Kael and Commissioner of Taxation (Taxation)

[2017] AATA 38

Kael and Commissioner of Taxation (Taxation) [2017] AATA 38 (20 January 2017)

Division:TAXATION & COMMERCIAL DIVISION

File Numbers:         2016/0299 and 2016/0300

Seppo Kael

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Dr James Popple, Senior Member

Date:20 January 2017

Place:Canberra

The Commissioner of Taxation’s objection decisions on 9 November 2015 are affirmed.

.........................[sgd]...............................................

James Popple, Senior Member

CATCHWORDS

TAXATION — Deductions and penalties — whether taxpayer entitled to deductions for overtime meal expenses — whether taxpayer received an allowance under an industrial instrument — whether amount identified by employer as being for overtime meals, but which was carved out of taxpayer’s gross salary, can be an allowance — whether taxpayer liable to administrative penalties due to failure to take reasonable care — whether administrative penalties should be remitted — decisions under review affirmed.

LEGISLATION

Income Tax Assessment Act 1997, ss 8-1, 32-5, 32-50, 995-1(1),

Taxation Administration Act 1953, s 14ZZK(b)(i); Schedule 1, ss 284-25, 284-75(1), 284-80, 284-85, 284-90(1), 284-225, 298-20

REASONS FOR DECISION

Dr James Popple, Senior Member

20 January 2017

Summary

1. The applicant claimed deductions for overtime meal expenses.  He was not entitled to claim those deductions, because he was not paid an overtime meal allowance under an award.  The payment of an “allowance” was a construction: a notional apportionment of part of his gross salary as being for his overtime meal expenses.  That “allowance” was carved out of the applicant’s gross salary, and so could never have been to do with his overtime meal expenses.

2. The applicant’s statements, in his tax returns, that he was entitled to those deductions were false and misleading.  He failed to take reasonable care to comply with a taxation law.  I agree with the Commissioner that an administrative penalty should be imposed on the applicant, at the rate of 25% of the tax shortfall amount.  I do not think that that penalty should be remitted.

   Background

3. The 2012 and 2013 income years are the relevant income years for this review.  Mr Seppo Kael was employed by Nordic Building Group Pty Ltd (Nordic) during the relevant income years.  On 13 December 2012 and 31 October 2013, respectively, he lodged his income tax return for each of the relevant income years.  He used a registered tax agent, Mr David McNeice.  On 21 December 2012 and 8 November 2013, respectively, the Commissioner issued a notice of assessment for each of the relevant income years.

4. On 17 February 2014, the Commissioner wrote to Mr Kael, advising him that his income tax returns for the relevant income years had been selected for audit.  The Commissioner advised that the audit would be of Mr Kael’s claimed deductions for work-related travel expenses for the 2013 income year, and for other work-related expenses (including overtime meal expenses) for each of the relevant income years.

5. During the course of the audit, Mr Kael decreased his claimed deduction for work-related travel expenses for the 2013 income year, and increased his claimed deduction for other work-related expenses for each of the relevant income years.

6. On 18 December 2014, the Commissioner wrote to Mr Kael, advising him of the outcome of the audit.  The Commissioner reduced each of the three deduction claims.  On 22 December, the Commissioner issued a notice of amended assessment for each of the relevant income years.  On the same day, the Commissioner issued a notice of assessment of shortfall penalty for the 2012 income year.  The Commissioner calculated the base penalty as 25% of the shortfall amount.  On 19 February 2015, Mr Kael lodged an objection against each of the three notices.

7. On 18 September 2015, the Commissioner issued a notice of assessment of shortfall penalty for the 2013 income year.  Again, the Commissioner calculated the base penalty as 25% of the shortfall amount.  On 4 November, Mr Kael lodged an objection against that notice.

8. On 9 November 2015, the Commissioner disallowed each of Mr Kael’s four objections.

9. On 18 January 2016, Mr Kael applied to the Tribunal, under s 14ZZ of the Taxation Administration Act 1953 (the TA Act) for review of those decisions.

   Decisions under review

10. The decisions under review are the Commissioner’s decisions on 9 November 2015, disallowing Mr Kael’s objections against the notice of amended assessment and notice of assessment of shortfall penalty for each of the relevant income years.

    Issues

11. Since the audit commenced, Mr Kael has changed the amount of his deduction claims several times, including at the hearing of this matter.  The issues still in dispute between Mr Kael and the Commissioner are:

    ·What amount, if any, can Mr Kael claim as a deduction in relation to each of the relevant income years for overtime meal expenses?

