JKY Projects Pty Ltd and Commissioner of Taxation

[2004] AATA 874

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 874

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2003/51

TAXATION APPEALS DIVISION		)
Re		JKY PROJECTS PTY LTD

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member K L Beddoe

Date20 August 2004  

PlaceBrisbane

Decision The Tribunal affirms the decisions under review.

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

Senior Member

CATCHWORDS

TAXATION – income tax assessment – claims for outgoings disallowed – whether outgoings incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income – whether allowable deductions - unexecuted documents purporting to create an employee welfare fund - payments to the fund have no relationship to the deriving of assessable income or with carrying on business for the purpose of producing assessable income – decision affirmed

Income Tax Assessment Act 1977 ss 8, 226, 227

REASONS FOR DECISION

20 August 2004   Senior Member K L Beddoe          

1.      The applicant company sought review of two objection decisions whereby the respondent Commissioner disallowed claims for outgoings of $99,799 (year of income ended 30 June 1999) and $10,455 (year of income ended 30 June 2000).

2.      The applicant says that the outgoings were incurred in gaining or producing assessable income or were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and are general deductions in accordance with section 8–1 of the Income Tax Assessment Act 1977 (“the Act”).

3.      The applicant further contends that the claimed outgoings are not within the terms of section 8-1(2) of the Act because they are not outgoings:

(a)of capital or of a capital nature;

(b)of a private or domestic nature;

(c)incurred in gaining or producing exempt income.

4.      The applicant also objected against imposition of additional tax in the subject assessments. 

5.      At the hearing Mr Jocelyn King Ybarzabal represented the applicant company and Miss Ford appeared for the respondent.

6. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the T documents and further documents were tendered and marked as exhibits.  Oral evidence was given by Mr Ybarzabal who is the controlling mind of the company.

7.      The applicant’s return of income for the year ended 30 June 1999 claimed a deduction for “All other expenses” of $148,599. The company was assessed as having a “nil” taxable income in a notice dated 10 March 2000.

8. By a notice dated 30 July 2001, the respondent notified an amended taxable assessment with the previous loss figure being adjusted by a variation of $99,799 in the “Taxable Income”. Penalty Tax was also assessed but this was reduced by a further notice of amended assessment dated 12 February 2003 as a result of the objection decision which accepted that section 226Z of the Income Tax Assessment Act 1936 applied to the applicant’s circumstances. 

9.      In June 1999, the company (by Mr Ybarzabal) entered into an arrangement with an accountant, Mr Choy, to invest in an Employee Welfare Fund said to be administered by National Welfare Fund (New Zealand Ltd) and to be known as the “Ybarzabal Employee Welfare Fund” (“the Fund”) (T17).

10.     Document T18 purports to be a copy of a trust deed of the Fund settled by one “Steve Cox” with the trustee shown as “Joe King Ybarzabal” who, I am satisfied, is the same person as Jocelyn King Ybarzabal.

11.     Somewhat inconsistently the fund was named as the “Ybarzabal Welfare Fund” and the applicant company was named as employer. 

12.     The trust deed is apparently signed by “Joe King Ybarzabal” whose signature is not witnessed. It is not executed by the settlor nor is it acknowledged by the applicant as employer.  As to the terms of the Trust Deed, they are not before me – only the cover sheet and the incomplete schedule.

13.     The evidence on behalf of the applicant is that, in fact, the Fund was not set up and that the financier, said to be Global Finance Ltd, does not exist.  It follows that because there was no loan from Global Finance Ltd there was no contribution of $89,100 to the Fund.

14.     I accept that the applicant paid a fee of 12% of $89,100 that is $10,692 to some person, probably Mr Choy, for the benefit of the promoters of the employee welfare fund scheme.  It is apparent that the payment of the fee had nothing to do with the Fund and was paid for the entry into and the expected setting up of the Fund or as A Hong Choy and Company Pty Ltd said on the receipt for $10,692 being for “Advice re tax planning for Y2K Advisors”. 

15.     Although there was in fact no loan, the applicant made payments of interest on the loan. 

16.     In so far as it is asserted that a donation in the amount of the loan was made to the Caboolture Catholic Church Building Fund I am not satisfied that the applicant made any payment to that fund.

17.     I accept that Mr Ybarzabal (the only regular employee of the applicant in the scheme) made a claim on the “fund” for his contributions to a private health insurance fund in Australia (MBF) and that the applicant company reimbursed the “fund” for the amount of the claim.  In other words non-deductible private health insurance contributions were sought to be converted to general deductions of the company.

18.     It is apparent from Exhibit A that the respondent did have a policy of accepting that contributions by an employer to an employee welfare fund would be general deductions in terms of the private rulings exhibited.  It is not asserted that the respondent made a private ruling in the applicant’s favour.

19.     In June 2000, the applicant, through Mr Ybarzabal, purported to enter into a further arrangement with National Health and Aged Care Pty Ltd and paid that company $6,000 described on the receipt as “Management Setup Fee”.  Part of the arrangement was to borrow $50,000 from SR Reeves and Associates Pty Ltd which was to be invested in “Retirement Village Joint Venture 2000”. Again, the documents have not been executed and there is no basis in fact, upon which I can be satisfied there is any substance to the purported arrangements. 

Consideration

20.     While I accept that from the applicant’s point of view the documents were intended to have effect, they do not support the applicant’s contentions because there are only unexecuted documents which lead to non-existent entities central to the claim for general deductions.  There is no basis in fact to support the contentions of the applicant company.

21.     Assuming that notwithstanding the unexecuted documents the arrangements were such as to create an employee welfare fund, in the circumstances of this case,  it is not apparent as to why the payments to the fund have any relationship to the deriving of assessable income of the applicant.

22.     While I am uncertain as to the alleged membership of the Fund it appears, from the material before me, that the only benefit to be derived was to convert non-allowable private health insurance contributions by employees and perhaps other possible medical expenses from private outgoings of employees to outgoings of the company which could be claimed as general deductions.  If effective there would be a benefit for employees and a loss for the applicant.

23.     However, I am not satisfied that such an arrangement, even if it was established in substance, has anything to do with gaining or producing assessable income of the applicant.  Nor, am I satisfied, that it could have anything to do with carrying on the business for the purpose of producing assessable income on the circumstances of this case. 

24. The respondent accepted that section 226Z applied in the circumstances of this case. I see no reason to interfere with this conclusion. Nor do I see any reason to exercise the discretion in section 227 of the Income Tax Assessment Act 1936 in the applicant company’s favour.

25.     Being satisfied that the subject assessments are not excessive, the decisions under review will be affirmed. 

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member K L Beddoe

Signed:         Sarah Oliver
  Associate

Date of Hearing  15 December 2003
Date of Decision  20 August 2004
For the Applicant  Mr J Ybarzabal
Counsel for the Respondent     Ms E Ford
Solicitor for the Respondent     ATO Legal Practice