John Sharratt and Commissioner of Taxation
[2015] AATA 293
•1 May 2015
[2015] AATA 293
Division TAXATION APPEALS DIVISION File Number(s)
2014/3797 & 2014/3798
Re
John Sharratt
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member CR Walsh
Date 1 May 2015 Place Perth Subject to what is stated in paragraphs 120 and 121 of the following Reasons for Decision, the Tribunal affirms the decision under review.
...............(Sgd).........................................................
Senior Member CR Walsh
CATCHWORDS
INCOME TAX – GOODS AND SERVICES TAX – PENALTIES - whether proceeds allegedly from the sale of an unlicensed bus, furniture imported from the UK and discarded, repaired and on-sold curb side furniture and gambling winnings constitute taxable supplies made by the Applicant in the course of carrying on his small scale building works business and/or assessable income of the Applicant – Applicant’s explanation of source of proceeds not credible or corroborated by objective evidence – shortfall penalty for “intentional disregard of a tax law” correctly imposed – no grounds for remission of shortfall penalties - objection decision affirmed
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 – Pt 2-5
Taxation Administration Act 1953 – s 14ZZK(b)(i) – s 284-20 – s 284-75(1) – s 284-80 - s 284-85 – s 284-90(1) - s 284-220 – s 284-225(1) – s 284-225(1)(c) – s 298-20
CASES
Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74
Davis v Commissioner of Taxation; Sirise Pty Ltd v Commissioner of Taxation [2000] FCA 44
Dixon v Federal Commissioner of Taxation [2008] FCAFC 167; (2008) 167 FCR 287
Harland as Trustee for the PCS Global Discretionary Trust v Commissioner of Taxation [2013] AATA 930
Kelly v Commissioner of Taxation [2012] FCA 423; (2012) 88 ATR 409
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation [1991] FCA 276; 91 ATC 4546
Pascoe v Commissioner of Taxation (1956) 30 ALJ 402
Sgardelis v Federal Commissioner of Taxation [2007] AATA 1499; 2007 ATC 2335
Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63
TSC 2000 Pty Ltd v Federal Commissioner of Taxation [2007] AATA 1629; 2007 ATC 2409
SECONDARY MATERIALS
Commissioner’s Practice Statement PSLA 2012/5
REASONS FOR DECISION
Senior Member CR Walsh
1 May 2015
INTRODUCTION
During the year ended 30 June 2012, Mr Sharratt carried on a business of providing small scale building work under the business name “John the Builder”.
In the 2012 year, Mr Sharratt made deposits, together totalling $235,329, into accounts with the following four financial institutions, which were held either in his own name, or jointly with his wife, Mrs Sharratt:
· United Community Credit Union (Small Biz) account;
· Commonwealth Bank of Australia (Complete Access) account;
· Westpac (Platinum Card) account; and
· Westpac (Rocket Deposit) account.
Mr Sharratt seeks a review of the Commissioner’s decision, dated 16 May 2014 (Objection Decision), which disallowed Mr Sharratt’s objection, dated 19 February 2014 (Objection) against the following assessments issued to him by the Commissioner in relation to the 2011/2012 financial year:
· Notice of assessments of net amount, dated 28 January 2014, for each of the tax periods 1 July 2011 to 30 September 2011, 1 October 2011 to 31 December 2011, 1 January 2012 to 32 March 2012 and 1 April 2012 to 30 June 2012, for the amount of $10,446 (2012 GST Assessment);
· Notice of assessments of shortfall penalty, dated 31 January 2014, for each of the tax periods 1 July 2011 to 30 September 2011, 1 October 2011 to 31 December 2011, 1 January 2012 to 32 March 2012 and 1 April 2012 to 30 June 2012, for the amount of $9,026.55 (2012 GST Penalty Assessment).
· Notice of amended assessment for the year ended 30 June 2012, dated 13 February 2014, which adjusted Mr Sharratt’s taxable income for the 2012 year from $0 to $116,201 and resulted in a shortfall amount of $33,099.35 (2012 Amended Income Tax Assessment); and
· Notice of assessment of shortfall penalty, also dated 13 February 2014, for the amount of $29,789.40 (2012 Income Tax Penalty Assessment).
The above assessments were issued to Mr Sharratt by the Commissioner following closer analysis of the above deposits during an audit of Mr Sharratt’s Business Activity Statements (BASs) for the 2011/2012 financial year and his 2012 income tax return.
The Commissioner’s position is that each of the deposits made by Mr Sharratt in the 2011/2012 financial year represented undisclosed “taxable supplies” made by Mr Sharratt in the course of carrying on his business of small scale building work and/or “assessable (business) income” derived by Mr Sharratt, with the consequence that Mr Sharratt is liable to penalties on the relevant shortfall amounts.
Subject to certain concessions which have been made by Mr Sharratt (refer to paragraph 23 below), Mr Sharratt disputes this.
FACTUAL & PROCEDURAL BACKGROUND
Mr Sharratt’s business
Mr Sharratt has been registered for GST under Part 2-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) since 15 January 2008.
During the 2011/2012 financial year, Mr Sharratt carried on the business of small scale building work under the business name “John the Builder”. Most of his work was provided to private individuals (i.e. rather than to other businesses) and related mainly to private dwellings. Mr Sharratt’s work involved the provision of Mr Sharratt’s own labour and, in some instances, required the hire of equipment and the provision of some materials. Mr Sharratt describes his main business activity, in his 2012 income tax return, as “other residential building construction”.
2011/2012 invoices
Mr Sharratt issued the following invoices, totalling $94,704, to clients of his “John the Builder” business during the 2011/2012 financial year:
Invoice No.
Customer/Payer
Amount
220711
J Meluman
$4,000
110811
L Godfey
$3,135
150811
Jeff
$3,520
220811
J Meluman
$7,700
240811
L Godfey
$3,124
140811
Mark
$10,423
260911
J Melumen
$4,355
221011
D Gibbs
$4,961
41111
Mr & Mrs Craigie
$11,000
171111
J Oliver
$2,041
81211
Mr & Mrs Craigie
$11,000
301211
Mr & Mrs Craigie
$4,000
40212
Ref: XX The Esplanade Mt Pleasant
$7,500
240212
Ref: XX The Esplanade Mt Pleasant
$8,425
190312
Leseur Investments Pty Ltd
$825
30412
L & P Godfrey
$1,650
260412
Mr & Mrs Craigie
$1,600
260512
Dave
$5,445
Total
$94,704
Most of the above invoices can be matched to deposits made to either the United Community Credit Union account or the Westpac Rocket Deposit account, as the statements issued by those financial institutions, in some cases, contain notations indicating the source of the deposit.
