Copley and Commissioner of Taxation (Taxation)

[2024] AATA 8

Copley and Commissioner of Taxation (Taxation) [2024] AATA 8 (8 January 2024)

Division:TAXATION AND COMMERCIAL DIVISION

File Number:2022/2063, 2022/2064 and 2022/2065          

Re:Robert Copley  

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member Dr M Evans-Bonner

Date:8 January 2024

Place:Perth

The Reviewable Decision is affirmed.

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Senior Member Dr M Evans-Bonner

CATCHWORDS

TAXATION – income taxation – Applicant claimed deductions for work related car expenses and other work related expenses –  financial years ending 30 June 2018, 30 June 2019 and 30 June 2020 – whether expenses incurred in gaining or producing the Applicant’s assessable income – whether substantiation requirements satisfied – Applicant primarily relied upon bank statements as evidence of expenses – a lack of receipts or tax invoices to substantiate expenses – lack of specificity in vehicle logbook – whether deductions allowable under s 8-1 of the Income Tax Assessment Act 1997 (Cth) – Applicant unable to meet burden in s 14ZZK of the Taxation Administration Act 1953 (Cth) – Reviewable Decision affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth), ss 8-1, 8-1(1), 8-1(2), 28.90, 28.90(2), 28.90(6), 28.125(2), 28.125(3), 900.10, 900.15, 900.100, 900.105, 90.110, 900.115, 900.115(2)

Taxation Administration Act 1953 (Cth), s 14ZZK

CASES

Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148

SECONDARY MATERIALS

Practice Statement Law Administration: Verification approaches for electronic device usage (PS LA 2001/6) 

REASONS FOR DECISION

Senior Member Dr M Evans-Bonner

8 January 2024

BACKGROUND TO THE APPLICATION

1. Mr Copley is a real estate salesperson. He is the Managing Director of The Vines Real Estate (WA) Pty Ltd (Vines Real Estate) where he is also a director and 50% shareholder (T64). Similarly, he is also a director and 50% shareholder of Copley & Associates Pty Ltd (Copley & Assoc) (T63).  

2. Mr Copley claimed tax deductions for the income years ended 30 June 2018, 30 June 2019, and 30 June 2020 (Relevant Years) in his personal income tax returns for those years (T3-T5).

3. Mr Copley’s income in the Relevant Years was derived from his employment with Vines Real Estate. He also received Director’s fees from Copley & Assoc of $5,400 in each of the Relevant Years.

4. The Commissioner issued Notices of Assessment for the 2018 and 2019 income years on 21 May 2021. The issue of a Notice of Assessment for the 2020 income year was delayed because the Commissioner commenced a pre-issue audit for that income year.

5. During the audit process the Commissioner requested supporting documents from Mr Copley’s accountants, but they were not provided, and so on 4 August 2021, the Commissioner notified Mr Copley that the audit had been completed.

6. On 10 August 2021 the Commissioner issued Notices of Amended Assessment for the 2018 and 2019 income years and a Notice of Assessment for the 2020 income year (the Original Assessments) which did not allow any of the claimed deductions.

7. On 5 October 2021, Mr Copley’s tax agent lodged an objection against the Original Assessments, stating that he should be permitted to deduct the expenses which were incurred in his role as “Real Estate Person; Manager and Licensee of The Vine Real Estate (WA) Pty Ltd” (T28/435). He also claimed further “other work-related expenses” in his objection under the label “D5” and attached supporting documents including bank and credit card statements, vehicle expenses and telephone bills.

8. These additional claims significantly added to the amounts of D5 expenses originally claimed. Specifically, for the:

   ·2018 income year the claimed expenses were increased from $28,773 to $42,273.55.

   ·2019 income year the claimed expenses were increased from $26,359 to $41,893.

   ·2020 income year the claimed expenses were increased from $24,253 to $44,682.

9. The Commissioner allowed Mr Copley’s objection in part in a decision dated 12 January 2022 (T2) (Objection Decision). Specifically:

   ·Director’s fees of $5,400 for each of the Relevant Years were allowed in full. Rental Expenses (Label 21) were allowed in full for the 2018 and 2019 income years.

