MMFT and Commissioner of Taxation (Taxation)

MMFT and Commissioner of Taxation (Taxation) [2018] AATA 772 (5 April 2018)
Division:TAXATION AND COMMERICAL DIVISION
File Number(s): 2016/6175 – 6177
Re:MMFT
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Egon Fice, Senior Member
Date:5 April 2018
Place:Melbourne

The Tribunal affirms the
objection decision made by the Commissioner on

8 November 2016.
..............................[sgd]..........................................
Senior Member
TAXATION – income tax – overdue income tax returns – contractor – rental income – rental deductions - default assessment – objection disallowed – onus of proof – whether or defaults assessment excessive - work-related travel expense deductions – liability to administrative penalties – remission of penalties under Taxation Administration Act 1953 – discretion to remit
Legislation
Income Tax Assessment Act 1936, ss. 6, 166, 167, 190(b)
Income Tax Assessment Act 1997, ss. 4-15, 85-10, 102-5(1), 900-25
Taxation Administration Act 1953, ss. 14ZZK, 284-75(3), 284-90(1)
Cases
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Imperial Bottleshops Pty Ltd v Federal Commissioner of Taxation (1991) 22 ATR 148
Kimche v Federal Commissioner of Taxation (2004) 57 ATR 28
R v Deputy Commissioner of Taxation (W.A.); Ex parte Briggs (1987) 14 FCR 249
Secondary Materials
Practice Statement Law Administration (PS LA 2014/4)
REASONS FOR DECISION
Egon Fice, Senior Member
5 April 2018

The Applicant failed to lodge income tax returns for the 2008, 2009 and 2010 income years. On 15 December 2011 the Australian Taxation Office (ATO) sent a letter to

AA Consulting Services Pty Ltd (AA Consulting), a corporate entity through which the Applicant conducted consultancy services, advising him that a review of his taxation liabilities had commenced.
As a consequence of that review, payments received by AA Consulting Services Pty Ltd were attributed to the Applicant as personal services income. For the years in question, those amounts were $68,127, $213,948 and $227,058 respectively. On 27 April 2012 the Applicant agreed that he had received all of the income reported by AA Consulting Services Pty Ltd.
In a letter dated 30 April 2012 the ATO requested the applicant lodge his outstanding income tax returns for the three years in question by 4 June 2012. When the Applicant did not respond to that request, the ATO sent him a further letter dated 20 June 2012 warning him that unless he lodged his returns by 18 July 2012 he would become liable to a default assessment and he may also be liable for administrative penalties including an additional administrative penalty for late or unlodged income tax returns. The Applicant again failed to comply and lodge the required income tax returns.
In addition to the income derived through AA Consulting Services Pty Ltd, the ATO noted that the Applicant owned a rental property until the 2010 income year. The ATO noted that the Applicant had declared substantial losses in relation to his share of that rental property in earlier years and accepted it was likely to have continued. The ATO therefore restricted rental expenses to the amount of rental income claimed in each financial year, resulting in no net income for tax purposes.
On 1 August 2012 the Commissioner wrote to the Applicant, informing him that he was required to lodge tax returns for the three income years in question. The Commissioner also informed the Applicant that assessments had been raised under s. 167 of the Income Tax Assessment Act 1936 (ITAA 36). On the same day, the Applicant’s tax agent lodged three income tax returns for the income years in question.
On 15 August 2012 the Commissioner issued to the Applicant default assessments pursuant to s. 167 of the ITAA 36 in the amounts of $16,743.45, $78,637.15 and $82,712.25 respectively for the income years in question. On 22 August 2012 the Commissioner issued to the Applicant notices of assessment of penalty for failing to provide a document (an income tax return) pursuant to s. 284-75(3) of the Taxation Administration Act 1953 (the Administration Act).
On or about 19 May 2016 the Applicant’s tax agent lodged an objection to the assessments made by the Commissioner. However, that objection was withdrawn on

