Huynh and Anor and Commissioner of Taxation

[2008] AATA 305

ADMINISTRATIVE APPEALS TRIBUNAL

DECISION AND REASONS FOR DECISION [2008] AATA 305

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No. QT2006/438

TAXATION APPEALS DIVISION		)         No. QT2006/450
Re		VAN LAM HUYNH and MINH THI NGOC NGUYEN

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Dr P McDermott RFD Senior Member

Date15 April 2008  

PlaceBrisbane

Decision The Tribunal affirms the decisions under review.

..................[Sgd].........................

Senior Member

CATCHWORDS

TAXATION – Procedural Matters – goods and services tax – taxi hire business –whether two goods and services tax assessments are excessive – decision under review affirmed.

A New Tax System (Goods and Services Tax) Act 1999
Naboulsi v Federal Commissioner of Taxation [2000] FCA 813
Commissioner of Taxation v De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd (1998) 82 FCR 507

REASONS FOR DECISION

15 April 2008 Dr P McDermott RFD Senior Member    

INTRODUCTION

1.               Mr Van Lam Huynh & Ms Minh Thi Ngoc Nguyen (”the applicants’) are registered for goods and services tax (‘GST’).  I have to decide whether two GST assessments[1] that were made on 29 September 2006 are excessive. The assessments were made for the nine quarterly tax periods ending on 31 December 2002 through to 31 December 2004

[1] Application QT2006/438: Reasons for Decision, Document 1, T2, Folio 3. Application QT2006/450: Reasons for Decision, Document 2 T2, Folio 3.

HISTORY OF THE MATTER

2.               From 1 October 2002 until 31 December 2004 the applicants operated a taxi hire business, utilising at various times five taxi vehicles, namely Taxi 401, Taxi 601, Taxi 701, Taxi 801 and Taxi 901.

3.               Taxi 901 was driven by the applicants. The other taxi vehicles (Taxi 401, Taxi 601, Taxi 701, Taxi 801) were operated by other drivers under what would I consider to be a bailment arrangement. It is settled that the holder of a taxi license who allows a driver to use the taxi is not the employer of the driver but a bailor of the taxi. In Commissioner of Taxation v De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd[2], Beaumont, Foster and Sackville JJ referred to “the view long taken by the courts in this country, and in earlier high authority in England, that the relationship between a taxi owner and the driver is one of bailment, rather than one of employment”. There was no creditable evidence before me that the arrangement between the applicants and the drivers of Taxi 401, Taxi 601, Taxi 701, Taxi 801) was other than a bailment arrangement. Indeed I am fortified in my conclusion that those drivers operated the taxis under a bailment arrangement as the taxi rental contracts use the familiar language of bailment: bailor and bailee[3].

[2] (1998) 82 FCR 507 at 516.

[3] Exhibit 4

BUSINESS ACTIVITY STATEMENTS

4.               On 29 June 2005, the applicants lodged nine Business Activity Statements for the following periods

·1 October 2002 to 31 December 2002.

·1 January 2003 to 31 March 2003.

·1 April 2003 to 30 June 2003.

·1 July 2003 to 30 September 2003.

·1 October 2003 to 31 December 2003.

·1 January 2004 to 31 March 2004.

·1 April 2004 to 30 June 2004.

·1 July 2004 to 30 September 2004.

·1 October 2004 to 31 December 2004.

