H J International Trade Group Pty Ltd and Commissioner of Taxation (Taxation)
[2016] AATA 450
•30 June 2016
H J International Trade Group Pty Ltd and Commissioner of Taxation (Taxation) [2016] AATA 450 (30 June 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number
2014/4360
Re
H J International Trade Group Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal F D O'Loughlin, Senior Member
Date 30 June 2016 Place Melbourne The Tribunal affirms the income tax and associated penalty decisions under review. The Tribunal varies the GST and associated penalty decisions under review to reflect the reduced GST liability as shown in Table 4.
........[sgd]...........................................
F D O'Loughlin, Senior Member
INCOME TAX AND GST AND PENALTY – Whether assessments are excessive – income tax and associated penalty decisions affirmed – GST and associated penalty decisions varied
Legislation
Taxation Administration Act 1953 (Cth) s 14ZZK
Cases
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Davis v Commissioner of Taxation (2000) 171 ALR 654
Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149
Galea v Federal Commissioner of Taxation (1990) 21 ALD 722
Gauci v Commissioner of Taxation (1975) 135 CLR 81
George v Commissioner of Taxation (1952) 86 CLR 183Imperial Bottleshops Pty Ltd & Egerton v Commissioner of Taxation 91 ATC 4546
McAndrew v Commissioner of Taxation (1951) 98 CLR 263
Moreau v Commissioner of Taxation (1926) 39 CLR 65Pascoe v Commissioner of Taxation (1956) 30 ALJR 402
Tisdall v Webber (2011) 193 FCR 260
Trautwein v Commissioner of Taxation (1936) 56 CLR 63
Vu v Commissioner of Taxation [2006] FCA 889
REASONS FOR DECISION
F D O'Loughlin, Senior Member
30 June 2016
The Applicant operates a milk bar and contends it operates a homestay accommodation business for foreign students.
Following an audit, the Respondent was not satisfied that the Applicant had returned its true taxable income for the years ended 30 June 2011 and 30 June 2012, nor was he satisfied that the Applicant had reported its true GST net amounts for the period from 1 April 2010 to 30 June 2012. The evidence of sales and purchases in manually kept books and cash register roll totals did not reconcile to the taxable amounts reported and were less than the amounts that the Respondent contends could be expected if industry norms or expectations were applied to the purchases reported.
The Respondent raised assessments by reference to those norms and expectations. He also imposed penalties.
As noted in the Respondent’s Statement of Facts Issues and Contentions:[1]
(a)the amounts originally reported in respect of the homestay operations are as set out in Table 1:
[1]Without adopting the paragraph numbering.
Table 1
Year
Income
Expenses
2011
$68,869.00
$48,098.00
2012
$96,901.00
$49,779.00
(b)the Applicant’s milk bar only makes cash sales;
(c)the tax invoices supplied by the Applicant showed that of the Applicant’s total purchases, in the 2011 year 92% were cigarettes and in the 2012 year 93% were cigarettes;
(d)at the conclusion of the audit, the Respondent amended the Applicant’s GST and income tax assessments to:
(i)exclude all income and expenses relating to the homestay activities;
(ii)disallow the Applicant’s expenses relating to the purchase, ownership and running expenses of two cars registered in the name of one of the Applicant’s directors, Mr Huang;
(iii)disallow purchases not supported by a valid tax invoice; and
(iv)apply the tobacco retailing industry benchmarking figures to determine the Applicant’s business income.
The assessments resulted in tax shortfalls and penalties were imposed.
