Daniel Perry and Commissioner of Taxation

[2013] AATA 671

[2013] AATA  671

Division	TAXATION APPEALS DIVISION
File Number	2013/1795
Re	Daniel Perry
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Mr R G Kenny, Senior Member
Date	20 September 2013
Place	Brisbane

The Tribunal affirms the Objection Decision.

............................[Sgd]............................................

Mr R G Kenny, Senior Member

CATCHWORDS

INCOME TAX – Claims for unsubstantiated deductions – Tax shortfall – Recklessness by taxpayer in making claims – Imposition of administrative penalty – No basis for remittal of penalty – Commissioner’s objection decision affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth) s 8-1

Taxation Administration Act 1953 (Cth) s 14ZZK, Schedule 1 ss 284-75, 284-90, 298-20

CASES

Arnett & Ors v Federal Commissioner of Taxation (1998) 98 ATC 2137

BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347
Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287
Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 94 ATC 4844
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139

Re Kirby and Collector of Customs (1989) 20 ALD 369

REASONS FOR DECISION

Mr R G Kenny, Senior Member

20 September 2013

BACKGROUND

1. During an audit of the applicant’s income tax return for the 2011/12 tax year, the Commissioner of Taxation (“the Commissioner”) determined that the applicant had made certain unsubstantiated claims for tax deductions in relation to his work as a car salesman. The Commissioner disallowed some of the claims and imposed a penalty of $6,092.20, being 50% of the tax shortfall. This was based on the Commissioner’s finding that the applicant had acted recklessly in making false or misleading statements which led to the tax shortfall.

2. At the hearing, the applicant confirmed that the matter about which he sought review by the Tribunal was the amount of the penalty imposed by the Commissioner.[1] No dispute was raised by the applicant in relation to the calculation by the Commissioner of the tax shortfall amount of $12,184.43.

   [1] See the application for review, signed on 3 April 2013 and lodged with the Tribunal on 19 April 2013.

3. The applicant’s tax return was lodged with the Commissioner by his tax agent. Claimed deductions included work-related car expenses of $23,065; work-related clothing and laundry expenses of $645; and other work-related expenses, including phone expenses and a car dealer’s licence expense, of $10,605. Following an audit by the Commissioner, the applicant was advised by letter, dated 24 October 2012,[2] that these were reduced to nil, $150 and nil, respectively. On 2 November 2012, the Commissioner issued the applicant with a notice of assessment for the 2011/12 tax year. An objection, lodged by the applicant’s tax agent on 12 November 2012 with reference to the applicant’s telephone expenses, car dealer license expense and the administrative penalty, was allowed in part in that deductions of telephone expenses was reduced. The objection was disallowed in relation to the other matters.

   [2] Exhibit 1, T-Document 10, pp. 280-282.

   LEGISLATION

4. The following provisions of the Income Taxation Assessment Act 1997 (Cth) (“ITAA 1997”) and the Taxation Administration Act 1953 (Cth) (“TAA 1953”) are relevant to the issue of the applicant’s administrative penalty:

   ITAA 1997

   8‑1  General deductions

   (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

   (b)  it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

   (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.

   For a summary list of provisions about deductions, see section 12‑5.

   (3)  A loss or outgoing that you can deduct under this section is called a general deduction.

   TAA 1953

   284‑75  Liability to penalty

   (1)  You are liable to an administrative penalty if:

   (a)  you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and

   (b)  the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

   Note: This section applies to a statement made by your agent as if it had been made by you: see section 284‑25.

   (2)  You are liable to an administrative penalty if:

   (a)  you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under an *income tax law or the *MRRT law or *petroleum resource rent tax law; and

   (b)  in the statement, you treated an income tax law, or the MRRT law or petroleum resource rent tax law, as applying to a matter or identical matters in a particular way that was not *reasonably arguable; and

   (d)  item 4, 5 or 6 of the table in subsection 284‑90(1) applies to you.

   (3)  You are liable to an administrative penalty if:

   (a)  you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and

   (b)  that document is necessary for the Commissioner to determine a *tax‑related liability of yours accurately; and

   (c)  the Commissioner determines the tax‑related liability without the assistance of that document.

   Note: You are also liable to an administrative penalty for failing to give the document on time: see Subdivision 286‑C.

