Kwan and Commissioner of Taxation (Taxation)
[2021] AATA 4465
•1 December 2021
Kwan and Commissioner of Taxation (Taxation) [2021] AATA 4465 (1 December 2021)
Division: SMALL BUSINESS TAXATION DIVISION
File Number(s):2020/8535
Re:Janus Kwan
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Member D Mitchell
Date:1 December 2021
Place:Brisbane
The Tribunal affirms the decision under review.
.....................[SGD]..................................
Member D Mitchell
CATCHWORDS
TAXATION – income tax – was the Applicant carrying on a business – deductibility of expenses – Applicant’s burden to prove amended assessment excessive or otherwise incorrect – decision under review affirmed
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)
CASES
Briginshaw v Briginshaw (1938) 60 CLR 336
Commissioner of Taxation (Cth) v Walker (1985) 16 ATR 331
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 22 ATR 334 at 357
Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873
Imperial Bottleshops Pty Ltd and William John King Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148
Inglis v Federal Commissioner of Taxation (1970) 10 ATR 493
Martin v Federal Commissioner of Taxation (1953) 90 CLR 470
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
REASONS FOR DECISION
Member D Mitchell
1 December 2021
INTRODUCTION
Ms Janus Kwan (the Applicant) is seeking review of an objection decision of the Commissioner of Taxation (the Respondent) dated 23 September 2020.[1]
[1] Exhibit 1, T Documents, T24, page 194, Notice of Objection Decision.
The reviewable objection decision disallowed the Applicant’s objection to the amended assessment for the year ended 30 June 2019 (the 2019 income year) regarding non-primary production business losses.[2] The Respondent determined that the Applicant was not entitled to claim the business losses on the basis that she was not carrying on a business during the 2019 income year.[3]
[2] Exhibit 1, T Documents, T24, page 194, Notice of Objection Decision.
[3] Exhibit 1, T Documents, T2, page 61-62, Reasons for Objection Decision.
BACKGROUND
The Applicant is a certified practising accountant (CPA) who worked as an auditor at the Australian Taxation Office (ATO) for 11 years, up until October 2018 when she took a redundancy. The Applicant told the Tribunal that her expertise was in excise and goods and services tax (GST) and as such she knew very little about income tax.[4]
[4] Transcript, pages 9-10.
The Applicant has not been employed since October 2018.[5]
[5] Exhibit 1, T Documents, T1, page 8, Appendix – Application for Review of Decision.
On 15 June 2019, the Applicant obtained an Australian Business Number (ABN) as an individual/sole trader.[6]
[6] Exhibit 2, Supplementary T Documents, ST8, page 268, ABN extract.
On 22 June 2019, the Applicant entered into a 12-month lease over a residential property at Carlingford (the Carlingford property).[7]
[7] Exhibit 1, T Documents, T7, pages 91-101, Residential tenancy agreement for the Carlingford property.
On 28 June 2019, the Applicant registered the business name “J Kwan & Co”.[8]
[8] Exhibit 2, Supplementary T Documents, ST9, page 269, ASIC Business Name Details for J Kwan & Co.
On 31 October 2019, the Applicant lodged her income tax return for the 2019 income year seeking to claim a net business loss of $107,032.[9]
[9] Exhibit 2, Supplementary T Documents, ST1, pages 195-229, 2019 Income Tax Return.
On 21 January 2020, the Respondent notified the Applicant that she was being audited in relation to the 2019 income year, requested further information and invited her to make a voluntary disclosure.[10]
[10] Exhibit 1, T Documents, T5, pages 69-73, Audit Notification Letter.
On 4 February 2020, the Applicant provided further information and made a voluntary disclosure that she had incorrectly recorded her business income and provided that her actual net business loss should have been $74,232.[11]
[11] Exhibit 1, T Documents, T6, page 74, Email from the Applicant regarding voluntary disclosure and T7, pages 75-120, Voluntary disclosure form and attachments.
By way of a letter dated 9 March 2020, the Applicant provided further information to the Respondent.[12]
[12] Exhibit 1, T Documents, T10, pages 124-126, Email from the Respondent to the Applicant seeking further information.