As part of the objection process the Respondent accepted that further deduction claims in relation to car and telephone expenses ought be allowed which meant that a corresponding input tax credits ought be allowed. After objections were considered the Applicant’s position was as set out in Tables 2 and 3:
Table 2
Post Objection GST and penalty position
Quarterly Period
GST Liability
Shortfall Penalty
1 April 2010 to 30 June 2010
$4,141.00
$1,035.25
1 July 2010 to 30 September 2010
$2,827.00
$664.75
1 October 2010 to 31 December 2010
$1,338.00
$279.25
1 January 2011 to 31 March 2011
$2,199.00
$496.50
1 April 2011 to 30 June 2011
$1,682.00
$396.25
1 July 2011 to 30 September 2011
$2,000.00
$450.25
1 October 2011 to 31 December 2011
$2,499.00
$564.75
1 January 2012 to 31 March 2012
$1,512.00
$322.00
1 April 2012 to 30 June 2012
$637.00
$101.00
Total
$18,835.00
$4,310.00
Table 3
Post Objection Income Tax and penalty position
Post Objection GST position
Income Year ended 30 June
Tax shortfall
Shortfall Penalty
2011
$5,927.40
$1,481.85
2012
$4,110.30
$1,027.57
Total
$10,037.70
$2,509.42
Before the hearing the Respondent conceded that the Objection Decision needs to be altered to allow further input tax credits in respect of a small range of acquisitions. The Respondent describes this as a concession. In the circumstances of this matter, there is no doubt that it is a concession. And because he is prepared to make that concession, the Tribunal will not stand in the way of it. Post the concession, the GST position the Respondent contends ought prevail is as set out in Table 4 below:
Table 4
Post Concession GST position
Quarterly Period
Adjustment Amount
Revised GST Liability
Remission in Shortfall Penalty
Revised Shortfall Penalty
1 April 2010 to
30 June 2010
N/A
$4,141.00
N/A
$1,035.25
1 July 2010 to
30 September 2010
$844.00
$1,983.00
$211.00
$453.75
1 October 2010 to
31 December 2010
$844.00
$494.00
$211.00
$68.25
1 January 2011 to
31 March 2011
$844.00
$1,355.00
$211.00
$285.50
1 April 2011 to
30 June 2011
$844.00
$838.00
$211.00
$185.25
1 July 2011 to
30 September 2011
$806.00
$1,194.00
$201.50
$248.75
1 October 2011 to
31 December 2011
$806.00
$1,693.00
$201.50
$363.25
1 January 2012 to
31 March 2012
$806.00
$706.00
$201.50
$120.50
1 April 2012 to
30 June 2012
$907.00
($270.00)
$226.75
Nil
Total
$6,701.00
$12,134.00
$1,675.25
$2,760.50
The Respondent contends that the issues to be determined are as follows:
(a)(Issue 1 - Amended BASs and Amended Income Tax Returns) Whether the Applicant has established that the amended GST net amount assessments made by the Respondent for the Relevant Quarters and whether the amended income tax assessments made by the Respondent for the 2011 Year and 2012 Year are excessive, in particular, has the Applicant established on the evidence what the correct position should be with respect to the Relevant Quarters and Relevant Years.
(b)(Issue 2 - Homestay) A sub-issue to Issue 1 above is whether the Applicant has established that it was conducting a homestay arrangement during the 2011 Year and 2012 Year?
(c)In addition, the following issues are relevant to the Amended BASs, in particular the Applicant’s entitlement to input tax credits claimed in the Relevant Quarters:
(i)(Issue 3 - ITCs for Homestay Acquisitions) Assuming that the answer to Issue 2 is yes (which is denied), is the Applicant entitled to claim any input tax credits on acquisitions made by the Applicant in relation to carrying on the homestay arrangement?
(ii)(Issue 4 - ITCs relating to Motor Vehicles) To what extent, if any, is the Applicant entitled to claim any input tax credits on acquisitions made by the Applicant in relation to the purchase of a motor vehicle and the petrol costs in relation to two motor vehicles?
(iii)(Issue 5 - No Tax Invoice) To what extent, if any, is the Applicant entitled to claim any input tax credits for acquisitions for which no tax invoice has been identified?
(d)(Issue 6 - Administrative Penalties) Whether the administrative penalties imposed by the Respondent on the GST shortfall amounts and tax shortfall amounts were correctly imposed. That is, did the Applicant or his tax agent fail to take reasonable care when making a false or misleading statement which resulted in a GST shortfall and a tax shortfall in each of the Relevant Quarters and Relevant Years, respectively, (see subsection 284-75(1) and section 284-90 of Schedule 1 to the [Administration Act[2]])?
