Bryxl Pty Ltd as Trustee for the Kypu Trust and Commissioner of Taxation
[2015] AATA 89
•19 February 2015
[2015] AATA 89
Division GENERAL ADMINISTRATIVE DIVISION File Numbers
2012/4750
2014/2838
2014/28392014/2912
Re
Bryxl Pty Ltd as Trustee for the Kypu Trust
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Egon Fice, Senior Member
Date 19 February 2015 Place Melbourne The Tribunal affirms the decisions under review.
......................[sgd]..................................................
Egon Fice, Senior Member
Catchwords
TAXES AND DUTIES – Goods and Services Tax – Basic and special rules – Registration
TAXES AND DUTIES – Goods and Services Tax – Basic and special rules – Supplies and acquisitions – Basic rules – Creditable acquisitions – Carrying on an enterprise – land development – no land acquisitions made
TAXES AND DUTIES – Administration of federal tax legislation – Penalties, offences and prosecutions – Particular penalties and offences – False or misleading statements or records – Penalty – Where recklessness as to operation of taxation law – Claim for GST input tax credits
TAXES AND DUTIES – Administration of federal tax legislation – Australian business numbers – Deregistration
Legislation
A New Tax System (Australian Business Number) Act 1999 (Cth) ss 8, 18
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 7-1, 9-20, 11-5, 11-15, 23-5, 23-10, 25-55, 195-1
Income Tax Assessment Act 1936 (Cth) ss 51, 190
Income Tax Assessment Act 1997 (Cth) s 995-1
Planning and Environment Act 1987 (Vic) ss 47-8, 68
Taxation Administration Act 1953 (Cth) s 14ZZK, sch 1 ss 284-25, 284-75, 284-80, 284-90, 298-20Cases
Cooper Brooks (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1980) 147 CLR 297
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Hart v Federal Commissioner of Taxation (2003) 131 FCR 203
Hart v Federal Commissioner of Taxation (2002) ATC 5193
Hope v Bathurst City Council (1980) 144 CLR 1
Russell v Federal Commissioner of Taxation (2011) 190 FCR 449Russell v Federal Commissioner of Taxation [2009] FCA 1224
Secondary Materials
Miscellaneous Taxation Ruling MT 2008/1 – Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
REASONS FOR DECISION
Egon Fice, Senior Member
19 February 2015
Bryxl Pty Ltd (Bryxl), whose directors are Mr Philip Heading and Mr Norman Thompson, registered for GST (goods and services tax) commencing 1 August 2010. It is the trustee of the Kypu Trust. Bryxl was required to report monthly on an accruals basis. It purported to be carrying on the enterprise of land development in Kyabram, Victoria. It proposed to subdivide the land at Kyabram into 285 blocks.
Between 1 October 2010 and 31 March 2011, Bryxl lodged Business Activity Statements claiming a total of $226,128 in input tax credits for creditable acquisitions to the value of $2,261,283 made throughout that period. In fact the input tax credits for the months in issue (the relevant period) are:
·October 2010 – $1,128
·February 2011 – $75,000
·March 2011 – $150,000
Throughout the relevant period, no sales were reported by Bryxl.
On 12 August 2011 the Australian Taxation Office (ATO) notified Bryxl, via Mr Heading, that it had been selected for an audit of its GST on acquisitions for the period 1 August 2010 to 30 June 2011.
The ATO provided to Bryxl an interim audit report under the cover of a letter dated 23 September 2011. In summary, the audit findings were that Bryxl:
(a)failed to demonstrate to the Commissioner that it was carrying on an enterprise;
(b)was not entitled to ABN and GST registration;
(c)had not satisfied the Commissioner that it was entitled to input tax credits of $226,128 for the period 1 October 2010 – 31 March 2011, which were disallowed; and
(d)was liable for an administrative penalty at the rate of 50% of the shortfall amount due to recklessness.
On 11 October 2011 the Commissioner issued a notice of assessment and liability to pay penalty in the amount of $113,064.00. Furthermore, on 13 October 2011 the Commissioner issued notices of assessment in respect of the October 2010, February 2011 and March 2011 GST claims. The Commissioner determined that each of those amounts claimed as input tax credits should be reduced to $0. On 14 October 2011 Bryxl was advised that the audit was complete with the final decision being consistent with the interim decision.
On 20 April 2012 Mr Heading, who described himself as a Public Accountant and a Taxation Consultant, appeared to lodge an objection with the ATO to the liability to pay an administrative penalty. However, in subsequent discussions with an officer from the ATO on 21 May 2012, it appears that Mr Heading informed the officer that in addition to the administrative penalty, Bryxl also wished to object to the reduction of the input tax credits to $0. He said nothing about the ABN and GST registration which was to be cancelled with effect from August 2010.
In an objection decision delivered to Mr Heading under the cover of a letter dated 24 August 2012, the Commissioner informed Bryxl that its objection had been disallowed. Furthermore, the Commissioner affirmed the decision that Bryxl was liable to an administrative penalty in the amount of $113,064. The Commissioner also noted that Bryxl had been unable to satisfy him that it was in fact carrying on an enterprise for the tax periods in question. In those circumstances, the Commissioner noted that it was appropriate that Bryxl’s ABN and GST registration had been cancelled. Bryxl lodged an application with the Tribunal seeking review of the Commissioner’s decision on 22 October 2012.
Under the cover of a letter to the ATO dated 27 August 2013, Mr Heading lodged a further objection also indicating that it should be treated as a request for an extension of time to lodge an objection. He said that he did not realise that the first objection lodged to the penalty decision did not include an objection to the cancellation of the GST (and, presumably, the ABN) registration. He stated the objection in the following way:
We object to the cancellation of our Australian Business Number and registration for Goods & Services Tax and disallowance of input tax credits.
