Li and Commissioner of Taxation

[2008] AATA 849

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 849

ADMINISTRATIVE APPEALS TRIBUNAL      )   

)    No: 2007/4781

TAXATION APPEALS DIVISION  )   

ReShi Qi LI

Applicant

And    Commissioner of Taxation

Respondent

DECISION

TribunalProfessor GD Walker, Deputy President

Date23 September 2008

PlaceSydney

DecisionThe decision under review is affirmed.

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

Professor GD Walker
  Deputy President

CATCHWORDS - Taxation – whether amended assessment was excessive – whether penalty for failure to take reasonable care was correctly applied – applicant bears the burden of proving the facts on which he relies – applicant failed to discharge the burden of proof – assessment not excessive – penalty was appropriate – decision under review is affirmed.

…

RELEVANT ACT/S:

Taxation Administration Act 1953 (Cth) (the TAA): 14ZZK, 284-90

…

REASONS FOR DECISION

23 September 2008	Professor GD Walker, Deputy President
Basic facts

1.      At all relevant times the applicant Mr Shi Qi Li worked as a cook at the Kam Fook Shark Fin (Jin Fu) seafood restaurant in Chatswood, New South Wales (the restaurant or the Kam Fook restaurant).  He began employment there on 1 July 2003.

2.      In his personal income tax return for the year ending 30 June 2004 (T3 pp5-12), the applicant declared a gross income of $22,360 as wages from the restaurant.  An amount of $3,380 was recorded as tax withheld.  Those figures matched the figures on the PAYG payment summary provided by the restaurant to the applicant (T13 p47).

3.      On 11 August 2004 the respondent issued a notice of assessment to the applicant in accordance with the figures declared by the applicant on his income tax return ( T4 p13 -the original assessment).

4.      Subsequently, the respondent conducted an audit on the applicant’s employer, the restaurant.  An interview with the principal of the restaurant, Ms Rosetta Oi Ling Lee, was conducted on 28 April 2006 (T5 pp14-29).  After the interview, on 17 July 2006, the restaurant’s legal representatives provided the respondent with a spreadsheet detailing the amounts paid by the restaurant to its employees (T6 pp30-31).

5.      The spreadsheet stated the wages paid to the applicant as $56,513.

6.      The transcript of the interview with Ms Lee refers to the restaurant’s practices in relation to paying its employees.  In it, Ms Lee acknowledges that there is a discrepancy between the amount paid to an employee and the amount he or she declares (T5 p24).

7.      Consequently, there is a difference of $34,153 between the amount of wages reported by the applicant on his income tax return and the figures received from the restaurant’s solicitors.

8.      On 29 May 2007 the respondent issued an amended assessment (T11 p37) reflecting an increase in the applicant's assessable income by that amount.  The revised taxable income was now $56,513, less deductions of $615 as allowed in respect of the original return (T10 p36).  A tax shortfall penalty of $2,864.03 was added.  The applicant objected to the amended assessment and the respondent disallowed the objection in full on 30 August 2007 (T15 p55).

9.      In the objection, the applicant had stated that “no additional money” was received from his employer apart from that declared in his payment summary (T13 p40).  On the basis of his return, the applicant declared and paid tax on only $430 of his gross weekly income, which equates to an annual amount of $22,360.  He paid $3,380 by way of income tax, which averages at $65 per week.

10.     On 3 October 2007 the applicant appealed to this tribunal against the respondent’s disallowance of his objection (T1 p1-2).

11. At the hearing, the applicant appeared in person while Ms Vicki Hammond appeared on behalf of the respondent. The documents before the tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act1975 (the T documents), taken into evidence as Exhibit R1, together with the other documents tendered by the parties at the hearing.  The applicant gave oral evidence in person through a Cantonese interpreter.

Issues

12.     This application raises two issues:

(a)Is the amended assessment issued by the respondent to the applicant excessive?

