Goldberg and Anor and Commissioner of Taxation

[2008] AATA 1045

ADMINISTRATIVE APPEALS TRIBUNAL          № 2007/1331
  № 2007/1329

TAXATION       APPEALS       DIVISION

Re:           ALEXANDER GOLDBERG AND

IFH PTY LTD

Applicants

And:COMMISSIONER OF TAXATION

Respondent

CORRIGENDUM

Tribunal:       Dr Gordon Hughes, Member

Date:17 December 2008

Place:Melbourne

Member Hughes made a Decision under s 43 of the Administrative Appeals Tribunal Act 1975 (the Act) in these applications on 20 November 2008.

The Tribunal was advised that there were errors in the Reasons for Decision.

In accordance with s 43AA(1) of the Act, the Tribunal directs that the Registrar alter the text of the Reasons for the Decision by:

1.deleting the reference to the quarter ended 30 June 2003 in paragraphs 11 and 12;

2.deleting the amount of $3,240 in respect of the penalty initially imposed for the quarter ended 31 March 2003 in paragraph 14 at the third dot point of the decision and replacing it with $3,637.50; and

3.deleting the amount of $2,160 in respect of the penalty initially imposed for the quarter ended 31 March 2003 in the second last sentence in paragraph 16 and replacing it with $2,425.

(sgd) Gordon Hughes
  Member

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 1045

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No      2007/1331

TAXATION       APPEALS        DIVISION

)         No     2007/1329

Re

ALEXANDER GOLDBERG &

IFH Pty Ltd

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Dr Gordon Hughes, Member

Date20 November 2008

PlaceMelbourne

Decision The Tribunal affirms the decisions under review.

(sgd) Dr Gordon Hughes

Member

TAXATION - Creditable Acquisition – book publishing initiative – absence of indicia of conducting a business – advice from advisers sought on inadequate premise – whether tax shortfall penalty appropriate

A New Tax System (Goods and Services Tax) Act 1999 Sections 9-20, 11-5, 11-15(1), 11-20, 29-10(1), 29-10(2), 29-10(3) and 195-1

Taxation Administration Act 1953 Sections 284-75 and 284-90

Martin v Federal Commissioner (1952) 90 CLR 470

Ell and Another v Federal Commissioner of Taxation (2006) 61 ATR 661

Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873

REASONS FOR DECISION

20 November 2008               Dr Gordon Hughes, Member

1.      These two applications were heard together by the Tribunal because the two applicants were involved in the same book publishing initiative.  The Applicant IFH Pty Ltd (IFH) claimed to be a book-publishing wholesale company and the Applicant Mr Alexander Goldberg was a sole trader, trading as Australian Training Enterprises, which sold its business to IFH.  Mr Goldberg was a director and secretary of IFH.

2.      The principal issue for determination was whether, during their respective relevant periods, the Applicants were carrying on an enterprise and made creditable acquisitions such that they were entitled to claim input tax credits.

3.      The Applicants asserted that during the relevant period IFH had ordered, and was awaiting the completion of, its first book.  The book had been in preparation for some years and external editors had been paid to edit it.  The book related to a new theory on psychology.

4.      The Respondent asserted that the Applicants had not provided sufficient evidence of carrying on a business and that its activities were more in the nature of a private recreational pursuit or at least an activity with no reasonable expectation of profit or gain.  Alternatively, if the Applicants were carrying on an enterprise, they had not established that they made any creditable acquisitions during the relevant period.

BACKGROUND

5.      Between 1 July 2000 and 31 December 2002 (the relevant IFH period), IFH was allegedly operating as a book publishing company.

6.      Between 15 December 2002 and 30 June 2003 (the relevant Goldberg period), Mr Goldberg was allegedly operating as a sole trader under the trading name Australian Training Enterprises.

