Catherine Campbell and Commissioner of Taxation
[2012] AATA 473
•25 July 2012
[2012] AATA 473
Division Taxation Appeals Division File Number(s)
2011/1169
Re
Catherine Campbell
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 25 July 2012 Place Brisbane (heard in Mackay) The objection decisions under review are affirmed.
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Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – GST – Input tax credits – definition of carrying on an enterprise – assessment of the shortfall amount – administrative penalty – definition of intentional disregard – definition of recklessness – decisions affirmed.
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-20, 105-1
Taxation Administration Act 1953 (Cth) s14ZZK(b)
CASES
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
SECONDARY MATERIALS
Miscellaneous Tax Ruling MT 2008/1
REASONS FOR DECISION
Senior Member Bernard J McCabe
Catherine Campbell is locked in a dispute with the Commissioner of Taxation over her GST liability for the period 1 August 2008 through 30 June 2010. In particular, Ms Campbell objected to the Commissioner’s decision to deny her claims for a number of input tax credits in relation to GST. The Commissioner’s objection decision dated 22 December 2010 also reduced the administrative penalty to 50% of the tax shortfall on the basis the taxpayer had not intentionally disregarded taxation laws, but rather had been reckless. The Commissioner also declined to remit the penalty in whole or in part. Ms Campbell has asked the Tribunal to review the case.
The Commissioner has a number of concerns in relation to Ms Campbell’s affairs. He doubts whether she was genuinely carrying on an enterprise within the meaning of s 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act); he also has difficulty making the link between particular expenditures and the taxpayer’s business (such as it was), and the relevant periods.
In a case like this, the taxpayer must persuade me the Commissioner’s assessment is excessive. But it is not enough for her to call the accuracy of the Commissioner’s figures into question. The legislature accepts the taxpayer is likely to be in a better position to understand and justify her own affairs, so she ought to assume the burden for correcting any mistakes that arise. Section 14ZZK(b) of the Taxation Administration Act 1953 (Cth) says, in effect, the taxpayer must establish how the assessment should be adjusted to make it right, or more nearly right: see Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 88 per Latham CJ. As a practical matter, the Commissioner’s decision will be affirmed (at least in relation to the amount of the taxation shortfall) if the evidence does not suggest a better, alternative explanation of what has occurred.
THE TAXPAYER’S CLAIM THAT SHE WAS CARRYING ON AN ENTERPRISE
One may only claim input tax credits in respect of creditable acquisitions made in the course of carrying on an enterprise. Enterprise is defined in s 9-20 of the GST Act. That provision talks of an enterprise as being “an activity, or series of activities, done…in the form of a business…or in the form of an adventure or concern in the nature of a trade…”. The definition of “carrying on [an enterprise]” in s 195-1 is wide: it extends to “doing anything in the course of the commencement or termination of the enterprise”.
No two businesses are the same, and the parliament has never attempted to exhaustively define the expression. The task of assessing whether a particular set of activities qualifies as a business or enterprise requires an assessment of fact. In making that assessment, one might look for certain indicia that are commonly associated with businesses. One would expect to see an expectation of profit, for example. Ms Campbell insisted that was the case here: she said everything she did was with a view to making a large profit, albeit that she did not anticipate making profits until some point in the (hopefully not too distant) future. But even if I accept that is so, I should still be able to identify aspects or features of the conduct that would suggest she was conducting a business as opposed to doing something else, or nothing at all.
Ms Campbell says she was carrying on an enterprise named FM Personnel Solutions. She says she established the business on the Gold Coast in mid-2008 with a friend. Ms Campbell told me at the hearing she had gained experience in human resource management while working for a number of companies overseas. She said the business initially focused on traditional recruiting activities. She established a database of firms and potential employees and began doing placement work. She also reviewed resumes for a fee. Not long after the applicant commenced the business, she met a wealthy individual whom she believed had experience working in human resources in other countries. She said this man became her mentor and offered to support her business. That was fortuitous because Ms Campbell and a school-friend with expertise in IT had identified what they believed was a gap in the market for a firm like FM Personnel Solutions. Ms Campbell says she wanted to develop a software package that would help mining and resource firms in particular manage all of their human resource functions.