That objection was also treated by the ATO as an objection to the disallowance of all three claimed input tax credits. The extension of time to lodge an objection was granted. Following further correspondence with the ATO, in a letter dated 18 September 2013, Mr Heading clarified that Bryxl’s claim was for a refund of input tax credits amounting to $1,128 only. In a second objection decision dated 8 November 2013 (matter number 2014/2839) the Commissioner disallowed Bryxl’s objection to the cancellation of its GST and ABN registration. The Commissioner also disallowed Bryxl’s objection to the disallowance of its input tax credit of $1,128 for the tax period ended 31 October 2010. On behalf of Bryxl, Mr Heading lodged further applications for a review of those decisions by the Tribunal on 2 June 2014.
The issues which I am required to determine are whether or not Bryxl:
(a)was carrying on an enterprise for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and A New Tax System (Australian Business Number) Act 1999 (ABN Act) during the monthly periods between 1 October 2010 and 31 March 2011;
(b)was entitled to be registered for GST and entitled to an ABN (Australian Business Number);
(c)was entitled to claim $1,128.00 by way of input tax credits under Division 11 of the GST Act for the month ended 31 October 2010;
(d)is liable to an administrative penalty pursuant to s. 284-75 of Schedule 1 to the Taxation Administration Act 1953 (the Administration Act); and
(e)can establish grounds to remit all or part of the administrative penalty pursuant to s. 298-20 of Schedule 1 to the Administration Act.
ONUS OF PROOF
The Commissioner made it clear in his written outline of submissions that he relied on s 14ZZK of the Taxation Administration Act 1953 (the Administration Act). Section 14ZZK provides:
14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving that:
(i)if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive; or
(ii)if the taxation decision concerned is a franking assessment—the assessment is incorrect; or
(iii)in any other case—the taxation decision concerned should not have been made or should have been made differently.
In this case, we are concerned with s. 14ZZK (b) (i) and (iii).
Brennan J in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 referred to the manner in which a taxpayer can discharge the burden of proof. He said that it varies with the circumstances. His Honour said that if the Commissioner and taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it is sufficient for the taxpayer to show he is entitled to succeed on that point. However, in the absence of an agreement confining the issues for determination, his Honour said, at 624:
Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In Gauci v. Federal Commissioner of Taxation (44), Mason J. said:
“The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.”
Section 190(b) of the Income Tax Assessment Act 1936 -1969, to which Mason J referred in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, is similar to the burden of proof provisions now set out in s 14ZZK of the Administration Act.
It should also be clear that in accordance with s. 14ZZK (b)(iii), Bryxl has the onus of proving that the decision to cancel its GST and ABN registration should not have been made or should have been made differently.
CARRYING ON AN ENTERPRISE FOR THE PURPOSES OF THE GST ACT
As s. 7-1 (2) explains, entitlements to input tax credits arise on creditable acquisitions and creditable importations. The expression creditable acquisition is explained in s. 11-5 in the following way:
You make a creditable acquisition if:
(a)you acquire anything solely or partly for a*creditable purpose; and
(b)the supply of the thing to you is a*taxable supply; and
(c)you provide, or are liable to provide,*consideration for the supply; and
(d)you are*registered, or*required to be registered.
The expression creditable purpose is a defined term. Relevantly, s. 11-15 provides:
(1) You acquire a thing for a creditable purpose to the extent that you acquire it in*carrying on your *enterprise.…
The expressions carrying on and enterprise are defined in s. 195-1 in the following way:
carrying on an*enterprise includes doing anything in the course of the commencement or termination of the enterprise.
enterprise has the meaning given by s. 9-20.
Section 9-20 comprehensively deals with the expression enterprise. In so far as it is relevant to this matter, it provides:
(1) An enterprise is an activity, or series of activities, done:
(e)in the form of a*business; or
(f)in the form of an adventure or concern in the nature of trade; or
(g)on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or…
Business is defined in s. 195-1 as:
business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
It should be reasonably clear from the definitions which I have set out above that the carrying on of an enterprise may encompass a wide range of activities or even a single activity at any point in time between the commencement and termination of the enterprise. However, the various expressions used in those definitions also establish boundaries.
The courts have, on many occasions, explained that there are a number of factors which must be considered when determining whether an entity is carrying on a business. The most commonly cited example is the decision of the High Court of Australia (Gibbs, Stephen, Mason, Murphy and Aiken JJ) in Hope v Bathurst City Council (1980) 144 CLR 1. The issue in that case was whether land owned and occupied by the appellant was wholly or mainly used by him for carrying on the business or industry of grazing. Mason J, after referring to the dictionary meaning of the word business, said, at 8-9:
In truth it is the popular meaning of the word as used in the expression “carrying on a business”, rather than the popular meaning of the word itself, that is enshrined in the statutory definition. It is the words “carrying on” which imply the repetition of acts (Smith v. Anderson (26)) and activities which possess something of a permanent character.
…
It denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis.
The important question which must be considered for the purposes of this matter concerns activities conducted in the course of commencement of an enterprise. Although in the context of a claim for deductions pursuant to s. 51 of the Income Tax Assessment Act 1936, the Full Court of the Federal Court of Australia (Bowen CJ, Franki and Fisher JJ) dealt with this issue in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310. Bowen CJ and Franki J said, at 314:
There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business.
A more recent decision of the Full Court of the Federal Court of Australia in Russell v Federal Commissioner of Taxation (2011) 190 FCR 449, the Court (Dowsett, Edmonds and Gordon JJ) dealt specifically with the application of s. 11-5 GST Act. In particular, it was required to determine whether the thing acquired (a swimming pool) by the appellant was for a creditable purpose because it was acquired in the carrying on of an enterprise. While the Court was essentially concerned with the exclusions set out in s. 11-15 and in particular whether the acquisition was of a private or domestic nature, nevertheless, it is helpful in that it draws the clear distinction between cases dealing with allowable deduction claims under the Income Tax Assessment Act 1997 and the definition of the expression carrying on your enterprise as set out in the GST Act. Dowsett J referred to the following passages of the decision made by the primary Judge (Logan J in Russell v Federal Commissioner of Taxation [2009] FCA 1224) where his Honour said:
249 When the definition of “carrying on” is recalled, it can be seen that a thing may be acquired for a creditable purpose to the extent that it is acquired in the course of the commencement of, materially, a business. The converse of this, necessarily, in my opinion, is that a thing acquired otherwise than in the course of the commencement of the business, even though it may ultimately be deployed in a business once that business commences, is not acquired for a creditable purpose.