    ·Was the Commissioner correct to impose an administrative penalty at the rate of 25% of the tax shortfall amount arising from Mr Kael’s deduction claims for overtime meal expenses for each of the relevant income years?

    ·Should that administrative penalty be remitted?

12. Because of s 14ZZK(b)(i) of the TA Act, Mr Kael has the burden of proving that the Commissioner’s objection decisions are excessive or otherwise incorrect.

    Mr Kael’s working arrangements

13. Mr Timo Koikkalainen is a director of Nordic.  Mr Kael and Mr Koikkalainen each made statements, and gave evidence at the hearing.  I make the findings set out in [14]–[17] below, on the balance of probabilities.  These findings are based on the evidence of Mr Kael and Mr Koikkalainen, and documents before me.  These findings are generally not contested.

14. During the relevant income years, Mr Kael’s responsibilities included project management, building construction supervision, quantity surveying and occupational health and safety.  As well as supervising the work of others, he did building work himself.

15. Mr Kael worked during the day on building sites.  He would also do paperwork in the evenings.  He would often work on weekends.

16. Before the beginning of each income year, Mr Koikkalainen would set Mr Kael’s salary for that income year.  The starting point was an amount greater than the relevant salary under the relevant award: the Building and Construction General On-site Award 2010 (the award).  To this was added an amount to cover regular overtime; an amount for work performed at home; and an amount to cover out-of-pocket expenses.  For the 2012 income year, there was also an amount added to cover Mr Kael being required to use his own car for work purposes.  Mr Kael’s annual salary having been calculated in this way, he was paid a fixed amount weekly.  He did not receive regular payslips.

17. In addition, Mr Kael received a profit share bonus, determined by Mr Koikkalainen, on the completion of each project.

    Overtime meal expenses

18. Mr Kael claimed a deduction for an amount for overtime meal expenses in his income tax return for each of the relevant income years.  He initially claimed $3312 for the 2012 income year, and $3324 for the 2013 income year (a total of $6636).  Before the hearing of this review, he had increased his claims to $3608 and $5923 (a total of $9531).[1]  During the course of the hearing, he decreased his claims to $277 and $99 (a total of $376).

    [1]     I have rounded these figures to the nearest dollar amount.

19. In this review, Mr Kael has sought to substantiate these claimed deductions by reference to bank records of his expenditure.  During the course of the hearing, he decreased his claims to less than 4% of what he had claimed before the hearing.  Mr Kael no longer contends that all of the expenditure that he identified was expenditure on food or drink to do with overtime that he worked.  This reduction in his claims followed questions he was asked during cross-examination about the nature of some of the expenditure he had identified.

20. Section 8-1 of the Income Tax Assessment Act 1997 (the ITA Act) allows for the deduction from assessable income of losses or outgoings in certain circumstances.  Section 32-5 provides that there can be no deduction for entertainment expenses.  However, s 32-50 (item 5.1) provides that s 32-5 “does not stop you deducting a loss or outgoing for … buying food or drink to do with overtime that you work, if you receive an allowance under an *industrial instrument to buy the food or drink”.  Section 995-1(1) provides that:

    industrial instrument means:

    (a)  an *Australian law; or

    (b)  an award, order, determination or industrial agreement in force under an *Australian law.

21. Mr Kael says that he received an allowance under the award to buy food or drink to do with overtime.  The Commissioner says that Mr Kael did not receive an allowance under an industrial instrument.  The Commissioner points out that Mr Kael’s salary was not calculated under the award: the award base salary was used only as a starting point, and Mr Kael’s salary was set higher than that.  Mr Kael was paid a fixed amount each week, regardless of the number of hours he worked in that week.  He was not paid for ordinary time worked and then overtime on a penalty rates basis.  The Commissioner says that, if Nordic did not calculate Mr Kael’s salary under the award, then Nordic cannot have been required to pay him an overtime meal allowance under the award.

22. I agree with the Commissioner: Mr Kael did not receive an allowance under the award.  In fact, he did not receive an allowance at all.

23. The Commissioner points to Taxation Ruling TR 92/15, which “explains the difference between an allowance and a reimbursement for the purposes of determining … whether [a] payment is assessable income under the Income Tax Assessment Act 1936”.[2]  That ruling says that:

    A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense.  It is paid regardless of whether the recipient incurs the expected expense.  The recipient has the discretion whether or not to expend the allowance.[3]

    (The Commissioner does not contend that the ruling applies to this review, but says that I should adopt its reasoning.)

