Gilbert and COMMISSIONER OF TAXATION
[2010] AATA 882
•10 November 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 882
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/3795-3797
TAXATION APPEALS DIVISION ) Re BRETT GILBERT Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr S E Frost, Senior Member Date10 November 2010
PlaceSydney
Decision Objection decisions affirmed. ..............................................
S E Frost
Senior Member
CATCHWORDS
TAXATION- carrying on a business- hobby- pastime- commercial enterprise- profit- business-like manner- continuous and repetitive activities- ordinary commercial principles- motor sidecar racing- business plan- sponsorship- AFFIRMED.
LEGISLATION
Income Tax Assessment Act 1997; Section 35-30, 35-45
CASES
Ell v Commissioner of Taxation (2006) 61 ATR 661
FCT v Murry (1998) 193 CLR 605
Martin v FCT (1953) 90 CLR 470
Woods v Deputy Commissioner of Taxation (1999) 43 ATR 491
REASONS FOR DECISION
10 November 2010
Mr S E Frost, Senior Member Introduction
1. In the three years of income ended 30 June 2005, 30 June 2006 and 30 June 2007, Brett Gilbert, the Applicant, claimed significant deductions in relation to what he asserts is a business associated with motorcycle sidecar racing.
2. Mr Gilbert’s tax returns for 2005 and 2006 were assessed as lodged. However, in relation to the 2007 year, the Commissioner wrote to Mr Gilbert, requesting further information in support of his deduction claims. There followed some correspondence between the parties. In February 2008, the Commissioner issued a notice of assessment for 2007, in which he disallowed the business deductions claimed. At the same time, the Commissioner issued notices of amended assessment for the 2005 and 2006 years, similarly disallowing the deductions previously accepted.
3. Mr Gilbert objected to the amended assessments for 2005 and 2006, and to the original assessment for 2007. Upon the Commissioner’s disallowance of the objections, Mr Gilbert applied to the Tribunal for review.
The issues
4. The main issue before the Tribunal is whether, in conducting his sidecar activities during the 2005, 2006 and 2007 income years, Mr Gilbert was carrying on a business.
5. If that issue is decided in Mr Gilbert’s favour then there is a further question to consider, that is, whether he satisfies either of two tests in Division 35 of the Income Tax Assessment Act 1997 (the 1997 Act) – the “assessable income” test in s 35-30, or the “other assets” test in s 35-45(4).
6. If the “business” issue is decided in Mr Gilbert’s favour but the Division 35 issues are decided against him, then any losses that arise from his sidecar activities can only be claimed against income from those activities. However, if he satisfies one of the Division 35 tests, then there is no such restriction.
7. In either event, if the taxpayer is successful in principle to any extent, the parties agree that any question of substantiation of Mr Gilbert’s claim should be remitted to the Commissioner.
The “business” question
8. The principles governing the question of whether a person is carrying on a business have been summarised on numerous occasions; as the Commissioner identified, a helpful example is to be found in the judgment of Sackville J in Woods v Deputy Commissioner of Taxation (1999) 43 ATR 491 at 497:
[34] The question of whether a particular activity constitutes a business depends upon an assessment of the relevant facts and involves matters of fact and degree: Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 (Hill J), at 4554-4555. No one factor is decisive and many elements may have to be considered: Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 79 ATC 4261 (FC), at 4264, per Bowen CJ and Franki J. It is to be borne in mind, however, when weighing the relevant factors, that there is usually a distinction between the pursuit of a pastime, even if the pursuit is vigorous, and the carrying on of a business: Martin v Federal Commissioner of Taxation [1953] HCA 100; (1953) 90 CLR 470, at 479, per curiam.
[35] The factors relevant to assessing whether a taxpayer was carrying on a business at a particular time include the following:
(i) Whether the activities were undertaken as a commercial enterprise for the purpose of making a profit: Hope v The Council of the City of Bathurst [1980] HCA 16; (1980) 144 CLR 1, at 8-9, per Mason J; Thomas v Federal Commissioner of Taxation (1972) 72 ATC 4094 (HC), at 4099, per Walsh J (“commercial purpose or character”). But it is not necessary that there was an immediate purpose of profit-making in a particular year: Ferguson, at 4264, per Bowen CJ and Franki J. A business may, for example, be conducted in a limited way as preparatory to or in preparation for a larger scale business: Ferguson, at 4269, per Fisher J; Federal Commissioner of Taxation v Walker (1985) 16 ATR 331 (S Ct Qld/Ryan J), at 334.