250 An acquisition may be a creditable acquisition even though it would not give rise to a deduction under s 8-1 of the ITAA 1997. For example, an acquisition on capital account in the course of carrying on of a business would not give rise to a deduction under section 8-1 of the ITAA 1997 but, all other things being equal, would give rise to a creditable acquisition.
251 That the notion of a creditable acquisition is wider than the notion of an income tax deduction expenditure raises an interrogative note about why “carrying on” was defined in such an inclusive way. Commencement and termination expenditures can, in the income tax deduction context, be regarded as not incurred in, i.e. in the course of, the carrying on of the business. Are, for example, expenditures on capital works in respect of an accommodation facility before that facility has opened its doors to paying customers, to be regarded as expenditures “in the course of the commencement of the accommodation facility business?”
I should also mention two brief passages in the judgement of Logan J which were not disturbed on appeal. His Honour said:
252 Identifying the “commencement” of a business is, obviously, a question of fact but that does not mean that the question will always admit of an easy answer.… Determining whether or not a particular business exists calls for a thorough understanding of the nature of the market in which the asserted business operates and exactly what is entailed in commencing to carry on business in that market.
253 On this basis, the partnership [Mr and Mrs Russell] is not entitled to the input tax credits claimed because they were not acquired for a creditable purpose. During the course of what Mr Russell termed “Stage 1” in his business plan, there was not yet a business of a naturist retreat being carried on, only the undertaking of steps which were precursors to the commencement of such a business.
In my opinion, in order to establish whether the input tax credits claimed by Bryxl arose from an acquisition or acquisitions made for a creditable purpose to the extent that any such acquisitions were acquired in carrying on an enterprise, I need to examine in some detail the land development project which was claimed to be the enterprise.
I should say at the outset that the documents provided by Mr Heading are unsatisfactory. Some are incomplete, some are simply absent and some appear to be inconsistent with statements made to the ATO in the course of discussions following assessment. Because Mr Heading, in the course of his oral evidence, confirmed that he had formal accounting qualifications and claimed to have worked on assignments for the ATO, I have no doubt that he fully understands the need to provide the ATO with complete and accurate statements and documents in support of the claims made by Bryxl. Furthermore, Bryxl in any event bears the onus of proving that the assessments made by the Commissioner were excessive or that any other decisions made by the Commissioner should have been differently made.
According to the information obtained by the ATO from Mr Heading, on 24 August 2010 Mr Thompson on behalf of Bryxl entered into a contract to purchase land at Kyabram. The problem is that Mr Heading has not produced either to the ATO or the Tribunal a complete copy of the contract of sale. The only parts of that document put into evidence by Mr Heading are the Particulars of Sale (pages 3 and 4) and clauses 16-20 (pages 16 and 17) of the special conditions. What there is of that document discloses that the vendor of the land was Rylene Pty Ltd (ACN 005370847) as trustee for the WD O’Brien Family Trust. The purchaser is named as Norman Thompson and/or nominee. The purchase price is stated as $2,035,000 (inclusive of GST in the amount of $185,000) with a deposit of $185,000 to be paid on the signing of the contract. The balance is said to be payable at settlement.
I did not have in evidence an executed contract or so much as the execution page. In other words, there was no objective evidence before me that the parties had agreed to enter into this contract. Furthermore, no date had been entered indicating when settlement was to take place.
The Special Condition set out at clause 16.1 provides that part of the purchase price would be deemed to be paid by the purchaser by giving to the vendor at settlement a second mortgage of the land sold to secure the sum notionally lent by the vendors to the purchaser. Clause 16.2 provides that the principal under the second mortgage was to be $300,000 or, if the purchaser elected to defer the payment of GST under clause 17 of the Special Condition, $485,000. By clause 16.3, the purchaser warranted that the amount secured by the first mortgage would not, on the settlement date, exceed $1,650,000.
Clause 19 refers to a contract of sale of land dated 11 October 2010 between Rylene Pty Ltd and Mr Thompson. That agreement clearly post-dated the agreement claimed by Mr Heading to have been entered into on 24 August 2010. The 11 October 2010 agreement was apparently rescinded and by this special condition, both vendor and purchaser acknowledged that the contract was at an end and that neither party had any further rights or obligations under the rescinded agreement. Mr Heading has not explained what happened to the alleged agreement made on 24 August 2010 and, in any event, it is apparent that the documents he gave to the ATO and which were put into evidence in the course of this hearing are not documents from that agreement.
Quite plainly, the parts of contract for the sale of land put into evidence by Bryxl do not support what Mr Heading said about the contract. In his letter to the ATO of 25 May 2011, Mr Heading said the purchase price was $1,850,000. He repeated this evidence in the course of his oral examination and in an email to the ATO on 22 June 2011. Whether the payment of GST is taken into account or not, and taking into account the notional loan from the vendors in the amount of $300,000, that purchase price does not accord with the document produced in evidence.
In a covering letter sent to the Tribunal with further materials dated 14 July 2014, Mr Heading said that the deposit had been paid and as a consequence, he and Mr Thompson were allowed to represent the vendors and to have access to the land. There are a number of difficulties with this statement.
