Dezfoolian and Commissioner of Taxation (Taxation)

[2021] AATA 3991

Dezfoolian and Commissioner of Taxation (Taxation) [2021] AATA 3991 (29 October 2021)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):       2020/7637-2020/7641

Re:Alireza Dezfoolian

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member R Olding

Date:29 October 2021

Place:Sydney

The objection decision is varied by reducing the interest included in the applicant’s assessable income for the 2016, 2017 and 2018 income years to the amounts of $14,357, $14,015 and $12,193 respectively.

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Senior Member R Olding

CATCHWORDS

TAXATION – INCOME TAX -  foreign exchange losses – where applicant transferred funds to Iranian bank account – where exchange rate movements adversely affected the value of the applicant’s funds – where applicant failed to bring interest on the funds to account – where respondent agreed to change in conversion rate upon receipt of further information – decision varied only to that extent

TAXATION – ADMINISTRATIVE PENALTIES – penalty for false or misleading statement with no shortfall – penalty for false or misleading statement resulting in shortfall – lack of reasonable care – remission – decision affirmed

LEGISLATION

Income Tax Assessment Act 1997, s 6-5, Div 775

Taxation Administration Act 1953, s 14ZZK; Sch 1, ss 284-75(5), 284-90(1), Items 3, 3C, s298-20, s 284-220(1)(c)

CASES

Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) [2011] FCA 1090
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50

REASONS FOR DECISION

Senior Member R Olding

29 October 2021

1. The applicant, Mr Dezfoolian, is an Australian resident. In 2011, he transferred $180,000 from his Australian bank account to an account with Maskan Bank in Iran, with the hope of benefitting from higher interest rates on offer in Iran.

2. Maskan Bank periodically credited interest to Mr Dezfoolian’s account which was designated in Iranian Rials (‘IRR’). Unfortunately for Mr Dezfoolian, declines in the AUD/IRR exchange rate adversely affected the value of his funds. Mr Dezfoolian withdrew most of the funds in his IRR account on 21 October 2018, converting them to Australian dollars which he transferred to his Australian bank account.

3. Taking the view that he had made losses because of the decline in the value of his funds due to the exchange rate, Mr Dezfoolian did not include the interest credited to his account at Maskan Bank in his Australian income tax returns. He also claimed capital losses and carried forward losses relating to the decline in the value of his investment.

4. The Commissioner of Taxation issued assessments treating the interest credited to Mr Dezfoolian’s account as part of Mr Dezfoolian’s assessable income. The Commissioner also assessed administrative penalties in respect of the income years after Mr Dezfoolian removed the funds from Maskan Bank; that is, in respect of the years ended 30 June 2019 and 2020.

   DECISIONS UNDER REVIEW

5. Mr Dezfoolian objected to the income tax and penalty assessments. The Commissioner disallowed the objections. Mr Dezfoolian has applied for review of the objection decisions.

6. The objection decisions before the Tribunal for review relate to:

   (a)Primary tax assessments – for the years ended 30 June 2016, 2017 and 2018;

   (b)Penalty assessments – relating to the years ended 30 June 2019 and 30 June 2020.

7. Mr Dezfoolian bears the burden of proving that the assessments are excessive: Taxation Administration Act 1953 (‘TAA’), s 14ZZK.

   PRIMARY TAX ASSESSMENTS – 2016, 2017 AND 2018

8. I understand Mr Dezfoolian’s disappointment at finding the interest included in his assessable income even though the value of his deposit declined due to the exchange rate movements. However, broadly speaking, the Australian income tax system brings to account ordinary income, such as interest on bank accounts, in the year in which it is derived[1] and foreign exchange gains and losses in the year in which they are realised.[2]

   [1] Income Tax Assessment Act 1997 (‘ITAA 1997’), s 6-5.

   [2] ITAA 1997, Division 775.

9. Mr Dezfoolian does not dispute that the interest was credited to his Maskan Bank account. That being so, there is no legal basis on which I could conclude that the interest was not derived when it was credited to his account. Mr Dezfoolian did not submit otherwise, merely maintaining that he should not have to pay tax when he suffered a loss in the value of his funds.

10. In those circumstances, the Commissioner was correct to assess Mr Dezfoolian to income tax on the basis that the interest was derived when Maskan Bank credited it to his account.

11. On the basis of information subsequently provided by Mr Dezfoolian, the Commissioner now accepts that the exchange rate for conversion of the interest from IRR to Australian dollars should be calculated at the rate specified by Express Money Exchange[3], rather than the less favourable basis on which the interest was converted to Australian dollars for the purposes of the assessments.

