Munkayilar and Commissioner of Taxation (Taxation)
[2021] AATA 1839
•22 June 2021
Munkayilar and Commissioner of Taxation (Taxation) [2021] AATA 1839 (22 June 2021)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2020/1604
Re:Ahamed Munkayilar
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member Linda Kirk
Date:22 June 2021
Place:Melbourne
The Tribunal sets aside the decision under review and in substitution:
1.remits the administrative penalty by 85% under section 298-20(1) of the Tax Administration Act 1953; and
2.otherwise affirms the decision under review.
...[sgd]...................................................................
Senior Member Linda Kirk
Catchwords
TAXATION – objection to assessment – shortfall penalty – claimed work-related clothing, self-education and other expenses – whether Applicant discharge burden under s 14ZZK Taxation Administration Act 1953 – whether shortfall penalty is excessive or incorrect – whether to remit shortfall penalty – expenses not incurred by Applicant – insufficient evidence to substantiate claimed deductions – Applicant failed to exercise reasonable care in preparing return – Applicant made genuine attempt to meet tax obligations – penalty remitted – reviewable decision set aside and substituted
Legislation
Administrative Appeals Tribunal Act 1975
Income Tax Assessment Act 1997Taxation Administration Act 1953
Cases
Abichandani v Commissioner of Taxation, Re [2019] AATA 4296
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347
Coppell v Federal Commissioner of Taxation, Re (2000) 44 ATR 1001
Diarra and Commissioner of Taxation, Re [2019] AATA 5545
Hart v Commissioner of Taxation (2003) 131 FCR 203
Picton Finance Ltd v Federal Commissioner of Taxation, Re (2013) 93 ATR 876
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483Yazbek and Commissioner of Taxation, Re [2014] AATA 423
Secondary Materials
Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
REASONS FOR DECISION
Senior Member Linda Kirk
22 June 2021
BACKGROUND AND REVIEW APPLICATION
Mr Ahamed Munkayilar (‘the Applicant’) seeks a review of the decision of the Commissioner of Taxation (‘the Respondent’) dated 4 February 2020 to disallow the Applicant’s objection to the Notice of Amended Assessment for the income tax year ended 30 June 2018 and the Notice of Assessment of Shortfall Penalty for the year ended 30 June 2018 (‘the Objection Decision’).
On 20 August 2018, the Respondent received the Applicant’s income tax return for the year ended 30 June 2018 (‘2018 Return’).[1] In the 2018 Return the Applicant:
(a)listed his main occupation as a social worker,[2]
(b)disclosed gross payments from Ability Assist Pty Ltd in the amount of $75,001;[3] and
(c)claimed work-related expenses as deductions in the sum of $15,492.[4]
[1] T4, 17–49.
[2] Ibid 18.
[3] Ibid.
[4] Ibid 22.
On 27 August 2018, the Applicant was issued a Notice of Assessment for the year ended 30 June 2018 (‘2018 NOA’).[5] The outcome of the 2018 NOA resulted in a $10,760.06 credit to the Applicant.
[5] T5, 50.
On 3 June 2019, the Respondent issued a letter notifying the Applicant that an audit was being conducted in relation to the work-related expenses he had claimed in his 2018 Return.[6]
[6] T6, 52.
By way of letter dated 3 June 2019, the Respondent required the Applicant to provide documentation by 1 July 2019 in order to substantiate the $15,492 work-related expenses the Applicant had claimed as deductions.[7]
[7] Ibid 55–57.
On 27 June 2019, the Applicant’s tax agent, Dr Chuks Iheakor, emailed the Respondent advising that the Applicant was unable to find the receipts on which the claims were based and that the school fees he claimed as deductions were based on incorrect advice provided by the Applicant.[8] The Applicant’s tax agent also provided the Respondent with a completed voluntary disclosure form signed 27 June 2019[9] (‘Voluntary Disclosure’) and supporting documents.[10] The Voluntary Disclosure sought to reduce the work-related expenses claimed by the Applicant as deductions in the 2018 Return as detailed in paragraphs 35, 37 and 47 below.
[8] T7, 60.
[9] Ibid 61, 64.
[10] Ibid 62, 63.