The first is that there was no objective evidence before me of any deposit being paid at any time. Given that Mr Heading was Bryxl’s accountant, that should not have posed any difficulty. Secondly, there was no evidence that settlement ever took place. In fact, in response to a query raised by the ATO, Mr Heading said in an email dated 22 June 2011:
I explained that settlement has not yet taken place and that further more we have not yet received a tax invoice from the vendor of the land.
The Commissioner obtained a Register Search Statement from LANDATA on 22 September 2014. That statement discloses Rylene to be the sole registered proprietor of the Kyabram land. The land is subject to a mortgage to Australian Executor Trustees Ltd. There are no caveats on that title as one might expect had there been a subsisting valid contract of sale. Plainly, there has been no settlement of the claimed sale of land contract. The Commissioner has also recorded in his Statement of Facts, Issues and Contentions that when asked about financing the purchase of the Kyabram property, Mr Heading said the settlement had not taken place as the contract allowed one year for settlement. As I have already indicated, no settlement date is stated on the extracts from the sale of land contract which was in evidence. The evidence indicates that, some three and a half years after that letter was provided to the ATO, nothing has altered.
There is a further glaring problem with what Mr Heading said about obtaining a planning permit. Mr Heading said in his email of 14 July 2014 that having paid the deposit, the purchasers were allowed to represent the vendor and have access to the land. He claimed that:
If [because] the terms and conditions of the land purchase were such that the vendor did not allow any access to the land or allow us to represent him in any land development matters then it would be reasonable to conclude that we the purchasers were only preparing to engage in the business of land development. Such was not the case.
From that, Mr Heading submitted that it was reasonable to conclude Bryxl was preparing to engage in the business of land development.
I did have in evidence a Planning Permit issued on 23 December 2010 by the Shire of Campaspe in respect of the Kyabram land. That was issued under s. 47 of the Planning and Environment Act 1987 (Vic) (the Planning and Environment Act) which relevantly provides:
(1) If a planning scheme requires a permit to be obtained for a use or development of land or in any circumstances mentioned in section 6A (2) or for any combination of use, development and any of those circumstances, the application for a permit must –
(a)be made to the responsible authority in accordance with the regulations; and…
An applicant for a Planning Permit need not be the owner of the land. Section 48 of the Planning and Environment Act relevantly provides:
(1) If the applicant is not the owner of the land for which the permit is needed, an application must –
(b)be signed by the owner of the land; or
(c)include a declaration by the applicant that the applicant has notified the owner about the application.…
It follows from the above legislative provisions that what Mr Heading said about paying a deposit in order to enable him to proceed with the development is simply incorrect. All he needed to do was to make a declaration that Bryxl had notified Rylene about the planning permit application.
There is one further problem faced by Bryxl. The Planning and Environment Act provides, at s. 68:
(1) A permit for the development of land expires if –
(a)the development or any stage of it does not start within the time specified in the permit; or
(aa)the development requires the certification of a plan of subdivision or consolidation under the Subdivision Act 1988 and the plan is not certified within two years of the issue of the permit, unless the permit contains a different provision;…
The Planning Permit in evidence sets out the following at clause 25:
This permit will expire if one of the following circumstances applies:
(a)The Plan of Subdivision for the first stage of the subdivision is not Certified under the Subdivision Act 1988 within two (2) years of the date of this permit.
(b)The registration of the Plan of Subdivision is not completed within five (5) years of the date of Certification under the Subdivision Act 1988.
The Responsible Authority may extend the periods referred to if the request is made in writing before the permit expires or within three (3) months afterwards. Prior to approval being given for extension of the Responsible Authority may require the review and resubmission of Plans, computations and other relevant information to accord with current requirements, Acts and Regulations, Codes of Practice and Australian Standards.
Despite what Mr Heading has said about plans being lodged with the Council for subdivision in September 2010, that could only have been for the purposes of obtaining a Planning Permit. The planned subdivision could only proceed following compliance with the Subdivision Act 1988. There was no evidence before me that Bryxl proceeded beyond obtaining a Planning Permit. In those circumstances, the planning permit expired on 23 December 2012. Without that, no subdivision could proceed.
Perhaps the most significant impediment to Bryxl proceeding with the subdivision plan for the Kyabram land is the fact that it could not raise the purchase price.
The first thing which needs to be said is that Mr Heading first claimed that the purpose of acquiring the Kyabram land was for profit-making by resale to a syndicate of buyers put together by a property consultant, Mr James Buckley. I had in evidence a Heads of Agreement dated 24 August 2010 between Mr Thompson, Mr Heading and Mr Buckley. At that stage, it is not clear that Bryxl was involved in any way given that those three persons were said to have agreed to purchase the Kyabram land. In fact, I had no evidence whatsoever that Bryxl was at any stage substituted for Mr Thompson as a party to the sale of land transaction.
According to Mr Heading, Mr Buckley claimed he had access to a syndicate of people with available money to invest in real estate deals. He also claimed that while Mr Thompson negotiated the purchase of the property, the intention was a relatively quick profit on the transfer of the purchased land to the syndicate arranged by Mr Buckley.
Mr Heading then said he and Mr Thompson worked together for several months and engaged land surveyors and engineers. I had in evidence a tax invoice issued by Planright Surveying dated 18 October 2010. The account is addressed to Mr Thompson and it does not mention Bryxl. The brief outline of the work carried out by Planright indicates it was involved in the application for the Planning Permit in respect of the Kyabram land. It included providing a detailed report to the Council; provision of aerial photography overlay on to the Overall Development Plan; preparing a site and description plan; and a site analysis and design response as required by the Council. The total costs on the invoice amount to $12,411.85. Planright also appears to have provided to Mr Thompson what appears to be an indicative quote for the cost of works dated 1 May 2012. The copy of that document provided to the Tribunal is of poor quality and difficult to read. Furthermore, the costs of the envisaged works on the land have been redacted, ostensibly on the grounds that they are commercial in confidence. The final two paragraphs, as best I can make out, state:
These items represent all the works that are required under the permit issued by Campaspe Shire council, and to the best of our knowledge would represent the entire expenditure. Our ? Were compiled using actual tendered rates for similar recent properties within the same region. On this basis we are confident that actual contract rates for this development would be very close to these.
