El Kordi and Commissioner of Taxation (Taxation)
[2015] AATA 527
•20 July 2015
El Kordi and Commissioner of Taxation (Taxation) [2015] AATA 527 (20 July 2015)
Division TAXATION & COMMERCIAL DIVISION File Number(s)
2014/4082-4084
Re
Khaled El Kordi
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President Date 20 July 2015 Place Sydney 1.The application in respect to the 2004 tax year is dismissed.
2.The reviewable objection decision, being the Respondent’s extension of time refusal decision dated 24 June 2014 in respect to the 2005 and 2006 tax years, is affirmed.
...................[sgd]..................................................
Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION AND REVENUE – objection decisions – refusal to extend time to make objections against amended assessments – decision affirmed
LEGISLATION
Income Tax Assessment Act 1936 ss 170, 175A
Income Tax Assessment Act 1997 s 900-205
Taxation Administration Act 1953 ss 14ZW, 14ZX
CASES
Brown v Federal Commissioner of Taxation (1999) 42 ATR 118
Re Herbert and Federal Commissioner of Taxation (2013) 88 ATR 360
Re Jones and Federal Commissioner of Taxation (2008) 73 ATR 227
REASONS FOR DECISION
Professor R Deutsch, Deputy President
20 July 2015
INTRODUCTION
In this case the Applicant is seeking a review of the Respondent’s decision dated 24 June 2014 in which the Respondent refused to grant to the Applicant an extension of time to lodge objections against amended assessments in respect of the income years ended 30 June 2005 and 30 June 2006.
In that same decision, the Respondent had also refused to grant an extension of time to lodge an objection against an amended assessment for the year ended 30 June 2004. However, the Respondent concluded that he was out of time to amend the Notice of Assessment for the 2004 income year. This was because that Notice of Assessment issued on 5 April 2005 and the amended assessment in respect of that year issued on 13 July 2007. This was outside the period allowed for the issue of an amended assessment provided for under item 1 of section 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Accordingly, the Respondent cancelled the amended assessment in respect of the 2004 income year and reduced the associated administrative penalty. Thus, the extension of time application is not sought in respect of the 2004 income year. In the circumstances, application 2014/4082 which relates to the 2004 year is dismissed pursuant to s 42A(1) of the Administrative Appeals Tribunal Act 1975 (“AAT Act”).
The Respondent opposes the application in respect of the 2005 and 2006 income years. In so doing, the Respondent asserts that the Applicant has not shown a sufficient case for an extension to be granted so as to treat the Applicant’s objection as if it had been lodged within the relevant time period.
FACTS
Background and Circumstances leading to the Amended Assessments being issued
At all relevant times, the Applicant was the sole director and sole shareholder of a company called Kaimoff Group Pty Ltd (“Kaimoff”). Kaimoff was deregistered on 4 December 2011.
At various times the Applicant engaged a number of different tax agents to conduct his tax affairs. The Applicant engaged:
·Mr Mofid Bebawy as his tax agent to prepare and lodge his income tax returns for the 2004 and 2005 income years. These returns were lodged on 29 March 2005 and 10 August 2005, respectively;
·Expert Tax Solutions as his tax agent to prepare and lodge his income tax return for the 2006 income year. This return was lodged on 29 September 2006;
·Mr George Myssy of Myssy Taxation Services to pursue various means of resolving issues relating to his disputed tax returns;
·Mr Nicholas Manolios of Gertos Savell Katos (“GSK”) for the same purpose;
·Mr Farid Massudi of Taccs Bloc for the same purpose.
The Respondent issued the Applicant with Notices of Assessment for the 2004, 2005 and 2006 income years on 5 April 2005, 17 August 2005 and 26 October 2006 respectively.
In late 2006, the Respondent commenced an audit of the Applicant’s income tax returns for the income years ended 30 June 2004 and 30 June 2005 and of Kaimoff’s income tax returns and business activity statements for the same periods. Prior to the conclusion of the audit, the year ended 30 June 2006 was added to the audit.
The Respondent concluded that the Applicant had treated the funds of Kaimoff as his own and failed to declare certain amounts which he had received as drawings from Kaimoff in the 2004, 2005 and 2006 income years. These amounts were treated by the Respondent as salary or director’s fees received by the Applicant.
