Latif and Commissioner of Taxation

[2008] AATA 675

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 675

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/0604 &

TAXATION APPEALS DIVISION		)         2007/0605
Re		ZAID LATIF

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Dr K S Levy RFD, Senior Member

Date4 August 2008

PlaceBrisbane

Decision

1.        The decisions under review are affirmed.

2.        I remit the calculation of motor vehicle expenses back to the Commissioner to consider adopting either the 12 percent of original cost method or, the one-third of actual expenses method.

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

Senior Member

CATCHWORDS

TAXATION – Income Tax – claim for motor vehicle and business expenses – applicant endures the burden of proof – log book method not justified as a basis for claiming deductions for motor vehicle expenses – probative evidence needed for business expenses’  claim – both claims not justified – decisions under review affirmed.  

Re Turner and Deputy Federal Commissioner of Taxation [1999] AATA 448

McCormack v The Federal Commissioner of Taxation (1978) 143 CLR 284

Trautwein v The Federal Commissioner of Taxation (1) (1936) 56 CLR 63

SZFDE v Minister for Immigration and Citizenship (2007) 81 ALJR 1401; [2007] HCA 35

Income Tax Assessment Act 1997 s 28-125

REASONS FOR DECISION

4 August 2008	Dr K S Levy RFD, Senior Member
INTRODUCTION

1.      Mr Zaid Latif, the applicant, is a director of GlobalTel Australia Pty Ltd and of Zaro Consulting Pty Ltd.  Mr Latif was also the accountant of those two companies.  In addition, he conducted an independent business selling communication services in Australia and overseas, particularly in Iraq.

2.      For the 2000/2001 and 2001/2002 years, Mr Latif lodged income tax returns in respect of these businesses.  Certain claims relating to motor vehicle usage and expenses together with expenses for the telecommunication businesses were disallowed following an audit by the Commissioner of Taxation.  On 23 May 2005, Mr Latif then lodged amended taxation returns.  These were reviewed by the ATO auditors and certain deductions claimed were then allowed, but deductions in relation to motor vehicle usage and certain expenses in relation to his business were still denied.

3.      Mr Latif objected to the amended assessment on 14 December 2005.  Those objections were rejected.  Mr Latif now appeals to this Tribunal.

ISSUES

4.      To clarify the issues before the Tribunal, the amounts in dispute are as follows:

(a)For the year ended 30 June 2001 –

(i)        Motor vehicle expenses (depreciation, hire

           charges/interest, insurance, and petrol and  oil

$9,214.65

           Less private use component of 19%

$1,751.00

$7,463.65

(ii)       Total business income

$201,000.00

           Less expenses associated with alleged

telecommunication service maintained in Iraq

           (Contractor/commission expenses; lease and rent expenses; depreciation expenses on computer equipment; motor vehicle expenses; other expenses)

$282,299.00

           Net loss of the business

$81,299.00

(b)For the year ended 30 June 2002 -

(i)        Motor vehicle expenses (depreciation, hire

           charges/interest, insurance, and petrol and  oil

           Less private use component of 19%

$23,245.00

$4,417.00

$18,829.00

(ii)       Total business income

$230,000.00

           Less expenses associated with alleged

telecommunication service maintained in Iraq

           (Contractor/commission expenses; lease and rent expenses; depreciation expenses on computer equipment; motor vehicle expenses; other expenses)

$344,582.00

           Net loss of the business

$114,582.00

5.The issues therefore are as follows:

(a)Is the log book method justified as a basis for claiming deductions for motor vehicle expenses for the applicant for the 2000/2001 year and 2001/2002 year? and

(b)Are the depreciation and other claims associated with the claimed telecommunication business allowable under s 28–125 of the Income Tax Assessment Act 1997?

