Karapanagiotidis and Commissioner of Taxation

[2007] AATA 1961

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 1961

ADMINISTRATIVE APPEALS TRIBUNAL      )          No VT200600355

)          No VT200600356

TAXATION APPEALS  DIVISION		)
Re		ALEX KARAPANAGIOTIDIS DIANA KARAPANAGIOTIDIS

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member B.H. Pascoe  

Date16 November 2007

PlaceMelbourne

Decision

The Tribunal varies the decision under review to the extent of reducing the assessable amount of capital gain in the year ended 30 June 2003 to $48,293 in respect to each of the applicants and remits the matter to the respondent to calculate the tax shortfall penalty at the rate of 25 per cent of the net tax shortfall after giving effect to this decision.

The Tribunal certifies that proceedings have terminated in a manner favourable to the applicant.

(sgd) B.H Pascoe

Senior Member

CATCHWORDS - Income tax – capital gain – vacant land – date of acquisition – cost base – small business relief claimed – penalties

Income Tax Assessment Act 1997

Taxation Administration Act 1953

REASONS FOR DECISION

16 November 2007   Senior Member B.H. Pascoe 

1.      This is an application to review decisions of the respondent, Commissioner of Taxation, to disallow objections against amended assessments of income tax for the year ended 30 June 2003.  The amended assessments were issued to include a capital gain of $53,750 in the assessable income of each of the applicants, Mr A. and Mrs D. Karapanagiotidis.  After objection, the amount of the tax shortfall penalty was reduced from $5,372.15 to $4,750 to recognise that each of the applicants had included an amount of $7,900 in each of their income tax returns for the year ended 30 June 2004 in relation to the same transaction.

2.      At the hearing, Mr and Mrs Karapanagiotidis were represented by Mr M. Ahmed, their accountant and tax agent.  The respondent was represented by Mr A. Vourgoutzis, an officer with the respondent.  Evidence was given by Mr and Mrs Karapanagiotidis.

3.      The background to this matter is that Mr and Mrs Karapanagiotidis jointly purchased a vacant block of land in Avondale Heights (the property) for $125,000.  The property was sold under contract dated 3 May 2003 with settlement occurring on 3 August 2003 for $340,000.  The applicants and their tax agent took the view that disposal was on the date of settlement and included a capital gain in each return for the year ended 30 June 2004 of $7,900 calculated as follows:

Net proceeds of land 5 August 2003   323,564

Less

Cost of land 1 November 1989         125,000

Interest paid 1990-2002  121,500

Rates   12,188

Legal Costs   1,094 259,782

Capital Gain  63,782

50% discount  31,891

Further 50% Roll over relief  15,945

Taxable gain of each taxpayer   7,900

The issues before the Tribunal were:

• The date of purchase of the property;

• Amounts to be included in the cost of the property;

• Whether roll over relief was available to the applicant; and

• The imposition of a shortfall penalty.

It was conceded by Mr Ahmed that the correct date of disposal of the property was the date of the contract, 3 May 2003, so that the capital gain should have been included in the year ended 30 June 2003.

4.      The date of purchase of the property was in issue as a consequence of s 110-25 of the Income Tax Assessment Act 1997 (the Act).  This section sets out the five entitlements to be included in the cost base of an asset.  Under sub section (2) the first element is the total money paid or payable to acquire the asset.  Sub-section (3) includes as the second element the individual costs incurred in acquiring the asset or the costs that relate to a CGT event in relation to the asset.  Sub section (4) provides

The third element is the non‑capital costs of ownership of the CGT asset you incurred (but only if you *acquired the asset after 20 August 1991).  These costs include:

(a)interest on money you borrowed to acquire the asset; and

(b)costs of maintaining, repairing or insuring it; and

(c)rates or land tax, if the asset is land; and

(d)interest on money you borrowed to refinance the money you borrowed to acquire the asset; and

(e)interest on money you borrowed to finance the capital expenditure you incurred to increase the asset’s value.

For completeness sub-section (5) sets out the fourth element as capital expenditure incurred to increase the assets value and sub section (6) states the fifth element as capital expenditure incurred to establish, preserve or defer title to or right over the asset.