As a result, on 13 July 2007, the Respondent issued Notices of Amended Assessments to the Applicant for the 2005 and 2006 income years (“the Amended Assessments”), which increased the Applicant’s assessable income by the amounts treated as salary or director’s fees for those years.
On 17 July 2007, penalties were also imposed at the rate of 25% (“the Penalty Assessments”) by way of a separate notice (“the Penalty Notice”).
If the Applicant wished to object against the Amended Assessments, he was required to do so within two years after the Amended Assessments were received by him - that is, by 13 July 2009. He sought to object only on 10 June 2014 – almost five years after the final date on which such objections would ordinarily be possible.
The Applicant’s actions after the Amended Assessments were issued
Through several tax agents, the Applicant took various steps in an attempt to address the debt that was the subject of the Amended Assessments as follows.
On 21 April 2008, by way of a letter, Mr George Myssy at Myssy Taxation Services acting for the Applicant, offered $5,000 to settle the “outstanding debt”.
On 18 November 2008, Mr Myssy contacted the Respondent advising that the Applicant wished to compromise the debt.
On 12 December 2008, again through Mr Myssy, the Applicant offered the Respondent “in-between $8,000 & $10,000” as a “full settlement of the total debt” and this offer was rejected by the Respondent on 19 August 2009.
On 21 May 2009, again through Mr Myssy, the Applicant submitted an Application for an Arrangement to Pay by Instalments.
On 17 April 2012, Mr Nicholas Manolios of GSK submitted a message which indicated that the Applicant sought to enter into a “one payment arrangement” with the Respondent to discharge his debt. A note created on 5 May 2012 records that an arrangement had not been accepted by the Respondent due to uncertainty as to the source of funds to pay the debt.
On 27 November 2012 the Applicant applied for an Application for release of his tax debts.
On 18 December 2012, the Respondent wrote to the Applicant advising that the release application could not be considered as the Applicant and Kaimoff had failed to lodge income tax returns for a number of years and Kaimoff had also failed to lodge business activity statements for a period.
On 18 January 2013, Mr Manolios informed the Respondent that the Applicant’s outstanding tax returns had been lodged and that he had not been associated with Kaimoff since 30 June 2008 and requested the Respondent to “continue with the hardship application as interest is being charged on a daily basis”.
On 11 April 2013, the Applicant submitted to the Respondent an Application for release, which was identical to the previous release application and on 18 May 2013, the Respondent advised that this further release application was declined.
In late 2013, the Applicant approached Mr Farid Massoudi to act on his behalf and finally, on 10 June 2014, almost seven years after the Amended Assessments and Penalty Notice were issued Mr Farid Massudi acting for the Applicant submitted an Objection form (“the Objection”). The Applicant requested that the Respondent treat the Objection as having been lodged in time on the basis that:
·the Applicant’s previous tax agents had failed to lodge an objection; and
·Mr Massudi could not lodge the Objection any earlier because of the need to obtain evidence to support the Objection.
The Applicant’s grounds of objection which were partially referred to in the written objection form and partly in the hearing can best be summarised as follows:
(a)First, the Applicant believes that he is relieved by section 900-205 of the Income Tax Assessment Act 1997 (“ITAA 1997”) from substantiating business expenses (mainly certain cash acquisitions);
(b)Secondly, the Applicant alleges that the Respondent made errors of law calculating the 40% profit margin for the 2004 income year and subsequently applying this to the 2005 and 2006 income years; and
(c)Thirdly, that Kaimoff’s income was substantially from selling second hand motor vehicles and that motor vehicle purchase amounts totalling $159,000 were not properly taken into account.
I note for completeness that the argument relating to the 40% profit margin was not specifically raised in the Objection and if this Tribunal was reviewing an Objection decision, leave of this Tribunal would be required to rely on this ground. I will not consider that procedural aspect any further in this decision.
On 24 June 2014, the Respondent issued his decision in which he refused to grant an extension of time to lodge the Objection.
ISSUE
The key issue that the Tribunal has to determine is:
·Whether the Tribunal, pursuant to section 14ZX(1) of the Taxation Administration Act 1953 (TAA 1953), should agree to the Applicant’s request under section 14ZW(2) asking the Respondent to deal with the Objection as if it had been lodged within the relevant time period?
