HHWT and Commissioner of Taxation (Taxation) - [2017] AATA 1540

HHWT and Commissioner of Taxation (Taxation) [2017] AATA 1540 (25 September 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2015/5628, 2015/6760 & 2016/2316-2317
Re:HHWT
APPLICANT

AndCommissioner of Taxation
RESPONDENT

Tribunal:Egon Fice, Senior Member
Date:25 September 2017
Place:Melbourne

DECISION
(a)The Commissioner’s objection decision in respect of ABN 64 061 909 681 made on 25 August 2015 is affirmed;
(b)the Commissioner’s objection decision in respect of ABN 64 061 909 681 on the administrative penalty made on 25 August 2015 is affirmed;
(c)the Commissioner’s objection decision made on 10 November 2015 in respect of ABN 29 454 780 304 regarding the net amounts of GST payable for the quarters September 2011 to March 2014 is affirmed;
(d)the Commissioner’s objection decision made on 10 November 2015/29 February 2016 in respect of ABN 29 454 780 304 regarding the GST administrative penalty is affirmed except for the 20% uplift for the second and subsequent tax periods in each GST quarter;
(e)the Commissioner’s objection decision made on 10 November 2015/29 February 2016 in respect of the applicant’s taxable income for the 2012 and 2013 income years is affirmed; and
(f)the Commissioner’s objection decision made on 10 November 2015/29 February 2016 regarding the assessment penalties for shortfalls of income tax for the 2012 and 2013 income years is affirmed except for the 20% uplift for each income year which is remitted.

........................................................................
Egon Fice, Senior Member
TAXATION - appeal against objection decision – income tax assessment – whether assessment excessive or otherwise incorrect – claimed input tax credits disallowed – accountancy practice conducted under partnership – partnership dissolved – whether goods and services acquired for a creditable purpose in winding up partnership – applicant claimed loss of records – lack of invoices for claimed input tax credits –partnership found not to be conducting an enterprise following dissolution
TAXATION – estimation of income based on billable hours – ATO refunds for clients placed into general bank account – deposits from clients of accounting practice not matched with tax invoices – claimed significant gambling winnings unable to be substantiated – claimed loan moneys unable to be substantiated – lack of evidence to provide reasonable estimation of income – applicant unable to prove deductions – applicant unable to prove assessment excessive or otherwise incorrect
TAXATION – penalties – administrative penalties – where applicant’s taxation shortfall arose due to failure of applicant to take reasonable care – failure to take reasonable care when lodging BAS returns in quarterly periods – finding that applicant was reckless in lodgement of BASs and income for income years – penalties correctly imposed – 20% uplift penalty remitted for returns following initial return – no basis for remission of other penalties
Legislation
Taxation Administration Act 1953, ss 14ZZK, 14ZQ, 105-55, 382-5
A New Tax System (Goods and Services Tax) Act 1999, ss 11-5, 11-15, 17-5, 23-5, 23-15, 25-50, 25-55, 29-5, 29-10, 93-5, 184-1, 195-1, 284-75, 284-90, 284-220
Partnership Act 1958 (Vic), ss 30, 36, 41, 42
Income Tax And Assessment Act 1997, ss 5-30, 100-10, 900-5, 900-185, 995-1
A New Tax System (Australian Business Number) Act 1999
Cases
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
George v Federal Commissioner of Taxation (1952) 86 CLR 183
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
Tisdall v Webber (2011) 122 ALD 49
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
ImperialBottleshops Pty Ltd v Federal Commissioner of Taxation (1991) 22 ATR 148
Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 63
Ma v Commissioner of Taxation (1992) 37 FCR 225
Krew v Commissioner of Taxation (Cth) (1971) 45 ALJR 324; [1971] ATC 4213
Martin v Federal Commissioner of Taxation (1993) 27 ATR 282
Kimche v Federal Commissioner of Taxation (2004) 57 ATR 28
Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315
Secondary Materials
The Law of Partnership in Australia (ninth edition) 2007
Miscellaneous Tax Ruling (MT 2008/1)
Practice Statement Law Administration 2012/5
REASONS FOR DECISION
Egon Fice, Senior Member
25 September 2017

The applicant in this proceeding commenced an accounting practice in 1991 in partnership with his then wife. In about 2000, the applicant’s wife joined the practice on a full-time basis.
The applicant and his wife separated in May 2006 and the Family Court of Australia made orders by consent on 24 October 2006 regarding the separation. In accordance with those orders, the parties executed a deed described as Dissolution Deed with Continuation of Business After Retirement of Partner (the Dissolution Deed). The partnership was declared to have been dissolved by mutual consent (so far as the retiring partner was concerned) on 1 June 2006 and the business was said to be carried on by the continuing partner after that date. The Dissolution Deed provided that the applicant purchase the interest of his former wife in the partnership for $1.
From 1 September 2006 the applicant continued to conduct the business of the accounting practice which, contrary to the assertion of the applicant, retained the same trading name but with the new ABN 29 454 780 304.
In a letter dated 1 April 2014 the Australian Taxation Office (ATO) informed the applicant that it intended to audit the former partnership for the tax period 1 July 2010 to 31 December 2013. On completion of the audit, the ATO informed the applicant by letter dated 9 September 2014 that it had assessed the applicant with an additional activity statement liability of $23,033 resulting from disallowance of input tax credits; and an administrative penalty of $6,758.25. The ATO issued a Notice of assessments of net amount and a Notice of assessments of shortfall penalty on 9 September 2014 and 16 September 2014 respectively.
On 28 March 2015 the applicant’s solicitors served on the Commissioner a Notice of Objection to the assessment of net amount and the shortfall penalty. The Commissioner handed down his reasons for decision on 25 August 2015, disallowing the applicant’s claim for input tax credits and affirming the accompanying administrative penalty assessment.
On 26 October 2015 the applicant applied to the Tribunal for a review of the objection decision relating to the former partnership practice (the Partnership Practice Objection Decision). That decision is the subject of Matter No. 2015/5628.
On 1 April 2014 the ATO also informed the applicant of its intention to audit the new practice on 8 April 2014. The audit was intended to cover the activity statements lodged in the period 1 July 2010 to 31 December 2013.
The ATO notified the applicant of the interim findings of its audit in a letter dated 12 December 2014. The audit found that the new partnership/practice (it is questionable whether a partnership continued in existence) understated its GST liability by $197,729. Furthermore, the audit found that the applicant had understated sales income in the period 1 July 2011 to 30 June 2014 by $184,028.
The audit also examined the applicant’s income tax payable for the 2012 and 2013 income years. It found that the applicant had understated his tax payable in the 2012 income year by $114,058.35. At the time of publishing its interim report, the ATO noted that the applicant had not lodged his 2013 income tax return. The auditor noted that during the 2013 income year, the applicant had received deposits into his bank account which were deemed to be income. They amounted to $1,097,605. Working from statistics for the applicant’s accountancy profession, the auditor estimated that the net profit on earnings would be 46% of gross income and therefore allowed deductions of $592,707. That resulted in the applicant having a taxable income of $504,898 for the 2013 income year. The tax payable on that income was assessed at $215,898.
The auditor also determined that the applicant was liable to administrative penalties. The auditor determined that the applicant’s activity statements for the 2012 income year were false and misleading, incorrectly stating the net amount. The shortfall amount for penalty purposes was determined to be $184,028.
As for the applicant’s income tax return, the auditor determined that document contained false or misleading information incorrectly stating taxable income. The auditor determined a shortfall amount of $114,058.35 for penalty purposes.
The applicant lodged his 2012 income tax return on 21 November 2013. He returned a taxable income of $18,982. He lodged his 2013 income year tax return on 15 December 2014 returning a taxable income of $0. The Commissioner issued a notice of amended assessment for the 2012 income year on 11 March 2015. He amended the applicant’s taxable income to $180,207. The Commissioner also issued a notice of amended assessment for the 2013 income year on 11 March 2015 amending the applicant’s taxable income to $307,366.
On 28 March 2015 the applicant lodged with the Commissioner objections against the assessment for the 2012 and 2013 income years. The Commissioner disallowed those objections determining that the applicant had understated his income for both income years. The Commissioner calculated an income tax shortfall of $58,398.25 for the 2012 income year and $116,763.75 for the 2013 income year. The total shortfall for both years was $175,162.
On 11 March 2015 the Commissioner issued to the applicant notices of assessment of shortfall penalty for both the 2012 and 2013 income years. The penalties payable by the applicant were $35,038.90 and $70,058.25 respectively. On 11 March 2015 the applicant, along with objections to his income assessments, lodged an objection against the assessments of penalty for the 2012 and 2013 income years. The Commissioner also disallowed those objections in full.
As for the net amount assessments for the purposes of GST following lodgement of business activity statements for the periods from 1 July 2011 to 31 March 2014, the Commissioner issued a notice of assessment of GST net amount for the quarter ended 30 September 2011, on 29 December 2011.
The Commissioner issued to the applicant a Notice of assessment of net amount in respect of the tax quarters ended December 2011, March 2012 and June 2012 on 2 March 2015 (for the so called new partnership). The Commissioner also issued on 2 March 2015 a notice of amended assessments of net amount in respect of the remainder of the quarters in question. The applicant objected to those assessments in a letter dated 28 March 2015. On 10 November 2015 the Commissioner notified the applicant that his objections had been considered and disallowed.
The Commissioner issued a Notice of assessments of shortfall penalty in respect of each of the relevant tax quarters in question on 3 March 2015. The total penalties assessed amounted to $80,431.20. The Commissioner decided not to remit any of those penalties.
The issues I am required to determine in these three applications before the Tribunal are whether:
(g)the Objection Decisions made by the Commissioner regarding the amended GST net amount assessments for the accounting practice trading under ABN 64 061 909 681 (the partnership) for the period 1 July 2010 to 30 June 2012 and the quarter ended 31 December 2013, were the correct decisions;
(h)the administrative penalties applied to the partnership accounting practice were correctly made;
(i)the Objection Decisions made by the Commissioner disallowing the applicant’s income tax assessments for the 2012 and 2013 income years were the correct decisions;
(j)penalty assessments were correctly made in respect of the applicant’s income tax assessments for the 2012 and 2013 income years;
(k)
the Objection Decisions made by the Commissioner regarding the amended GST net amount assessments for the accounting practice trading under