5.      In the hearing, Mr Ahmed sought to argue that the date of acquisition was 25 November 1995 being the date on which funds were borrowed from the National Australia Bank to settle the outstanding balance owing on the purchase of the property.  It was said that this date was reinforced by the transfer of land from the original vendor to Mr and Mrs Karapanagiotidis being dated 22 December 1995.  It would appear that this argument as to the date of acquisition arose only after the implications of section 110-25(4) were recognised.  In correspondence with the respondent in relation to the objection, Mr Ahmed clearly stated that the date of acquisition was November 1989 and the land had been acquired on vendor finance with interest only payable.  In their evidence, both Mr and Mrs Karapanagiotidis clearly recalled purchasing the property at auction on Saturday 25 November 1989.  They paid a deposit and recalled visiting the vendor’s office quarterly for the next number of years to pay instalments due.  The balance of the purchase price was due in November 1995 and a loan of $84,000 was arranged from the National Australia Bank.  While no copy of the actual contract of sale could be located, the respondent obtained and tendered a copy of a Notice of Disposition of an Interest in Land referring to the particular property, lodged by the vendor and showing the sale price of $125,000, a deposit of $18,750 and the date of transfer as 25 November 1989.  The Tribunal is left in no doubt that the property was purchased on 25 November 1989 under a terms contract of sale where the actual transfer or conveyance was made on final settlement of that contract in November 1995.

6.      Section 109-5 of the Act sets out the date of acquisition of a CGT asset within that section Event Number A1 is when the disposal contract is entered into.  Event Number B1 covers the circumstances when an agreement is entered into to obtain the use and enjoyment of a CGT asset and states that the date of acquisition is the time when you first obtain the use and enjoyment of the asset.  In the circumstances of this case, it seems clear that there was a disposal of the property by the vendor and the disposal contract was entered into on 25 November 1989.  Even if it could be said that such a term contract was not a disposal contract, which I am unable to accept, it is clear that use and enjoyment was obtained on that date.  Consequently section 110-25(4) results in an inability to include interest on money borrowed to acquire the property rates or maintenance costs in the cost base of the property acquired prior to 20 August 1991.

7.      Prior to the hearing, the respondent was provided with details and acceptable substantiation of the relevant expenditure under section 110-25(2), (3) and (5).  This resulted in a recalculation of the capital profit as:

Proceeds of Sale  $340,000

Cost Base

Purchase Price  $125,000

Incidental costs of purchase

Stamp duty   $3,700

Registration and other costs                  $757

Conveyance Fees   $450

Incidental costs of sale

Commission  $15,697

Conveyance/legal cost   $736

Capital costs to increase value              $485$146,825

Capital Gain  $193,175

Subject to the claim for relief under Division 152 of the Act, this calculation results in an assessable capital gain of $96,587 after the 50 per cent discount under Division 115 and an assessable capital gain to each of the joint owners of $48,293.  It is noted that Mr Ahmed sought to include in the cost base his fee of $3,500 apparently related to this dispute. On what basis this was sought is unclear but it is clear that it cannot be so included.

8.      The evidence of Mr and Mrs Karapanagiotidis was that they had no clear plans for the use of the property at the date of purchase.  The property was near to where they lived and they considered the purchase to be a good investment.  Prior to sale in 2003 the land remained vacant.  They said that not long before the sale, they put two storage containers on the land for the purpose of storing archived documents and records from the company which they owned and managed.   They had formed the company, Alex Taxis & Broker Pty Ltd on 13 April 1994.  The company operates a business of dealing in hire cars and licenses.  It was said that by 2003, the company was in need of additional funds to finance the business.  This led them to sell the land and pay the net proceeds into the company.  The company has 100 shares on issue with 99 in the name of Mr A. Karapanagiotidis and one in the name of Mrs D. Karapanagiotidis.  Both are directors of the company.

9.      Mr Ahmed tendered a minute of what was described as General Meeting of the company on 25 March 2004 at which Mr and Mrs Karapanagiotidis and Mr Ahmed were said to be present.  After referring to proceeds of the sale of the property $323,566.83 having been invested in the company on 5 August 2003 the minutes stated:

It was resolved that the directors decided to invest in the proceed of the $323,566.83 in the 100 Ordinary Shares of the company.  There will be no alteration in the number of the Ordinary Shares.  There will be no increase or decrease of the number of any shares whatsoever.