On 6 August 2019, the Respondent issued the Applicant an audit finalisation letter, notifying the Applicant that as a result of the audit, the Applicant’s work-related expenses claimed in the 2018 Return would be disallowed in full (‘the Audit Decision’).[11]
[11] T10, 70.
As a result of the audit, the Respondent determined that the Applicant had a tax shortfall amount in the sum of $12,131.90.[12]
[12] Ibid 77.
By way of the audit finalisation letter dated 6 August 2019, the Respondent advised the Applicant that he must start making compulsory repayments against his study or training support loans and, due to the audit result, the compulsory repayments for such loans have become payable and have been included in the shortfall sum.[13]
[13] Ibid 75.
The Respondent also determined that the Applicant was liable for an administrative penalty of $6,065.95, being 50% of the shortfall amount, for making a false or misleading statement as a result of the Applicant’s and/or his agent’s recklessness in preparing the 2018 Return.[14]
[14] T10, 75–78.
On 14 August 2019, the Respondent issued the Applicant a Notice of Amended Assessment for the 2018 income tax year (‘the Amended Assessment’).[15] As a result, the Applicant’s taxable income was increased from $60,096 to $75,588 for the 2018 income tax year.[16]
[15] T11, 79.
[16] Ibid.
On 14 August 2019, the Respondent issued the Applicant a Notice of Shortfall Penalty (‘the Shortfall Penalty Notice’)[17] in the sum of $6,065.95 for making a false or misleading statement.
[17] T12, 83.
On 17 November 2019, the Applicant lodged an objection to the Amended Assessment and Shortfall Penalty Notice.[18]
[18] T13, 87–104.
On 4 February 2020, the Respondent made the Objection Decision, disallowing the Applicant’s objection in full and upholding the original Audit Decision, including the decision to impose a shortfall penalty of 50%, on the basis that the Applicant or his tax agent were reckless in the preparation of the 2018 Return.[19]
[19] T2, 12–15.
On 12 March 2020, the Applicant lodged an application for review of the Objection Decision with the Administrative Appeals Tribunal (‘the Tribunal’).[20]
[20] T1.
The application was heard at a hearing of the Tribunal on 18 and 19 February 2021. The Applicant appeared at the hearing by video-link and was self-represented. The following persons gave oral evidence and were cross-examined at the hearing:
(a)the Applicant;
(b)Ms Bilkisu Tijani — the Applicant’s wife; and
(c)Dr Chuks Iheakor — the Applicant’s tax agent.
LEGISLATIVE FRAMEWORK
Taxpayer’s onus of proof
For the purposes of this application, the provisions of the Administrative Appeals Tribunal Act 1975 (Cth) are modified by section 14ZZK of the Taxation Administration Act 1953 (Cth) (‘TAA’) which provides in so far as it is relevant:
On an application for review of a reviewable objection decision:
…
(b)the applicant has the burden of proving that:
(i) if the taxation decision concerned is an assessment—the assessment is excessive or otherwise incorrect and what the assessment should have been; or ...
Claims for work-related expenses
Section 8-1 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA’) allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income (unless that loss or outgoing is capital, private or domestic in nature). There must be a connection or nexus between the loss or outgoing and the assessable income, so that the loss or outgoing is directly related to the production or gaining of that assessable income. A loss or outgoing can only be deducted to the extent in which it is incurred in producing assessable income. Where a loss or outgoing has been incurred for both income producing and private purposes, the loss or outgoing must be apportioned.
Pursuant to section 900-15(1) of the ITAA, work-related expenses can only be deducted if they qualify as a deduction under some other provision of the ITAA outside Division 900, and are substantiated by written evidence. Section 900-115 of the ITAA requires taxpayers to keep written evidence that sets out:
(a)the name or business name of the supplier; and
(b)the amount of the expense, expressed in the currency in which it was incurred; and
(c)the nature of the goods or services; and
(d)the day the expense was incurred; and
(e)the day it is made out.
Section 900-185 of the ITAA provides that an expense cannot be allowed as a deduction if a taxpayer cannot comply with a request to produce written evidence of the expense.