The details of the respective Business Activity Statements lodged are:

BAS Tax period Peri	Lodgement Date	Sales (G1)	Purchases (G11 & G10)	GST On sales	GST on  purchases	Net Refund
1 Oct 02- 31 Dec 02	29 Jun 05	45,466	84,155	4,133	7,650	3,517
1 Jan 03- 31 Mar 03	29 Jun 05	48,858	71,656	4,441	6,514	2,073
1 Apr 03- 30 Jun 03	29 Jun 05	48,998	76,263	4,454	6,933	2,479
1 Jul 03-30 Sep 03	29 Jun 05	33,249	65,043	3,022	5,913	2,891
1 Oct 03-31 Dec 03	29 Jun 05	23,591	51,678	2,144	4,698	2,554
1 Jan 04-31 Mar 04	29 Jun 05	26,346	71,479	2,395	6,498	4,103
1 Apr 04-30 Jun 04	29 Jun 05	25,478	34,992	2,676	3,181	505
1 Jul 04-30 Sep 04	29 Jun 05	12,895	40,340	1,172	3,667	2,495
1 Oct 04-31 Dec 04	29 Jun 05	12,465	54,872	1,296	4,988	3,692
Total	24,309

REVIEW

5.               On 22 December 2004 the Commissioner commenced a review of the lodged Business Activity Statements. This review was finalised on 14 December 2005. The officers who conducted the review had concluded that the applicants had understated the quantum of sales. This was relevant for the assessment of GST on sales. It was also concluded that the applicants had overstated the quantum of purchases. This was relevant for the claim for input tax credits.

6.               As part of the review the Commissioner conducted a kilometre reading review to compare the income that was reported to the distance travelled by the taxi vehicles. Using vehicle repair tax invoices an odometer reading was determined for two of the vehicles at a time close to the end of the review period. The methodology that was adopted by the Commissioner is transparent.[4] It was in my view, fair to the applicants in taking into account the fuel that would be used in attaining the mileage of the vehicles. The applicants have made no complaint about the methodology of the Commissioner. 

[4] Application QT2006/438: Reasons for Decision, Document 1, T2 Folio  5-6. Application QT2006/450: Reasons for Decision Document 2, T2, Folio 5-6.

NOTICES OF ASSESSMENT

7.               On 20 December 2005 the Commissioner issued notices of assessment as follows:

BAS Tax period Peri	Sales(G1)	Purchases (G11 and G10)	GST On sales	GST on  purchases	Net payable (dr)
1 Oct 2002 - 31 Dec 2002	110,825	84,155	10,075	5,087	4,988
1 Jan 2003 - 31 Mar 2003	108,416	51,249	9,856	4,659	5,197
1 Apr 2003 - 30 Jun 2003	103,708	76,263	9,428	3,751	5,677
1 July 2003 - 30 Sep 2003	73,744	65,043	6,704	4,679	2,025
1 Oct 2003 - 31 Dec 2003	65,010	31,152	5,910	2,832	3,078
1 Jan 2004 - 31 Mar 2004	56,166	71,479	5,106	2,393	2,713
1 Apr 2004 - 30 June 2004	46,970	34,992	4,270	1,713	2,557
1 July 2004 - 30 Sep 2004	37,840	40,340	3,440	2,407	1,033
1 Oct 2004 - 31 Dec 2004	37,840	54,872	3,440	2,935	505
Total	27,773

8.               On 20 December 2005 the Commissioner issued a notice of assessment of penalty. Penalty was imposed in the sum of $26,041, being 50% of the shortfall amount of $52,082.

OBJECTION

9.               On 9 February 2006 the applicants (through their tax agent) objected to the calculation of sales and the exclusion of payments to drivers and fuels costs from the calculation of claimable input tax credits. On 9 February 2006 the applicants’ tax agent contended the correct figures for sales and purchases are as follows:

BASTax period Peri	Sales (G1)	Purchases (G11 & G10)	GST On sales	GST on  purchases	Net refund (cr)/Net Payable (dr)
1Oct 2002 - 31Dec 2002	77,534.50	137,705.06	7,048.59	9,955.19[5]	2,906.60cr
1 Jan 2003 - 31 Mar 03	102,176.70	110,935.08	9,288.79	10,085.01	796.22cr
1 Apr 2003 - 30 June 03	61,846.50	108,196.50	5,622.41	6,654.05	1,031.64cr
1 July 03 - 30 Sep 03	76,404.85	120,688.78	6,945.90	7,789.71	843.81cr
1 Oct 2003 - 31 Dec 03	52,641.75	61,898.88	4,785.61	5,627.17	841.56cr
1 Jan 2004- 31 Mar 04	59,672.50	103,527.98	5,424.77	5,306.54	118.23dr
1 Apr 2004 - 30 June 04	56,783.55	65,418.38	5,162.14	4,479.03	683.11dr
1 Jul 04 - 30 Sep 04	25,731.65	54,488.15	2,339.24	3,693.20	1,353.95cr
1 Oct 04 - 31 Dec 04	26,656.15	70,342.58	2,423.29	4,341.42	1,918.13cr
Total	8,890.57cr

[5] The Commissioner at the hearing submitted that it is unclear how the applicants derived this figure. No explanation from the applicants has been forthcoming.

10.              The objection (which is relevant to both applications before me) is as follows:

“Ground for objections

1.Income has been calculated by using the distance travelled would not reflect the true income received by the taxpayer.  This is due to some of the drivers were on set pay and not shift pay.  That is drivers have the cabs for a full day and pay the taxpayer a set amount regardless of how much the drivers receive for the day.

Also taxpayer using taxi to take his children to and from school each day and also using taxi vehicle for his own family travelling.  Therefore, using odometer to calculate mileage and apply it to set rate would be overstated the income received for the taxpayer.

2.The amended acquisition amounts have been excluded amount taxpayer paid to drivers.  By excluding expenses paid to drivers would understated the GST Credit to the taxpayer.

On the original business activity statements lodged, the GST Sale figures reported were the net amount of drivers’ shares and fuel costs.  Therefore, payment to drivers and fuel costs should be included in the activity statements.[6]”

[6] Application QT 2006/438 Document 1 T12, Folio 24 ; Application Q2006/450 Document 2. T23; Folio 40.

11.                  The applicants did not object to the imposition of penalty. That the applicants did not object to penalty was confirmed in a letter of 25 September 2006[7]. However, the applicants sought remission of penalty after the hearing of these applications was adjourned.

[7] Q2006/450 Document 2, T28, Folio 171

12.                  On 7 September 2006 the applicants through their tax agent advised the Commissioner that there was no disagreement with the sales figures calculated by the Commissioner and the only issue in contention was the calculation of the purchase figures and the exclusion of payments to drivers and fuels costs from the calculation of claimable input tax credits[8].

[8] QT 2006/450 Document 2, T25, Folio 52-55

13.                  On 29 September 2006 the Commissioner issued the applicants two notices disallowing the objection of the applicants. On 30 November 2006 the applicants lodged with this Tribunal an application to review the decisions disallowing the objections.

14.                  I mention that under taxation administration law[9] the applicants are limited to the grounds stated in the objection unless the Tribunal orders otherwise.  The applicants or their tax agent have not sought leave to amend the grounds which are stated in the notice of objection.

[9] Taxation Administration Act 1953, s14ZZK (a).

BURDEN OF PROOF

15.                  It is well settled that the applicants have the burden of proving that the amount of the assessments are excessive[10]. The Commissioner does not have to prove that the assessments were correctly made[11]; nor is the Commissioner required to provide evidence in support of the assessments[12]. When this application was first heard I explained to the applicants the onus of proof that lay on them as taxpayers. I also emphasised that to discharge their onus of proof it was important that they produce documentary evidence of the supplies or purchases in question. As Mr H P Stevens, as the then Chairman of Board of Review No 1 remarked: “A tribunal cannot find `facts' in respect of which evidence has not been led”[13].

[10] Taxation Administration Act 1953, sub-section 14ZZK(b)(i); Palmer and Federal Commissioner of Taxation (1998) 98 ATC 2353; 41 ATR 1016

[11] Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81.

[12] Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614.

[13] Case L67 79 ATC 519 at 522.