2011/2012 BASs
Mr Sharratt lodged paper (as distinct from electronic) BASs, each signed by him, disclosing gross sales totalling $104,740 (GST inclusive) from his small scale building work business for the quarterly tax periods ended 30 September 2011, 31 December 2011, 31 March 2012 and 30 June 2012, as follows.
Quarterly Tax Period Ended Date Lodged Label G1 - Sales 30 September 2011 4 November 2011 $46,782 31 December 2011 1 March 2012 $36,676 31 March 2012 4 May 2012 $16,750 30 June 2012 10 October 2012 $4,532 $104,740
Each of the BASs was expressly stated to be lodged on a “cash” accounting basis. There is no record of Mr Sharratt ever having lodged his BASs on an “accruals” basis.
2012 Income Tax Return
On 18 October 2012, Mr Sharratt’s tax agent lodged an income tax return for the year ended 30 June 2012, on his behalf, disclosing the following income and deductions:
Gross Interest
$21
Total Business Income
$76,934[1]
Interest expense
-$811
Depreciation expense
-$7,445
Total motor vehicle expense
-$6,850
All other expenses
-$60,559
-$75,665
Net Income from business
$1,269
Net rent
-$7,702
Other income
$108
-$6,304
Less: Cost of managing tax affairs
-$208
Tax Loss
-$6,512
[1] This amount is presumably GST exclusive (i.e. equivalent to $84,627 GST inclusive).
2012 Income Tax Assessment
On 26 October 2012, the Commissioner issued Mr Sharratt with an income tax assessment for the 2012 year which assessed his taxable income as “nil” (i.e. based on his 2012 income tax return).
Interim Audit Report
On 23 July 2013, the Commissioner wrote to Mr Sharratt advising him that he intended to audit Mr Sharratt’s BASs for the 2011/2012 financial year and his 2012 income tax return.
On 13 August 2013, the Commissioner conducted an audit interview at the premises of Mr Sharratt’s tax agent and collected the records used to prepare Mr Sharratt’s 2011/2012 BASs and his 2012 income tax return.
On 18 November 2013, the Commissioner sent Mr Sharratt an “Interim Audit Report” advising Mr Sharratt of his conclusion that Mr Sharratt had underestimated the value of his taxable supplies and/or assessable (business) income for the 2011/2012 financial year and that adjustments would be made to Mr Sharratt’s income tax and GST net amount assessments to reflect this (Interim Audit Report). More specifically, in the Interim Audit Report the Commissioner found that Mr Sharratt’s deposits in the 2011/2012 financial year (totalling $235,329) represented taxable supplies made and/or assessable (business) income derived by Mr Sharratt in that year.
Mr Sharratt’s Response to Interim Audit Report
By letter dated 28 November 2013, Mr Sharratt’s wife responded to the Interim Audit Report on Mr Sharratt’s behalf (28 November 2013 Letter).
The 28 November 2013 Letter provided explanations for several deposits (totalling $15,717) and a deposit (of $1500), made on 5 June 2012, to the Westpac Platinum Card account.
On 23 January 2014, the Commissioner issued Mr Sharratt with a final audit report for the 2011/2012 financial year. The Commissioner accepted that the deposits (totalling $15,717) were not income and, consequently, he did not subsequently assess Mr Sharratt on that amount.
The deposit of $1,500, made on 5 June 2012, to the Westpac Platinum Card account was claimed by Mrs Sharratt, in the 28 November 2013 Letter, to have been sourced from a transfer made out of the Westpac Rocked Deposit account. That is, according to the 28 November 2013 Letter, an amount of $1,500 was transferred from the Westpac Rocket Deposit account, via an internet online transfer, on 5 June 2012.
Initially, the Commissioner did not accept this explanation. However, following further analysis of Mr Sharratt’s banks statements, the Commissioner now accepts that this was the case and that this $1,500 amount does not represent taxable supplies made and/or assessable income derived by Mr Sharratt. Consequently, the Commissioner concedes that an adjustment to the 2012 GST Assessment, in relation to the quarter ended 30 June 2012, is necessary to reflect this. The Commissioner also concedes that an adjustment is required to the corresponding penalty assessment for that quarter. This is addressed in paragraphs 120 and 121 below.
Conceded Deposits
The 28 November 2013 Letter also contained an admission by Mrs Sharratt, on Mr Sharratt’s behalf, that:
· all the deposits made to the United Credit Union account (totalling $90,589); and
· various deposits made to the joint Westpac Rocket Deposit account (totalling $39,923);
,together totalling $130,512, all represented proceeds from “taxable supplies” made by Mr Sharratt in the course of him carrying on his small scale building work business (Conceded Deposits).
Disputed Deposits
However, in the 28 November 2013 Letter Mrs Sharratt claimed, on Mr Sharratt’s behalf, that each of the remaining deposits (Disputed Deposits) was a:
general cash deposit and not income for a job from John the Builder. [Emphasis added]
In the 28 November 2013 Letter, the source of the Disputed Deposits was claimed to be:
(i) proceeds from the sale of a car for $60,000;
(ii)unquantified proceeds from sale of discarded furniture found by Mr Sharratt by the roadside, repaired by him and on-sold; and
(iii) Mr Sharratt’s unquantified winnings from gambling.
No attempt was made in the 28 November 2013 Letter to specifically identify particular deposits derived from any of these sources or, in the case of the roadside furniture and gambling activities, to quantify these amounts.
2012 GST Assessment
The Commissioner did not accept Mr Sharratt’s explanations in respect of the source of the Disputed Deposits contained in the 28 November 2013 Letter.
Consequently, on 28 January 2014, the Commissioner issued Mr Sharratt with the 2012 GST Assessment (for the amount of $10,446).
2012 GST Penalty Assessment
Further, on 31 January 2014, the Commissioner issued Mr Sharratt with the 2012 GST Penalty Assessment (for the amount of $9,026.55).