ABN 29 454 780 304 for the period 1 July 2011 to 31 March 2014 were the correct decisions; and
(l)the administrative penalties applied to the accounting practice were correctly made.
THE BURDEN OF PROOF
The burden or onus of proof in taxation matters rests upon the applicant. Section 14ZZK of the Taxation Administration Act 1953 (the Administration Act) provides:
On an application for review of the reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving:
(i) if the taxation decision concerned is an assessment – that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case – that the taxation decision concerned should not have been made or should have been made differently.
The task of the Tribunal is not dissimilar to that of the Court hearing this matter by way of a de novo hearing. Guidance may be obtained from the decision of Brennan J in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621 where he said:
... It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. ...
Brennan J also referred to the manner in which a taxpayer can discharge the burden of proof. He said that it varies with the circumstances. His Honour said that if the Commissioner and taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it is sufficient for the taxpayer to show he is entitled to succeed on that point. However, in the absence of an agreement confining the issues for determination, his Honour said, at 624 – 625:
Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In Gauci v. Federal Commissioner of Taxation (44), Mason J. said:
“The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.”
That view, expressed in a dissenting judgment, now prevails: Macmine Pty. Ltd. v. Commissioner of Taxation (45); McCormack's Case (46).
Section 190(b) of the Income Tax Assessment Act 1936 -1969, to which Mason J referred in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, is similar to the burden of proof provisions now set out in s 14ZZK of the Administration Act.
I should also refer to the High Court of Australia (Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ) decision in George v Federal Commissioner of Taxation (1952) 86 CLR 183 where the Court said, at 201:
Section 190 provides that upon every appeal to the Court the burden of proving that the assessment is excessive shall lie upon the taxpayer. With this provision must be read s. 177(1), which provides that the production of a notice of assessment, or a document purporting to be a copy under the hand of the commissioner the second commissioner or a deputy commissioner, shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct. The word “assessment” is defined by

s. 6(1) to mean the ascertainment of the amount of taxable income and of the tax payable thereon. In conformity with this definition s. 166 directs the commissioner to make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon. From these provisions both in their present form and in their slightly different earlier form, the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income:…
It is also clear that the applicant must go further than showing that the assessments are wrong. The applicant must show what the correct assessment should be, and what corrections should be made in order to make the assessments right or nearly right. In Dalco’s case, Toohey J referred to the finding by Yeldham J at first instance where he referred to the taxpayer having had control and benefit of the monies included by the Commissioner in his assessable income. Toohey J said, at 633-634:
Although such "control and benefit" may not be conclusive proof of the taxpayer's liability, it does entail that the taxpayer do more than show that the Commissioner's assessment was made on a wrong basis.
That is not to say that, in such circumstances, the Commissioner's assessment is completely at large or that particulars of an assessment will not be ordered. If the Commissioner has simply plucked a figure "out of the air" (Reg. v. Deputy Commissioner of Taxation (W.A.); Ex parte Briggs (74)) or has proceeded "upon no intelligible basis" (Trautwein v. Federal Commissioner of Taxation (75)), the Commissioner may be in breach of his statutory duty to make an assessment from the information in his possession: see Bloemen (76). I express no view on that matter for this is not such a case; the assessments were reached after a long and detailed investigation into the taxpayer's affairs.
It should be clear that in the absence of evidence adduced by the applicant, the Tribunal cannot find in an applicant’s favour. However, it is not necessary for a taxpayer to prove every conceivably relevant fact in a case where all of the facts are known and it is sufficient if the taxpayer can point to evidence that enables the Court or Tribunal to infer that the taxable income assessed is excessive. Support for that contention may be found in the decision of Gibbs J in McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284. His Honour said, at 303:
… To discharge that burden in a case such as the present he must prove affirmatively, on the balance of probabilities, that the property was not acquired for the purpose of profit-making by sale. The burden may be discharged by drawing inferences from the evidence. In some cases in which all relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose... The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail.
Murphy J in McCormack’s case, although dissenting, had this to say about the burden of proof at 323:
A taxpayer might discharge the burden of proof placed on him by s 190(b) in any of several ways. He may prove all relevant circumstances and from these establish that an inference should be drawn that the property (from the sale of which by the taxpayer a profit arose) was not acquired by him for the purpose of profit-making by sale. Or he may prove by direct evidence that such a purpose did not exist. The burden might also be discharged by a combination of direct evidence and inference from other circumstances. ...

I am aware that caution needs to be exercised when drawing inferences from the evidence. I am particularly mindful of the decision of the Full Court of the Federal Court (Greenwood, Tracey and Buchanan JJ) in Tisdall v Webber (2011) 122 ALD 49. His Honour Buchanan J said, at 84-85:
[128] It is important to bear in mind also that the inferential process is not one where speculation, guesswork or mere assumption is accommodated. So far as the work of courts is concerned, where the application of a judicial method is expected, the process of drawing an inference from available facts is not to be equated with conjecture, surmise or guesswork. The arbitrary selection of one possibility over others from an available number of possibilities by such a method is not merely lacking in logic; it fails to conform to the necessity that inferences be drawn as matters of legitimate deduction, based on probative values.
[129] In Bell IXL Investments Ltd v Life Therapeutics Ltd (2008) 68 ACSR 154; [2008] FCA 1457 Middleton J said (at [14]):
In considering the material before the Court, the trier of fact must be careful to distinguish between inference and conjecture. A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding. Whilst sometimes it may be difficult to distinguish between conjecture and inference, nevertheless the distinction is an important one.
[130] His Honour's observations, with respect, state a fundamental principle which is authoritatively established but which is not always observed (see also Luxton v Vines (1952) 85 CLR 352 at 358, quoting Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1).
GST NET AMOUNT ASSESSMENTS REGARDING ABN 64 061 909 681 –