    [2] Taxation Ruling TR 92/15 at [1].

    [3] Taxation Ruling TR 92/15 at [2]. By contrast, the ruling says that “[a] payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed”: at [3].

24. Mr Kael was paid the same amount each week, regardless of how much overtime he worked during that week.  He was even paid that same weekly amount in relation to times when he was on leave and could not possibly have worked overtime.  As the Commissioner says, “it is illogical to suggest that you can predetermine an amount of allowance without having reference to when the employee works overtime”.

25. At the end of each income year, when Mr Kael’s tax return was prepared, an estimate was made of how much overtime he had actually worked during that year and (commensurately) how much he had spent on food and drink to do with that overtime.  That estimate may have been accurate.  Mr Kael may even have been able to substantiate the expenditure in relation to which he claimed he was paid an allowance.  But, that estimate had no effect on his gross salary.  If that estimate was that Mr Kael had worked much more (or much less) overtime than had been expected when his salary was calculated, there would have been no change to his gross salary.  The estimate (after the income year) of how much overtime he had actually worked during the income year affected only the proportion of his gross salary that was said to be an allowance for his overtime meal expenses.  The calculation of that “allowance” after the income year was merely a construction.  It had no effect on his gross salary.  The fact that Nordic carved the “allowance” out of Mr Kael’s gross salary means that it cannot have been an amount to cover an estimated expense.

26. Nordic estimated that Mr Kael would work a certain amount of overtime during the coming income year.  That expected level of overtime was factored into the calculation of his salary.  Mr Kael worked overtime, and may have bought food and drink to do with that overtime.  But he was not paid an allowance, under an industrial instrument or otherwise.

27. It follows that Mr Kael cannot claim any deduction for overtime meal expenses for either of the relevant income years.

    Imposition of an administrative penalty

28. Section 284-75(1) of Schedule 1 to the TA Act[4] relevantly provides:

    [4] The provisions in Schedule 1 to the TA Act have effect because of s 3AA. For the remainder of these reasons, I adopt the shorthand of referring to provisions in Schedule 1 as if they were provisions in the TA Act proper.

    284-75  Liability to penalty

    (1)You are liable to an administrative penalty if:

    (a)  you make a statement to the Commissioner …; and

    (b)  the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

    Section 284-25 provides that “[t]his Division [which includes s 284-75] applies to a statement made by your agent as if it had been made by you”.

29. The amount of the penalty is calculated according to s 284-85, which involves a base penalty amount worked out using a table in s 284-90(1).  Item 3 of that table provides that, if a shortfall amount[5] results from a statement described in s 284-75(1) and the amount, or part of the amount, resulted from “a failure by you or your agent to take reasonable care to comply with a *taxation law”, the base penalty is 25% of the shortfall amount or part.

    [5]     See TA Act, s 284-80.

30. In each of the two notices of assessment of shortfall penalty, the Commissioner advised Mr Kael that an administrative penalty had been assessed because he or his agent had made a false or misleading statement and he had a shortfall amount because of that statement.  The Commissioner calculated the base penalty as 25% of the shortfall amount.

31. The Commissioner says that the administrative penalty was correctly imposed at 25%.  Further, the Commissioner says that, “had it been understood at the time of the audit or the objection[s] that the amounts claimed as deductions had not been incurred, [the penalty] may have been imposed at a higher rate”.  I have not made any findings about whether Mr Kael actually incurred the costs that he claimed as deductions.

32. The Commissioner says that, in deciding whether the administrative penalty was correctly imposed at 25%, I should have regard to the fact that Mr Kael used a registered tax agent to prepare his income tax returns.  He says that “where a taxpayer uses a registered tax agent, there is a requirement that a greater level of care and skill is taken” because registered tax agents can be expected “to possess a greater degree of knowledge in relation to taxation affairs”.  The Commissioner says this because “it appears that amounts were claimed by [Mr Kael] that were never incurred, including expenses on overtime meals”.  As noted above, I have not made any findings about whether Mr Kael incurred the costs that he claimed as deductions for overtime meal expenses.  That is because Mr Kael cannot claim those deductions, even if he did incur those costs.  However, I think that I can have regard to the fact that Mr Kael used a registered tax agent, given the reason why he cannot claim those deductions.  The payment of an overtime meal “allowance” was a construction.  It was carved out of his gross salary, and could never have been to do with his overtime meal expenses.  That must have been abundantly clear to Mr McNeice, the registered tax agent who helped Mr Kael prepare his returns—and who also assisted Nordic with its taxation arrangements, and assisted Mr Koikkalainen to set Mr Kael’s annual salary before each income year, as explained above.[6]

    [6] See [16] above.