Section 900-40 of the ITAA provides an exception to the substantiation requirements as it relates to laundry expenses and allows taxpayers to claim up to $150 in laundry expenses without written evidence. Whilst a taxpayer is not required to provide written evidence of the laundry expenditure, in order to claim a deduction, laundry expenditure must still meet the requirements of section 8-1 of the ITAA.
Work-related expenses that are capital in nature cannot be deducted pursuant to
section 8-1(2) of the ITAA. However, section 40-25 of the ITAA allows for a deduction of the work-related portion of the decline in value of a depreciating asset.Expenses incurred by a taxpayer travelling between their workplace and the place of education, and between the taxpayer’s home and the place of education, may be deductible if the requirements of section 8-1 of the ITAA are met. If a taxpayer seeks to claim car and travel expenses for travel to the place of education, it must be demonstrated that the self-education has a sufficient connection to the taxpayer’s employment.
Voluntary Disclosure
Section 284-225(5) of Sch 1 to the TAA provides for the consequences to a taxpayer for the making of a Voluntary Disclosure.
If you voluntarily tell the Commissioner, in the *approved form, about your *shortfall amount or *scheme shortfall amount, part of it or the false or misleading nature of the statement after the Commissioner tells you that an examination is to be conducted of your affairs relating to a *taxation law for a relevant period, the Commissioner may treat you as having done so before being told about the examination if the Commissioner considers it appropriate to do so in the circumstances.
Administrative Penalty
Section 284-75(1) of Sch 1 to the TAA provides that a person will be liable to an administrative penalty if he or she:
(a)makes a statement to the Respondent or to an entity that is exercising powers or performing functions under a taxation law; and
(b)the statement is false or misleading in a material particular, whether because of the thing in it or omitted from it.
Section 284-75(5) of the TAA provides that a taxpayer is not liable to an administrative penalty under subsection (1) for a statement that is false or misleading in a material particular if they, and their agent (if relevant), took reasonable care in connection with the making of the statement.
The amount of the penalty applied, is calculated pursuant to sections 284-85(1) and 284‑90(1) of Sch 1 to the TAA:
(a)25% for failure to take reasonable care to comply with a taxation law;
(b)50% for recklessness as to the operation of a taxation law; and
(c)75% for ‘intentional disregard’ of a taxation law.
Remission of Penalty
Section 298-20(1) of Sch 1 to the TAA provides:
(1)The Commissioner may remit all or a part of the penalty.
(2)If the Commissioner decides:
(a)not to remit the penalty; or
(b)to remit only part of the penalty;
the Commissioner must give written notice of the decision and the reasons for the decision to the entity.
(3)If:
(a)the Commissioner refuses to any extent to remit an amount of penalty; and
(b)the amount of penalty payable after the refusal is more than 2 penalty units; and
(c)the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out in Part IVC.
Safe Harbour provision
Section 284-75(6) of Sch 1 to the TAA provides a ‘safe harbour’ provision:
(6)You are not liable to an 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 a taxation law (other than the Excise Acts).
(7)If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph (6)(b).
ISSUES FOR DETERMINATION
The primary issues to be determined by the Tribunal are:
(a)Whether the Applicant has discharged his onus of proving that the Amended Assessment is excessive or otherwise incorrect and, if so, what should the assessment have been; and
(b)Whether the Shortfall Penalty Notice is excessive or otherwise incorrect and whether it should it be remitted in full or part.
EVIDENCE BEFORE THE TRIBUNAL
The Applicant
The Applicant told the Tribunal that during the financial year ended 30 June 2018 he was employed as support staff at Ability Assist, which provides support services for adults and children with disabilities.[21] In this role he looks after young people in their homes and takes care of all their daily needs, including taking them to and from school and to appointments, cooking their meals, and showering them and assisting them to go to the toilet.[22] He has been working for Ability Assist for six years.[23]
[21] Transcript of Proceedings 18 February 2021, 9.
[22] Ibid 9–10.
[23] Ibid 10.
The Applicant engaged a tax agent, Dr Iheakor, to prepare his tax return. Dr Iheakor came to the Applicant’s home in the evening and the Applicant and his wife gave Dr Iheakor the information he needed to complete their tax returns. The Applicant’s tax return was lodged on 20 August 2018. At 7:42am on 21 August 2018, Dr Iheakor sent to the Applicant and his wife copies of the tax returns Dr Iheakor had lodged for them both with the Australian Taxation Office (‘ATO’) the previous day.[24]
[24] Transcript of Proceedings 19 February 2021, 141.