    [3] Express Money Exchange is a remittance service used by Mr Dezfoolian to transfer the funds from Maskan Bank to his account in Australian dollars at the Commonwealth Bank.

12. There is insufficient evidence to determine when the interest was, on each occasion during the income years, credited to Mr Dezfoolian’s account. Bank statements show the amount credited by 31 December in each year but not when the interest was credited throughout the year. However, the parties agreed that calculating the conversion at the rate applicable at 31 December each year would be appropriate in the circumstances.

13. The objection decision should be varied to reflect the more favourable Express Money Exchange conversion rate applicable at 31 December in each year. The variations in assessable income attributable to the revised conversion rates are as follows:

Income year	Interest assessed at objection	Interest to be assessed
2016	$19,553	$14,357
2017	$20,232	$14,015
2018	$16,766	$12,193

PENALTY ASSESSMENTS

1. Although Mr Dezfoolian’s income tax returns for the 2016, 2017 and 2018 were false or misleading and resulted in shortfalls in the tax payable, the Commissioner wholly remitted administrative penalties in respect of those years. The audit officer explained to Mr Dezfoolian that he could only claim a foreign exchange loss in the year in which the loss was realised and the losses could not be spread over the years of the investment.[4]

   Penalty assessments

   [4] Note of telephone conversation of 18 June 2019 at T12-251.

   Penalty assessed - 2019

2. In his return for the year ended 30 June 2019, Mr Dezfoolian claimed a deduction of $117,800 under ‘Item D9 – Gifts or donations’. He concedes that the amount claimed was not a gift or donation but instead says it was an attempt to claim a capital loss in respect of the foreign exchange movements. He also claimed carried forward losses of $110,000.

3. The Commissioner correctly determined that these claims should be disallowed but allowed a deduction of $151,946 for the foreign exchange loss Mr Dezfoolian suffered when he transferred the funds from Maskan Bank to his Australian dollar account in October 2018. The Commissioner also determined that Mr Dezfoolian’s gross interest income should be increased from $5,697 to $9,077.

4. Due to an administrative oversight, at the time of the hearing the Commissioner had not processed these amendments. However, the Commissioner confirmed that Mr Dezfoolian’s income tax return and the unprocessed amendments would not result in a shortfall in tax payable.

5. Nevertheless, the Commissioner assessed a penalty of $4,200. This is the base penalty amount for a false or misleading statement in a return that does not result in a shortfall of tax payable.[5] The Commissioner remitted an uplift of the penalty by 20 percent that would otherwise have applied because a base penalty applied in an earlier income year[6] (but had been remitted in the previous audit). The Commissioner did not otherwise remit the penalty and maintains that no further remission is appropriate.

   [5] TAA, Sch 1, s 284-90(1), Item 3C.

   [6] TAA, Sch 1, s 284-220(1)(c).

   Penalty assessed – 2020

6. In respect of the 2020 income year, Mr Dezfoolian also wrongly claimed a deduction at Item 9 – Gifts or donations, as well as carried forward losses. After disallowing these items, the Commissioner assessed a shortfall of $39,935.52. The corresponding penalty assessment for a false or misleading return resulting in a shortfall of tax, calculated at the base rate of 25 percent for lack of reasonable care,[7] is in the amount of $9,983.85.

   [7] TAA, Sch 1, s 284-90(1), Item 3.

   Consideration 

7. While I have considered the penalty assessments for each year separately, because of the commonality of circumstances and reasoning it is convenient to deal with them together. This also reflects the way Mr Dezfoolian approached his submissions.

   False or misleading?

8. Mr Dezfoolian says his returns were not false or misleading because, when he claimed the deductions under Item D9 Gifts or deductions, he included a comment: ‘Capital loose (sic) (not working)’. Mr Dezfoolian says, and I accept, that he tried to bring the loss to account as capital losses but the part of the Australian Taxation Office (‘ATO’) online return facility where he tried to insert the amount would not accept it as a deduction against his income.

9. Although the evidence is not clear in this regard, it seems more likely than not that the reason Mr Dezfoolian considered the ATO website was not functioning properly was that it did not offset the claimed capital loss against his other income. Capital losses may only be offset against capital gains and not against ordinary income. By wrongly returning the losses as gifts or donations, Mr Dezfoolian achieved his objective of reducing his assessable income by the amount of the losses he claimed in 2019 and the amount he treated as carried forward losses in 2020.

