Hua-Aus Pty Ltd and Commissioner of Taxation
[2008] AATA 1033
•17 November 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 1033
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/0403
TAXATION APPEALS DIVISION ) Re HUA-AUS PTY LTD Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Ms Robin Hunt, Senior Member Date17 November 2008
PlaceSydney
Decision The reviewable decision is varied as follows:
For the period 1 October 2004 to 31 December 2004:
· The value of taxable supplies was $343,034;
· Creditable acquisitions was $44,306; and
· Penalty for failure to withhold is $24,597.50.
....................[Sgd]...................
Ms Robin Hunt
Senior Member
CATCHWORDS
TAXATION – Goods and Services Tax – review of objection decision – assessment of GST liability and penalty – escort service enterprise involved taxable supplies – assessment based on failure of taxpayer to adduce evidence explaining sources of bank deposits – taxpayer bears burden of proving facts on which he relies – failure to discharge burden of proof – objection decision amending assessment not excessive or incorrect – penalty reduced – decision under review varied.
A New Tax System (Goods and Services Tax) Act 1999 (Cth) s 9-5
ATO Practice Statement Law Administration PS LA 2003/11: Remission of Penalty for Failure to Withhold as Required by Division 12 in Schedule 1 to the Taxation Administration Act 1953
Taxation Administration Act 1953 (Cth) ss 14ZZK, Schedule 1 – ss 12-190(1), 16-30(1), 16-45, Part 2-5
Taxation Administration Regulations 1976
Taxation Ruling 94/4
Farr, Smith & Co v Messrs Limited [1928] 1 KB 397
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Howe v Smith (1884) 27 Ch D 89
REASONS FOR DECISION
17 November 2008 Ms Robin Hunt, Senior Member introduction
1. Hua-Aus Pty Ltd is an Australian company registered for Goods and Services Tax (‘GST’) purposes. The company carries on business as a provider of escort services. Mr Mike Hua, as the sole director of the company, wrote a letter objecting to a Notice of Assessment of GST net amount issued by the Commissioner for the period 1 October 2004 to 31 December 2004 (‘the relevant quarter’). Mr Hua also objected to a Notice of Penalty for failure to withhold related amounts from payments made to his suppliers. A Deputy Commissioner considered the objections and made a reviewable decision on 16 December 2006 (‘the objection decision’). This decision reduced the amount of taxable supplies for the assessment of GST net amount but disallowed in full the objection to penalty imposed. Mr Hua applied to this tribunal for review of the objection decision on behalf of Hua-Aus Pty Ltd.
issues
2. The review concerns the correctness of GST assessment for the relevant quarter, and appropriate penalty for failure to withhold amounts from payments made to suppliers, as set out in the objection decision. Mr Hua argues the objection decision resulted in calculations of taxable supplies for GST assessment and penalty which are excessive and should be reduced.
consideration and findings
3. In a letter dated 26 December 2005, Mr Hua made an objection to an assessment and associated penalty which the Commissioner issued after an audit took place of the Applicant’s Business Activity Statement (‘BAS’) for the relevant quarter. The Commissioner took the view that the objection related to the GST net amount assessed and penalty for failing to withhold amounts from certain payments made to suppliers.
4. The Applicant lodged a BAS for the relevant quarter on 28 February 2005. The BAS declared total sales of $64,525; GST of $5,866 owing to the ATO, with the ATO owing the Applicant $4,438, leaving a net amount of $1,451. On 25 October 2005, the Applicant lodged an amended BAS, showing total sales of $415,874; GST of $37,806 owing to the ATO, with the ATO owing the Applicant $4,028, leaving a net amount of $33,801.
5. In considering the objection, the Commissioner dealt with amounts of $106.10, $26.30 and $35.56, comprising part of the deposit of $20,497.96 made to the Applicant’s bank account on 25 October 2004, and decided they were not taxable supplies. As a result, the amount of taxable supplies was reduced to $415,706.58.
