Jarvis and Commissioner of Taxation
[2016] AATA 99
•24 February 2016
Jarvis and Commissioner of Taxation (Taxation) [2016] AATA 99 (24 February 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2014/5984-5985
Re
Deborah Jarvis
FIRST APPLICANT
File Number(s)
2014/5979-5980
Re
Anthony Jarvis
SECOND APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 24 February 2016 Place Sydney Objection decisions affirmed.
.......................[sgd]..............................................
Deputy President S E Frost
CATCHWORDS
TAXATION AND REVENUE – income tax – deductions – interest expenses – factual circumstances unclear – burden of proof not discharged – objection decisions affirmed
LEGISLATION
Income Tax Assessment Act 1997, s 8-1(1)
Taxation Administration Act 1953, s 14ZZK
REASONS FOR DECISION
Deputy President S E Frost
24 February 2016
INTRODUCTION
The applicants, Mr and Mrs Jarvis, are attempting to claim deductions which were not included in their original returns for the 2010 and 2011 income years. They are trying to claim them now because their new tax agent told them they missed some deductions they might be entitled to.
The applicants asked the Commissioner to amend their assessments but he could not do that because the time limit for amendment had expired. The only course open to the applicants in those circumstances was to object against the original assessments. They did so, but in each case the Commissioner denied the deduction claims and disallowed the objections. The applicants then applied to the Tribunal for review of those objection decisions.
For the reasons that follow, I must affirm the objection decisions.
SUMMARY OF THE DEDUCTION CLAIMS
The claims are for interest incurred on three loan accounts held by the applicants.
Some of the borrowings date back to December 2003. Others are more recent, having been made in 2009, 2010 and 2011. In respect of each loan account the applicants continued to pay interest during the 2010 and 2011 income years. It is that interest that was charged to them during those years that they say is deductible.
THE MATERIAL BEFORE THE TRIBUNAL
Apart from the T documents (97 pages in respect of each applicant), there is little material before the Tribunal. There is a statutory declaration made by Mrs Jarvis on 30 April 2015 (Exhibit A1), but no written statement from her husband.
The applicants’ representative, Mr Groves, prepared a Statement of Facts, Issues and Contentions dated 20 October 2015, to which are appended Annexures A to H. The statement and its annexures were marked as Exhibit A2. There is also a four-page Agreement for Sale of Shares in a Corporation, dated 9 May 2005, to which I will refer shortly. The front page of that agreement is included in the T documents but the Commissioner had not seen the remaining three pages until Mr Groves produced the entire document to the Tribunal during the hearing. It was marked as Exhibit A3.
Neither applicant gave oral evidence at the hearing.
THE FACTS
It is difficult to make reliable findings of fact because of the paucity of material before me.
On the one hand, Exhibit A2 asserts that the applicants were directors of a company, Moonford Pty Ltd, that operated a business under the name Coastline Tree Services, and that Moonford Pty Ltd “merged” with a second company, Treecorp Pty Ltd, to form a partnership trading as Treecorp Solutions. The partnership activities are said to have included tree pruning and removal, stump grinding and removal, and land clearing. The statement does not fix any of those activities to a particular timeframe. Furthermore, the statement was prepared not by the applicants but by their representative Mr Groves.
On the other hand, Exhibit A1 states that Mrs Jarvis, rather than her company Moonford Pty Ltd, was a partner in Treecorp Solutions. Once again, there is no reference to the time period during which she claims to have been such a partner.
I was informed by Mr Gupta, the Commissioner’s representative, that the applicants had consistently asserted to the Commissioner that it was the applicants’ company, Moonford Pty Ltd, that was a partner in the partnership, not the applicants themselves as individuals. To that extent it seems that Mrs Jarvis’ statement may be incorrect. I do not criticise her for that; it is quite likely that she did not fully understand the structure under which the business was carried on. But it does make it difficult to make a reliable finding about who carried on the business. She did not attend the hearing, and so she was not available to clarify that question.
The second company mentioned in Exhibit A2, Treecorp Pty Ltd, is also something of a mystery. Perhaps it is in fact Treecorp Solutions Pty Ltd, originally owned by a Mr and Mrs Murphy, who sold their shares to Mr and Mrs Jarvis on 9 May 2005: Exhibit A3 refers. It is not clear where Treecorp Solutions Pty Ltd fits into the scheme of things; neither Mr nor Mrs Murphy gave evidence in these proceedings.