The GST Penalty Assessment was made pursuant to s 284-85 of Schedule 1 to the TAA on the basis that Mr Sharratt’s shortfalls arose as a result of his “intentional disregard of a taxation law”.
The GST Penalty Assessment, in so far as it relates to the tax periods ended 31 December 2011, 31 March 2012 and 30 June 2012, was also made on the basis that when Mr Sharratt lodged his respective BASs for those periods he had, in each case, previously lodged a BAS or BASs that contained shortfalls resulting from “intentional disregard of a taxation law”.
2012 Amended Income Tax Assessment
On 13 February 2014, the Commissioner issued Mr Sharratt with the 2012 Amended Income Tax Assessment which adjusted Mr Sharratt’s taxable income for the 2012 year from $0 to $116,201 and resulted in a shortfall amount of $33,099.35.
2012 Income Tax Penalty Assessment
Also on 13 February 2014 the Commissioner issued Mr Sharratt with the 2012 Income Tax Penalty Assessment for the amount of $29,789.40.
This income tax penalty amount is 90% of the relevant shortfall (i.e. the total of the primary tax, medicare levy and temporary flood levy payable under the 2012 Amended Income Tax Assessment) and was assessed by the Commissioner on the basis that:
· the shortfall of $33,099.35 resulted from Mr Sharratt’s “intentional disregard of a taxation law” - thereby attracting a base rate of 75% of the shortfall; and
· at the time Mr Sharratt lodged his income tax return for the 2012 year he had previously lodged BASs that also contained shortfalls resulting from “intentional disregard of a taxation law”- thereby attracting an additional 20% uplift pursuant to s 284-220 of Schedule 1 to the TAA.
Objection Decision
A stated in the “Introduction”, on 13 February 2014, Mr Sharratt objected to the 2012 GST Assessment, the GST Penalty Assessment the 2012 Amended Income Tax Assessment and the 2012 Income Tax Penalty Assessment.
In the Objection, Mr Sharratt denied that the Disputed Deposits represented undeclared taxable supplies and/or assessable income. Mr Sharratt also asserted that the $39,923 in undeclared deposits made to the Westpac Rocket Deposit account, that were subsequently conceded by Mr Sharratt (i.e. in the 28 November 2013 Letter) as representing “taxable supplies”, were mistakenly omitted from his relevant BASs by Mrs Sharratt, who he claims prepared the relevant BASs on his behalf. Mr Sharratt claimed that Mrs Sharratt believed that all business receipts were to be deposited into the United Credit Union account, which was said to have been intended to operate as the sole business account, and that Mrs Sharratt was unaware that Mr Sharratt had deposited the majority of the additional amount of $39,923 into the Westpac Rocket Deposit account. On that basis, Mr Sharratt contends that the penalty should be remitted to “nil”.
On 16 May 2014, the Commissioner issued the Objection Decision, disallowing the Objection in full.
Application for Review
On 20 July 2014, Mr Sharratt applied to the Tribunal for a review of the Objection Decision.
In an email (with attachments) from Mr Sharratt to the Commissioner, dated 21 October 2014 (21 October 2014 Email), Mr Sharratt contended that the Disputed Deposits comprised:
(i)“exactly” $22,000 in cash from the sale of an unlicensed bus to a person call Tony Jessop of Madora Bay, Western Australia, on 12 January 2012;
(ii)“approximately” $14,000 in cash from the sale of furniture in the year ended 30 June 2012 that he had “shipped over from the UK”;
(iii)“approximately” $12,000 in cash from sale proceeds from sale of discarded furniture found by Mr Sharratt by the roadside and repaired by him (and on-sold); and
(iv)“approximately” $40,000 in cash representing his winnings from gambling at the Perth Crown Casino and at the TAB (attaching signed “Statutory Declarations” by two people who claim to have seen Mr Sharratt at the Perth Crown Casino on a number of occasions).
In the 21 October 2014 Email, Mr Sharratt further contended that it was not possible for him to have received proceeds of $219,612 from taxable supplies made during the 2012 year, as claimed by the Commissioner, because he charged only $40 per hour (plus GST) for his labour and because he worked, on average, only 8 hours per day, 4 days per week. Mr Sharratt also contended that he had 4 weeks holiday per year, did not work on public holidays or weekends and spent 84 days in the year doing volunteer work for the Mandurah State Emergency Service (SES).
Additional Invoiced Amounts/Deposits not Included in Commissioner’s calculation
Further analysis by the Commissioner of Mr Sharratt’s invoices for work done in the 2011/2012 financial year shows that the following two invoices relate to cash deposits made to the United Community Credit Union account that have, in error, not been assessed by the Commissioner:
Deposit to United Community Credit Union account
Invoice No.
Client
Amount
Date
Amount
301211
Mr & Mrs Craigie
$4,000
30/12/2012
$4,000
260412
Mr & Mrs Craigie
$1,600
26/04/2012
$1,600
In addition, the following invoice cannot be matched to any deposit made by Mr Sharratt to any known account of his in the 2011/2012 financial year and has also, in error, not been assessed by the Commissioner:
Invoice No.
Client
Amount
190312
Leseur Investments Pty Ltd
$825
ISSUES
The ultimate issue for determination is whether Mr Sharratt has discharged his burden of proving, on the balance of probabilities, that each of the 2012 GST Assessment, the GST Penalty Assessment, the 2012 Amended Income Tax Assessment and the 2012 Income Tax Penalty Assessment is excessive: s 14ZZK(b)(i) of the TAA.
In deciding this, the Tribunal must consider:
·Whether the Disputed Deposits represent proceeds from taxable supplies and/or assessable income derived by Mr Sharratt in the 2011/2102 financial year: refer to paragraphs 45 to 102 below;
·If the Disputed Deposits did represent, in part, proceeds from the sale of any of the items referred to in paragraph 38 above, whether they were proceeds from taxable supplies and/or assessable income derived by Mr Sharratt in the 2011/2012 financial year in any event: refer to paragraphs 45 to 102 below;
·Whether the penalties imposed on Mr Sharratt by the Commissioner are correct and whether those penalties should be remitted in whole or in part: refer to paragraphs 103 to 110 and 113 to 116 below;
·Whether the Commissioner correctly applied s 284-220 of Schedule 1 to the TAA in increasing the relevant penalties in respect of shortfalls arising in relation to Mr Sharratt’s BASs for the tax periods ended 31 December 2011, 31 March 2012 or 30 June 2012 or in relation to his income tax return for the 2012 year: refer to paragraphs 111 and 112 below; and
·Whether all or some part of the above shortfalls attributable to the omission of the $39,923 in the Conceded Deposits made to the Westpac Rocket Deposit account resulted from Mr Sharratt’s “intentional disregard of a taxation law”: refer to paragraphs 117 to 119 below.
