Gluck v Federal Commissioner of Taxation

[2005] FCA 1634

FEDERAL COURT OF AUSTRALIA

Gluck v Federal Commissioner of Taxation [2005] FCA 1634

JEFFREY GLUCK v FEDERAL COMMISSIONER OF TAXATION

ACD 38 OF 2004

EMMETT J
11 OCTOBER 2005
CANBERRA

IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIA CAPITAL TERRITORY DISTRICT REGISTRY	ACD38 OF 2004

BETWEEN:	JEFFREY GLUCK APPLICANT
AND:	FEDERAL COMMISSIONER OF TAXATION RESPONDENT
JUDGE:	EMMETT J
DATE OF ORDER:	11 OCTOBER 2005
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.        The appeal be dismissed. 

2.        The applicant pay the respondent’s costs of the appeal.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIA CAPITAL TERRITORY DISTRICT REGISTRY	ACD38 OF 2004

BETWEEN:	JEFFREY GLUCK APPLICANT
AND:	FEDERAL COMMISSIONER OF TAXATION RESPONDENT
JUDGE:	EMMETT J
DATE:	11 OCTOBER 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. Before the Court is an appeal pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). Under s 44, an appeal lies on a question of law from a decision of the Administrative Appeals Tribunal (‘the Tribunal’). This appeal is from a decision of the Tribunal affirming a decision on review, of the respondent, the Federal Commissioner of Taxation (‘the Commissioner’), in relation to an objection to an assessment issued by the Commissioner to the applicant Mr Jeffrey Gluck (‘the Taxpayer’).

2. On 10 October 1998, the Taxpayer lodged an income tax return for the year ended 30 June 1998.  That return disclosed income that resulted in a refund of tax.  However, following investigations on behalf of the Commissioner, the Commissioner concluded that the Taxpayer had not disclosed the whole of his assessable income for the year in question.

3. A notice of assessment was issued, dated 23 May 2000.  By that notice of assessment, the Commissioner indicated that the taxable income of the Taxpayer was $45,027, and that there had been an understatement of taxable income, as a consequence of which penalties and interest were included in the notice of assessment.  The notice of assessment showed that net business income of $42,350 had been added to the income disclosed by the Taxpayer.  The assessment arose out of renovation work carried out by a Mr Humphries on his own house, in connection with which the Taxpayer provided assistance as a building supervisor.

4. By notice of objection dated 7 August 2000, the Taxpayer objected to the assessment.  The Commissioner made an objection decision on 20 July 2001 in respect of that objection.  On 8 August 2001, the Taxpayer applied to the Tribunal for review of the Commissioner’s objection decision. 

5. The basis of the assessment was that the Taxpayer had received assessable income in the sum of $108,885.25, and had incurred expenditure in deriving that assessable income in the sum of approximately $50,000.  As a result of an arithmetical error on the part of the Commissioner, or his officers, the amount of taxable income did not actually reflect the figures found by the Commissioner.  However, the error was in favour of the Taxpayer.

6. The notice of appeal to this Court describes seven questions of law as follows:

   ‘(a)Whether there was any evidence or other material sufficient to justify the making of the decision;

   (b)Whether the decision was so unreasonable that no reasonable person could have made that decision;

   (c)Whether the Tribunal failed to make particular findings of fact in the course of the reasoning;

   (d)Whether the Tribunal properly construed the terms of section 14ZZK of the Taxation Administration Act 1953, when deciding that the taxpayer had not discharged the onus of proof;

   (e)Whether the Tribunal properly construed the terms of Division 3A of Part VI of the Income Tax Assessment Act 1936;

   (f)Whether the Tribunal took into account irrelevant considerations when determining the appropriate level of culpability to be imposed;

   (g)Whether the Tribunal failed to take into account relevant considerations when determining the appropriate level of penalty and interest to be imposed.’

7. The grounds based on the fifth question of law were abandoned in the course of argument before the Court.  In essence, there were three questions said to be questions of law.  The first was that there was no valid assessment.  In essence, the Taxpayer contended that the assessment was made in bad faith.  Secondly, the Taxpayer contended that there was no evidence that could justify the conclusion that the Tribunal reached.  There are several sub issues within that question.  The third issue, which arises only if the Taxpayer fails on the first two, is whether there was an error on the part of the Tribunal in confirming the penalty tax that was included in the assessment.