In any event, Mrs Jarvis states in her statutory declaration that in December 2003, the business (trading as Treecorp Solutions) purchased a backhoe. She says that the purchase was financed by her and her husband by drawing down money from their home loan. It seems (although there is no purchase documentation) that the purchase price of the backhoe was around $30,000.[1]
[1] Exhibit A2, paragraph 5.
Mrs Jarvis also states:
On or about 24 September 2004, my husband & I bought out our partners’ share of the business for $50,000.00. We became aware that the business owed debts of $95,000. Accordingly, we applied for further finance: for Employee redundancy payments, $49,000 and Bank Overdraft, $45,000.
In addition, my husband & I made smaller payments to pay Treecorp’s creditors, including its taxation bills that Treecorp could not pay at the time. It seemed to make sense to use our excess money in our home loan facility, to pay these debts.[2]
[2] Exhibit A1.
Mr Groves has attempted to identify some of these movements of money by reference to the various Annexures to Exhibit A2. That attempt is not entirely satisfactory, and there are many questions left unanswered, including how to reconcile the claim that Mr and Mrs Jarvis bought out their “partners’ share of the business for $50,000.00”[3] in September 2004 with the fact that the share sale agreement is dated May 2005.
[3] Ibid.
Mr Groves’ statement also refers to some borrowings that are not referred to by Mrs Jarvis in her statutory declaration, including an amount of $50,000 to finance a new business, trading as MX Street Wear.[4]
[4] Exhibit A2, paragraph 25.
ARE THE DEDUCTIONS ALLOWABLE?
Deductions are allowed against assessable income by s 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). That subsection reads as follows:
8-1 General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Because of the uncertainty around the facts, it is not possible for me to find that any of the deductions are allowable.
The likelihood is that the business trading as Treecorp Solutions was carried on, first, by a partnership of two companies, Moonford Pty Ltd and Treecorp Pty Ltd, and then, from May 2005, by Moonford Pty Ltd alone. Contrary to Mrs Jarvis’ statement in her statutory declaration, it is doubtful (although admittedly possible) that the business was at any time carried on by Mr and Mrs Jarvis individually.
Given the likelihood that the business was carried on by a partnership of two companies and then by a single company (Moonford Pty Ltd), any interest paid on money borrowed by Mr and Mrs Jarvis would not have been incurred in gaining or producing their assessable income (paragraph (a) of s 8-1(1)). Instead, it would have been incurred in gaining or producing the assessable income of another entity – either the partnership (of two companies, not four individuals) or, later, the company by itself.
Nor would it have been necessarily incurred in carrying on a business conducted by Mr and Mrs Jarvis, and so paragraph (b) of s 8-1(1) also could not apply.
Alternatively, it may be that the money was borrowed by Mr and Mrs Jarvis and then lent to their company for the purpose of deriving assessable income from the company by way of interest. Once again, however, the state of the evidence is such that I could not be satisfied that that was in fact the arrangement. No loan agreement has been produced, and the tax returns as lodged by Mr and Mrs Jarvis are not consistent with such an arrangement. If the money was truly lent to the partnership of the two companies then it should not have been difficult to have Mr and Mrs Murphy give evidence to that effect.
More recently, with the assistance of Mr Groves, Mr and Mrs Jarvis have amended their PAYG summaries to reduce the salary and wages they received, and to characterise the amount of the reduction as interest received from Moonford Pty Ltd. Of course, creating a document to that effect does not make it so. I am not satisfied on the basis of that documentation that they did in fact lend money to the company, or that they derived interest income from the company.
CONCLUSION
The applicants have failed to discharge the burden of proof they bear under s 14ZZK of the Taxation Administration Act 1953. The objection decisions must be affirmed.
I certify that the preceding 25 (twenty -five) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost ..............................[sgd]......................................
Associate
Dated 24 February 2016
Date(s) of hearing 28 January 2016 Advocate for the Applicant W Groves, Tax Agent Solicitors for the Respondent ATO Review and Dispute Resolution Group
Key Legal Topics
Areas of Law
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Tax Law
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Statutory Interpretation
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Administrative Law
Legal Concepts
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Statutory Construction
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Judicial Review
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