On 23 March 2020, the Respondent issued an audit notice of decision for the 2019 income year, disallowing the claimed net business loss of $107,032 and advising that as a result the Applicant owed $36,394.54.[13] No penalties were imposed.[14]
[13] Exhibit 1, T Documents, T12, pages 132-134, Audit finalisation letter.
[14] Exhibit 1, T Documents, T12, page 132, Audit finalisation letter.
On 19 May 2020, the Applicant lodged an objection to the amended assessment[15] which included a detailed submission outlining her reasons for objection.[16]
[15] Exhibit 1, T Documents, T14, pages 151-162, Objection and attachments.
[16] Exhibit 1, T Documents, T14, pages 155-160, Attachment A to Objection.
On 18 August 2020, the Applicant wrote to the Respondent, as follows:[17]
Please take into account and reconsider all the circumstance in my case including:
- Due to my illness (i.e. I am suffering from anxiety and depression), I am incapacity of performing my normal duties at work and I am inability to concentrate and focus in details for my pre-injury work, I am unemployed since 1 October 2018.
- In order to help me to recover from my illness, my sister and friends encouraged me to start my own business.
- Although I am not in my full capacity, I genuinely intend to start up and run my own business. Otherwise, I did not have to rent a property and purchase the assets and goods.
[17] Exhibit 1, T Documents, T15, page 163, Letter from the Applicant to the Respondent.
In outlining that she was carrying on a business and explaining her activities relating to property development and direct selling business for the 2019 income year, throughout the audit and objection process the Applicant advised the Respondent that:[18]
[18] Exhibit 4, Respondent’s Outline of Submissions, pages 5-6, paragraph 24.
(a)Her main activities are “property developer” and “direct selling”.[19]
[19] Exhibit 1, T Documents, T7, page 77, Voluntary disclosure form.
(b)She elected to use an accrual accounting method.[20]
[20] Exhibit 1, T Documents, T7, page 81, Relevant facts.
(c)She advertised her direct selling activities via friends and their network.[21]
[21] Exhibit 1, T Documents, T7, page 77, Voluntary disclosure form.
(d)She did not have liability or indemnity insurance for either of her activities.[22]
(e)She did not have a website for either of her activities.[23]
(f)She did not have a business bank account for either of her activities.[24]
(g)She primarily transacts in cash in relation to her activities.[25]
(h)She provided her business plan,[26] which the Respondent summarised broadly, as:
i.Her main business activity is property development, where she intends to look for a potential development site (for example, an old house) to knock down and rebuild.
ii.Her ideal profit margin is 16%-20% on development costs.
iii.She “genuinely believes” that she will make a significant profit on these activities on the basis that buyers from Hong Kong are willing to pay more for residential property, and there is an increase in interest from Hong Kong in the Australian residential property market. The Respondent noted that this belief appeared to be solely informed from newspaper articles and housing listings.[27]
iv.She will carry on multiple business activities (for example, purchasing goods at a discounted price and reselling at a higher price) as it is unlikely that her business can make a profit in the short term.
[22] Exhibit 1, T Documents, T7, page 77, Voluntary disclosure form.
[23] Exhibit 1, T Documents, T7, page 81, Relevant facts.
[24] Exhibit 1, T Documents, T14, page 160, Attachment A to Objection.
[25] Exhibit 1, T Documents, T11, page 127, Applicant’s response to request for further information; T14, page 160, Attachment A to Objection.
[26] Exhibit 1, T Documents, T7, pages 89-90.
[27] Exhibit 3, Parties’ Joint Hearing Bundle, A3, Newspaper Articles, pages 95-101.
On 23 September 2020, the Respondent issued an objection decision, disallowing the objection on the basis that the Applicant was not carrying on a business in the 2019 income year.[28]
[28] Exhibit 1, T Documents, T24, page 194, Notice of Objection Decision and T2, pages 56-62, Reasons for Objection Decision.
The Applicant sought an extension of time to make an application for review of the Respondent’s objection decision to the Tribunal.[29] With the agreement of the parties,[30] the Tribunal granted the Applicant an extension of time to apply for a review of the Respondent’s objection decision until 22 December 2020.[31]
[29] Exhibit 2, Supplementary T Documents, ST2, pages 230-234, Extension of time request for making an application for review of decision to the AAT.
[30] Exhibit 2, Supplementary T Documents, ST3, page 235, Respondent’s notice not opposing extension of time request.