33. Mr Kael’s tax returns stated that he was entitled to deductions for buying food or drink to do with overtime that he worked, because he received an allowance under an industrial instrument to buy that food or drink. Those statements were false and misleading. So, Mr Kael is liable to an administrative penalty in relation to each of the relevant income years (s 284-75(1) of the TA Act). Those statements resulted in a shortfall amount for each of the relevant income years. Those shortfall amounts resulted from a failure by Mr Kael to take reasonable care to comply with a taxation law, specifically provisions about deductions in the ITA Act.[7]  The administrative penalty was correctly imposed at 25% (s 284-90(1), item 3).

    [7] See [20] above.

34. The penalty in dispute in this review relates only to deductions claimed for overtime meal expenses.  The Commissioner says that I should also have regard to what he says is “a range of false or misleading statements made in the income tax return[s] at the time of lodgement”.  I have not had regard to those other statements, because I think that an administrative penalty of at least 25% was correctly imposed even having regard only to the statements made about Mr Kael’s deductions for overtime meal expenses.

35. Mr Kael says that, applying s 284-225(1) of the TA Act, I should reduce the base penalty amount by 20%, because “[f]ull disclosure was made at the commencement of the audit” of his income tax returns for the relevant income years. But s 284-225(1) does not apply in this review, even assuming that Mr Kael made a “full disclosure”—or, in the words of s 284-225(1)(b), that, after being told of the audit, he “voluntarily [told] the Commissioner … about the shortfall, the part of it or the false or misleading nature of the statement”. Section 284-225(1)(c) requires that what the taxpayer voluntarily tells the Commissioner “can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the examination” (that is, in the audit). As noted above,[8] during the course of the audit, Mr Kael increased his claimed deduction for other work-related expenses (which included overtime meal expenses) for each of the relevant income years. I do not think that anything that Mr Kael told the Commissioner after the audit commenced could be said to have saved the Commissioner a significant amount of time or resources. I cannot reduce the base penalty under s 284-225(1) of the TA Act.

    [8] See [5] and [18] above.

36. I have decided that Mr Kael at a minimum failed to take reasonable care to comply with a taxation law.  I note that, item 2 of the table in s 284-90(1) provides that the base penalty is 50% if the shortfall amount resulted from “recklessness by you or your agent as to the operation of a *taxation law”; and item 1 provides that the base penalty is 75% if it resulted from “intentional disregard of a *taxation law … by you or your agent”.  I think it is possible that either of these items might properly apply to the statements about deductions for overtime meal expenses made in Mr Kael’s tax returns, given the involvement of Mr McNeice (a registered tax agent) in their preparation.  However, the Commissioner has not argued that I should impose an administrative penalty higher than 25%, and I have decided not to do so.

    Remittal of the administrative penalty

37. Section 298-20 of the TA Act provides that the Commissioner may remit all or a part of a penalty. For the reasons that I have given above about why an administrative penalty of at least 25% was appropriately imposed on Mr Kael, I do not think that I should remit all or part of that penalty.

    Conclusion

38. Mr Kael was not paid an overtime meal allowance, under an industrial instrument or otherwise.  The payment of an “allowance” was a construction.  It had no effect on Mr Kael’s gross salary, and could never have been to do with his overtime meal expenses.

1. Mr Kael claimed a deduction in relation to each of the relevant income years for overtime meal expenses.  His statements that he was entitled to those deductions were false and misleading.  Mr Kael failed to take reasonable care to comply with a taxation law.  The Commissioner was correct to impose an administrative penalty at the rate of 25% of the tax shortfall amount arising from Mr Kael’s deduction claims for overtime meal expenses.  That administrative penalty should not be remitted.

I certify that the preceding 39 (thirty-nine) paragraphs are a true copy of the reasons for the decision herein of Senior Member Popple

......................[sgd]..................................................

Associate

Dated: 20 January 2017

Date of hearing:	12 December 2016
Date final submissions received:	22 December 2016
Advocate for the Applicant:	Mr David McNeice
Counsel for the Respondent:	Ms Vicki Hammond
Solicitors for the Respondent:	Review and Dispute Resolution, Australian Taxation Office