(b)Was the penalty correctly applied under s 284-90(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA) at the rate of 25 percent on the basis of the applicant’s failure to take reasonable care?

13. The respondent relied on s 14ZZK of the TAA and put the applicant to proof of all the facts on which he relied.

Applicable law

14. In proceedings such as these, s 14ZZK of the TAA places on the applicant the burden of proving that the decision under review should not have been made or should have been made differently.

15. Section 284-75(1) of Schedule 1 (TAA) states that a taxpayer is liable to an administrative penalty if he or she, directly or through an agent, makes a statement to the commissioner that is false or misleading in a material particular and that a shortfall results. The relevant shortfall amount “is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been” (s 284-80 of Schedule 1).

16. The amount of the penalty is calculated as a percentage of the shortfall amount. Pursuant to s 284-90 of Schedule 1 (TAA), the percentage is determined by the nature of the taxpayer’s conduct when the false or misleading statement was made. In this instance, the respondent applied Item 3, which operates where “Your shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a taxation law”.

Applicant’s evidence

17.     At the hearing the applicant adopted his letter to the Australian Taxation Office dated 15 June 2008 (Exhibit A1) in which he stated that he had been cheated by his previous employer in relation to tax.  He began at the restaurant on 1 July 2003 and worked full-time six days (60 hours) per week, including Saturdays and Sundays.  The hours were from 10:30 am to 10:30 pm with a break from 3 pm to 5 pm.

18.     He was told that all the money he received was after tax.  All his income tax matters were handled by the employer company.

19.     He was paid approximately $900 per week and was told to sign the company payroll record, but no figure appeared on that record until early 2006.

20.     The company reported his annual income to the respondent at about $23,000 per annum each year.  He believed their reason was that by so doing, they would pay less tax and lower contributions for superannuation and workers’ compensation.

21.     He had been unwilling to comply with the company’s direction, but had been told by his employer that it was company policy and that he must report that amount to the tax office.  As a new immigrant, he had no choice if he wanted to retain his position.

22.     The company’s malpractice became known to the respondent in early March 2005 and it was investigated by tax officials from 7 March to 13 March 2005.  The company then prepared some false documents and asked their employees to pay the tax that should have been paid by them, as the company had withheld tax money from employees.

23.     He had referred the matter to the federal Workplace Ombudsman and to the New South Wales Office of Industrial Relations on the ground that his previous employer had paid him much less than he deserved.  The complaint was still under investigation.

24.     Unless he could obtain funds from the restaurant, his plan would be to pay his outstanding tax debt by instalments, as he is now engaged in the full-time study of English in order to improve his employment prospects and his family relies mainly on Centrelink for living expenses.

25.     He believed the penalty should be waived because he had no intention of evading tax but was influenced by his employer.  He was a new immigrant at the time and ignorant in matters of tax law.  Given his family’s currently low income, it would be difficult for him to pay the amount owing to the respondent.

26.     The amount alleged by the respondent as his taxable income for 2003-2004 was incorrect and was actually $43,920.

27.     In cross-examination the applicant said that he had always worked the same hours at the restaurant and was not paid on an hourly rate.  He was not paid extra for working at weekends and received no bonuses.

28.     Occasionally he was required to work on his day off, and for that was paid an extra day’s pay.

29.     His estimate that he earned $900 per week was an average based on his estimate of his weekly income.  He had no wage slips to corroborate his estimate but simply relied on his memory.

30.     When it was pointed out to him that the ATO investigation of the restaurant was actually in November 2005, not March as he had said, he replied that he must have made a mistake.  He had not, however, been mistaken about the $900 figure.

31.     In the relevant financial year he had travelled overseas, representing the restaurant in a chefs’ competition in Malaysia, at which he had won first prize.  He had not been paid to attend the competition but his expenses had been covered by the restaurant.

32.     He had not received four week’s paid annual leave.  The restaurant’s practice was to pay employees an additional week’s pay in lieu of leave every three months.