The Value of each of share will be the same.

This has been done in full satisfaction and Accord between the Shareholders.

Apart from repeating that the amount was treated as capital, Mr Ahmed was unable to explain how under either Corporations Law or accounting principles the amount had been dealt with in the books and records of the company.

10.     Division 152 of the Act provides various concessions against capital gains under the general heading of Small business relief.  The two basic conditions for relief in relation to this property are that the net value of the assets that the business and related entities own does not exceed $5 million and the relevant asset must be an active asset.  While it would appear that net assets of the applicants and/or the company do not exceed this maximum figure, the significant question is whether the property was an active asset.  An active asset is defined in section 152-40 as an asset which is used or held ready for use in the course of carrying on a business by the owners, their small business CGT affiliate or an entity connected with them.  Here the clear evidence was that the property was left as vacant land during the whole of the period of ownership by Mr and Mrs Karapanagiotidis.  There was no evidence of those individuals carrying on business during that period.  A business was carried on by the company which they owned and controlled but I cannot accept that the allowance of passively storing old records in two containers placed on the property can be regarded as using the land in the course of carrying on a business.  The relevant relief within Division 152 cannot apply.  The property was not held for 15 years for the purposes of sub-division 152-B.  The sale proceeds were not used in connection with the applicants’ retirement for the purposes of sub-division 152-D.  It is clear, also, that no replacement asset was acquired for the purposes of sub-division 152E. In simple terms, Mr and Mrs Karapanagiotidis sold a passive investment in property and used the proceeds to provide additional working capital in a company which they owned.  On what basis this was provided is unclear but what is clear is that the small business relief provision of Division 152 of the Act has no application.

11. The final issue was the imposition of tax shortfall penalties of 25 per cent of the tax short fall pursuant to Division 284 of Schedule 1 to the Taxation Administration Act 1953 for failure of the applicant or their tax agent to take reasonable care.  The penalty was calculated on the tax shortfall for the year ended 30 June 2003 less the tax credit resulting from the amendment of assessment for the year ended 30 June 2004 to exclude the $7,900 previously included as income in that year.  Mr Ahmed submitted that there should be no penalty as there had been no intention of evading tax and the applicants had sought to include the capital gain as income within the complexities of the legislative provisions.  While it is accepted that an amount was included in each return in 2004, it cannot be accepted that reasonable care was adopted by the applicants’ tax agent.  If only the timing was wrong in adopting the settlement date rather than the contract date, Mr Ahmed may have had an acceptable argument.  However, the calculation of the gain sought to deduct interest and rates as part of the cost base notwithstanding the initial acceptance of the acquisition date as being prior to August 1991.  In addition the amount shown as interest of $121,500 was clearly well in excess of the actual interest paid and appears more likely to have been total payment to the lender including payment on account of principal.  Rates were shown as part of the cost base as 14 year at $870.54 per annum notwithstanding that, at the hearing, it was denied that rates were paid by the applicants in the first six years from 1989.  This $870.54 was based on one rate notice of October 1990 addressed to Mr and Mrs Karapanagiotidis.  A further 50 per cent reduction was claimed as roll over capital gain with no detail or justification provided.  In all of these circumstances, I am satisfied that there was a failure to take reasonable care to comply with a taxation law so attracting a penalty of 25 per cent.  I am unable to see any justification for remission of this penalty under section 292-20.

12.     It follows from the foregoing that the decision under review should be varied to the extent of reducing the assessable capital gain in the year ended 30 June 2003 to $48,293 in respect of each of the applicants and remitting the matter to the respondent to calculate the tax shortfall penalty of 25 per cent of the net tax shortfall amount.

I certify that the 12 preceding paragraphs are a true copy of the reasons for the decision herein of

Signed: Lauren Spragg
  Associate

Date of Hearing  16 October 2007
Date of Decision  16 November 2007
Advocate for the Applicant          Mr Ahmed
Advocate for the Respondent       Mr Vourgoutzis