set out at paragraph 33 above, the Applicant’s case in relation to the penalty under s 284-90(1) primarily relies on establishing that Mr Thompson was not the Applicant’s agent. For the reasons set out above, the Tribunal rejects that Applicant’s arguments on that issue and finds that Mr Thompson (Barrack & Associates) was the Applicant’s agent for the purposes of assessing a penalty under s 284-90 of the TAA.
At paragraphs 71 and 72 of the Applicant’s submissions made after the Second Hearing, the possibility of the Tribunal finding that Mr Thompson was the Applicant’s agent is raised, however, the Applicant’s argument seems to be that if that is the Tribunal’s finding, Mr Thompson “was not the Applicant’s preferred agent but was instead an agent foist upon her by circumstances in which she was ultimately a mere passenger” (paragraph 71) and that “in light of the compelling evidence that the Applicant did not fraudulently, deceptively or even intentionally mislead or obstruct the Respondent…the rules of natural justice and the requirements to construe penalties strictly should override any ‘default’ approach deeming the conduct on the part of the taxpayer due to the tax agent’s actions.”
No authority for that proposition is cited by the Applicant. It flies in the face of the clear wording of the TAA and its underlying policy, which seems to be conceded by the Applicant’s submission at paragraph 72 which says that “…it is acknowledged that there would be policy reasons that dictate that the actions of a tax agent might be deemed to be adopted by the relevant taxpayer”. The taxpayer being liable for the actions, in particular the statements, of his or her agent is more than a “default” approach or discretionary policy, it is prescribed to be the case by ss 284-25, 284-75(1) and 284-90(1) Item 1 of the TAA. The Applicant is liable for the statements of Mr Thompson.
At paragraph 7(d)(ii) of the Applicant’s closing submissions made after the Second Hearing, the concession is made that “no evidence was led in these proceedings suggesting the (former) tax agent’s level of culpability was less that that contained in s 284-90(1) Item 1…However, the Tribunal, in its unfettered discretion to remit the penalty, may take into account the Applicant’s own level of culpability…(and) may find that the Applicant’s own culpability was less than ‘intentional disregard’ (Item 1), less than ‘reckless’ (Item 2)…”
In the Tribunal’s view, the approach proposed by the Applicant ignores the clear wording and intent of the legislation that where a taxpayer uses an agent to file his or her tax returns, it is the agent’s conduct which is relevant. The approach proposed by the Applicant would defeat the purpose of ss 284-25, 284-75 and 284-90(1) of the TAA, all of which make the taxpayer liable for the statements of the agent in the tax return for the purposes of calculating a penalty. As s 284-25 puts it “This Division applies to a statement made by your agent as if it had been made by you”. In other words, the taxpayer may be totally blameless in his or her actual conduct, however, the culpable conduct of the agent, by operation of the identified sections, is the taxpayer’s conduct.
As noted above, the Applicant’s arguments about Mr Thompson not being the Applicant’s agent in large part relied on Mr Thompson being dishonest, making false statements about filing returns and generally ignoring arrangements with the ATO and legal obligations in relation to tax matters, such as the obligation to respond to ATO enquiries. Having argued that, it is difficult to see how the Applicant could argue that Mr Thompson’s conduct as the Applicant’s agent and the failure to disclose the CGT event in the 2013 Return was anything other than a deliberate disregard of the taxation law.
In making the assessment that Mr Thompson and/or the Applicant had intentionally disregarded the tax law, the Commissioner in his Objection Decision (T1, p62) and in the reasons for decision (T2, p131) identified the following facts as supporting the Applicant and/or her agent having intentionally disregarded the taxation law:
(a) You initially did not lodge your outstanding return under audit. However, as a result of prosecution you lodged a return for the year ended 30 June 2013 omitting CGT income.
(b) The amount of the CGT income omitted was quite substantial and still remains after the objection decision.
(c) You are aware of your requirements to declare CGT income as you have previously declared CGT income in the year ended 30 June 2008.
(d) The property sold was an investment property. The law is clearly established in relation to reporting income from the sale of a CGT asset.
(e) You used a tax agent to prepare and lodge your income tax return.
The Tribunal also notes that the tax agent was also the accountant for Mr Bosanac during the relevant period and would, it is fair to infer, have been aware of Mr Bosanac’s dealings including the sale of the Property. Much was made by the Applicant of her being dragged along in the affairs of her husband, she being a “mere passenger” and her having Mr Thompson, Mr Bosanac’s accountant, “foist upon her” (paragraphs 71 and 74 of the Applicant’s submissions after the second hearing). Given that it is Mr Thompson’s conduct as the Applicant’s agent that is relevant in determining whether there has been an intentional disregard of the taxation law, the fact that Mr Thompson was Mr Bosanac’s accountant as well as the agent of the Applicant, gives rise to an inference that Mr Thompson would have been aware of the sale of the Property, that that would have been a CGT event and therefore should have been included in the Applicant’s 2013 return (re inferring intentional disregard see Weyers & Anor v Federal Commissioner of Taxation 2006 ATC 4523; [2006] FCA 818. See also paragraph 114 of Miscellaneous Taxation Ruling MT 2008/1).
The Tribunal is satisfied that the Applicant’s agent intentionally disregarded the taxation law for the purposes of Item 1 in s 284-90(1) of the TAA and that therefore a base penalty amount of 75% of the shortfall amount is justified.