The Applicant confirmed that he claimed the following work-related expenses in his 2018 Return:
Label Item on 2018 Return Amount D3: Work related clothing expenses $270 D4: Work related self-education expenses $14,822 D5: Other work-related expenses $400 Total work-related deductions claimed $15,492
The Applicant’s tax agent’s Payment Summary Worksheet, provided the following further details in relation to the work- related deductions:[25]
[25] T3,16.
Label Item on 2018 Return Description Amount D3: Work related clothing expenses Laundry $150 Non - Slip Shoes $120 Total D3 = $270 D4: Work related self-education expenses Cert IV in Child Protection $9,435.00 HELP debt $4,000.00 Computer purchase $648.95 dep 4years ie @ $137.00 Travel expenses from work to Geelong for training $1,500.00 Total D4 = $15,072 D5: Other work- related expenses Phone use $50/mth 60% $300 Hand cream $100 Total D5 = $400 Total work-related deductions claimed = $15,492 Work-related clothing expenses
By way of the Voluntary Disclosure, the Applicant reduced the claim for work-related clothing expenses from $270 to nil on the basis that proof of purchase could not be located.[26] He stated, “I could not locate my receipts after searching”.[27]
[26] T7, 64.
[27] Ibid 61.
The Applicant told the Tribunal that he was not required to wear a uniform at work, and therefore he would wear his regular day clothes.[28] However, he purchased non-slip shoes to wear at work because when he showers the clients his shoes become wet and slippery.[29] No further explanation or information was provided by the Applicant with respect to how the $150 laundry expense was originally calculated. The Applicant told the Tribunal that he has no receipts in his possession that are legible and relate to any of these expenses.[30] However, he did purchase t-shirts at Kmart which he wore to work but he does not have itemised receipts relating to these purchases.[31]
[28] Transcript of Proceedings 18 February 2021, 11, 32
[29] Ibid 11–12.
[30] Ibid 19.
[31] Ibid 32–33, 35.
Work-related self-education expenses
By way of the Voluntary Disclosure, the Applicant reduced the claim for work-related self-education expenses from $14,822 to $396.60 stating
Wrong claim on tuition fees. Was wrongly advised. Fees were paid via SFSS loan. New claim of $396.60 based on 20% of car registration (attached) and cost of distance travelled. KM travelled = 1,564, petrol cost claimed $278.[32]
[32] T7, 64 .
Of the $14,822 originally claimed by the Applicant as work related self-education expenses,[33] the sum of $9,435.00 was claimed in relation to a course of study, ‘Cert IV in Child Protection’.[34] During the audit, the Applicant provided a partial, unaddressed letter from Melbourne Polytechnic that offers an unnamed student a place in the Certificate IV, Child, Youth and Family Intervention (‘Certificate IV course’) at the Prahran Campus of Melbourne Polytechnic commencing on 18 September 2017.[35] On 1 July 2019, an ATO Audit Officer telephoned Melbourne Polytechnic, who advised that in 2017 and 2018 the Certificate IV course was free under a Victorian Government initiative.[36]
[33] T4, 22.
[34] Ibid 16.
[35] T7, 63.
[36] T9, 69.
The Applicant told the Tribunal that he commenced the Certificate IV course at Melbourne Polytechnic in 2018. He enrolled in this course because he was already working as a disability worker, and he thought that if he had a formal qualification he would be able to best support the children. He enrolled at the Prahran campus but then realised it is too far to travel, so he transferred to the Geelong campus.[37] He was not required by his employer to undertake this course at the time, but it later became compulsory for all employees of Ability Assist.[38] He completed the course in full.[39] He did not provide any supporting documentation in relation to this course from his employer to the ATO as no one asked him to do so.[40]
[37] Transcript of Proceedings 18 February 2021, 38.
[38] Ibid 39.
[39] Ibid.
[40] Ibid 40.