16.                  When these applications were first heard the applicants indicated that they still had some relevant documents at home.  The applicants were unrepresented and have language difficulties which warranted the presence of a translator. I considered that it was important that in order for me to make the “correct or preferable”[14] decision that the applicants should have the opportunity to produce all relevant documents at the hearing. I accordingly made a direction for the applicants to give to the “Brisbane Registry of the Administrative Appeals Tribunal and to the Respondent all documents to be relied upon at the hearing, on or before Thursday 9 August 2007”[15]. I also wish to place on record that Mr K Ố Seighin of the Australian Tax Office has provided assistance to the applicants by photocopying any documents.  The Australian Tax Office, in keeping with the spirit of the model litigant policy, has also provided assistance to the applicants and this Tribunal by filing the photocopied documents in the registry of this Tribunal.

[14] Drake v Minister for immigration and Ethnic Affairs (1979) 24 ALR 577 at 589 per Bowen CJ and Deane J

[15] Direction, 31 July 2007.

RELEVANT LEGISLATION

17.                  Section 70(1) of the Tax Administration Act 1953[16] requires that if you make a taxable supply, taxable importation, creditable acquisition or creditable importation you must:

(a)keep records that record and explain all transactions and other acts you engage in that are relevant to that supply, importation, acquisition, dealing or entitlement; and

(b)retain those records for at least 5 years after the completion of the transactions or acts to which they relate.

[16] Section 70 repealed with effect 1 July 2006. Section 382-5 of the TAA commenced 1 July 2006.

18. Division 144 of the A New Tax System (Goods and Services Tax) Act1999 (“the GST Act”) provides that if you supply taxi travel you are required to be registered. The obligation of taxi operators to register is “regardless of turnover”[17]:

[17] s 144-1 of the GST Act

19. An entity that is registered under the GST Act is required by s 31-5 of the GST Act to give to the Commissioner a GST return. The GST return is incorporated in the approved form of a Business Activity Statement. The Business Activity Statement records the amount of GST for a tax period that an entity has self-assessed it is liable to pay as well as the amount of input tax credits to which the entity has self-assessed it is entitled to claim. Section 17-5 of the GST Act provides that the difference between the GST payable and the input tax credits claimed is the net amount.

20. Section 35-5 of the GST Act provides that if the net amount is less than zero, the entity is entitled to a refund. Section 33-3 of the GST Act provides that if the net amount for a tax period is greater than zero, the entity must pay the difference to the Commissioner.

21. Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply you make. Section 9-5 defines what is a taxable supply: it essentially is a supply for consideration where the supply is made in the course or furtherance of an enterprise that you carry on.

22. Section 11-20 of the GST Act provides that an entity is entitled to input tax credits for its creditable acquisitions. Section 11-5 defines what is a creditable acquisition and s 11-15 also defines what is a creditable purpose.

23. Section 29-10(3) of the GST Act provides that input tax credits will not be attributable to a tax period unless the taxpayer holds a tax invoice for the acquisition by the end of the tax period.

24. For the sake of completeness, I mention that the four periods apply to the applicants are each period of three months ending on 31 March, 30 June, 30 September or 31 December in any year as provided by section 27-5 of the GST Act. Returns for these quarterly tax periods were required to be lodged in accordance with section 31-8 of the GST Act.

25. Section 29-70 of the GST Act sets out the requirements for a tax invoice.

CONSIDERATION

26.                  I have come to the conclusion that the applicants have not provided any creditable evidence to support their claim that the assessments are excessive. In particular the applicants have not shown that the actual substantive GST amount payable is less than appears on the assessments. The applicants have in my view not discharged the onus of proof which is imposed on them under the tax administration law[18].  The applicants have essentially produced statements of earnings which have not been verified by original records.

[18] Taxation Administration Act 1953, sub-section 14ZZK(b)(i).