   NO VALID ASSESSMENT

8. There were a number of factors advanced by the Taxpayer in support of his contention that the assessment of the Commissioner was invalid because it was made in bad faith.  First, the Taxpayer points to the fact that an auditor within the Australian Taxation Office, Ms Harprakash Khaira, accepted, in the course of cross-examination in the proceeding before the Tribunal, that the audit which she had undertaken of the affairs of the Taxpayer was not finalised and was not finished at the time when the assessment was made.

9. Secondly, the Taxpayer points to the fact that, in the course of an interview with the auditor, he asserted that he had expended substantial sums of money in connection with the renovation of Mr Humphries’ house and that the expenditure exceeded the income that he received in connection with the renovation. He relies on the fact that he terminated the interview without furnishing full particulars of the expenditure that he claimed he had incurred, beyond receipts for approximately $56,000. He complains that the Commissioner did not attempt to utilise the compulsory provisions of ss 263 and 264 of the Income Tax Assessment Act 1936 (Cth) (‘Income Tax Assessment Act’), to determine precisely what expenditure the Taxpayer may have incurred.

10. Thirdly, the Taxpayer points to the fact that the Commissioner accepts that the notice of assessment was issued at a time when the Taxpayer was about to go overseas.  Finally, the Taxpayer points to evidence that the Commissioner’s audit officer had unjustifiably formed an adverse view of the Taxpayer as a result of her inquiries.

11. Before dealing with those questions, it is desirable to say something more about the circumstances of the renovations of Mr Humphries’ house, as found by the Tribunal.  The Commissioner and his officers had before them, relevantly, two documents prepared by the Taxpayer in the name ‘Jeff’s Joinery’.  The first, although not the first in time, is a document entitled ‘Final Account’ dated 5 December 1997.  It states in typed script:

    ‘Amount paid to date on quotation number 97058 and extras, 68 Longmore Crescent, Wanniassa,   $95,000
    Balance due,   $5385.25.’

    Endorsed in handwriting on that document is the note, ‘Paid in full’ and the signature of the Taxpayer.  Relevant to that final account are three documents issued by Jeff’s Joinery under the references ‘Job Number 97058’, ‘Job Number 97058/E’ and ‘Job Number 97058-E2’.  Those three documents, which might conveniently be referred to as ‘quotations’, are for amounts that total $100,385.25, being the sum of the two amounts shown in the final account.

12. The second document is dated the 23 October 1997.  It was issued by Jeff’s Joinery and is entitled ‘Invoice’.  It shows a total cost of $8,500 for water damage to bathroom and laundry.  It is addressed to 68 Longmore Crescent, Wanniassa.  Endorsed on the bottom of that document in handwriting is a note saying ‘Paid bank cheque No 00440963, 24/10/97, $8500 Colonial State Bank’.

13. The Commissioner relied upon the total of the amounts shown in those documents, of $108,885.25, as evidence of the receipt of that sum, or sums totalling that amount, by the Taxpayer, as assessable income.  The Commissioner’s position was that, at an interview with Ms Khaira, the Taxpayer provided receipts for expenses incurred in undertaking the renovations, totalling $56,847.99.  There was no further evidence before the Commissioner or before the Tribunal as to the amount of expenditure incurred by the Taxpayer in the carrying out of the renovation works at Mr Humphries’ house. 

14. The amount of $56,847.99 included receipts for four skylights and two heating systems.  However, Ms Khaira determined that only two skylights and one heating system was installed in Mr Humphries’ house and disallowed the expense of the remaining two skylights and one heating system.  The Commissioner therefore accepted only the sum of $53,235.99 as allowable deductions from the assessable income of $108,885.25. 

15. Ms Khaira accepted that she had not finalised, or finished, the investigation and audit that ultimately led to the notice of assessment.  She also accepted that a decision was made to issue the notice of assessment at the time when it was made, because of the Taxpayer’s proposed departure from Australia.  It was not suggested that the Taxpayer was leaving for any reason other than a legitimate pursuit of his business affairs.

16. Ms Khaira gave evidence before the Tribunal that the making of the assessment and the issuing of the notice of assessment was ‘a rush job’.  She explained that she meant by that expression that she had to get the assessment checked with her team leader because the Taxpayer was leaving the country.  She also accepted, in the course of cross-examination, that she had lost trust in the Taxpayer and, consequently, wanted to get the notice of assessment out as quickly as she could. 