[31] Exhibit 2, Supplementary T Documents, ST4, page 236, Order of AAT granting an extension of time for making an application for review of decision.
On 22 December 2020, the Applicant lodged an application for review of the objection decision together with detailed submissions to this Tribunal.[32]
[32] Exhibit 1, T Documents, T1, pages 1-55, Application for Review and attachments.
A Hearing was held by Microsoft Teams on 5 November 2021. At Hearing the Applicant was self-represented and gave evidence under affirmation.
THE LAW
The relevant law in this matter includes the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Taxation Administration Act 1953 (Cth) (TAA 1953).
Where a person disagrees with an amended assessment issued by the Respondent they may object to that decision.[33] Following a review of the objection, an objection decision is made by the Respondent.[34]
[33] Following the requirements set out in Part IVC of the TAA 1953.
[34] Section 14ZY of the TAA 1953.
Where a taxpayer is dissatisfied with an objection decision made by the Respondent they may apply to the Tribunal for a review of the decision or appeal to the Federal Court against it.[35]
[35] Section 14ZZ of the TAA 1953.
The Applicant in exercising her right to seek review of the Respondent’s objection decision has, by virtue of section 14ZZK(b)(i) of the TAA 1953, the burden of proving that the assessments for the Tax Periods in dispute are excessive or otherwise incorrect and what those assessments should have been.
The Tribunal is not bound by the rules of evidence and it may inform itself on any matter in such a manner as it thinks appropriate.[36] However, in Briginshaw v Briginshaw (1938) 60 CLR 336 Dixon J (as he then was) considered the relevance of the civil or balance of probabilities standard of proof in Tribunal proceedings. For the Applicant to persuade this Tribunal of the facts it offers to demonstrate that the amended assessments were excessive and as such incorrect and what the assessments should have been:[37]
…. the tribunal must feel an actual persuasion of its occurrence or existence ... It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality… it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters ‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony, or indirect inferences.
[36] Section 33(1)(c) of the Administrative Appeals Act 1975 (Cth).
[37] Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362.
The discharge of the Applicant’s evidentiary burden in this matter must be considered keeping in mind that the evidence said to support the Applicant’s position is uniquely within the Applicant’s possession or control.[38]
[38] Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63, per Latham CJ at 87-88.
Section 8-1(1)(b) of the ITAA 1997 provides that a loss or outgoing can be deducted from assessable income to the extent that it is necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.
Section 8-1(2)(b) of the ITAA 1997 provides however, that a loss or outgoing cannot be deducted under section 8-1(1)(b) to the extent that such a loss or outgoing is of a private or domestic nature.
Business is defined in section 995-1 of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but not as an occupation as an employee.
The question as to whether a taxpayer is carrying on a business has been considered by many Courts and Tribunals. The determination is based on the large or general impression gained from a consideration of all of the typical indicia of the existence, or otherwise, of the carrying on of a business.[39] No single indicia is necessarily determinative.[40]
[39] Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474.
[40] Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 22 ATR 334 at 357.
In considering whether the taxpayer was carrying on a business in Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873, Bowen CJ and Franki J said at [876-7]:
The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.
As a result of the case law in relation to this issue, the factors generally considered to be relevant in determining whether a taxpayer is carrying on a business include:[41]
(a)Whether there is a profit-making intent;
(b)The scale of the activities, including the nature and type of capital and level of turnover;
(c)Whether a commercial approach is taken;
(d)System and organisation employed;
(e)Methods characteristic of the particular line of business;
(f)Sustained and frequent activity;
(g)The type of activity and the type of taxpayer; and
(h)The intention of the taxpayer.
[41] Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873; Commissioner of Taxation (Cth) v Walker (1985) 16 ATR 331; Federal Commissioner of Taxation v Radnor (1991) 102 ALR 187.
ISSUES
The issues for determination by the Tribunal are:
(a)whether the Applicant was carrying on a business during the 2019 income year; and
(b)if so, was the Applicant entitled to deduct the expenses claimed; and
(c)whether the Applicant has discharged her burden of proof to establish that the amended assessment for the 2019 income year was excessive or otherwise incorrect and what the assessments should have been.