6. Although the objection decision decreased the original assessment of taxable supplies by $168, the bulk of the amounts treated as taxable supplies for the original assessment remained. The objection decision also disallowed Mr Hua’s objection in full as to the imposition of penalty for failure to withhold amounts for the relevant quarter. Full reasons for decision did not accompany the objection decision but were furnished for the review. These reasons together with the Commissioner’s documents before the tribunal show the context of the dispute.
7. By Notice of Assessment of GST net amount for the relevant quarter, issued on 28 October 2005, the Commissioner notified the Applicant of the increase in GST net amount from $1,428DR to $33,778DR. The notice explained that this increase resulted in a debit adjustment of $32,350 for the relevant quarter. The increased assessment reflected unreported taxable supplies in the amount of $351,349 pursuant to section 9-5 of ANew Tax System (Goods and Services Tax) Act1999(Cth) (‘GST Act’). The unreported taxable supplies consisted of un-sourced deposits into bank accounts operated by the Applicant and by Mr Hua.
8. The Notice of Penalty for failure to withhold amounts, issued on 31 October 2005, informed the Applicant of liability to pay penalty in the sum of $26,173.50. The amounts withheld were not fully described in the notice. The Commissioner explained for the review that the penalty arose under subparagraph 16-30(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (‘TAA’) and was calculated and assessed on the basis of failure to withhold $52,347 pursuant to subsection 12-190(1) of Schedule 1 to the TAA.
9. In or about February 2005, the Commissioner conducted an audit of the Applicant and investigated the correctness of the BAS lodged for the relevant quarter. During the audit process, the Commissioner acquired copies of bank account statements for accounts operated by the Applicant and by Mr Hua, including:
Hua-Aus Pty Ltd
Mike Hua trading as Hua-Kuang International Trading Co.
Mike Hua
10. These account statements revealed a number of deposits made during the relevant quarter which were not disclosed as taxable supplies in the BAS lodged by the Applicant for this period. In particular, a total of $376,331.20 was deposited into a Business Cheque Plus Account operated by the Applicant. A Deputy Commissioner wrote to Mr Hua on 15 August 2005 seeking further information about financial records which Mr Hua supplied in connection with the audit. Mr Hua from time to time provided some more details of transactions but not all are substantiated by supporting documentation or confirmation from other persons involved in transactions with the Applicant or Mr Hua. At the conclusion of the audit, the Commissioner treated as unreported taxable supplies those deposits which were not satisfactorily explained or supported by other documentation, and issued a Notice of Assessment of GST net amount on 28 October 2005.
11. Similarly, because a number of creditable acquisitions claimed by the Applicant were not substantiated by any tax invoice, the Commissioner reduced creditable acquisitions for the relevant quarter and related GST claimed on taxable supplies. On 16 December 2006, the Commissioner issued a Notice of Amended Assessment of GST net amount for the relevant quarter, noting the previously assessed net amount was $33,801DR, the amended assessment of net amount was $33,786DR, and crediting the difference of $15 to the Applicant’s running balance account.
12. Since the filing of the Application for Review of Decision, the Commissioner undertook further investigations and obtained information and documentation which assisted characterisation of some of the deposits under consideration as something other than taxable supplies. Accordingly, some concessions result in variation of the BAS lodged by the taxpayer for the relevant quarter as follows:
Taxable Supplies
$343,034
GST on Taxable Supplies
$31,185
Creditable Acquisitions
$44,306
Input Tax Credits
$4,028
13. Taking these figures into account, the Commissioner calculated the Applicant under-reported taxable supplies for the relevant quarter by $278,509 and GST on taxable supplies by $25,319.
14. The adjustments or concessions to the Commissioner’s calculations followed receipt of further information from Mr Hua. One major adjustment related to a deposit of $200,000 made on 24 November 2004 into the Business Cheque Plus Account operated by the Applicant. The Commissioner accepted, and I find, that the $200,000 deposit is not a taxable supply but represents a loan towards a purchase of real estate (‘the C property’) for $500,000. The source of additional funds for the balance of the purchase price of the C property, however, has not been satisfactorily explained.