EXTENSION OF TIME
Time Period to Lodge a Taxation Objection
Section 14ZW of the TAA 1953 sets out the time requirements for lodging a taxation objection. Section 14ZW relevantly states that:
(1) Subject to this section, the person must lodge the taxation objection with the Commissioner within:
(aa) if the taxation objection is made under section 175A of the income Tax Assessment Act 1936:
(i) if item 1,2 or 3 of the table in subsection 170(1) of that Act applies to the assessment concerned-2 years after notice of the assessment is given to the person; or
(ii) otherwise-4 years after notice of the assessment concerned is given to the person…
As a result of subparagraph (i) it is clear that the Applicant had until 13 July 2009 to lodge the Objection.
Section 14ZW(1)(aa)(i) applies because:
(a)the Applicant lodged a taxation objection (being the Objection) pursuant to section 175A of the ITAA 1936; and
(b)item 1 of the Table in section 170(1) of the ITAA 1936 applies.
Extension of Time to Lodge a Taxation Objection
Section 14ZW(2) provides:
If the period within which an objection by a person is required to be lodged has passed, the person may nevertheless lodge the objection with the Commissioner together with a written request asking the Commissioner to deal with the objection as if it had been lodged within that period.
Whether to agree or refuse an extension of time request made pursuant to section 14ZX(1) of the TAA 1953 is a discretionary matter. The factors which are to be considered in exercising that discretion include (Brown v Federal Commissioner of Taxation (1999) 42 ATR 118 at 131-132):
(a)the explanation for the delay in lodging the taxation objection on time;
(b)the circumstances attendant upon that delay;
(c)whether the taxation objection is one which, prima facie, is frivolous or discloses that the taxpayer has an arguable case; and
(d)any other relevant matters in the circumstances of the case including whether any prejudice might be occasioned to the Respondent.
It is also clear from the decided authorities that it is the Applicant who bears the onus of establishing why the Tribunal should agree to grant the extension of time request: Re Jones and Federal Commissioner of Taxation (2008) 73 ATR 227 at 230.
The Tribunal will now consider each of these matters.
Explanation for the Delay and the Circumstances attendant upon the Delay
The Applicant lodged the relevant objection on 10 June 2014. This was almost five years after the date by which it should have been lodged.
Although there was much discussion at the hearing about the Applicant’s circumstances there was no satisfactory explanation for the lengthy delay provided. Although this is not the sole factor, it is important in determining whether to grant an extension of time.
The Applicant contends that he engaged Mr Myssy and Mr Manolios to lodge an objection but both failed to lodge an objection despite his numerous requests. There a number of issues to consider in regard to this contention.
First, the Applicant has failed to lead any evidence in support of the contention. For example, he did not call any of the tax agents who could have confirmed exactly what it is they were instructed to do or not do for the Applicant. At the hearing it was stated that Mr Myssy had been asked to appear as a witness but had declined to do so.
Secondly, there is no written evidence to support the Applicant’s contention that he had instructed the agents to lodge an objection. Indeed, rather to the contrary, there is correspondence from the tax agents that appears inconsistent with the Applicant’s contention that he instructed the tax agents to lodge an objection. As summarised by the Respondent, these include:
a. the letter dated 21 April 2008 from Mr Myssy stating that he was approached by the Applicant regarding his outstanding debt and that his calculations of the Applicant’s assets, liabilities etc. contained in the letter therein were prepared after meeting with the Applicant;
b. the letter dated 12 December 2008 from Mr Myssy stating that he was writing on behalf of the Applicant and that the Applicant was very keen to settle; and
c. the letter dated 17 April 2012 from Mr Manolios stating that the Applicant requested him to enter into a payment arrangement with the Respondent.
Thirdly, despite the Applicant’s dissatisfaction with the lack of progress by Mr Myssy, it seems that the Applicant took approximately two to three years to engage Mr Manolios to purportedly lodge an objection. The Applicant asserts, but provides no tangible evidence, that he was financially unable to engage another representative to lodge the objection. He provides no evidence to demonstrate that he had financial difficulties such that he could not engage another representative. In any event, he could have lodged an objection himself, or at the very least have put the Respondent on notice of his intention to lodge an objection. The Applicant took no such action.