   (4)  You are liable to an administrative penalty if:

   (a)  you make a statement to an entity other than:

   (i)  the Commissioner; and

   (ii)  an entity exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and

   (b)  the statement is, or purports to be, one required or permitted by a taxation law (other than the Excise Acts); and

   (c)  the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

   Exceptions to subsections (1) and (4)

   (5)  You are not liable to an administrative penalty under subsection (1) or (4) for a statement that is false or misleading in a material particular if you, and your *agent (if relevant), took reasonable care in connection with the making of the statement.

   (6)  You are not liable to an administrative penalty under subsection (1) or (4) if:

   (a)  you engage a *registered tax agent or BAS agent; and

   (b)  you give the registered tax agent or BAS agent all relevant taxation information; and

   (c)  the registered tax agent or BAS agent makes the statement; and

   (d)  the false or misleading nature of the statement did not result from:

   (i)  intentional disregard by the registered tax agent or BAS agent of a *taxation law (other than the *Excise Acts); or

   (ii)  recklessness by the agent as to the operation of a taxation law (other than the Excise Acts).

   (7)  If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph (6)(b

   284‑90  Base penalty amount

   (1)  The base penalty amount under this Subdivision is worked out using this table and section 284‑224 if relevant:

Base penalty amount
Item	In this situation	The base penalty amount is:
1	You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from intentional disregard of a *taxation law (other than the *Excise Acts) by you or your agent	75% of your *shortfall amount or part
2	You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a *taxation law (other than the *Excise Acts)	50% of your *shortfall amount or part
3	You have a *shortfall amount as a result of a statement described in subsection 284‑75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law (other than the *Excise Acts	25% of your *shortfall amount or part

…

298‑20  Remission of penalty

(1)  The Commissioner may remit all or a part of the penalty.

(2)  If the Commissioner decides:

(a)  not to remit the penalty; or

(b)  to remit only part of the penalty;

the Commissioner must give written notice of the decision and the reasons for the decision to the entity.

Note: Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons.

(3)  If:

(a)  the Commissioner refuses to any extent to remit an amount of penalty; and

(b)  the amount of penalty payable after the refusal is more than 2 penalty units; and

Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.

(c)  the entity is dissatisfied with the decision;

the entity may object against the decision in the manner set out in Part IVC.

SUBMISSIONS

Ms Allison Roberson

1. For the Commissioner, Ms Roberson submitted that the applicant and/or his tax agent acted recklessly in claiming deductions to which the applicant was not entitled and that the penalty was properly assessed at 50% of the shortfall amount under Item 2 of s 284‑90(1) of Sch 1 of the TAA 1953. She submitted that “recklessness” connotes gross negligence in including or omitting material upon which the taxation legislation is to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, and a reasonable person in the position of the statement-maker would see there was a real risk that the legislation will operate incorrectly.[3] Ms Roberson also submitted that the level of care that would be expected of a tax agent would be that of an ordinary and competent practitioner practising in that field and having the same level of expertise.[4]

   [3] Citing BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347.

   [4] Citing Arnett & Ors v Federal Commissioner of Taxation (1998) 98 ATC 2137.

2. In relation to car expenses, Ms Roberson submitted that the applicant had not maintained a contemporaneous log book. In relation to the car dealer’s license expense, she submitted that the expense was not incurred in the relevant financial year as the liability to renew the license did not arise until after the relevant tax year.[5] She submitted that laundry expense records were not maintained by the applicant and that Telstra records indicated that the applicant had two mobile phones, one of which was used by the applicant’s wife, that the account included home internet charges and that international calls were included in the Telstra accounts. Ms Roberson also provided copies of the applicant’s previous taxation returns for the five years prior to the relevant tax year,[6] noting that similar claims had been made by him in those years such that he should be familiar with the substantiation requirements for the various claims.

   [5] Exhibit 1, T-Document 15, p. 312.

   [6] Exhibit 2.

3. Ms Roberson further submitted that it was not appropriate for the tax penalty of 50% to be remitted under s 298-20 of Sch 1 of the TAA 1953. She submitted that this would be appropriate if the penalty was harsh or unjust in the applicant’s circumstances.[7]

   [7] Citing Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287.