15 July 2012 when the Applicant said he could not provide the required information within the time limit.
On 19 September 2016 the Applicant applied for an extension of time to lodge his objection for the three income years in question. The Commissioner allowed the extension of time application and, having considered the objection, disallowed it in full. Included in the objection decision was the Commissioner’s decision not to process the income tax returns lodged on 1 August 2012 for the 2008, 2009 and 2010 income years.
The issues I am required to determine are:
(a)whether the Applicant has discharged his onus of proof to demonstrate that the default assessments issued by the Commissioner for the 2008, 2009 and 2010 income years are excessive;
(b)if the answer to (a) is in the affirmative, whether the Applicant has proved the actual amount of income on which he should be assessed for the income years in question; and
(c)whether the administrative penalty imposed for failure to lodge income tax returns for the 2008, 2009 and 2010 income years should be remitted in whole or in part.
ONUS OF PROOF
Section 14ZZK of the Administration Act, as it applied to the relevant income years, provided:
On an application for review of an objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving:
(i)     if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive; or
(ii)    if the taxation decision concerned is a franking assessment – the assessment is incorrect; all
(iii)    in any other case – the taxation decision concerned should not have been made or should have been made differently.
The High Court of Australia case Federal Commissioner of Taxation v Dalco (1990)

168 CLR 614 dealt with s. 190(b) of the ITAA 36 which was substantially in identical terms to the current s. 14ZZK of the Administration Act. Brennan J said, at 620 – 621:
Section 190(b) confirms the burden of proof which, apart from that provision, a taxpayer appellant would bear in seeking relief from the court against the liability which is otherwise conclusively imposed upon him by the operation of s. 177(1)…
A taxpayer, who seeks to discharge the burden of proving that the amount shown in the notice of assessment is excessive, is limited by s. 190(a) to the grounds stated in an objection against the assessment.… But an objection and a Commissioner’s notice of decision on the objection are not pleadings which so confine the issues as to preclude the Commissioner from putting the taxpayer to proof of the true amount of his taxable income. After all, the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act… Although the grounds of objection limit the grounds of appeal, the ultimate question for the court [or in this case, the Tribunal] hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgement as to the amount of the assessment.
I should also refer to the Commissioner’s role in the hearing of an application brought to either the Tribunal or a court by a taxpayer. Frequently taxpayers form the view that in order to prove that an assessment is excessive, all that is required is to disclose some error or fallacy in the Commissioner’s reasoning. Such a view is incorrect. As Mason J said in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, at 89:
The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessment should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail…
… There is nothing inherently unfair in a provision which places the onus on the taxpayer to prove his case when the purpose for which an asset was acquired depends so much on his intentions and on circumstances of which he, rather than the Commissioner, has comprehensive knowledge.
Earlier, the High Court of Australia (Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ) in George v Federal Commissioner of Taxation (1952) 86 CLR 183, when dealing with ss. 190, 166 and 177 of the Income Tax Assessment Act (1936-1947), said at 201:
From these provisions both in their present form and in their slightly different earlier form, the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he derived during the year of income:… The justice of that burden cannot be disputed. From the nature of the tax, the Commissioner has, as a rule, no means of ascertainment but what is learnt from the taxpayer, and the taxpayer is presumably and generally, in fact, acquainted with his own affairs. The onus may prove to be dischargeable easily or with difficulty according to circumstances…
STANDARD OF PROOF
There appeared to be no dispute about the standard of proof which applies to an Applicant who has the onus of proving an assessment to be excessive. However, for the sake of completeness, I should refer to the Federal Court of Australia (Ryan J) decision in Kimche v Federal Commissioner of Taxation (2004) 57 ATR 28 where his Honour said, at 87:
