Dotrac Pty Ltd and Anor and Commissioner of Taxation
[2014] AATA 336
•29 May 2014
[2014] AATA 336
Division TAXATION APPEALS DIVISION File Number
2013/1392
Re
Dotrac Pty Ltd
FIRST APPLICANT
File Number
2013/1397
Re
George and Lila Ioannidis
SECOND APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 29 May 2014 Place Sydney The objection decisions are affirmed.
.......[Sgd].................................................................
Deputy President S E Frost
CATCHWORDS
TAXATION – GST – whether applicants carrying on an enterprise – identification of activities – whether applicants making acquisitions – whether "promissory notes" constitute the provision of consideration – administrative penalty – recklessness – failure to seek independent advice on an arrangement involving multiple parties not at arm's length – decisions affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999(Cth) – ss, 9-15, 9-20, 11-5, 11-15, 29-5, 29-10, 195-1
Taxation Administration Act 1953(Cth) – Pt IVC, ss 14ZZK, Schedule 1 ss, 284-75, 284-80, 284-85, 284-90
CASES
BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164
Hart v Commissioner of Taxation (2003) 131 FCR 203; [2003] FCAFC 105
Re Simon Harland as Trustee for PCS and Commissioner of Taxation [2013] AATA 930REASONS FOR DECISION
Deputy President S E Frost
29 May 2014
A company by the name of Montpac Pty Ltd, in its capacity as the trustee of the 2000A Parkwood Estate Unit Trust, is the owner of a property of some 4,900 acres near Goulburn. The property, referred to in these proceedings as the “Oallen Property”, has a pine plantation on it but Montpac wants to subdivide it and develop it.
A second company by the name of Global Network Link Pty Ltd, in its capacity as the trustee of the Diamond Unit Trust, owns a property in Grenfell (“the Grenfell Property”) which it would like to develop.
Dotrac Pty Ltd (the first applicant in these proceedings) and the partnership of George and Lila Ioannidis (the second applicant) claim to have made acquisitions in relation to the development of the Oallen Property. Dotrac also claims to have made acquisitions in relation to the development of the Grenfell Property. Both applicants are registered for GST. They claimed input tax credits (ITCs) on those purported acquisitions. However, the Commissioner formed the view that the ITC claims could not be supported. Accordingly the Commissioner made amended assessments of both applicants’ “net amounts” – in Dotrac’s case, for the tax periods from April 2010 to June 2011, and in the partnership’s case, for the tax periods from April 2009 to December 2010. The Commissioner also assessed administrative penalty in each case at 50 per cent of the shortfall amount.
The Commissioner’s position when he made the amended assessments was that neither applicant carried on an enterprise at all, so that neither of them could be entitled to any ITCs.
The applicants objected against the amended assessments. In each case the objection was allowed in part. The reason for the partial allowance of the objection was that the Commissioner accepted that each applicant was carrying on an enterprise, and had made some creditable acquisitions, but only in respect of activities that were not connected with either of the development properties. On the Commissioner’s view, nothing done by the applicants in relation to the Oallen Property, or by Dotrac in relation to the Grenfell Property, constituted or formed part of any enterprise carried on by either of them, and as a result they were not entitled to any ITCs in that regard.
Each applicant applied to the Tribunal for review of the objection decisions. A number of other entities related to these applicants, including Montpac and Global Network, also received amended assessments and objection decisions at around the same time, and similarly sought review of the objection decisions in the Tribunal. Those other applications have all been resolved in one way or another; only the applications of the current applicants remain to be determined.
THE ISSUES FOR DETERMINATION
The essential issue in respect of the amended assessments is whether the applicants are entitled to the ITCs they claimed in relation to the Oallen and Grenfell Properties. That depends on whether they made “creditable acquisitions” for the purposes of the A New Tax System (Goods and Services Tax) Act1999 (GST Act). That, in turn, depends on (i) whether the applicants’ activities, or any of them, in relation to the Oallen or Grenfell Properties constituted an “enterprise”; (ii) whether the applicants acquired taxable supplies from suppliers; (iii) whether any of the applicants’ acquisitions were made in “carrying on” an “enterprise”; and (iv) whether the applicants provided, or were liable to provide, consideration for any such supplies.
In respect of the administrative penalty, the issues are (i) whether the applicants or their agents were reckless, or alternatively failed to take reasonable care, in complying with their tax obligations; and (ii) whether any penalty imposed should be remitted, either wholly or in part.
THE RELEVANT LEGISLATION
The relevant pieces of legislation are the GST Act and the Taxation Administration Act 1953 (TAA).
Section 11-5 of the GST Act answers the question “What is a creditable acquisition?” 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 term “creditable purpose” is defined (to the extent presently relevant) in s 11-15(1) as follows:
You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
Section 9-20 of the GST Act defines the concept of “enterprise”. The relevant part of subsection (1) states:
An enterprise is an activity, or series of activities, done:
(a) in the form of a *business; …
The word “business” is defined in s 195-1 as including “… any profession, trade, employment, vocation or calling, but does not include an occupation as an employee”.
Further, “carrying on” an enterprise is defined in s 195-1 to include “doing anything in the course of the commencement or termination of the enterprise”.
Division 29 of the GST Act deals with the “attribution”, or timing, of GST that is payable to the Commissioner, and ITCs that are payable by the Commissioner. Relevant to that concept are ss 29-5(1) and (2), relating to GST on supplies, and ss 29-10(1) and (2), relating to ITCs:
29-5 Attributing the GST on your taxable supplies
(1)The GST payable by you on a *taxable supply is attributable to:
(a)the tax period in which any of the *consideration is received for the supply; or
(b)if, before any of the consideration is received, an *invoice is issued relating to the supply—the tax period in which the invoice is issued.