MATTER NO. 2016/5628
On 25 August 2015 the Commissioner issued to the applicant his Objection Decision regarding the Business Activity Statements (BASs) lodged by the partnership for the quarterly periods ending 30 September 2010 to 31 December 2013. The partnership conducted the accounting practice. During the period in question, the practice claimed input tax credits totalling $27,033. However, on 29 April 2014 the applicant lodged a revised business activity statement for the quarter ended 31 December 2013. As a result of that amendment, for the December 2013 quarter, the applicant reduced the net amount from $2352 (which was originally reported) to $0.
The Commissioner did not dispute the amended assessment made for the quarter ending 31 December 2013. The applicant’s Running Balance Account (RBA) was adjusted in accordance with s. 155-40 of Schedule 1 of the Administration Act. The remaining quarters continue to be in dispute.
The expression net amount is defined in s. 17-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Relevantly, it provides:
(1)The net amount for a tax period applying to you is worked out using the following formula:
GST – Input tax credits
where:
GST is a sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period.
input tax credits is the sum of all of the input tax credits to which you are entitled for the *creditable acquisitions and *creditable importations that are attributable to the tax period.
…
In each quarter in question, the partnership claimed input tax credits in excess of its GST liability arising out of the provision of its accounting services. The Commissioner disallowed each claim in full on the ground that the partnership did not meet the requirements of Divisions 11 and 25 of the GST Act.
Although, prior to its dissolution, the partnership was an entity registered under the GST Act, according to the Commissioner, upon dissolution, it was required to be deregistered. An entity, for the purposes of the GST Act is described in s. 184-1 as follows:
(1) Entity means any of the following:
(c)an individual;
(d)a body corporate;
(e)a corporation sole;
(f)a body politic;
(g)a *partnership;
(h)any other unincorporated association or body of persons;
(i)trust;
(j)a *superannuation fund.
Note: The term entity is used in a number of different but related sensors. It covers all kinds of legal persons. It also covers groups of legal persons, and other things that in practice are treated as having a separate identity in the same way as a legal person does.
…
The expression partnership is defined in the GST Act by reference to the meaning given to that expression in s. 995-1 of the Income Tax And Assessment Act 1997 (ITAA 97). There, it is defined as:
partnership means:
(a)an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or
(b)a limited partnership.
The reference to a limited partnership is a reference to a partnership where the liability of at least one person is limited. It is irrelevant for the purposes of this case.
There was no dispute about the fact that the applicant and his former wife were in a partnership prior to dissolution of their marriage. I had in evidence a Deed of Partnership made on 1 July 1991 established for the purpose of conducting an accounting, auditing and corporate advisory business. The partnership commenced on the date the Partnership Deed was made. The Partnership Deed made provision for the retirement of any partner either for cause or by notice. It made no provision for dissolution of the partnership but it does refer to the consequences should the partnership be determined.
Division 23 of the GST Act describes who is required to be registered for the purposes of the GST Act and who may be registered. Section 23-5 provides:
You are required to be registered under this Act if:
(a)you are *carrying on an *enterprise; and
(b)your *GST turnover meets the *registration turnover thresh.
There was no issue in this case as to whether the partnership was carrying on an enterprise prior to dissolution and that it met the GST turnover threshold for registration. The registration turnover threshold for an entity which was not a non-profit body was $50,000 under s. 23-15 of the GST Act, or such higher amount as the regulations specified.
The GST Act also makes provision for when a registered entity must apply for cancellation of registration and when the Commissioner must cancel GST registration. Section 25-50 provides:
If you are *registered and you are not *carrying on any *enterprise, you must apply to the Commissioner in the *approved form for cancellation of your *registration. You must lodge your application within 21 days after the day on which you ceased to be carrying on any enterprise.
Section 25-55 relevantly provides:
(1) The Commissioner must cancel your *registration if:
(a)you have applied for cancellation of registration in the*approved form; and
(b)at the time you applied for cancellation of registration, you had been registered for at least 12 months; and
(c)the Commissioner is satisfied that you are not *required to be registered.
Note: Refusing to cancel your registration under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).
(2) The Commissioner must cancel your *registration (even if you have not applied for cancellation of your registration) if:
(a)the Commissioner is satisfied that you are not *carrying on an *enterprise; and
(b)the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months.
…
(3) The Commissioner must notify you of any decision he or she makes in relation to you under this section. If the Commissioner decides to cancel your registration, the notice must specify the date of the effect of the cancellation.
As noted, on 1 June 2006 the partners of the partnership executed the Dissolution Deed. The relevant aspects of the Dissolution Deed are as follows:
1. The partnership between the parties to this deed in the business of Accounting, Auditing and Corporate Advisory Services carried on by them under the partnership agreement specified in Item 3 of the Schedule is hereby declared to have been dissolved by mutual consent [so far as the retiring partner is concerned] on the 1^st day of June 2006 and the said business shall from that date be carried on by the continuing partner.
In Victoria, partnerships are governed by the Partnership Act 1958 (Vic) (the Partnership Act). Section 30 deals with retirement from a partnership at will. It provides:
(1) Where no fixed term has been agreed upon for the duration of the partnership any partner may determine the partnership at any time on giving notice of his intention so to do to all the other partners.
(2) Where the partnership has originally been constituted by deed a notice in writing signed by the partner giving it shall be sufficient for this purpose.
Dissolution is dealt with under Division 4 and, relevant to this matter, is s. 36 which provides:
36 Dissolution by expiration or notice
Subject to any agreement between the partners a partnership is dissolved –
(a)…
(b)…
(c)if entered into for an undefined time by any partner giving notice to the other or others of his intention to dissolve the partnership.
In the last-mention case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution or if no date is so mentioned as from the date of the communication of the notice.
The right of a partner to notify the public at large of the dissolution of the partnership is dealt with in s. 41 of the Partnership Act. It provides:
41 Right of partners to notify dissolution
On the dissolution of a partnership or retirement of a partner any partner may but one of such partners shall publicly notify the same in the Government Gazette and at least in one newspaper circulating in each district in which the firm carries on business and may require the other partner or partners to concur for that purpose in all necessary or proper acts (if any) which cannot be done without his or their concurrence.
In this case, notification of the dissolution was published in the Victoria Government Gazette on Thursday, 26 October 2006.
The Partnership Act also contains provisions dealing with the authority of partners for the purposes of winding up the partnership. Section 42 of the Partnership Act provides:
After the dissolution of a partnership the authority of each partner to bind the firm and other rights and obligations of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution but not otherwise:
…
Clearly, the partnership was dissolved on 1 June 2006 following notice being given by the retiring partner. The only question which arises is whether the acts done in the name of the partnership after 1 June 2006 and which form the basis for the continued lodgement of BASs and claims for input tax credits were necessary to wind up the affairs of the partnership or to complete transactions begun but unfinished at the time of dissolution.
In his objection to the Commissioner’s disallowance of the input tax credits for each of the quarters ending between 30 September 2010 and 30 June 2012, the applicant stated that during the period in question, he acquired goods and services for a creditable purpose. He did not explain what those goods or services were or why the acquisition was necessary for the purpose of winding up the affairs of the partnership.
The Commissioner submitted that the applicant had not shown, in any of the tax periods in question, that it carried on an enterprise for the purposes of the GST Act.
Section 11-5 explains the concept creditable acquisition. It provides:
You make a creditable acquisition if:
(a)you acquire anything solely or partly for a *creditable purpose; and
(b)the supply of the thing to you is a *taxable supply; and
(c)you provide, or are liable to provide, *consideration for the supply; and
(d)you are *registered, or *required to be registered.
The expression creditable purpose is defined in s. 11-15 which, relevantly, provides:
(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(a)the acquisition relates to making supplies that would be *input taxed; or
(b)the acquisition is of a private or domestic nature.
…
The GST Act also sets out rules regarding the tax periods to which taxable supplies, creditable acquisitions, creditable importations and adjustments are attributable (Division 29). There are attribution rules regarding the provision of taxable supplies and obtaining or acquiring creditable acquisitions. Section 29-5 deals with attributing the GST on taxable supplies. There are different provisions dealing with entities which conduct their enterprise on an accruals basis and those entities conducting their enterprise on a cash basis. The applicant’s evidence was that the accounting practice was conducted on a cash basis. Therefore, the following applies:
(2) However, if you *account on a cash basis, then:
(a)if, in a tax period, all of the *consideration is received for a*taxable supply – GST on the supply is attributable to that tax period; or
(b)if, in a tax period, part of the consideration is received – GST on the supply is attributable to that tax period, but only to the extent that the consideration is received in that tax period; or
(c)if, in a tax period, none of the consideration is received – none of the GST on the supply is attributable to that tax period.
Similarly, attribution for creditable acquisitions depends on whether the entity accounts on an accrual basis or a cash basis (s. 29-10). Relevant in this case is the following:
(2) However, if you *account on a cash basis, then:
(a)if, in a tax period, you provide all of the *consideration for a *creditable acquisition – the input tax credit for the acquisition is attributable to that tax period; or
(b)if, in a tax period, you provide part of the consideration – the input tax credit for the acquisition is attributable to that tax period, but only to the extent that you provide the consideration in that tax period; or
(c)if, in a tax period, none of the consideration is provided – none of the input tax credit for the acquisition is attributable to that tax period.
(3) If you do not hold a*tax invoice for a *creditable acquisition when you give to the Commissioner a *GST return for the tax period to which the input tax credit (or any part of the input tax credit) on the acquisition would otherwise be attributable:
(a)the input tax credit (including any part of the input tax credit) is not attributable to that tax period; and
(b)the input tax credit (or part) is attributable to the first tax period for which you gave to the Commissioner a GST return at a time when you held that tax invoice.
However, this subsection does not apply in circumstances of the kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply.
(4) If the *GST return for a tax period does not take into account an input tax credit attributable to that tax period:
(c)the input tax credit is not attributable to that tax period; and
(d)the input tax credit is attributable to the first tax period for which you give the Commissioner GST return that does take it into account.
The essence of liability for GST and the claiming of input tax credits is the carrying on of an enterprise. The words carrying on of an enterprise (or business) clearly imply the notion of continuity. In other words, the proceeds received or the expenses claimed for GST purposes must result from the entity registered for GST being actively involved in an enterprise at the time of supply (evidenced by receipt of consideration) and the time of acquisition of goods or services in the furtherance of the enterprise (usually payment of consideration upon receipt of a tax invoice). There can be no claim without evidence of a tax invoice in respect of each relevant acquisition during a particular GST period, in this case, each quarter.
In his examination-in-chief, the applicant referred to Minutes of Proposed Orders which were subsequently made by the Family Court in relation to the dissolution of his marriage. Regarding the then existing partnership which conducted the accounting practice, the applicant particularly referred to clause 12.6 which states:
The wife hereby relinquishes and forgoes and shall have no claim or right to claim any interest legal or equitable in any loan account (s) presently payable (if any) from the business to the wife subject to the husband providing written confirmation forthwith as to the maintenance of professional indemnity insurance in relation to the business and the partnership and that he will continue to do so for a period of seven years from the date hereof. The husband shall provide to the wife each year a copy of the certificate of currency with respect to the insurance, and a copy of the policy.
The Dissolution Deed contains a similar provision at clause 7 which provides:
7. The continuing partner acknowledges and warrants that he has at all material times maintained the appropriate professional indemnity insurance in relation to the business of the partnership and further warrants that he will continue to do so for a period of 7 years from the date of execution of this deed.
The first point which needs to be made is that there can be no doubt that the partnership in existence before 1 June 2006 ceased to be in existence on and from that date. There were only two legal persons involved in the partnership and upon one of those persons giving notice to the other that they had retired from the partnership commencing on 1 June 2006, the partnership was dissolved. The Dissolution Deed makes it clear that from 1 June 2006 the accountancy practice was to be carried on by the applicant alone. A person acting in business alone is not a partnership. Upon the giving of a notice by a partner of any partnership, no matter how many partners comprise that partnership, the existing partnership is determined (s. 30 of the Partnership Act).
The Partnership Act also makes provision for the authority of partners to bind the firm and for rights and obligations to continue notwithstanding dissolution, but only so far as it is necessary to wind up the affairs of the partnership. While the remaining partners, assuming there were more than one, have limited authority to perform acts in the name of the partnership, it cannot be said that they automatically acquire a right to continue to conduct the business or enterprise being conducted by the former partnership. On dissolution, assets and liabilities outstanding need to be finalised and once that has been completed, the remaining partners may enter into a new partnership which is to conduct the same business enterprise carried on by the former partnership. Ordinarily, a new partnership deed is executed.
In this case, the rights and liabilities of the two partners in the accountancy practice were finalised by the Dissolution Deed made on 1 June 2006. Not only did both parties expressly agree that the then existing partnership was dissolved by mutual consent, they also agreed that the business from that date would be carried on by the continuing partner. That is, it was agreed that the applicant would carry on the business of the former partnership in his own right as an individual. The heading of the Dissolution Deed makes it abundantly clear that in addition to dissolution, it deals with the continuation of the accounting practice following the wife’s retirement. It was also agreed by the Dissolution Deed that the applicant would maintain professional indemnity insurance in relation to the business of the partnership for a period of seven years from the date of execution of the Dissolution Deed. No doubt that is because the applicant was required to indemnify his wife for any liabilities incurred by her in her capacity as a partner of the partnership. If a claim was made and the applicant became liable, no doubt his wife wanted some security that the claim would be met irrespective of the applicant’s financial position.