15. On 25 November 2004, bank statements show the Applicant presented $140,000 in cash to its bank and purchased a bank cheque in the amount of $349,059.24. In the absence of an explanation as to the source of these funds, the Commissioner treated the $140,000 as sourced from taxable supplies. I find this is appropriate treatment as no better evidence of the source of this sum has been furnished for the review and the burden of proof rests on the taxpayer to show the assessment is excessive or should have been made differently (section 14ZZK of the TAA).
16. In the reasons for the objection decision furnished for the tribunal review, the Commissioner set out detailed and revised amounts treated as taxable supplies in the absence of further information from the taxpayer. I have not repeated the figures in my reasons but note that the Commissioner, after detailing the amounts considered, amended the Notice of Assessment of GST amount by decreasing taxable supplies by $168.
Deposits
17. The total amount deposited in the Applicant’s bank account from credit card merchants was $64,727.24. The total amount deposited in Hua-Kuang’s bank account from credit card merchants was $8,284.54. In relation to the other deposits in the bank accounts and payments on the credit cards, the following information is available:
Date Amount Description 5 October 2004 $40,000 The deposit of 2 cheques for $20,000 each from a company name source. 7 October 2004 $1,306 Listed in the bank statement as a deposit at Kingsgrove. 14 October 2004 $1,786 Listed in the bank statement as a deposit at Kingsgrove. 25 October 2004 $1,648 Listed in the bank statement as a deposit at Kingsgrove. 25 October 2004 $20,497.96 $20,000 – The deposit of a cheque from 2 named persons
$330 - Received from the Office of State Revenue.
$106.10 and $26.30 - The Applicant’s deposit slip indicates these were deposits of cheques from M.B.F.
$35.56 – The Applicant’s deposit slip indicates this was a deposit of a cheque from I.A.G3 November 2004 $5,000 Deposit of cash by a named person at Royal Sydney Exchange. 5 November 2004 $5,000 Listed in the bank statement as a deposit from Eddy. 8 November 2004 $5,000 Listed in the bank statement as a deposit from Eddy. 17 November 2004 $988 Listed in the bank statement as a deposit at Kingsgrove. 24 November 2004 $200,000 Deposit of 2 cheques for $100,000 each from 2 named persons. 24 November 2004 $2,630 Listed in the bank statement as a deposit at Kingsgrove. 25 November 2004 $8,000 Listed in the bank statement as an internet funds transfer. 26 November 2004 $1,298 Listed in the bank statement as a deposit at Kingsgrove. 8 December 2004 $1,228 Listed in the bank statement as a deposit at Kingsgrove. 16 December 2004 $2,062 Listed in the bank statement as a deposit at Kingsgrove. 21 December 2004 $12,510 Payment from NRMA Insurance for a car insurance payout. 29 December 2004 $500 Listed in the bank statement as a deposit from AIA Co Aust Ltd. 30 December 2004 $1,424 Listed in the bank statement as a deposit at Kingsgrove. Unknown $726 This amount is not listed on the bank statement but is the difference between the total credits for the month of December and the total of the credit amounts listed.
18. No further facts are available for the following payments made to Mr Hua’s MasterCard:
Date Amount 5 October 2004 $1,000 14 October 2004 $1,500 12 November 2004 $1,250 15 November 2004 $1,250 31 December 2004 $4,500
19. No further facts are available for the following payments made to Mr Hua’s credit card account:
Date Amount 15 October 2004 $380 15 October 2004 $810.13 15 October 2004 $632 12 November 2004 $380 24 December 2004 $19,724.43
20. The Commissioner now accepts that three deposits of $330 from the Office of State Revenue; $200,000 from Mr Li and Ms Luo was in connection with purchase of the C property; and $12,510 from NRMA, were all not taxable supplies.
21. On 25 November 2004, the Applicant drew a bank cheque for $349,059.24 at its bank. In the absence of any other information, I find that part of the funds for this cheque came from an amount of $140,000 cash supplied by the Applicant at the time the cheque was drawn. In the absence of any alternative explanation of the source of deposits in the Applicant’s bank account and Hua-Kuang’s bank account, as well as the payments on Mr Hua’s MasterCard and another credit card and the $140,000 contributed to the bank cheque, I find the Commissioner was correct in treating these amounts as taxable supplies.