Was the increase in base penalty amount under s 284-220 of the TAA justified?
The base penalty amount was increased under s 284-220(1) of the TAA by the Commissioner on the basis that:
In not responding to a request for information and questionnaire issued to you on 28 March 2014, lodging your income tax return for the year ended 30 June 2013 on 23 September 2014, not declaring your CGT income and your representative Mr David Thompson, not responding to the section 264 notice issued on 7 November 2014, you prevented and obstructed the Commissioner from finding out about your shortfall
(Commissioner’s reasons for decision T2, at paragraph 330)
The increase in the base penalty was imposed under s 284-220(1)(a) of the TAA (T2 at paragraph 131). The question is whether the circumstances identified by the Commissioner as justifying the increase in the base penalty, or any other circumstances disclosed in the evidence, could be considered to have been steps taken by the Applicant “to prevent or obstruct the Commissioner from finding out about a shortfall amount, or the false or misleading nature of a statement, in relation to which a base penalty amount was calculated” (s 284-220(1) of the TAA)
Shortfall amount is defined in section 284-220(1) as:
"shortfall amount" has the meaning given by section 284-80 in Schedule 1 to the Taxation Administration Act 1953 .
(s 995-1 of the ITAA)
Section 284-80 in Schedule 1 of the TAA is set out in paragraphs 43 and 44 above. As the existence of a shortfall amount depends on a statement in a tax return having been made and that statement being incorrect, there can be no “shortfall amount” until a tax return is filed. Accordingly, circumstances prior to the filing of the 2013 Return cannot be relevant for the purposes of s 284-220(1) insofar as that section relates to steps to prevent the Commissioner from finding out about a shortfall amount.
Similarly, insofar as the Commissioner seeks to rely on the second limb of s 284-220(1)(a) of the TAA, namely concealing the false or misleading nature of the statement in relation to which the base penalty was calculated (i.e. the statement made in the tax return), that too cannot include conduct prior to the filing of the tax return. As the tax return is the false statement, the act of filing the tax return cannot be conduct to prevent or obstruct the Commissioner from finding out about the falsity of the statement (tax return). The making of the false statement is not conduct concealing the falsity. Further, to include the filing of the tax return which comprises the false statement and gives rise to the shortfall amount invoking the base penalty under s 284-90(1) of the TAA as a reason to increase that penalty appears to be double dipping. Such a construction would, in effect, give rise to an increase in the base penalty under s 284-220(1) of the TAA in every case.
It seems that in his reasons for increasing the penalty identified in his reasons for decision as set out in paragraph 97 above, the Commissioner has relied on conduct prior to or the filing of the 2013 Return and the filing of the return itself. The only conduct that could properly be taken into account in determining whether the base penalty should be increased under s 284-220(1)(a) of the TAA is Mr Thompson’s failure to respond to the s 264 Notice in November 2014.
Three issues arise out of that. They are:
(a)is the conduct of Mr Thompson covered by s 284-220(1)(a) of the TAA?
(b)is the failure to respond to a s 264 notice “taking steps” for the purposes of the section; and
(c)if the answers to (a) and (b) are yes, does that conduct warrant a 20% (or less) increase in the base penalty.
In relation to issue (a), the Applicant submitted that the use of the word “you” in s 284-220, as distinct from the use of the phrase “you or your agent” in s 284-90(1) means that the conduct to come within s 284-220(1) must be the conduct of the Applicant, not that of Mr Thompson. The Tribunal thinks that there is merit in that argument. The provisions of ss 284-25 and 284-75 make the taxpayer liable for the statements of the taxpayer’s agent, not for the conduct of the type described in s 284-220(1) of the TAA.
In relation to issue (b), the operative wording of s 284-220(1)(a) of the TAA is “you took steps to prevent or obstruct”. It is the Tribunal’s view that in the context of conduct to justify an increase in a penalty, a failure by a person on whom such a notice is served to take steps, namely respond to the s 264 notice (which in itself has statutory consequences for that person - see T32 at p 354), cannot be considered “steps taken (by you) to prevent or obstruct” for the purposes of s 284-220(1)(a) of the TAA.
The Tribunal therefore finds that the increase in the base penalty under s 284-220(1)(a) was not justified.
CONCLUSION
For the reasons set out above the Tribunal finds that:
1.The claimed payment of $124,000 commission/fee was not an “incidental cost” for the purposes of s 110-35 of the ITAA;
2.Mr Thompson was acting as the Applicant’s agent;
3.The base penalty amount under s 284-90(1)(a) of the TAA was not excessive; and
4.The increase in the base penalty amount under s 284-220(1)(a) of the TAA was not justified.
DECISION
The Tribunal orders that the Objection Decision be varied by there being no increase in the base penalty under s 284-220(1)(a) of the TAA and accordingly, the shortfall penalty is reduced from 95% to 75% for the income tax year ending 30 June 2013.
I certify that the preceding 107 (one hundred and seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President S Boyle
......[sgd]............................................................
Administrative Assistant - Legal
Dated: 16 February 2018
Date of hearing: 1 November 2017 Applicant: In person Counsel for the Applicant: Mr Fickling Representative for the Applicant: Mr Blow Solicitors for the Applicant: Cove Legal Respondent: In person Counsel for the Respondent: Ms Vernon Representative for the Respondent: Mr Burrows Solicitors for the Respondent: Australian Government Solicitor
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