One of the principal claims of the applicant, as I understood him, was the expenses he was required to meet in respect of professional indemnity insurance as a consequence of the Dissolution Deed. There are several problems with the way this has been put by the applicant.
The first is that although the Dissolution Deed refers to the continuing partner, it is plain that that expression is intended to refer to the applicant. Following dissolution of the partnership, there was no evidence that the applicant intended to continue the practice with any other person or persons. Furthermore, the Dissolution Deed, by referring to the continuing partner, expressly states that he (i.e. the applicant) is to continue to maintain professional indemnity insurance for a period of a further seven years. That seems to be the case irrespective of whether the applicant acquired additional persons to come into his accountancy practice as partners.
The applicant put into evidence an application for personal indemnity insurance dated 14 July 2012. The application form indicates that the application is made on behalf of two entities, ABN 64 061 909 681 and ABN 29 454 780 304. I also had in evidence professional indemnity insurance certificates of currency between 1 September 2009 and 1 September 2013. The insured in each of those certificates is named under the original name given to the accountancy practice and the applicant trading under that name. There was also a covering email from the insurance broker stating that between 1 September 2006 and 1 September 2013 the insurer provided cover to both entities. Perhaps the only problem, if there is one, is that the application form requires the details of partners to be listed. Only the applicant’s name appears. Because a partnership is not a legal entity, those persons at any time comprising the partnership need to be named as they are the only persons who may conduct the business in the partnership name. In doing so, they bind all of the other partners to any liabilities incurred.
The wife’s name does not appear as a partner of either insured entity. There is also no indication that the insurer made any distinction between the liabilities of each entity. Effectively, that indicates that because the applicant continued to carry on the business in his own right following the dissolution of the partnership, the insurer simply treated the insured as being the applicant. That is, no portion of premium expenditure can be attributed to the ABN 64 061 909 681 entity.
It is worthwhile recalling what Keith L Fletcher said in his text The Law of Partnership in Australia (ninth edition) 2007 regarding the liabilities of incoming and outgoing partners. He said, at [6.135]:
This section [Victoria Partnership Act s. 21] provides a formal reminder that, while the business may continue, any change in the composition of the partnership marks the end of one relationship and the creation of a new partnership. The rights and liabilities of members of the separate firms are separate and distinct. Members of the original firm are responsible for contractual obligations incurred before the termination date, even if quantified after that date, and newly admitted partners are not liable for those obligations unless they expressly or by conduct accept that obligation.
In my opinion, the fact that the ABN 64 061 909 681 entity was included on the professional indemnity insurance applications does not, by itself, indicate that it was conducting an enterprise. Its inclusion was simply stated to cover the liabilities to which the applicant was exposed as a consequence of its past business activities. It is possibly also a function of the fact that professional indemnity insurance policies are usually described as claims made policies. That is, there must be a current policy in force at the time a claim is made, even if it relates to a transaction or event which occurred prior to the current policy coming into existence. Whether the liability related to a prior period in time or later, the applicant was in any event the only entity which could be made liable. Hence the insurance certificates refer only to the applicant trading in the business name which had been used, even for the partnership.
Therefore, I find that the cost of acquiring and maintaining such a policy cannot be claimed as a creditable acquisition made by the partnership. Any policy issued after the dissolution of the partnership was issued to the applicant who, as a sole practitioner, continued to conduct the business of the accounting practice formerly conducted by the partnership. That does not fit within the definition of a creditable acquisition as it was not acquired for a creditable purpose. It could not have been acquired for the purpose of conducting the enterprise of the partnership. In fact the partnership ceased to conduct an enterprise on the date of its dissolution.
As was submitted by Mr P Nicholas of counsel, who appeared on behalf of the Commissioner, the partnership having ceased to carry on any enterprise was required, within 21 days after the date of dissolution, to have applied to the Commissioner for cancellation of its registration pursuant to s. 25-50 of the GST Act. This was not a case where the partnership required time to run down after the dissolution was declared. The applicant had personally acquired his wife’s interest in the partnership for the sum of one dollar upon execution of the Dissolution Deed. The applicant retained the power to collect all assets of the former partnership and to demand, sue for, recover, receive and give full and effectual receipts and discharges for all debts owing or belonging to the partnership (clause 5). Any business conducted by the accounting practice after 1 June 2006 was conducted by the applicant in his own right. That included getting in any monies owed to the accounting practice when it was carried on as a partnership.
Even if my analysis regarding the nature of the expenditure for professional indemnity insurance is incorrect, there is another compelling reason why I should find that the claimed input tax credits should be disallowed.
In a meeting with ATO officers on 8 April 2014 the applicant said that the partnership bank account was closed in June 2006. Furthermore, the applicant said that his computers suffered from a virus in January 2013 which destroyed all files and the hard drive on the computer which contained his accounting records. He said that source documents, which included tax invoices, were taken by the Family Court in his divorce proceedings. Nevertheless, in his oral evidence, the applicant said that the partnership had a contract with a mortgage broker and was entitled to receive ongoing fees and trailer fees for loan transactions with clients introduced to the mortgage broker. He also said that the partnership had an outstanding debt owed to it which needed to be recovered.
In his examination-in-chief the applicant was taken to a BAS for the quarter ended 31 December 2011. That statement discloses total sales including GST to amount to $268. In the same quarter, the non-capital purchases amounted to $26,400. In explaining those entries, the applicant said that the sales figure was the result of a trailing commission to which the partnership was entitled. As for the non-capital purchases, the applicant said that would have been a single invoice issued from the new business to the partnership business to: recoup the expenses that were being outlaid from time to time on behalf of the partnership, be they legal fees, be they rental be they a proportional rental, be they administrative costs of me chasing debts, whatever the case may be. There was no tax invoice in the amount of $26,400 in evidence. Furthermore, the applicant was not able to state precisely the amount of each individual claim which comprised the total sum. The applicant attempted to explain in the following way:
No, what I tried to do was – rather than a bill on an item by item basis – an exact proportion of an exact expense, I determined in globo what I thought to go back to that partnership for two reasons. One, I wish to ensure that the partnership was liable to the new partnership lest I went on a litigation path with Tattersalls. I did not want someone putting their hand up and saying they wanted a share of the litigation. I wanted it heavily indebted in the first place. Secondly, I was trying to create an arm’s length situation where I am recovering items like legal fees that were not claimed in the new practice and other expenses – back rental from the practice. Instead of itemising them month by month, I claimed it on an annual basis – on the basis that I am on – on and in globo basis it fairly reflected what was fair.…
I should add that there was no evidence of a new partnership as claimed by the applicant.
In the course of his oral evidence, the applicant agreed that the expenditure relating to the input tax credits claimed for the quarter ending December 2011 were not incurred in that quarter. With respect to the applicant, without the production of a tax invoice for the December 2011 GST quarter, the input tax credit cannot be attributed to that tax period

(s 29-10(3) the GST Act). Even though the applicant claimed he had lost all of his accounting records, he said in his evidence-in-chief that what he was trying to do was to smooth out the expenses across some unexplained period of time. With respect, the applicant, being an accountant, must have known that the Commissioner could not accept such a claim.
If that were not sufficient, the notion that the applicant could invoice the new business for the expenditure claimed to have been outlaid on behalf of the partnership is highly questionable. I had nothing in evidence before me to suggest that there was an agreement between the applicant (as a sole trader) and the partnership regarding the meeting of the partnership’s outstanding expenses other than that set out in the Dissolution Deed. In fact the very purpose of dissolution, as I have indicated above, is to identify and quantify all outstanding liabilities of the partnership which then become liabilities of those persons who were partners at the relevant time in accordance with the Partnership Deed. A partnership, while an entity for the purposes of GST, is not a legal entity. While the income and expenditure of a partnership is returned for tax purposes, at the end of each financial year, after taking into account liabilities, profits are distributed in accordance with the Partnership Deed. On dissolution, the liabilities become liabilities of individual partners and not the partnership. The position is succinctly stated by Fletcher, in his text where he said, at 1.30:
Execution cannot now be levied against partnership property in specie, in respect of an individual partner’s private judgement debt, but the debtor’s share in the profits, during the subsistence of the partnership, and her or his share of the proceeds on dissolution can be made payable to the judgement creditor pursuant to a charging order.
The learned author went on to say, at 1.55:
The refusal of both the judiciary and the legislature to recognise the partnership firm as a legal entity, distinct from its constituent members, is a characteristic peculiar to the common law concept of partnership. This refusal has in the past caused many difficulties. Some of them, mainly those of a procedural and administrative nature, have been resolved by legislation, giving a very limited recognition to the partnership firm as such.
Given the legal position as I have stated above, after the dissolution of the partnership, because of the terms set out in the Dissolution Deed, the existing liabilities of the partnership fell on the applicant personally. There is no basis upon which those liabilities could be transferred to a new partnership or to a new entity without novation. On dissolution, all debts of the partnership became the liability of the applicant (because of the indemnity granted in the Dissolution Deed).
Although Mr Redenbach of counsel, who appeared for the applicant, submitted that the activities conducted by the applicant after execution of the Dissolution Deed were properly described as part of carrying on the enterprise, respectfully, I cannot agree. While I agree that the expression carrying on an enterprise as defined in s. 195-1 of the GST Act includes doing anything in the course of the commencement or termination of the enterprise, the activities to which the applicant has referred did not occur in the course of termination of the enterprise. They occurred after it had terminated. The partnership had been dissolved and the Dissolution Deed dealt comprehensively with the partners’ rights and obligations as a consequence of dissolution. Nothing further was required to be done in order to terminate the enterprise. Notice had also been given in the Victorian Government Gazette which was published on 26 October 2006.
In his oral examination the applicant tendered a document setting out what he described were expenses relating to the practice. As best I can determine, those expenses relate to legal expenses, indemnity insurance expenses, a sub-contracting fee to an entity called Smartplay and share of rental expenses. While some of those expenses refer to the income tax year in which they were incurred, not one of them breaks down the expenditure by quarters as required for reporting GST. There are no particulars given of the expenditures. Given the statutory requirements which must be met in order to claim an input tax credit, I find that the evidence, if it can be described as that, does not satisfy the statutory obligation for a claim.
Accordingly, I find that the decision made by the Commissioner regarding the partnership GST net amount assessments was correct. The input tax credits claimed by the partnership for the quarters ended September 2010 to 30 June 2012 should be disallowed.
ADMINISTRATIVE PENALTY IN RESPECT OF NET AMOUNT ASSESSMENTS FOR THE QUARTERS ENDING 30 SEPTEMBER 2010 TO 30 JUNE 2012
Section 284-75 of the GST Act deals with liability to administrative penalties. Relevantly, it provides:
(1) You are liable to administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
…
It cannot be disputed that the entries made at labels G1 and G11 of the BASs in issue contain material particulars. They are the very figures upon which the GST and input tax credits are calculated: GST by dividing the sales figure by 11 and the input tax credit by dividing the non-capital purchases figure by 11.
As the Commissioner submitted, despite the partnership having been dissolved on