Fourthly, even after engaging Mr Massudi, the Applicant took a further six months to lodge an objection. The Applicant contends that after engaging Mr Massudi he was unable to lodge the required objection immediately because he needed to obtain evidence such as bank statements and invoices “to assess whether [the Applicant] should appeal”. There is no evidence of the time it took for Mr Massudi to obtain these documents. In any event, Mr Massudi could have put the Respondent on notice of the possibility of an objection in the interim.
At no stage has the Applicant or any of his agents ever contacted the Respondent to advise that he intended to lodge an objection.
Up until around June 2014 when the Applicant finally lodged the relevant objection, the Applicant acted inconsistently with the actions of a person seeking to object to the Amended Assessments. Rather than seeking to lodge objections as expeditiously as possible, he has instead sought unsuccessfully to settle the tax debts through settlement offers, made applications to pay by way of instalment arrangements and made applications to have his tax debts released.
Generally there is nothing to stop a taxpayer from both objecting to amended assessments and simultaneously seeking some form of compromise such as a settlement or a payment arrangement. This is not an uncommon practice where a taxpayer is unsure of his ground and whilst asserting his view as correct by lodging an objection, is nonetheless recognising the risks associated in pursuing an objection by looking to settle in some other way.
The situation in this case is quite different. The taxpayer showed not the slightest inclination to challenge the assessments by way of objection for many years but instead pursued strategies that impliedly accepted the amounts in the Amended Assessments. This is a circumstance attendant upon the delay in lodging objections which is of direct relevance in evaluating whether an extension of time should be granted.
Merits of the Applicant’s Substantive Argument
In considering the Applicant’s substantive arguments I am conscious of the fact that there is a danger in assessing the arguments without the benefit of much of the evidence that would be available at a full hearing.
Nonetheless I need to at least assess whether there is an arguable case for the Applicant if I were to grant an extension of time.
The arguments put by the Applicant seem to fall into three categories which I will now briefly consider.
First, the Applicant relies on section 900-205 of the ITAA 1997 for relief from substantiating certain business expenses, which were mainly cash acquisitions, on the basis that the documents supplied to Mr Bebawy, the Applicant’s first named tax agent, were lost.
Reliance on this section is misconceived because the section does not apply to the Applicant’s circumstances. The relevant audit was an audit of the Applicant’s income tax affairs and the Amended Assessments concerned the amounts included in his assessable income and not his deductions. Thus, section 900-205 provides no basis for challenging the Amended Assessments.
Furthermore, to the extent that the Applicant is relying upon section 900-205 for relief from substantiation of the deductions (that is, the business expenses) of Kaimoff, the argument is equally misconceived since section 900-205 does not apply to companies. It only applies to individuals.
Secondly, the Applicant contends that the Respondent “made errors of law” in calculating the 40% profit margin for the 2004 income year and subsequently applying this to the 2005 and 2006 income years. The basis for this contention seems to be based on the fact that the Respondent amended the assessment for the 2004 income year outside the two year time period stipulated by section 170(1) of the ITAA 1936.
This contention is also misconceived in that the mere fact that the Respondent was out of time to amend the assessment in respect of the 2004 income year does not “invalidate” the reasoning processes and conclusions made in respect of that particular income year. The Amended Assessment in respect of that year falls away but the reasoning that led to the calculation of the 40% profit margin stands subject to any successful challenge. That reasoning unless itself successfully contradicted by the Applicant has potential relevance in respect of the 2005 and 2006 income years even if the actual amended assessment in respect of the 2004 income year is out of time.
In other words, it may well be that there are other bases for challenging the 40% profit margin, but no such alternative bases were put to the Tribunal.
Thirdly, the Applicant contends that the Respondent failed to accurately consider that a portion of Kaimoff’s income was from selling second hand cars and that the purchases of cars totalling $159,000 were an outgoing of Kaimoff.
Again this argument is misconceived because the characterisation of these purchases had no bearing on the calculation of the Applicant’s assessable income for the relevant years.
Thus, even if the Applicant was able to demonstrate that there was no personal use associated with the vehicles, it does not demonstrate that the Amended Assessments in respect of the Applicant were excessive.
The problem with most of these arguments is that there is a confusion in the mind of the Applicant and his advisors as to the distinction between the Applicant and Kaimoff. The Amended Assessments for the 2005 and 2006 income years relate to the Applicant and not to Kaimoff. Thus, arguments relating to the amounts included in the assessable income and deductions in respect of Kaimoff are not necessarily related to the position of the Applicant.