(2)However, if you *account on a cash basis, then:
(a)if, in a tax period, all of the *consideration is received for a *taxable supply—GST on the supply is attributable to that tax period; or
(b)if, in a tax period, part of the consideration is received—GST on the supply is attributable to that tax period, but only to the extent that the consideration is received in that tax period; or
(c)if, in a tax period, none of the consideration is received—none of the GST on the supply is attributable to that tax period.
29‑10 Attributing the input tax credits for your creditable acquisitions
(1)The input tax credit to which you are entitled for a *creditable acquisition is attributable to:
(a)the tax period in which you provide any of the *consideration for the acquisition; or
(b)if, before you provide any of the consideration, an *invoice is issued relating to the acquisition—the tax period in which the invoice is issued.
(2)However, if you *account on a cash basis, then:
(a)if, in a tax period, you provide all of the *consideration for a *creditable acquisition—the input tax credit for the acquisition is attributable to that tax period; or
(b)if, in a tax period, you provide part of the consideration—the input tax credit for the acquisition is attributable to that tax period, but only to the extent that you provided the consideration in that tax period; or
(c)if, in a tax period, none of the consideration is provided—none of the input tax credit for the acquisition is attributable to that tax period.
The administrative penalty provisions in the TAA are set out later in these reasons, at [74]-[78].
In proceedings such as these, under Part IVC of the TAA, each taxpayer bears the burden of proving that (i) each of the amended assessments of net amount, and the assessments of administrative penalty, is excessive (s 14ZZK(b)(i) of the TAA); and (ii) the decision not to remit the penalty should not have been made, or should have been made differently (s 14ZZK(b)(ii) of the TAA).
ARRANGEMENTS RELATING TO THE DEVELOPMENT PROPERTIES
I will deal mainly with the arrangements relating to the Oallen Property. They do not differ in any material respect, at least as far as the GST arrangements are concerned, from those relating to the Grenfell Property. I will separately mention the Grenfell arrangements if necessary.
It seems to be uncontroversial that there has been some work undertaken in respect of the Oallen Property. It is even true to say that there has been some work done on the property. The dispute between the applicants on the one hand, and the Commissioner on the other, centres on what that work consists of, how much of it was done, who it was done for, and whether it has been paid for.
Mr Ioannidis represented both applicants in these proceedings. He explained that he is an accountant by training, with well over 30 years of experience as such, both in commerce and in private practice. He also has what he described as a “real estate background”, and has done “quite a lot of project subdivision developments”.
Mr Ioannidis said there were “about seven” unit-holders in the 2000A Parkwood Estate Unit Trust (of which, it will be recalled, Montpac was the trustee). Dotrac was one of those unit-holders, itself as trustee of another unit trust, called the Western Group Unit Trust. Mr Ioannidis described Dotrac also as “one of the principal contractors to the project”, that project being, presumably, the project of developing the Oallen Property for its eventual subdivision. He said that the G & L Ioannidis partnership (the second applicant in these proceedings, which from now on I will refer to as “G&L”, since this is the label generally applied to it during the hearing) became another one of the “principal contractors”, but this was “down the track”, which I understood to mean not initially.
Exactly what the “principal contractors”, including Dotrac and G&L, did in relation to the property remains, regrettably, the subject of “quite profound mystery”, as the Commissioner’s counsel Mr O’Mahoney so aptly put it during the hearing. The same observation applies in respect of what the “principal contractors” are supposed to have acquired from the entities described by Mr Ioannidis as the “subcontractors”, who are said to have undertaken some of the development activities.
When pressed, Mr Ioannidis described Dotrac’s activities as “project management”, and alternatively as “the director on this whole project”. He said Dotrac had “entered into an agreement for certain works to be done”. He said the agreement was with two companies – one named Axis R Us Pty Ltd, which he identified as “one of our other subsidiaries”, and another named LDG Engineering Pty Ltd, which was owned by one of the clients of the accounting firm for which Mr Ioannidis works. He said there were “documents relating to that”; he said there was “a three-way arrangement to cover Montpac, to cover Dotrac, to cover G&L in their respective roles at different stages”. However, he was unable to identify where, among the body of documents before the Tribunal and numbering almost 2000 pages, documents relating to any such “three-way arrangement” were to be found.
In broad terms, the case put by the applicants is this. Montpac engaged the “principal contractors” to get certain work done on the property. The principal contractors in turn engaged subcontractors to do the physical work. The subcontractors did the work and charged the work to the principal contractors. The principal contractors bundled up the charges, marked them up by 20 per cent and on-charged them to Montpac.
Assuming that all relevant supplies were taxable supplies, and that the true supply chain was from the subcontractors to the principal contractors, and then to Montpac, the GST law would apply to arrangements like that in the following way. The subcontractors would charge GST to the principal contractors. The subcontractors would pay that GST to the Commissioner, and the principal contractors (that is, Dotrac and G&L) would claim ITCs equal to the GST charged to them by the subcontractors. The principal contractors would charge GST to Montpac. The principal contractors would pay that GST to the Commissioner, and Montpac would claim ITCs equal to the GST charged to it by the principal contractors.
