Morgan and Commissioner of Taxation (Taxation)
[2017] AATA 811
•6 June 2017
Morgan and Commissioner of Taxation (Taxation) [2017] AATA 811 (6 June 2017)
Division: GENERAL DIVISION
File Number(s): 2015/5789-5791
Re:Kevin John Morgan
APPLICANT
Commissioner of TaxationAnd
RESPONDENT
DECISION
Tribunal:Egon Fice, Senior Member
Date:6 June 2017
Place:Melbourne
The Tribunal affirms the decision under review.
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Egon Fice, Senior Member
TAXATION – review of objection decision - income tax – whether applicant reported correct amount of GST payable in quarterly tax periods - GST shortfall – whether applicant entitled to input tax credits claimed in BAS statements – administrative penalty for failure to take reasonable care – onus of proof – burden of proof not discharged by applicant – decision affirmed
Legislation
A New Tax System (Goods and Services Tax) Act 1999 ss 23-10, 29-40, 29-10, 153-A, 153-B
Taxation Administration Act 1953 ss 14ZZK, 11-5, 11-15, Sch 1 ss 284-75, 284-90.
Tax Agent Services Act 2009Cases
Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614
George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81Secondary Materials
Law Administration Practice Statement PS LA 2006/2, Administration of shortfall penalty for false or misleading statement
Goods and Services Tax Ruling GSTR 2000/37, Goods and services tax: agency relationships and the application of the law
Miscellaneous Taxation Ruling MT 2008/1, Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregardREASONS FOR DECISION
Egon Fice, Senior Member
6 June 2017
Mr Kevin Morgan conducted an enterprise trading under both his name and 21st Century Auctions. He was registered for GST in accordance with s. 23-10 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). He was required to complete business activity statements (BASs) on a quarterly basis using the cash method of accounting
(s. 29-40).
Mr Morgan’s enterprise comprised a hardware store during the first few periods under review but that store subsequently ceased operation. Mr Morgan then carried on the enterprise under the name 21st Century Auctions which conducted auctions of stamps and coins and other collectables four times per year.
In August 2010 the Commissioner commenced an audit of Mr Morgan’s income tax returns and BASs for the periods from 1 July 2007 to 30 June 2008; 1 July 2008 to 30 June 2009; and 1 July 2009 to 30 June 2010. In the first interim report following the audit, which is dated 7 July 2011, the auditor found a GST shortfall totalling $21,147 for the three income years in question. The auditor also found that it was not possible to reconcile the MYOB (Mind Your Own Business accounting software) general ledger and the GST reports for the periods 1 July 2007 to 30 June 2008 and 1 July 2008 to 30 June 2009. Although the audit was able to reconcile the input tax credits claimed during the 2010 income year, it was unable to reconcile the input tax credit claim for the 2008 and 2009 income years with the lodged activity statements.
Following that first interim report, Mr Morgan wrote to the auditor in an attempt to explain some of the discrepancies. On 12 August 2011 the Commissioner provided a second interim report which found that the amount of understated GST for the three income years in question amounted to $27,157. The Commissioner also found that Mr Morgan had over-claimed his input tax credits for the period in question by $14,914. That resulted in the shortfall amount of $42,071, to which the Commissioner applied a 25% penalty on the basis that Mr Morgan failed to take reasonable care in preparing GST returns. The penalty amount was $10,517.75.
In a letter dated 12 August 2011 the Commissioner informed Mr Morgan of the conclusions reached following completion of the audit. The findings in the second interim report were affirmed. The Commissioner also informed Mr Morgan of his right to lodge an objection. In a subsequent letter dated 30 August 2011 the Commissioner repeated his findings adding that consideration had been given to remitting the penalty. The Commissioner decided that his case did not allow for a remission of the penalties imposed in accordance with the Practice Statement Law Administration PS LA 2006/2 (withdrawn on 23 August 2012 and replaced by PS LA 2012/5). The Commissioner also informed Mr Morgan of the general interest charge to be applied, which, of course, this Tribunal does not have the power to address.
In a letter dated 31 August 2011 the Commissioner issued Mr Morgan with a Notice of Assessment of net amount for the periods 1 July 2007 to 30 June 2010. The Commissioner set out in a table which noted, for each relevant quarter, the amounts included in Mr Morgan’s activity statements for each tax period; the amounts which the Commissioner determined to be the correct amount for each period; and the difference which resulted in his running balance account debit being increased by $42,071.