   ·Work related car expenses (Label D1) and other work related expenses (D5) for the Relevant Years were disallowed in full.

   ·Gifts and donations for the 2019 and 2020 income years were also disallowed in full.

10. It is the Objection Decision (T2) that is the Reviewable Decision before the Tribunal.

11. To give effect to the Objection Decision, the Commissioner issued Notices of Amended Assessment on 21 January 2022 (T17-T19). I will collectively refer to these as the Amended Assessments.    

12. On 11 March 2022, the Applicant sought review of the Reviewable Decision in this Tribunal (T1).

13. The total amount of deductions that Mr Copley claimed for the Relevant Years was $151,189.55. The breakdown is as follows:

    ·$48,582.55 for the 2018 income year, comprising $6,309 of D1 – work related car expenses and $42,273.55 of D5 – other work related expenses.

    ·$50,609.00 for the 2019 income year comprising $8,123 of D1 – work related car expenses, $41,893 of D5 – other work related expenses and $593 for gifts and donations.

    ·$51,998.00 for the 2020 income year comprising $7,109 of D1 – work related car expenses, $44,682 of D5 – other work related expenses and $207 for gifts and donations.

    ISSUE

14. The issue I must determine is whether the expenses claimed by Mr Copley that are in dispute (for D1, D5 and for gifts and donations) are deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

15. This involves a consideration of whether:

    ·The expenses claimed were incurred in gaining or producing Mr Copley’s assessable income (as required by s 8-1(1) of the ITAA 1997).

    ·The expenses claimed were of a capital, private or domestic nature (if so, no deduction is allowable pursuant to s 8-1(2) of the ITAA 1997).

    ·Mr Copley can substantiate the expenses pursuant to the record keeping requirements in Division 28 and Division 900 of the ITAA 1997.

16. In this application, these considerations are somewhat interlinked. Specifically, Mr Copley was not able to substantiate many of the expenses and consequently it was difficult for me to assess whether they were incurred in gaining or producing his assessable income and whether some of the expenses were of a private or domestic nature (and if they were both how they should be apportioned). Indeed, some of the evidence (such as credit card statements showing purchases that were personal in nature) suggested that some of the expenses fell into that category.

17. This meant that Mr Copley fell short of meeting the burden under s 14ZZK of the Taxation Administration Act 1953 (Cth) (TAA) which requires him to establish that the Amended Assessments were excessive or otherwise incorrect and what they should have been. 

    STATUTORY FRAMEWORK

18. Section 8-1 of the ITAA 1997 concerns general deductions. The relevant subsections are s 8-1(1) and (2) which set out when deductions can and cannot be made:

    (1) You can deduct from your assessable income any loss or outgoing to the extent that:

    (a)         it is incurred in gaining or producing your assessable income; or

    …

    (2) However, you cannot deduct a loss or outgoing under this section to the extent that:

    (a)         it is a loss or outgoing of capital, or of a capital nature; or

    (b)         it is a loss or outgoing of a private or domestic nature; or

    (c)        it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

    (d)         a provision of this Act prevents you from deducting it.

    (Notes and asterisks omitted throughout decision.)

    …

19. To be eligible to claim a tax deduction, a taxpayer must also be able to substantiate the expenses pursuant to the record keeping requirements in Division 28 and Division 900 of the ITAA 1997. Subdivision 900-E of the ITAA 1997 contains provisions which explain to taxpayers that they must have written evidence to support a claim for a deduction, otherwise they are not entitled to a deduction for the expense (s 900.10, 900.15, 900.100, 900.105, 90.110).

20. The relevant parts of s 900.115 of the ITAA 1997 set out the requirements for the written evidence:

    (2)   You must get a document from the supplier of the goods or services the expense is for. The document must set out:

    (a)  the name or business name of the supplier; and

    (b)  the amount of the expense, expressed in the currency in which it was incurred; and

    (c)  the nature of the goods or services; and

    (d)  the day the expense was incurred; and

    (e)  the day it is made out.

    (3)   There are 2 exceptions to these requirements:

    (a)  if the document does not show the day the expense was incurred, you may use a bank statement or other reasonable, independent evidence that shows when it was paid;

    (b)  if the document the supplier gave you does not specify the nature of the goods or services, you may write in the missing details yourself before you lodge your income tax return for the income year.