In broad terms, that seems to have been the intended approach here. But there is an interesting twist. The applicants accounted for GST on a non-cash basis. That meant that, whenever they made a creditable acquisition, they could claim their ITCs as soon as they had an invoice from their supplier, even if the invoice itself remained unpaid: s 29-10(1)(b) of the GST Act. On the other side of the ledger, when you account for GST on a non-cash basis you attribute GST on your supplies to the tax period in which you issue an invoice for the supplies, even if you have not received any consideration: s 29-5(1)(b). That did not cause any immediate concern for the applicants because they did not invoice Montpac until at least two years after receiving the invoices from the subcontractors – and even then, for only part of the amounts that had been charged to them.
In addition to that, at least some of the subcontractors accounted for GST on a cash basis, which meant that they did not have to pay the Commissioner any GST on supplies they made, until they actually received the consideration for them: s 29-5(2)(c) of the GST Act.
The amounts invoiced to the applicants by the subcontractors are substantial. The total amount invoiced to Dotrac (including in relation to the Grenfell Property) is over $250,000. The total amount invoiced to G&L is in excess of $820,000.
The invoices themselves are short on detail.
An invoice dated 24 June 2010, and issued to Dotrac by Axis R Us, seeks payment of $5,615.50 for “Costs – Develop – Grenfell”. A second invoice from the same supplier, and dated 26 July 2010, nominates “Project Management – Goulburn Project July 2010” and an invoice price of $4,353.25. It seems curious that Axis R Us invoiced Dotrac for “project management” in relation to the Oallen Property, when it was Mr Ioannidis’ contention that Dotrac was itself the project manager.
It will be recalled that Mr Ioannidis described Axis R Us as “one of our other subsidiaries”: see [23] above. The Axis R Us invoices indicate that the company has the same postal address as the firm of public accountants “Ioannidis & Associates” which also issued invoices to Dotrac in June 2010 for “I & A Project management costs”, “Risk management plan” and “Review & Opinion on Business”, and in respect of which the Commissioner appears to have accepted Dotrac’s ITC claims.
Two invoices issued to G&L by Pezoto Enterprises Pty Ltd (which seems to have been another “subcontractor” in relation to the development of the Oallen Property), one on 30 June 2010 and another on 30 September 2010, describe the supply as simply “Procure: Works for Goulburn Project – Roads”, and specify GST-inclusive amounts, respectively, of $268,450.60 and $290,873.00 payable.
There are other documents that provide some indication of what was being done, or at least what was proposed to be done, on the Oallen Property. These are documents styled “Schedule to Costs”; examples of them are at Tabs ET38 and ET39 of Exhibit A1.
The “Schedule to Costs by Pezoto Enterprises Pty Ltd” at ET38 includes the following table of information:
Item No Description of scheduled work Amount incl. GST 1. Diamond Unit Trust Works for Goulburn Project – Roads $279,844.95 2. Montpac Pty Ltd Works for Goulburn Project – Roads Sub-division $112,508.00 3. Montpac Pty Ltd Works for Goulburn Project – Roads Sub-division $173,500.25 4. Montpac Pty Ltd Works for Goulburn Project – Roads Sub-division $285,000.02 5. Montpac Pty Ltd Works for Goulburn Project – Roads Sub-division $262,589.80 6. Global Network Link P/L Works for Goulburn Project – Roads $186,653.50 7. Global Network Link P/L Works for Goulburn Project – Roads $266,057.00 8. Global Network Link P/L Works for Goulburn Project $235,745.95 10. G&L Ioannidis Works for Goulburn Project – Roads $290,873.00 11. G&L Ioannidis Works for Goulburn Project – Roads $268,450.60
The omission of item 9 is not an error on the Tribunal’s part; the table is reproduced accurately from Exhibit A1.
The amounts shown at items 10 and 11 are identical to the amounts invoiced to G&L by Pezoto in June and September 2010, as mentioned in [32] above.
What is not explained by the table, and what Mr Ioannidis was unable to explain to the Tribunal, is (i) why some of the work was to be charged to the Diamond Unit Trust, some to Montpac, some to Global Network and some to G&L; and (ii) why the total amount to be charged (all – or virtually all – of it, apparently, relating to “roads”) was to be apportioned between those different entities in the way that it was.
During the hearing the following exchange, referring to this table, took place between Mr Ioannidis and me:
DEPUTY PRESIDENT: What does it tell me, apart from perhaps work that Pezoto says it has either done or going to do, and that it has decided that it is going to invoice it to different parties for certain amounts. What does it tell me apart from that? And there’s a question-mark over whether it even shows me that?
MR IOANNIDIS: ---Okay. If you go through the item numbers, it says, Diamond Unit Trust, Montpac, Montpac, Global Network, G&L, and you refer to the subsequent agreements which is in more detail with the parties to perform the works. So you’ve got to look at it in entirety, not just that summary, that’s what I’m saying. So basically, all right, look, on the face value it might look like Montpac has given consent, it authorises it. But in detail who is going to do – like how we structured it, it’s on the subsequent documents on the schedules attached to it, which explain. For example, if I can direct it, where it says number 10 there, “G&L’s works for Goulburn Project 290,” and it shows you the number of invoices on the other agreements that relate to that.
DEPUTY PRESIDENT: I still don’t understand how it is – I’m not even sure that this document says what I’m about to say it says. It might say Pezoto is going to invoice a total of $2.3 million as follows, to different people in different amounts. It doesn’t tell me why it’s going to invoice the different entities the different amounts. It doesn’t tell me anything about what Diamond Unit Trust, Montpac, Global Network or G&L are actually doing. And remember that was the very, very first or almost the very first question that was asked today. What are they doing. You see, it seems to be a document telling various entities associated with you, well, we’re going to do 2.3 million – we are either going to or we have done $2.3 million worth of work somewhere and there will be an invoice [for] 279,000 to Diamond Unit Trust. There will be 112,000, 173,000, 285,000 and 262,000 to Montpac. And there will be three invoices made out to Global Network and there will be two invoices made out to G&L. But I don’t understand what it says apart from that. It doesn’t give any detail as to what the work is, and it doesn’t tell me – it doesn’t even hint at telling me what Diamond Unit Trust is doing, what Montpac is doing. Now, they’re not relevant to the current proceedings. But it doesn’t tell me what G&L is doing?