7.      During the relevant IFH period, IFH lodged Business Activity Statements on a quarterly basis and reported as follows:

-for the quarter ended 31 March 2002, input tax credits of $4,320 on alleged capital purchases of $47,520;

-for the quarter ended 30 September 2002, input tax credits of $12,000 on alleged capital purchases of $132,000;

-for the quarter ended 31 December 2002, input tax credits of $49,000 on alleged capital purchases of $490,000 and GST of $5,500 on sales of $55,000;

-for the quarter ended 31 December 2000, input tax credits of $3,545;

-for the quarter ended 30 June 2001, input tax credits of $550;

-for all other quarters in the relevant period, either no activity was reported or, where it was reported, IFH subsequently revised the relevant Business Activity Statements to nil.

8.      During the relevant Goldberg period, Mr Goldberg lodged Business Activity Statements on a quarterly basis and claimed as follows:

- for the quarter ended 31 December 2002, input tax credits of $5,500 on alleged capital purchases of $60,500;

- for the quarter ended 31 March 2003, input tax credits of $4,850 on alleged capital purchases of $53,350; and

- for the quarter ended 30 June 2003, input tax credits of $7,800 on alleged capital purchases of $85,800.

9.      Subsequent to their lodgement, the Applicants' Business Activity Statements for the respective relevant periods were reviewed by the Commissioner.

10.     Following a request from Mr Goldberg's agent by way of letter dated 14 October 2003, the Business Activity Statement for the quarter ended 30 June 2003 was revised to exclude the input tax credits originally claimed.

11.     Upon completion of the review of the Applicants' Business Activity Statements in late 2005, the Commissioner determined that during their respective relevant periods:

- neither Applicant was carrying on an enterprise and was not entitled to be registered for GST;

-IFH's Business Activity Statements for the quarters ended 31 March 2002, 30 September 2002, 31 December 2002 and 30 June 2003 needed to be revised; and

- Mr Goldberg's Business Activity Statements for the quarters ended 31 December 2002 and 31 March 2003 needed to be revised.

12. The Commissioner also determined that the Applicants were each liable for an administrative penalty at a rate of 75% for intentional disregard pursuant to sections 284-75 and 284-90 of the Taxation Administration Act 1953 (the TAA) for making false and misleading statements that led (in the case of IFH) to a tax shortfall amount for the quarters ended 31 March 2002, 30 September 2002, 31 December 2002 and 30 June 2003 and (in the case of Mr Goldberg) to a tax shortfall amount for the quarters ended 31 December 2002 and 31 March 2003.

13.     Consequently, the Commissioner issued the following notices to IFH:

- Notice of Assessment of GST Net Amount for the quarter ended 31 March 2002 revising the GST Net Amount from $4,320Cr to $0 on 12 August 2005;

- Notice of Assessment of GST Net Amount for the quarter ended 30 September 2002 revising the GST Net Amount from $12,000Cr to $0 on 12 August 2005;

- Notice of Assessment of GST Net Amount for the quarter ended 31 December 2002 revising the GST Net Amount from $43,500Cr to $0 on 12 August 2005;

- Notice of Penalty for the quarter ended 31 March 2002 imposing penalty in the amount of $3,240 on 20 September 2005;

- Notice of Penalty for the quarter ended 30 September 2002 imposing penalty in the amount of $9,000 on 20 September 2005; and

- Notice of Penalty for the quarter ended 31 December 2002 imposing penalty in the amount of $32,625 on 20 September 2005.

14.     The Commissioner also issued the following notices to Mr Goldberg:

- Notice of Assessment of GST Net Amount for the quarter ended 31 March 2003 revising the GST Net Amount from $4,850Cr to $0 on 12 August 2005;

- Notice of Assessment of GST Net Amount for the quarter ended 31 December 2002 revising the GST Net Amount from $5,500Cr to $0 on 19 August 2005;

- Notice of Penalty for the quarter ended 31 March 2003 imposing penalty in the amount of $3,240 on 24 August 2005; and

- Notice of Penalty for the quarter ended 31 December 2002 imposing penalty in the amount of $4,125 on 24 August 2005.