The Applicant confirmed at the hearing that he did not pay any fees for the Certificate IV course. It was a free course paid for by the government. He told the Tribunal that he advised his tax agent, Dr Iheakor, that the course was free. However, Dr Iheakor told the Applicant ‘No, it’s not free … you’re going to pay for it, and that’s what they do.’[41] Dr Iheakor told him that the course fees will be added to his previous student HECS debt, and he would have to eventually pay it off.[42] He showed the Applicant the screen of his laptop which he said was his student portal on a database which showed that the Applicant would have to repay a sum of $9,435. When the Applicant was informed of this he became ‘really worried’, ‘disappointed’, and ‘upset’ that he would have to pay for the course, and he did not pay attention to what was on the screen.[43]
[41] Ibid 41.
[42] Ibid.
[43] Transcript of Proceedings 18 February 2021, 42.
Following his meeting with Dr Iheakor, the Applicant contacted Melbourne Polytechnic to find out whether he would have to pay for the course. He called ‘more than a hundred times.’ He finally spoke to someone who said someone would call him back, but they never did.[44] He sent an email to Melbourne Polytechnic on 30 August 2018 asking for clarification about whether he would have to pay for the course.[45] The Applicant provided a screenshot to the Tribunal which showed he received an email from Melbourne Polytechnic on 31 August 2018. All that is visible is ‘Hi Ahmed, we don’t charge.’[46]
[44] Ibid 42–43.
[45] Ibid 44.
[46] Ibid 43, 45.
The Applicant’s agent lodged his income tax return, for the year ended 30 June 2018, on 20 August 2018. The Applicant agreed that this tax return included a claim for the Certificate IV course fees even though he was not sure whether he had to pay them. He further agreed that at the time his tax return was lodged he had not paid any course fees.[47] He agreed he was aware at the time his tax return was prepared that it included a claim for a deduction for course fees that he did not pay, and he had not at that point in time received confirmation from Melbourne Polytechnic about whether he did have to pay the course fees.[48] He told the Tribunal that he believed that he could not delay lodging his tax return, and this is why he did not wait to get a response from Melbourne Polytechnic about whether he had to pay for the course.[49]
[47] Ibid 45.
[48] Ibid 46.
[49] Ibid 47.
The Applicant told the Tribunal that when he received the Notice of Assessment dated 27 August 2018 and was paid a $10,000 tax refund, he thought it related to his employment because they tax him ‘very big amounts on work.’[50]
[50] Ibid.
The Applicant confirmed that he does have a HELP debt but that he did not make a payment of $4,000 towards a HELP debt in the 2018 financial year.[51] He said he was not aware that he claimed $4,000 for a HELP debt in his 2018 tax return.[52]
[51] Transcript of Proceedings 18 February 2021, 51.
[52] Ibid 52.
The Applicant told the Tribunal that during the financial year ending 30 June 2018 he used his laptop computer to read work emails and to confirm his shifts on Easy Employer.[53] He bought this computer from a small shop and was not given a receipt when he purchased it. At the time of the audit, he requested and obtained a note from the retailer who sold it to him, but he can no longer find this note.[54] The Applicant did not provide any further explanation or information as to why the claim of $137 for depreciation for the computer was reduced to nil in the Voluntary Disclosure.
[53] Ibid 12.
[54] Ibid 37.
The Applicant provided screenshots from bank statements which included handwritten references to ‘petrol’.[55] He explained that he was driving to Geelong in the 2018 financial year to attend classes.[56] In relation to his original claim of $1,500 for travel expenses, the Applicant said that his tax agent told him he could claim this amount and he does not know how it was calculated.[57] He confirmed that he does not have any receipts for this expenditure.[58] The Applicant did not provide any further explanation or information as to why this claim was reduced from $1,500 to $396.60 in the Voluntary Disclosure, nor did he provide any further evidence or material to substantiate how the $396.60 figure was arrived at.
[55] T13, 92.
[56] Transcript of Proceedings 18 February 2021, 25–26, 28–29.
[57] Ibid 29, 31.
[58] Ibid 27.
Other work-related expenses
By way of the Voluntary Disclosure, the Applicant reduced the claim for other work-related expenses from $400 to nil stating, “Also have not been able to locate the folder where I keep my receipts.”[59]
[59] T7, 61.