22. Regarding the deposits and payments in evidence, the Commissioner has concluded:
Date Amount Account Source Commissioner’s position Various $64,727.24 Applicant’s bank account Merchant credit card deposits Consideration for taxable supplies Various $8,284.54 Hua-Kuang’s bank account Merchant credit card deposits Consideration for taxable supplies 5 October 2004 $40,000 Applicant’s bank account Contended by the Applicant as the repayment of a loan. Consideration for taxable supplies 7 October 2004 $1,306 Applicant’s bank account Unknown Consideration for taxable supplies 14 October 2004 $1,786 Applicant’s bank account Unknown Consideration for taxable supplies 25 October 2004 $1,648 Applicant’s bank account Unknown Consideration for taxable supplies 25 October 2004 $20,497.96 Applicant’s bank account $20,000- Contended by the Applicant as an amount loaned to the Applicant from Mr Li for the purchase of the C property Consideration for taxable supplies 3, 5 and 8 October 2004 3 x $5,000 Applicant’s bank account Contended by the Applicant as the repayment of a loan Consideration for taxable supplies 17 November 2004 $988 Applicant’s bank account Unknown Consideration for taxable supplies 24 November 2004 $2,630 Applicant’s bank account Unknown Consideration for taxable supplies 25 November 2004 $8,000 Applicant’s bank account Unknown Consideration for taxable supplies 26 November 2004 $1,298 Applicant’s bank account Unknown Consideration for taxable supplies 8 December 2004 $1,228 Applicant’s bank account Unknown Consideration for taxable supplies 16 December 2004 $2,062 Applicant’s bank account Unknown Consideration for taxable supplies 29 December 2004 $500 Applicant’s bank account Unknown Consideration for taxable supplies 30 December 2004 $1,424 Applicant’s bank account Unknown Consideration for taxable supplies December 2004 $726 Applicant’s bank account Unknown Consideration for taxable supplies 5 October 2004 $1,000 Mr Hua’s MasterCard Contended by the Applicant as the repayment of a loan Consideration for taxable supplies 14 October 2004 $1,500 Mr Hua’s MasterCard Contended by the Applicant as the repayment of a loan Consideration for taxable supplies 12 and 15 November 2004 2 x $1,250 Mr Hua’s MasterCard Contended by the Applicant as the repayment of a loan Consideration for taxable supplies 31 December 2004 $4,500 Mr Hua’s MasterCard Contended by the Applicant as the repayment of a loan Consideration for taxable supplies 15 October 2004 $380, $810.13 and $632 Mr Hua’s credit card Contended by the Applicant as refunds
Consideration for taxable supplies 12 November 2004 $380 Mr Hua’s credit card Contended by the Applicant a refund Consideration for taxable supplies 24 December 2004 $19,724.43 Mr Hua’s credit card Contended by the Applicant a refund and the repayment of a loan Consideration for taxable supplies 25 November 2004 $140,000 Cash contribution to bank cheque unknown Consideration for taxable supplies Deposit on 5 October 2004 in the Amount of $ 40,000
23. On 5 October 2004, a deposit of $40,000 was made into the Business Cheque Plus Account operated by the Applicant. Mr Hua maintains that the money represents money ‘I got back from John which he invested money into a Chinese restaurant …’. Mr Hua stated the cheque was from a named company. Aside from a deposit slip for a cheque drawn by the named company, there is no documentation which substantiates any arrangement with that entity or ‘John’, whose identity is not further disclosed. In the absence of further explanation, I find the Applicant has not demonstrated that the inclusion of this $40,000 in its assessment is excessive.