(ii) Whether the activities were engaged in on a continuous and repetitive basis: Hope, at 9, per Mason J. But even isolated transactions may be part of a business if, for example, they can be seen as the beginning of a larger scale undertaking: Ferguson, at 4264.
(iii) Whether the activities were carried on in a business-like manner: Ferguson, at 4264; Martin, at 479 (“systematic and organized”). It will therefore be relevant to inquire whether the taxpayer kept adequate books and records and employed a systematic approach to the conduct of the undertaking.
(iv) Whether ordinary commercial principles were applied to the conduct of the undertaking, characteristic of the line of business of which the undertaking is said to have formed part: Evans, at 4555.
(v) Whether the scale and volume of the undertaking (including the amount of capital employed) were substantial, especially where the question is whether the taxpayer was conducting a business or was engaging in a hobby or recreational activity: Ferguson, at 4265; Trautwein v Federal Commissioner of Taxation [1936] HCA 46; (1936) 56 CLR 196 (Evatt J), at 206-207.
There may be overlap among the various factors and not all criteria will necessarily suggest the same result.
9. The Commissioner’s written submissions supplemented those observations with the following specific statements from the authorities:
· It is relevant to inquire whether the taxpayer had a profit making purpose: the majority in FCT v Murry (1998) 193 CLR 605 observed at 626 [54] that:
A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions.
· The question of whether the taxpayer had such an intention is, however, merely relevant and not determinative: see FCT v Stone (2005) 222 CLR 289 at 305 [55]. In Ell v Commissioner of Taxation (2006) 61 ATR 661 at 689, Emmett J observed:
[112] If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose.
[113] Where expenses and outgoings claimed as deductions are disproportionate to the assessable income produced, subjective factors, including the direct and indirect objects of a taxpayer, may become determinative (see Fletcher v FCT [1991] HCA 42; (1991) 173 CLR 1 at 17-19). Where an expense or outgoing claimed as an expense or outgoing of a business is disproportionate to any assessable income that may be gained, it will not be as easy to conclude that the expense or outgoing was incurred in gaining or producing that income (see Spassked Pty Ltd v Commissioner of Taxation [2003] FCAFC 282; (2003) 136 FCR 441 at [64]).
· The carrying on of a business may be contrasted with the pursuit of a hobby or pastime. As the Court stated in Martin v FCT (1953) 90 CLR 470 at 479:
… the pursuit of a pastime, however vigorous the pursuit may be, does not usually amount to carrying on a business and gains or losses made in such a pursuit are not usually considered to be assessable income or allowable deductions …
· The mere fact that a taxpayer intends to and does derive income from an activity does not mean that the taxpayer is carrying on a business: see Ell at [133].
10. The Commissioner contends that, applying these principles, the Tribunal should conclude that Mr Gilbert was not conducting a business in the relevant years, but was only engaged in the pursuit of a hobby or pastime.
The factual background
11. Mr Gilbert is, and was during the relevant years, the managing director of Aircom Systems Pty Ltd (Aircom Systems), a company that manufactures pneumatic tube conveying systems.
12. In addition to that, he has had an interest in sidecar racing for many years, having once been a racer himself. He gave up racing in 1994 after a serious race track accident but he remained close to the sport.
13. He explained in his written statement of January 2010:
…
6. In the latter part of 2000 and in 2001, I managed a New Zealand F1 motor racing sidecar team at a round of the World Championships held at Phillip Island, Tasmania [later corrected to Victoria]. During that race meeting I discussed F1 motor sidecar racing and the potential of the sport with the best European team riders, managers and owners. This was the first time that sidecar world championships were held in Australia and there was much media hype around those championships. It was then that I realised significant money making opportunities existed in the F1 motor sidecar industry. It was in its infancy and I could see the potential in its commercial development.…
8. In 2003/2004 I was the New South Wales Delegate to the Australian Sidecar Racing Association (ASRA). During that time as representative through contact with key people in the racing industry, I became more aware of the commercial opportunities of motor sidecar racing and its development into a major spectator sport. I had on-going discussions with the management of the peak bodies in motor sidecar racing and formed a close association with a number of key people within that industry. …
9. On the 8th December 2003 I approached by letter under the letterhead of the Australian Sidecar Racing Association Inc Terry O’Neill, the CEO of Australasian Superbike Company Pty Ltd (AUSCO) which company was being appointed by Motorcycle Australia to administer sidecar racing Australia-wide. At that same time, Mr David White, CEO of Motorcycle Australia was also approached by me about motor sidecar events in Australia. … I was endeavouring to raise the profile of the industry generally.