CONSIDERATION
The Tribunal notes that the Applicant raised a number of concerns she had in relation to the Respondent’s conduct throughout the review process.[42] The Tribunal’s jurisdiction is limited to reviewing the objection decision, there are alternative means for the Applicant to raise such concerns if she feels it necessary to do so.
[42] Exhibit 3, Parties’ Joint Hearing Bundle, A5, Applicant’s Amended Statement of Facts, Issues and Contentions pages 273-294.
When considering the factors that are examined to determine whether a taxpayer is carrying on a business, the Tribunal is mindful that the situation as a whole must be considered.
In summary the Applicant’s case was that in late 2018 and early 2019 she made a decision to start her own business as a property developer, however given the lead time for a property developer to make significant profit, in the short term she also conducted other business activities. The Applicant’s evidence was that she also intended to purchase discounted items and sell them at a higher price, thereby generating a profit. The Applicant contended that between January and early June 2019 she conducted business activities in preparation for carrying on a business and as such she did not claim any expenses incurred during that preparation stage.[43]
[43] Exhibit 3, Parties’ Joint Hearing Bundle, A5, Applicant’s Amended Statement of Facts, Issues and Contentions page 273.
The Applicant submitted that she had used the accrual accounting method and that in the 2019 income year she was carrying on a business, with the main activity as a property developer.[44] The Applicant contended that the claimed expenses were necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.[45]
[44] Exhibit 3, Parties’ Joint Hearing Bundle, A5, Applicant’s Amended Statement of Facts, Issues and Contentions page 274, paragraph 6.
[45] Exhibit 3, Parties’ Joint Hearing Bundle, A5, Applicant’s Amended Statement of Facts, Issues and Contentions page 274, paragraph 7.
The Applicant told the Tribunal that she applied for an ABN and registered a business name on the date she did as it has special meaning to her and her son. She emotionally told the Tribunal that her intention was to set up a business that she could hand over to her son.[46] The Tribunal does not doubt the good intentions held by the Applicant in that regard.
[46] Transcript, page 64.
Unfortunately however, the Applicant was not able to provide adequate supporting evidence that showed that she was conducting a business in the 2019 income year as either a property developer or in making direct sales. The Tribunal considers that as a whole, the Applicant had ideas of ways to make an income outside of employment, however based on the evidence before it, and for the reasons that follow concludes that during the 2019 income year she did not carry on a business in either property development or direct sales. The Applicant did not provide adequate independent corroborating evidence or personal contemporaneous records in relation to her contended activities. It was clear to the Tribunal that such evidence and records do not exist.
The Applicant’s evidence was based around a business plan provided to the Respondent on 4 February 2020. The business plan was expressed in writing as follows:[47]
[47] Exhibit 1, T Documents, T7, pages 89-90, Business Plan and Idea.
Business Plan and Idea:
· I intend to make a profit from my own business.
· Main business activity as a property developer – Looking for potential development site for a small project (e.g. buying an old house, engage a builder, knock it down and rebuild a brand new residential property and then selling it to potential buyers from Hong Kong).
o Ideal profit margin is between 16% and 20% on development costs. e.g. a property can be sold at $1.8M with a development cost of $1.5M. I genuinely believe I will make a significant profit form this activity when comparing the property price/market in Hong Kong with Sydney. I believe the potential buyers from Hong Kong are willing to pay more than local buyers. Especially, the potential customers are increasing after the 12 June 2019 Hong Kong Protest.
o Ideally to find buyers/investors before the off-the-plan sales.
o Assist potential buyers/investors from Hong Kong to apply to the Foreign Investment Review Board (FIRB) to purchase real estate in Australia.
o However, because of the nature of this business activity, it is unlikely my business can make a profit in the short term.
· Carrying on multiple business activities as long as my own business can make a profit.
· Aim to purchase any kind of goods at a discounted price thus I will make a profit by selling the goods at a higher price e.g. buying and selling goods online via friends and their networks.
· Form a group of buyers to create a buyer force (bargaining power of purchasers) thus I can negotiate better purchase prices and make a profit from the transactions.
· Buying a vehicle for business purposes and/or selling the depreciating asset to make a profit.
· Ideally to find a buyer before purchasing an item.