27.                  The situation before me is not that dissimilar to the case of Naboulsi v FCT[19] where a tax driver had not discharged the burden of showing that a cash book truly reflected the takings or income of his tax business. Here, the applicants have produced a mass of documentation which purports to record various transactions. However there are no records which properly record payments made or particulars of supplies and acquisitions that are made.

[19](2000) 44 ATR 388.

28.                  The tenor of the evidence of Mr Huynh was that the statements of earnings are accurate documents. However, I make the observation that the statements of earnings which were produced by the applicants[20] do not on their face appear to be authentic. Many entries in the statement of earnings purport to record the takings as being “round” figures, eg, $3000[21], $3000[22], $3000[23], $3000[24], $1000[25], $1000[26], $2000[27], $1000[28]. At the hearing I remarked upon this pattern of entries to give the applicants the opportunity to explain these entries. I was not given any explanation of this pattern or any documents which would verify the correctness of such entries.

[20] Exhibits 1 and 2.

[21] Exhibit 2, p. 25.

[22] Exhibit 2, p. 27.

[23] Exhibit 2, p.41.

[24] Exhibit 2, p. 42.

[25] Exhibit 2, p. 43.

[26] Exhibit 2, p. 46.

[27] Exhibit 2, p. 47.

[28] Exhibit 2, p. 43.

29.                  I also comment that the applicants produced invoices which purport to record the daily takings for various taxi vehicles.  The invoices record that for cab 801 on various days the daily takings were exactly $90.70.  There are invoices which record takings for 7 October 2002, 8 October 2002, 11 October 2002, 12 October 2002, 16 October 2002, and 17 October 2002: on each day the takings are recorded to be $90.70.  This coincidental pattern was also not explained.  I cannot give these invoices any weight at all.

30.                  The amounts that the applicants claim to reflect the ‘correct’ GST payable are unsupported by any original records. The applicants, in my view, have not produced any creditable evidence to verify the figures advanced.

31.                  The applicants have not shown that that the actual purchases that have been made are greater than the purchases that appear in the assessments of the Commissioner. 

32. I have already referred to subsection 29-10(3) of the GST Act which provides that input tax credits will not be attributable to a tax period unless the taxpayer holds a tax invoice for the acquisition by the end of the tax period. The tax invoice is the cornerstone of the GST regime. A tax invoice is a document that substantiates a creditable acquisition[29]. 

[29] Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998, at 177.

33.                  I must say that I would have expected that the tax invoices for the purchase of fuel for the operation of the taxis would have been produced by the applicants: however, no tax invoices were produced by the applicants.

34.                  The input tax credits that have been claimed for drivers’ payments are unsupported by original records and, in particular, the total takings from which the drivers’ payments are derived are not verified by records outlining each operational taxi shift. There is no record of whom the driver is, what the hours of the shift are and what distance the taxi cab has travelled[30]. The failure by the applicants to put in place systems to record these items in my view warrants the imposition of a penalty by the Commissioner on the basis that the conduct of the applicants has been reckless.

[30] Taxation Ruling TR 96/11.

35. There is another, more fundamental, difficulty in respect of the claim for input tax credits, and that is, there appears to be no basis in law for claiming input tax credits for the drivers’ share of takings. The driver of each taxi is under a bailment arrangement and makes payment to the applicants as licensee for the use of the taxi supplied by the applicants. The applicants in fact make a supply not an acquisition. The drivers’ share of takings is not a creditable acquisition within s 11-5 of the GST Act which gives rise to an entitlement to claim input tax credits.

36. It is also clear that some of the acquisitions claimed were for a private purpose: eg, clothing, prescriptions, gifts, personal phone calls, furniture and private legal costs. Each of these items is certainly not a creditable acquisition within s 11-5 of the GST Act. This is because a creditable acquisition must be acquired for a “creditable purpose”, that is for the purpose of carrying out an enterprise: see s11-15 of the GST Act.