10. Discussions ensued throughout the 2004 year and I was developing in my mind a business plan as to how I could cash in and make money out of what I knew was a growing public sport, spectacle and industry.
… (emphasis added)
The taxpayer applies for an Australian Business Number (ABN)
14. In February 2005 Mr Gilbert applied for, and was given, an Australian Business Number (ABN). According to Mr Gilbert, it was around this time that his activities took on a “business” character.
15. The Australian Business Register records that the “legal name” of the entity to which the ABN was given is Mr Brett J Gilbert, and that the “trading name” is Aircom Castrol F1 Sidecar Racing Team.
Aircom Systems sponsors the 2005 Australian championships
16. In 2005 the administration of sidecar racing Australia-wide was undertaken by Australasian Superbike Company Pty Ltd (AUSCO) on behalf of Motorcycle Australia. In April of that year, Aircom Systems committed to contribute $15,000 towards the 2005 F1 Australian Sidecar Championship series, and as a result, the series would be named the Aircom Systems F1 Australian Sidecar Series. The sponsorship arrangement required the inclusion of the Aircom Systems logo in all media advertising, programs and trophies, and the display of the logo on each sidecar competing in championship races.
17. The sponsorship also made it possible, according to an email sent to Mr Gilbert by Terry O’Neill, the CEO of AUSCO, to get both free-to-air and pay television coverage of one race per meeting.
The “business plan”
18. Mr Gilbert gave oral evidence that in about May 2005 (as opposed to ‘late 2005’ as included in his written statement) he formulated a written business plan relating to his sidecar activities. The document, identified as Attachment 4 to Exhibit A1, was –
… used to obtain support and to bring formality to the business plan that I had thought through from my first contacts with Terry O’Neill in December 2003 and in the period of time following the Phillip Island discussions with the European teams.
19. The Executive Summary of the business plan notes:
Motorcycling Australia (MA) is the controlling body for motorcycle competition in Australia. They have identified a negative growth in Australian F1 Sidecar Racing over the past 5 years. To increase the competitors and increase revenue within the sport, MA has requested Aircom Castrol Racing to advise on areas of concern and where we can improve the sport of F1 Sidecar Racing.
20. The Commissioner expressed some doubts as to whether the document actually existed around May 2005 but in oral submissions accepted that it had been “floating around” in 2005. He noted that correspondence to the ATO dated 22 May 2008, submitted on the taxpayer’s behalf by his tax agent, included this:
In 2004, I was approached by Motorcycle Australia to look at what could be done to lift the sport. I submitted a 5 year business plan to manage the sidecar class which was subsequently approved by Motorcycle Australia.
21. I accept that the document, as originally formulated, was substantially in the form which now appears as Attachment 4 to Mr Gilbert’s written statement. I say “substantially” because Attachment 4 describes itself as “2005 REV 1” and the current version of the document is unlikely to be identical to the original. There are also some statements in the document which suggest that some of it, at least, was written after May 2005. By way of example, I note that the present tense is used widely throughout the document; specifically, page 5 of the document, which states:
“We are selling products direct from the LCR factory in Switzerland ...” (emphasis added)
Also, page 5 of the document includes the following paragraph:
“Currently the market for F1 sidecar racing is experiencing a growth stage. Superside International GmbH completed a survey conducted in 2006 at the MOTO GP, British Superbikes and German Superbike Championships. The resulting number was a 40% increase in the competitive numbers from 2004 to 2006.” (emphasis added)
22. There are other unusual aspects to the “business plan”. As a document setting out proposed activities of a start-up business, it deals with topics such as “Objectives”, “Mission”, “Keys to Success”, “Products and Services” and “Financial Plan”. It also has some projections of income, although they are somewhat optimistic. On the other hand, it is quite unclear how the document was meant to operate as a “plan to manage the sidecar class” for Motorcycle Australia, or “to advise on areas of concern” confronting the sidecar racing industry.