15.     On 14 November 2005 the Applicants lodged an objection against the above assessments of GST net amount and penalty.

16. The Commissioner issued a notice of decision on objection on 5 February 2007, allowing the objection by each Applicant in part, by reducing the rate of penalty for understatement of tax pursuant to sections 284-75 and 284-90 of the TAA to a rate of 50% for recklessness. The amount of the penalty for the quarters ended 31 March 2002, 30 September 2002 and 31 December 2002 (in the case of IFH) was reduced to $2,160, $6,000 and $21,750 respectively. The amount of the penalty for the quarters ended 31 December 2002 and 31 March 2003 (in the case of Mr Goldberg) was reduced to $2,750 and $2,160 respectively. The assessments of GST Net Amount for the quarters ended 31 March 2002, 30 September 2002 and 31 December 2002 (in the case of IFH) and for the quarters ended 31 December 2002 and 31 March 2003 (in the case of Mr Goldberg) were maintained.

LEGISLATION

17. Section 11-20 of A New Tax System (Goods and Services Tax) Act1999 (the GST Act) provides that an entity is entitled to an input tax credit for any creditable acquisition that it makes.

18. Section 29-10(1) of the GST Act provides that an entity accounting on an accruals basis is entitled to attribute any input tax credit it can claim to the tax period in which any consideration (or part consideration) was provided or in which an invoice was issued for the creditable acquisition.

19. Section 29-10(2) of the GST Act provides that an entity accounting on a cash basis is entitled to attribute (or partly attribute) an input tax credit to the tax period in which the entity provided consideration (or part consideration) for the creditable acquisition. If, in a tax period, none of the consideration was provided, none of the input tax credit for the creditable acquisition is attributable to that tax period.

20. Section 29-10(3) of the GST Act further provides that an input tax credit will not be attributable to a tax period, to which it would otherwise be attributable, unless the entity that made the creditable acquisition holds a tax invoice for that acquisition at the time it lodged the relevant Business Activity Statement with the Commissioner.

21. An acquisition is a creditable acquisition if certain conditions are met (section 11-5 of the GST Act). One such condition is that the acquisition was made solely or partly for a creditable purpose (paragraph 11-5(a) of the GST Act ).

22. An entity will not acquire something for a creditable purpose to the extent that the acquisition is of a private or domestic nature (paragraph 11-15(2)(b) of the GST Act); but will acquire it for a creditable purpose to the extent that it acquires it in carrying on its enterprise (subsection 11-15(1) of the GST Act ).

23.     The expression carrying on an enterprise is defined to include doing anything in the course of the commencement or termination of the enterprise (section 195-1 of the GST Act ), and the word enterprise is relevantly defined to mean an activity, or series of activities, done in the form of a business (section 9-20(1)(a) of the GST Act), but relevantly does not include an activity, or series of activities, done as a private recreational pursuit or hobby (section 9-20(2)(b) of the GST Act), or by an individual without a reasonable expectation of profit or gain (paragraph 9-20(2)(c) of the GST Act ).

24.     The other conditions that need to be met for an entity to make a creditable acquisition are that:

- the acquisition made was the supply of something that was a taxable supply (paragraph 11-5(b) of the GST Act ); and

- the entity provided, or was liable to provide, consideration for the supply (paragraph 11-5(c) of the GST Act); and

- the entity was registered, or required to be registered for GST (paragraph 11-5(d) of the GST Act).

25. An acquisition is not a creditable acquisition if any of the conditions set out in section 11-5 of the GST Act are not met.

DISCUSSION

26.     Mr N Gulati, the advocate for the Respondent, asserted that there was no evidence that the Applicants were carrying on an enterprise during the respective relevant periods.  He said that none of the indicia of conducting a business were evident.  Invoices submitted by the Applicant did not relate to the relevant periods and therefore did not indicate activity during those periods.  Invoices for the relevant periods were not made out to the Applicants.  There was no evidence of any publishing activity during the relevant periods and at best there was an expression of intention to enter into a publishing contract at some time in the future.  There was no evidence of a business plan and no market analyses, forecasts or research to support the Applicants' assertions that the book would be well received internationally.