· The purposes to rent the brand new property located at [redacted] Carlingford:
o It is used for business purposes.
o As an office, I only take 5 minutes walking distance form my own home.
o The oversized garage can store the business goods/assets.
o Renting out this brand new residential property to potential buyers/investors from Hong Kong as a sample of their dream house.
· As I am still suffering from illness and not tolly recover yet, I am incapable to do everything by myself. As such, I have to rely on and pay to people who can work for me.
At Hearing the Applicant told the Tribunal:
·She had experience working with property dealers and developers between 2014 to 2016 when she worked in an audit team at the ATO that dealt with cases of phoenix behaviour from property developers or builders. During that time she went to development sites, interviewed builders or developers to understand how they were incurring their expenses. From that experience she understands how they work and the whole process starting from finding the land to knocking down the structure and rebuilding. Her main concern when working as part of that team related to GST.[48]
[48] Transcript, pages 9-10.
·She has not yet undertaken a property development project as the market is too hot and she could not find a property at a reasonable price to knock down and rebuild, but she constantly inspected properties.[49]
[49] Transcript, page 10.
·When asked what research she had undertaken in the 2019 period, that she knows the Hong Kong property market is the most expensive in the world, so she thought that if she can sell to Hong Kong buyers, they would pay more than local buyers. She knows the character of Hong Kong people, once they like the property, they do not care about price. She wanted to find a Hong Kong property investor to fund the project upfront to minimise the financial risk.[50]
[50] Transcript, page 11.
·She did not have documentation to show her research from the beginning of 2019 because she did not keep records.[51]
[51] Transcript, pages 53-55.
·When asked what research she had undertaken in 2019 in relation to the Sydney property market, that she was familiar with the Sydney property market and since January 2019 she was motivated to start her business, so the first thing she tried to do was to find her own office and then after that she inspected residential properties from February 2019.[52]
[52] Transcript, pages 11-12.
·She wanted to find an investor from Hong Kong to invest upfront. She would ask them to fund the project by making progress payments throughout the purchase.[53]
[53] Transcript, page 13.
·Her initial idea was to purchase a property in her business name, knock it down, rebuild and sell it, however after she went to the bank and understood that they would not lend her money, she started to think about ways to minimise the risk and decided it was better to find an investor upfront.[54]
[54] Transcript, page 14.
·She had $120,000 of her own money which was her investment into her business and would allow her to put down a deposit on a property.[55]
[55] Transcript, page 48.
·She did not have any investors in Australia during the 2019 income year.[56]
[56] Transcript, page 49.
·When asked that if she had no investors in the 2019 income year and the banks would not lend her any money, how would she fund the purchase of a property that she had identified in 2019 income year, that she would do so with her redundancy payment and her own money, which would cover the deposit and that in the worst case she could borrow money from her sister to complete the purchase. But that is why she wanted to find an investor to fund the project.[57]
[57] Transcript, page 50.
·She is a perfectionist and because she does not have perfect information, she has not set up a website.[58]
[58] Transcript, pages 14-15.
·She had not talked to a solicitor to draw up an investment agreement, but did talk to a Hong Kong Barrister.[59] She did not pay for the enquiry phone call to the Barrister because she was introduced to them by a friend and it was a quick 5 minute phone call and she did not make a follow up appointment as she had not found a property.[60]
[59] Transcript, page 15.
[60] Transcript, pages 46-47.
·She talked to a builder in Australia and inspected a house with that builder and asked him how much to knock down and rebuild.[61] That house was in Baulkham Hills in early 2019 to calculate costs. She could not recall the exact address of the property or timing of the visit.[62]
[61] Transcript, page 15.
[62] Transcript, pages 44-45.
·In relation to her business plan, that because she is not a large company or big organisation, she did not need to document every single thing, her plan is simple. It started from January 2019. The business plan provided was started around March 2019 but was initially handwritten on paper and sometimes even though she did not write it down, there were ideas in her head.[63]
[63] Transcript, pages 16-17.
·She made the business plan before she started to search for properties, however it was less detailed at the time. In February 2019 the business plan was just a broad idea the words were different but she had the same ideas.[64]
[64] Transcript, pages 56-57.