If it is established that a payment was received in a particular year of income, the onus is on the taxpayer to establish, on the balance of probabilities, circumstances which deprive that receipt of the character of income, for example, because it was a repayment of a loan or other capital advance or by way of gift.
DEFAULT ASSESSMENTS
Section 166 of the ITAA 36 imposes on the Commissioner a duty to make an assessment of the amount of taxable income and the tax payable thereon. It provides:
From the returns, and from any other information in the Commissioner’s possession, or from any one or more of these sources, the Commissioner must make an assessment of:
(a)the amount of taxable income (or that there is no taxable income) of any taxpayer; and
(b)the amount of the tax payable thereon (or that no tax is payable); and
(c)the total of the taxpayer’s tax offset refunds (or that the taxpayer can get no such refunds).
The expression taxable income is a defined term which means assessable income less deductions (per s. 4-15 of the Income Tax Assessment Act 1997 (ITAA 97) and s. 6 of the ITAA 36). When one examines Part III of the ITAA 36 and Chapter 2 of ITAA 97, it should be immediately apparent that liability to taxation is determined by the application of those provisions. Assessable income involves a determination of ordinary income and statutory income and may involve considerations regarding exempt income. While deductions may be general or specific, there are rules about deductibility of particular kinds of amounts. Plainly, liability to taxation depends on an ascertainment of those two components. It follows that the Commissioner is not free to base his assessment on anything other than those two components, regardless of the methodology he adopts to arrive at an amount. Broadly, a taxpayer is liable to pay tax on the net gain derived by income in an income year, taking into account the expenses incurred in producing that income. That net gain includes any net capital gain for the income year (s. 102-5(1) of the ITAA 97).
Although s. 167 of the ITAA 36 is headed Default Assessment and is frequently referred to by that name, it is only partially correct. In fact, in earlier statutes which contained marginal notes rather than paragraph headings, what was stated was: Assessment in case of default or unsatisfactory return.
Section 167 provides:
If:
(a)any person makes default in furnishing a return; or
(b)the Commissioner is not satisfied with the return furnished by any person; or
(c)the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his or her judgement income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of section 166.
Where a person has failed to lodge an income tax return or where the Commissioner believes that a taxpayer has derived taxable income but has not lodged a return, he may make an assessment from any other information in his possession. Section 167 effectively permits the Commissioner to make an assessment of taxable income irrespective of an income tax return having been lodged or, where one has been lodged, irrespective of the information contained in such a return. The methodology which the Commissioner adopts to make an assessment, particularly where no income tax return has been lodged, is not prescribed.
The application of ss. 166 and 167 of the ITAA 36 was explained by Sheppard J in R v Deputy Commissioner of Taxation (W.A.); Ex parte Briggs (1987) 14 FCR 249. His Honour said, at 263:
It is to be observed that s. 166 empowers the Commissioner to use the returns lodged by a taxpayer and other information in his possession for the purpose of making an assessment of the amount of the taxable income of the taxpayer. The Commissioner may, pursuant to this section, rely entirely upon the returns, partly on the returns and partly on other information, or entirely on sources of information apart from the returns.
Sheppard J then referred to the relationship between ss. 166 and 167 as was stated by the High Court in George. The High Court said, at 203 – 204:
Section 166 on its own terms covers cases where the Commissioner depends exclusively on sources other than a return. It says that he is to make his assessment from (1) the returns, (2) from any other information, or (3) from any one or more of these sources. Clearly enough under s. 166 the Commissioner can make an assessment which does not adhere to the income returned and yet to do so must involve some want of satisfaction with the return. Section 167 is exegetical [the addition of a word or words by way of further elucidation] to s. 166. It is not an independent power. What it does is to mention with particularity three situations which might arise in carrying out the duty imposed by s. 166, and to direct how in those situations the Commissioner shall proceed for the purpose of s. 166. Just as under s. 166 considered alone the Commissioner ascertains the amount of the taxable income and thus assesses it so he does under s. 167, used in aid of