   The applicant

4. The submissions of the applicant were that the penalty was unfairly imposed on him.
   He referred to his conduct as being unintentional and the penalty as being more severe than would be imposed in a court if he had been convicted of criminal conduct.
   He advised that he had paid most of the penalty and that the outstanding amount was approximately $1,400. He said that he was currently earning a low wage and that his wife was about to have a baby which meant that his living costs will render him unable to repay the remainder of the penalty.

   EVIDENCE

5. In giving his evidence, the applicant was vague, hesitant and unconvincing.
   He frequently responded to specific questions about aspects of his expenditure in the relevant tax year in a manner which was not greatly cooperative. He frequently responded by declaring that he was unable to recall details. In giving evidence about his claims, the applicant maintained that, on all the deductions in his tax return, he relied on his tax agent. He conceded that he was not in the habit of keeping records in relation to purchasing items he used in his work or of maintaining a contemporaneous log book of his vehicle use. He described a busy working life involving him in significant travel to various parts of Queensland including mining sites where he would inspect trade-in vehicles and arrange for the delivery of replacement vehicles. He agreed that one of his phones was used by his wife and agreed that some of the phone bills recorded on his Telstra account were non-work related international calls from the Philippines made while he and his family were there on a holiday. He described his work uniform, claimed as a deduction, as merely whatever clothing he happened to be wearing on a particular day. There was no requirement from his employer to wear specified clothing or shoes. Some aspects of his evidence were given in a confused manner. In particular, this related to his dealers license which is payable under the Property Agents and Motor Dealers Act 2000 (Qld). He was uncertain of the cost of the licence, whether it was taken for one or for three years or whether he or his employer had paid the license fee.

   CONSIDERATION

6. It is not in dispute that the applicant bears the onus of proof in this matter[8] or that the standard of proof is on the balance of probabilities.[9]

   [8] See s 14ZZK(b)(i) of the TAA 1953; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; and Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 94 ATC 4844.

   [9] Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139; and Re Kirby and Collector of Customs (1989) 20 ALD 369.

7. It is also undisputed that the applicant claimed deductions against his income which were not substantiated. At this hearing, he accepted that an administrative penalty had to be imposed on him, but said that his conduct should not have resulted in such a severe penalty. I do not accept that contention. He did not maintain a log book or retain invoices or receipts. It is unclear how his tax agent was able to assess the expenses claimed on the applicant’s behalf. His evidence was given in an unconvincing manner relying, in the main, on the input of his tax agent and his own inability to recollect details of aspects of his claimed deductions. He was concerned that the Commissioner would allege intentional wrong-doing on his part. Of course, that has not been the case. The applicant is alleged to have acted recklessly in making the claims that he did. I accept the meaning attributed to the concept of “recklessness” advanced by Ms Roberson[10] and I am satisfied that the applicant was grossly negligent in claiming the deductions included in his tax return. There was a real risk that the material in his tax return would be incorrect, and a reasonable person in his position would be aware that there was a real risk and that the legislation would not operate correctly.

   [10] See para 5 (above).

8. Under s 284-90 of the TAA 1953, the base penalty in the case of such reckless conduct is 50% of the shortfall amount. For the lesser penalty of 25% to apply, the applicant’s conduct would need to bear the character of failure to take reasonable care to comply with a taxation law. I am satisfied that his conduct was more serious than mere failure to take reasonable care and that the 50% penalty was the appropriate level of penalty in his circumstances. I am also satisfied that there is no basis in this matter for the penalty to be remitted under s 298-20 of the TAA 1953. The applicant’s incorrectly claimed deductions were many and involved thousands of dollars. I have noted that much of the penalty had been repaid and I am satisfied that it would not be harsh or unjust for the applicant to pay, in full, the penalty imposed on him.

   DECISION

9. The Tribunal affirms the Objection Decision.

I certify that the preceding 13 (thirteen) paragraphs are a true copy of the reasons for the decision herein of Mr R G Kenny, Senior Member

................................[Sgd]........................................

Associate

Dated 20 September 2013

Date of hearing	11 September 2013
Applicant	In person
For the Respondent	Ms Allison Roberson
Solicitors for the Respondent	Joyce Kot and Stacey Jackson, Australia Taxation Office, Legal Services Branch