Ferozkohei and Commissioner of Taxation (Taxation)

This matter concerned an application for review of the Commissioner of Taxation's objection decision regarding the applicant's 2013 income tax return. The applicant, a director and employee of a company, had lodged a return claiming gross income of $175,000 and various deductions, including work-related expenses and a net rental property loss. The Commissioner subsequently audited the return, adjusted the claimed deductions, and imposed a 50% administrative penalty for recklessness. The applicant objected to this decision, and upon the Commissioner affirming the objection decision, the applicant sought a review by the Tribunal.

The core legal issues before the Tribunal were whether the applicant had discharged her onus to prove that the Commissioner's assessment was excessive and what the assessment should have been. Specifically, the Tribunal was required to determine the deductibility of claimed interest expenses and capital works deductions relating to rental properties, and whether the administrative penalty for recklessness was correctly imposed. The applicant's claims for work-related car expenses and travel expenses were also in dispute, with some admitted as errors.

The Tribunal applied the principle that the applicant bears the burden of proving that claimed deductions are allowable under section 8.1 of the Income Tax Assessment Act 1997 (ITAA), meaning they must be incurred in gaining or producing assessable income. For interest deductions, the Tribunal noted that the use or application of borrowed funds is critical, and if only part of a borrowing is for an income-producing purpose, the interest must be apportioned. The applicant's submission that interest was arbitrarily allocated across cross-securitised loans for multiple properties, without clear evidence of the proportion used for income-producing purposes, was found insufficient. Similarly, for capital works deductions, the Tribunal referred to sections 43.25 and 43.30 of the ITAA, requiring deductions to be for completed capital works and to be substantiated. The applicant's estimation of capital works deductions based on a similar property, without specific evidence for the property in question, was also deemed inadequate.

The Tribunal affirmed the Commissioner's objection decision. The applicant failed to provide sufficient evidence to substantiate her claims for rental property interest and capital works deductions, thus not discharging the onus of proof placed upon her. Consequently, the amended assessment and the shortfall penalty were upheld.