s. 166, ascertain the amount upon which, in his judgement, income tax or to be levied and thus assesses it. By definition “assessment” means the ascertainment of the amount of the taxable income, and of the tax payable thereon… The fact that unless the taxpayer discharges the burden laid upon him by s. 190(b) approving that this ascertainment or judgement is excessive, he cannot succeed and it can be no part of the duty of the Commissioner to establish affirmatively what judgement he formed, much less the grounds of it, and even less still the truth of the facts of affording the grounds.
Brennan J also dealt with the interaction between ss. 166 and 167 of the ITAA 36 in Dalco. His Honour said, at 618 – 620:
Section 167 must be read in conjunction with s. 166 of the Act for the two sections together prescribe the scope of the duty of the Commissioner to make assessments and confer upon him the power to perform that duty… The taxpayer does not impugn the validity of the assessments; he attacks the respective amounts at which his taxable income was assessed…
Where one or other of the situations described in paras (a), (b) and (c) of s. 167 exists, the Commissioner or his delegate is empowered to make an assessment of an amount which, in the Commissioner’s judgment, is the amount on which tax ought to be levied: George’s Case (28). It is that amount which, for the purposes of s. 166, becomes the taxpayer’s taxable income. That amount may not be in truth the taxpayer’s taxable income for a particular income year and it may not be so regarded by the Commissioner (as in Trautwein v Federal Commissioner of Taxation (29)) but, for the purpose of s. 166, that amount is the taxpayer’s taxable income for the income year to which the assessment relates unless it is shown on appeal from, or on review of, the assessment that the amount of the assessment is wrong: Henderson v Federal Commissioner of Taxation (30).
The High Court decisions to which I have referred above may be summarised in the following way. The power to make an assessment from an income tax return lodged by the taxpayer or from any other information is found in s. 166. Arriving at an assessment is a single duty even though the Commissioner may arrive at an amount by different means. That duty remains unaltered whether the Commissioner simply accepts the income tax return lodged by the taxpayer or whether he arrives at a different amount as a result of being in possession of other information. It is wrong to treat the judgment formed by the Commissioner regarding the amount upon which income tax ought to be levied as being different to the taxpayer’s taxable income. The two sections must be read together. Regardless of means by which the amount arrived at by the Commissioner was determined, it does not alter the taxpayer’s obligation. To succeed on review by the Tribunal, the taxpayer must establish his or her actual taxable income and demonstrate that it is less than the amount assessed by the Commissioner.
DISCHARGING THE ONUS OF PROOF
Section 14ZZK of the Administration Act casts the burden of proving that an assessment is excessive on the taxpayer. It does not provide any assistance with how a taxpayer may go about that task. There is nothing in any of the taxation statutes which explains to the taxpayer how that might be achieved. In fact, as Brennan J said in Dalco, the manner in which a taxpayer can discharge the burden varies with circumstances (page 624). His Honour went on to say:
If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection.
It is important that a taxpayer seeking review of a decision of the Commissioner regarding an assessment, understands that in discharging his or her onus of proof, they must, by evidence, establish their true income tax liability. It does not assist a taxpayer to show that the Commissioner arrived at his assessment via incorrect methodology or assumptions. The High Court in George said, at 201:
The word “assessment” is defined by s. 6(1) to mean the ascertainment of the amount of taxable income and of the tax payable thereon. In conformity with this definition s. 166 directs the commissioner to make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon. From these provisions both in their present form and in their slightly different earlier form, the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income: Stone v Federal Commissioner of Taxation (1); Moreau v Federal Commissioner of Taxation (2); Federal Commissioner of Taxation v Clarke (3); Trautwein v Federal Commission of Taxation (4). “The justice of that burden cannot be disputed. From the nature of the tax, the commissioner has, as a rule, no means of ascertainment but what is learnt from the taxpayer, and the taxpayer is presumably and generally, in fact, acquainted with his own affairs. The onus may prove to be dischargeable easily or with difficulty according to the circumstances”, per Isaacs ACJ, Federal Commissioner of Taxation v Clark (5).

