HARRISON Applicant And COMMISSIONER OF TAXATION

[2010] AATA 155

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 155

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2008/4659, 2009/3587

TAXATION          APPEALS      DIVISION		)
Re		YONG HARRISON

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B H Pascoe, Senior Member  

Date2 March 2010

PlaceMelbourne

Decision The Tribunal affirms the decisions under review.

(sgd) B H Pascoe

Senior Member

GOODS AND SERVICES TAX – brothel owner – whether providing room hire only – whether providing sexual services – Business Activity Statement ignored cash payments -  onus of proof not discharged

A New Tax System (Goods and Services Tax) Act 1999

Taxation Administration Act 1953

REASONS FOR DECISION

February 2010 Mr B H Pascoe, Senior Member  

1.      These applications are for a review of decision of the respondent to disallow objections against assessments of Goods and Services Tax (GST) and penalties relating to the eight quarterly periods commencing from 1 October 2004 to 30 September 2006.  The total amount of shortfall in GST assessed by the respondent was $38,917 and penalties of 25 percent were imposed.  While the letter from the respondent on completion of the audit advised the applicant that penalties would total $9,729.40 being 25 percent of the shortfall, the actual penalties assessed totalled $9,605.25.  The difference was a reduction in the penalty for the quarter ended 30 September 2006 from $1,107.50 on a shortfall of $4,430 to $983.50.  The reason for this reduction is not clear.

2.      At the hearing, the applicant, Ms Y Harrison, was represented by Mr W Albon a solicitor.  The respondent was represented by Mr J Geale of counsel.  Evidence was given by Ms Harrison, her accountant, Mr N Dey, and a sexual service provider who will be referred to by her professional name of Lee.

3.      Ms Harrison is and was during the relevant periods the proprietor of a licensed brothel trading under the name of Purple Garden Relaxation Centre.  She is the tenant of the property which has a permit for three rooms.  She has been registered for GST since 2000.  Ms Harrison said that she was a member of the Committee of Management of her professional industry association, The Australian Adult Entertainment Industry Inc (AAEI).  Through that involvement she was aware of an Australian Taxation Office (ATO) project in relation to the adult services industry.  As a result of discussions between the two bodies, she was aware of an acceptance by the ATO that payment for services provided to clients of brothels and escort agencies could be split into two with the brothel owner receiving payment for room hire and a separate amount paid direct to the individual sexual services provider.

4.      Ms Harrison maintained that this practice of split fees was in place in her brothel.  She said that her instructions to Mr Dey, was to prepare Business Activity Statements (BAS) on the basis that the services she provided were limited to room hire.  She said that all BAS returns for the relevant period reflected this income split basis of accounting for GST.

5.      Ms Harrison said that she does not and cannot exercise control over the service providers and has no contract with them.  While she seeks to have a fair distribution of work among the providers, she said that it was up to the service provider whether they were available at particular times and whether they would provide the service requested by an individual client and up to the client whether they wished to have a particular provider of the service requested.  Ms Harrison said that she sets the recommended retail price for both the room hire and service provision based on prices charged by her competitors.  The prices vary according to the services requested and the period of time to be involved.  She said that clients were required to pay the full amount in advance.  She maintained that the room hire content of the fee was paid to her or a manager and the service fee paid to the service provider.  It was said that where a client wished to pay by credit card she refunded the service fee part of the payment to the client in cash which would then be paid direct to the provider.  She acknowledged that it was common for the service provider to request her to hold the cash for safety reasons.  In such cases a note is prepared acknowledging the holding of the money which is returned to the service provider at the end of the shift.

6.      Ms Harrison said that she has always maintained a daily record of bookings.  Produced to the Tribunal were copies of computer prepared daily records for some days from May 2006 to October 2006.  These recorded a code for the service provided, the total fee, the room hire amount, the service fee, the amount paid by credit card, the room number and the name of the service provider.  Ms Harrison acknowledged that the computer prepared daily records were not the records prepared contemporaneously but prepared on computer at a later time for the purposes of the ATO audit.  She said the original records were handwritten, messy and too difficult to read.  They were subsequently destroyed.

