McPartland and Commissioner of Taxation (Taxation)
[2022] AATA 686
•31 March 2022
McPartland and Commissioner of Taxation (Taxation) [2022] AATA 686 (31 March 2022)
Division:TAXATION AND COMMERCIAL DIVISION
File Numbers: 2020/1921-3
Re:Darryl McPartland
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Numbers: 2020/1924-6
Re:Kathleen McPartland
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Britten-Jones
Date:31 March 2022
Place:Adelaide
The Tribunal affirms the decisions under review.
...............................[SGD].........................................
Deputy President Britten-Jones
CATCHWORDS
TAXATION – whether applicants have demonstrated default assessments issued by the Australian Taxation Office were excessive – whether applicants have demonstrated their correct taxable income for the relevant income years - onus not discharged – whether penalties should be remitted in full or part - decisions under review affirmed.
LEGISLATION
Taxation Administration Act 1953 (Cth)
CASES
Rigoli v Commissioner of Taxation (2014) 141 ALD 529
REASONS FOR DECISION
Deputy President Britten-Jones
31 March 2022
Introduction
These applications for review relate to three financial years commencing on 1 July 2014 and ending on 30 June 2017. The applicants claim that their taxable income during this period was nil and that the only income they received were Centrelink payments related to a disability support pension. The respondent assessed that there was significant taxable income for the applicants and issued default notices of assessment for them in December 2018. The applicants, through their accountant, objected to these assessments. The respondent disallowed the objections in November 2019. The applicants filed review applications with the Tribunal on 1 April 2020.
The issue for the Tribunal is to determine whether the applicants have discharged their onus of demonstrating that the assessments for 2015 to 2017 income years were excessive and/or incorrect and, if so, what the correct taxable income for each income year should be and whether the penalties imposed should be remitted.
The notices of assessment were based on findings of an audit dated 6 December 2018. The applicants had numerous bank accounts either in individual or joint names. The auditor calculated the total amount of personal expenditure from these accounts for each financial year and then equated that expenditure with income for the purposes of the notices of assessment. The respondent submitted that the audit did not include business expenses or transfers between accounts unless paying off a credit card or the home loan and that it accurately reflected the income of the applicants for the relevant years. This is not to suggest that the role of the Tribunal is to review the accuracy of the audit and its findings – s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth) (the TAA) places the onus on the applicants to prove that the amount of default assessments and penalty assessments are excessive and what the correct assessments should be. Authority for this proposition is the decision of the Full Court of the Federal Court in Rigoli v Commissioner of Taxation (2014) 141 ALD 529:
25. The task Mr Rigoli sought to carry out was to simply identify some errors in the Commissioner’s approach so that the matter might be remitted on the basis of those errors for reconsideration by the Commissioner. This is the very picking and choosing which the authorities make clear is impermissible. The taxpayer’s choice is to pay tax according to the Commissioner’s assessment under s 167 or to establish, as a matter of evidence, what was “the amount upon which ... income tax ought to be levied”. An intermediate course, which involves elements of the Commissioner’s calculations and facts which the taxpayer chooses to lead in evidence, is not an available option.
26. The contention that the authorities should not apply to a merits review by the AAT as distinct from judicial review cannot be accepted. It is an argument which ignores or gives no effect to the fundamental provisions of s 14ZZK of the Administration Act. This issue was considered recently by the Full Court (Jessup, Jagot and Nicholas JJ) in Rawson Finances Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 26; (2013) 296 ALR 307. Jagot J, (with whom Nicholas J agreed), observed (at [89]-[90]) that s 14ZZK is a modification of the AAT Act because, but for s 14ZZK, a taxpayer would not have the burden of proving that an assessment is excessive. However, where s 14ZZK applies, the only state of satisfaction that the AAT is required to reach is whether, on the facts as found by the AAT, the taxpayer has proved that the assessment is excessive. If that state of satisfaction cannot be reached, the application for review must be dismissed. Her Honour went on to note that, as the authorities made clear, the taxpayer does not discharge this burden of proving that the assessment is excessive by demonstrating some error in the Commissioner’s judgment under s 167 of the amount upon which income tax ought be levied (see Dalco per Brennan J (at 625) and Toohey J (at 634) and Gashi (at [66]-[67])).
The onus on the applicants arising from s 14ZZK(b)(i) of the TAA assumes some importance in this matter because the business affairs of the applicants were not well structured or documented. Companies and bank accounts were set up but personal and corporate affairs were intermingled with little or no documentation recording arrangements that were later claimed to exist. Very few accounting records exist for the relevant period. The applicants blame their accountants who were engaged in 2012 and terminated in August 2017. The applicants have commenced legal action against these accountants for breach of contract and negligence. However, since 2017 the applicants have received better professional advice. Another accountant was engaged to assist with the audit process in 2017 and 2018. The applicants’ objection notices of January 2019 were prepared by a chartered accountant, Robert Veitch, who has continued to provide some assistance to the applicants. The applicants were legally represented at the time they commenced the application for review in the Tribunal but they were unable to afford legal representation or to have their accountant at the hearing.