I should also refer to what Mason J said in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, at 89:
The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.
2008 INCOME YEAR
Income
The Applicant’s assessable income for the 2008 income year was derived essentially from consulting services which he provided through his private company, AA Consulting. In addition, the Applicant and his former partner owned a rental property from which they both derived rental income.
The income the Applicant received from providing consulting services was treated as personal services income by the Commissioner. The Applicant did not dispute that treatment. However, the Applicant maintained that in the 2008 income year, he provided consulting services as what he described as a PAYG contractor. He produced in evidence the original PAYG Payment Summary which was provided to him by the corporate entity which engaged his services, Adaps Pty Ltd (Adaps). That document discloses gross payments of $42,110 to the Applicant and the sum of $14,589 as tax withheld. As far as I am aware, there is no such thing as a PAYG contractor. PAYG taxpayers are provided with a PAYG Payment Summary by their employer at the end of each financial year. Either the Applicant was employed by Adaps or he provided his services as a contractor.
On investigating the ATO records, the Commissioner found the record of employees for whom Adaps remitted PAYG withholding amounts. The Applicant is not recorded as one of those employees. Additionally, the ATO has no record of Adaps having remitted any withholding tax on behalf of the Applicant. That is despite the fact that the document produced by the Applicant appears, at least on its face, to be regular.
In addition, the Applicant provided a statement from AustralianSuper for the period 1 January 2008 to 30 June 2008. That statement discloses contributions from Adaps in the sum of $3,789.93.
However, because the ATO has no record of withholding tax having been remitted on behalf the Applicant; and the Applicant described himself as a contractor and the work he did for Adaps as a contractor; I find that withholding tax was not remitted by Adaps on behalf of the Applicant despite what is indicated on the PAYG Payment Summary. The payments made to him in respect of that work must be treated as his personal services income. The fact that Adaps made superannuation payments on behalf of the Applicant does not advance his claim. It is not evidence supporting his claim that withholding tax was remitted in respect of payments made to him for his contracting work.
The Commissioner indicated that the default assessment of the Applicant’s assessable income was derived from AA Consulting’s financial records. Those records indicated he was paid $68,127 for the 2008 income year. In addition to that income, the Commissioner attributed to the Applicant a further $59 by way of franked dividends including franking credits and an estimated rental income of $8,504. The figure $8,504 was used by the Commissioner for each of the income years in question because the Applicant did not have documentary evidence of rental receipts other than a spreadsheet prepared by him or his accountants. The Applicant did not produce any source documents at the hearing of this matter.
The ATO also noted that its records indicated the Applicant held his interest in the rental property until the 2010 income year. In each year that property was held, substantial losses were declared and claimed against the rental income. Therefore, the ATO decided to restrict rental expenses to the amount of rental income estimated to have been received in each of the income years in question. That is a reasonable approach given the lack of records produced by the Applicant and that he has the onus of proving that the assessment made by the Commissioner was excessive.
The absence of documentary evidence creates significant problems for the Applicant in discharging his onus of proof. Hill J in Imperial Bottleshops Pty Ltd v Federal Commissioner of Taxation (1991) 22 ATR 148 explained it in the following way, at 155:
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 has incurred the outgoings he is making a self-serving statement. That does not necessarily mean 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.
What was said by Hill J above applies in this case. In fact the Commissioner has erred on the side of caution regarding rental income accepting that expenditure in relation to the maintenance of the property would, most likely, have exceeded the rental income derived. Accordingly, I find it reasonable that the Commissioner has fully set off rental income in all of the income years in question. I also find it reasonable that the Commissioner relied on the records of AA Consulting to attribute personal services income to the Applicant. The records disclose that on 27 April 2012, the Applicant agreed he had received that income which was recorded in an email to his tax agent.
The Applicant also claimed deductions for motor vehicle expenses, phone/internet expenses and work-related travel expenses (flights between Sydney and Melbourne).
Motor vehicle expenses
The Applicant claimed motor vehicle expenses in the amount of $3,500 for the 2008 income year. He based that claim on estimated travel distance in excess of 150 km per week. The Applicant did not provide any further details in his evidence. He said he did not keep a log book. He said he used his motor vehicle to visit clients and for travel to airports. The $3,500 figure appears to have been based on 100% business use. The Applicant produced a certificate of registration for a Porsche wagon. That was for the year 2013 – 2014. Whether he had that motor vehicle in 2008 is not clear from the documentary evidence. In the income tax return he attempted to lodge with the ATO for the 2008 income year, which the ATO refused to accept, in the section dealing with details of motor vehicle expenses, he indicated that the odometer at the commencement date, 1 July 2007, was zero. There was no evidence that he acquired the vehicle in 2007 let alone that it was used 100% of the time for business purposes. I find that the Commissioner’s refusal to accept the Applicant’s deduction claim in respect of motor vehicle expenses was the correct decision in the circumstances. The Applicant has not discharged the onus of proving that he incurred those expenses, let alone that they were work-related.