ANALYSIS
Proceeds from the sale of unlicensed bus ($22,000)
In the 28 November 2013 Letter, Mr Sharratt attributed $60,000 of the Disputed Deposits to the sale of a motor vehicle (i.e. a Ford Focus turbo). However, as the documentary evidence clearly shows, the sale of that vehicle did not occur until July 2012. As such, the proceeds from the sale of the motor vehicle (actually only $49,500) were not received by Mr Sharratt until after the end of the 2011/2012 financial year and so could not have been the source of any of the Disputed Deposits. This means that whatever the true source of the $60,000, wrongly attributed to the sale of the car, Mr Sharratt was either unaware of it or chose not to disclose that information. In either event, this casts doubt on the credibility of Mr Sharratt and his explanation of the source of this deposited amount.
In the 21 October 2014 Email, for the first time, Mr Sharratt attributed some $36,000 of the Disputed Deposits to proceeds from the sale of an unlicensed bus ($22,000) and imported furniture ($14,000). These are large sums of money attributable to a small number (apparently only 2) of unusual transactions that are claimed to have occurred, at most, only 2 years before the Commissioner’s Interim Audit Report was given to Mr Sharratt. In these circumstances, it appears unusual for Mr Sharratt to forget about these transactions in November 2013 but suddenly recall them again in October 2014.
Attached to the 21 October 2014 Email was a copy document signed by Mr Sharratt to Mr Jessop that purported to evidence the sale of the bus by Mr Sharratt to Mr Jessop for $22,000 on 1 January 2012.
In a questionnaire from the Commissioner’s representative, dated 1 December 2014 (December 2014 Questionnaire), Mr Sharratt was asked why the bus had not been previously mentioned to either the ATO’s auditor, his accountant, the objections officer or at the Tribunal conference (on 1 October 2014). In his response, dated 21 December 2014 (December 2014 Response), Mr Sharratt did not directly answer the question, although he implied that he forgot about the bus and that it was only the chance sighting of some old photos of the bus that made him remember.
In the December 2014 Questionnaire, Mr Sharratt was also asked to specify where the bus was kept while it was in his possession. His response was “at a friend’s house”.
In a subsequent questionnaire from the Commissioner’s representative, dated 9 January 2015 (January 2015 Questionnaire), Mr Sharratt was asked to describe the bus and if he could provide photos of it.
On 15 February 2015, in his response to the January 2015 Questionnaire (February 2015 Response), Mr Sharratt supplied pictures of Mr Jessop’s bus.
On 11 March 2015, a summons was issued, at the Commissioner’s request, for Mr Jessop to appear at the hearing of this matter. The Commissioner’s representative was advised by his process server that a copy of the summons had been left at Mr Jessop’s stated address with a male person who agreed to give it to Mr Jessop when he returned.
On the afternoon of 11 March 2015, the Commissioner’s representative received a telephone call from a male person who identified himself as “Tony Jessop”. This person advised the Commissioner’s representative that although he had purchased an ex TransPerth bus and had “done it up” he had not purchased it from Mr Sharratt and that the document he had signed in that regard was false.
On 17 March 2015, the Commissioner’s representative sent Mr Sharratt an email advising him of what Mr Jessop had told him on the phone on 11 March 2015 and asked Mr Sharratt whether, in the circumstances, he still intended to testify that he had sold a bus. Later that day, the Commissioner’s representative received an email from Mr Sharratt (a copy of which was tendered at the hearing as Exhibit R3) advising that he now “withdrew” his “allegation about the bus”. Mr Sharratt confirmed this to the Tribunal at the hearing of this application on 18 March 2015.
It is unclear precisely what the implications of this “withdrawal” are in relation to Mr Sharratt’s position. There are three possible interpretations, either:
(i)Mr Sharratt is conceding that the source of $22,000 of the Disputed Deposits, previously attributed to the sale of the bus, was in fact assessable income;
(ii) the source of $22,000 of the Disputed Deposits is simply unexplained; or
(iii)he no longer claims the previously alleged proceeds from the sale of the bus as a source of the Disputed Deposits but says that the remaining other nominated sources of those deposits (i.e. gambling and sale of furniture) are the source of the whole of the Disputed Deposits. If accepted, this would mean that amounts previously attributed to gambling winnings and proceeds from the sale of furniture were, in total, greater, by a corresponding amount, than the amounts previously nominated.
As contended by the Commissioner, although the third of these three possibilities is least damaging to Mr Sharratt’s position, it still presents, very obvious and serious implications for Mr Sharratt’s general credibility and, given the lack of documentary or other objective corroborating evidence to support the existence and quantum of these other alleged sources, Mr Sharratt’s case largely depends on that credibility. As submitted by the Commissioner, the recanting of the sale of bus explanation is all the more damaging to Mr Sharratt’s credibility given the lengths he previously went to defend that story.
Proceeds from the sale of UK imported antique furniture ($14,000)
As stated above, in the 21 October 2014 Email, Mr Sharratt claimed that the Disputed Deposits include approximately $14,000 in cash from the sale of antique furniture in the 2011/2012 financial year that Mr Sharratt imported from the UK.
As with the alleged proceeds from the sale of the bus (discussed above), this item was not raised by Mr Sharratt prior to being mentioned briefly at the Tribunal Conference (on 1 October 2014). Mr Sharratt did not mention the sale of the UK imported furniture to the ATO auditor, his accountant or the ATO objections officer, despite it being a substantial amount, the furniture having allegedly been sold in a single transaction (see paragraph 61 below) and that transaction having occurred less than 2 years previously. This raises questions about the credibility of Mr Sharratt’s explanation of the source of this Disputed Deposit amount and about his credibility more generally.