EVIDENCE

6.      Mr Latif is qualified as an accountant and has an accounting degree from an Australian University, although he is not a member of one of the professional accounting bodies.  He was employed as the accountant for GlobalTel Australia Pty Ltd (GlobalTel) and by Zaro Consulting Pty Ltd (Zaro) and was also a director of both of those companies.  In addition, he undertook a separate business venture alone providing telecommunication services in Australia and Iraq.

7.      GlobalTel was a telecommunications company offering cheap overseas telephone calls for ordinary citizens of Australia.  That company maintained no technical staff but offered services from Australia to other countries including fixed line calls to mobiles in Australia.  It did not offer local calls.  In relation to Zaro, this company had telecommunications equipment in Iraq and in Australia.  It offered wholesale telecommunication services between Australia and Iraq but only to other providers.  It also had the capacity to bid for other technical work (installation and supply of telecommunication networks and equipment).  It also managed the telecommunication networks for other companies.  Mr Latif’s personal business was described as offering a tele-housing facility in Iraq which was a room where others could come in and connect to his equipment. 

8.      In Australia, GlobalTel had an office in Bankstown in Sydney.  Zaro had an office in Piermont in Sydney.  The distance between the two offices was some 80 kilometres (round trip).  Mr Latif maintained a log book for a period of three months in line with the policy established by the Australian Taxation Office if businesses seek to claim deductions for motor vehicle expenses.  In the log book maintained by Mr Latif, he has, over a three month period, made almost daily entries of business trips between the city and his home or his offices, which were approximately 90 kilometre round trips.  However, his business involved more than travelling between the offices of the two related companies.  Some of his business was generated by conducting marketing campaigns in shopping centres in Sydney and on occasions, a number of these campaigns were being conducted concurrently in different shopping centres in Sydney and in the suburbs.

9.      He also claimed that he purchased the vehicle involved, a 1991 Nissan Skyline for $55,000.  The respondent disputes that the vehicle could be worth that amount.  In fact, the Advocate for the respondent, in early submissions, submitted that the respondent had a document from the New South Wales Road Traffic Authority showing that the vehicle was purchased for $52,500.  While the applicant claimed that he paid $55,000, he also submitted that he had no other record as he had bought the vehicle through an agent.  The Tribunal queried whether the difference in purchase value could have been the agent’s fee.  The applicant agreed that that might be the case but he had no records to verify it.  He did however submit a document he had received from a website called the “Red Book” which is an organisation which provides a record of valuations and average prices of sales for used vehicles.  In relation to a 1991 Nissan Skyline, the website document submitted shows that it was worth $110,000 when purchased new.  However, the national average price on a private sale for such a vehicle was between $23,000 and $28,000 currently.  The applicant then conceded that he would accept the vehicle might be worth $52,500 in accordance with the New South Wales Road Traffic Authority records rather than argue further that the vehicle might be worth $55,000 at the time of purchase. 

10.     In relation to the motor vehicle records, the applicant had a record of the motor vehicle log kept for three months. The applicant gave evidence about his businesses and the log book method and recordings.  The Commissioner has objected to the log book as every entry merely shows “meeting” as a description of each journey.  Mr Latif maintained that he completed the log book contemporaneously at the end of each trip.  The Commissioner says the record is inadequate and does not satisfy s28–125(2)(d) of the Income Tax Assessment Act 1997.  The Tribunal and the respondent had access to a photocopy of the log book.  The Tribunal then asked if the original log book was available and Mr Latif volunteered it for examination.  It was also made available for examination by the respondent.  The Tribunal queried Mr Latif about the completion of the log book and suggested that given the pen used for completion of the book and the appearance of the entries, there was a degree of uniformity that makes it appear that was completed at the same time, ie. at one sitting or well after the events of the trips claimed.  It did not have the appearance of having been written whilst sitting in the car.  Mr Latif denied this.  The Tribunal further suggested during the course of subsequent evidence in relation to this matter, that the log book showed only one entry per day and did not appear to have been completed at the end of each trip.  The evidence that only business trips were entered and private trips were excluded did not seem to follow the pattern which was actually recorded in the log book.  Mr Latif still maintained it was an accurate record.