1 June 2006, the BAS statements continued to be lodged with the ATO even though the partnership was no longer carrying on an enterprise. The partnership was required to notify the Commissioner that it had ceased to be an entity conducting an enterprise for the purposes of the GST Act. The applicant ought then to have applied for registration as the entity conducting the accounting practice whereupon he would have been issued with a new Australian Business Number (ABN) in accordance with Division 4 of the A New Tax System (Australian Business Number) Act 1999.
The Dissolution Deed makes it plain that the partnership was dissolved upon execution of the Dissolution Deed. As an accountant, it is reasonable to expect the applicant to have understood the significance of dissolution of the partnership and its inability to continue to conduct the accountancy practice. In fact the Dissolution Deed expressly states that from the dissolution date, the accountancy practice business was to be carried on by the applicant. The input tax credit claims made by the applicant purportedly on behalf of the partnership after it had been dissolved were plainly unsustainable. The applicant must have reasonably known that to be the case. Furthermore, the provisions in the GST Act dealing with creditable acquisitions and entitlement to input tax credits for creditable acquisitions are reasonably clear. As an accountant, it is difficult to understand how the applicant had formed the view that the claims made for input tax credits in each quarter could be attributed to those quarters when the claims were made. There was no evidence of any tax invoice and the applicant admitted no tax invoice had issued for the claimed acquisitions. He admitted he had taken a global approach and simply apportioned expenditures which he believed had been incurred at least in the income years in which the BASs were lodged.
I find that the shortfall amount for each quarter in question was as follows:
30 September 2010  $2670
31 December 2010  $2536
31 March 2011  $3851
30 June 2011  $3890
30 September 2011  $3630
31 December 2011  $2376
31 March 2012  $2315
30 June 2012  $3413
31 December 2013  $2352
In arriving at the above figures, I have accepted the submissions made by Mr Nicholas regarding the 31 December 2013 quarter. The applicant lodged a revised BAS for that tax period and it is deemed to be an amended assessment of the net amount for the period. The Commissioner did not dispute that the net amount for that period was $0.
Section 284-90 sets out the base penalty amount depending on the degree of culpability of the taxpayer. In this case, the Commissioner determined that the appropriate base penalty amount for each period was 25% of the shortfall amount. Item 3 on the table under s. 284-90 (1) provides the following narrative:
You have a *shortfall amount as a result of the statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a *taxation law (other than the *Excise Acts)
In my opinion, the base penalty amount for each of the periods in question was correctly assessed at 25%. I find that the applicant failed to take reasonable care to comply with the GST Act when lodging the BAS returns the quarterly periods in issue.
The second issue which I am required to determine relates to BASs lodged by the applicant for the tax periods 1 July 2011 to 31 March 2014, trading under the same accountancy name as that of the partnership, but on the applicant’s own account following partnership dissolution. The applicant was registered for GST and was allocated the ABN 29 454 780 304. There is also a consequential issue which arises from the BASs lodged by the applicant. That is whether the applicant correctly reported his taxable income for the 2012 and 2013 income years. These issues are the subject of Matters No. 2015/6760 and 2016/2316.
BAS LODGED BY THE APPLICANT FOR THE TAX PERIODS 1 JULY 2011 –

31 MARCH 2014
The applicant lodged a BAS for each quarter between July 2011 and March 2014. These were all in respect of the applicant trading on his own account under ABN 29 454 780 304. In a letter dated 29 December 2011 the ATO notified the applicant that it had reviewed the BASs for the quarter ended 30 September 2011 and had made an assessment of the applicant’s GST net amount for the period in accordance with s. 105-5 (1) of Schedule 1 to the Administration Act. The ATO changed the GST net amount from $4921Cr to $1129Dr. Effectively that resulted in a debit adjustment or disallowance of input tax credits of $6050 for the period. The applicant was informed of his right to object to that assessment.
By letter dated 2 March 2015 the ATO notified the applicant of further assessments for the quarters ending December 2011, March 2012 and June 2012. It made further adjustments of the net amount which resulted in an additional $18,073 Dr being applied as a result of increased sales figures. On the same date, the ATO issued the applicant with a notice of amended assessments of net amount for each of the quarters in question between September 2011 and March 2014. It resulted in the following:

Tax Period Previously Assessed Net amount Amended Assessed Net amount
Difference

September 2011 $1,129 Dr $3,080 Dr $1,951 Dr

September 2012 $6,476 Cr $13,975 Dr $20,451 Dr

December 2012 $11,016 Cr $197 Cr $10,819 Dr

March 2013 $3,670 Cr $14,692 Dr $18,362 Dr

June 2013 $3,020 Cr $15,488 Dr $18,508 Dr

September 2013 $2,819 Cr $15,985 Dr $18,804 Dr

December 2013 $7,999 Dr $26,875 Dr $18,876 Dr

March 2014 $5,505 Dr $13,713 Dr $8,208 Dr

Total

$115,979 Dr

On 3 March 2015 the ATO issued to the applicant a notice of assessment of shortfall penalty as a consequence of the adjustments made to the claimed input tax credits for the quarters in question. The total penalty amount was $80,431.20.
On 27 March 2015 the applicant lodged with the ATO a notice of objection to the amended net amount assessments. With respect to the author of that document, it appears to be simply a template objection notice drafted as if it were a pleading, without being particularised. For example, it states that the revision was not made by the Commissioner bona fide or that the amount of GST attributed to the taxpayer by the Commissioner was wrong and excessive. No particulars were provided. There was no statement by the applicant regarding what the correct amount should be and how the correct amount ought to be calculated. The applicant also lodged with the Commissioner a notice of objection to the penalty assessments. The reasons for rejection are identical to those contained in the objection to the net amount assessments. Those reasons are essentially based on the claim that the assessment was not made by the Commissioner bona fide and that the taxpayer did not make any false or misleading statements in any material particular. Again, none of the grounds set out in the objection are particularised.
In a letter dated 10 November 2015 the Commissioner notified the applicant that his objections to the net amount assessments and administrative penalties were disallowed.
As a consequence of the Commissioner’s findings regarding the additional activity statement liabilities, the applicant was issued with notices of amended assessment to his personal income tax returns for the income years 2012 and 2013. The Commissioner amended the applicant’s taxable income from $18,982 to $180,270 in the 2012 income year; and from $0 to $307,366 in the 2013 income year. The Commissioner also issued to the applicant notices of assessment of shortfall penalty in relation to his income tax returns. The amount of penalty assessed for the 2012 income year was $35,038.90 and $70,058.25 for the 2013 income year. The applicant also objected to the amended assessments of income and the administrative penalties assessment.
DISCLOSURE OF INCOME DERIVED IN THE 2012 AND 2013 INCOME YEARS
I must say at the outset that the evidence regarding the applicant’s income from the operation of his accounting practice and other sources was anything but satisfactory.
According to the applicant, the main reason for his inability to be more precise about his income and to be able to provide documentary evidence was that in January 2013 his computer system, used by the accounting practice, was infected by a virus which destroyed all of the files and the hard drive where the accounting records were stored. In his witness statement made on 28 September 2016, the applicant said that he engaged the services of his son, who he described as a computer expert, to attempt to restore the hard drive. He said that attempt was unsuccessful and that he purchased a new computer in or about January 2013.
His witness statement referred to an annexure which was said to be a copy of the invoice for that new computer. However, when he was taken to that annexure, the applicant agreed it was plainly an incorrect document, being a tax invoice for rent of the premises occupied by the accounting practice. When asked in the course of his oral evidence whether he held an invoice for the purchase of the new computer, the applicant said he would attempt to retrieve a copy of it on the first evening of the hearing. The applicant did not produce an invoice for the purchase of a new computer on the following day. Furthermore, the applicant did not put into evidence a statement from his son regarding attempts to recover information on the computer he said was infected with a virus. Other than the applicant’s evidence of what happened to his accounting records, there was no objective evidence to support his statement.
In cross-examination the applicant was asked whether he backed up his computer files as a matter of practice. The applicant said he did not. He said he did back up his client files which were on a different computer. Respectfully, an accountant conducting the business of an accountancy practice who did not back up his computer files as a matter of practice or, alternatively, keep hard copies of business documents including client files can only be described as careless. When it was put to the applicant that the client files would contain invoices issued by the applicant to the client, his response was:
They would. In some – I did, as I mentioned yesterday, I sometimes issued – – –
You said yesterday – – –? – – – Sometimes issued client invoices on my own computer. I used to try and then copy them onto – in hard copy onto the invoice hard copy file be maintained.
In his witness statement, the applicant described the bank accounts used by the business conducting the accounting practice. They included a Westpac Cash management account; a Westpac business cheque plus account; a Westpac account in the name of a superannuation fund; an ANZ account in the applicant’s name trading under the partnership name; and then an ANZ investment loan account. In his witness statement, the applicant said that the only deposits made into those accounts were either from clients paying fees for accounting services; funds transferred or withdrawn from other accounts and deposited in the accounts referred to; refunds from the ATO for clients; gambling winnings; and on occasion, prize money from horse races. The applicant was involved, to some degree, in breeding racehorses. He explained that with ATO refunds, he would deduct his fees and forward the balance to the relevant client.
Notably, the applicant did not have a trust account. As will become apparent presently, ATO refunds were simply deposited in the accounting practice’s ordinary bank accounts. It appears the applicant was oblivious to the fact that those monies were never the monies of the accounting practice or the applicant. That is despite any agreement he had with clients to take his fees from those refunds.
Furthermore, in his witness statement, the applicant said that clients always paid for his accounting services either by cheque or direct deposit into a bank account or by way of deduction from refunds received from the ATO. He said no clients ever paid him in cash. He also said that the partnership continued to collect trailer (trailing) fees from a broker. He then said that the new practice received less than $5000 per annum in any year from commissions. As I understand those statements, the applicant considered he was entitled to the fees originally due to the partnership. That is in accordance with my understanding of what happened following the dissolution.
While the applicant produced a list of clients and fees received from the clients of the accounting practice between July 2012 and June 2013, my attempts to locate and reconcile those lists with the bank accounts proved futile. While some of those payments can be identified in the various accounts, most cannot. From the accounts, it appears that when payments were made by particular clients, their names were entered against the deposit description. However, there are many deposits, some of them reasonably large, which are unidentified under the description of the transaction. By way of example, on 11 August 2011, there is a deposit in the amount of $143,000 to the ANZ investment loan account without identification. Deposits direct from the ATO are identified.
In his 2012 income tax return, the applicant returned income of $423,070. In the 2013 income year, he returned income of $437,800. The list of clients billed by the applicant for the 2013 income year amounted to $429,830. The applicant explained that he added to this sums of $11,000 and $35,000 which are understood to have been deducted from ATO refunds; and then deducted $43,257 GST resulting in a net total of $432,573.
The problem with that calculation is that it appears to be selective. As I understood the applicant, he accounted on a cash basis. In the list of invoices issued for the 2013 income year there are a number of invoices which appear to have remained unpaid. They total $81,620. In addition, the list of clients and invoices issued does not match completely with the copy invoices which I had in evidence. For example, the list identifies a client who was issued with an invoice on 15 November 2012 in the amount of $5940. The list indicates that sum remained unpaid. It indicates an amount outstanding on that account of $3940 as the remainder appears to be accounted for by a part payment.
In his witness statement, the applicant attempted to justify the income he returned in the years in question. He explained that during those years he worked full-time at the practice charging at the rate of $300-$340 per hour (excluding GST). He said he worked the equivalent of 44 weeks per year and about 40 hours per week. The applicant said about one third of his time was spent on practice administration, marketing and other non-billable matters. Two thirds of his work time was spent on billable matters. Therefore, in each year, he worked approximately 1210 billable hours. At the stated billing rate, that amounted to billings of approximately $400,000.
The applicant said that during the 2012 and 2013 income years, he employed another accountant as a contractor. He paid the contractor about $75 per hour for his work and charged his work out to clients at $180-$200 per hour. He said the contractor worked approximately 200 hours in each of the income years and therefore generated net fee income for his practice of approximately $40,000 in each year. The applicant attached to his witness statement an invoice from the contractor dated 30 September 2013. That invoice was for the amount of $15,000 plus $1500 GST. Those figures support what the applicant said about the contractor’s work for the 2013 income year. The only point I might make about that invoice is that it appears to be unusual for a contractor to bill for his or her services only once in a financial year. The contractor was not called to give evidence.
I should point out that in an email sent by the applicant to an officer of the ATO on