Phone/Internet expenses
The Applicant claimed deductions amounting to $3,125 for these expenses. The only evidence produced by the Applicant in relation to this claim is a statement from Vodafone indicating he paid $4,166.78 in the 2008 income year. I have noticed that in the statement prepared by either the Applicant or his accountant regarding income expenses for the rental property, there is a claim for telephone expenses in each of the financial years in question. That does not assist the Applicant and in fact may indicate the claim is duplicated in any event. I find the Applicant has failed to discharge the onus of proof in respect of this deduction claim.
Work-related travel expenses
This claim relates to flights said to have been undertaken between Sydney and Melbourne by the Applicant. In the 2008 income year, he said there were 36 flights at a cost of $439 per flight resulting in a $15,804 claim for these expenses. According to the Applicant, this calculation was based on his frequent flyer statement showing his frequent flyer points. He said one point was the equivalent of one dollar in expenditure. There was no evidence before me to support that claim.
The problem is that there was no evidence, except for the self-serving statements made by the Applicant, regarding the purpose of any of these flights. The Applicant stated that he lived and worked in Sydney and had to travel to Melbourne and Canberra regularly for meeting with clients. In his written submissions, the Applicant said that he was engaged as a project specialist managing regulatory initiatives in the banking and financial sectors. He produced by way of evidence several emails which refer to project monthly meetings. However, it is not clear from those somewhat vague documents whether participation was by personal attendance or teleconference. Also, it does not account for the fact that the claim for travel between Melbourne and Sydney is in excess of monthly meetings. On that basis, I find that the Applicant has failed to discharge the onus of proving that those claimed expenses were work related. In my opinion, the Commissioner correctly denied a deduction for those expenses.
2009 AND 2010 INCOME YEARS
The Commissioner determined that the Applicant’s personal services income for the 2009 and 2010 income years was $213,948 and $227,058 respectively. Those amounts are not significantly different to those claimed by the Applicant. There were franked dividends of $65 for the 2009 income year and $52 for the 2010 income year.
The rental income in both these income years was dealt with by the Commissioner in the same manner as the 2008 income year. It has no bearing on the outcome.
The motor vehicle expenses claimed by the Applicant were $3750 in both income years. To begin with, it is highly unlikely that those figures, being precisely identical, are correct. If, as appears to be the case, they are based on an estimate made by the Applicant, he has not produced any objective evidence of the basis upon which that estimate is made. I find that the Applicant has failed to discharge his onus of proving that these expenses were in fact incurred or, if they were, they were incurred in the course of producing assessable income.
The remaining claim in both income years related to work-related travel expenses incurred as a consequence of the Applicant flying between Sydney and Melbourne. Other than the Qantas frequent flyer statement referred to above, there was no evidence that these expenses were incurred in the amounts claimed or that they were work-related. In addition, there is evidence that the Applicant worked as a contractor during these financial years. In the income tax returns the Applicant’s tax accountants lodged, even though they were not accepted by the Commissioner, it is claimed that he received personal services income from the National Australia Bank (NAB) in both income years. Section 85-10 of the ITAA 97 sets out the limitations on deductions for non-employees in respect of personal services. Relevantly, it provides:
(1) You cannot deduct under this Act an amount to the extent that it relates to gaining or producing that part of your *ordinary income or *statutory income that is your *personal services income if:
(a)the income is not payable to you as an employee; and
(b)you would not be able to deduct the amount under this Act if the income were payable to you as an employee.
For the reasons I have referred to above, I find that the deductions claimed by the Applicant in the years in question, namely $9,219 and $439, must be disallowed.
LIABILITY TO PENALTIES
Section 284-75 of the Administration Act sets out the basis upon which a taxpayer may become liable to administrative penalty. Relevant to this case is the following:
(3) You are liable to administrative penalty if:
(a)you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
(b)that document is necessary for the Commissioner to determine a *tax -related liability of yours accurately; and
(c)the Commissioner determines the tax-related liability without the assistance of that document.
In this case, in respect of all three income years in question, the Commissioner asked the Applicant on a number of occasions to lodge his overdue income tax returns. Finally, in a letter dated 20 June 2012, the Commissioner said the following:
Unless you lodge these returns by 18 July 2012, we’ll issue a default assessment using the figures in the enclosed ‘summary of your estimated taxable income’. You’ll have to pay any tax you owe, and you may also be liable for these penalties:
· a minimum penalty of 75% of any tax you owe, and
· an additional administrative penalty for late or unlodged income tax returns.
The Applicant failed to comply with the final demand from the Commissioner to lodge his overdue income tax returns. Therefore, he exposed himself to a penalty assessment. The base penalty amount for a failure to comply with income tax lodgement requirements is located at Item 7 of the table set out under s. 284-90(1) of the Administration Act. That amount is stated to be 75% of the tax-related liability concerned.