I trust this information is of use to you and answers your current queries.
Plainly, the letter I have referred to above makes clear that Planright had not, as at 1 May 2012, been engaged to commence any subdivision work. All that appears to have been done by that time is that a planning permit was obtained by Planright.
When it became apparent to Mr Heading that Mr Buckley was not able to produce a syndicate which would purchase the Kyabram land, he, along with Mr Thompson, devised a plan by which they would renegotiate the claimed agreement of 24 August 2010 in respect of equal profit-sharing. They resolved to retain the original Heads of Agreement but decided that they would submit accounts for the value of work done to the Kypu Trust. Mr Heading issued a tax invoice to Bryxl on 26 February 2011 in the sum of $825,000. On 13 March 2011 Mr Thompson’s company, Waranga Constructions Pty Ltd, issued a tax invoice to Bryxl in the amount of $1,650,000. According to Mr Heading, the purpose of these invoices was in fact to apply pressure to Mr Buckley to withdraw his claim for a one third interest in profits from the land development business. After Mr Buckley relinquished his claim, Mr Heading said he reversed two invoices amounting to $2,475,000 previously submitted in BAS returns. In cross-examination Mr Heading admitted that the invoiced amounts did not represent the true value of any goods and services acquired or the receipt of advice or information.
Upon queries being raised by the ATO regarding these invoices, Mr Heading, in a letter dated 25 May 2011, admitted that he could not determine when those invoices would in fact be paid. He suggested that would occur at the first refinancing point which should be in August 2011. He also suggested that Bryxl’s claim for input tax credits be deferred until such time as those invoices were in fact paid. In other words, Bryxl had no capacity to make the payment at the time of lodgement of each BAS.
Documents in evidence disclose that Bryxl had made an application to Nationwide Capital Pty Ltd (Nationwide) for a loan in the amount of $3,218,000. It appears an offer of finance was made on 4 May 2011 subject to a number of rather onerous conditions. In any event, the loan was for a period of four months only. That funding did not proceed.
Bryxl made a further application for finance from EDG Constructions Credit in about August 2012. In a letter dated 28 August 2012, EDG provided an outline of the terms on which it proposed funding be provided for a period of 18 months. That proposal was also subject to final approval. That approval did not eventuate.
On 13 March 2014 Mr Heading provided to the tribunal a copy of a letter which appears to have been written by Mr Romi Baumanis, who appears to be a solicitor. According to Mr Heading, he met Ms Nelia Teodoro, a person who had returned from business in the Philippines. Mr Heading confirmed that Ms Teodoro wanted to help fund the Kypu Trust. Mr Heading said he had another associate with him at this meeting who he said had links with wealthy people and confirmed from independent sources that funding was under way. He said those involved in the funding of this matter stated that funds would flow as at the end of March 2014.
In a letter dated 12 March 2014 Mr Baumanis wrote to Mr Heading stating that his client, Ms Teodoro, acknowledged that he had valid claims upon her from various loans and costs and that a company called QNA Equity International Pty Ltd, of which Mrs Teodoro was a director, acknowledged that salary and costs were owing to him. Mr Baumanis continued:
I truly believe from the information supplied to me that substantial sums of money should be received by Ms Teodoro and that such sums should be more than sufficient to meet all of your claims.
I included in these funds [sic] Mrs. Teodoro will have sufficient funds to enable funding to both your Kyabram Land Development and your Olinda Church rebuilding program.
Ms C Basilicata, who appeared on behalf of the Commissioner, made enquiries of Mr Baumanis regarding the contents of his 12 March 2014 letter to Mr Heading. Unsurprisingly, Mr Baumanis recanted what he said in that letter. He said he represented Ms Teodoro and her Family Group and went on to say:
To my knowledge there are no formal Business Relationships between any entity in the Ms Teodoro Group and Bryxl Pty Limited.
I am advised that Mr Heading will not be relying upon any of the understandings relayed in my letter of 22 March 2014 [sic – 12 March 2014].
Quite frankly, while it is readily understandable that Mr Heading is desperate to demonstrate that he has obtained funding for the purchase of the Kyabram land, the information provided by Mr Baumanis, ostensibly a lawyer, is simply a sham.
The obvious conclusion which I must reach is that Bryxl has not been able to obtain the funds necessary to purchase the Kyabram land. Furthermore, until such time as the land is in fact conveyed to Bryxl, it could not possibly have commenced an enterprise involving the subdivision of that land. Although Mr Heading told the ATO that in November 2011 Bryxl had presold 20 blocks of residential land to a company called About Turn Property Pty Ltd for $100,000 per block, I had no documents before me evidencing such a sale. Furthermore, given the fact that in November 2011 Bryxl was not the owner of any part of the Kyabram land, it plainly could not enter into a contract to sell what it did not own.
The evidence in this case regarding Bryxl conducting a business or enterprise involving the subdivision and sale of land discloses that while Bryxl may have had the intention to carry out such a business or enterprise, the steps it undertook in obtaining a planning permit and a market valuation cannot properly be described as being steps taken in the course of commencement of an enterprise. Until such time as it acquired the right to deal with the land in such a way that subdivision and sale could occur, it is artificial to suggest it was conducting the enterprise involving the subdivision and sale of land. The steps taken were clearly precursors or preparatory to the possible commencement of business, whether that be subdivision of the land or a quick sale to a syndicate of buyers.
