Ho and Commissioner of Taxation

[2009] AATA 622

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 622

ADMINISTRATIVE APPEALS TRIBUNAL      )

)              Nos: VT200400019-24

TAXATION APPEALS DIVISION		)
Re		Jessica Ho

Applicant

And Commissioner Of Taxation

Respondent

DECISION

Tribunal Mr G. L. McDonald, Deputy President

Date21 August 2009

PlaceMelbourne

Decision The Tribunal accepts the respondent has allowed legitimately claimable deductions from the applicant’s assessable income.  The Tribunal therefore does not need to change the decision which it handed down on 3 September 2008.

…....(sgd G L McDonald)....

Deputy President

CATCHWORDS – INCOME TAX ASSESSMENT ACT – medical practitioner – whether applicant was an employee – lack of evidence of employee relationship – whether there was intentional disregard by the applicant to pay income tax – whether the respondent had allowed claimable deductions from the applicant’s assessable income – decision under review not amended

REASONS FOR DECISION

21 August 2009 Mr G L McDonald, Deputy President

1.        The Tribunal handed down written reasons in this matter on 3 September 2008.  In paragraph 91 of those reasons, the Tribunal left it open for the applicant to make a further submission if it transpired that the respondent had assessed the income tax payable by her on the basis of the gross amount earned by her in the tax years 1993 to 1998 inclusive, that is, that the respondent had not allowed legitimately claimable deductions from the applicant’s assessable income.

2.        On behalf of the applicant it is conceded that while the respondent “may have allowed some legitimately claimable tax deductions to the Applicant ...”[1] the deductions allowed were not all which were legitimately claimable.  What is submitted by the applicant is not, as the respondent points out,[2] in accordance with the condition on which the leave was granted.  For that reason alone the respondent urges the Tribunal to reject the applicant’s claim.

[1] Applicant’s Reply to the Respondent’s Submissions, filed 27 October 2008, paragraph 7.

[2] Respondent’s Reply to the Applicant’s Submissions, filed 24 September 2008, paragraph 3.

3.        Rather than peremptorily dismissing the further submission, in view of the parties making further detailed submissions with respect to the deductions permitted and/or claimed the Tribunal has examined the factual circumstances to determine whether the respondent permitted legitimately claimed deductions.

4.        Support for the proposition that a taxpayer whose evidence has been found to be unreliable and who sought to evade the payment of taxation is nevertheless entitled to tax deductions on his expenses notwithstanding an absence of records is found in Martin v Federal Commissioner of Taxation.[3]  That case concerned a scrap metal dealer who met the stated criteria and where it was found that an absence of records about expenditure existed.  Davies J held:

I regard it as unsatisfactory that the Taxation Office has not sought to come to a conclusion about Mr Martin’s costs of earning his income save to say that expenditure not proven would not be allowed.  An unwilling taxpayer, even though he is a tax evader whose evidence is not reliable, should not be assessed to tax on gross income.  The Act requires that a judgement be made as to allowable deductions.  I have sought to undertake this task, doing the best I can on the inadequate information available, and keeping in mind that the burden of proof lies on the taxpayer, Mr Martin.[4]

[3] (1993) 93 ATC 5200.

[4] (1993) 93 ATC 5200 at 5207 per Davies J.

5.        In the instant case, the Tribunal found that the taxpayer was an unreliable witness and that those called to testify on her behalf were also unreliable.  It was claimed on her behalf that the Tribunal had found as a fact that she had incurred expenses attributable to the cost of the provision of premises and services which were payable to third parties, that is, to Supercare for the years 1993 to 1996 and to Mr John Chong for the years 1997 and 1998 (inclusive for both periods).

6.        The respondent agrees that to the extent that the applicant made payments for the provision of premises and clinic facilities (together referred to as ‘the services’) that amount would be legitimately deductible.  However, on behalf of the respondent it is submitted that such legitimate expenses have been deducted.  The deductions extend to including amounts paid to Supercare but not to Mr John Chong.  The respondent claims that there was no evidence that any such payments were made to the latter.

7.        The Tribunal was concerned with the tax years 1993 to 1998 inclusive.  The applicant does not address the 1993 year but the respondent has done so in its submission.

1993 Tax Year

8.        For the 1993 tax year the respondent identifies a gross income of $387,683.75 was earned by the applicant.  From this amount a deduction to Supercare of $196,317.07 has been made.  The figure was accepted as a payment to Supercare for the provision of the services consequently making her taxable income $163,036.00 with a further adjustment in the applicant’s favour for an arithmetical error.  The Tribunal is satisfied that the assessment takes into account an allowable deduction for the provision of services.

1994 Tax Year

9.        For the 1994 tax year both parties agree that the applicant’s gross income was $347,212.85.  From this the respondent has allowed a deduction of $60,722.46, being the amount it claimed was confirmed as being paid to Supercare by the applicant.  The applicant claims a deduction of 45% of the total payable to Supercare for support services provided to the applicant by Supercare, being $156,245.69.

1995 Tax Year

10.      For the 1995 tax year both parties again agreed that the applicant’s gross income was $415,210.20.  The respondent has allowed a deduction of $181,975.02 for payments made by the applicant to Supercare for the provision of clinic services.  The applicant again claims a deduction of 45% of the total assessable income payable by the applicant to Supercare for the provision of support services, being $186,846.59.

1996 and 1997 Tax Years

11.      In the case of the 1996 and 1997 tax years the Tribunal found that Mr John Chong took over the clinic operation in place of Supercare (after May 1995).[5]

[5] [2008] AATA 783 at [86].