In the December 2014 Questionnaire, the Commissioner’s representative asked Mr Sharratt why the alleged sale of the UK imported antique furniture had not been raised by him previously. No response to this question was provided prior to the hearing.
At the hearing, Mr Sharratt was again asked to explain his failure to mention any proceeds from the sale of UK imported antique furniture earlier. Mr Sharratt’s response was that he considered the sale of these items to be a “personal matter” because the furniture had been his “personal use” furniture. It was put to Mr Sharratt that this did not ring true because previously he had been happy to attribute the Disputed Deposits to the sales of his personal motor vehicle. He did not respond to that.
In the December 2014 Questionnaire, Mr Sharratt was also asked:
· to describe the antique furniture – including details of individual items sold, how much they were purchased for and/or why they were valuable;
· how much was each of the major individual items sold for? - i.e. to describe major items and what they were sold for;
· how he was paid for each item? – i.e. cash, cheque, internet transfer;
· when did each of these sales took place?;
· how he could be sure that each of these sales happened during the year ended 30 June 2012 - or that payment was received in that year?;
· to whom were the items sold?; and
· identify any cash deposits (from the attached list) that the Commissioner has treated as assessable income that he says comprises proceeds from the sale of this furniture.
In the December 2014 Response, all Mr Sharratt said was that:
· the furniture consisted of “antiques pine furniture”;
· “It was sold as a job lot” but, seemingly inconsistently, “to friends and friends of friends”;
· he does not remember the date of the sale;
· he knows that the sale happened in the 2011/2012 financial year because there is no other explanation for the Disputed Deposits; and
· he is unable to specifically link these proceeds with any of the Disputed Deposits.
In the January 2015 Questionnaire, the Commissioner’s representative pointed out the apparent inconsistency in his answers to the question seeking a description of the major items of antique furniture sold and what they were sold for – i.e. that they were all sold together in the one transaction to the same person “as a job lot” but that they were also sold to “friends and friends of friends”.
In the January 2015 Response, Mr Sharratt stated that all of the antique UK imported furniture was sold to one person but that he did not personally know this person. Mr Sharratt also said that the 3 most valuable items sold were an antique pine dresser, an antique pine bedroom suite and an antique table and chairs.
At the hearing, Mr Sharratt advised the Tribunal that he did not advertise the sale of the antique furniture but, rather sold it by “word of mouth”, it was a “cash” transaction and that he did not provide a receipt to the purchaser of the furniture. At the hearing, the Commissioner’s representative again asked Mr Sharratt how he can be sure that the sale of the antique imported furniture occurred during the 2011/2012 financial year if he cannot remember, even approximately, the date of the sale. Although initially denying any inconsistency in his position in that regard, Mr Sharratt did say that “he thought it was after Christmas”. Further, at the hearing, Mr Sharratt undertook to obtain some verification for the date of sale and the name of the person who allegedly purchased the imported antique furniture. However, he did not.
Instead, in a letter dated 8 April 2015 (which letter was provided in response to the Respondent’s Submissions, dated 18 December 2014), Mr Sharratt simply states:
·I can not (sic) find the address of the person that I sold my furniture to but I have looked through old photos and found one that show part of the furniture that was in our bedroom in the UK.
Even if Mr Sharratt were able to objectively establish that the sale of this furniture in fact took place and that the $14,000 was received by him (which he cannot), there is still no evidence directly linking any such proceeds to any of the Disputed Deposits.
Proceeds from the sale of furniture found by the roadside, repaired and on-sold ($12,000)
In the 28 November 2013 Letter, Mr Sharratt also attributed some of the Disputed Deposits to proceeds from the sale of furniture he allegedly found by the roadside, repaired and then on-sold. However, in the 28 November 2013 Letter, Mr Sharratt did not quantify, even approximately, these proceeds.
Despite this, in the 21 October 2014 Email, Mr Sharratt was able to state, with some degree of certainty, that these proceeds totalled approximately $12,000. The source of the information used to ascertain that amount was not, and has not subsequently been, provided. As with Mr Sharratt’s explanations for the source of the other Disputed Deposits, Mr Sharratt’s explanation concerning the source of this $12,000 is completely uncorroborated. This raises questions about the credibility of Mr Sharratt’s explanation and his credibility more generally.
In the December 2014 Questionnaire, Mr Sharratt was asked by the Commissioner’s representative (at questions 31-37) to give details of major items sold including: description; how much sold for; when sold; how did he know that these were sold during the year ended 30 June 2012; to whom were they sold; how did he advertise; and what was done with the money - for example what accounts were these winnings deposited into or what were they used to purchase.
In the December 2014 Response, Mr Sharratt said that he sold “various items of furniture” including “painted pine cabinets, real timber wardrobes, tables and chairs, tea chests and ottomans” and that the items in question were sold “on average” for amounts varying “from $200 to $1,200 depending on furniture and what was involved in the repairs”.
At the hearing, Mr Sharratt he said that he mainly sold these items by way of garage sales that he held approximately every 3 weeks and advertised by placing a sign outside his house on the roadside. Mr Sharratt was unable to link any particular deposit to the proceeds of any of these alleged sales.
In the January 2015 Questionnaire, Mr Sharratt was asked by the Commissioner’s representative to give “a few examples of the most profitable items you sold – i.e. a description of each item and what work you put into it – i.e. in terms of time and money, and how much you sold each such item for?”
In the January 2015 Response, Mr Sharratt stated that he could not “remember exact as it’s a hobby I enjoy doing so time and money does not come into it.”
As submitted by the Commissioner, what emerges from this is that Mr Sharratt cannot say how he has arrived at the figure of $12,000 for the alleged proceeds of sale of this furniture and this represents an admission by Mr Sharratt that he cannot be certain that the actual sales of that furniture were not substantially less than $12,000.
At the hearing, when pressed about this, all Mr Sharratt could say was that he must have obtained that amount or more because there was no other possible source for the funds.
It was also put to Mr Sharratt that even if he in fact obtained $12,000 from the sale of abandoned and repaired furniture, as claimed, he could not be sure he obtained all or even part of that amount during the year ended 30 June 2012. His response to this was that he knew it must have all been received during the 2011/2012 financial year because he recalls that he did not start collecting and repairing furniture until the 2011 calendar year.