The evidence before me does not permit a finding that at the time Bryxl lodged with the ATO the BAS statements for the periods ended 31 October 2010, 28 February 2011 and 31 March 2011, Bryxl was carrying on an enterprise in accordance with the GST Act. Accordingly, I find that Bryxl has not discharged the burden of proving that the assessments for the relevant periods were excessive as required pursuant to s. 14ZZK of the Taxation Administration Act. The necessary corollary which follows this finding is that Bryxl was not entitled to input tax credits for claimed expenditure in any of the months in question. It had not acquired anything for a creditable purpose as is required by s. 11-5 of the GST Act.
ABN AND GST REGISTRATION
Section 23-5 of the GST Act provides:
You are required to be registered under this Act if:
(a)you are*carrying on an*enterprise; and
(b)your*GST turnover meets the*registration turnover threshold.
Furthermore, s. 23-10 describes who may be registered for GST in the following way:
(1) You may be*registered under this Act if you are carrying on an*enterprise (whether or not your*GST turnover is at, above or below the*registration turnover threshold).
Subdivision 25-B deals with the cancellation of registration. The circumstances in which the Commissioner must cancel registration are set out in s. 25-55 which provides:
(1) The Commissioner must cancel your*registration if:
(a)you have applied for cancellation of registration in the*approved form; and
(b)at the time you applied for cancellation of registration, you had been registered for at least 12 months; and
(c)the Commissioner is satisfied that you are not*required to be registered.
(2) The Commissioner must cancel your*registration (even if you have not applied for cancellation of your registration) if:
(a)the Commissioner is satisfied that you are not*carrying on an*enterprise; and
(b)the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months.
(3) The Commissioner must notify you of any decision he or she makes in relation to you under this section. If the Commissioner decides to cancel your registration, the notice must specify the date of effect of the cancellation.
Given the findings I have made on the evidence regarding whether or not Bryxl is carrying on an enterprise for the purposes of the GST Act, the Commissioner must cancel its GST registration in accordance with s. 25-55 (2) (a) of the GST Act.
The issue of an Australian Business Number (ABN) is controlled by A New Tax System (Australian Business Number) Act 1999 (the ABN Act). Division 2 states the objects of the ABN Act which includes making it easier for businesses to conduct their dealings with the Australian Government by establishing a system for registering businesses and issuing them with unique identifying numbers so that they can identify themselves reliably. Entitlement to the issue of an ABN is provided for under Part 2 Division 4 of the ABN Act. Section 8 relevantly provides:
(1)*You are entitled to have an Australian Business Number (*ABN) if:
(a)you are*carrying on an*enterprise in*Australia; or
(b)in the course or furtherance of carrying on an enterprise, you make*supplies that are*connected with Australia.
S. 18 of the ABN Act deals with when registration can be cancelled. It relevantly provides:
(1) the*Registrar may cancel*your registration in the*Australian Business Register if satisfied that:
(a)…
(b)…
(c)you are no longer entitled to have an ABN.
Plainly, an entity is not entitled to have an ABN if it is not carrying on an enterprise in Australia. Given I have found that Bryxl was not carrying on an enterprise during the relevant period of time, it was not entitled to have an ABN. Accordingly, in my opinion, it was appropriate for the Registrar to cancel Bryxl’s ABN.
ADMINISTRATIVE PENALTY
Liability to administrative penalties is dealt with in Schedule 1, Division 284 and in particular s. 284-75 of the Administration Act. Insofar as it is relevant, it provides:
284-75 (1) You are liable to an administrative penalty if:
(d)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
(e)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
The BAS’s with which the Tribunal is concerned in this matter were lodged with the ATO by Mr Heading in his capacity as the tax agent acting for Bryxl. Therefore, s. 284-25 may be relevant as it provides:
This Division applies to a statement made by your agent as if it had been made by you.
The expression taxation law is defined in s. 995-1 (1) of the Income Tax Assessment Act 1997 (the 1997 Act). It provides:
taxation law means:
(a)an Act of which the Commissioner has the general administration (including a part of an Act to the extent to which the Commissioner has the general administration of the Act); or
(b)legislative instruments made under such an Act (including such a part of an Act); or
(c)the Tax Agent Services Act 2009 regulations made under that Act.
The can be no question that the Commissioner has the general administration of the GST Act (see Division 105 of the Administration Act).
Liability to an administrative penalty depends on whether the taxpayer has what is described as a shortfall amount. That expression is defined in s. 284-80 and the following table. Relevantly, it provides:
(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 2An amount that the Commissioner must pay or credit to you under a*taxation law (other than the*Excise Acts) for an accounting period, or under a tourist refund scheme under Division 168 of the*GST Act or Division 25 of the A New Tax System (Wine Equalization Tax) Act 1999, worked out on the basis of the statement is more than it would be if the statement were not false or misleading.
The base penalty amounts are set out in the table found in s. 284-90 of the Administration Act. The Commissioner determined that Item 2 applied resulting in a base penalty amount of 50% of Bryxl’s shortfall amount. Item 2 provides:
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)
Recklessness is not a defined term for the purposes of the Administration Act. Accordingly, it should be given its ordinary meaning in the context in which it appears in the legislation. As the High Court of Australia (Gibbs CJ, Stephen, Mason, Aickin and Wilson JJ) explained in Cooper Brooks (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1980) 147 CLR 297, at 304:
It is an elementary and fundamental principle that the object of the court, in interpreting a statute, “is to see what is the intention expressed by the words used”: River Wear Commissioners v. Adamson (16). It is only by considering the meaning of the words used by the legislature that the court can ascertain its intention. And it is not unduly pedantic to begin with the assumption that words mean what they say: cf. Cody v J. H. Nelson Pty Ltd (17). Of course, no part of a statute can be considered in isolation from its context – the whole must be considered.