·She decided to rent a residential property for her business premises as it could show Hong Kong buyers their dream house and she could use it to persuade them to invest.[65]
·She did not have business indemnity insurance. She did have insurance on the Carlingford property however, did not know whether the insurance company considered that insurance to be landlord insurance or personal home and contents insurance.[66]
·In December 2019 she moved into the Carlingford property and moved out in February 2020 and was using it as her office and storage space. When suggested this was inconsistent with the property being used as a display home, that no it was not it, was both.[67]
·In the 2020 income year she had two lots of investors come and stay in the Carlingford property. She did not have agreements in place with those investors in relation to their stay in the property or the services she would provide while they were there.[68]
·The company in Hong Kong that she entered an agreement with to find Hong Kong investors is run by a person she knew prior to moving to Australia and was referred to her by her sister. The agreement in place was not detailed as she had faith in them.[69]
·She had looked at selling items from Australia that were not available in Hong Kong through her contacts in Hong Kong and she engaged with people in relation to this.[70]
·When she bought things to sell in Australia, she would search the potential price she could sell them for and work out the purchase price that way and then sell them by relying on her friends and their networks.[71]
·She could not get further information from the person she had purchased items from in the 2019 income year. She had paid cash.[72]
·She purchased goods in 2019 from a business that was closing down and made 3 sales in relation to those goods in the 2019 income year period.[73]
·She purchased a car on 28 June 2019 for business purposes, to inspect properties and take Hong Kong investors around. On 30 June 2019 she entered into a verbal sales agreement to sell the vehicle for a profit having accepted a $500 deposit. The sale did not proceed and she subsequently used the vehicle in the 2020 year when the perspective investors from Hong Kong came to Australia.[74]
[65] Transcript, pages 19-20.
[66] Transcript, page 20.
[67] Transcript, page 58-59.
[68] Transcript, pages 20-21.
[69] Transcript, pages 28-29.
[70] Transcript, pages 35-36.
[71] Transcript, page 36.
[72] Transcript, pages 36-37.
[73] Transcript, pages 36-37 and 56-57.
[74] Transcript, pages 30-34.
The Respondent contended that:
(a)The Applicant was not operating in a business-like manner as her:[75]
[75] Exhibit 4, Respondent’s Outline of Submissions, pages 11-12, paragraph 48-51.
· Business plan is vague and does not contain any meaningful detail regarding:
o the research (if any) conducted by her in relation to property development, realistic estimates of quantity and volume of sales, income expected from her activities, estimated expenses, or how she would finance expected expenses; or
o the markets that she proposed to target for her direct selling activities, realistic estimates of quantity of volume of sales, income expected from her activities, estimated expenses, or how she would finance expected expenses.
· Business plan, nor any other document she provided disclose a systematic approach for:
o identifying or assessing property sites for her property development business; or
o identifying goods to resell at a higher price.
· Activities do not include any of the other usual hallmarks of a property development or direct sales business for example conducting feasibility studies, maintaining a separate business account, obtaining business insurance or creating a website advertising her businesses.
(b)Based on the facts before the Tribunal that the Applicant could not hold a reasonable expectation that her activities would be profitable, especially where the Applicant had no experience or training in the Australian property development or direct selling markets and had not consulted experts or received advice on the running or profitability for any of her purported activities.[76]
[76] Exhibit 4, Respondent’s Outline of Submissions, page 10, paragraph 41.
(c)There was no size or scale to the Applicant’s activities.[77]
[77] Exhibit 4, Respondent’s Outline of Submissions, pages 11, paragraphs 44-47.
(d)The Applicant had not established that her conduct as a whole during the 2019 income year established that she engaged in either of her purported businesses regularly, routinely or systematically. Rather the Applicant’s activities can be characterised by informality and were haphazard and disorganised in nature.[78]
[78] Exhibit 4, Respondent’s Outline of Submissions, pages 12, paragraph 53.
(e)The Applicant did not establish she had engaged in any methods that would be characteristic of a property development or direct selling business.[79] As:[80]
[79] Exhibit 4, Respondent’s Outline of Submissions, page 13, paragraphs 55.
[80] Exhibit 4, Respondent’s Outline of Submissions, pages 13-14, paragraphs 56 and 58.
