Liang and Commissioner of Taxation

[2009] AATA 182

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 182

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2008/0742

Sitting as the SMALL TAXATION CLAIMS TRIBUNAL		)
Re		KUN XIANG LIANG

Applicant

And COMMISSIONER OF TAXATION

Respondent

ORAL DECISION

Tribunal   Ms R Hunt, Senior Member

Date  13 February 2009

Date of Written Reasons  18 March 2009

Place  Sydney

Decision   The decision under review is affirmed. 

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

Ms R Hunt
  Senior Member

CATCHWORDS

TAXATION - income tax - objection to assessments and penalties - amended assessment –penalty for failure to take reasonable care – 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

Legislation Considered:

Taxation Administration Act 1953: ss 14ZZK, Schedule 1 – 284-75, 284-80, 284-90

Case Law Considered:

Zhu and Commissioner of Taxation [2008] AATA 692

REASONS FOR DECISION

13 February 2009 Robin Hunt            

summary

1.      Kun Xian Liang submitted tax returns for the income year ending 30 June 2004 in which he declared personal services income. Mr Liang earned this income through his employment in a restaurant. Subsequently, the Commissioner interviewed his employer about discrepancies in pay records concerning wages paid to employees. The employer admitted to irregularities involving cash payments in addition to wages declared for income tax purposes. Mr Liang denies that he received any amounts other than the wages he declared in his income tax return. After hearing the evidence of both parties, I have decided that the Commissioner’s amended assessment and penalty, imposed for lack of reasonable care on Mr Liang’s part, should be affirmed. This means Mr Liang has been unsuccessful in his objections to the Commissioner’s assessments.

issue

2.      The issue before me is whether the amended assessment issued by the Commissioner to the taxpayer, increasing his assessable income by $29,490, is excessive and whether the related penalty imposed is also excessive.

consideration

3.      The taxpayer, Mr Liang, seeks review of the Commissioner’s decision of 25 October 2007 to disallow the taxpayer’s objection (dated 15 June 2007) against the notice of assessment (dated 31 May 2007) and the assessment of penalty (dated 31 May 2007).

4. The Australian Taxation Office (ATO) conducted an audit into the tax affairs of the taxpayer’s employer. The auditor concluded that the employer failed to declare the full amounts of income paid to its employees. A record of interview shows that the employer disclosed to an officer of the ATO that the taxpayer had received additional cash wages which resulted in a total tax shortfall of $29,490 for the period ended 30 June 2004. The Commissioner then issued the taxpayer with an amended notice of assessment based on this information. The Commissioner also assessed a penalty in accordance with section 284 of Schedule 1 to the Taxation Administration Act 1953 (“the TAA”). The penalty raised against the taxpayer is an administrative penalty calculated at the rate of 25% of the shortfall amount. This percentage is at the lower end of the scale available to the Commissioner and is based on lack of reasonable care in relation to the application of a taxation law.

5.      The taxpayer objected on 15 June 2007 to all adjustments and to the penalty assessed. He maintained his objection in a statement furnished for the Tribunal’s review and in giving oral evidence at a hearing. Although his statement of facts and contentions was prepared by a registered tax agent, the taxpayer was not represented at the Tribunal hearing during which he gave oral evidence and denied he was paid any amount over that he had declared as earnings for the year ended 30 June 2004. 

6.      For the review, the Commissioner referred to Mr Liang’s bank statements and made observations about the income required to meet mortgage payments and other family expenses. Mr Liang asked that the Tribunal take into account some adjustments to his combined family income in comparing the family’s outlays with the income he had declared. He produced his daughter’s tax records as evidence that she had contributed some earnings to the family budget. He also supplied a family budget estimate which he said he had discussed with his wife and his accountant. The accountant had prepared a budget document as evidence for the review.

7.      Mr Liang agreed that he had worked for the employer named and said that his wages were paid weekly in cash. He gave evidence that he worked 20 hours per week over four days of 5 hours and never worked overtime. He made a special trip at the weekend to collect his pay.