The Commissioner also relied on Miscellaneous Taxation Ruling MT 2008/1 (MT 2008/1) which sets out the meaning of recklessness in the context of the operation of a taxation law. MT 2008/1 is a public ruling for the purposes of the Administration Act. Accordingly, if a taxpayer relies on the ruling, the Commissioner must apply the law to that taxpayer in the way set out in the ruling unless the Commissioner is satisfied that the ruling is incorrect and disadvantages the taxpayer. Where a taxpayer relies on such a ruling, he or she is protected from having to pay a penalty if it turns out that it does not correctly state how the relevant provision applies.
Clauses 99-104 of MT 2008/1 set out the Commissioners view of the meaning of recklessness. In summary, those provisions state:
·Recklessness connotes conduct which is more culpable than a failure to take reasonable care to comply with a taxation law but less culpable than an intentional disregard of a taxation law.
·A finding of recklessness depends on the application of an essentially objective test. There must be conduct which falls short of the standard of a reasonable person in the position of the taxpayer concerned. Dishonesty is not an element of establishing recklessness. The actual intention of the taxpayer is of no relevance.
·Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by reasonable person.
·Recklessness is gross carelessness, the doing of something which involves a risk whether the doer realises it or not; and having regard to all the circumstances, the taking of that risk would be described as reckless.
·The degree of the risk and the gravity of the consequences need to be weighed in forming a conclusion about whether conduct is reckless.
The decision of the Full Court of the Federal Court of Australia in Hart v Federal Commissioner of Taxation (2003) 131 FCR 203, although concerned with s. 226 H of the Income Tax Assessment Act 1936 (the 1936 Act), is instructive. That section in the 1936 Act provided for a 50% shortfall penalty where the shortfall or part of it was caused by the recklessness of the taxpayer or a registered tax agent with regard to the correct operation of the Act or the regulations. Hill and Hely JJ, Spender J dissenting, said this about the concept of recklessness for the purposes of the 1936 Act, at 214:
Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person’s conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364 Cooper J made the following observations in relation to recklessness in the context of s. 226 H:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
It is also of some assistance to examine the primary decision made by Dowsett J in Hart (Hart v Federal Commissioner of Taxation (2002) ATC 5193). Mrs Hart, the applicant, was married to Steven Irvine Hart, an accountant. Mr Hart was actively involved in aviation and in particular in performing aerobatics and demonstrating aircraft at airshows. He owned a number of aircraft and was paid for his performances at airshows. Mr Hart claim deductions for expenditures incurred in the operation of his aircraft, claiming that he conducted a business associated with the operation of those aircraft. The Commissioner disallowed his deductions noting that over an eight year period, the total income from those operations amount to $6,190. For the same period, he claimed expenditure in the amount of $357,381.
Dowsett J accepted that establishing the business claimed to have been operated by Mr Hart necessarily involved development of a reputation over time. However, while accepting that one may incur losses in conducting business in the hope of a subsequent profit, his Honour said that hope usually gives way to reality, at least when money is concerned. He said that a prudent person would have concluded, after operations had been conducted for almost 10 years, that no profit was likely.
On the question of penalty, his Honour made the point that Mr Hart was an accountant. The income tax returns were completed by Harts Pty Ltd which was a tax agent. Mr Hart was, according to his Honour, part of the accounting operations. He also had intimate knowledge of the operation of the aircraft and hence was well aware of the relevant circumstances surrounding the conduct of the aviation business for the years in question. Dowsett J said, at [26]:
If Harts Pty Ltd had considered this matter in light of the long history of Nemesis receiving very low income for very high outgoings, it would inevitably have had serious reservations about the deductibility of the expenses in question. It is, to say the least, extremely unusual for a business persistently to incur substantial expenses for no appreciable return.… These matters would have led to doubts about whether Unlimited [the operating trust] was conducting such a business, given the absence of any activity until very late in 1995 when Mr Hart commenced training. Even then there was no air show activity until after the end of the 1995-1996 tax year. Any rational consideration of the facts would have demonstrated that by 1995, no business was being carried on in connection with air show activities.
In light of those findings, Dowsett J said, at [29]:
For those reasons I see no reason to doubt the correctness of the finding of recklessness for the purposes of s. 226H.
It should be apparent that there are a number of parallels in this matter. Mr Heading is an accountant and he prepared the BAS statements on behalf of Bryxl. He was intimately involved in the proposal to subdivide the Kyabram land. Significantly, Mr Heading was aware that the intended quick sale of the Kyabram land post-acquisition to the syndicate assembled by Mr Buckley would not eventuate. For that reason, and in order to dissuade Mr Buckley from maintaining his claim to one third share of the profits to which apparently Mr Buckley claimed he was entitled, in February and March 2011, both Mr Heading and Mr Thompson, through his company Waranga Constructions Pty Ltd, each raised a tax invoice seeking payment for work they claimed to have done in furtherance of the plan to subdivide the Kyabram land. Those invoices were sent to Bryxl on about 26 February 2011. At that time, there was no evidence that Bryxl could pay those invoices nor did the invoices set a time by which payment was required. In fact, Mr Heading admitted to the Commissioner that those invoices were issued on a two thirds and one third basis leaving $1,000,000 profit in the business based on an independent valuation. It appears that the issue of those invoices succeeded in having Mr Buckley surrender any claim which he may have had to subsequent profits.
Regardless of the basis for the two tax invoices referred to above, and the fact that Mr Heading was aware that Bryxl could not pay those invoices, Mr Heading objected to the disallowance of the claimed input tax credits resulting from the claimed expenditure. In fact it was not until September 2013 that Mr Heading informed the ATO that the input tax credits for those two invoices were no longer being pursued. In a letter dated 18 September 2013 Mr Heading said:
As James Buckley has agreed to withdraw his claim for one third of all profits from the land development business we, that is Norman Thompson and I, have therefore reversed two invoices amounting to $2,475,000 previously submitted in BAS returns. These invoices were raised upon receipt of a sworn real estate valuation but are no longer needed to counter James Buckley’s claim.