Mr Morgan lodged an objection to the notice of assessment on 12 April 2015. In essence, the basis of that objection was that:
(a)all auction proceeds remained the property of the vendors at all times and only the commission component was required to be reported in the BAS statements;
(b)those vendors who were registered for GST would have included payments made to them in their BAS statements;
(c)some vendors were private individuals not registered for GST and there was no requirement to report those transactions, only the commissions received;
(d)GST was correctly deducted and reported in respect of overseas vendors; and
(e)the accounting software used by Mr Morgan had been approved by the ATO so there could be no question of inadequate bookkeeping.
On 5 June 2015 the Commissioner sent to Mr Morgan his Objection Decision. The Commissioner determined that Mr Morgan had not reported the correct amount of GST payable for the tax periods between 1 July 2007 and 30 June 2010. The Commissioner also determined that Mr Morgan was not entitled to the input tax credits claimed in his BAS statements between 1July 2007 and 30 June 2009.
Mr Morgan lodged an application for review of the Objection Decision with the Tribunal on 30 October 2015.
BURDEN OF PROOF
The Commissioner relied on s. 14ZZK of the Taxation Administration Act 1953 (the Administration Act) which provides:
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the ground 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 – that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case – that the taxation decision concerned should not have been made or should have been made differently.
The consequence of that provision for Mr Morgan is, that in order to succeed on this application, he must discharge the burden of proving, by evidence, that the amended assessments made by the Commissioner for the GST periods between 1 July 2007 and 30 June 2010 were excessive. It is insufficient for Mr Morgan to simply claim that all of the BAS returns were correct and all of the relevant materials were provided to the Commissioner.
As the Commissioner submitted, in this case, Mr Morgan must establish, on the balance of probabilities, that the actual assessments should have reflected the amounts recorded in his activity statements. The auditor determined the value of sales made by Mr Morgan by examining the deposits made into his bank accounts. Based on that information, the auditor determined that Mr Morgan had understated his income which was subject to GST. That method is clearly an indirect method of making an assessment. Nevertheless, as the Commissioner contended, a taxpayer cannot succeed simply by proving that errors had been made by the Commissioner.
The High Court of Australia (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) dealt with this issue in Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 with Toohey J said, at 631:
… A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment…
In addition, I should refer to what Brennan J said in Dalco’s case about reliance on an error made by the Commissioner. His Honour said, at 625:
The majority of the Full Federal Court in the present case treated the error which they held to infect the Commissioner’s assessment of the amount of the taxpayer’s taxable income as concluding the question whether that amount was excessive. It did not. If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessable income an amount which, on those facts, ought not have to have been included. But where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer’s taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed… Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.
The Commissioner has no obligation to establish a positive case supporting his assessment. The High Court of Australia (Dixon CJ, McTiernan, Williams, Webb Fullagar JJ) in George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183 said, at 204:
The fact is that unless the taxpayer discharges the burden laid on him by s. 190 (b) of proving that his 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 affording the grounds.
Brennan J also referred to what Mason J said in Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81:
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.…
Essentially, there are three issues which I must determine. The first is whether Mr Morgan reported the correct amount of GST payable in the quarterly tax periods between 1 July 2007 and 30 June 2010. The second issue is whether Mr Morgan was entitled to the input tax credits claimed in the relevant quarters between 1 July 2007 and 30 June 2010. The final issue is whether the assessment to impose administrative penalties at 25% of the shortfall amount was the preferable decision.
THE GST PAYABLE IN THE RELEVANT QUARTERS
Voluminous documents were produced by Mr Morgan which were used to record income derived from sales, such as cash books, vendor’s statements from auctions and till tapes from the hardware store’s operation. The problem the Commissioner faced was that on audit, the sales figures recorded on the relevant BAS reports could not be reconciled with the MYOB accounting reports and the records used to record income from sales. The auditor analysed the bank accounts in the names of Mr Morgan, 21st Century Auctions and Stamp News Pty Ltd and concluded that there were significant shortfalls reported in the BAS reports for the audit period. The auditor took into account identifiable transfers from Mr Morgan and Stamp News Pty Ltd in the 2008, 2009 and 2010 income years. The Commissioner also noted that in many of the quarterly statements, there was a significant difference between the total sales figure and non-capital purchases.