Some background facts
The applicants were directors and shareholders of Mac-Attack Rentals Pty Ltd (Mac-Attack) which was registered for GST. Mr McPartland is a director and shareholder of HD Downunder Pty Ltd (HD Downunder) which was incorporated on 18 September 2014.
Mac-Attack was engaged in the business of motorcycle wholesaling and held an approval to import motorcycles. Part of its business was to import motorcycles and to carry out compliance work on them to allow them to be sold in Australia. The applicants used their personal bank accounts for payment of expenses and receipt of revenue related to the business of Mac-Attack.
HD Downunder was incorporated for the purpose of importing and purchasing motorcycles but it hardly traded and never became registered to import motorcycles.
The respondent carried out audits of Mac-Attack and HD Downunder (together referred to as the companies) and on 6 February 2019 issued default notices of assessment to which objections were lodged. In November 2019, the respondent made decisions on the companies’ objections. The default income tax assessments for the companies were adjusted in part. Reasons for these decisions were provided on 25 November 2019 and included findings by the Deputy Commissioner of Taxation that:
(a)records of the companies were not an accurate or reliable depiction of business activities;
(b)company business accounts were used for private purposes by the applicants and their private accounts were used for business use;[1]
(c)an analysis of bank statements revealed that the applicants had used business accounts and credit cards for non-business purposes, to fund their personal living expenses and lifestyle;[2]
(d)the applicants made no loans to the companies; rather, amounts withdrawn by the applicants were payments of income to them;[3]
(e)the applicants were deemed to have received income from the companies and hence the companies could claim a deduction equal to the amount of income paid to the applicants;[4]
(f)these deductions for HD Downunder were $212,979 for the 2016 income year and $242,074 for the 2017 income year. These deductions for Mac-Attack were $328,532 for the 2015 income year and $212,979 for the 2016 income year.[5]
[1] HD Downunder objection decision ST-35 at [19.c] and Mac-Attack objection decision ST-37 at [11.c].
[2] HD Downunder objection decision ST-35 at [27] and Mac-Attack objection decision ST-37 at [13].
[3] HD Downunder objection decision ST-35 at [31] and Mac-Attack objection decision ST-37 at [16].
[4] HD Downunder objection decision ST-35 at [37] and Mac-Attack objection decision ST-37 at [20].
[5] HD Downunder objection decision ST-35 at [37] and Mac-Attack objection decision ST-37 at [20].
The above findings with respect to Mac-Attack and HD Downunder were generally reflected in the objection decisions with respect to the applicants made on 26 November 2019. Further with respect to the applicants, the Deputy Commissioner of Taxation determined that:
(a)the applicants did not provide any capital funds to the companies and there were no director loan agreements in place with the companies;
(b)the personal expenses of the applicants, drawn from personal bank accounts, exceeded their respective incomes from Centrelink;
(c)the applicants each earned, as employment income or director’s fees, income of $164,266 in the 2015 income year, $182,482 in the 2016 income year and $121,037 in the 2017 income year.
Contentions of the Applicants
The applicants contended that they had funded the companies including by a loan recorded in the balance sheet of Mac-Attack for the year ending 30 June 2014 in the sum of $447,328.02.[6] The subsequent withdrawals from bank accounts were said to be repayments of the loan account and not taxable income.
[6] Exhibit 3 at pg 147. See also email from Robert Veitch to the ATO dated 23 April 2019 at T-25.
In addition to the $447,328.02 loan there was said to be a further loan of $205,629.06 arising from the applicants using their own funds to pay company expenses on a Westpac credit card and there were sales of personal assets that had nothing to do with the companies.[7]
[7] Exhibit 3 at pg 80.
The applicants contended that the personal drawings of the applicants were less than the amounts assessed at audit.
The applicants contend that the income attributed to Mac-Attack is in fact income of the D & K McPartland family partnership which has its own ABN and owned the stock and derived income of the business.[8] Under this alternative scenario, the applicants incurred expenses of the partnership and the corresponding loan to Mac-Attack does not arise.
[8] Exhibit 3 at pg 143.
The applicants’ ultimate contention is that they had no taxable income for the relevant years.
Consideration
In order to address the applicants’ contentions it is necessary to make some findings of fact bearing in mind the ultimate issue is whether the applicants can establish that the amount of the default assessments and penalty assessments are excessive and, if so, what the correct assessments should be. The fact finding exercise has been made more difficult because there are few contemporaneous documents from the relevant period ending 30 June 2017. Despite having had the benefit of accounting and legal advice in the period from late 2017 it is apparent that the applicants have not been able to put forward a clear case to support their contentions.
One example of this lack of clarity is whether the business was conducted by the corporate vehicles of Mac-Attack and HD Downunder or through the family partnership between the applicants. The respondent contends that no finding of this nature is required in order to affirm the decision in favour of the respondent because the onus upon the applicants has not been made out. The respondent contends that it does not make any difference whether the business was conducted through a corporate vehicle or personally because the audit established an amount of personal income based upon personal expenditure by the applicants as recorded in their banking records. The applicants contend that their personal income was no greater than their Centrelink payments but I consider that the banking records show a much higher level of personal expenditure which corresponds with the findings of the audit. For the reasons that follow, the applicants have failed to establish that their income, assessed by the respondent in this way, is excessive.