7.      Ms Harrison who is of Chinese origin said that she has some difficulty with spoken English and more difficulty with written English.  However she maintained that she had made herself familiar with the requirements of taxation laws and had complied with them  She had sought advice as required from her accountant, Mr Dey.

8.      Lee, whose real name was provided to the Tribunal, gave evidence that she was a sexual services provider at the Purple Garden during the relevant period.  She maintained that the clients paid her direct for those services.  She said that she chose the times she was available subject to there being an available room, was the person who contracted to provide the service and could refuse a customer.  The brothel owner provided the facilities.  Lee said that she regularly handed the money from the client to the brothel manager for safekeeping.  She said that there were occasions where the client paid by credit card but the manager had inadequate cash available to pay her share and would pay her the next day after obtaining cash from the bank.

9.      Mr Dey is a partner in an accounting firm, Accounting First Pty Ltd, and has been in practice for more than 25 years.  He has acted as accountant for Ms Harrison for more than seven years.  He said that he believed that Ms Harrison was familiar with all aspects of taxation law relating to the operation of a brothel.  He believed that she was particularly aware of the interpretation of the law that saw a client pay her for room hire and for the client to pay a separate amount to the sexual service provider.  In his written statement filed with the Tribunal he stated that Certainly all of the tax returns I submitted on her behalf inclusive of her BAS returns has reflected this practice.  In his oral evidence, Mr Dey said that he had attended a meeting between brothel owners and a Mr Warwick of the ATO where the basis of two separate fees for the room rental and service provision was explained.  Mr Dey said that he maintained a general ledger in the MYOB computer system for Ms Harrison.  In his oral evidence he said that the sales figure was made up from the bank statement showing credit card receipts plus cash as recorded in the day sheets maintained by Ms Harrison.  However on being shown a copy of the ledger account prepared by him for sales subject to GST, the total of which was $35,410 as included in the BAS for the quarter ended 30 September 2006, Mr Dey accepted that $26,660 of the total was made up of receipts by credit card.  It became clear that the only source of the sales recorded was the bank statement and not any other record provided by Ms Harrison.  As such the amounts recorded represented 100 percent of credit card receipts, not the proportion said to be for room hire, plus the small amount of cash receipts which Ms Harrison decided to bank.

10.     As indicated earlier, only the daily records for some days in 2006 were tendered to the Tribunal.  An examination of these sheets for the month of August 2006, where those for six days of the month only were provided, showed the following totals:-

Total Revenue	$ 12,590
Room Hire	$   5,390	(42.7%)
Service Fees	$   7,200	(57.2%)
Paid by cash	$ 11,270	(89.5%)
Paid by credit card	$   1,320	(10.5%)

If it could be said that these six days were properly representative of the percentage of fees paid by credit card so that the total credit card payments during the quarter ended 30 September 2006 of $26,660 represented 10.5 percent of total revenue then that total revenue would have been $253,905 for the period.  If the applicant’s argument that the room hire proportion only was liable to GST then 42.8 percent or $108,671 would be that amount.  This can be compared with the amount of $35,410 shown in the BAS and $78,689 assessed by the respondent after the audit.  It would appear that the calculation by the respondent was based on the amount in the return lodged and an assumption that this represented the room hire content only and that the proportion of room hire to total fee paid by a client averaged 45 percent.

11. The difficulty for Ms Harrison is that, pursuant to s 14ZZK of the Taxation Administration Act 1953, an applicant to this Tribunal has the burden of proving that an assessment is excessive.  After the evidence of Mr Dey had been completed, the Tribunal suggested to the parties that this evidence appeared to indicate that it was more likely than not that the assessment of GST by the respondent had been understated irrespective of the correction or otherwise of the argument that GST should be levied on the room hire fee only.  The indicative amounts set out earlier were advised to the parties.  It should be said that I have no reason to believe that either Ms Harrison or Mr Albon had been aware prior to the hearing of the basis on which Mr Dey prepared the BAS returns.  It was clear that the expectation of Mr Albon was that the sole issue for consideration by the Tribunal was whether the GST assessments should exclude the amounts paid for the service provided, leaving only the amount relating to room hire, contrary to the basis adopted by the respondent in the disputed assessments.  In light of the evidence at this hearing, the applicant was unable to demonstrate that the assessments were excessive and much less able to show what was the correct liability. 