56.With regards to the Applicant’s property development activities:
(a) Based on her business plan, the Applicant is merely searching for ‘potential’ sites for development, without considering factors that would significantly impact the financial viability of a property development. Given the inherent risks of this industry, it would be reasonable to expect that such a business would have a detailed and specific method of identifying viable sites, rather than vague statements of “aiming” to find a potential development project;65
(b) The major expenses purportedly incurred by the Applicant in relation to her property development activities are marketing, a used car and rent. For property developers, it would be expected that other expenses would be incurred, for example, feasibility studies, consultant and / or professional advisor fees from Australian property and / or construction experts.
(c) The Applicant has not established that she has engaged in any activities that are characteristic of operating in the property development industry, for example, attending industry events, seeking professional advice in relation to the management of her property development business, identifying suitable sites for property development, conducting feasibility studies, or engaging experts such as construction or property development experts;
(d) The Applicant has not established that she has even commenced her property development activities, she has not entered into any contract negotiations (for example, for the purchase of property, or building and construction services) or into any formal commitments in relation to her property development activities, or lodging or considering development approvals for potential projects.
……
58.With regards to the Applicant’s direct selling activities:
(a) The Applicant does not use a commercial space to store her ‘stock’.
(b) The Applicant does not have coherent marketing strategy, or other method of advertisement for her direct selling activities beyond relying on her friends.
(f)The Applicant’s submission that no formal qualifications or training or relevant experience is required to engage in Australian property development, does not demonstrate that she had any relevant qualifications, personal training, or experience in the Australian property development industry. This is more important in circumstances where she has not evidenced that she has sought or obtained any professional advice in relation to her property development activities.[81]
(g)A mere intention to carry on a business is not enough, there must be activity and the Applicant’s activities were at best sporadically undertaken, and with an unarticulated, vague and inchoate purpose that is not consistent with the carrying on of a business. The activities lack any sufficient commercial character to be regarded as a business in their own right.[82]
[81] Exhibit 4, Respondent’s Outline of Submissions, page 14, paragraph 60-63.
[82] Exhibit 4, Respondent’s Outline of Submissions, page 14, paragraph 64.
The Respondent summarised their contentions that the Applicant was not carrying on a business as follows:[83]
3.Each of the relevant indicia typically considered by the courts and the Tribunal in this field, either affirmatively favours the conclusion that neither Applicant conducted a business of property development or direct selling during the 2019 income year, or the Applicant has disclosed insufficient information to support the contrary view.
4.While the absence of one indicator is not fatal to the Applicant’s case (for example, lack of profit-making intent, no commercial approach undertaken, no relevant experience or qualifications), the Applicant’s inability to make out any of the indicators can only lead to the conclusion that the Applicant is not carrying on a business.
5.The activities of the Applicant were, at best, sporadically undertaken, and with an unarticulated, vague and inchoate purpose that is not consistent with the carrying on of a business. The activities lack any sufficient commercial character to be regarded as a business in their own right.
6.At its highest, the Applicant’s activities during the 2019 income year could have amounted to activity conducted in preparation for carrying on a property development business, although the Respondent observes in this respect that no actual property development was ever subsequently undertaken by the Applicant.
[83] Exhibit 4, Respondent’s Outline of Submissions, pages 1-2, paragraphs 3-6.
The Tribunal accepts the Applicant’s evidence to the extent that she is genuinely seeking to create an income source and a pathway for her son’s future. While the Tribunal acknowledges the distress the present proceedings has caused the Applicant, the Tribunal is conscious that an idea of itself and a mere intention to carry on a business is not enough to establish that the Applicant was carrying on a business in the 2019 income year.[84]
[84] Inglis v Federal Commissioner of Taxation (1970) 10 ATR 493 at 496-497.
The Applicant told the Tribunal that she decided to start her own business in early 2019. The evidence before the Tribunal clearly sets out that the Applicant has not sought to claim deductions or declare income in relation to her purported business activities that may be attributable to the period prior to 15 June 2019. The Applicant’s view was that any transactions prior to that date relate to preparatory activities.
The trouble with this is that there is limited corroborating evidence before the Tribunal in relation to any of the Applicant’s preparatory activities. The Applicant’s evidence at Hearing was primarily that she had evolving ideas, did not necessarily write them down or keep records of what she did. Given the short window of time in the 2019 income year that the Applicant purports to have been carrying on a business the Tribunal considers such information to be extremely relevant. The absence of such evidence, in circumstances where the Applicant holds accounting qualifications and has experience as an ATO auditor, calls the creditability of the Applicant’s evidence into question.