17. Ms Khaira was cross-examined about her evidence that she had lost trust with the Taxpayer.  She accepted that one of the incidents that gave rise to that loss of trust concerned an answer given, at some stage in an interview by the Taxpayer concerning income of a company called Esibuilt Pty Limited (‘Esibuilt’).  Esibuilt appears to be controlled by the Taxpayer.  The suggestion was that the Taxpayer, when asked about his affairs, did not disclose income of Esibuilt. 

18. However, there does not appear to have been any evidence before the Tribunal as to precisely what question was asked of the Taxpayer, and in what context.  The most that can be gleaned from the evidence is that the Taxpayer was provided with a pre-interview questionnaire, in which he was asked whether he had any related companies or any other business.  He did not disclose his connection with Esibuilt in that context.

19. It is not open to the Commissioner, when making an assessment, simply to pluck a figure out of the air, or to make an uninformed guess.  If the Commissioner simply plucked a figure out of the air, or proceeded upon no intelligible basis, the Commissioner may well be in breach of his statutory duty to make an assessment from the information in his possession (see R v the Deputy Commissioner of Taxation, Ex Parte Briggs (1987) 14 FCR 249). However, those are not the circumstances in the present case.

20. Ms Khaira and her supervisor had precise documentary evidence that justified a notice of assessment for a greater amount than was actually shown in the notice of assessment.  There is no possible doubt as to what the Commissioner’s reasoning was in making the assessment.  I do not consider that there is anything in any of the matters advanced as constituting bad faith on the part of the Commissioner that could possibly justify a conclusion that the notice of assessment was issued in bad faith.  The attack on the validity of the assessment must fail.

    NO EVIDENCE

21. The second broad ground, is in my view, no more than an invitation to this Court to substitute a different finding of fact from that made by the Tribunal.  There are a number of aspects of the contention to which I need refer.  First, there is the question of a quantity surveyor’s report. 

22. In a preliminary hearing before a Senior Member of the Tribunal, it was suggested that the parties might have reached a way forward by agreeing on the appointment of a quantity surveyor to determine the cost of the work involved in the renovations of Mr Humphries’ home.  In due course, a report by Rawlinsons Group Pty Limited (‘the QS Report’), expressed the opinion that the total construction value of the renovations was $155,397.  The QS Report was admitted into evidence before the Tribunal without objection by the Commissioner and without any challenge to the findings contained in it.

23. The Taxpayer’s first contention is that there was, in effect, an agreement concerning the QS Report.  He invites the Court to conclude that there was an agreement between the Taxpayer and the Commissioner that, for the purposes of the proceeding in the Tribunal, the whole of the sum of $155,397 should be taken to have been expended by the Taxpayer himself, in carrying out the renovations.  If that were so, then he had no taxable income, because his allowable deductions exceeded his assessable income.

24. The Tribunal observed that the Taxpayer had produced the QS Report, although he did not call the surveyor who made the report.  The Tribunal observed that the Taxpayer did not analyse the contents of the QS Report in any manner when giving his evidence before the Tribunal.  Most significantly, however, the Taxpayer did not claim that he was responsible for all of the payments made, or expenses incurred in the work, described in the QS Report.  The Tribunal therefore did not accept the QS Report as incontestable evidence that the Taxpayer provided all the goods and services, or paid for all of the items, set out in the QS Report. 

25. In his witness statement, which was admitted as evidence before the Tribunal, the Taxpayer said, relevantly:

    ‘18.I acknowledge receiving the sum of $100,385.25 from Mr Humphries.

    19.I believe I may have spent more than $100,385.25 purchasing building materials for the extension and/or making payments to third parties that provided goods and services during the construction of the extension.

    20.I have seen a quantity survey which was done by the Rawlinsons group, dated 18 June 2003 and which shows the total cost of construction of the extension in 1997 dollars as being $155,397.’

26. He was asked about those statements in cross-examination.  In particular, he was asked  whether he believed the statement in paragraph 19 to be the case.  His response was:

    ‘I may have, it’s hard to say, isn’t it.  Well, I mean, like I said, a lot of the things is paid in cash and there was no receipts.’

    He was then asked if he asked for receipts and his response was:

    ‘I didn’t pay everybody.  Mr Humphries paid a lot of the people.’

27. The Taxpayer agreed that Mr Humphries paid a lot of people and that Mr Humphries paid for some of the subcontractors directly.  There is clearly evidence to support the Tribunal’s conclusion that the QS Report should not be taken to be incontestable evidence that the Taxpayer provided all the goods and services, or paid for all of the items set out in the report.