In the second interim report (12 August 2011) prepared by the auditor, the Commissioner set out a summary of Mr Morgan’s BAS report lodgements in the three income years 2008 – 2010 ). I have set that out in the table below.
Issue 1
2008 2009 2010 Total Total Sales G1 616,853 355,924 293,104 1A (GST on sales) -52,361 -30,945 -25,765 G10 (capital purchases) -34,990 G11 (non-capital purchases) 809,999 -581,477 -333,072 1B (GST on purchases) 74,311 51,725 28,013 Wages -15,535 -63,550 -34,950 Net cash flow position -221,721 -268,323 -72,670 -562,714
The table above discloses a negative cash flow over the three-year period amounting to $562,714. As the auditor explained, that meant that either Mr Morgan’s borrowing had increased by that sum; his bank account was reduced by that sum; he disposed of personal assets in that amount; or some combination of those events. Mr Morgan was not able to substantiate or explain where the $562,714 came from. In fact, the Minutes of Interview with Mr Morgan and his bookkeeper undertaken on 17 December 2010 records that when it was pointed out to Mr Morgan that the reported figures on the BAS reports for the periods under review disclosed that the 1B figure was always significantly higher than the 1A figure, Mr Morgan appeared to be shocked and could not offer an explanation other than he had no faith in one of his former bookkeepers. The 1B figure is of course the input tax credit claimed on non-capital purchases.
Not being able to reconcile the BAS reports with the general ledger in the MYOB accounting software, the auditors then resorted to an analysis of the various bank accounts used by Mr Morgan, taking account of transfers between accounts in order to establish the GST shortfall. That detailed analysis resulted in an understatement of GST payable for the 2008 income year of $4498; $13,677 for the 2009 income year; and $8,982 for the 2010 income year. Because GST is a transactional tax and varies between tax periods, the auditor determined the percentage of GST to be attributed to each quarter based on the percentage of GST reported in Mr Morgan’s original activity statements. The total GST shortfall amount to $27,157 for the three income years in question.
As I have already indicated above, in his objection Mr Morgan did not refer to any additional documents not used by the auditor for the purposes of analysing the GST shortfall. Nor did Mr Morgan produce any further documents for the purposes of the hearing of this matter. The only explanation offered by Mr Morgan was that the
book-keepers who are responsible for maintaining the accounts maintained that the figures provided were correct and accurate. In his objection Mr Morgan also stated that the auction proceeds of options he conducted remain the property of the vendor at all times and only the commission component was required to be reported in the BAS reports. He repeated that statement in his oral evidence at the hearing.
With respect to Mr Morgan, the treatment of GST where a person, such as an auctioneer, acts on behalf of a principal, is described in Subdivision 153-A and 153-B of the GST Act. Furthermore, the basic principles applicable to such circumstances are set out in Goods and Services Tax Ruling GSTR 2000/37. The Subdivisions to which I have referred above explain the special rules which apply to agents who have not entered into an arrangement where they are treated as separate suppliers or acquirers of goods or services and those who have entered into an arrangement where they are not treated as such. Entering into such arrangements in respect of both supply and acquisition results in the transaction between the principal and its intermediary (agent) being treated as a transaction between two principals. Given that Mr Morgan had bookkeepers keeping his accounts and preparing the BAS returns, it is difficult to see how those persons could have made the various errors claimed by Mr Morgan. In any event, Mr Morgan did not put into evidence any documents evidencing arrangements he had with principals in the course of conducting auctions in the name of 21st Century Options and Kevin Morgan Stamps and Coins.
Although the Commissioner admitted that his calculations were not made on the basis of identifying individual transactions but rather through the indirect means of examining bank account entries of the parties involved; and that the resultant figure was necessarily an estimate, where the taxpayer bears the onus of proving that the assessment was excessive, it is plainly up to the taxpayer to indicate reasonably accurately and with evidence why an estimate made by the Commissioner should not stand and what the more accurate figure is. In this case, Mr Morgan has not done so. It follows I must find that Mr Morgan has failed to discharge the evidentiary burden of proving that the assessment made by the Commissioner regarding the shortfall of GST payable for the tax periods between 1 July 2007 and 30 June 2010 was excessive.