8.      At the hearing, counsel for the Commissioner went through the budget that Mr Liang had furnished and checked the expenditure set out. Mr Liang gave evidence he had three children who were all students and that his eldest daughter had worked for a time. His eldest daughter’s earnings were $5,307.80 and his wife did not have a job but received Centrelink payments. The Commissioner’s records show Centrelink payments made to his wife and eldest child totalled $21,132.64. For the family of five, total expenditure came to $37,162.48. Mr Liang’s income declared was $18,000. Bank statements show the taxpayer deposited $14,523.25 during the year and this amount went in full to payment of his mortgage. After home loan payments, Mr Liang was left with a balance at the end of the financial year of $3,039.56.

9.      Mr Liang had difficulty explaining some of the expenditure set out in his budget document. For example, the budget set out that the family spent $100 per week on clothing and Mr Liang thought this was excessive but conceded this was his wife’s department. He confirmed that his family spent nothing on entertainment and nothing on public transport. Mr Liang drove a car to work and declared some car expenses. He said his children never went on school camps or excursions and he was not sure how much was spent on school shoes and books. Mr Liang had a credit card but said he paid for purchases in cash. He did not know whether his wife used a credit card or cash to do the shopping.  He maintained that mobile phone expenses were $360 per year for three family members who had mobile phones. Total medical expenses shown were $684 and this included insurance. However, when it was put to Mr Liang that his medical insurance exceeded the total figure given for medical expenses, Mr Liang said that he and his wife had not known how to work this out and it might have been the cost during the first year of insurance.

10.     Credit card statements which the Commissioner obtained from Mr Liang’s bank showed regular patterns of spending at a variety of stores including Kmart, Big W, Woolworths, Spotlight, David Jones, Grace Bros, Dymocks, Toys R Us, Office Works, and other retailers. Some entries for the credit card expenditures showed purchases made at a liquor outlet. Mr Liang said he never drank or smoked but sometimes bought alcoholic drinks for other people. Some of these purchases were gifts and the cost of some purchases made for other people had been repaid to him in cash. Mr Liang said there were no other outlays beyond those shown in the budget because anything else was unaffordable. The budget indicated no savings. 

11.     When asked, Mr Liang agreed that the family owned a television. He was not sure if the household used a computer during the year in question. It was put to Mr Liang that his credit card statement showed payments to an internet service provider but Mr Liang told the tribunal he was not aware of this and thought they had connected the following year. Mr Liang also gave evidence that the family did not have access to pay TV. However, when shown the credit card records, Mr Liang  gave evidence that that the family subscribed to obtain a Hong Kong program. He could not indicate where this expense was included in the budget. Mr Liang could not explain some other payments to vendors and service suppliers that were reflected in his credit card statements and did not know where they would fit into the budget.

12.     When it was put to Mr Liang that purchases made on his credit card, when taken with his mortgage payments, exceeded his total budget for the relevant period, Mr Liang said he did not know how to respond. He again suggested his wife did the shopping and that all expenses were accounted for in his budget.

13.     In the year following that at issue, the whole family travelled to mainland China. Although Mr Liang said his income was the same as the previous year and he had no savings, he explained that this trip was possible because they bought cheap airline tickets and had no expenses once in China.

14.     The Commissioner’s representative reminded Mr Liang that his employer had been interviewed and had disclosed that she had made employees extra cash payments not shown in the wage records and tax records. Mr Liang was referred to a record of interview included in the supplementary tribunal documents for the review.  Mr Liang responded that he just knew that his wage was $350 per week and he never received anything extra. 

Applicable law

15.     As Deputy President G D Walker observed in the similar case of Zhu and Commissioner of Taxation 2008 ATC 10-040, in proceedings such as these, s 14ZZK of the TAA places on the taxpayer the burden of proving that the decision under review should not have been made or should have been made differently.

16. Section 284-75(1) of Schedule 1 of the 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).

17. The amount of the penalty is calculated as a percentage of the shortfall amount. Pursuant to s 284-90 of Schedule 1 of the 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 Commissioner 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’.

findings

18.     Evaluation of the evidence, as in the Zhu case, which concerns the same employer and the same alleged understated payment of wages, must start from the proposition that under s 14ZZK of the TAA, the taxpayer bears the burden of proving the facts on which he relies in order to prove that the assessments are incorrect.