MR IOANNIDIS: ---Well, if you go – - –
DEPUTY PRESIDENT: And I did tell you earlier this morning, you need to be able to tell me something about the activities that G&L was carrying on?
MR IOANNIDIS: ---All right. G&L and Dotrac and – yes.
DEPUTY PRESIDENT: Yes. Exactly. This document doesn’t do that?
MR IOANNIDIS: ---All right. Can I just go one step back. Where G&L and Dotrac is the principal contractor and I refer to that, right, and they have passed on 20 per cent and it’s hard to work out. Okay. Now, with reference to your previous question and – - –
DEPUTY PRESIDENT: But so far, Mr Ioannidis, what you’re doing is you’re telling me you’re putting a label on them?
MR IOANNIDIS: ---Yes.
DEPUTY PRESIDENT: You’re saying that they’re principal contractors?
MR IOANNIDIS: ---That’s correct.
DEPUTY PRESIDENT: You’re telling me something about their pricing?
MR IOANNIDIS: ---Yes.
DEPUTY PRESIDENT: Which is cost plus 20 per cent?
MR IOANNIDIS: ---Yes.
DEPUTY PRESIDENT: But you’re telling me nothing about what they are doing?
MR IOANNIDIS: ---This is where – - – - – -
DEPUTY PRESIDENT: What they are doing?
MR IOANNIDIS: ---Okay.
DEPUTY PRESIDENT: What their activities are. I use the word “activities” because it’s in the definition of enterprise. What are their activities?
MR IOANNIDIS: ---So in terms of the activities, if we look at Dotrac, then part of the works that Axis has done to complete, are part of these activities in a particular lot. They are itemised here.
DEPUTY PRESIDENT: But can I just stop you there?
MR IOANNIDIS: ---Yes.
DEPUTY PRESIDENT: The work that Axis does talks about Axis’ activities. It doesn’t say anything about the partnership’s activities. Do you understand that distinction?
MR IOANNIDIS: ---Hang on, we’re talking about Dotrac now. I’m referring to – - –
DEPUTY PRESIDENT: Well, Dotrac?
MR IOANNIDIS: ---Well, I’m referring to this example that I’ve got here.
DEPUTY PRESIDENT: The work or the activity that Axis R Us carries out tells me nothing about the activities that are carried out by the partnership or by Dotrac?
MR IOANNIDIS: ---That’s right but then Axis invoiced Dotrac and Dotrac invoiced – sorry.
DEPUTY PRESIDENT: Is that the – - -?
MR IOANNIDIS: ---Some of the works that were done were – - –
DEPUTY PRESIDENT: Well, is that the activity? Is the activity, the activity of invoicing; is that the activity?
MR IOANNIDIS: ---No, no, the activity is not – - –
DEPUTY PRESIDENT: The activity is more than the activity of invoicing?
MR IOANNIDIS: ---Of course. Yes, of course, yes. But the overall – - –
DEPUTY PRESIDENT: What is the activity?
MR IOANNIDIS: ---Management, overseeing things, looking at organising things.
DEPUTY PRESIDENT: And that was the arrangement that was struck by a deal of some sort between Dotrac and the land-owner, and by the partnership and the land-owner, presumably?
MR IOANNIDIS: ---Well, that’s right. But, as I explained to you, because the other unit-holders, they didn’t want to put any more money in, I had to risk my own capital. Okay.
DEPUTY PRESIDENT: You know – - -?
MR IOANNIDIS: ---And that was part of this – - –
DEPUTY PRESIDENT: And when you say that, I suppose what occurs to me is that there might be a document somewhere that says, well, the original arrangement was “x” but now that other people don’t want to throw in any more money the arrangement has changed to “y”. Is there a document like that?
MR IOANNIDIS: ---Well, basically, yes, there should be something.
DEPUTY PRESIDENT: But is there? There should be, I would expect there to be, but is there?
MR IOANNIDIS: ---Well, that’s in relation to when we minuted this, what had to be done, and there were minutes in relation to that.
DEPUTY PRESIDENT: Where are they?
MR IOANNIDIS: ---Well, we’ve got them somewhere.
DEPUTY PRESIDENT: But where are they? You see, you’ve said a few times today there’s lots of documents?
MR IOANNIDIS: ---Yes, that’s right.
DEPUTY PRESIDENT: I agree with that?
MR IOANNIDIS: ---Yes.
DEPUTY PRESIDENT: There are lots of documents?
MR IOANNIDIS: ---Yes.
DEPUTY PRESIDENT: But where are the critical documents? Where are the critical documents that talk about what the partnership did and what Dotrac did, and who they did it for, and for how much? Where are those sorts of – - -?
MR IOANNIDIS: ---Well, with how – - –
DEPUTY PRESIDENT: You see, I’m almost submerged in documents?
MR IOANNIDIS: ---Yes, I know.