    ASSESSING THE DEDUCTIONS

21. The Commissioner submitted that Mr Copley has not met his burden under s 14ZZK of the TAA. The Commissioner said that this was because Mr Copley has failed to establish that the expenses were incurred by him, and that he has failed to establish a nexus between the wages that he derived from employment with Vines Real Estate or from the Director’s fees that he received from Copley & Assoc, and the expenses claimed as deductions (transcript/37).

22. Mr Copley submitted that the expenses that he claimed for the Relevant Years were legitimately incurred to earn his income. He stated that he would not have made any claims that were not genuine (transcript/30, 40). I accept that Mr Copley was acting honestly and that he was only attempting to claim for expenses he thought he was entitled to. However, Mr Copley admitted that his vehicle logbook was not detailed enough and that he did not have receipts for many of the expenses claimed (transcript/25, 42).

23. It is also useful here to outline Mr Copley’s evidence about the different entities because the expenses claimed were paid from accounts including an account in the name of Copley & Assoc trading as The Vines Real Estate, a credit card account in the name of Copley & Assoc and the personal bank account of Mr Copley.

24. Mr Copley explained that Copley & Assoc was “non-operational” but that it submitted an income tax return each year (transcript/38). He explained that he would pay his own money into Copley & Assoc and that it derives no income (transcript/19). He explained that Vines Real Estate generated the sales income and claimed business expenses such as advertising. However, he claimed any personal expenses in his individual income tax return (transcript/26). His evidence was that he was personally paying for all the expenses claimed regardless of whether they were in the name of Vines Real Estate or Copley & Assoc (transcript/41).

25. I will now discuss each category of deduction.

    D1 – Work related car expenses

26. Mr Copley has claimed expenses relating to registration, insurance, repairs, roadside assistance, and fuel. He has claimed car expenses using the logbook method. These expenses for the Relevant Years total $21,541.

27. The first problem for Mr Copley is that the expenses are being claimed for a vehicle that is owned by Copley & Assoc. The vehicle has been financed and the borrower is stated as Mr and Mrs Copley in a statement covering the period March 2015 to March 2019 (T62/1360) and as Copley & Assoc in a subsequent statement dated 15 July 2021 (T36/727). A person can claim a deduction using the logbook method, if, while they held the car, the used it in producing their assessable income. A person holds a car while they own it, or while it is leased to them (s 28.90(2) and (6) of the ITAA 199). I note Mr Copley’s evidence (outlined above) that he personally paid all the expenses regardless of the entity. Nevertheless, s 28.90 is not met because he did not hold the car, rather Copley & Assoc did. That is, the expenses were incurred by Copley & Assoc and not Mr Copley.

28. The second problem for Mr Copley is that his logbook lacks sufficient specificity. For example, the start and finish times encompass a whole day, and the purpose is described as “work-various/ personal” “work-various” or “personal” (T33/511). This does not comply with the requirements for completing a logbook in the ITAA 1997 which requires, amongst other things, an entry for each “journey” (unless two or more journeys are made in a row which can be recorded as a single journey) and specification of why the journey was made (s 28.125(2) and (3) of the ITAA 1997).

29. A further problem for Mr Copley is that he did not have any receipts to substantiate fuel expenses. He only has bank account transaction statements in Mr Copley’s name and in the name of Copley & Assoc showing purchases at petrol stations. For example, Mr Copley’s personal account shows a debit of $124.33 at Coles Express on 27 November 2017 (T31/486). Another example is a debit of $9.00 at Caltex on 7 June 2018 (T31/492). Although Mr Copley believed that he only bought fuel at fuel stations (transcript/10), a transaction statement does not comply with s 900.115 of the ITAA 1997 because it is not clear what goods or services were acquired. That is, bank account transaction statements are an insufficient substantiation that the expenses were incurred and do not comply with s 900.115(2) of the ITAA 1997.

30. I am therefore not satisfied that Mr Copley has met the burden of establishing that the Amended Assessments were excessive or incorrect and what they should have been with respect to the car expenses.  