By his own admission, Mr Sharratt has no way of knowing how much he actually obtained for the sale of abandoned and repaired furniture and admits that the figure of $12,000 is no more than a guess. Mr Sharratt’s explanation of the source of these proceeds is completely uncorroborated. Mr Sharratt is essentially asking the Tribunal to trust his memory and his general credibility, despite his admittedly false story regarding the bus and his implausible explanation in relation to the alleged gambling winnings: refer to paragraphs 79 to 92 below.
Gambling winnings ($40,000 approximately)
In November 2013, Mr Sharratt suggested that his relevant winnings from gambling were somewhere in the order of about $17,000 – i.e. = $89,100 less $60,000 (car), less $12,000 (roadside furniture).
However, Mr Sharratt now attributes the balance of the Disputed Deposits, of approximately $40,000, to winnings from gambling.
Mr Sharratt has never indicated that he has any records of his gambling activities and, as is apparent from the above, he cannot provide evidence of the amount he won or lost. In the circumstances it is reasonable to infer that he does not know.
The following table is a summary of the questions the Commissioner’s representative asked Mr Sharratt about his alleged gambling winnings in the December 2014 Questionnaire and Mr Sharratt's responses to those questions in the December 2014 Response:
Question No.-
Commissioner’s questions (December 2014 Questionnaire)
Mr Sharratt’s responses (December 2014 Response)
25
Where did the claimed winnings come from – i.e. mainly Casino or TAB? What was the approximate breakup percentage wise between Casino and TAB winnings?
Don’t know never kept tab of these things
26
Did you have a TAB account – if so give details.
No did not have a TAB acc
27
How often did you gamble?
a
Casino – for example every day, once a week, once a fortnight, once a month?
Once a fortnight
b
TAB – for example every day, once a week, once a fortnight, once a month?
Once a month
28
When did this occur, for example:
a
Casino – weekends, mid- week, during the day, at night?
At night
b
TAB – weekends, mid-week, during the day, at night?
During the day
29
How much did you gamble on average on each visit to:
a
Casino
$30
b
TAB
$100
30
Give details of major wins at:
a
Casino, including in relation to each win:
i
How much
Small on each roulette table but could work out to big wins. I would average $750-$1500 per fortnight
ii
When
ii
What game was the amount won at
iv
How much did you gamble/stake
Stake was $30, paid in cash.
v
How were you paid – cash, cheque
vi
What did you do with the money – for example what accounts were they deposited into or what were they used to purchase.
I do not remember which exact payments were paid for what! To cover bills.
vii
Identify any cash deposits (from the attached list above) that we have treated as assessable income that you say comprise proceeds from major Casino wins.
b
TAB, including:
i
How much
Small bets on various races. I would average $500 - $800
ii
When
ii
Name of race, horse, venue
iv
How much did you gamble/stake
Stake between $30 - $100
v
How were you paid – cash, cheque
Paid in cash
vi
What did you do with the money – for example what accounts were they deposited into or what were they used to purchase.
I do not remember which exact payments were paid for what! To cover bills.
vii
Identify any cash deposits (from the attached list above) that we have treated as assessable income that you say comprise proceeds from major TAB wins.
In the January 2015 Questionnaire, the Commissioner’s representative also asked for clarification from Mr Sharratt in relation to the answers to 2 questions – specifically whether amounts referred as being “staked” were totals for the whole night or visit or whether they related to each spin of the roulette wheel or bet on a horse race, as the case may be. Mr Sharratt confirmed in the January 2015 Response that these amounts were totals, bet or staked, in respect of each visit to either the casino or TAB as the case may be.
From Mr Sharratt’s above responses, it is, as submitted by the Commissioner, clear that he does not know how much he won or lost from gambling, even in approximate terms, in the 2011/2012 financial year.
That conclusion is reinforced by his testimony at the hearing where he indicated that his only basis for attributing particular amounts to proceeds from the sale of abandoned furniture and gambling was that there was no other possible source for the unexplained deposits.
As submitted by the Commissioner, the amounts that Mr Sharratt claims to have won are inherently implausible given the relatively small amounts that he says that he wagered in order to obtain his very substantial alleged winnings and that common experience is that the losses of most gamblers, especially over an extended period of time, exceed their winnings. Mr Sharratt by contrast, if believed, has been remarkably successful and consistently so over the whole 2011/2012 financial year.
Mr Sharratt says that on average he outlaid $30 per visit to the Perth Crown Casino, which he says he visited on average once per fortnight – i.e. approximately 26 times during the 2011/2012 financial year. That equates to only $780 in total for the 2012 year – i.e. $30 x 26 = $780. But he claims to have won $750 to $1,500 per fortnight – i.e. between $19,500 and $39,000 for the 2012 year.
Similarly, in relation to his TAB winnings, Mr Sharratt says that he would bet between $30 and $100 once per month. That equates to between $360 (12 x $30) and $1,200 (12 x $100) for the 2012 year. But he claims to have won, on average, between $6,000 ($500 x 12) and $9,600 ($800 x 12) for the 2012 year.
Prior to the hearing, Mr Sharratt’s position was that he must have won approximately $40,000 during the 2011/2012 financial year. However, at the hearing he stated that he could have won substantially more than $40,000 from gambling in the 2012 year – presumably this is to make up for the amount of $22,000 which Mr Sharratt previously contended was from the sale of a bus but later withdrew. This casts doubt on the credibility of his claim and on his credibility generally.
As the Commissioner points out, if Mr Sharratt had been so successful he must have had some sizeable wins in the 2012 year the specific details of which one would think, an ordinary person similarly circumstanced, would be able to readily recall. Despite being invited to do so, Mr Sharratt is apparently unable or unwilling. This further weakens the credibility of this claim and of Mr Sharratt’s credibility more generally.
Even if Mr Sharratt did win the amounts he claims then, as alluded to above, because most gamblers are likely to lose more than they win over any extended period, it is, as the Commissioner contended, more likely than not that he had wagered even greater amounts (than what he has claimed to have won). If that is the case then, in order to show that his assessments are excessive, Mr Sharratt would need to be able to explain the sources of the funds so wagered. Because he claims that his winnings have been deposited in bank accounts, Mr Sharratt would need to either be able to identify specific withdrawals from those bank accounts or to identify some other non-income source. He has done neither.