18 February 2015, the applicant, in justifying the income he returned in the years in question, said the contractor’s work was charged out at about $300 per hour. Nevertheless, he arrived at approximately the same figure by indicating he could only work about 5.5 billable hours per day.
There are more significant problems with the applicant’s assessment of taxable income for the income years in question. The applicant claimed he was a prolific gambler, at times, to use his expression, having turned about $900,000 in a six-month period. He claimed to have gambling winnings but said his net position from gambling was a loss rather than a gain. He said he gambled using cash by going to the TAB not far from his business premises. In about late 2013 he began using a TAB gambling account and was now a platinum customer, reflecting an advanced level of gambling. The applicant claimed that he generally gambled by withdrawing $1000 from one of his accounts. If he won he would deposit the winnings back into the account on the same day or the next day either as cash or a cheque.
Despite what the applicant said in his witness statement, I had in evidence the transcript of an interview conducted by the ATO on 20 November 2014. When asked why he was taking money out of these accounts and what that money was used for, the applicant responded:
… I do have wagers from time to time on the horses and I have explained that on more than one occasion.
When asked how much time he would spend at the TAB, the applicant said:
Well, it depends. It depends if there is if – if I am full on with work, it could be a little. If I am quiet, on a Wednesday afternoon I could spend…
How many days a week to go there?
It depends on whether I have got anything I want to have a wager on. It could be three, four times a week, it could be once a week. Depends on what I am doing.
And what would your turnover be?
I have no idea. I could not answer that.
Mr Stephan Andruszko, a TAB operator at a TAB outlet where the applicant said he gambled, made a statutory declaration on 30 August 2014 which was in evidence. Mr Andruszko deposed that he had known the applicant for 15 years during which time the applicant frequented the TAB agency on weekends and on occasion during the week when he had been on duty. Mr Andruszko attended the hearing and gave oral evidence. He said he had written out numerous cheques to the applicant for winnings, particularly over the preceding five years. He had also paid the applicant winnings in significant amounts of cash when that was requested, saying that the applicant would take the cash to the bank at the Westpac branch next door. Mr Andruszko did not explain how he knew the applicant was in fact depositing money at the branch. However, when asked in cross-examination whether he knew the applicant was depositing money in the Westpac branch, he agreed that was what the applicant told him.
When asked how long he had known the applicant as a customer of the TAB, Mr Andruszko seemed to expand on what he had previously said in his statutory declaration. He said: I’ve worked there since about 1997 so I would say best part of 16, 17, 18 years. Maybe 20 years. He described the applicant’s gambling as consistent and prolific. When asked how many days a week he estimated he saw the applicant, Mr Andruszko said:
I do not work full time now but you would see him virtually every day, bar Sunday. Yes.
When asked whether he could remember any big wins or losses which the applicant had, Mr Andruszko said:
Yes. A few years ago – look, I really do not know when because it all blurs into one but I did – I personally made a cheque out for him for about $240,000 and I think it was last Easter I banked a cheque as a favour for him – banked a cheque next door for $30,000.
Mr Andruszko did not explain why, if the bank was next door, he was asked to deposit the cheque for the applicant. In fact, although it may be implied by the context of what Mr Andruszko said about that cheque, that it was the proceeds of winnings, it may equally be understood as being a cheque given to him from another source.
In cross-examination Mr Andruszko said he knew the applicant had a TAB account. He said that account enabled the applicant to place bets over the telephone. Mr Andruszko explained that a person using a TAB account and betting by telephone was required to have funds in that account for the purpose of betting. Mr Andruszko also agreed that records were kept by the TAB of those transactions which included items such as date of the transaction, the race the bet was placed on and the horse which was backed. I did not have any of those documents in evidence.
The applicant also made much of the fact that he had a rewards card which was described as a platinum card. That indicated that he was a substantial gambler. When Mr Andruszko was asked about that card, he explained that the point system awarded depended on the amount wagered. Mr Andruszko said that the applicant used his card all the time. When asked about the operation of that card in cross-examination, Mr Andruszko said that records were kept of the amount that the card holder had bet.
I had in evidence a document from the TAB which recorded the applicant’s points balance and setting out information about how the rewards program operated. On that document, which is undated, the applicant’s points balance was 1385. The applicant explained that for every dollar spent gambling, the holder of the rewards card was given one point. If that were the case, the amount gambled by the applicant does not seem to be overly large given the points balance. However the applicant pointed out in his evidence-in-chief that as one accrued additional points, one moved up to a higher tier. The document in evidence refers to Status Credits and the applicant’s Status Credit rating was 489,880 credits. The applicant then equated the Status Credit rating as indicating the dollar amount spent on gambling. With respect to the applicant, there is no indication over which period of time those Status Credits were accrued. The document itself states:
Status Credits determine your status level and are rewarded based on your betting activity.
Status credits only contribute to tiers in the account program. Status credits do not apply to the cash members, as there are no tiers in place for cash members.
As I understand the loyalty program, one Status Credit is earned per one dollar bet. While reward points remain valid for two years there seems to be no time limitation placed on Status Credits. There is another factor which the applicant did not point out in the course of his evidence. The document explains that a punter does not earn rewards points for bets placed over the telephone with an operator. Given that the applicant held a telephone account, any betting placed over the telephone would not record points.
With respect to Mr Andruszko, I found his evidence to be of little assistance and it should carry little weight. That is because it is inconsistent with statements he has previously made and the information which was given in evidence-in-chief was subsequently determined to be as a consequence of what the applicant had told Mr Andruszko, rather than what he had observed.
The Westpac bank statements appear to support what the applicant said about his gambling. There are occasions on which $1000, $2000 or $3000 amounts were regularly withdrawn, sometimes even on a single day. The only problem is that those withdrawals do not appear to be cash withdrawals but rather, they are funds transfers via the Internet.
When asked in cross-examination whether he kept a record of what he won through his betting, the applicant said he did not. He was also not able to say into which accounts the money was deposited if he had winnings. When asked whether there were any occasions where he received large winnings from the TAB, the applicant said there were a number. While the applicant said he could not recall precisely when he had large winnings, he said:
I can tell you, I regularly won sums in excess of $5000, sometimes in excess of 10. There were some bigger ones around the 35 to 40,000 mark. I tried to take cheques and – partly cash partly cheques, depending on how quickly I needed the funds cleared, so if you going to ask me to reconcile, I have no idea.
My examination of the bank accounts said to have been conducted by the applicant during the relevant period do not shed any light on deposits which may have been the proceeds of gambling winnings.
The second explanation offered by the applicant for deposits into his bank accounts but which he said were not income was that they were loans.
In his statement of evidence the applicant referred to a loan of $60,000 from Somerville Servo. He said that occurred in late 2013 or early 2014. He said the owners of that business offered to assist him first by deferring fees during a difficult divorce. The applicant said that on settlement of that matter, his fees were paid and an advance was given to him to assist him because the owners were aware of the applicant’s difficult financial position.