11.     In cross-examination, the directorships of the companies were clarified, including employment and remuneration of the directors.  The applicant also said Zaro shared business premises with GlobalTel although they maintained separate employees and there was no sharing of staffing resources between the two organisations.

12.     Mr Latif admitted that there were times when he went directly from home to the office or vice versa rather than directly from home to an official appointment but he could not recall how often this occurred.  During the period for which the log book was maintained, it appeared that there were a large number of occasions when the applicant travelled directly from home to appointments.  Mr Aftanas, advocate for the Commissioner, accepted the dollar value of expenses for the car as claimed.

13.     In relation to the business expenses claimed, it was noted that there were many purchases from Rash Projects in Iraq.  However, the most significant and critical expenses involve a claim for depreciation for two invoices for computer equipment bought for the business in Iraq.  One of those invoices was for $544,555 in August 2001, and then 4½ months later on 13 January 2002, there was a further purchase of computer equipment of $651,090.  That is, over $1 million was paid for equipment for Iraq in the 2001/2002 financial year.  Mr Latif stated that he borrowed money for the purchase of some of this equipment and some had been repaid.  He could not remember how much he had repaid.

14.     The invoice for the equipment was made by his company, GlobalTel and then onsold to Mr Latif.  Under cross-examination, it was revealed that the conventional invoicing system of GlobalTel was not used for raising of the invoice to Mr Latif for this equipment.  Indeed, while there was an invoicing system available in GlobalTel, (which issued 12,000 invoices (approximately) per month), at Mr Latif’s direction, these invoices were prepared outside of the normal company invoicing system.  In that respect, the invoices were irregular but they were also irregular in the sense that they did not have an invoice number.  Mr Latif said that the other company’s invoices had a number but these two special invoices did not.  There was also evidence that GlobalTel utilised the MYOB accounting system, which provided an invoicing module.  However, Mr Latif said that his companies did not use the invoicing module of MYOB but a separate invoicing software system which could not communicate electronically with MYOB.

15.     The evidence also noted that the transactions in Iraq were operated often through agents, in particular with Rash Projects and Saadi Trading Company.  Mr Latif said he had no records of when the computer equipment was purchased.  He also had no bank records as independent verification of the transactions.  The Tribunal was advised also that the companies are now in liquidation.

16.     Final submissions of the parties were received.  Mr Latif said he was entitled to claim the expenses he has submitted.  Mr Aftanas says there is no evidence to support the expenses of the computer purchases and no evidence that the business ever in fact existed.  He also emphasised there are no bank records.  Mr Latif submitted that the transactions were paid in cash in Iraq as he had surplus moneys there.

CONSIDERATION

17.      I have considered all of the evidence and all of the relevant legislative requirements in arriving at a decision in this matter.

18.     The relevant legislation is the Income Tax Assessment Act 1997.  Section 28–125 of that Act provides as follows:

ss28-125 How to keep a log book

“(1) It is in your interests to record in the log book any journey made in the *car during the log book period in the course of producing your assessable income. If a journey is not recorded, the log book will indicate a lower *business use percentage than is actually the case.

(2) A journey is recorded by making in the log book an entry specifying:

(a) the day the journey began and the day it ended;

(b) the *car’s odometer readings at the start and end of the journey;

(c) how many kilometres the car travelled on the journey;

(d) why the journey was made.

The record must be made at the end of the journey or as soon as possible afterwards.

(3) If 2 or more journeys in a row are made in the *car on the same day in the course of producing your assessable income, they can be recorded as a single journey.

(4) The following must be entered in the log book:

(a) when the log book period begins and ends;

(b) the *car’s odometer readings at the start and the end of the period;

(c) the total number of kilometres that the car travelled during the period;

(d) the number of kilometres that the car travelled, in the course of producing your assessable income, on journeys recorded in the log book;

(e) the number of kilometres referred to in paragraph (d), expressed as a percentage of the total number referred to in paragraph (c).