Deposit on 25 October 2004 in the Amount of $20,000
24. On 25 October 2004, a sum of $20,000 was deposited into the Business Cheque Plus Account operated by the Applicant. The only explanation offered by Mr Hua is that this money represents a ‘deposit’ for the purchase of the C property. A handwritten letter from a Mr Li to the ATO, dated 16 August 2007, states the $20,000 was a deposit towards the purchase of the C property. The Applicant did not call Mr Li as a witness. In these circumstances, I accept the Commissioner’s assertion that the surrounding documents are inconsistent with the explanation offered by the Applicant. As the Commissioner has pointed out, a deposit is usually given in ‘earnest to bind the bargain so entered into’: Howe v Smith (1884) 27 Ch D 89, 101 per Fry LJ, and a payment made on entering into a contract ‘guarantee[ing] that [the contracting party] will fulfil his contract’: Farr, Smith & Co v Messrs Limited [1928] 1 KB 397, 408 per Wright J. The deposit of $20,000, however, was not made at the time of the contract. The copy of the Contract for the Sale of Land which Mr Hua has furnished is dated 22 January 2004. The deposit was made on 25 October 2004, more than 9 months after the date of contract. Further, the sum of $20,000 does not represent the whole deposit stipulated under the contract in the amount of $50,000. Mr Hua gave evidence about complications that arose when one of the parties to the contract withdrew and that he had to find another purchaser but did not explain particular portions or interests or percentages of intended ownership. As I have observed above, Mr Li has not been called to give evidence in support of Mr Hua’s explanation and in these circumstances, I am not persuaded that Mr Hua’s explanation is adequate.
$140,000 Tendered in Cash by the Applicant
25. On 25 November 2004, the Applicant withdrew from a Business Cheque Plus Account the amount of $209,065.74. The Commissioner accepts that the sum of $200,000 deposited a day earlier, is not a taxable supply. The Commissioner has located a further withdrawal in the form of a bank cheque made payable to Perpetual Lawlink Victoria Limited. The cheque was for $349,059.24 because the Applicant produced a further sum of $140,000 in cash for the cheque. The Applicant has not explained the source of these funds and it follows that I accept the Commissioner’s treatment of the funds as a taxable supply or supplies.
26. Section 14ZZK of the TAA requires the taxpayer to prove that the assessment is excessive or should be made differently. Mr Hua did endeavour to explain the purchase of the C property and the difficulties he experienced when a joint purchaser pulled out, but this difficulty did not account for $140,000 of the funds eventually used to conclude the purchase.
$15,000 Received on 3, 5 and 8 November 2004
27. On 3, 5 and 8 November 2004, a named person and another named as ‘Eddy’ made a deposit of $5,000 on each of these days into the Business Cheque Plus Account operated by the Applicant. Mr Hua asserts that these deposits are repayments of a loan made to ‘Steven Ni’ for a shop owned in Hurstville. No person named Steven Ni gave evidence at the tribunal hearing. Copies of cheque butts produced by the Applicant in substantiation of the loan show the following payments made to Westfield and to a business name, said to be a shop operated by Mr Ni:
· $8849.20 paid to a business name on 26/1/03
· $8849.73 paid to Westfield on 28/3/03
· $8849.73 paid to Westfield on 29/4/03
· $8849.73 paid to Westfield on 26/6/03
28. According to the tribunal documents before me, the payments referred to above were not made for the benefit of a Steven Ni but for a Steven Li.
29. None of the material produced by the Applicant corresponds with the deposits made by the first named person or ‘Eddy’ on 3, 5 and 8 November 2004. The payments attributed by Mr Hua to a ‘loan’ equal $35,398.39. It is not clear that there is any correlation with the $15,000 deposited into the bank account. Further, there is no evidence to link the deposit of $15,000 with the payments made to Westfield and Cut Price Variety. Mr Hua has never disclosed the identity of the first named person or of ‘Eddy’ or a relationship with Steven Li and the business named. There is no additional information before me about the purpose of the payments. I therefore find that the Applicant has not discharged the burden of showing that the objection decision on the assessment was excessive or incorrect as to inclusion of these payments in the assessment.