The taxpayer seeks sponsorship for the racing team
23. The business plan identified the three main categories of revenue as product sales, prize money and sponsorship.
24. According to paragraph 27 of his written statement, Mr Gilbert sought to obtain sponsors to support the sidecar racing team. Sponsorship was offered at “gold”, “silver” and “bronze” level. He envisaged one gold sponsor ($50,000), two silver ($30,000 each) and three bronze ($10,000 each).
25. He said at paragraph 28 of this statement:
Sponsorship in 2005 to 2007 was reasonable but fell far short of my expectation. It was hard to convince sponsors to put up cash without a track record first.
26. An attachment to Mr Gilbert’s statement sets out details of claimed sponsorship for the 2005 to 2007 seasons. By far the largest “sponsor” in each year was Aircom Systems – for $47,080 in 2005, $52,516 in 2006 and $32,418 in 2007.
27. It seems that SsangYong Australia committed to support the racing team to the extent of “$16,200 plus GST” for the 2006 racing season but it is not clear whether that entire amount was paid, or when. It also seems that in return for that support, the team was named “SsangYong F1 Sidecar team” for the 2006 season. SsangYong sponsorship of $5,000 is included in the sponsorship summary for 2006 and $17,000 in the summary for 2007, although both are described as “SsangYong NZ”.
28. In a letter dated 6 February 2009, Castrol confirmed that it had been “involved with the Aircom Castrol Sidecar Racing Team in the 2005 and 2006 Australian Superbike Championships as an industry product sponsor”, contributing products to the value of $10,000 per annum. I note that the 2005 sponsorship summary shows Castrol sponsorship at $7,500 and the one for 2006 shows $5,000.
29. The support provided by most of the remaining sponsors listed in the Attachment to Mr Gilbert’s statement, appears to have been in the form of product, or the payment of expenses on behalf of the team.
30. In relation to sponsorship generally, the taxpayer said in his written statement:
I spoke with David Bowyer of Castrol who said to me “You get up there in the world rankings and Castrol will support you financially, at the moment at the current level we will support you with product”. There was no doubt that from the responses I received, I realised that the more the Aircom Castrol Sidecar Team succeeded, the more willing would be sponsorship and the larger would be the endorsements. This was particularly so of cash sponsorships. I knew from other motor sports that large cash sponsorship would flow once the Aircom Castrol Sidecar Team became a household name within the sidecar industry and as sidecar racing occupied more and more of free to air television and pay television.
31. Mr Gilbert also said that he sent 100 DVDs to major corporations in an attempt to secure cash sponsorship.
32. Mr Gilbert noted in an email dated 12 April 2007 that SsangYong committed $50,000 in sponsorship for the 2007 Superside World Championships. There is no evidence before me that that sponsorship amount was paid, although that is perhaps not surprising since most of the racing for the 2007 world championship series was to take place during the 2008 financial year, which is outside the period in dispute.
The purchase of sidecar outfits and other major equipment
33. Also attached to Mr Gilbert’s written statement is an invoice dated 1 March 2005 from LCR Engineering[1] of Switzerland for two “Louis Christen Engineering Road Sidecar GSXR 1000”, priced at CHF49,800 (Swiss francs) each. Mr Gilbert said in his witness statement that the invoice was for two chassis only, without motors.
[1] LCR apparently stands for Louis Christen Racing. Louis Christen is evidently one of the major manufacturers of racing sidecars in the world.
34. According to Mr Gilbert, what arrived in Australia were one complete sidecar (chassis plus motor) plus one chassis, without motor. The motor for the second chassis was purchased in Australia and fitted to the chassis here. The motor for the first chassis was fitted in Switzerland, but not by Mr Christen. It was fitted by Steve Abbott, the then world champion, who was coming to Australia to race in the 2005 Australian championships for Mr Gilbert. Therefore, what was delivered to Australia was one bike, set up by Steve Abbott and ready to race, and a second chassis to which was fitted a motor in Australia by Adam Treasure, the other rider for the Gilbert team.