10. I accept that Mr Dezfoolian intended in his comment to refer to a capital loss. I do not accept that this minimal comment is sufficient to transform the otherwise plainly false and misleading inclusion of foreign exchange losses as gifts or donations into statements that are not false or misleading. The losses claimed were foreign exchange losses. They were plainly not gifts or donations but that is how Mr Dezfoolian returned them. The statement is at least false, and arguably also misleading notwithstanding the comment Mr Dezfoolian inserted in his returns.

    Reasonable care?

11. A taxpayer is not liable for an administrative penalty for a false or misleading return if the taxpayer exercised reasonable care in connection with making the relevant statement in the return.[8] Whether reasonable care was exercised is to be assessed in the context in which the taxpayer made the statement in the return.

    [8] TAA, Sch 1, s 284-75(5).

12. In that regard, Mr Dezfoolian is not an unsophisticated man. He described his occupation in his 2019 and 2020 returns as ‘COMPUTING PROFESSIONAL – SOFTWARE ENGINEER’. Even accepting his assertion that he tried to call the ATO about the preparation of the returns but the line was busy, this would not be sufficient to discharge his burden of proving that he exercised reasonable care in preparing his returns. That is especially so in the context of Mr Dezfoolian having already been audited in respect of interest income from the Maskan Bank for previous years and having been told of the correct treatment of foreign exchange losses.

13. Further, there is no evidence of Mr Dezfoolian actually making any inquiries at all – either of the ATO or by examining the ATO website or through a tax agent - about the proper treatment of the foreign exchange loss or preparation of his returns, notwithstanding the earlier audit experience. Calling an ATO inquiry number, finding it busy, then proceeding to lodge returns without further inquiry or investigation is not reasonable care.

14. Considered in the context of Mr Dezfoolian’s level of sophistication; the advice received from the ATO at the earlier audit; and the absence of any actual effort to ascertain the correct treatment, I can only conclude that Mr Dezfoolian has not discharged the burden of proving that the penalty assessments are excessive on the basis that he exercised reasonable care. On the evidence before the Tribunal, it could not be said that Mr Dezfoolian made reasonable attempts to comply with the taxation law.[9]

    [9] Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) [2011] FCA 1090, [38].

    Remission?

15. The discretion to remit penalties is broad.[10] The Tribunal must consider whether it is appropriate in all the circumstances to wholly or partly remit the penalty.[11]

    [10] TAA, Sch 1, s 298-20.

    [11] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50, [249].

16. Mr Dezfoolian did not put forward any additional arguments in support of further remission. His argument that he should not have been required to pay any tax because he suffered a loss on his investment due to the foreign exchange movements goes to the underlying policy of the law and cannot support remission of penalty. Nor do his assertions, even if accepted, about the ATO online return function not supporting the manner in which he tried to prepare his return assist in the context already indicated.

17. Mr Dezfoolian had a responsibility to ensure that his returns were accurate. The evidence indicates that he took little effort to do so and was more intent on claiming what he considered to be the appropriate tax treatment. It is also not irrelevant that, as already mentioned, the Commissioner remitted the penalty uplifts for these two years and wholly remitted the penalties that would otherwise have applied for each of the three earlier income years that were subject to audit.

18. In those circumstances, I am not persuaded that Mr Dezfoolian has made a case for further remission of the penalties assessed by the Commissioner.

19. It might be thought that that is a harsh outcome in respect of the 2019 income year for which there was no shortfall in tax payable. However, Parliament has imposed penalties in those circumstances for reasons it considered to be appropriate. The mere fact that there is no shortfall is not sufficient, in itself, to warrant remission of penalties. The other circumstances mentioned weigh against further remission for the reasons indicated and Mr Dezfoolian has not put forward other considerations in favour of full or partial remission of the penalties.

    Conclusion

20. It follows that I am not persuaded that Mr Dezfoolian has discharged the burden of proving the penalty assessments are excessive.

    DISPOSITION OF THE REVIEW

21. The objection decision should be varied to allow for the more favourable exchange rate for conversion of the interest from IRR to Australian dollars mentioned above. On the basis of the applicable taxation laws and the evidence before the Tribunal, no other variations to the primary tax or penalty assessments are warranted.

I certify that the preceding 34 (thirty-four) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding

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Associate

Dated: 29 October 2021

Date(s) of hearing:	7 October 2021
Advocate for the Applicant:	Self-represented
Advocate for the Respondent:	A Hinder
Solicitors for the Respondent:	ATO Review & Dispute Resolution