$8000 Deposit on 25 November 2004
30. On 25 November 2004, the Applicant received a transfer of funds from the Westpac Banking Corporation Cheque Account operated by Mr Hua trading as Hua-Kuang International Trading Co. Mr Hua has not explained why the transfer took place or why funds were deposited into the account. In absence of an explanation, I find the objection decision was correct in treating the deposit as a taxable supply.
Deposits on 5 and 14 October 2004 Totalling $2500
31. On 5 and 14 October 2004, a total sum of $2500 was transferred into the Bank Mastercard Account operated by the Applicant. Mr Hua maintains that these payments were from a Ms Ma. No further particulars as to the identity of Ms Ma or why the monies were deposited has been supplied. Accordingly, I find the objection decision was correct in treating the transfer sum as a taxable supply.
32. The Commissioner, on the basis of the best information that has now been provided by the Applicant and Mr Hua, and after viewing bank records for the Applicant and the associated bank accounts of Mr Hua and entities revealed in the audit, has calculated total taxable supplies for the relevant quarter to be $343,034. This figure is reached as follows:
Applicant’s bank account $163,323.24
Hua-Kuang’s bank account $8,284.54
Mr Hua’s MasterCard $9,500.00
Mr Hua’s credit card $21,926.56
Contribution to bank cheque $140,000.00
Total $343,034.34
33. The Applicant reported taxable supplies in its BAS as $64,525 and GST payable as $5,866. Mr Hua has not substantiated these amounts except to the extent of the concessions made by the Commissioner. I conclude therefore that the Applicant under-reported taxable supplies by $278,509 and GST payable amount by $25,319.
34. After conclusion of the tribunal hearing, Mr Hua made further representations by letter dated 6 August 2008. He offered a further written explanation of various transactions but no further documentation substantiating his claims. He stated, for example, that he had helped his friend, ‘Bing’, who ran a Chinese restaurant and was lucky to get the money back. He also repeated that he lent some money to his friend ‘Steven Ni’ who paid rent to Westfield. He claimed another sum was a rebate from American International Assurance and was tax deductible. His friend ‘Ms Ma’, who was mentioned above, had moved to Melbourne. Some sums were supposedly money repaid by Ms Ma and other sums were ‘refund cheques’. He also enclosed a letter dated 15 July 2008, signed by Jianguo Jin on the letterhead of Hua-Aus Pty Ltd. The letter set out that the signatory had lent Mr Hua $140,000 cash to purchase the C property and supplied a contact telephone number.
35. None of the material supplied in the letter of 6 August 2008 and the attached letter dated 15 July 2008 adds substance to the representations of Mr Hua. I consider there is no evidence before me leading to a conclusion that the amounts taken into account in reaching the adjusted assessment in the objection decision should be treated differently.
36. As the amount of taxable supplies has been reduced after the audit and review process, the Commissioner has calculated that $49,195 should have been withheld from $101,433.67 of payments to the escorts. I agree with this aspect of the decision, there being insufficient evidence of any miscalculation in reaching this conclusion and again by reference to the Applicant’s burden under section 14ZZK.
Creditable Acquisitions Claimed by the Applicant
37. In its BAS, the Applicant claimed creditable acquisitions totalling $51,323. The Commissioner revised this sum to $44,306. The Applicant has provided no further information to support the amount of creditable acquisitions claimed. In other words, the burden of proof in this respect has not been discharged. I find, accordingly, that the Commissioner’s assessment ought to stand. I find the taxpayer made acquisitions of $44,306 and was entitled to input tax credits of $4,028 in the relevant quarter. The GST shortfall in the BAS for the relevant quarter was therefore $25,729.
Failure to Withhold Penalty
38. The Commissioner, in the reasons for decision supplied on 6 February 2007, set out that Mr Hua explained in connection with his objection that the Applicant Company supplied delivery and advertising services to the escorts used in the enterprise. The escorts provided escort services to the clients. The Applicant received half the gross fee paid by the client. The escort received the other half of the gross fee paid by the client. Mr Hua argued that the parties involved had responsibility for their own income tax and GST liabilities. He did not consider it his responsibility to ascertain an escort’s name, their address or Australian Business Number (‘ABN’).