35. Mr Christen gave oral evidence by telephone from Switzerland. Originally he said that he had provided two complete bikes (that is, chassis plus motor). However, on further questioning he said that it was:
… one bike, complete ready, and the other bike, it was then not complete ready to race yet – he had to fix the other things, himself, in Australia.
36. In an email that he sent to Mr Gilbert on 9 December 2004, Mr Christen wrote about the “details for LCR to fit extra parts to your sidecar as you request”, and then listed various items, with prices, to a total of CHF15,015. One of the items listed was “2002 Suzuki GSXR 1000 (race prepared by Steve Abbott)”. He added later in the email:
All installation work to be complet [sic] the bikes ready for race – no charge.
Price of each chassis as offered CHF49,800.-
Extras as above CHF15,015.-
Total price for each sidecar CHF63,015.-
37. If it was ever the plan to provide two entire sidecars, that did not eventuate. I find that one complete sidecar, including motor, was supplied, together with a second rolling chassis. The total amount payable to LCR was CHF114,615 (that is, CHF49,800 for each chassis plus CHF15,015 for the extra parts including the Steve Abbott-prepared motor).
38. Not the entire total amount payable to LCR ended up being paid. Mr Christen said that he received one payment in June 2005 and a second payment in October 2005, totalling CHF48,223. There is a resulting shortfall of over CHF66,000. Mr Gilbert explained, and Mr Christen confirmed, that when he went to Europe in 2007 to compete in the world championships, he gave one of the bikes back to Mr Christen. Mr Gilbert says that the return of that bike represented “full and final payment” of the debt owed to LCR.
39. In April 2007, Mr Gilbert purchased what he described as a “transporter” for about $55,000 from Steve Webster Racing in the UK. Steve Webster is a multiple world champion sidecar racer and is, according to Mr Gilbert, “like a mentor” to him. Although the invoice from Steve Webster Racing is made out to Aircom Systems, Mr Gilbert explained, and I accept, that the reference to Aircom Systems is only to the delivery address, and the transporter was sold to Mr Gilbert personally. That is confirmed by the documents at Tab 14 of his written statement (and in particular the details of the loan made by ANZ Bank to Mr Gilbert and his wife) and Mrs Gilbert’s evidence that:
The reason that the loan was in joint names, was a bank requirement because the home which provided the security was in joint names. However, my husband repaid the $60,000 from his own resources and I was not responsible as between my husband and myself to repay those loans.
40. A telegraphic transfer receipt attached to Mr Gibert’s written statement, confirms that the transporter was paid for in full.
41. In January 2007, Mr Gilbert purchased a Windle sidecar for $50,000. Once again, although the payment came from the joint account with his wife, Mrs Gilbert confirmed that the purchase was made by Mr Gilbert alone.
Racing activities
42. Mr Gilbert’s witness statement says:
[14] The results from sidecar competitions for the team I owned and managed were:
·2005 – Winners:
oAustralian Sidecar Championships
oWanganui Street Championships NZ
oNew Zealand TT
·2006 – Winners:
oAustralian (2 Sidecar Team) Championship
oNew Zealand Sidecar Championships
oNew Zealand GP
oWanganui Street Championship NZ
·2007 – Winners
o10th in World Sidecar Championships
oWanganui Street Championship NZ
[15] The Aircom Castrol Sidecar Team competed in Australia and internationally in order to become a world ranked motor sidecar racing team and thus raise the profile of both motor sidecar racing and the team. The result in the world championship in 2007 was not sufficient to attract large sponsorship.
43. I did not understand the Commissioner to dispute any of the results set out in [14] of the witness statement. He did, however, take issue generally with Mr Gilbert’s repeated claim that the racing team – and the brand that Mr Gilbert said he was trying to promote for commercial purposes – was properly identified as “Aircom Castrol Sidecar Team”. He noted, for example, that the team was known in 2006 as the “SsangYong F1 Sidecar team” (see [27] above) and that the sidecar of Adam Treasure, one of the team’s riders, had “De With Performance Racing” signage prominently displayed on it, rather than the distinctive green livery of Castrol.