The Applicant told the Tribunal that he purchased hand cream as his work requires him to wash his hands ‘200 times a day’ and he has a very serious kind of eczema and his hands get very dry.[60] He explained that he uses his personal phone to make necessary work calls, for example to arrange medication for his clients.[61] He told the Tribunal that he has no receipts in his possession that are legible and relate to these expenses.[62] He contacted Vodafone to obtain receipts for payments he had made, but they were unable to provide them as he is not on a contract.[63]
[60] Transcript of Proceedings 18 February 2021, 14–15.
[61] Ibid 13.
[62] Ibid 19.
[63] Ibid 36.
The Applicant told the Tribunal that when he received notification on 3 June 2019 that he was to be audited, he made an appointment to meet with his tax agent, Dr Iheakor. During this meeting, he and Dr Iheakor spoke to the ATO case officer who advised that certain deductions could not be claimed. After the meeting, the Applicant did not have any further communication with Dr Iheakor, despite phoning him, and sending him text messages and emails.
In his evidence to the Tribunal, the Applicant initially accepted that the Voluntary Disclosure had been made by Dr Iheakor on his behalf.[64] He later told the Tribunal that the Voluntary Disclosure was made by Dr Iheakor without his consent or authorisation.[65]
[64] Ibid 17.
[65] Transcript of Proceedings 19 February 2021, 120, 124.
The Applicant confirmed that he understood that by signing his tax return he was declaring that the contents of it were true and correct.[66] He also agreed that he understood that even though he had a tax agent assist him with preparing his tax return, he was under an obligation to ensure that the contents of the tax return are correct.[67]
[66] Transcript of Proceedings 18 February 2021, 52.
[67] Ibid 53.
The Applicant agreed that he now understood, but did not before, that it is his responsibility to properly record matters related to his tax affairs and to draw all relevant tax information to the attention of his agent.[68]
[68] Ibid.
The Applicant was asked whether he understood that by including the deduction for the course fees and the HELP debt in his tax return that he did not incur that he made a false and misleading statement in his tax return. The Applicant said that he did not make a false and misleading statement and he did not tell the tax agent to include these deductions in his tax return.[69]
[69] Transcript of Proceedings 18 February 2021, 53.
Ms Bilkisu Tijani
Ms Tijani told the Tribunal that Dr Iheakor asked the Applicant whether he was studying, and he said he was and that the course was related to his work but that he did not have to pay for it. In response, Dr Iheakor said to the Applicant, ‘you’ve paid for it, you’ve been charged’ and showed the Applicant his screen.[70] Both she and the Applicant said the course was free, but Dr Iheakor said that sometimes it is free ‘but then they charge you later and then you have to pay it through HECS.’[71] She agreed that she did not see the screen herself. She was present when the Applicant phoned Melbourne Polytechnic to find out whether he had to pay the course fees. As he was unable to get an answer, they assumed that Dr Iheakor was correct and that the fees would be charged.[72]
[70] Ibid 58.
[71] Ibid.
[72] Ibid 59.
Ms Tijani confirmed that she and the Applicant both completed their tax returns on the evening when Dr Iheakor visited their home, and they were lodged before the Applicant made any enquiries about the fees with Melbourne Polytechnic. She agreed that it is her understanding that the Applicant has not paid for the fees by way of a cash payment or by way of a charge on his HECS. She further agreed that at the time the Applicant’s tax return was lodged that it was unclear to both of them whether he had incurred any costs in respect of the course. They both believed the course was free, and they would never have thought otherwise if Dr Iheakor had not shown the Applicant his laptop screen and said ‘look, they’ve charged you.’[73]
[73] Ibid 60.
Dr Chuks Iheakor
Dr Iheakor told the Tribunal that he met with the Applicant and his wife at their home a day or two prior to the lodgement of the tax return.[74] At this meeting, he obtained information from the Applicant about his income and expenses which he entered into a document on his laptop. He used this information to prepare the Applicant’s tax return. He completed and lodged the tax return on 20 August 2018 and sent a copy to the Applicant the following day.[75]
[74] Transcript of Proceedings 19 February 2021, 71.
[75] Ibid.