The evidence before me on the hearing of this matter clearly establishes the Applicant’s liability to penalties. Despite numerous reminders from the ATO that his tax returns for the income years in question were overdue, the Applicant failed to comply, thus compelling the Commissioner to issue default assessments pursuant to s. 167 of the ITAA 36. Those assessments are based on the Commissioner’s assessment of the Applicant’s assessable income and not on a precise figure. Those assessments were issued to the Applicant on 15 August 2012.
Section 298-20 deals with the remission of penalty. Relevantly, it provides:
(1) The Commissioner may remit all or a part of the penalty.
In his submissions regarding penalties, the Applicant referred to the Practice Statement Law Administration (PS LA 2014/4). That Practice Statement deals with the administration of the penalty imposed by s. 284-75(3). The scope of that document is set out in clause 9 which provides:
9. This practice statement provides guidelines on how the Commissioner’s discretion in subsection 298-20 (1) to remit the penalty may be exercised. There is no intention to lay down conditions that may restrict the exercise of the discretion. Nor does the practice statement represent a general exercise of the Commissioner’s discretion. Rather, the guidelines are provided to:
· help ATO staff in the exercise of the discretion, and
· ensure that entities in like situations receive like treatment.
I am mindful that Practice Statements are designed to provide guidance to ATO staff and are not legally binding. They do not restrict the exercise of discretion by the Commissioner but rather assist to produce consistency in discretionary decision making.
Clause 28 of PS LA 2014/4 sets out the approach which should be adopted regarding the discretion to remit penalties. It provides:
The discretion to remit penalties, in whole or in part should be approached in a fair and reasonable way. Remission, in full or in part, will generally occur when:
·     an entity has a genuine, yet mistaken, belief that lodgement was not required as opposed to an indifference to, or a rejection of, their obligation
·     an entity understood their obligation to lodge but circumstances beyond their control affected their ability to lodge
·     the amount of penalty imposed by law causes an unjust result
·     there were credits available to offset the amount of the tax-related liability payable, or
·     there was extraordinary cooperation during an examination.
PS LA 2014/4 also deals with the obligation to lodge income tax returns. The clauses dealing with the mistaken belief that lodgement was not required or that genuine effort was made to understand the obligation to lodge do not apply to the Applicant. He was sent numerous reminders and failed to comply. The clause which is relevant to the Applicant’s case is clause 32 which provides:
Remission will generally not be appropriate in the following circumstances:
· the entity understood, or should have understood, their lodgement obligation, or
· the ATO has explained to the entity the obligation to lodge, or requested the entity to lodge the document, and after a reasonable time the entity has not lodged.
The particular complaints raised by the Applicant are as follows:
·his tax history with the ATO discloses that at no time did he consider that lodging his tax returns in bulk form (which I understand involved lodging income tax returns for several income years at one time, usually after the due date) was an issue and was managed by his tax agent;
·he co-operated fully with the ATO auditor;
·he made requests to the ATO auditor to allow more time to obtain documentary evidence regarding his travel claims and access to receipts which he said were impeded;
·what he described as mitigating circumstances combined to impact on his capacity to deal with his tax matters; and
·the timing and prolonged effects of the mitigating circumstances.
The evidence before me discloses something quite different to those matters he has explained should be taken into account. In fact the Applicant has a poor compliance history for lodgement of income tax returns. As the Commissioner pointed out, his income tax returns between July 2003 and June 2007 were lodged 292, 246, 215 and 163 weeks late respectively. There was no evidence before me that the Commissioner permitted the Applicant to lodge returns in bulk as he claimed. Income tax returns for each income year are required to be lodged on a specified date unless the Commissioner extends time for lodgement. The evidence discloses that the Applicant either ignored or was not capable of complying with numerous extensions to deadlines set by the Commissioner.
Although the Applicant complained of a number of personal problems which may have caused the recent delays in the lodgement of his income tax returns, his history discloses a pattern of behaviour which cannot be attributed to his personal affairs. Plainly, he has been a serial offender. Furthermore, although the Applicant complained of not having sufficient time to obtain material to substantiate his expenditure and the like, he appears to be completely oblivious to or has ignored the substantiation rules regarding work expenses. Section 900-25 of ITAA 97 provides:
(1)   Once you have the material required by section 900-15 or 900-20, you must retain it for 5 years. There is no need to lodge it with your *income tax return. The Commissioner may require you to produce it: see Subdivision 900-G. The period for which you must retain it is called the retention period.
(2)   The 5 years start on the due date for lodging your *income tax return for the income year. If you lodge your return later, the five years start on the day you lodge it.
(3)   However, the *retention period is extended if, when the 5 years end, you are involved in a dispute with the Commissioner that relates to the expense. See section 900-170.
(4)   If you do not retain the material for the *retention period, you cannot deduct the expense. If you have already deducted it, your assessment may be amended to disallow the deduction.
(5)   …