Ms Campbell and her school-friend set about the business of software development towards the end of 2008. The taxpayer says she did not give up all of her other business activities, but they were no longer the focus of the business. She says she engaged in marketing activities and market research in preparation for the eventual launch of the software. She was also involved in the preparation of training videos and other activities that one might expect to see in a business like this during its start-up phase.
Things came unstuck in January 2010 when the taxpayer’s home was burgled. That was a problem because the business was conducted from the home. (The house included a large garage that was apparently converted into offices.) The burglars cleaned out all of the equipment used in the business and made off with all of the business records. The taxpayer says she was left with nothing. Even the software itself was gone: apparently the applicant was not in the habit of backing up.
The burglary was reported to the police but the taxpayer said she did not immediately inform her mentor of what had occurred. The school-friend apparently gave up in the face of this new obstacle and left the business. She may have since left the country: in any event, the taxpayer was not able to obtain any evidence from her former partner (or employee, or joint-venturer: the precise nature of the relationship was unclear from the evidence). The taxpayer purchased new computers and other equipment to replace what had been stolen, even though it was no longer clear what the business was doing given the software development process had effectively failed. I understand the taxpayer continued to use a credit card she had been provided by her mentor to make some of these purchases, just as she had done before the burglary. (It was a curious arrangement: the mentor gave one of his own credit cards to the taxpayer along with the PIN to make business purchases.) The taxpayer says she was in denial about the future during this period. It was not until May or June that she knew she could not continue with the business. By then, her mentor had cut-off contact with her. He refused to provide any information to her that might have been used in connection with this application. She does not know where he is nor has she had any contact with him. He has not made any formal demand for repayment of the monies he advanced, although it is uncertain whether he would have a right to recover whatever monies he made available since it is unclear whether he loaned the money or made an equity investment. He may have been a creditor, or a partner; or his relationship might have been characterised altogether differently.
Although this business was in a start-up phase, the taxpayer says it did exist for over two years. It consumed hundreds of thousands of dollars of capital provided by the taxpayer’s mentor and carried on a number of other activities involving a range of people that one would expect to result in paperwork and other records or testimony. But the taxpayer says she has no records of anything that occurred prior to 2010 – in other words, for the bulk of the life of the business – because of a remarkably thorough burglary.
Theft, flood, fire and other calamities do occasionally disrupt businesses and destroy records. Sometimes the disaster is man-made, or the product of bad decisions. It makes no difference, provided the disruption was unintended. A decision-maker dealing with a taxpayer in those circumstances must be pragmatic. If the records are unavailable, there might be other evidence which supports the taxpayer’s story.
Not in this case. The taxpayer did not call her mentor or her school-friend to give evidence. She says she is no longer in contact with them. She did not call evidence from any of her former suppliers, and she provided limited material and no testimony from former clients. Indeed, when pressed, she could not nominate more than a handful of clients she had dealt with in the course of her business. She insisted she had made inquiries of many of the people and businesses she had dealt with but “doors were slammed in my face”.
The taxpayer was also unable to explain what marketing activities she had undertaken to secure the clients in the first place. In her oral evidence, she repeatedly referred to handshakes and “being out there”, but she was unable to clarify what that meant. She referred to advertisements that had been placed in a newspaper, but she claimed the newspaper had been unable to provide copies of the ads she placed when it was asked to do so. She was also unable to identify anyone willing to give evidence about her market research activities in connection with the development of the software. The software was presumably developed in consultation with people in the relevant industry who could inform the taxpayer and her collaborators about what was required, but none of those people were identified or called as witnesses.
Ms Campbell’s evidence also raised questions about the quality of the records that were supposedly being kept before they were removed in the burglary. I refer in particular to the financial records. In her oral evidence at the hearing, the taxpayer said the mentor assumed responsibility for the financial records. That is not surprising if many of the expenditures in the business were incurred on a credit card in his name – but it is surprising that a business would be financed in this way in the first place. This evidence raised more questions than it answered about the precise nature of the taxpayer’s relationship with her mentor. I note she was asked to address this issue at the hearing, but she declined to do so. I was not referred to evidence of lawyers or other professionals being retained to advise the collaborators about the terms of their business relationship: indeed, the agreement between the taxpayer and her mentor was supposedly hand-written and it was struck without the benefit of legal advice even though the product being developed by the business was likely to cost a great deal to launch and was projected to generate a very large return.