(e)(Issue 7 - Remission) Do the Applicant’s circumstances warrant a remission of all or part of the administrative penalties imposed under section 298-20 of Schedule 1 to the [Administration Act]?
[2]The Taxation Administration Act 1953 (Cth).
The Burden of Proof
In a matter such as this one, it is critical to consider and apply s 14ZZK of the Administration Act to the facts to be found.
The burden of proof imposed by s 14ZZK of the Administration Act requires a taxpayer to establish that the relevant assessment is excessive. In this context, excessive means the amount of the assessment exceeds what it should be.[3] What this means is that a taxpayer must establish the claim he or she asserts.[4] It is not enough to show that the Respondent made an error[5] or that an assessment may be wrong.[6] Taxpayers must go further and show what the correct position should be,[7] or what correction should be made to make the assessment right or more nearly right,[8] or the amount that should be assessed for tax,[9] or show that he or she has been assessed to a liability which the Assessment Acts[10] do not impose.[11]
[3]Commissioner of Taxation v Dalco (1990) 168 CLR 614, 621 per Brennan J with whom Mason CJ and Dawson, Gaudron and McHugh JJ agreed and 631 per Toohey J. McAndrew v Commissioner of Taxation (1951) 98 CLR 263.
[4]Trautwein v Commissioner of Taxation (1936) 56 CLR 63, 87 per Latham CJ, Moreau v Commissioner of Taxation (1926) 39 CLR 65, 70 per Isaacs J.
[5]Trautwein above, 87 per Latham CJ, Dalco above, 621 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
[6]Trautwein above at 112 per Dixon and Evatt JJ, Dalco above, 625 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed, 631 and 633 per Toohey J.
[7]Trautwein above at 87 per Latham CJ.
[8]Trautwein above at 88 per Latham CJ.
[9]Trautwein above at 103/4 per Starke J., Dalco above at 625 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
[10]The Income Tax Assessment Act 1997 (Cth) and Income Tax Assessment Act 1936 (Cth).
[11]Trautwein above at 111 per Dixon and Evatt JJ., Dalco above at 624 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed and 626 per Deane J and 631 per Toohey J, George v Commissioner of Taxation (1952) 86 CLR 183 at 201 per Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ.
There is no onus on the Respondent under the Assessment Acts or the Administration Act and there is no requirement that an assessment be supported by evidence.[12] It is not necessary for the Respondent to show that a taxpayer’s assessable income was at least a particular figure or that a particular amount is assessable. And if the Respondent chooses to make such an assertion and fails to prove it, that failure does not bear upon whether the taxpayer has discharged the statutory burden of proving an assessment is excessive.[13]
[12]Gauci v Commissioner of Taxation (1975) 135 CLR 81, 89 per Mason J (in the minority but not on this point, see Dalco above per Brennan J at 624).
[13]Vu v Commissioner of Taxation [2006] FCA 889, 9 per Finn J., Galea v Federal Commissioner of Taxation (1990) 21 ALD 722 per Hill J.
The manner in which a taxpayer’s burden might be discharged varies with the circumstances. If a dispute concerns assessability of an identified amount, then a taxpayer may show that the assessment is excessive by demonstrating that that amount is not assessable without any examination of the balance of the assessment.[14] This might be shown by demonstrating that the amount was derived by someone else.[15] If a dispute is not so confined then any shortfall in proof of the amount by which an assessment is excessive is problematic for a taxpayer.[16] In these circumstances, a taxpayer needs to prove the actual amount that should be assessed.
[14]Dalco above at 624 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
[15]Dalco above at 626 per Deane J.
[16]Dalco above at 624 per Brennan J with whom Mason CJ and Dawson Gaudron and McHugh JJ agreed.
There are two further principles connected to the burden of proof principles outlined above that have a particular relevance in this proceeding.