Receipt of prize money
44. Paragraph 68 of Mr Gilbert’s statement lists only three amounts of prize money for the whole of the three financial years in dispute, and they all came in the space of a few days: separate amounts of $4,000 and $2,564 on 27 May 2005, and an amount of $2,000 on 2 June 2005. Those amounts do not agree with the figures that were provided to the Australian Taxation Office (ATO) by the taxpayer’s tax agent in May 2008 ($2,250 in 2004/05 and $2,000 in 2005/06) and they cannot be reconciled with the tax returns. The quantum of prize money received was never established to my satisfaction; I can conclude no more than that the amount received was modest.
45. Further prize money was won at the 2007 world championships, but because it was received in November 2007 (that is, during the 2008 income year), it is not a receipt that is relevant to the period in dispute.
Was the taxpayer carrying on a business during the relevant years?
General comments
46. I have struggled with the question of whether the highlighted portions of Mr Gilbert’s witness statement (see [13] above) accurately reflect his state of mind in 2001, 2003 and 2004. Part of the difficulty arises from the fact that those highlighted portions differ so markedly from the claims made in Mr Gilbert’s notice of objection, where his tax agent said:
…
The client carries on a business owning a team which competes in F1 Sidecar racing within Australia and World Championships. His team is the current Australian Champion. The Business has a website were [sic] information is recorded so fans can see how the team is performing.
The client has invested around Two [sic] hundred thousand dollars in equipment to establish the team. The race team competes in front of around sixty thousand people at certain race tracks, which complies with any other race cars, bikes or boats racing in the world.
The team has two forms of revenue, being race winnings and sponsorships. So although the team has not been showing a profit this could be turned around at any time with race wins and the right sponsorship coming on board. If the team was not to trade profitabl [sic] in a short period of time the owner would possibly have to cease trading as he could not afford to keep the team competing.
The non-commercial business activities rule does not apply in this situation as the client passes the test of other assets used in carrying on a business of more than $100,000.
The business is run in a professional manner and is not a back-yard run business or run as a hobby.
…
47. During the hearing Mr Gilbert was not taken specifically to the notice of objection lodged on his behalf by his tax agent, but he was taken to answers that the agent had prepared in response to a questionnaire formulated by the ATO in relation to his business deduction claims. Contained in the documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, there appear the following questions and answers (the answers were provided to the ATO on 8 January 2008 but the form was signed by the tax agent and dated 21 December 2007) (the questions are shown in bold type, as in the original; the underlining is added):
Briefly describe below the nature of your activity.
Competed in the Australian and World Championship F1 Sidecar Racing. Competed in Australian Speedway Side-Car Racing.
...
Scale of activities
...
(a) Can you provide details of the number of jobs completed/volume of sales relating to your latest tax return lodged? This does not have to be exact, an estimate is acceptable.
Current Australian Sidecar Champion.
Competed in 7 FIM world sidecar championship races.
(b) Where do you carry on your activity? Do you operate from home or do you have an office elsewhere?
Various race tracks within Australia and the world.
...
Repetition and regularity of activities
...
(c) Please provide details of some of the jobs completed and the type of work involved.
Preparing the Sidecars to race within Australian and World Championships.
... (emphasis added)
48. The questionnaire indicated in Section 2:
If you have a business plan, please attach a copy.
49. Curiously enough, no copy of the business plan was provided to the ATO at that stage, despite the fact that (as I have found) a document that the taxpayer described as a “business plan” had been formulated almost three years earlier.
50. The reference to the taxpayer having competed in Australian speedway sidecar racing (see underlining above) is entirely wrong. It is clear even to me that a Formula 1 sidecar outfit is an entirely different type of machine to the kind of outfit used in speedway (dirt-track) racing. There is no evidence that the taxpayer has ever shown any interest in speedway racing (either as a competitor or as a team manager, as opposed to a spectator). An answer claiming that he did compete in speedway racing must cast some doubt on the question of whether the agent fully understood his client’s activities, and also whether he had his client review the answers provided to the ATO before they were sent in.
51. Mr Gilbert was asked about these answers, at page 92 of the transcript, where, among other things, he repeated his claim in his witness statement that he had not seen the answers before they were sent to the ATO:
MR ABBOTT: ... that business non‑commercial activity questionnaire, that’s not your handwriting, is it?‑‑‑Well, that’s not my writing, no.
Did you prepare it?‑‑‑No.