Other Considerations - Prejudice
The Respondent has submitted that it would be materially prejudiced if the Tribunal were to allow an extension of time.
Largely as a result of the delay in instituting the proceedings relating to the objections, the Respondent has not been unable to locate:
·any hardcopies of certain documents such as bank statements, invoices and cheque butts, some or all of which were relevant to the audit of the Applicant and which once held by the Respondent;
and
·any electronic copies of certain documents on its electronic data-storage system. Some electronic material has been located including assessments, audit decisions, amended assessments, a facsimile dated 19 March 2007 (which may be of some relevance) and a section 264 notice and two facsimiles requesting banks to provide information.
In support of this assertion that such documents cannot be located the Respondent filed a witness statement of Ms Shamini Niranjan dated 2 June 2015. Ms Niranjan is employed by the Australian Taxation Office and conducted the relevant audits. In her statement Ms Niranjan outlines the searches she undertook and the results thereof. She states at paragraph 21 of her Witness Statement that:
On 22 May 2015 I searched my personal H-Drive on the ATO network. I was unable to find the bank statements or cheque details obtained from the bank in relation to the audits of Kaimoff Group and Khaled El Kordi.
The Applicant has provided 12 bank statements for the period 30 June 2003 to 30 June 2004 in relation to a relevant Westpac account held by Kaimoff.
However, the statements only relate to the 2004 income year (which the Applicant is not objecting to) and not the 2005 or 2006 income years. The statements only comprise some of the documents that were relied upon in the audit. The audit relied upon bank statements of the Applicant’s personal savings accounts and credit card accounts and cheque details for cheques paid out of the Kaimoff business account. The Applicant has not provided these documents and the Respondent is no longer able to find the relevant hardcopy or electronic copies of those documents.
The Applicant contends that he had difficulty obtaining the required statements and invoices in support of the Objection. This is perhaps understandable as financial institutions are only required to keep financial records (for example, invoices, receipts, cheques etc.) for seven years after the transactions covered by the records are completed. This period has expired.
Thus, in the absence of the majority of documents relied upon in the audit and the Amended Assessments, the Respondent argues that it would be unable to test the validity of any of the Applicant’s claims. The Respondent further argues that it will be unable to properly consider an objection to the Amended Assessments.
As such, the Applicant’s claims are likely to be based predominantly on his recollection and the recollection of other persons who may be able to verify his claims. Given the passage of 12 years since the commencement of the 2004 income year, it is likely that any useful avenue of inquiry would have disappeared and it is unlikely that any recollections of the Applicant and other persons, including the relevant auditor, would be accurate. The delay has resulted in a diminution in the quality of any decision making that can be rendered in relation to the matters at hand since the evidence crucial to certain aspects of the case has either disappeared or deteriorated to a point where it will be of any real value.
The Respondent relies upon a recent decision of this Tribunal, Re Herbert and Federal Commissioner of Taxation (2013) 88 ATR 360. In that case the Tribunal refused the taxpayer an extension of time to lodge an objection because, inter alia, the Commissioner would be otherwise prejudiced. This was on the basis that:
·the original audit documents were unavailable (except for the assessments and amended assessments);
·with the effluxion of 16 years, any recollection of the taxpayer would be inaccurate; and
·the officers involved in the audit were no longer able to verify claims..
DECISION
Having regard to all the relevant matters outlined above, the Tribunal is of the view that the Applicant has failed to show sufficient cause to satisfy it that the discretion to allow an extension of time should be exercised.
Accordingly, the reviewable objection decision, being the Respondent’s extension of time refusal decision dated 24 June 2014 in respect to the 2005 and 2006 tax years, is affirmed. The application in respect of the 2004 income year is dismissed.
I certify that the preceding 69 (sixty -nine) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President ..................[sgd]..................................................
Associate
Dated 20 July 2015
Date of hearing 4 June 2015 Advocate for the Applicant Mr F Massudi, Taccs Bloc Advocate for the Respondent Mr E Chan, ATO Review and Dispute Resolution Group
Key Legal Topics
Areas of Law
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Tax Law
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Administrative Law
Legal Concepts
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Appeal
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Judicial Review
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Procedural Fairness
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Standing
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Statutory Construction