    D5 – Other work related expenses

31. In this category Mr Copley claimed bank fees for credit card interest totalling $94,567, phone expenses totalling $8,255 and other expenses totalling $26,026.55 for the Relevant Years.

32. Mr Copley is claiming interest on seven credit cards as a tax deduction. In his application Mr Copley explained that in 2011 he formed the Vines Real Estate company with a new business partner (who is now no longer his partner) and that, “I had a large amount of Bank Card debt which was from me withdrawing funds from the Cards and putting those funds to repay creditors of my previous business dealings” (T1/4). In an objection dated 5 October 2021, Mr Copley’s tax agent stated that: “The debts have been incurred over the past years for the payment of his work expenses and payment of costs associated with the ownership of the business The Vines Real Estate” (T28/436). At the hearing Mr Copley explained that they were debts from “a long time ago” from a real estate business owned by his father which Mr Copley took over. He said that at the time it was easy to get credit cards and so he used the credit cards as business loans and that he put the money back into the business to keep it going (transcript/17-18).

33. Mr Copley has produced credit card statements which show the opening balance of the credit cards at the start of the financial year. For example, the opening balance on one of the cards in Mr Copley’s name for the period 24 July 2017 to 21 August 2017 was $23,913.63 (T34/564). However, there is no evidence to show what that balance comprised. For example, it is unknown whether the interest costs claimed relate to work expenses incurred in earning Mr Copley’s assessable income such as items purchased for work, whether the expenses were personal, or whether they were partly personal and partly for work. In this regard, I note that some of the statements contain personal transactions, for example, for CrownBet, TABtouch, Jeans West, a personal cash advance, Bras and Things and a bar charge (transcript/15-17). Mr Copley agreed that there are some personal expenses on the statements. However, he stated that they were “very small in comparison to the big major fixed debt on each card” (transcript/17). Also, one of the accounts is in the name of Copley & Assoc (T34/562) and so any interest incurred on this account is arguably not an expense incurred by Mr Copley, but rather one incurred by Copley & Assoc. I find that the interest expenses were not sufficiently substantiated or apportioned.

34. Mr Copley has also claimed a deduction for telephone expenses for the Relevant Years which he sought to substantiate with telephone tax invoices. Mr Copley said that he had conservatively estimated 40 to 50% of his use was work related, although he thought that it was probably more like 70 to 80% (transcript/20).

35. The telephone tax invoices relied upon are in the name of Mr Copley’s wife, Mrs Copley (T37, T45, T53). This raises some doubt about who incurred the expenses.

36. The composition of those accounts also raises doubts about who incurred the expenses and the proportion of work related use. The first tax invoice (T37) covered two mobile telephones (for Mr and Mrs Copley respectively), two telephone services and a “bundle”. Mr Copley could not recall what these latter two services and the bundle were for but thought one of the services was for his home telephone. For another tax invoice, Mr Copley could not recall what the three mobile services stated in that invoice were for (transcript/21).

37. Practice Statement Law Administration: Verification approaches for electronic device usage (PS LA 2001/6) provides that a taxpayer requires evidence to demonstrate how the taxpayer has calculated their deduction based on a proportion of the total expense incurred. PS LA 2001/6 does, however, contemplate that in “limited cases” a reasonable estimate can be provided if the claim is small, and the taxpayer can demonstrate their estimate was reasonably likely in the circumstances.

38. Although Mr Copley attempted to conservatively estimate his telephone use, I am not satisfied the estimate was reasonable because the evidence I have just outlined raises doubts about the accuracy of any estimate. The PS LA 2001/6 suggests that a diary record or an itemised list of calls over a four week period is sufficient evidence to demonstrate how a taxpayer has calculated their deduction. This method allows for the percentage of work related calls during that period to be apportioned over a yearly period. However, Mr Copley confirmed that he did not realise that he had to keep a diary of his telephone usage. He confirmed that he did not keep any other documentation to apportion business or personal use (transcript/20-21).

39. Mr Copley was engaged in full-time work as a real estate agent and the nature of that work requires telephone usage. Some of his telephone expenses would have been incurred to generate his income from real estate sales. That means that the assessment may have been incorrect, as required by s 14ZZK of the TAA. However, Mr Copley is also required to demonstrate what the assessment should have been. The uncertainties regarding the extent of Mr Copley’s telephone use for work purposes, as well as the accounts being in his wife’s name, mean that he has not been able to demonstrate this.