DEPUTY PRESIDENT: But the documents that might really throw some light on what the issues are, the dispute that you’ve been having with the tax office since the audit commenced, the documents that might throw some light on that, I don’t know how I get my hands on them …
(Transcript pp. 43-45)
At Tab ET39 of Exhibit A1 there is a further Schedule of Costs, similar in concept to the one set out in [34] above, but relating to LDG Engineering Industries Pty Ltd. Its table looks like this:
Item No Description of scheduled work Amount incl. GST 1. Global Network Link P/L Progess pmt for Oalen project preliminary planning for Civil Works, Proposed 40 mt Structural bridge plus 10m. Anchor points up and down stream plus intermediate crossing supports – Crossing – 1 East to West (for Montpac Pty Ltd) $44,880.40 2. Global Network Link P/L Progess pmt for Oallan project. Engineering $44,880.40 3. Diamond Unit Trust Prelimanary planning for civil Works. Proposed 40 ml Structural bridge plus 10m. Anchor points up and down stream plus intermediate crossing supports – Crossing –
2 East to West$86,420.40 4. Global Network Link P/L Progess pmt bridge works Oallan project $44,880.40 5. Diamond Unit Trust Structural Drawing Layout for 40 mt bridge Steel work plus 10m. Anchor points up and down stream plus intermediate crossing supports – Crossing – 3 East to West $75,849.95 6. G&L Ioannisdis Progess pmt for labour + Materials G&L Share for road construction. $55,122.80 7. G&L Ioannisdis Progess pmt for labour + Materials OALLEN Subdivision $85,256.81 8. G&L Ioannisdis Bridge for road construction at OALLEN Subdivision G&L share $74,476.35 9. Global Network Link P/L Progess pmt for engineering services Oallen project $44,880.40 10. Diamond Unit Trust Proposal planning and preliminary for Rails $98,756.90 11. G&L Ioannisdis Progess pmt for building construction OALLEN/GOULBURN $46,171.29 12. Dotrac P/L Progess pmt manufacture of the steel beams for the road crossover $16,565.45 13. Dotrac P/L Progess pmt for Oallen project $16,565.45 14. Dotrac P/L Road Crossover progress pmt $16,565.45 15. Dotrac P/L Manufacture the engineering steel work for the crossover bridge $16,565.45 16. Dotrac P/L Brackets Oallen project support Hot dip galvanised $15,400.00 17. Montpac Pty Ltd Oallen project – Subdivision Lot 2.Preliminary Planning for Civil works proposed 55m structurawl Bridge + intermediate crossing supports plus Anchor points 10m up and down stream plus intermediate crossing supports – Crossing – 4 South to north of Lot 2 Subdivision
$61,051.76 18. As per schedule of costs from variations of 15% to 20% if any $168.857.93
This table is also reproduced accurately from Exhibit A1. All errors are as they appear in the exhibit. That table suffers from the same shortcomings as the earlier one.
During the March 2010 tax period G&L received four invoices from LDG Engineering. The invoices bear the following descriptions and specify the following amounts payable:
Invoice date Description Amount ($) 18/03/2010 Progress payment for Labour + Materials G&L Share
Oallen/Goulburn Sub Devision Bridge for Road Construction55,122.80 19/03/2010 Progress payment Labour & Material Oallen Subdivision 85,256.81 24/03/2010 Bridge for Road Construction at Oallen/Goulburn
Subdivision G&L Share74,476.35 31/03/2010 Progress payment for Bridge Building Construction
Oallen/Goulburn46,171.29
The amounts shown on the first three of those invoices are equivalent to the amounts in items 6, 7 and 8 respectively of the table in [39].
In the respective reasons for the objection decisions[1] the Commissioner notified each applicant that Goulburn City Council had informed the Commissioner that approval to subdivide the Oallen Property had been refused. The Commissioner’s Statement of Facts, Issues and Contentions was more specific:[2]
On 21 February 2012, ATO officers met with representatives of Goulburn City Council (“Council”) at the Oallen Property to view the status of the works (“February 2012 meeting”). At this meeting the Council’s Manager of Development Controls, Richard Davies confirmed that:
(a)The works in relation to which invoices from Axis, LDG and Pezoto had been issued had not been carried out;
(b)There were no waterways in the area requiring the construction of a substantial bridge and, at most, some crossings may be required;
(c)Montpac had lodged 3 separate development applications with the Council for the subdivision of lots at the Oallen Property (one in each of the 2004-2005, 2006-2007 and 2007-2008 tax years), and that each had been refused;
(d)Montpac would not be able to sell the land in lots without development application approval as without such approval there would be no legal title for individual lots.
[1] T2-11 for Dotrac; T2-9 for G&L
[2] Paragraph 25; references omitted
The applicants were clearly on notice that, among many other concerns, the Commissioner had doubts about the extent of work undertaken on the property, and whether any road or bridge construction work had been performed, or even permitted. Mr Ioannidis claimed, apparently inconsistently with the information from the Council, that there was a development approval in place, but it became clear that the only relevant approval was in relation to the pine plantation. It also unfolded that he was asserting that the road construction work was permitted under the existing pine plantation consent, without further approval. The following is from the transcript, at pages 83-84:
DEPUTY PRESIDENT: But just so I understand what you’re saying?
MR IOANNIDIS: ‑‑‑Yes.
DEPUTY PRESIDENT: You had a pine harvesting licence?
MR IOANNIDIS: ‑‑‑Yes, sir.
DEPUTY PRESIDENT: On the land that you wanted to subdivide?
MR IOANNIDIS: ‑‑‑Yes.
DEPUTY PRESIDENT: And as part of the licence – - -?
MR IOANNIDIS: ‑‑‑Yes.
DEPUTY PRESIDENT: The harvesting licence – - -?
MR IOANNIDIS: ‑‑‑Yes.