Each of the entries must be made at or as soon as possible after the start or end of the period, as appropriate.

(5) Each entry in the log book must be in English.”

19. On behalf of the Commissioner, it was submitted that there is not sufficient evidence for the claims made in relation to motor vehicle expenses. In relation to the computer equipment expenses claimed, the Commissioner says there is no evidence of the expenses being made and indeed, he contends that the business did not exist at all. The Commissioner relies on s14ZZK(b) of the Taxation Administration Act 1953 which states the applicant has the burden of proof in relation to all of the claims he makes. 

20.     In the course of the evidence, Mr Latif, an accountant, was articulate and well-prepared.  However, he was at times, evasive or on occasions even avoided answering questions.  At one point he suggested to the Commissioner’s advocate that his questions were irrelevant.  He had to be directed to answer a question on one occasion.

21.     I make the following findings on material facts:

(a)The evidence of the purchase price of the 1991 Nissan Skyline is insufficient to establish the purchase price.  However, I accept the concession by the applicant that the car value is $52, 500.

(b)Having examined the original of the log book, I do not accept that it was completed progressively or after each trip.  Equally, the paucity of entries that might reflect private expenditure are minimal and are likely to be unreliable.  I therefore do not accept it as an accurate record.

(c)Mr Latif was a director of the businesses GlobalTel and Zaro.  He used his car for those businesses based on the distance between Bankstown and Sydney and the business he describes. I accept that he travelled greater than 5,000 kilometres in a year.

(d)There is no evidence that the separate business undertaken by Mr Latif (apart from GlobalTel and Zaro) ever existed.

(e)There are no records or any evidence that the computer equipment which is claimed as a loss was ever purchased. 

22.     Of all the issues in contention, there were assertions made by the applicant but little in the way of evidence (or at least in relation to any verifiable evidence) of the claims he makes.  Overall, I formed the view that the applicant was not a witness of truth in relation to much of his evidence.

23.     I do however accept that Mr Latif had the two businesses he claims in Australia (i.e. GlobalTel and Zaro) and that he used his vehicle for business purposes for greater than 5,000 kilometres per year.  Because of my findings above about the unreliability of the evidence in relation to the log book method, I also find –

(a)That it was not completed in the spirit of the scheme maintained by Australian Taxation Office; and

(b)It was not completed with sufficient description ie. “meeting” is not an adequate description.

24.     In relation to (b) above I was referred to Re Turner and Deputy Federal Commissioner of Taxation[1].  The Commissioner says that is authority for not accepting a description as “meeting” on each entry provided by the applicant as being adequate.  The applicant says Turner’s case had other defects as it did not describe the vehicle; and described the trips as “business”.  I think “meeting” and “business” are both equally vague.  I find that the term “meeting” which has been invariably used, does not adequately describe the business trips for the three month sample period.  This finding is also made in the context that I have serious doubt that the log book was filled in progressively as required and I find of the witness’ responses on oath for this respect to be unreliable. I therefore reject the assertion that the log book has been sufficiently maintained. 

[1] [1999] AATA 448.

25.     The Commissioner says however there are four methods available for determination of motor vehicle expenses.  These are:

(a)The log book method;

(b)The cents per kilometre method;

(c)The 12% of original value method; and

(d)One-third of actual expenses method.

26.     I have already determined that the log book method is not an appropriate basis to calculate Mr Latif’s motor vehicle expenses.  Equally, because of the unreliability of the log book data in relation to business kilometres, the cents per kilometre method is equally inappropriate as an accurate estimate of the business kilometres is not available.  I reject the claims based on either of those two methods.  Based on evidence which may be available from the “Red Book” website, an objective average value price for a vehicle of that make and at the time of purchase may be available.  If so, then the Commissioner of Taxation may be able to utilise the 12% of original value method.  Alternatively, the one-third of actual expenses method could be adopted and given the age of the vehicle this may be a more appropriate method.  The matter should be referred back to the Commissioner to recalculate the motor vehicle expenses based on either of the last two optional methods mentioned above.