40. Mr Copley has also claimed various other expenses in the Relevant Years. These include RACWA, Landgate, Morton Learning, JB HiFi, Harvey Norman, Officeworks, PLE Computers, Blue Diamond Mach-Gen, and Power Tech Telecom. Mr Copley relies upon bank transaction statements as evidence of these expenses. As I mentioned above, bank account transaction statements are an insufficient substantiation and do not comply with s 900.115(2) of the ITAA 1997. That is, it is unclear from bank statements alone as to what the expense was, how the expense was incurred in earning Mr Copley’s assessable income, and any apportionment between business and personal use.     

41. Mr Copley’s other expenses include Onepath life insurance, paid by Copley & Assoc (T35/705; T57). He also claimed AMP life Insurance. There are no corresponding statements or payment receipts, but an annual statement shows a “regular employer contribution” (T56). Mr Copley also claimed car interest on the same vehicle in the name of Copley & Assoc that I discussed above. It is therefore unclear whether Mr Copley incurred these expenses as an employee, or whether it was Copley & Assoc who incurred the expenses. I note that although Mr Copley’s evidence was that Copley & Assoc was not operational, it did lodge an income tax return and paid him Director’s fees in the Relevant Years.

1. I observe that several expenses are likely to have been incurred in the gaining of Mr Copley’s assessable interest as a real estate agent. Those expenses are a Real Estate Licensing Fee of $644.60 and Landgate fees. However, there is insufficient substantiation because those charges only appear on bank statements (T33/534; T36/724).

2. I am therefore not satisfied that Mr Copley has met the burden of proving that the Amended Assessments were incorrect and what they should have been with respect to the D5 – other work related expenses.

   D9- GIFTS OR DONATIONS

3. Mr Copley relies on bank transaction statements to show that he has made charitable donations. Two of the donations are likely to be legitimate charitable donations because the payments were made to “Movember” and “Telethon”. However, it is unclear whether three payments to “RM Brackstone Family” and one payment to “Go fund me” were payments to registered charities. There are no receipts or tax invoices for any of the claimed donations. As there is no supporting documentation to substantiate any of these expenses, I am not satisfied that Mr Copley has met the onus of establishing that the Amended Assessments are excessive or otherwise incorrect, and what they should have been, with respect to these donations.

   CONCLUSION

4. For the reasons outlined above, the expenses claimed by Mr Copley are not deductible under s 8-1 of the ITAA 1997.  

5. In other words, Mr Copley has not met the burden under s 14ZZK of the TAA of proving that the Notices of Assessment are excessive or otherwise incorrect and what they should have been. Unfortunately, in the absence of corroborating evidence supporting the expenses claimed, such as tax invoices which meet the requirements of s 900.115 of the ITAA 1997, the evidence of a taxpayer (in this case, Mr Copley) that they have incurred the expenses is unlikely to be sufficient to meet the burden (see Hill J in Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148 at 155). Similarly, letters from Mr Copley’s accountant stating that Mr Copley paid the expenses personally (A2), that the expenses were incurred in the operation of Mr Copley’s business (A3) and asserting that the Commissioner was provided with sufficient evidence (A4), are insufficient in assisting Mr Copley to meet the burden.

6. Unfortunately, Mr Copley did not keep adequate receipts and records to support the expenses that he claimed and to apportion personal and business usage. He therefore failed to meet the substantiation requirements. The way that Mr Copley structured his employment and his corporate entities further added to the confusion as to who incurred the expenses. Fortunately, Mr Copley is now aware of his record keeping requirements and has restructured his affairs to help his compliance. This should assist in preventing similar issues to those in this application from arising in the future.  

   DECISION

7. The Reviewable Decision is affirmed.

I certify that the preceding 48 (forty-eight) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr M Evans-Bonner

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Associate

Dated: 8 January 2024

Date of hearing:	5 September 2023
Representative for the Applicant:	Self-represented
Representative for the Respondent:	Ms K McClurkin, Australian Taxation Office