12.      It seems from the tax returns of Mr John Chong that he returned the gross income earned from the applicant’s professional services and paid by HIC, being $428,567.00 in 1996/1997 tax year and $466,462.00 for the 1997/1998 tax year.[6]  Despite the Tribunal’s finding that payments by the HIC are payments made to the medical practitioner as the result of personal exertion, it seems that in respect to the two tax years in question that the applicant reassigned some of the payments due to her to Mr John Chong.  It follows that the deductions claimed for ‘wages – other’ in both returns is not referrable to the applicant.  The other claimed deductions are clearly referrable to expenses incurred in the operation of a medical clinic, other than a sum for each of the two years referred to as ‘commission’ being $235,400.00 and $253,883.00 respectively.  The applicant returned $39,000.00 as income paid to her in both the 1997 and 1998 tax years.[7]

[6] T documents, T41 and T49.

[7] T documents, T39 and T47.

13.      Mr Mahoney, on behalf of the Deputy Commissioner of Taxation, wrote to Mr JK Chong on 10 November 1998 seeking advice about the claimed deduction of $235,400.00 which had been listed as a payment of ‘commission’.  Mr Mahoney requested information as to who the payment had been made.[8]  The letter was sent to Mr John Chong’s tax agent.  Curiously the applicant’s husband responded in a letter dated 23 November 1998 stating the applicant had been paid $39,000.00 with two other doctors being paid commissions totalling $30,952.00.  The balance was described as “the management fee levied on the medical practice by me …”[9]  The letter is on the letterhead of J K Chong and in addition addresses other queries raised in Mr Mahoney’s letter of 10 November 1998 connected with the operation of the medical clinic, including that he (Mr Joo K Chong, the applicant’s husband) was unable to provide the cheque numbers for the payments as he has been unable to locate his cheque books. This is a curious response when it is claimed Mr John Chong was the operator of the clinic and it may been expected that he was responsible for the custody of the records including those relating to cheques which had been paid on behalf of the clinic.

[8] T document, T42.

[9] T document, T43.

14.      The applicant was discharged from bankruptcy on 13 August 1995.[10]  The applicant maintained she tried to negotiate a higher remuneration rate from Mr John Chong for her work at the clinic but was unsuccessful in doing so.  Instead the applicant maintained that Mr John Chong reminded her that he had been paying the rent for the house she and her family occupied during the final two years of the bankruptcy of the applicant and her husband.  He also agreed to provide her with a fully maintained motor vehicle.[11]

[10] Exhibit A4, paragraph 164.

[11] Exhibit A4, paragraphs 165 to 167.

15.      The Tribunal does not accept that the amount claimed as ‘commission’ in Mr John Chong’s tax return for the years 1997 and 1998 is as described.  The Tribunal is satisfied that with respect to the 1997 and 1998 tax years that the applicant has not been honest in her evidence that she was paid only $39,000.00 per annum for her work at the medical clinic.  The applicant was represented and could have called both her husband and her brother-in-law (Mr John Chong) to give evidence to explain what the ‘commission’ payments related to.  She did not.  The Tribunal is satisfied that in accordance with its finding in the previously given decision that it was the applicant who received payments from the HIC with respect to consultations which she undertook at the clinic.  Whether she directed these into other accounts or not is not to the point.

16.      The adjusted tax returns for the 1997 and 1998 years, as appended to the respondent’s submission in reply dated 24 September 2008 demonstrate that deductions, many of which were claimed in the same amounts in Mr John Chong’s tax returns for the same years,[12] have been applied to the applicant’s tax returns for those years.  The figures had been accounted for in the tax returns of the applicant and hence the condition on which the Tribunal granted leave to have this aspect agitated has not been fulfilled.  The applicant has not been assessed on the gross amounts as submitted on her behalf.

[12] T Documents, T41 and T49.

Tribunal’s Consideration

17.      The Tribunal found that the applicant had directed money which was otherwise payable to her to other entities including companies with which her husband or his brother had interests.  The Commissioner has ascertained the amounts paid to those other entities and allocated the balance as the amount paid by the applicant to Supercare for the provision of the services.  The Tribunal found that, while there was an agreement proposed whereby 45% of the income would be paid to Supercare for the provision of services, there was no written agreement concluded between the applicant and Supercare.  The Tribunal concluded that the evidence pointed to the payment of 45% of the sum earned to Supercare.[13]  What the Tribunal concluded is not made as a finding of fact.  What is set out in the sentence is to be distinguished from a situation where the Tribunal states that it is satisfied that what was pointed to is found as a fact.  In fact, the deduction allowed for the 1993 tax year is greater than the 45% claimed by the applicant as being the determinative percentage.

[13] Jessica Ho and Commissioner of Taxation [2008] AATA 783 at [81].

18.      The onus rests with the applicant to satisfy the decision maker that the deduction claimed is justified.  The assessment made for each of the years 1993 to 1996 includes an amount allowed by way of deduction for the payment of services made to Supercare.  The Tribunal is satisfied that the condition set by the Tribunal for the making of further submissions has not been fulfilled and that the respondent has properly calculated a deductible amount for the payment of services in each of the years.

19.      For the above reasons, the Tribunal does not need to change the decision which it handed down on 3 September 2008.  The further submission of the applicant contained in submissions from her solicitors dated 17 September 2008 and 27 October 2008 are not accepted by the Tribunal.

I certify that the 19 preceding paragraphs are a true copy of the reasons for the decision herein of
Mr G. L. McDonald, Deputy President

Signed:         ..............(sgd G Horzitski)..................
  Associate                  Grace Horzitski

Dates of Hearing  11 to 14 August 2008

Date of Decision  21 August 2009
Counsel for the Applicant         Mr N. Rosenbaum
Solicitor for the Applicant          Mr D. Silberman
Counsel for the Respondent     Mr P. Sest

Solicitor for the Respondent     Mr V. Tavolaro, Australian Government Solicitor