His Honour then referred to the decision of Walsh J in Krew v Commissioner of Taxation (Cth) (1971) 45 ALJR 324; [1971] ATC 4213. Burchett J said:
That was a betterment [asset betterment] case, bearing some similarity to the present, in which Walsh J, in various parts of his judgement, acted on evidence that “substantial” portions of sums of money represented the proceeds of gambling; expressly eschewed (at [ATC] 4223) any attempt to reach a “precise result”; and acknowledged (at [ATC] 4224) that his decision as to certain “large payments” lacked “satisfactory evidence of a specific kind”, concluding nevertheless that it was “probable that a large part of the money was derived from gambling”, with the result that “a somewhat arbitrary decision” was required, to some extent in favour of the taxpayer.
A case which is factually closer to the present case is the Federal Court (Davies J) decision in Martin v Federal Commissioner of Taxation (1993) 27 ATR 282.
Davies J in Martin said that the fact that a taxpayer is untruthful and a tax evader is not a reason not to arrive at an assessment of income tax if the assessment can be made. Although his Honour found that Mr Martin’s evidence regarding his costs was unreliable, he nevertheless formed the view, on the balance of probabilities, that Mr Martin did have substantial costs, particularly expenditure relating to the purchase of stock. While he said that it was a matter of guesswork to put a figure on those costs, having regard to the evidence of the nature of the business conducted by Mr Martin and evidence of his lifestyle, it was reasonable to conclude that Mr Martin’s taxable income would not have been more than 50% of his identified gross income. However, it should be noted that in that case a witness produced records disclosing sums which he paid to Mr Martin and his Honour accepted that evidence. Furthermore, the parties agreed that the sums which made up Mr Martin’s assessments were gross income and that no sum had been allowed as a deduction for the cost of trading stock or otherwise as the cost of gaining or producing the assessable income.
The Federal Court (Ryan J) decision in Kimche v Federal Commissioner of Taxation (2004) 57 ATR 28 referred to the decisions in Ma and Martin. His Honour said, at 38:
It follows, I consider, that if, in a case like the present, the taxpayer is able to establish facts tending to show that some part of a particular receipt did not bear the character of income but is unable to quantify with precision the amount of that part then the assessment will be excessive only in respect of the minimum amount which could have borne a different character.
The three cases I have referred to above are all cases in which the taxpayer was able to establish, on the balance of probabilities, circumstances which deprived receipts treated as income by the Commissioner of that character, or was able, by evidence, to disclose expenditure in the earning of income liable to tax even though precise amounts could not be established.
While I undoubtedly had evidence that the applicant in this case gambled significantly, I did not have cogent evidence in respect of any single unidentified deposit transaction in the bank accounts operated by the accountancy practice where it could be said, on the balance of probabilities, that embedded in that deposit transaction were gambling monies. The applicant did not have any TAB records but relied on the evidence of Mr Andrusko, a TAB employee at the agency where the applicant frequently wagered on the horses. In his evidence in chief, Mr Andrusko said, in response to a question whether he could recall any specific big wins or losses incurred by the applicant said he recalled making out a check to the applicant for about $240,000 and taking a cheque in the sum of about $30,000 to the bank next door. However, when in cross-examination Mr Andrusko was taken to his Statutory Declaration where he said that he would frequently take to the bank at the Westpac branch next door, significant sums of cash which were the applicant’s winnings, he agreed that statement was based on what was told to him by the applicant. In other words, he did not personally observe the applicant depositing sums of cash at the Westpac bank next door which could be described as winnings. While records may have been kept of the amounts that the applicant wagered at that TAB agency, records of winnings were not. As for the $240,000 and $30,000 cheques, those entries were not identified in the bank accounts by the applicant and my searches for such deposits failed to find any evidence of deposits which might be identified as TAB cheques deposited on behalf of the applicant. As a matter of logic, it is difficult to understand why the applicant would have asked Mr Andrusko, who no doubt was busy running the TAB agency, to take a cheque next door to the Westpac bank on his behalf.
The Westpac bank account, which was primarily used for the accounting practice, is replete with unidentified deposits. The applicant was unable to identify the source of those funds when asked to do so by officers of the ATO at the meeting held on 20 April 2014 or in his evidence on the hearing of this matter. While it is true to say that on a number of occasions, the deposits in the Westpac account are identified as being deposits from the accounting practice’s clients or as refunds received from the ATO, there are even more deposit entries without any identification on them. The applicant was the breeder of racehorses and in his evidence he indicated that from time to time he did receive prize money. It is not clear what happened to those monies.
Therefore, this is not a case such as the three cases I have referred to above dealing with estimates of assessable income. There was no basis on the evidence before me to make an estimate of the true income derived by the applicant as a consequence of conducting his accounting practice. While he attempted to do so by reference to his charge out rates and the time he claimed generating billable hours, I did not have in evidence material which would support what the applicant said about billable hours. He did produce some tax invoices issued to clients and there is no question that some of those invoices were paid and deposited into the Westpac account and are identified as belonging to a particular clients. My examination of the accounting records also discloses that there are many significant deposits from clients of the accounting practice for which the applicant has not produced a tax invoice and has not included those payments in his assessable income.
In addition to the above, Mr Redenbach referred me to the decision of the Full Court of the Federal Court of Australia (Allsop CJ, Kenny, Besanko, Robertson and Mortimer JJ) in Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315. The Court referred to the decision of Burchett J in Ma and said, at 392:
The proposition which the appellant sought to derive from this passage was that in performing its review function, the Tribunal may be required to make an estimate upon inexact evidence, and it cannot avoid its responsibility to make findings by relying on the burden of proof section. This proposition may be accepted for the present purposes. The difficulty for the appellants is that, subject to the third argument dealt with below, they are unable to identify the estimate they contend the Tribunal should have made and the evidence by reference to which the estimate should have been made. It is true that the Tribunal appears to have thought it likely that there were subcontractor expenses of a reasonably substantial amount, but the appellants have not identified any findings of the Tribunal, or evidence referred to by it, that could form the basis of even an estimate upon inexact evidence.
The third way in which the appellants put their argument… The Tribunal was not entitled to adopt what the appellants described as an “all or nothing” approach. If an “at least” figure was established on the evidence, then the tribunal should have made a finding in accordance with that evidence.
We think that proposition is correct. If a taxpayer claims his or her expenses were $10, but fails to prove that fact because the evidence is rejected, this does not prevent the tribunal for finding that the expenses were five dollars where there is other satisfactory evidence establishing expenses of at least that amount. In our opinion, the burden of proof section does not dictate a different conclusion.
The first point made above by the Full Court dealt with income. While the Court accepted what was said by Burchett J in Ma, in order to make an estimate, the Court was mindful that there needed to be sufficient evidence to form the basis for an estimate. The problem in this case is that such evidence is absent. Other than the self-serving statements made by the applicant, it is not possible to establish a basis for estimating a proportion of deposits recorded in the Westpac bank account which should be disregarded as assessable income other than that already established by the Commissioner. In this case, it is the unexplained deposits together with tax invoices which either do not appear to have been paid, or more likely, are not recorded in that account. The problem is compounded by the claimed input tax credits which of course represent expenditure in the conduct of the accounting practice. Both income and expenditure which was able to be clearly identified by the Commissioner was included in his objection decision. It is the unidentifiable entries which cause problems and those concerns were not alleviated by the evidence before me. At the hearing conducted by the ATO on 20 November 2014, the applicant was asked to explain all the credits and debits in his bank accounts. The applicant said he could not do that. For example, when asked to explain a number of transactions on a particular day, the applicant said:
Those… could be anything. I don’t know what they are… we’re going back… the amount. You’re talking three years ago. I I’ve got hundreds of transactions a month, let alone being able to identify transactions three years ago.
Even if the evidence can be said to leave open the inference that not all of the deposits can be described as assessable income and withdrawals as claimable expenditure, that would not assist the applicant. There must be some basis upon which one can quantify the extent to which reductions or additions may be made. The mixture of entries in the accounts in evidence makes that impossible. As I have already indicated, bank accounts used by the accounting practice include monies from a variety of sources, some identified and many not so. Even those deposits which are identifiable do not match the tax invoices issued by the accounting practice in the income years in question. There is no way of ascertaining whether those invoices have been paid and the moneys not deposited, or whether they have not been paid. The withdrawals in those accounts are even more prevalent. There is no explanation given for those withdrawals or how the monies were used. But the applicant claims that most of those if not all were used for gambling purposes. Other than his self-serving statement, there is nothing in evidence which would allow me to distinguish between gambling monies and other genuine expenditures covered by those withdrawals. To add to the problem, the applicant identified some of the monies placed into those accounts as being loans. There is no record of any loan in evidence. There are statements made by the applicant and a statement by Mr Seketa. However Mr Seketa has made subsequent statements to the ATO indicating he never lent any monies to the applicant. Without proper recording, I find it is not possible to make a reasonable estimate of the applicant’s assessable income in either of the income years in question or the claimed input tax credits on the BASs for those years.
ADMINISTRATIVE PENALTIES
I have already dealt with the penalty assessments issued by the Commissioner in respect that the BASs lodged on behalf of the partnership. In addition, the Commissioner issued notices of assessment of shortfall penalty following the assessment of net amount for the BAS quarters ended September 2011 through to March 2014. The amount of penalty assessed for the lodgement of those BASs was $80,431.20. The Commissioner also issued shortfall penalty assessments resulting from a shortfall amount in the income tax returns lodged for the 2012 and 2013 income years. The penalty payable for the 2012 income year was $35,038.90 and for the 2013 income year $70,058.25. Those penalties were calculated on the basis of 50% base rate for recklessness and an additional 20% for being previously liable to an administrative penalty for making a false or misleading statement in accordance with s. 284-220 (1) of the Administration Act. Because the penalties for GST and income tax are grounded on the same bases, it is convenient to deal with them concurrently rather than independently.
Liability to administrative penalties is dealt with in s. 284-75 of the Administration Act. I have set out its relevant provisions above at [76]. I have not referred to what is commonly known as the safe harbour provisions in s. 284-75(6) for the reason that the applicant was a registered tax agent and prepared his own returns. Those provisions do not apply to him.
In making his findings that the applicant was reckless in the lodgement of his BASs and income tax returns for the relevant income years, the Commissioner took into account the following:
·the applicant had been a chartered accountant for 23 years, providing accounting services which included the lodgement of activity statements and income tax returns
·as such, the applicant must have been aware of the legislation and what he needed to report in the activity statements and income tax returns
·the applicant completed and lodged his own activity statements and income tax returns
·the Westpac business accounts identified the applicant as an accounting practice and it received regular deposits from clients which were identified in the accounts. There were payments of significant amounts which were not reported in the BASs and income tax returns. The applicant should have been aware that those items were required to have been reported
·the applicant attempted to excuse the absence of records by reason that his computer was destroyed by a virus. However he did not maintain sufficient records to accurately record all of his business transactions and there were no supporting documents to verify deposits which he claimed were not income
·the applicant did not operate a trust account into which his client’s monies were deposited. His client’s ATO refunds were lodged directly into his own business account with the applicant claiming he was entitled to retain portions of those monies to cover his fees. There was no evidence that the balance of the refunds were transferred to the clients nor is there any evidence that the funds he withheld were reported in the BASs and income tax returns lodged.
·The applicant claimed clients had requested that they receive ATO refunds in cash but he failed to maintain records of clients who were paid and how much was paid. He did not issue a receipt to his client for records of the payments being made.
The description used in the table setting out the base penalty amounts under Item 2 giving rise to a 50% base penalty of the shortfall amount is that the amount resulted from recklessness. Recklessness is not defined in the Administration Act. However the Commissioner has made a Miscellaneous Tax Ruling (MT 2008/1) which deals with penalties relating to statements. That Ruling is a public ruling and as such is an expression of the Commissioner’s opinion about the way in which a relevant provision applies or would apply to entities generally or to parts of entities in relation to a particular scheme or class of schemes. If a taxpayer relies on the ruling, the Commissioner must apply the law to that taxpayer in the way set out in the ruling unless satisfied that the ruling is incorrect and disadvantages the taxpayer. If that were the case, the law may be applied to the taxpayer in a way that is more favourable.
The meaning of the expression recklessness is set out in clauses 99-108 of MT 2008/1. Relevantly, they provide:
… ‘recklessness’ connotes conduct that is more culpable than a failure to take reasonable care to comply with the taxation law but less culpable than an intentional disregard of a taxation law.
… a finding of recklessness depends on the application of an essentially objective test. There must be the presence of conduct that falls short of the standard of a reasonable person in the position of the entity. Similar to the position with a failure to take reasonable care, dishonesty is not an element of establishing recklessness. The actual intention of the entity is of no relevance.
Behaviour will indicate recklessness where it falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity.…
Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.…
Mr Redenbach submitted that the decision to impose a penalty and to uplift the penalty by further 20% was not the correct decision in the applicant’s circumstances. Mr Redenbach argued that the applicant may have filed a return which was not false or misleading even though he could not meet the burden of proof imposed by s. 14ZZK of the Administration Act. He submitted that whether the applicant was reckless should be determined regardless of whether he had failed to meet the onus of proof requirements.
With respect to Mr Redenbach, it is artificial to separate out the burden of proof requirement from false or misleading statements regarding material particulars. Where a taxpayer is unable to establish by evidence, on the balance of probabilities, what their true income was in any particular income year, and they lodge a statement, be it an income tax return or a BAS, it is reasonably foreseeable that the statement is likely to be incorrect and accordingly, misleading as to the true income of the taxpayer. Intention to mislead is not a requirement under the liability to penalty provisions in s. 284-75 of the Administration Act. If the statement lodged is incorrect in a material particular, either because of the figures returned by the taxpayer or failure to include as income monies which should properly have been returned as income, the statement will be false and misleading and the taxpayer exposed to penalties.
The applicant faces another difficulty. That is, Part 5-30 of ITAA 97 deals with record-keeping and other obligations. In fact, s. 900-5 provides that the substantiation rules apply to an individual and to a partnership which includes at least one individual as if the partnership were an individual. To deduct certain types of losses and outgoings, including work expenses, a taxpayer will need to substantiate them (s. 100-10 of ITAA 97). Section 100-70 provides that where a taxpayer is required to retain records of an expense under Division 900, they are required to retain records for 5 years. If a taxpayer does not comply with a notice from the Commissioner to produce evidence of claimed expenses, the taxpayer cannot deduct the expense and if that expense has already been deducted, the assessment may be amended to disallow the deduction (s. 900-185(1)).
There are further record-keeping requirements in the Administration Act regarding indirect tax transactions. Section 382-5 relevantly provides:
(1) You must:
(a)keep records that record and explain all transactions and other acts you engage in that are relevant to a *supply, importation, acquisition, dealing, manufacture or entitlement to which this subsection applies; and
(b)retain those records for the longest of:
(i)     5 years after the completion of the transactions or acts to which they relate; and
(ii)    The *period of review for any assessment of an*assessable amount to which those records, transactions or acts relate; and
(iii)    if such an assessment has been amended under Subdivision 155-B – the period of 4 years mentioned in paragraph 155-70 (2)(a) (which provides for a refreshed period of review) that applies to the latest such amendment.
(2) Subsection (1) applies to:
(a)a *taxable supply, *taxable importation, *creditable acquisition or *creditable importation made by you; or
(b)a *supply made by you that is*GST-free or *input taxed; or
…