12.     Having reached the conclusion that the applicant has been unable to discharge the onus of proving that the assessments are excessive albeit for quite different reasons than those which were sought to be argued, it is unnecessary for the Tribunal to make a finding relative to the so called split fee argument.  At the commencement of the hearing the parties were asked whether this application was seen as a test case for that split fee argument.  Both parties said that it was not.  Mr Geale stated that the respondent accepted that, if a brothel proprietor correctly operated on a two separate fee basis, the facts demonstrated that the two fees were properly segregated physically and by proper accounting, the respondent accepted that such proprietor was liable to GST on the room hire amount only.  However, it was said that, in this case, there had not been such separation.

13.     In the statement of facts and contentions provided by the respondent for the purposes of the hearing it was said that the applicant made a taxable supply of sexual services in the course of her enterprise as a brothel for the following reasons:

(a)the daily sales sheets of the Applicant recorded the services provided and the fee charged for the service provided; and

(b)the Applicant provided the means for collecting and processing payments from the customer; and

(c)payment of the service fee was provided by the customer directly to the applicant by way of electronic funds transfer, or cash payment; and

(d)the Application exercised effective control over the distribution of work between the SSPs³ who worked for her; and

(e)the Applicant maintains a Prostitution Services Licence; and

(f)the Applicant paid the SSPs at the end of each shift.

It should be said that further factors arising from the evidence were that:

(a)the applicant set the fees for each service available and the service providers had no control over fees;

(b)the applicant provided a list of such fees displayed in a prominent position in the reception area of the brothel;

(c)the applicant was the sole advertiser of the services; and

(d)the evidence of Lee was that it was normal for the service fees to be retained by the owner and paid later, including, at times, the next day.

Having regard to all the evidence, it is unlikely that I could be satisfied that the applicant was not liable for GST on the service fee proportion of the total fee.  The more likely position was that the applicant provided the client with the total service and utilised the sexual service provider individuals as sub-contractors for such sexual service.

14. The final issue is this matter is the imposition of penalties which were levied at the rate of 25 percent on the alleged shortfall amount. Pursuant to s 284-90 of Schedule 1 to the Taxation Administration Act 1953 a base penalty of 25 percent is applicable where the shortfall amount resulted from failure by you or your agent to take reasonable care to comply with a taxation law.  Given the evidence of the basis on which Mr Dey prepared and lodged the BAS returns it is clear that there was a clear failure to take reasonable care.  Mr Dey said that he had access to the daily records.  It is not unreasonable to assume that he should have been aware that a business such as this would receive a significant proportion of revenue in cash.  Nevertheless, he lodged a return including only 24.7 percent as cash.  It could be said that a higher rate of 50 percent could be applicable in this case in that the complete omission of reference to cash receipt records may be considered as being reckless.

15.     At the conclusion of the hearing, Mr Geale stated that the respondent was not seeking any decision which would involve further amended assessments to increase the liability to GST or penalties.  Consequently, it is appropriate that the decisions under review to disallow the objections to the assessments of GST and penalties should be affirmed for the reasons set out above.

I certify that the fifteen [15] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B H Pascoe, Senior Member

(sgd) Mya Anumarlapudi
  Clerk

Dates of Hearing  16 & 17 February 2010 
Date of Decision  2 March 2010
Solicitor for the Applicant          Mr W Albon, NW Albon Legal Pty
Counsel for the Respondent     Mr J Geale
Solicitor for the Respondent     Mr A Elbourne, ATO Legal Services Branch