The Tribunal is mindful that the evidence provided by the Applicant should be considered carefully. Hill J in Imperial Bottleshops Pty Ltd and William John King Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148 at 155 stated:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be “tested most closely, and received with the greatest caution”: Pascoe v FCT (1956) 6 AITR 315; 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as ‘prima facie unacceptable’, cf McCormack v FCT (1979) 143 CLR 284 at 302 per Gibbs J; 9 ATR 610; 23 ALR 583.
Interestingly, the Applicant told the Tribunal at Hearing that she was a CPA who had extensive experience as an auditor at the ATO, however claimed her expertise was in excise and GST, not in income tax.[85] In her written submissions the Applicant provided that:[86]
After eight years’ part-time study accredited as a professional, the Applicant always adheres to the Accounting Standards and the Code of Conduct (e.g. integrity and ethics).
Since working full time at the ATO as a Compliance Officer in October 2007, the Applicant always follows the Taxpayer’s Charter, the APS Values, the ATO Values, procedure, polices and guidelines.
[85] Transcript, pages 9-10.
[86] Exhibit 3, Parties’ Joint Hearing Bundle, A5, Applicant’s Amended Statement of Facts, Issues and Contentions page 282, paragraphs 37-38.
It is of great concern to the Tribunal that despite her professional expertise as a CPA and auditor that the Applicant failed to keep reasonable records in relation to her purported preparatory activities from January 2019 or to develop a more sophisticated business plan. Further, while the Applicant may have specialised in excise and GST, she would have undertaken study in and been exposed to income tax specific laws and requirements. As such, it is reasonable to expect that the Applicant is in a far better position than the average taxpayer to be aware of the relevant factors required to be met to demonstrate that a business is being carried on.
The Applicant’s evidence was as a whole, unclear in relation to how she proposed or purported to carry on either her property development or direct sales activities.
The Tribunal accepts the contentions (as outlined in paragraphs 41 and 42 above) made by the Respondent in relation to the application of the evidence advanced by the Applicant to the issues before the Tribunal.
Based on the totality of the evidence before it, the Tribunal finds that the Applicant did not establish positively that any of the factors considered to be relevant in determining whether a taxpayer is carrying on a business (as outlined in paragraph 31 above) weighed in favour of a finding that her activities constituted the carrying on of a business. As such the Tribunal is not satisfied that the Applicant was carrying on a business during the 2019 income year.
Due to this finding the Tribunal is not required to consider the Applicant’s purported reported business income or claimed business deductions, however notes that, the Applicant contended that she relied on information found on the Respondent’s “website to report the business incomes (i.e. a reasonable estimate of the assessable income) and the claimed expenses (i.e. prepaid expenses, instant asset write-off and other expenses)”.[87]
[87] Exhibit 3, Parties’ Joint Hearing Bundle, A5, Applicant’s Amended Statement of Facts, Issues and Contentions page 275, paragraph 8.
The Tribunal considers it reasonable to expect that the Applicant is aware of her taxation obligations, taxation laws and how to obtain independent taxation advice if required.
The Applicant told the Tribunal that she had checked her interpretation of the information she relied upon from the Respondent’s website with friends who were presently engaged as accountants.[88]
[88] Transcript, page 28.
On each occasion the information referred to by the Applicant to justify the income and deductions she was relying on was incorrectly and illogically applied. The Tribunal does not accept that a person with the qualifications and experience of the Applicant reasonably believed that her arguments were made in accordance with accounting principles or were sustainable at law.
Based on the evidence before it the Tribunal finds that the Applicant did not satisfy her onus to prove that the amended assessment for the 2019 income year was excessive or otherwise incorrect and what the correct assessment should be.
CONCLUSION
The decision under review is affirmed.
I certify that the preceding 57 (fifty-seven) paragraphs are a true copy of the reasons for the decision herein of Member D Mitchell
...........................[SGD].................................
Associate
Dated: 1 December 2021
Applicant: By Microsoft Teams Solicitors for the Respondent: Ms Manuela Calligaro
Australian Taxation Office
0
10
0