INPUT TAX CREDITS
The disparity between the total sales figures and the non-capital purchases figures on the BAS reports immediately calls for an examination of the input tax credits claimed. The taxpayer is entitled to input tax credits for creditable acquisitions. The expression creditable acquisition is defined in s. 11-5 of the GST Act in the following way:
You make a creditable acquisition if:
(a)you acquire anything solely or partly for a *creditable purpose; and
(b)the supply of the thing to you is a *taxable supply; and
(c)you provide, or are liable to provide, *consideration for the supply; and
(d)you are *registered, or *required to be registered.
The expression creditable purpose is defined in s. 11-15 of the GST Act as follows:
(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(a)the acquisition relates to making supplies that would be*input taxed; or
(b)the acquisition is of a private or domestic nature.
…
A taxpayer must hold a tax invoice for a creditable acquisition when providing to the Commissioner a GST return (BAS). Section 29-10 relevantly provides:
…
(3) If you do not hold a*tax invoice for a*creditable acquisition when you give to the Commissioner a*GST return for the tax period to which the input tax credit (or any part of the input tax credits) on the acquisition would otherwise be attributable:
(a)the input tax credit (including any part of the input tax credit) is not attributable to that tax period; and
(b)the input tax credit (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice.
However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply.
…
The auditor found that the input tax credits claimed by Mr Morgan during the 2010 income year were correct. However, the auditor was unable to reconcile the input tax credits claimed for the 2008 and 2009 income years. In fact, at interview, Mr Morgan was unable to explain why the claimed creditable acquisitions were continually higher than the total sales figures between 1 July 2007 and 30 June 2009. In determining the correct amount of input tax credits to which Mr Morgan was entitled, the auditor used the figures recorded in the MYOB reports.
The total input tax credits claimed, taken from the MYOB reports for the quarters between September 2007 and June 2009, amounted to $111,123. The input tax credits claimed on the BAS returns amounted to $126,037. Accordingly, the Commissioner disallowed $14,914 claimed in input tax credits.
Because Mr Morgan did not provide any further documents or an explanation for the discrepancy, it necessarily follows that he has failed to discharge the onus of proving what the correct assessment should have been. I find that Mr Morgan’s claim for input tax credits for the period between September 2007 and June 2009 should be reduced by $14,914.
ADMINISTRATIVE PENALTIES
On completion of the audit, the Commissioner informed Mr Morgan in a report dated 30 August 2011 that in the lodgement of his BASs for the quarters in the income years in question, Mr Morgan made statements which are false and misleading. Those statements incorrectly stated the net amount of GST payable taking into account the sales figures and the input tax credits claimed. It resulted in a shortfall amount of $42,071.
On 7 September 2011 the Commissioner issued a Notice of assessment and liability to pay penalty. In his objection, Mr Morgan referred to the notice of assessment dated 31 August 2011. That document is in fact the report provided on completion of the audit. While the objection decision does not refer specifically to the administrative penalty, it is sufficiently clear that Mr Morgan objected to the administrative penalty and that the Commissioner, having issued penalty assessments, and having made the findings which were made in the report provided to Mr Morgan on completion of the audit, disallowed Mr Morgan’s objection to the penalty assessments.
Section 284-75 under Schedule 1 of the Administration Act relevantly provides:
(1) you are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation Law (other than the *Excise Acts); and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
…
(5) You are not liable to administrative penalty under subsection (1) or (4) for a statement that is false or misleading in a material particular if you, and your*agent (if relevant), took reasonable care in connection with the making of the statement.
(6) You are not liable to administrative penalty under subsection (1) or (4) if:
(a)you engage a *registered tax agent or BAS agent; and
(b)you give the registered tax agent or BAS agent all relevant taxation information; and
(c)the registered tax agent or BAS agent makes the statement; and
(d)the false or misleading nature of the statement did not result from:
(i) intentional disregard by the registered tax agent or BAS agent of a *taxation Law (other than the *Excise Acts); or
(ii) recklessness by the agent as to the operation of the taxation law (other than the Excise Acts).