28. It was open to the Tribunal to conclude that, since the only evidence of payments produced by the Taxpayer amounted to approximately $55,000, they were the only expenses that he actually incurred.  Thus, the real question before the Tribunal, having regard to the documentary evidence concerning receipts, was how much of the expenditure involved in Mr Humphries’ renovations were actually incurred by the Taxpayer.

29. The Taxpayer gave evidence-in-chief, which was relied upon on the appeal as, in effect, being conclusive evidence, that he had no taxable income.  He said ‘No’ in answer to the question:

    ‘Did you receive any benefit - any material benefit from this contract?’

    He said, ‘No’, in answer to the question ‘Did you receive any money or payment from this contract?’.  He said ‘Yes’, in answer to the question ‘Do you say that you didn’t earn anything?’.  He answered ‘Yes’, to the question ‘Do you say that your entire reason and the entire benefit to you, was work experience of supervision?’  The Taxpayer also relies on the assertion contained in paragraph 19 of his witness statement, referred to above. 

30. While that evidence may have been evidence upon which the Tribunal could have reached a different conclusion, it does not compel that different conclusion.  The Taxpayer says, however, that because neither the Commissioner, nor the Tribunal, called Mr Humphries, his assertions should be accepted at face value. 

31. If, in relation to an assessment made on the basis of asset betterment, a taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spends his time and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof, unless some positive reason is shown why he is to be disbelieved.  Any other view might introduce a degree of arbitrariness into liability for tax (see Ma v the Federal Commissioner of Taxation 92 ATC 4373 at 4377). However, that proposition has nothing to do with the present case.

32. There was clear and cogent evidence before the Tribunal that the Taxpayer had received income in the some of $108,885.25 and that he had expended no more than $55,000.  It was open to the Tribunal to reach the conclusion that it reached, namely, that the Taxpayer had failed to discharge the onus cast upon him of showing that the Commissioner’s assessment as to his taxable income was excessive.

33. The Taxpayer complained that the Tribunal should not have relied upon the admission made in paragraph 18 of his witness statement, without also accepting the assertion of his belief made in paragraph 19.  However, the clear documentary evidence was sufficient to justify the conclusion that the Taxpayer did in fact have assessable income of $108,885.25 and had allowable deductions of no more than $55,000.

34. The Taxpayer also complains specifically about the disallowance by the Commissioner of expenditure for two skylights and one heating system.  The Taxpayer was asked, in his evidence in chief, whether he obtained any advantage for himself by using a trade discount on Mr Humphries’ behalf.  His response was that there was an advantage for both of them, ‘a classic example being the heating units’.  He said that he needed a heating unit, because he had a wood fire and could not cut wood because of an injured back.  He arranged to get a discount by paying for the heater for himself and for Mr Humphries at the same time.  He said that he paid for one heater and Mr Humphries paid for the other and that they paid the same price.  That evidence is sufficient to justify disallowance of a deduction for two heaters.  The Commissioner allowed a deduction for one heater.  The Taxpayer said in evidence, that the same rationale applied in relation to skylights.  There was evidence of expenditure for four skylights, only two of which were installed in Mr Humphries’ house. 

35. In the light of the evidence from Ms Khaira, that she inspected Mr Humphries’ house and observed that there was only one heater and only two skylights, the disallowance of a deduction for an extra heater and two extra skylights is supportable by the evidence.  The Taxpayer’s complaint is that the other heater and the other skylights might have been stored somewhere in Mr Humphries’ premises.  Be that as it may, the question is whether there was evidence to support the finding, which there clearly was.

36. The issue before the Tribunal was a simple question of fact, namely whether there was evidence to support the conclusion that the Taxpayer did not have assessable income of $108,885.25 and whether there was evidence that he had incurred expenses in deriving that assessable income in excess of $53,235.99.  There was, without question, material before the Tribunal that would support the Commissioner’s assessments on the basis that there was assessable income of $108,885.25 and there were allowable deductions no greater than $53,235.99.

1. I do not consider that there is any substance in the contention that there was no evidence to support the Tribunal’s conclusions, or that the Tribunal’s conclusion was so unreasonable that no reasonable person could have reached that conclusion.  That being so, the question arises as to whether the penalty tax was properly imposed. 

   PENALTY TAX

2. Section 226J of the Income Tax Assessment Act relevantly provides that, if a taxpayer has a tax shortfall, and that shortfall, or part of it, was caused by the intentional disregard by the taxpayer of the Act, or the Regulations, the taxpayer is liable to pay, by way of penalty, additional tax equal to 75 per cent of the amount of the shortfall.