19.     In any event, I agree with D P Walker that the most cogent evidence in this case favours the Commissioner. The employer informed the Commissioner that she had made additional cash payments to the taxpayer among others. These admissions were made to the ATO as part of a wider investigation. The employer restaurant had nothing to gain by overstating the amounts paid to its workers.

20.     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, meaning undeclared, unrecorded cash wages. She explained her actions by saying that her understanding was that this was industry practice.

21.     Mr Liang has not explained adequately how he and his family could have lived on a budget of $37,162.48 for a year.  This is so even after adding Centrelink payments and his daughter’s earnings to the family’s combined income. Spending indicated by Mr Liang’s bank records, and particularly his credit card records, show that the purchases made by him and his wife, using his credit card, exceeded the amounts allowed for in the budget furnished. Expenditure, when taken with mortgage payments, exceeded all the family income even with the additions to Mr Liang’s declared wages, of Centrelink payments to his wife and daughter and around $2,000 received from the sale of NRMA shares. The budget shows no savings and Mr Liang gave evidence that there were none, but the bank savings account shows a balance of $3,039.56 on 24 June 2004. Despite having savings of this small amount at the end of the 2004 financial year, and Mr Liang’s evidence which indicated that he earned no more in 2005 than in 2004, Mr Liang and his family took a trip to China in 2005. Mr Liang said he bought cheap tickets but supplied no further details or substantiation as to how they were able to afford this trip.

22.     As well, Mr Liang was unable to explain many purchases and gave contradictory evidence about some matters. For instance, he said he always paid cash for petrol but there were several payments to service stations on his credit card statements.  As well, despite several purchases made at liquor stores, Mr Liang said he did not drink or smoke and said he bought drinks for unexplained others.

23.     Mr Liang has not convinced me that he had no additional income to that which he declared in his 2004 return when I consider the expenditures made on his credit card and other expenses he incurred. Taking into account all the evidence before me, on balance, I find that the taxpayer has failed to discharge the burden of proof placed on him of showing that the Commissioner’s amended assessment was excessive.

24.     Mr Liang made no submissions that the penalty assessed was excessive, having relied on his employer’s PAYG summary or earnings statement for tax purposes and having asserted there was no other wages record to support the Commissioner’s contentions. On balance, I find that the taxpayer was aware that the figures set out in the employer’s statement of earnings were substantially less than his real wages. I accept the Commissioner’s contention that such conduct would normally qualify for a penalty at the 50% rate for recklessness. In view of Mr Liang’s possible misunderstanding of his responsibilities in reliance on his employer’s practices, his inferior position as an employee reliant on PAYG statements furnished by his employer and because of his poor English skills, I accept that it is reasonable to reduce the usual penalty rate for reckless conduct to the 25% rate for lack of reasonable care and that this lower penalty is appropriate.

conclusion

25.     As requested by the Commissioner in his statement of facts and contentions, and in the absence of the taxpayer having established that his objections can be sustained, I have decided that the objection decision of the Commissioner, having been reviewed by me, is affirmed on the basis that:

(a)The taxpayer failed to include in his assessable income all the money he received from his employer, thus creating a tax shortfall;

(b)the taxpayer became liable to an administrative penalty within the meaning of s 284-75 of Schedule 1 to the TAA;

(c)the taxpayer’s shortfall amount resulted from the taxpayer or his agent, failing to take reasonable care; and

(d)there are no reasons to remit the taxpayer’s base penalty amount.

decision

26.     The decision under review is affirmed.

I certify that the 26 preceding paragraphs are a true copy of the reasons for the decision herein of Ms R Hunt, Senior Member.

Signed:         .....................................[sgd]...........................................
  Associate

Date/s of Hearing  13 February 2009
Date of Decision  13 February 2009
Date of Written Reasons                18 March 2009
Appearance for the Applicant        Self-represented
Solicitor for the Respondent           Vicki Hammond, ATO Legal Services