The provisions set out in s. 284-75 (6) are commonly referred to as the safe harbour exception. However, there was no evidence and in fact the Commissioner made enquiries regarding whether the book-keepers engaged by Mr Morgan were registered, finding they were not. The expression ‘registered tax agent’, as agent or tax (financial) adviser, is defined in the Tax Agent Services Act 2009. Mr Morgan did not dispute the Commissioner’s finding on this issue. There being no evidence to the contrary, I find that the safe harbour exception cannot apply in Mr Morgan’s case.
The Commissioner referred to Miscellaneous Taxation Ruling MT 2008/1. That Taxation Ruling explains that the taxpayer is required to take the same level of care to fulfil his or her tax obligations that could be expected of a reasonable person in that tax payers position taking into account the tax payer’s personal circumstances, knowledge, experience, education and skill. Taxation Ruling NT 2008/1 further provides, at paragraph 29:
Judging whether there has been a failure to take reasonable care turns on an evaluation of all the circumstances surrounding the making of the false or misleading statement to determine whether a reasonable person of ordinary prudence in the same circumstances would have exercised greater care.
Mr Morgan’s evidence was that the bookkeepers prepared the BAS reports for the quarters in question. He said he simply signed off on those documents, relying on the expertise and skill of the bookkeepers. However, it seems to me that Mr Morgan could not have avoided noting the very significant disparity between the claimed total sales amounts and the non-capital purchases in some quarters.
By way of example, in the quarter ended 30 September 2007, the difference between the two figures was $95,575. In the following two quarters the difference was approximately $16,000 and $62,000. In the September 2008 quarter the difference between those figures was $149,503 and was followed in the December 2008 quarter by difference of $58,510. That amounts to a discrepancy of some $381,588 over the 12 month period. In fact it is only until the 2009 income year where the sales figures exceed the non-capital purchases figures to any extent. Mr Morgan must necessarily have been aware of those discrepancies because, if those figures were accurate, he would have had to raise significant amounts of cash or obtain that cash from other sources in order to fund the purchases. There was no evidence that that occurred and therefore, it should have been reasonably obvious to him that there was a problem with the figures themselves.
Taking account of the circumstances I have mentioned above, I find that Mr Morgan did not take reasonable care when signing off on the BAS reports over the income years in question which led to the false or misleading statements being made.
The base penalty amounts are set out in the table which follows s. 284-90 of the Administration Act. I find that Item 3 applies in his case. That is, where the shortfall amount results from a failure by the taxpayer or his agent to take reasonable care to comply with a taxation law, the base penalty amount is 25% of the shortfall amount. This shortfall amount in Mr Morgan’s case was $42,071 resulting in an administrative penalty of $10,517.75.
Although a discretion exists which would allow me to remit the administrative penalty imposed, Mr Morgan did not argue that there were grounds for remission of the administrative penalty. I have therefore not considered whether the discretion should be exercised.
CONCLUSION
I have found that Mr Morgan failed to discharge the onus of proving that the assessment made by the Commissioner of the amount of GST payable in the quarterly tax periods between 1 July 2007 and 30 June 2010 was excessive. Nor did Mr Morgan discharge the onus of proving what the correct assessment in those quarters should have been.
I have also found that Mr Morgan failed to discharge the onus of proving that the assessments made by the Commissioner regarding entitlement to input tax credits in the quarterly activity statements between 1 October 2007 and 30 June 2009 were not the correct assessments and that a different assessment should have been made.
Finally, I have found that in making the statements set out in the BAS reports for the period in question, Mr Morgan made false and misleading statements as a result of failing to take reasonable care. An administrative penalty at the rate of 25% of the shortfall amount was the correct decision.
It follows that I must find that the objection decision made by the Commissioner on 5 June 2015 was the correct decision. I also find that the decision made by the Commissioner on 7 September 2011 to impose an administrative penalty at 25% of the shortfall amount was the correct decision. I affirm those decisions.
45. I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for the written reasons herein of Egon Fice, Senior Member
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Associate
Dated 6 June 2017
Date of hearing 20 October 2016 Applicant
Counsel for the Respondent
In person
Mr C Sievers
Solicitors for the Respondent
ATO Review and Dispute Resolution
Key Legal Topics
Areas of Law
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Tax Law
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Administrative Law
Legal Concepts
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Penalty
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Statutory Construction
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Judicial Review
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Procedural Fairness
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