37.                  It is my conclusion that the methodology of the applicants in calculating the sales figures is misconceived. The applicants are liable for the GST on payments made to them by the drivers for bailment of the taxis.  There are no proper records of such payments before me. The applicants have no liability for the GST on the takings of the other drivers of their vehicles. In fact the drivers of each taxi vehicle are individually responsible for accounting for GST on their takings[31]. The applicants only have responsibility for GST on the takings on the taxi vehicle that they operate and there are no proper records of these takings.

[31] The Commissioner’s view is contained in the ‘Taxi Industry Issues Register’. Under ‘Who has to account for GST’ there is the statement ‘Each driver is personally responsible for accounting for GST on supplies and paying their net GST amount to the Tax Office each tax period.’

38. Moreover, the applicants as the bailor are not entitled to input tax credits on the drivers’ share of takings as the drivers’ share of takings is not a creditable acquisition within section 11-5 of the GST Act. The applicants can only claim input tax credits for creditable acquisitions: see s 11-1 of the GST Act.

39.               The objection of the taxpayers is that some of the drivers were on “set pay”. Having regard to the notice of objection (as well as the terms of the rental contracts) the comment that the drivers were on “set pay” meant that the drivers were required to pay the applicants a “set amount regardless of how much the drivers receive for the day”. However, there is no creditable evidence before me of which drivers were on this “set pay” arrangement.

40. I also mention that some of the drivers’ contracts have not been completed. For instance, the contract to one driver (A.Z.) has not been completed as to whether the particular arrangement was for a set fee or was a rental fee based on turnover [32]. That contract is also undated as well as not being signed by the parties. Nor does the ABN number of the applicants appear on the contract. Neither the driver nor the applicants gave any evidence as to the contractual arrangements for that contract.

[32] Exhibit 4

41.                 I also feel constrained to observe that the accounting figures for sales as originally advanced by the applicant in the business activity statements, and as varied by the tax agent of the applicants would reveal an enterprise that would not be viable.  It would simply not be viable to run an enterprise of five taxi vehicles for two years on the basis of these accounting figures. I do not accept the evidence of Mr. Huynh that he was making a loss on the enterprise. I also mention that Mr Huynh in evidence stated that he made a profit on the sale of his home, but there was no documentary evidence before me of the amount of that profit or whether that profit was applied to subsidise the enterprise.

42.                  I also mention that one ground of objection of the applicants is that a taxi vehicle was used for taking the applicants’ children to school: however, no records were produced to substantiate the amount of such travel.  In the absence of records I am unable to verify this ground of objection.

43.                  There is no creditable evidence, as contended by the applicants in their objection and in other documentation, that the applicants make ‘payments to drivers for earning assessable income’[33].  There are certainly no records which support this contention.  The contention of the applicants that they made “payments to drivers for earning assessable income” is also inconsistent with the objection of the applicants that any payments made to the drivers were for “expenses”.

[33] QT 2006/450 Document 2, T25, Folio 52-55

45.                  When these applications were first heard the applicants had not objected to the imposition of penalty.  After this matter was adjourned the applicants unsuccessfully sought the remission of penalty. While there was no formal application before this Tribunal to review the decision of the Commissioner on penalty, I make the observation that in my view the applicants have not advanced a case to disturb the assessment of penalty of 50% which was imposed where the shortfall results from recklessness[34]. I mention that in a self-assessment system it is important that there is proper adherence to the requirements of the GST Act.

[34] Taxation Administration Act 1953, Schedule 1, section 298-20.

DECISION

46.                  I affirm the decisions under review.

I certify that the 46 preceding paragraphs are a true copy of the reasons for the decision herein of Dr P McDermott RFD Senior Member

Signed:         ....................[Sgd]............................................................
  Research Associate

Date/s of Hearing  12 November 2007
Date of Decision  15 April 2008
Date of close of submissions    11 March 2008
Applicant  Mr Huynh and Ms Nguyen
Respondent  Mr K O’Seighin, departmental advocate