I reject the applicants’ contention that they received no assessable income because payments received by them were repayments of a loan made to Mac-Attack. Evidence for this alleged loan is said to be found in Mac-Attack’s balance sheet as at 30 June 2014. This balance sheet was prepared by the accountants who are currently being sued by the applicants for negligence and Mr McPartland in his oral evidence expressed doubts as to its accuracy. The applicants contended that this same accountant said that they could use their personal accounts for expenses relating to Mac-Attack and that he would treat these as loans by them to Mac-Attack.[9]
[9] Exhibit 3 pg 2 submissions at [12].
The applicants have failed to provide satisfactory evidence of a loan agreement. There is no written loan agreement nor is there any record of the loan being repaid. There was no evidence from the applicants about the circumstances of entry into this alleged loan agreement except for the statement from their accountant that he would treat payments relating to Mac-Attack as loans. Further, there is no evidence of the establishment of the proposed loan. The accountant was not called to give evidence about the terms of any loan or that a loan was ever created. There is no contemporaneous record of the loan except in the balance sheet. Further, I note that the loan is not consistent with the applicants’ alternate case that the business was conducted via the applicants’ family partnership.
I note that the respondent through the audit process considered the available evidence of the numerous bank statements of the applicants and the expenditure shown therein. In addition, there was evidence of regular overseas travel in the relevant period. The personal income tax audits established, and I accept, that:
(a)the applicants used business bank accounts and credit cards for non-business purposes to fund their personal living expenses and lifestyle;
(b)the applicants did not provide any capital funds to the companies;
(c)the applicants did not have any director loans in places with the companies; and
(d)the applicants’ personal expenses, paid from their personal bank accounts, exceeded their only income from Centrelink.
It is implausible that the income of the applicants was limited to the amounts received from Centrelink. This lifestyle of regular overseas travel and high credit card expenditure is entirely inconsistent with the case of the applicants that they received no taxable income and that they survived on their Centrelink payments. Mr McPartland gave oral evidence that they drew down money from a mortgage facility, but the banking records show that the mortgage was being repaid and not drawn down. The records show that the applicants were using funds generated by the companies to pay for their personal living expenses including their mortgage.
Mr McPartland made an oral submission that the assessable income attributed to him and his wife was implausible because the companies made a loss each year and therefore there were no funds to make payments to them. This submission is misconceived because the loss each year included as a deduction the taxable income of the applicants. But for those deductions, the companies would have been in profit.[10] In any event, the submission does not advance the case for the applicants because they have still not established that the default assessments are excessive and what the correct assessments should be.
[10] See Exhibit 3 pg 45.
The applicants contended that some of the expenditure identified in the audit was not personal but, even if one were to accept that was the case (which I do not), the applicants did not establish that the default assessments were excessive and what the correct assessments should be.[11] The applicants further contended that income from the sales of non-business bikes and vehicles should not be included in their income but that assumes incorrectly that such income was included which it was not.
[11] Rigoli v Commissioner of Taxation (2014) 141 ALD 529 at [10] to [14], [20] and [25] to [27].
The Penalty Assessments
The Commissioner has a general discretion to remit all or any part of a penalty pursuant to s 298-20(1), Schedule 1 of the TAA. In this case the applicants claim that they were not required to lodge a return because they did not consider that they were being paid anything by the companies. Further, they blame their accountants for the position they find themselves in.
The applicants failed to lodge a tax return as required for each of the three years from 2014 to 2017. During this period the applicants were receiving a relatively small amount of Centrelink payments and yet they were conducting a business through Mac-Attack that generated sales income in 2015 of $1,072,091 and in 2016 of $263,745. Further, they were travelling overseas regularly and living a lifestyle which could not on any reasonable analysis be funded by those Centrelink payments. In these circumstances, I am not prepared to exercise a discretion in favour of the applicants.
The applicants rely upon a finding in the audit of Mac-Attack that a ‘safe harbour’ operates such that there should be no penalties.[12] Mauro Cutone, accountant for the applicants, wrote to Mr McPartland on 18 October 2021 referring to this finding and a meeting with the ATO on 22 August 2017 at which ‘safe harbour’ was agreed. I find that any discussion about ‘safe harbour’ was in the context of Mac-Attack or HD Downunder and has no relevance to penalties that may apply to the applicants personally.
[12] Exhibit 3 pg 145.
Decision
For these reasons the Tribunal affirms the decisions under review.
I certify that the preceding 26 (twenty-six) paragraphs are a true copy of the reasons for the decision herein of Deputy President Britten-Jones
........................[SGD]................................................
Associate
Dated: 31 March 2022
Date(s) of hearing: 20 and 21 December 2021 Applicants: In person Counsel for the Respondent: J. Battiste Solicitors for the Respondent: Australian Government Solicitor
3
2
0