Dr Iheakor told the Tribunal that he asked the Applicant whether he had completed any study and he told him about the Certificate IV course, which he said related to his work looking after children.[76] Dr Iheakor was satisfied that the fees were a claimable deduction based on what the Applicant said about the course being related to his employment.[77] The Applicant told him that he paid for the course himself ‘out of pocket’.[78] He asked the Applicant whether he could produce evidence that he paid the Certificate IV course fees and he said he was able to do so.[79] He did not ask the Applicant to show him this documentation as it was not necessary for him to see it. The Applicant only needed to let him know that he could provide the documents.[80] He did not do any kind of cross-check to verify the amount claimed.[81] He agreed that it is possible that he showed the Applicant the information on an ATO database to which he has access as a tax agent.[82] This showed that the Applicant had a debt to the Commonwealth for $9,435 for course fees which matched the figure given to him by the Applicant.[83] He turned his laptop to the Applicant to show him.[84] He said to the Applicant ‘if you paid for it, then we can claim it.’[85]
[76] Ibid 74.
[77] Ibid 75, 81.
[78] Ibid 96.
[79] Ibid 66, 75, 78, 87.
[80] Ibid 75.
[81] Ibid 77.
[82] Ibid 78.
[83] Ibid 80–81, 86.
[84] Ibid 88.
[85] Ibid 79.
Dr Iheakor was shown the Applicant’s Student Financial Supplement Scheme (‘SFSS’) loan account.[86] He agreed that this showed that as at August 2018 the Applicant had a debt owing of $9,435.28. He said that he realised this amount was an SFSS loan at the time of audit in June 2019 and accordingly made the Voluntary Disclosure. He agreed that the reason the $9,435 deduction was included in the Applicant’s 2018 tax return was due to a mistake.[87] It was possible that he made an assumption that this amount was deductible based on the information the Applicant had given him and the information on the ATO database.[88]
[86] T16, 109.
[87] Transcript of Proceedings 19 February 2021, 86–87
[88] Ibid.
Dr Iheakor was questioned about the deduction of $4,000 for the HELP debt. He said that 10% was a ‘reasonable estimate’ based on the approximately $40,000 debt that was owed by the Applicant, as shown on the ATO database.[89] He was asked on what legal basis he considered that the repayment of a HELP debt was deductible. He said that it was a course the Applicant did which related to his employment.[90] His understanding is that HELP payments incurred and paid by students are deductible.[91] At the time of the audit he examined this more closely and realised that this amount should not have been claimed because the Applicant could not provide supporting documentation for the deduction.[92] He agreed that if the HELP repayment claimed in the Applicant’s tax return was not a proper deduction according to law, then this mistake would lead to an incorrect statement in the Applicant’s tax return. He further agreed it would be reasonable for a tax agent to ensure that they did not make a mistake at the time of the lodgment of a client’s tax return.[93]
[89] Ibid 84–85. The actual amount owing was $49,520.
[90] Ibid 88–89.
[91] Transcript, 89-90.
[92] Ibid 89.
[93] Ibid 90.
In relation to the laundry expense claimed as a deduction, Dr Iheakor said this was based on a reasonable estimate of laundry of the Applicant’s work uniform twice a week and the amount was calculated using the ATO allowance.[94] The Applicant told him it was compulsory for him to wear a work uniform.[95] In relation to the non-slip shoes, the Applicant told him that the nature of his work required him to wear these shoes. The figure of $120 was the actual cost given to him by the Applicant.[96]
[94] Ibid 92.
[95] Ibid.
[96] Transcript of Proceedings 19 February 2021, 92.
The Applicant told Dr Iheakor that he purchased the computer in the 2018 financial year, and he assumed he used it wholly for study purposes. The computer was to be depreciated and the amount of $137 was claimed as a deduction.[97] In relation to the phone expense, he asked the Applicant whether he could substantiate the amount of $500 and he said he was on a plan costing $50 per month and his work usage is 60%.[98] Dr Iheakor told the Tribunal that he asked the Applicant whether he had receipts for the purchase of hand cream and he confirmed he did.[99] The Applicant did not show any documentation to Dr Iheakor at the time.[100]
[97] Ibid 93.
[98] Ibid 94.
[99] Ibid 75–76.
[100] Ibid 76.