27.     Mr Gulati said that, in short, on the threshold question of whether the Applicants were carrying on an enterprise, the Tribunal was required to determine what weight, if any, should be afforded to a series of unsubstantiated factual assertions by the Applicants.

28.     In determining whether an enterprise is being carried on in the form of a business, a number of indicia has been referred to in the past but ultimately the determination depends on the large or general impression gained: Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474. The Respondent submitted that indicia considered relevant in the past could be placed into six different categories – whether the activities had a significant commercial purpose or character; whether the taxpayer intended to and had a reasonable prospect of making a profit from the activities; whether the activities were repeated on a regular basis or conducted systematically; whether the taxpayer's activities were carried on in a way characteristic of the industry; whether the activity was carried on in a business like way (in terms of record keeping, keeping books of account and maintaining business plans, for example); and the size of scale of the activities.

29.     Neither the existence nor the absence of any such indicia is determinative of a genuine expectation of profit-making, and the proportion of expenses and outgoings to the assessable income produced has been considered to be of particular significance: Ell and Another v Federal Commissioner of Taxation (2006) 61 ATR 661. Allowance must be made for the fact that every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business: Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873 at 876. On the other hand, a mere intention to carry on a business will not suffice: Miscellaneous Taxation Ruling MT 2006/1 [127].

30.     The Tribunal is unable to accept, for a number of reasons, that the Applicants have demonstrated that they were carrying on an enterprise in the form of a business.

31.     In the case of IFH, the Tribunal accepts the Respondent's submission that IFH had not produced any evidence to demonstrate any activity or activities relating to the alleged publishing enterprise during the relevant period.  The invoices produced by the Applicant do not relate to the relevant period and are not evidence of a book publishing activity and there was no evidence of a binding contract between IFH and the book supplier.  The absence of a business plan, sales forecast or market research, whilst not determinative, is also significant.  The Applicant asserted that there was a huge market for the book but such assertions are subjective assessments rather than objective research.  Furthermore,  as submitted by the Respondent, the Applicant did not produce books or records for the relevant periods and generally failed to provide evidence of documentation one would normally associate with the running of a business.  Again, whilst not determinative, this factor has a cumulative significance with the other factors, which suggests that the Applicant was not conducting an enterprise in the form of a business.

32.     In relation to Mr Goldberg, no evidence has been produced to the Tribunal as to how his activities constituted the conduct of an enterprise in the form of a business during the relevant periods.  To the extent that invoices were produced, they did not relate to the relevant period or demonstrate any actual activity by the Applicant during the relevant period.  As with IFH, there was no evidence of a business plan or forecasts which one would normally associate with structured business activities.

33.     In their joint submission, the Applicants seemed to focus on the perceived unfairness of the book publishing initiative, or their business practices, being described as reckless.  This refers to the question of penalty but is secondary to the principal issue under consideration.  On the question of whether the Applicants were carrying on an enterprise, Mr S Davidson, representing the Applicants,  asserted  that the book under contemplation was a reality and that there was evidence they had sought advice from accountants, solicitors and taxation specialists. While these may be indicia of a genuine business, such activities relate to the interpretation by others of whether the Applicants' activities amounted to carrying on an enterprise and are not evidence, in themselves, that an enterprise was in fact being conducted.

34. In the case of the Applicants it would be more accurate to conclude that such activity as did occur during the relevant periods was more in the nature of a private recreational pursuit or hobby for the purposes of subsection 9-20(2)(b) of the GST Act. The expression private recreational pursuit or hobby is not defined in the GST Act and, according to Miscellaneous Taxation Ruling MT2006/1 (paragraph 367), is a question of fact in respect of which a number of indicators may provide some guidance.  Paragraph 87 of Taxation Ruling TR97/11 lists the following indicators which are reiterated in MT2006/1 paragraph 367:

- it is evident that the taxpayer does not intend to make a profit from the activity;

-losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how profit can be made;

-the transaction is isolated and there is no repetition or regularity of sales;

-any activity is not carried on in the same manner as a normal, ordinary business activity;

-there is no system to allow profit to be produced in the conduct of the activity;

-the activity is carried on a small scale;

-there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business; and

-any produce is sold to friends and relatives and not to the public at large.