The Applicant has not produced any documentary evidence to support his work-related expenses, including travel expenses, nor has he provided any documentary evidence in respect of expenditure incurred on the rental property. The consequences of failure to substantiate expenditures which are claimed as deductions are clearly spelt out in s. 900-25(4).
In light of the above evidence regarding Applicant’s non-compliance history, I accept the Commissioner’s submission that the imposition of a penalty does not create an unjust or unintended result, regardless of any personal circumstances in which the Applicant found himself.
CONCLUSION
Although the Applicant produced a PAYG Payment Summary for the 2008 income year which disclosed total tax withheld in the amount of $14,589, I have found that the claimed tax withheld was never remitted to the ATO. The payments the Applicant received from Adaps during that income year were in respect of work done by the Applicant as contractor through his private company. The evidence from the Commissioner was that the records disclosing payments to employees of Adaps did not include payments to the Applicant. Nor was there any record of the Applicant being an employee of that company.
Accordingly, I have found that the Applicant has failed to discharge the onus of proving that the assessment regarding his taxable income in the 2008 income year was excessive. There was no dispute about the default assessments of taxable income in respect of the 2009 and 2010 income years.
As for work-related travel expenses, I have found that the Applicant failed to substantiate those claimed expenses. Accordingly, he is not entitled to claim them. Similarly, as far as the rental property is concerned, the Applicant also failed to substantiate claimed expenses in the income years in question. He is not entitled to claim those expenses.
Although the Applicant claimed he was entitled to remission of the penalties assessed, I have found that there should not be any remission. His history and attitude towards keeping proper records to enable him to complete income tax returns and his reluctance to lodge such returns within the time required by the Commissioner weigh heavily against the grant of any remission.
It necessarily follows that I find the objection decision made by the Commissioner regarding the Applicant’s income tax payable for the income years 2008, 2009 and 2010 and the administrative penalty assessments for those income years was the correct and preferable decision. I have affirmed those decisions.

I certify that the preceding 64 (sixty-four) paragraphs are a true copy of the reasons for the decision herein of Senior Member Egon Fice

.....................[sgd]...................................................
Associate
Dated: 5 April 2018

Date(s) of hearing: 4 October 2017

Applicant: In person

Counsel for the Respondent: Ms Laura Keilly

Solicitors for the Respondent: Ms Liz Cameron

[2018] AATA 772

5 April 2018

Key Legal Topics

Areas of Law

Tax Law

Statutory Interpretation

Legal Concepts

Penalty

Remedies

Statutory Construction

Date(s) of hearing:	4 October 2017
Applicant:	In person
Counsel for the Respondent:	Ms Laura Keilly
Solicitors for the Respondent:	Ms Liz Cameron