Did you have any input, or did you review it?‑‑‑I didn’t see this document before it went out. I had a phone call from [my tax agent] and he did ask me a couple of quick questions. He said, “I’ve got to prepare a statement for the Taxation Office”. I haven’t – I have seen this since then, but I didn’t see it at the time before this went out. And these are not my answers.
And so, the answers are, what, shorthand answers. They’re not ‑ ‑ ‑?‑‑‑The answers are written by an accountant.
And you would have been able to provide ‑ ‑ ‑?‑‑‑I think I would have been able to provide pages of answers to some of the – yes, look, well, some of the questions here, I think, briefly – “briefly describe below the nature of your activity”. And it’s written in two lines. I’ll talk to you for days on what I do. It’s not something in my nature that I would write “Competed in Australian world championship F1 sidecar racing”.
52. In any event, the information provided to the ATO in early 2008 (that is, before the issue of the notices of amended assessment for 2005 and 2006, and the notice of assessment for 2007) focused entirely on the racing activities, and not to any extent on the broader activities that the taxpayer sought to emphasise in his written statement to the Tribunal, and in his oral evidence. For example, in his oral evidence he said (transcript pages 16-17):
What Aircom Castrol racing team does is that we help promote, and manage and service the industry. We don’t just – we don’t do the racing. I’m not the racer. I’m the person behind the racers who generate getting the racers, the logistics and managing them to get to the actual events, and I provide sponsorship or attract sponsorship from other areas. Whether I attract it from Aircom Systems or whether I attract it from Ssangyong, or whether I bring Castrol, or whether I bring other agents into the mix, I discuss that with the series of sponsors which might be Yamaha, or might be MA, Motorcycling Australia, and I bring these people on board, and that’s my role, to bring sponsorship into the industry to promote an industry, so that that’s my promotion I manage, and then I gain revenue out of the servicing of that industry.
53. That summary is broadly consistent with the “promote, manage, service” characterisation that he now gives to his activities. But that characterisation is significantly different from the version originally put to the ATO; early communication of the business plan to the ATO would certainly not have done the taxpayer’s case any harm. Ultimately, the taxpayer’s case as presented to the Tribunal bore only a passing resemblance to the early information that was provided to the ATO in pre-assessment correspondence and at the objection stage. On that basis there is serious doubt as to whether what is now asserted (and although I am satisfied that it is honestly asserted) presents an accurate picture of the activities during the relevant years.
54. I now turn to the factors mentioned in the authorities to determine whether a person is carrying on a business. While I acknowledge that they are not exhaustive, they provide a convenient framework for discussion. Because there is some overlap between the factors, I will not deal with all of them separately.
A commercial enterprise for the purpose of making a profit
55. The Commissioner says that the business plan is not a credible foundation for any business, but I disagree. The key to profitability, on the taxpayer’s model, is sponsorship, but that was always likely to be a consequence of success as much as a contributor to it. So it is not surprising that Mr Gilbert should say that his early focus was on sponsorship. And although he was wearing his Aircom Systems hat at the time, the sponsorship of the 2005 championship could only have helped the activities he was conducting on his own account.
Activities engaged in on a continuous and repetitive basis
56. The racing activities can certainly be said to have been engaged on in a continuous and repetitive basis, but there is a significant lack of evidence that the other activities proposed in the business plan were undertaken on the same basis. Now, of course, a business plan is just that – a plan – and it is not unusual for the proposed activities to differ from those actually undertaken. That in itself hardly warrants criticism. On the other hand, a person who claims that his activities have progressed beyond the vigorous pursuit of a hobby and have become the carrying on of a business should be able to point to evidence of the business-like examination and re-evaluation of his fledgling proposals and, if necessary, a recalibration or reformulation of them. There is no such evidence in this case.
Business-like manner; adequate books and records; systematic approach to the conduct of the undertaking
57. The Commissioner asserts that Mr Gilbert’s activities lacked organisation and system – there was no separate bank account, no separate e-mail address or website, and no separate business address. I would not regard any of those shortcomings as particularly significant in this case.
58. The factors that weigh more heavily against the taxpayer, in my view, are the “unbusiness-like” way in which he kept track of some of his activities, and the lack of written documentation of the more significant elements of them.