In conclusion, the Tribunal finds Mr Sharratt’s above explanation (i.e. that the Disputed Deposits are wholly or partly attributable to gambling wins) should not be accepted because, in the circumstances, it is inherently not credible and is unsupported by any objective corroborating evidence. As the Commissioner submitted, Mr Sharratt’s perseverance with this story further diminishes his credibility.
Hours worked times hourly charge (of $40 per hour) for labour
Mr Sharratt also argued that it was not possible for him to have received proceeds of $219,612 from taxable supplies made during the year ended 30 June 2012, as claimed by the Commissioner, because he charged only $40 per hour plus GST for his labour and because he worked, on average, only 8 hours per day, 4 days per week. However, this contention assumes that Mr Sharratt only charges for his labour. That assumption is not consistent with the income tax deductions claimed in his income tax return. After claiming substantial separate amounts for depreciation and motor vehicle expenses a claim of $60,559 is made for “other expenses”: refer to paragraph 13 above.
That is, Mr Sharratt claimed that the relevant assessments are excessive because he only charges $40 per hour and that there are not enough hours in the week for him to have earned the amounts the Commissioner claims – especially given the time he spends working for the Mandurah SES. However, in the December 2014 Response, Mr Sharratt concedes that he charges clients for labour and materials. Mr Sharratt’s response supports the Tribunal’s above conclusion.
Mr Sharratt’s record keeping
Mr Sharratt has primarily relied on statements issued by United Community Credit Union of deposits made to that account to determine his business receipts.
Although Mr Sharratt issued invoices to clients for work done (as set out in paragraph 9 above), he did not do so in every case. While an invoice was issued in relation to all but one of the relevant deposits made to the United Community Credit Union account, no invoices were issued in relation to any Conceded Deposits made to the Westpac Rocket Deposit account.
The table of invoices issued by Mr Sharratt in the 2012 year (as set out in paragraph 9 above) shows a total of only $94,704. Whereas, Mr Sharratt concedes in the 28 November 2013 Letter that deposits, totalling $130,512, represent his business receipts.
No receipt appears to have been issued by Mr Sharratt in relation to any of the following Conceded Deposits:
Date
United Community Credit Union account
Westpac Rocket Deposit account
8/09/2011
$8,000
28/09/2011
$10,000
9/10/2011
$1,485
17/10/2011
$5,000
8/02/2012
$2,453
23/02/2012
$2,500
23/02/2012
$1,175
9/05/2012
$1,540
21/06/2012
$2,000
26/06/2012
$2,000
$36,153
Further, the invoices themselves are not allocated sequential identification numbers. The number allocated is simply the date of issue. As such, it is not possible to tell whether any are missing or unaccounted for.
Conclusion – Disputed Deposits
Mr Sharratt relies on his personal, largely self-serving, testimony that the Disputed Deposits do not represent proceeds from taxable supplies and/or derived assessable income. He has been unable to corroborate these claims and the sources of the Disputed Deposits with any objective evidence. The authorities show that the testimony of witnesses who have an interest that turns on whether their testimony is accepted must be approached critically and will necessarily be the subject of careful scrutiny: see Pascoe v Commissioner of Taxation (1956) 30 ALJ 402 at 403 per Fullagar J; Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74 at [81] and [82]; Davis v Commissioner of Taxation;Sirise Pty Ltd v Commissioner of Taxation [2000] FCA 44 at [47] per Hill J; Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation [1991] FCA 276 at [31]; 91 ATC 4546 at 4,552 per Hill J.
In the absence of evidence which objectively corroborates the sources of the Disputed Deposits, Mr Sharratt has failed to discharge the onus of proof that he bears, pursuant to s 14ZZK(b)(i) of the TAA, that the assessments in question are excessive. The only reasonably likely and credible source of the Disputed Deposits is assessable income/taxable supplies derived from his small scale building work business.
As is evident from the discussion above (in paragraphs 95 to 99), Mr Sharratt’s record keeping is far from exemplary. However, a taxpayer cannot take advantage of the inadequacies of his or her own record keeping: see Trautwein v Federal Commissioner of Taxation [1936] HCA 77 [2]; (1936) 56 CLR 63 at 87 per Latham CJ and Kelly v Commissioner of Taxation [2012] FCA 423 [11]; (2012) 88 ATR 409.
Penalties
By lodging BASs and an income tax return for the 2011/2012 financial year that are incorrect, Mr Sharratt has made “false or misleading statements” for the purposes of s 284-20 and s 284-75(1) of Schedule 1 to the TAA.
For the purposes of s 284-80 of Schedule 1 to the TAA, Mr Sharratt had relevant shortfall amounts being, in the case of the BASs, the difference between the GST payable as per the lodged BASs and the GST assessed by the Commissioner. In the case of Mr Sharratt’s 2012 income tax return, the relevant shortfall was primary tax and medicare levy payable under the 2012 Amended Income Tax Assessment, the original assessment having been a “nil” assessment.
The amount of “base” penalty payable under Division 284 of Schedule 1 to the TAA depends on the relevant conduct of a taxpayer that caused the shortfall to arise as specified in the table contained in s 284-90(1).
Given the conclusion reached by the Tribunal in paragraphs 100 to 102 above (i.e. that the Disputed Deposits represent undisclosed assessable income and/or taxable supplies), it is reasonable to conclude that the shortfalls in question have been “intentionally” omitted by Mr Sharratt with the result that a 75% base rate is applicable pursuant to item 1 of s 284-90(1) of Schedule 1 to the TAA.
As submitted by the Commissioner, there is simply no other plausible explanation for the omission of the Disputed Deposits from Mr Sharratt’s 2012 income tax return and BASs for the 2011/2012 financial year.
Significance of admission regarding Conceded Deposits
Section 284-225(1) of Schedule 1 to the TAA entitles a taxpayer to a 20% reduction of the base penalty amount in certain circumstances, including where an concession (admission) is made by the taxpayer. Section 284-225(1)(c) of Schedule 1 to the TAA requires that:
telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the examination.
The concession made by Mr Sharratt in relation to the Conceded Deposits is consistent with a realisation by Mr Sharratt that, given the abovementioned notations in the relevant bank statements, it would have been futile to deny that the relevant deposits were business receipts. In that sense it is not really an admission at all.