39. The Commissioner considers escorts working for the Applicant were in the position of contractors. Payments to contractors are affected by the Pay As You Go (‘PAYG’) withholding system of accounting for taxes. Division 12 of Part 2-5 of Schedule 1 to the TAA requires the taxpayer to withhold an amount from certain payments made to a supplier. Subsection 12-190(1) of Schedule 1 to the TAA provides that a taxpayer must withhold an amount if the payment is for a supply that another entity has made or proposes to make, in the course of the taxpayer’s enterprise. Subsection 12-190(2) provides that the taxpayer need not withhold if the other entity has given an invoice that relates to the supply and quotes the other entity’s ABN, or the taxpayer has another acceptable record on which the other entity’s ABN is quoted.
40. Mr Hua agrees that the Applicant is an escort service but complains that he cannot meet taxation requirements due to the casual relationship with his escorts. He stated that he cannot control the escorts and organise the way they conduct their business in respect to taxation.
41. The Commissioner’s guidelines on GST and the sex industry – questions and answers, sets out the GST and PAYG obligations where such an enterprise is conducted. Paragraph 8 of these guidelines explains GST obligations where a client requests an escort through an establishment such as that of the Applicant. If the establishment is registered for GST, the price quoted for the total service is treated as GST inclusive. When a worker or contractor attends a booking and is paid the total GST-inclusive amount quoted, they hold this amount in trust for the establishment. The Commissioner includes the total payment in the establishment’s turnover for tax purposes. Any subsequent splitting of the fee is treated as a private arrangement and not as a tax altering arrangement.
42. During the relevant quarter, I have concluded the Applicant was an establishment that carried on the enterprise of supplying escort services with the escorts in the position of contractors. One way in which the Applicant may have dealt with escorts who provided services was to obtain ABNs from them. Mr Hua had difficulty in organising this with his suppliers of the services. The Applicant’s escorts did not give him a tax invoice for their services or a document quoting their ABNs. This left the Applicant with the only option of withholding 48.5% from the payments made to its escorts. See section 16-5 of Schedule 1 to the TAA and Division 12 as mentioned above.
43. As the Applicant did not obtain ABNs from the escorts or withhold 48.5% from payments made, it is liable to a penalty pursuant to subparagraph 16-30(1)(a) of Schedule 1 to the TAA. The amount to be withheld is determined in accordance with subsection 15-10(2) of Schedule 1 and regulations. Regulation 38 of Division 3 of Part 5 of the Taxation Administration Regulations 1976 states the amount to be withheld is 48.5%.
44. The Applicant is not in partnership with escorts he provides to clients. There is no evidence that the escorts participate in the management of the affairs of the Applicant. In a partnership, each escort would have an interest in management or in all of the assets of the partnership and a right to seek its dissolution under the Partnership Act 1892 (NSW). The records of the Applicant do not disclose the identity of any such ‘partners’ or of any accounting to partners or to a partnership or of calculation of profits distributed to partners. The relationship between the Applicant and the escorts operates as an unwritten contract. Activities are performed according to the unwritten understanding between the Applicant and parties who have a role in its activities.
45. The penalty imposed on the taxpayer was correct for the reasons set out in the reasons for the objection decision. The actual amount, however, has since been reduced to $24,597.50. The Commissioner must impose penalty equal to the amount that should have been withheld. As the amount of taxable supplies has been reduced after the audit and review process, the Commissioner has calculated that $49,195 should have been withheld from $101,433.67 of payments made to the escorts.
Are there grounds to further remit penalty?
46. The Commissioner imposed penalty according to the scale provided for reckless behaviour in failing to withhold 48.5% from payments to the escorts. The power to remit penalties imposed under section 16-30 is set out in subsection 16-45(1). I agree with the Commissioner that the correct penalty is $24,597.50.
47. In considering ATO Practice Statement Law Administration PS LA 2003/11: Remission of Penalty for Failure to Withhold as Required by Division 12 in Schedule 1 to the Taxation Administration Act 1953, the objection decision correctly decided that the conduct of the Applicant had been reckless. PS LA 2003/11 draws on Taxation Ruling TR 94/4 for the concept of recklessness.