27.     In relation to the telecommunications business which the applicant submits he undertook separately for the 2 companies mentioned above, the claims for computer equipment are based on invoices for over $1 million prepared at Mr Latif’s direction.  He could recall directing staff to prepare an invoice which was not placed under the normal GlobalTel invoice system, but he could recall little else of the transaction.  He could recall however that the amount was paid in Iraq and using money he had surplus in Iraq.  He had no records available however to show that the transaction occurred at all, or the value for which the computers may have been commercially purchased.  In view of the uncertainty of the evidence, I reject it as a legitimate deduction.  I do so as not only the evidence required is unavailable but also that it is likely to have been an uncommercial transaction.  In addition, even if there was such a transaction, there is no evidence to show the price paid by GlobalTel in comparison to the  price at which it was passed on to Mr Latif, and for which he now claims a tax deduction.  I was referred by the Commissioner in this context to McCormack v The Federal Commissioner of Taxation[2]. In that case, the Court had to consider whether the applicant taxpayer had discharged his burden of proof under s190 of the Income Tax Assessment Act 1936.  The majority of the High Court in that case held that the taxpayer had not discharged that burden of proof and said, inter alia,

“… if a taxpayer can succeed, simply because there is no evidence from which it can be concluded that the relevant purpose existed, that must mean that the burden of proving the existence of that purpose lies on the Commissioner.  That in my respectful opinion must be to invert the onus of proof…”[3].

[2] (1978) 143 CLR 284.

[3] McCormack v The Federal Commissioner of Taxation (1978) 143 CLR 284 at 303.

28.     I was also referred to the High Court decision in Trautwein v Federal Commissioner of Taxation (1)[4] where the Court, per Latham CJ, said:

“The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof”[5].

“There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books”[6].

[4] (1936) 56 CLR 63

[5] Trautwein v The Federal Commissioner of Taxation (1) (1936) 56 CLR 63 per Latham CJ at 87.

[6] Trautwein v The Federal Commissioner of Taxation (1) (1936) 56 CLR 63 per Latham CJ at 88.

29.     Also, as required by the Commonwealth Evidence Act 1995 there must be some probative evidence.  That is, any evidence is not sufficient.  It must be probative.  In other words, there must be some basis to draw an inference that a finding of fact can be made that certain facts asserted are true.  This is akin to the “Wednesbury unreasonableness” principle in SZFDE v Minister for Immigration and Citizenship[7].  I therefore reject the applicant’s submission as it is not reasonably open to the Tribunal to find in his favour as there is such a paucity of evidence that no reasonable tribunal of fact could so find.  To expect the public to fund such an expense in these circumstances would be unreasonable and contrary to the intention of the legislation.

[7] (2007) 81 ALJR 1401; [2007] HCA 35.

CONCLUSION

30.     I find therefore that the claims in respect of both motor vehicle expenses and business expenses have not been substantiated.  The claim therefore cannot succeed.

31.     The decisions under review are affirmed but I remit the calculation of motor vehicle expenses back to the Commissioner to consider adopting either the 12 percent of original cost method or, the one-third of actual expenses method.

I certify that the 31 preceding paragraphs are a true copy of the reasons for the decision herein of Dr K S Levy RFD, Senior Member

Signed:…………............. [Sgd]..................................................
              Elizabeth Young, Research Associate

Date of Hearing  16 July 2008
Date of Decision  4 August 2008
The Applicant was self-represented
Advocate for the Respondent   Stephen Aftanas, Departmental Advocate
Solicitor for the Respondent     Kim Hall