Furthermore, Mr Heading, at the time he lodged the first BAS statement for the period 1 October 2010 to 31 October 2010, knew Bryxl did not have the funds required to purchase the Kyabram land. In my opinion, it must have been apparent to Mr Heading that there was a real risk that the land development project could not proceed. Regardless, despite being an accountant and tax agent for Bryxl, and having knowledge of the GST Act and the circumstances in which a creditable acquisition arises thereby giving rise to an entitlement to an input tax credit, Mr Heading lodged a business activity statement claiming a credit of $1,128. In addition to that, Mr Heading also lodged business activity statements for the month ended February 2011 and March 2011 in the same circumstances. Bryxl was unable to borrow the monies required for purchase of the Kyabram land at that time and, in fact, has not been able to do so as at the date that this matter came on for hearing before me.
In a letter to the ATO dated 28 October 2013 Mr Heading said that it was many years ago since he had been involved in any tax audit or objection matters. He said he had little to do with GST matters since its introduction in 2000. He said he left those matters to be attended to by one of his employees. He transferred his accounting practice to an employee in 2009, that person being a qualified accountant and registered tax agent in her own right. He also employed an experienced bookkeeper who he claimed was skilled in GST to handle all GST return work. Mr Heading said that when preparing and lodging the BAS’s for the Kypu Trust, he telephoned the ATO and offered to attach copies of invoices with the BAS because he considered the transactions were not at arm’s length. He said he was told that copies of the invoices were not required at that time. He also said he referred to a lawyer (who he did not name) who had experience in GST matters. He was told that there were no relevant tax rulings in respect of transactions between entities registered for GST on an accruals basis and those entities registered GST on a cash basis. He said he researched private rule tax rulings in relation to those matters but could not locate any.
The problem is that Mr Heading did not make enquiries regarding the right to claim input tax credits. Furthermore, Mr Heading is an accountant and a registered tax agent, and, most importantly, the person representing Bryxl in all of the matters to do with the acquisition of the Kyabram land. He had the knowledge and experience to understand the basis upon which creditable acquisitions are made. It follows that he must have been aware of the risk he was taking in lodging claims for input tax credits when he did, particularly as Bryxl had not yet acquired the very thing required to undertake an enterprise involving the subdivision and sale of land.
Given Mr Heading’s qualifications and experience as an accountant and tax agent, and his personal involvement in the proposed subdivision development of the Kyabram land including obtaining funding for its purchase, I must find that Bryxl was aware at the time it claimed input tax credits that it was not carrying on an enterprise and hence was not entitled to the claimed input tax credits for any acquisitions made during the months in question. In my opinion, a reasonably well informed accountant and tax agent in those circumstances would have addressed the possibility that an enterprise was not being carried on. Hence, a rational consideration of the facts would have demonstrated that at the relevant time, Bryxl had not embarked upon the enterprise of subdivision and development of the Kyabram land. Adopting the expression used by the majority in the Full Court in Hart’s case, I find Mr Heading’s conduct indicated disregard of or indifference to consequences foreseeable by a reasonable person. In lodging the input tax credit claims during those months, Mr Heading was grossly negligent. Those actions were clearly more than a failure to exercise reasonable care. They were reckless.
For the sake of completeness I should also mention s. 298-20 which deals with remission of penalty. It simply provides the Commissioner with the discretion to remit all or part of the penalty. I did not have in evidence any material which might permit me to consider whether remission of penalty is warranted. Therefore, I decline to do so.
CONCLUSION
I have found that Bryxl has not discharged the onus to prove, on the balance of probabilities, that the input tax credits claimed in BAS statements lodged between October 2010 and March 2011 in the amount of $226,128 should be allowed.
Although Bryxl subsequently claimed to have withdrawn the BAS’s for February and March 2011, it maintained its objection to the disallowance of the October 2010 claim for $1,128. I have found that Bryxl was not entitled to an input tax credit as claimed in the October 2010 BAS because, at that time, it was not carrying on an enterprise. Because it was not carrying on an enterprise at that time, the things Bryxl claimed it had acquired could not have been acquired for a creditable purpose. An input tax credit entitlement only arises where there is a creditable acquisition.
Although Bryxl purportedly reversed the invoices issued for February and March 2011, that only occurred well after the Commissioner made his objection decision. It does not alter the fact that all of the input tax credit claims were made at a time when Bryxl was not carrying on an enterprise. Despite obtaining a planning permit for the proposed subdivision of the Kyabram land, Bryxl was not able to pursue that proposed enterprise because it was unable to raise the finance required for the purchase of the Kyabram land. Bryxl has never become the registered proprietor of that land.
I have also found that Bryxl’s ABN and GST registration should be cancelled. That is because the GST registration must be cancelled where the entity is not carrying on an enterprise. The same consideration applies to the entitlement to have an ABN. Once that entitlement ceases, the Registrar may cancel an entity’s ABN. In these circumstances, I have found that it was appropriate to do so.
I have also found that Bryxl was reckless in lodging the three input tax credit claims. It relied on Mr Heading who was at that time an accountant and registered tax agent. Mr Heading was fully aware of Bryxl’s financial circumstances and the fact that it had never acquired the Kyabram land. Nevertheless, aware of the risk that Bryxl would not be able to obtain a loan to complete the purchase of the land, he made the input tax credit claims. I did not have before me any evidence which would permit me to find that discretion should be exercised to remit all or part of the administrative penalties imposed by the Commissioner.
It follows that I am of the view that the Commissioner’s objection decisions made on 24 August 2012 and 8 November 2013 were correct. I affirm those decisions.
I certify that the preceding 94 (ninety four) paragraphs are a true copy of the reasons for the decision herein of Egon Fice, Senior Member .......................[sgd].................................................
Associate
Dated 19 February 2015
Date of hearing 6 October 2014 Date final submissions received 20 October 2014 Applicant In person Advocate for the Respondent Ms C Basilicata
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