48. Paragraphs 24 to 32 of PS LA 2003/11 outline factors which may increase or reduce penalty. Higher penalty applies in cases of intentional disregard of a taxation law. The objection decision is that the taxpayer was reckless. The reasons for decision took into account the Applicant having kept records and being a small business which could not afford regular services of a bookkeeper and accountant. The Applicant however failed to keep records of payments made to escorts and did not seek tax office advice about how to deal with these payments. The conduct of the audit and other matters were taken into account as well as detailed in the reasons for decision. Overall, the Commissioner decided that the Applicant’s failure to withhold was less than the worst tax failure deserving of the maximum penalty. The Commissioner takes the view that the taxpayer was reckless in terms of PS LA 2003/11. Reckless behaviour entitles a taxpayer to 50% remission of the penalty for failing to withhold. After the concessions made during the review process as to the amount which should have been withheld, the final decision was that the taxpayer is therefore subject to a penalty of $24,597.50.
49. For these reasons, taking into account gross carelessness and deliberate risk taking in relation to the failure to withhold under subsection 12-190(1) of Schedule 1 to the TAA, I find the assessment made of the taxpayer’s conduct is correct and the penalty assessment ought not to be disturbed.
Burden of proof on the taxpayer
50. In tax disputes, the Applicant bears the onus of proof. The present proceedings involve ‘reviewable objection decisions’ within the meaning of section 14ZQ of the TAA. Section 14ZZK of the TAA provides in respect to applications for review of a 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 that:
(i) if the taxation decision concerned is an assessment … - the assessment is excessive; or
(ii) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or
(iii) in any other case - the taxation decision concerned should not have been made or should have been made differently.
51. The Applicant has not discharged the burden in this case. In absence of acceptable evidence, the Commissioner is entitled to ascribe un-sourced deposits into the accounts of the Applicant and its director, Mr Hua, with the character of a taxable supply. Similarly, the Commissioner is entitled to make a reasonable estimate of the amount the taxpayer failed to withhold in accordance with subsection 12-190(1) of Schedule 1 to the TAA. Counsel for the Commissioner drew my attention to numerous examples of cases where the courts and the tribunal have considered the task of the tribunal in reviewing a decision on an objection and in deciding the correct outcome. I agree with all the matters set out in the Commissioner’s submissions under the discussion of onus of proof.
52. As Counsel for the Commissioner put it, section 14ZZK(b) effectively creates a rebuttable presumption that an assessment is not excessive, noting Mason J in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81:
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 sec. 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.
53. Accordingly, I find that the objection decision should be affirmed in essence, but varied insofar as to final values of taxable supplies and creditable acquisitions for the quarter in question. I find the Applicant’s total taxable supplies for the quarter was $343,034. Taxable supplies were under-reported by $278,509 and GST on sales was under-reported by $25,319. Creditable acquisitions for the quarter totalled $44,306. Further, due to the reduction found in the amount of taxable supplies, the penalty for failure to withhold is reduced and is now $24,597.50.
54. The tribunal will accordingly vary the objection decision in part, by reducing the value of taxable supplies and reducing the amount of creditable acquisitions as set out in paragraph 53 of the reasons for decision and by remitting administrative penalties in accordance with the reduction set out in the reasons for decision.
decision
55. The reviewable decision is varied as follows:
For the period 1 October 2004 to 31 December 2004:
·The value of taxable supplies was $343,034;
·Creditable acquisitions was $44,306; and
·Penalty for failure to withhold is $24,597.50.
I certify that the 55 preceding paragraphs are a true copy of the reasons for the decision herein of Ms Robin Hunt, Senior Member
Signed: .........................[Sgd]............................
Jennifer Wong, AssociateDate/s of Hearing 17 July 2008
Date of Decision 17 November 2008
Appearance for the Applicant M Hua
Counsel for the Respondent B C Kasep
Solicitor for the Respondent ATO Legal Services Branch
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