(a)The first concerns self-serving evidence. The evidence of witnesses who have interests that turn on whether that evidence is accepted, typically parties to an application in the Tribunal, needs to be approached critically,[17] and will necessarily be the subject of careful scrutiny.[18] Similar principles ought be applied to the evidence of those who have close relationships with parties to a proceeding, such as a director and shareholder. In Imperial Bottleshops,[19] where business expenditures were said to have been incurred, Hill J expanded on the caution required and said:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be "tested most closely, and received with the greatest caution": Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as "prima facie unacceptable", cf McCormack v Federal Commissioner of Taxation (1978-9) 143 CLR 284 at 302 per Gibbs J.[20]
Importantly, in Imperial Bottleshops, there was substantial, corroborating evidence from two employees of a supplier to the taxpayer and six current or former employees of the taxpayer. In addition, the statement of wealth did not show unexplained accumulations of assets that were inconsistent with the taxation position asserted by the taxpayer. The corroborating evidence, together with a rational reason for an absence of records, allowed Hill J to form a view that the taxpayer should be believed.[21]
(b)The second concerns the limited circumstances in which inferences can be drawn. They can be drawn from observed facts. Mere assumptions, guesswork and speculation are not accommodated in the process of arriving at conclusions.[22] There must be a body of evidence that might reasonably sustain a relevant finding of fact or permit the Tribunal to draw an inference.[23]
[17]See Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149, 81- 82 per Ryan, Jessup and Perram JJ and their explanation of the remarks of Fullagar J in Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402, 403.
[18]See Davis v Commissioner of Taxation (2000) 171 ALR 654, 47 per Hill J.
[19]Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation 91 ATC 4546.
[20]At 4552.
[21]Imperial Bottleshops, 4554-4555.
[22]See Tisdall v Webber (2011) 193 FCR 260, [128] per Buchanan J, with whom Tracey J agreed.
[23]See Tisdall, above, at [127] per Buchanan J, with whom Tracey J agreed.
In cases where the burden of proving an assessment is in issue, two things are possible: first it may be the case that the amount of the assessment made by the Respondent may not be the true taxable income and tax payable determined by operation of all of the provisions of the Assessment Acts, and, second, a taxpayer may well be giving an honest account in his her or its evidence, but the evidence does not demonstrate that the assessment is excessive in the requisite sense.
Factual Matters
The evidence led by the Applicant took two forms: oral testimony of one of its directors Mr Huang, and a substantial volume of documentary records and invoices and bank statements, in addition to the documents filed by the Respondent pursuant to s 37 of the Tribunal Act.[24]
[24]The Administrative Appeals Tribunal Act 1975 (Cth).
Mr Huang was also the advocate for the Applicant.
Mr Huang’s evidence included:
(a)the milk bar business is staffed principally by Mr Huang and his mother;
(b)much of the attendance at the milk bar is by Mr Huang’s mother who, Mr Huang contends, is old with failing eye sight and who makes mistakes with cash register machines. Accordingly her practice is to write down sales on sheets of paper each day which provides the foundation for the Applicant’s accounting record keeping system;
(c)the Applicant’s accounting record keeping system is a manual system that the totals on daily sheets of paper recording sales are transcribed into an accounts book, an exercise book recording daily sales and expense amounts for various items carried by the milk bar business, and on a daily basis cash is counted and if the cash exceeds the amounts recorded, then extra sales are recorded to acquit the surplus cash;
(d)the taxable income amounts were made up numbers because the Applicant’s tax agent had told Mr Huang that the ATO did not like to see losses and that would bring unwanted attention. The Applicant avoided returning losses by filing returns with what were admitted to be fabricated numbers;
(e)Mr Huang did not positively assert any particular record or amount was the correct record of the Applicants income;
(f)large deposits in the Applicant’s bank account, e.g. between 18 January 2011 and 17 February 2011, approximately $66,852, were from homestay students’ parents for either homestay students’ accommodation charges, or fees to be paid to the relevant school, or for airline tickets, or for school uniforms;
(g)payments or withdrawals from the bank account were to make payments as described above, and in some instances to make refunds. Payments made were apparently in cash with little, if any, external corroboration to support the contended uses of the money. Mr Huang’s assertions were not corroborated; and
(h)the homestay accommodation business for foreign students, by whomever it is operated, comprises two properties and is staffed by Mr Huang and his wife, Ms Ling Jiang.