33.     He agreed that his figure of $900 was a rough estimate of his net income after tax and that it could have been incorrect.

34.     The relevant return was prepared by a tax agent who had no connection with the restaurant.  He had not told the agent that he was being paid on average $900 per week because his employer had given him a PAYG payment summary stating his gross wages as being $22,360.

Applicant’s submissions

35.     The applicant submitted that he had made no error of recollection in setting out the amounts stated in annexure 2 [to Exhibit A1].  It was clear in his mind that when he began work at the restaurant he was receiving $830 per week and that he was promoted by one grade on 31 August 2003.  He was told that there could be a further promotion after three months if he performed well.

36.     The evidence on which the respondent relied was simply the employer’s version of the facts and there was no evidence to support it.  It was in the employer’s interests to understate the applicant’s income.

37.     Calculations he had made using the template provided on the Office of Industrial Relations website (Exhibit A2) corroborated his claim that he was paid $900 net per week.

38.     He had reported a gross income of about $22,000 at the employer’s request.  He had known it was wrong at the time, but the employer had told him to do it.  The respondent should be pursuing the employer, not himself, as the employer had already deducted tax instalments.

39.     The penalty should be waived because the matter was not yet concluded.  It was not he who had failed to pay income tax, but the employer.

Consideration

40. Evaluation of the evidence must start from the proposition that under s 14ZZK of the TAA, the applicant bears the burden of proving the facts on which he relies in order to prove that the assessment is incorrect.

41.     The most cogent evidence before the tribunal favours the respondent.  The spreadsheet showing the applicant’s gross income at $56,513 (T6 p31) was supplied through the restaurant’s legal representatives.  At that stage of the ATO investigation, the employer restaurant had nothing to gain by overstating that amount.

42.     At the interview on 28 April 2006, the principal of the restaurant, Rosetta Lee, admitted that a substantial amount of money was paid in cash wages, in this context meaning undeclared, unrecorded cash wages (T5 p24).  She believed it was a standard practice in the industry (T5 pp22, 25).

43.     Ms Lee’s evidence tends to support the correctness of the spreadsheet, which was supplied to the respondent by the restaurant’s legal representatives after the interview with Ms Lee.  There is no reason why the employer would have overstated the applicant’s earnings in that document, as to do so would cause the restaurant to incur a higher penalty.

44.     The applicant disputes the gross annual figure of $56,513 but has no diary, payslips or other material to substantiate his approximate estimate of $900 per week.  The ready reckoner calculation (Exhibit A2) is not probative in that regard.  He admits that he earned more than was shown in the earnings summary (T13 p47) and that he knew the figure was false when he lodged his tax return.  The estimate in the spreadsheet relates to matters peculiarly within the knowledge of the employer and is more likely to be correct than the applicant’s estimate.

45.     I find that the applicant has failed to discharge the burden of proving the assessment excessive.

46.     The applicant submitted that the penalty as assessed on the basis of 25 percent of the tax shortfall should be waived entirely because he had no intention to evade tax and the matter was not yet concluded.

47.     The applicant admitted that he had known the figures set out in the statement of earning were substantially less than his real wages and his own current estimate of $900 per week net confirms that position.

48.     I accept the respondent’s contention that such a false statement in a tax return would normally qualify for a penalty at the 50 percent rate for recklessness, at least, but that because of his immigrant status and lack of familiarity with Australian tax law, the 25 percent rate for lack of reasonable care is appropriate.

49.     The decision under review is affirmed.

I certify that the 49 preceding paragraphs are a true copy of the reasons for the decision herein of Professor GD Walker, Deputy President

Signed:   .............................[sgd]..............................................
               Renee Wallace, Associate

Date/s of Hearing:  18 August 2008
Date of Decision:  23 September 2008
Solicitor for the Applicant:                  Self-represented
Solicitor for the Respondent:             Ms V Hammond