The fact the taxpayer conducted her business from converted space in her home is not unusual, but the absence of systems is remarkable. I refer in particular to the failure to make copies of key records or back-up files – and the extraordinary failure to make a back-up of the work that went into developing the software packaging itself. It is startling that a business developing a commercial software package would not take the rudimentary precaution of making a proper back-up of the code.
I do not propose to rehearse all of the evidence tendered at the hearing in relation to this issue. It is unnecessary for me to explore every detail of the applicant’s activities and her every explanation for what occurred. The matters I have already discussed raise insuperable obstacles to a finding that the taxpayer was carrying on an enterprise. I do not know for sure what was going on here, but I am not persuaded the evidence establishes the taxpayer’s activities answered the description in s 9-20. In those circumstances, the Commissioner’s assessment of the shortfall amount must be affirmed.
THE RATE OF THE PENALTY
I have already noted the Commissioner determined an administrative penalty equal to 50% of the shortfall amount was appropriate. That rate is applicable where the false or misleading statements provided to the Commissioner were the product of recklessness. The Commissioner initially levied a penalty at the higher rate applicable in cases where there was an intentional disregard of a taxation law, but the penalty was reduced in the objection decision.
Given I found I was not persuaded the taxpayer was carrying on an enterprise, there must be some question as to whether the Commissioner’s view about penalties on objection is wrong. If the taxpayer was not carrying on a business but was instead engaged in some other pursuit, or was not doing anything at all, the very act of claiming input tax credits in a BAS is surprising. Surely she did so in disregard of the taxation laws?
Some assistance can be obtained from Miscellaneous Taxation Ruling MT 2008/1 which sets out the Commissioner’s views on the meanings of expressions including “recklessness” and “intentional disregard”. In that document, the Commissioner opines:
101. Behaviour will indicate recklessness where it falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity. Although the test for determining whether recklessness is shown is the same as that applied for testing a want of reasonable care, it is the extent or degree to which the conduct of the entity falls below that required of a reasonable person that underscores a finding of recklessness.
102. Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.
The Commissioner’s take on intentional disregard is expressed in these terms:
112. Intentional disregard means that there must be actual knowledge that the statement made is false. To establish intentional disregard, the entity must understand the effect of the relevant legislation and how it operates in respect of the entity's affairs and make a deliberate choice to ignore the law.9
113. Dishonesty is a requisite feature of behaviour that shows an intentional disregard for the operation of the law. This is another significant difference between this type of behaviour and behaviour that shows a want of reasonable care or recklessness where dishonesty is not an element.
114. Evidence of intention must be found through direct evidence or by inference from all the surrounding circumstances, including the conduct of the entity.
I am satisfied the Commissioner’s views I have quoted should be accepted as an accurate definition of the various expressions for present purposes, and I adopt them. The comments with respect to intentional disregard are particularly relevant. There is no direct evidence in this case that the taxpayer knew she was breaching a taxation law when she completed her BAS. Indeed, the whole problem with this case is that there is little in the way of reliable direct evidence about anything the taxpayer said, did, or thought. In those circumstances, it would not be appropriate to impose a penalty at the rate of 75%. But I am persuaded there is recklessness: it is unclear what basis, if any, the taxpayer had for making the claims she did. I am satisfied the evidence – such as it is – establishes the taxpayer disregarded risks that should have been foreseeable to a reasonable person.
SHOULD THE PENALTY BE REMITTED?
The taxpayer was unable to refer me to any evidence about her current circumstances or about the circumstances in which the mistakes were made that led to the shortfall that would justify remission of the penalty.
CONCLUSION
The objection decisions concerning the assessment of the shortfall amount, as well as the decision concerning assessment of the rate of penalty under review must be affirmed.
I certify that the preceding 23 (twenty three) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.
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Associate
Dated 25 July 2012
Date(s) of hearing 30 May 2012 Applicant Self-represented Solicitors for the Respondent Ms Kot
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