DEPUTY PRESIDENT: You were allowed to undertake road works, without further approval from the council?
MR IOANNIDIS: ‑‑‑To the access of the – of the pine and the harvest.
DEPUTY PRESIDENT: Without further approval?
MR IOANNIDIS: ‑‑‑That’s right. But that didn’t have any conditions where they – what standards.
DEPUTY PRESIDENT: And so, you say, “Well, we needed to build some roads – - -”?
MR IOANNIDIS: ‑‑‑That’s right. So – - -
DEPUTY PRESIDENT: “We want to eventually subdivide this property, so we might as well build top-quality roads”?
MR IOANNIDIS: ‑‑‑That’s right.
DEPUTY PRESIDENT: “We could get away with just doing some grading, but instead of that, we’re going to put in some great top-quality roads”?
MR IOANNIDIS: ‑‑‑(Indistinct) because we’re – - -
DEPUTY PRESIDENT: Is that it?
MR IOANNIDIS: ‑‑‑Part B – - -
DEPUTY PRESIDENT: Is that the position?
MR IOANNIDIS: ‑‑‑In the licence, says that you have to provide for your open control measures, crossings, not to damage the environment, and we did it all possible to that standard. And we did it to a subdivision standard. So I – I didn’t see anything wrong with that.
When Mr O’Mahoney put to Mr Ioannidis that the work referred to in the “Schedules of Costs” and the invoices had not been done, Mr Ioannidis replied that “it’s not completed totally” but “about 65 per cent of the work’s been done”[3]. There was no further detail given as to the entirety of the planned work, the timeframe, the basis of the estimate of “about 65 per cent”, or which of the planned work had been completed and which of it was yet to be undertaken.
[3] Transcript page 83
ANALYSIS – INPUT TAX CREDIT CLAIMS
Each applicant’s case fails at the most basic level.
Activity
It is trite to observe that an entity is not a “project manager” simply because someone says it is. It is equally trite to observe that, to carry on an enterprise, an entity must do something.
I have been unable to identify what, if anything, the applicants were doing in relation to either of the properties. It is significant that Mr Ioannidis had much difficulty articulating what the activities of the applicants were. He was able to put a label on Dotrac but he did not descend into any detail as to what that label required Dotrac to do. At its highest he described it as “Management, overseeing things, looking at organising things” but the explanation went no further. I cannot see that either it or G&L did much at all, beyond receiving invoices from the “subcontractors”. For the avoidance of doubt, I reject the notion that receiving invoices is relevantly an “activity”.
Mr Ioannidis could not take me to any document that set out an agreement, between either of the landowners and either of the applicants, that the applicants would perform services or tasks, engage or co-ordinate third parties, or even make arrangements of any kind in relation to the development of the properties. He might have had in his mind a clear demarcation between the responsibilities of the applicants and the landowners, but his inability to articulate it suggests that it was not as clear as he may have thought.
I am not satisfied that the applicants were conducting any activities in relation to the properties.
“In the form of a business”
For an enterprise there must be, in a case such as this, activities “in the form of a business”. The indicators of a business are well known, and include a commercial purpose or character; an expectation or prospect of profit; system and repetition; and consistency of activity with industry norms. No particular one of these indicators is determinative of a business, and the lack of any one or more of them is not determinative that a business does not exist. Furthermore, not all of them will be relevant all the time.
Nevertheless, I do not see any of these indicators here.
Mr Ioannidis did not point me to anything to suggest that he, or anyone, had undertaken any analysis of how the applicants’ activities or proposed activities (whatever they might have been) had a commercial purpose or character. Also, where the activities themselves are so difficult to identify, it is very difficult to make a case that the activities may lead to the generation of profit, even where there was an overall plan of charging an uplift of 20 per cent. Where did the uplift come from, and exactly what were the activities to justify it? Particularly telling is that the applicants did not invoice the landowners for over two years after receiving the invoices from the subcontractors. That is not normal commercial behaviour and it is another element of the arrangement that remained unexplained.
Mr Ioannidis was quite insistent that a profit would be generated, or at least that it was intended (and reasonably expected) that the activities would be profitable. But he was looking at the overall development project – which was conducted not by the applicants but by Montpac as trustee of a unit trust. He was not looking at the activities of the applicants. Despite his years of experience as an accountant, no doubt dealing with business arrangements on a daily basis, he failed to appreciate the distinction between the activities of the landowner and the activities of the applicants.
I am not satisfied that either of the applicants, in relation to the Oallen Property (and in the case of Dotrac, the Grenfell Property), carried on any activities “in the form of a business”.
Acquisitions
To make a creditable acquisition, you must first acquire something: s 11-5(a). You are only entitled to ITCs for acquisitions that you yourself make; you are not entitled to ITCs for someone else’s acquisitions: Re Simon Harland as Trustee for PCS and Commissioner of Taxation [2013] AATA 930, at [66].
I do not see how the applicants can be said to have acquired the things that were invoiced to them by the subcontractors, given that they had no interest in the land on which the works were being undertaken. It seems to me that the supplies were in fact made to the landowners, despite their having been invoiced to the applicants.
The true arrangement seems to me to have been that the work was done for, and the supplies were made to, the owners of the properties. At most, the applicants agreed to pay for some of the supplies. But I am not satisfied that the supplies were made to them.
Especially where, as here, there are multiple entities allegedly involved in a supply chain, and many of those entities are related to each other through common ownership, it is critically important that the respective duties and obligations of each of them are clearly recorded, and then reflected in the actual implementation of the arrangement. It is not enough to claim that an arrangement of a particular kind exists, or to use either “costings” or invoices as the foundation on which the claim is built. There must be more than that.