35.     Not all of the above indicators apply in the present case.  Nevertheless, the Tribunal is of the view that the activity carried out by the Applicants was in the nature of an isolated venture of particular interest to the individuals involved and with no plan in place to show how a profit could be made.  Any profit made from the activity would, in effect, be regarded as a bonus.  The activity of the Applicants was being carried out on a small scale and was not carried on in the manner of a conventional business.

36.     Given the Tribunal's conclusion that neither Applicant was carrying on an enterprise, it follows that neither Applicant has made a creditable acquisition.  It further follows that each Applicant has failed to discharge the burden of proving that the assessments of GST Net Amount for the quarters ended 31 March 2002, 30 September 2002 and 31 December 2002 (in the case of IFH) and for the quarters ended 31 December 2002, 31 March 2003 and 30 June 2003 (in the case of Mr Goldberg) were excessive.

37.     Each Applicant is liable to pay the assessed tax shortfall penalty of 50% because the tax shortfall for the quarters ended 31 March 2002, 30 September 2002 and 31 December 2002 (in the case of IFH) and 31 December 2002, 31 March 2003 and 30 June 2003 (in the case of Mr Goldberg) was a result of their or their agents' reckless behaviour.  As indicated above, the Applicants clearly took exception to the characterisation of their conduct as being reckless but perhaps they failed to appreciate the meaning of the term in the current context.  Draft Miscellaneous Taxation Ruling MT2008/D1 states [at paragraph 100] that recklessness arises where a taxpayer knows there is a real … risk that the material [submitted to the Federal Commissioner of Taxation] may be incorrect.  This is not suggestive of dishonesty on the part of the Applicants.  Draft Miscellaneous Taxation Ruling MT2008/D1 states [at paragraph 99] that behaviour will indicate recklessness where if falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity and [at paragraph 100] the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.

38.     Although Mr Davidson submitted, on behalf of the Applicants, that they had made all relevant enquiries at the Australian Taxation Office in order to verify their entitlement to input tax credits, the advice obtained appears to have been predicated on the assumption that the Applicants were engaged in carrying on an enterprise.  The recklessness of the Applicants was not necessarily in any failure to make enquiries or to seek professional advice but rather in their failure to ensure that their activities satisfied the relevant pre-requisites in respect of which that advice was being sought.  The Applicants appear to have proceeded in the knowledge that their respective claims for input tax credits could be problematic and in the hope that those claims would be allowed, while at the same time having failed to ensure that any of the relevant criteria had a reasonable prospect of being satisfied.

39. The Tribunal concludes that no remission of the amount of administrative penalty pursuant to section 298-20 of Schedule 1 of the TAA in the case of either Applicant. In reaching this conclusion, the Tribunal takes particular account of paragraph 142 of the Commissioner's Practice Statement Law Administrative 2006/2, which states that where an entity has … behaved recklessly … it is difficult to envisage a situation where the Commissioner would exercise the discretion to remit.  The Tribunal does not consider there are exceptional circumstances, or any particular injustice, which would justify a remission in this instance.

DECISION

40.      For the above reasons, the Tribunal affirms the decisions under review.

I certify that the forty [40] preceding paragraphs are a true copy of the reasons for the decision herein of:

Dr Gordon Hughes, Member

(sgd) Mara Putnis

Clerk

Date of Hearing:  6 June 2008

Date of Decision:  20 November 2008
Advocate for the Applicant:         Mr S Davidson
Advocate for the Respondent:      Mr N Gulati, ATO Legal Services Branch