In any event, as the Commissioner was already in possession of Mr Sharratt’s bank statements, and had examined them in producing his Interim Audit Report, before the concession was made, s 284-225(1)(c) of Schedule 1 to the TAA is clearly not satisfied.
Increase in base penalty
Under s 284-220(1)(c) of Schedule 1 to the TAA the base penalty amount is increased by 20% if the base penalty amount was worked out using item 1, 2 or 3 of the table in s 284-90(1) and a base penalty amount for the taxpayer was worked out under one of those items previously.
At the time that Mr Sharratt lodged his BASs for the quarters ending 30 December 2011, 31 March 2012 and 30 June 2012 and his income tax return for the 2012 year, he had previously lodged at least one activity statement (i.e. for the quarter ended 30 September 2011) to which an “intentional disregard” applied. Accordingly, the 20% uplift applies to the base penalties applicable to those tax periods.
Discretion to Remit Penalties
Under s 298-20 of Schedule 1 to the TAA, the Commissioner has the discretion to remit all or part of the penalty. Section 298-20 is expressed as an unfettered discretion. In determining whether to exercise that discretion consideration must be given to all relevant facts and circumstances while having regard to the purpose of the provision: see Harland as Trustee for the PCS Global Discretionary Trust v Commissioner of Taxation [2013] AATA 930 at [160] and the Commissioner’s Practice Statement PSLA 2012/5 at [155] to [159].
Relevant matters to consider include:
· that the purpose of the penalty regime is to encourage entities to take reasonable care in complying with their tax obligations. Where the entity has made a genuine attempt to report correctly, it will generally be the case that no penalty applies because of the exercise of reasonable care, safe harbour or because the law was applied in the accepted way; and
· remission decisions need to consider that a major objective of the penalty regime is to promote consistent treatment by reference to specified rates of penalty. That objective would be compromised if the penalties imposed at the rates specified in the law were remitted without just cause, arbitrarily or as a matter of course.
While “special circumstances” need not exist before the discretion to remit a penalty can be exercised (Dixon v Federal Commissioner of Taxation [2008] FCAFC 167; (2008) 167 FCR 287, at 291 [21] per Spender, Ryan and Emmett JJ), rarely will it be appropriate to exercise the discretion where a taxpayer has “intentionally” disregarded his tax obligations: see TSC 2000 Pty Ltd v Federal Commissioner of Taxation [2007] AATA 1629; 2007 ATC 2409 at 2435 [173] per DP Hack SC; Sgardelis v Federal Commissioner of Taxation [2007] AATA 1499; 2007 ATC 2335 at 2335 [102] per DP Block.
The Tribunal considers that because of Mr Sharratt’s intentional disregard of his tax obligations, no remission is justified in the circumstances and that, in any event, Mr Sharratt has failed to discharge his onus of proving that either the 2012 Income Tax Penalty Assessment or the GST Penalty Assessment penalty assessments is excessive (except to the extent outlined in paragraphs 120 and 121 below).
Penalty relating to omitted Conceded Deposits
As stated above (in paragraph 96), an invoice was issued in relation all but one of the Conceded Deposits made to the United Community Credit Union account. The total of the Conceded Deposits made to that account ($90,589) also bears some approximate relationship to the amounts disclosed in Mr Sharratt’s 2011/2102 BASs and his 2012 income tax return. By contrast, no invoices were issued in relation to the Conceded Deposits made to the Westpac Rocket Deposit account (i.e. totalling $39,923).
At the hearing, Mr Sharratt explained that the Conceded Deposits made to the Westpac Rocket Deposit account (i.e. totalling $39,923) came to be made to that account because it was his former business account. He said that the deposits concerned were made by way of electronic funds transfer by existing clients to whom he had previously given the BSB and account number details relating to that account. According to Mr Sharratt, no invoices were issued to these customers because in the past, when he had given a written quote, rather than issue an invoice, he simply endorsed the written quote.
While these may be plausible explanations for the depositing of these amounts to the Westpac Rocket Deposit account, rather than into the United community Credit Union account, and for Mr Sharratt’ failure to issue invoices in relation to that work, the fact remains that the evidence suggests that he has deliberately not declared any of the Disputed Deposits. As submitted by the Commissioner, in these circumstances, it stretches credibility to suggest that, despite this, Mr Sharratt intended to declare the $39,923 in omitted Conceded Deposits. Further, Mr Sharratt must have been aware that these amounts had been deposited into the Westpac Rocket Deposit account. Presumably Mr Sharratt (or someone) would have checked that account to ensure that the relevant customers had actually paid.
Adjustments to net amount assessment for quarterly tax period ended 30 June 2012 and corresponding penalty for deposit conceded by the Commissioner
The Commissioner accepts that Mr Sharratt’s net amount assessment for the tax period ended 30 June 2012 should be reduced as follows on account of his acceptance that the deposit of $1,500, dated 5 June 2012, made to the Westpac Platinum Card account was merely transfer from the Westpac Rocket Deposit account made on the same day: see paragraphs 21 and 22 above.
121. Quarterly Tax Period Ended
“G1” – Sales Assessed – per para 17 above
Less conceded deposit
Adjusted “G1”
30 June 2012
$31,135
$1,500
$29,635
Quarterly Tax Period Ended
“A1” – Assessed – per para 17 above
Less GST (1/11) of conceded deposit
Adjusted “A1”
30 June 2012
$2,830
$136
$2,694
It follows that the penalty applicable to that tax period should also be correspondingly reduced from $2,176.20 to $2,053.80:
A
B
C
D
E
Shortfall assessed
Conceded GST
Adjusted shortfall = A-B
Effective rate (75% x120%)
Adjusted penalty = CxD
$2,418
$136
$2,282
90%
$2,053.80
DECISION
For the above reasons, the Tribunal affirms the Objection Decision (subject to what is stated in paragraphs 120 and 121 above).
I certify that the preceding 122 (one hundred and twenty two) paragraphs are a true copy of the reasons for the decision herein of Senior Member CR Walsh .......(Sgd) A Tran.................................................................
Associate
Dated 1 May 2015
Date final submissions received
Date of hearing
17 April 2015
18 March 2015
Applicant
In person
Respondent’s representative
Mr R McGrade
Australian Taxation Office
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