The impression Mr Ioannidis has created is that he, and probably he alone, worked out a convenient way for GST to be handled, and then set about handling it that way. The decision that the applicants would pay for some of the services performed was not accompanied, as far as I can tell, by any properly considered and documented decision that the applicants would actually acquire those services.
Another limb of the Commissioner’s submissions in relation to the question of “acquisition” is that the work invoiced was not actually done. That submission was made before Mr Ioannidis gave his evidence that “about 65 per cent of the work” has been done. (Even if I accepted Mr Ioannidis’ explanation, it remains a matter of confusion as to whether the entire amount of the work, or only “about 65 per cent” of it, had been invoiced.)
For the sake of the argument, let me put Mr Ioannidis’ evidence to one side. Let me focus on the submission that the applicants are not entitled to ITCs because the supplies invoiced have not been provided. If the Commissioner’s submission is put as a universal proposition, and if it is a sound submission, then a taxpayer would never be entitled to ITCs for supplies that are invoiced in advance of performance. But that is plainly not right. There are many common instances where an invoice is issued before the subject matter of a supply is provided, and ITCs will nevertheless be available immediately, at least for a taxpayer accounting for GST on a non-cash basis. Simple examples are supplies of goods where payment is made at the time of ordering but where delivery is delayed; insurance contracts where the premium is typically paid before the period of cover has commenced; and the currently topical “donations” to political parties (or electorate-based fund-raising bodies) for future attendance by politicians at corporate functions, boardroom lunches and the like. There is nothing surprising about ITCs being available in these cases, given the architecture of the Australian GST law, where there are no “time of supply” rules and the focus is on “attributing” GST and ITCs to particular tax periods usually on the basis of the issuing or the receiving of an invoice.
The Commissioner’s submission must be taken instead as a submission that the supplies invoiced to the applicants are not real supplies, but a fiction, a sham. In other words, not only have the supplies not been made yet, they never will be made (or perhaps less bluntly, there was no genuine prospect, at the time they were invoiced, that they would be made).
I accept the principle that ITCs are not available when there is no actual supply. However, I do not accept that there were no actual supplies here by the “subcontractors”. I find on the balance of probabilities that there were supplies, but the problem that remains for the applicants is that any supplies that were made were not made by the subcontractors to the applicants. That is enough to make the applicants’ ITC claims unsustainable.
Consideration
Perhaps for abundant caution, the Commissioner submitted that, even if the applicants had made acquisitions in carrying on an enterprise, they had not provided, or been liable to provide, consideration for any such acquisitions.
“Consideration” is relevantly defined in s 9-15(1) of the GST Act as follows:
Consideration includes:
(a)any payment, or any act or forbearance, in connection with a supply of anything; and
(b)any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
The applicants’ argument is apparently that by receiving the invoices they became liable to provide consideration. (As mentioned above, for a taxpayer accounting for GST on a non-cash basis, the actual provision of consideration is not necessary; liability to provide consideration is sufficient.)
In addition to that, they argue that, in any event, they actually provided consideration for the supplies. They base this assertion on so-called “promissory notes” provided by each of them to the subcontractors who charged them for the works performed. Dotrac’s “promissory notes” are found at T19-258 and T19-259 (for amounts relating to work done on the Oallen Property) and at ST56 and ST59 of Exhibit R4 (for amounts relating to work done on both the Oallen Property and the Grenfell Property). G&L’s “promissory notes” are found at ST30, ST32 and ST 34 of Exhibit R5.
All the “promissory notes” are in similar form. They include a promise “to pay upon receipt of Sales from Lots in Oallen project …” the amounts invoiced to the applicants. The notes issued by Dotrac also specify that “this demand” may be made upon the promisor “after the sale of the proposed Lots in Oallen from Dotrac’s Share of proceeds”. The notes issued by G&L do not include the final words referring to the share of proceeds but are otherwise materially the same.
The notes do not represent the payment of consideration at the time they were issued; they represent, at most, promises to pay in the future. At the time the notes were issued, the applicants had no capacity to meet any demand to pay the amounts specified, and indeed, in accordance with the terms of the notes, the demand could not have been made at that time. The provision of a promise to provide consideration in the future is not the same as the provision of consideration today. In this regard I respectfully agree with the following comments of Deputy President Forgie in Re Simon Harland as Trustee for PCS and Commissioner of Taxation [2013] AATA 930, at [100]:
… I note that the definition of “consideration” is cast in terms of a payment, an act or forbearance and not in terms of a promise of liability to pay, act or forbear. It seems to me that a promise or liability to do those things cannot be read into the definition for the GST Act itself distinguishes between consideration and liability to provide consideration. If a promise or liability to do those things were intended to be understood to comprise consideration, there would be no need to distinguish between the two. I refer to s 9-5(a), which requires that a taxable supply have been made “for *consideration”, and contrast s 11-5(c), which provides that the person making a creditable acquisition “provide, or ... [be] liable to provide, *consideration for the supply”.
If it had been critical to decide whether the applicants had provided consideration at the time they issued the “promissory notes”, I would have decided that they had not. That conclusion is of little relevance since the applicants have failed the remaining elements of s 11-5 in any event.
CONCLUSION ON THE INPUT TAX CREDIT CLAIMS
The ITC claims that were not accepted at objection must be rejected. The objection decisions as they relate to the assessments of net amount are therefore affirmed.