59. For example, in relation to sponsorship, Mr Gilbert said that he sent 100 DVDs to major corporations in an attempt to secure cash sponsorship. He named some of those corporations and he provided three e-mail responses he received (all of them dated March 2007), indicating that the companies were unable to assist him. But there were ninety-seven others. Did they respond? If so, how? If not, did he send reminders? And if these approaches were unsuccessful, were others made? Had he made similar approaches earlier? Were they successful? This area of sponsorship, as I have already noted, was critical to the financial success of his undertaking, but too many questions have been left unanswered.
60. The evidence in relation to prize money is unsatisfactory. If Mr Gilbert’s undertaking had been conducted with a reasonable level of organisation and system then there should have been no uncertainty about the quantum of prize money received.
61. Another factor that weighs against him is the general record-keeping practice of storing paperwork in a shoebox and then delivering the shoebox to his accountant at the end of the financial year to formulate end-of-year accounts. A practice of that kind allows no real-time monitoring of financial performance which is one of the hallmarks of sound business practice. It also led to the retention of documents showing expenditure of modest amounts of less than $10 but in circumstances where – somewhat inexplicably – documents relating to repairs to racing engines, for amounts claimed to be in the tens of thousands of dollars, did not find their way to the accountant. The expenses (although now claimed to have been incurred) were not reflected in the accounts.
Whether ordinary commercial principles were applied
62. As the Commissioner has noted in his submissions, there were no significant contractual arrangements in place, either with riders or with sponsors. The arrangement with Aircom Systems seems to have been an oral one, despite the relative financial significance of it. Mr Gilbert gave evidence of a financial arrangement between himself and his riders as to the sharing of any prize money but again, that arrangement was undocumented.
Summary
63. It is reasonably clear that there was a change in thinking on Mr Gilbert’s part around 2004 or 2005 which triggered in him a desire to operate his sidecar activities on a different level from that at which he had operated in the past. He says now that he moved into a “business” phase and he remains confident that he can make a financial success out of his operations. It is possible that his confidence is well founded.
64. But the question is not whether his activities were more vigorous than they had been in the past, or whether he was now prepared to put more money into the activities, although those are relevant factors that I am obliged to take into account. The question is whether he was carrying on a business in the relevant years, and that – as Woods and many of the other authorities make plain – depends upon an assessment of the facts and involves matters of fact and degree.
65. There are, indeed, factors in Mr Gilbert’s favour. They include the level of investment he was prepared to make (although it is difficult to quantify with any precision the amounts involved – particularly in relation to the purchase of the LCR outfits and the expenditure on engine building, re-conditioning and repairs) and his enthusiastic, if inadequately documented, chasing of sponsorship.
66. But there are significant factors against him. They are the shifting nature of his case over time, his difficulty in establishing that he approached his activities with a reasonable level of organisation and system, the often unsatisfactory nature of the paperwork and the uncertainty around the financial position – from both a revenue and an expenditure perspective. His activities were, in summary, not as methodical as one would expect of a reasonably competent businessman – or, if they were, then he has failed to create (or, perhaps, retain) the documentary material that would establish that to be the case.
67. When assessing whether a person’s activities do or do not constitute the carrying on of a business, one should be careful not to require perfection. Mistakes and shortcomings are to be expected, particularly in a start-up phase, and those should not be viewed too harshly. What is required is a reasonable approach to the exercise – an approach which makes proper allowance for the difficulties faced, but one which expects, and requires, an appropriate response to those difficulties so that they might eventually be overcome, or at least managed.
Conclusion
68. The taxpayer has failed to satisfy me that he was carrying on a business in the relevant years. His activities, instead, are properly described as the vigorous pursuit of a recreational activity or hobby.
69. Given that conclusion, it is not necessary for me to consider the issues that may have arisen under Division 35 of the 1997 Act.
Decision
70. In those circumstances, the objection decisions must be affirmed.
I certify that the 70 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Senior Member
Signed: .....................................................................................
Associate B. DhanasarDates of Hearing 21-23 June 2010, 27 July 2010
Date of Decision 10 November 2010
Appearance for the Applicant Mr A Abbott, WHK Horwath
Counsel for the Respondent Mr R Scruby
Solicitor for the Respondent Mr R Pandey, ATO Legal Services
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