3. Section 226K relevantly provides that, if a Taxpayer has a tax shortfall for a year of income and the shortfall was caused by the Taxpayer, relevantly, in his return treating an income tax law as applying in relation to a matter, or incidental matters, in a particular way, and the shortfall exceeded $10,000, in circumstances where it was not reasonably arguable that the way in which the application of the law was treated was correct, the Taxpayer is liable to pay, by way of penalty, additional tax equal to 25 per cent of the amount of the shortfall.

4. Finally, ss 226X(a) and 226X(b)(i) relevantly provide that, if a taxpayer is liable to pay additional tax because of a tax shortfall, or part of a tax shortfall, and the taxpayer took steps to prevent, or hinder, the Commissioner from becoming aware of the shortfall, the taxpayer is liable to pay, by way of penalty, further additional tax equal to 20 per cent of the amount of the additional tax.

5. On the findings that were made by the Tribunal, it was open to the Tribunal to confirm the imposition of penalty tax in the amounts imposed by the Commissioner.  The Taxpayer, however, asserted that the Tribunal erred in failing to take account of his evidence that he alerted the Commissioner to the transaction in question.

6. The Taxpayer said that, at a time prior to the commencement of the Commissioner’s audit, he went to the Tax Office at Belconnen to see what rights he had as a person who had ‘put his builder’s licence on the line’.  He said that he did that because of an assertion made to him by Mr Humphries, that Mr Humphries was:

   ‘going to send you broke.  I am going to the tax office.  I’m going to do this, and I’m going to do that.’

7. The Taxpayer said that he went to the Tax Office in Belconnen in about February 1998, after the job on Mr Humphries’ house was completed.  He said that he did that because ‘when somebody threatens you about that, you want to see if you've done anything wrong’.  He said ‘I just wanted to make sure that I didn’t do anything wrong.’

8. He said that he was called up to speak to an officer of the Tax Office and gave this evidence:

   ‘I explained the situation to him that I done a job for a friend with my builder’s licence, we’ve had a run in, rah, rah, rah, he’s paid that, he hasn’t paid - you know, like, I hadn’t made any money out of it.  I told the bloke at the counter that he’s threatened me with this - that, you know, he’s going to come to the tax office.’

9. He then also said:

   ‘Well, when I was speaking to the gentleman in the cubicle I explained to him the situation that I was helping a friend out, let him use my licence, signed all the documentation, done a bit of supervision work, which I didn’t make any money on, that now that it’s come to a maintenance issue, that it’s come to the point where I was threatened about the tax, the gentleman behind there gave me a pamphlet, which I’ve misplaced.’

10. It is hard to see how that could, in any way, be characterised as a disclosure to the taxation office of the fact that the Taxpayer had received assessable income of $108,000, in respect of which he had incurred allowable deductions of no more than $53,000. 

11. The Taxpayer also refers to the circumstances to which I have already averted, concerning Ms Khaira’s loss of trust in the Taxpayer.  He also draws attention to the fact that the Tribunal was alerted to the situation by allegations made by Mr Humphries, who by that stage was antagonistic in the extreme to the Taxpayer. 

12. However, none of that seems to me to be germane to the question of whether the Taxpayer concealed his income.  On the findings that were made by the Tribunal, he clearly did conceal his income from the Commissioner.  He lodged a taxation return that did not disclose his income and he participated in an interview, with Ms Khaira, in which he made assertions that ultimately the Tribunal did not accept. 

13. The Tribunal’s conclusion was that the Taxpayer had not established that he did not conceal his income from the Commissioner and that he should therefore not suffer a penalty.  The Tribunal observed that the Taxpayer had not provided reliable records and had, in fact, asserted that he issued bogus invoices and receipts, at Mr Humphries’ request.  The Tribunal considered, therefore, that the Taxpayer had been involved in concealment.  The Tribunal was not satisfied, on the balance of probabilities, that the Taxpayer had not concealed income from the Commissioner.  The Tribunal was therefore satisfied that the penalty should not be reduced. 

    CONCLUSION

14. The Taxpayer has not established any error of law on the part of the Tribunal.  It follows, in my opinion, that the appeal should be dismissed.

I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:

Dated:            22 November 2005

Counsel for the Applicant:	Mr A.C. Powrie
Solicitor for the Applicant:	Powrie & Co
Counsel for the Respondent:	Mr A. Berger
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	11 October 2005
Date of Judgment:	11 October 2005