The documents in evidence reveal an unsatisfactorily incomplete account of the Applicant’s taxable income and taxable supplies. Illustrative features of the documentation provided to the Tribunal include:
(a)daily tally sheets of progressive sales are not available for all days recorded in the accounts book;
(b)there are also cash register rolls available which do not reconcile with daily takings recorded in the accounts book. The daily cash register totals, where available, are less than the recorded takings in the accounts book. Assuming the cash register items reflect sales, and there is no apparent reason for them other than to do so, the daily takings in the accounts book cannot be seen to be an accurate statement of sales revenue;
(c)deposits of large amounts in bank accounts without explanation beyond the oral testimony of Mr Huang; and
(d)the accounts book show deficits with expenses in excess of takings which do not reconcile with amounts disclosed in tax returns as set out in Table 5:
Table 5
Income Year ended 30 June
Taxable income returned
Accounts book deficit
Variance
2011
$178
$58,484
$58,662
2012
$171
$37,464
$37,635
The evidence led does not include any corroboration from the tax agent whose advice was allegedly followed, nor any corroboration from other sources.
When asked what the Applicants true income was, Mr Huang did not commit to any particular amount, or source of validation of any amount, and repeated, several times, a contention to the effect that the accounts book showed a deficit, and that the Applicant’s tax agent had advised not to return a deficit.
Income tax and GST conclusions
The evidence led in relation to the Applicant’s income and expenses and its accounting for them is not sufficient to satisfy the burden of proof to show the assessments and amended assessments to be excessive. In circumstances where:
(a)there is an absence of documentary evidence;
(b)there is positive evidence to suggest that the account book evidence relied on is not complete; and
(c)substantially all of the evidence led is affected to some degree by what might be described as the Pascoe Principle,[25] as the evidence led is that of one of the Applicant’s directors,
it is necessary to show what the proper assessable income is. This is an instance where the quantum of the Applicant’s taxable income needs to be proven. The Applicant is required to lead sufficient evidence that would justify a finding that an assessment is excessive and the extent to which it is so. The Applicant has failed to do this.
[25]Pascoe v Commissioner of Taxation (1956) 30 ALJR 402, 403 per Fullagar J.
The combination of the accounts book, invoices led in evidence, inconsistent cash register rolls and absence of commitment to amounts of taxable income and supplies, or particular sources from which these amounts can be determined with confidence, make determination of the Applicant’s taxable income and supplies little, if at all, more than guesswork.
This being the case, it is impossible to say by what amount the assessments are excessive.
Accordingly the primary tax objection decisions must be affirmed. In these circumstances issues 2 to 5 as formulated become academic.
That the Respondent has agreed to reduce the assessments for particular amounts are matters for him. The Tribunal will not stand in the way of the Respondent making those adjustments; adjustments about which the Applicant cannot complain. The Applicant has not proven any entitlement to more than the Respondent is prepared to concede.
The outcomes of the present applications should not be taken as acceptance that the Applicant did, as it contends, carry on the homestay business or that it did not, as the Respondent contends.
Penalty
Penalty has been imposed for failure to take reasonable care. In circumstances where a fabricated income figure is used in relevant tax filings it is difficult to see how reasonable care could be demonstrated. Further, there being no evidence of what the tax agent did or did not do makes a finding that the tax agent took reasonable care impossible to make. There does not appear to be any grounds for remission.
Beyond the concession the Respondent is prepared to allow, the penalty decision is affirmed.
Decision
The Tribunal affirms the income tax and associated penalty decisions under review and varies the GST and associated penalty decisions under review to reflect the reduced GST liability as shown in Table 4.
I certify that the preceding 29 (twenty-nine) paragraphs are a true copy of the reasons for the decision herein of
...........[sgd]............................................
Associate
Dated 30 June 2016
Dates of hearing 16 July 2015, 24 August 2015, 3 September 2015 Date final submissions received 18 September 2015 Advocate for the Applicant Yutao Huang Counsel for the Respondent Nasos Kaskani Advocate for the Respondent Ben Norman
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