ANALYSIS – ADMINISTRATIVE PENALTY
Prior to amendments made by Act No. 56 of 2010,[4] s 284-75(1) in Schedule 1 to the TAA was in the following terms (note omitted):
(1) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c) you have a *shortfall amount as a result of the statement.
[4] The pre-amendment version of s 284-75(1) applies to things done (including statements made) prior to 4 June 2010, while the amended version applies to things done on or after that date. However, the outcome for the applicants is the same under either version of the law.
“Shortfall amount” is dealt with in s 284-80(1) in the following way (note omitted):
(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.
Shortfall amounts Item You have a shortfall amount in this situation: 1 … 2 An amount that the Commissioner must pay or credit to you under a *taxation law 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 Equalisation 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 3 … 4 …
There is no doubt that the applicants are liable to an administrative penalty under s 284-75(1) since each paragraph of the subsection is satisfied. Each of the applicants made statements to the Commissioner which were false or misleading in a material particular (by claiming ITCs that I have found they were not entitled to). They have a shortfall amount because the amount that would have been credited to them on the basis of the statements is greater than the amount to which they are entitled.
Working out the amount of penalty starts with s 284-85 in Schedule 1 to the TAA. Subsection (1) provides as follows:
Work out the *base penalty amount under section 284-90. If the base penalty amount is not increased under section 284-220 or reduced under section 284-225, this is the amount of the penalty.
The base penalty amount was neither increased nor reduced in this case, and so the amount of the penalty is simply the “base penalty amount”, to be found in s 284-90. The penalty was assessed by the Commissioner at 50 per cent of the shortfall amount because of recklessness as to the operation of a taxation law. In light of s 14ZZK of the TAA, it is the taxpayer’s task to prove the Commissioner wrong.
In this context, recklessness is “gross carelessness”: BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164 at [77], endorsed in Hart v Commissioner of Taxation (2003) 131 FCR 203; [2003] FCAFC 105 at [33] and [43]. In BRK, Cooper J said, in relation to the earlier penalty provision in s 226H of the Income Tax Assessment Act 1936:
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 the behaviour of Mr Ioannidis, and that of any agent of the applicants who was involved in the lodgement of the Business Activity Statements (BASs), that matters here.
The person nominated by Mr Ioannidis as the applicants’ “tax agent” at the time of lodging the BASs is Vince Filocamo, the principal of the accounting firm that employs Mr Ioannidis. Other accountants, including Thanh Vu and George Calinescu, also appear to have provided some assistance. Mr Filocamo, apart from being Mr Ioannidis’ employer, is also the sole director of Dotrac.
There is no suggestion that anybody truly independent gave advice on how the BASs should be prepared. That is a grave error on the part of the applicants and their advisers.
The arrangement involved multiple entities, many of them not at arm’s length. It involved, on the applicants’ case, the performance of different functions by the different entities. It involved large amounts of money. It involved the on-charging of costs with a 20 per cent mark-up. It involved the creation of “promissory notes”, the efficacy of which might have been the difference between ITC entitlement and ITC rejection.
The arrangement called out for independent advice. With his level of experience, Mr Ioannidis should have seen that. Instead, he thought he knew the answers. But most of the answers he and the other accountants gave were wrong.
There is a document at Tab ET7 of Exhibit A1 that demonstrates how wrong they were. It is a print-out of Division 11 of the GST Act, dealing with creditable acquisitions. Handwritten at the top of the page are the words “For Dotrac P/L” and “For George Ioannidis objection. Forms part of the objection to ATO for [name of ATO officer]”. Handwritten down the left-hand side of the first page are various ticks, each of them accompanied by the word “Yes”. These ticks and notations appear next to the text of s 11-1, next to each of the four paragraphs of s 11-5 (“Yes” appears twice next to paragraph (c)), next to the text of s 11-10(1) and next to the text of paragraphs (a), (b), (c) (“Yes” three times at paragraph (c)), (d) and (e) of s 11-10(2). At the foot of the page appear the signatures of Mr Calinescu, Mr Ioannidis and Mr Vu, and one other unidentified person, evidently also an accountant. The date under Mr Calinescu’s signature is 13 November 2012.
There is a similarly annotated document at Tab ET5 of Exhibit A1, labelled “For G&L Ioannidis”.
The four accountants answered “Yes” to all the questions I have answered “No”. Although the date on the document is 13 November 2012, which is some time after the lodgement of the BASs, the answers no doubt reflect the answers that were given, or would have been given if the questions had been asked, around the time the BASs were lodged. The accountants were too close to the arrangement to give it the proper degree of consideration and dispassionate analysis.
In my view, given the type of arrangement involved and its size, it was gross carelessness on the part of the applicants and their agents not to obtain independent advice, which should have alerted them to the difficulties with the positions they took in the BASs. Administrative penalty at 50 per cent of the shortfall amount is properly imposed. The applicants did not offer any reasons as to why the penalty should be remitted, and I find that there are none.
CONCLUSION ON THE ADMINISTRATIVE PENALTY
In relation to the penalty assessments, the Commissioner allowed each applicant’s objection in part, to take account of the partial allowance of the ITC claims. The shortfall amount in each case was reduced, and so was the penalty. The objection decisions as they relate to administrative penalty are therefore affirmed.
DECISION
The objection decisions of the Commissioner are affirmed.
I certify that the preceding 90 (ninety) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost. .......[Sgd].................................................................
Associate
Dated 29 May 2014
Date of hearing 10 February 2014 Date final submissions received 28 February 2014 Representative for the Applicant Mr G Ioannidis Advocate for the Applicant Vince Filocamo & Associates Counsel for the Respondent Mr G O'Mahoney Solicitors for the Respondent AGS
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