Furthermore, it is an offence under the Administration Act to fail to keep or retain records under s. 382. Section 382-5 (9) provides:
An entity commits an offence if:
(a)the entity is required to keep or retain a record under this section; and
(b)the entity does not keep or retain the record in accordance with this section.
Penalty: 30 penalty units.
Given the statutory requirements to maintain records, particularly in respect of GST transactions, it is inexcusable that a chartered accountant should fail to keep proper records of all business transactions. The risk of not doing so and the attendant consequences must have been apparent to the applicant in this case. His conduct falls seriously short of a standard which would be expected from a chartered accountant in his position. What the applicant has demonstrated is a disregard for, or an indifference to, the risk posed by his conduct which would be evident to a reasonable person in his position. A finding of recklessness in those circumstances is the correct decision.
Mr Redenbach also submitted that there is a clear distinction between assessable income and other amounts, such as from gambling, which are not assessable in the hands of the taxpayer. Similarly, the receipt of loan funds cannot be treated as income. While the distinction drawn by Mr Redenbach is reasonably clear, although I should say that gambling may be assessed as income in certain circumstances and that would need to be more thoroughly assessed, the taxpayer in this case made no attempt to distinguish between deposits which were gambling monies; those which were loans; client monies refunded by the ATO placed into his own account whereupon some of those monies were taken, according to the taxpayer, in payment of his fees without there being any documentary evidence of authority to do so; and expenses claimed as input tax credits without evidence of consideration having been given for the acquisition. The mixing of various monies into his personal account is simply unacceptable behaviour by a chartered accountant. I have no doubt he is fully aware of that. It is, undoubtedly, reckless behaviour.
Although Mr Redenbach also referred to the unchallenged evidence of Mr Andrusko that the applicant had significant gambling involvement, what the applicant in fact did with any winnings as explained by Mr Andrusko was by way of hearsay given to him by the applicant. It carries little or no weight. I accept that the scale of gambling was significant however there was no direct evidence of the amount of that gambling and where proceeds of winnings were placed. It appears the monies came from the general business account and, as I have indicated above, it is not possible to discern whose money was used for that gambling.
REMISSION OF PENALTIES
Although the Commissioner applied a 20% uplift to the penalties imposed for recklessness, in closing submissions Mr Nicholas explained that in accordance with the Commissioner’s remission policy in Practice Statement Law Administration 2012/5 (PSLA 2012/5), the Commissioner decided to remit the uplift factor of 20% applied in respect of the second and subsequent tax periods in each GST quarter, and both of the income tax years. As is stated in PSLA 2012/5, an unintended or unjust outcome may result from mechanically applying the uplift provisions. That is particularly so where the base penalty amount is increased because two or more penalties were assessed on the same day and the entity had not been advised of a previous penalty. In those circumstances, the behaviour cannot be regarded as intentional disregard of the law.
In my opinion, the Commissioner’s decision to remit the 20% uplift in respect of the income tax returns for the 2012 and 2013 income years and for the second and subsequent relevant GST quarters is the preferable decision in respect of that penalty.
Although I accept that the taxpayer’s personal life was turbulent throughout this period, I cannot accept that in continuing with his accounting practice, he was unable to ensure that his taxation affairs complied with statutory requirements. That is particularly so because during the periods in question, he was responsible for the taxation affairs of clients as well. The claimed loss of his computer records remains unsubstantiated. I only had the applicant’s self-serving oral evidence. In any event, to operate an accounting practice without putting into place adequate backup facilities for the recovery of records and information essential to the conduct of that practice is also inexcusable. As for his gambling, his failure to keep records and, particularly, to separate out the money he used for gambling from the accounting business accounts which already contained funds from various sources and were not the applicant’s, is inexcusable. I find there is no basis in the evidence before me for any further remission of penalties.
CONCLUSION
I have found that the Objection Decisions made by the Commissioner regarding the amended GST net amount assessments for the partnership trading under ABN 64 061 909 681 between 1 July 2010 and 30 June 2012, and for the quarter ended 31 December 2013 were the correct decisions. After dissolution of the partnership, it ceased to carry on an enterprise, the enterprise then being carried on by the applicant from dissolution date. The Commissioner’s decision to disallow the input tax credits claimed by the partnership was the correct decision.
As for the administrative penalties in respect of the net amount assessments for each of the quarters in the 2011, 2012 and the December quarter in 2013, I find they were correctly assessed at 25% of the shortfall because the applicant failed to take reasonable care to comply with the GST Act when lodging BAS returns.
The BASs lodged by the applicant following dissolution of the partnership for the period between July 2011 and March 2014 were significantly amended by the Commissioner following audit, taking into account the applicant’s objections. I have found that the Commissioner’s amended assessments of the net amounts for each of the quarters in question were correct. That is because the applicant failed to discharge the onus of proving that those assessments were excessive. Likewise, I have found that the penalty assessments as a result of the shortfall were also correctly calculated on the basis of 50% of the shortfall for recklessness. I have also found that the Commissioner’s decision to apply an additional uplift of 20% in respect of the first quarter was correct. The Commissioner’s decision to remit the 20% uplift factor applied to the second and subsequent tax periods was also correct.
My findings regarding the BASs statements for the quarters ending September 2011 through to March 2014 must necessarily be reflected in the income tax returns lodged by the applicant for the 2012 and 2013 income years. I have found that the applicant failed to discharge the onus of proving that those assessments were excessive. Although the applicant attempted to establish an estimated taxable income for those years which was significantly different to that assessed by the Commissioner, I have found that the evidence was inadequate to establish a sound basis for making any estimate. That was because the applicant did not keep adequate records of his transactions, both personal and business, and those transactions were recorded in the bank account which was used essentially for the accounting practice but which contained a mixture of monies and claimed loans.
Additionally, I found that the shortfall penalty assessments for the 2012 and 2013 income year tax returns were correctly calculated at 50% of the base rate for recklessness. I also agree with the Commissioner that the 20% uplift for both income years should be remitted. I find that to have been the preferable decision.
I have found there is no other basis for establishing any further remission of the administrative penalties.
By way of summary;
(m)the Commissioner’s objection decision in respect of ABN 64 061 909 681 made on 25 August 2015 is affirmed;
(n)the Commissioner’s objection decision in respect of ABN 64 061 909 681 on the administrative penalty made on 25 August 2015 is affirmed;
(o)the Commissioner’s objection decision made on 10 November 2015 in respect of ABN 29 454 780 304 regarding the net amounts of GST payable for the quarters September 2011 to March 2014 is affirmed;
(p)the Commissioner’s objection decision made on 10 November 2015/29 February 2016 in respect of ABN 29 454 780 304 regarding the GST administrative penalty is affirmed except for the 20% uplift for the second and subsequent tax periods in each GST quarter;
(q)the Commissioner’s objection decision made on 10 November 2015/29 February 2016 in respect of the applicant’s taxable income for the 2012 and 2013 income years is affirmed; and
(r)the Commissioner’s objection decision made on 10 November 2015/29 February 2016 regarding the assessment penalties for shortfalls of income tax for the 2012 and 2013 income years is affirmed except for the 20% uplift for each income year which is remitted.

I certify that the preceding 206 (two-hundred and six) paragraphs are a true copy of the reasons for the decision herein of Egon Fice, Senior Member

............................[sgd]............................................
Associate
Dated: 25 September 2017

Date of hearing:
19-20 December 2016

Date of final submissions: 7 April 2017

Advocate for the Applicant: Mr G Redenbach

Solicitors for the Applicant: Madgwicks Lawyers

Advocate for the Respondent: Mr P Nicholas

Solicitors for the Respondent: ATO Dispute Resolution

Tax Period	Previously Assessed Net amount	Amended Assessed Net amount	Difference
September 2011	$1,129 Dr	$3,080 Dr	$1,951 Dr
September 2012	$6,476 Cr	$13,975 Dr	$20,451 Dr
December 2012	$11,016 Cr	$197 Cr	$10,819 Dr
March 2013	$3,670 Cr	$14,692 Dr	$18,362 Dr
June 2013	$3,020 Cr	$15,488 Dr	$18,508 Dr
September 2013	$2,819 Cr	$15,985 Dr	$18,804 Dr
December 2013	$7,999 Dr	$26,875 Dr	$18,876 Dr
March 2014	$5,505 Dr	$13,713 Dr	$8,208 Dr
Total	$115,979 Dr

Date of hearing:	19-20 December 2016
Date of final submissions:	7 April 2017
Advocate for the Applicant:	Mr G Redenbach
Solicitors for the Applicant:	Madgwicks Lawyers
Advocate for the Respondent:	Mr P Nicholas
Solicitors for the Respondent:	ATO Dispute Resolution