Dr Iheakor told the Tribunal that in response to the audit, he met with the Applicant and asked him whether he could provide supporting documentation for the claimed deductions.[101] The Applicant could not provide him with any documentation, so the Voluntary Disclosure was made ‘zeroing the claims’ for the course fees and for the other unsubstantiated claims.[102] He became aware, as a consequence of a conversation with an ATO case officer, that the claim for the course fees should not have been made because it was an SFSS debt.[103] He told the Applicant that it was a loan and he said it was paid through his workplace. Dr Iheakor came to the conclusion that it ‘was a wrong claim’.[104] It was on the basis of the Applicant’s explanation that his employer paid the course fees, not the Applicant himself, that the Voluntary Disclosure was made reducing the claim for the fees to nil.[105]
[101] Ibid 78, 94.
[102] Ibid 66, 94–95.
[103] Ibid 95.
[104] Ibid.
[105] Ibid 96–98, 100.
Dr Iheakor was questioned about the amount of $396.60 the Applicant claimed for self-education expenses in the Voluntary Disclosure. He told the Tribunal that this related to the Applicant’s travel costs for the use of his car (petrol and registration) calculated in accordance with the estimated kilometers he travelled.[106] The Applicant did tell him that on some occasions he took the train to Geelong and this was factored into the calculation.[107]
[106] Transcript of Proceedings 19 February 2021, 101.
[107] Ibid 101–102.
Following his meeting with the Applicant to discuss the audit process, Dr Iheakor did not hear again from the Applicant until he received the ATO’s response to the audit, and at that point they disengaged because there was no further advice he could give the Applicant.[108]
[108] Ibid 78–79, 111.
CONSIDERATION AND REASONS
Has the Applicant discharged his onus of proving that the 2018 Return is excessive or otherwise incorrect and, if so, what should the assessment have been?
Under section 14ZZK of the TAA, the Applicant bears the onus to prove that the Respondent was wrong or excessive in his assessment with respect to the work-related deductions claimed by the Applicant in his 2018 Return. The Applicant must establish that the amount of tax levied under the assessment exceeds his substantive liability under the taxation legislation.
The Applicant lodged his 2018 tax return on 20 August 2018 and claimed work-related deductions totalling $15,492. These deductions fell within three categories. The first category comprised work-related self-education expenses comprising of the Certificate IV course fees ($9,435), the HELP repayment ($4,000), travel expenses ($1,500) and computer depreciation ($137). The remaining two categories were work-related clothing expenses ($270) and other work-related expenses ($400).
The Applicant confirmed at the beginning of the hearing that each of these deductions and the disallowance of those deductions by the Objection Decision remained in dispute.
For the reasons that follow, the Tribunal finds that the Applicant has failed to demonstrate that each of these deductions were incurred by him, or that he has failed to provide sufficient evidence to substantiate some or all of these claimed deductions. Accordingly, the Applicant has not discharged his onus to prove that the Respondent was wrong or excessive in his assessment with respect to the work-related deductions claimed by him in his 2018 tax return.
Work-related self-education expenses
Certificate IV course fees
The Respondent contends that the Applicant has not discharged his onus under section 14ZZK of the TAA of demonstrating that the claimed deduction for the Certificate IV course fees in the sum of $9,435.00 was in fact incurred by him. In order to claim a deduction a taxpayer have must have actually incurred the expense, and the Applicant did not make any payment related to the Certificate IV course.[109] The Respondent further contends that the Applicant has not established a nexus between the earning of his assessable income and the course.[110] Further, or in the alternative, the Respondent contends that the Applicant has not substantiated the course fees in accordance with Division 900 of the ITAA.[111]
[109] Respondent’s Statement of Facts, Issues and Contentions (SFIC), para 66.
[110] Ibid para 67
[111] Ibid para 68.
In his evidence to the Tribunal, the Applicant conceded that he did not incur any costs with respect to the Certificate IV course and that it was provided to him free of charge. His evidence that the course was free was corroborated by his wife and there is no document or other evidence to suggest otherwise. The evidence is that when he met with Dr Iheakor and was shown an ATO database which recorded an amount of $9,435 which appeared related to the Certificate IV course, this created a doubt in his mind about whether the course was free or whether he would be charged for it at a later stage. However, according to his own evidence, at no point in time did he make a payment of $9,435, or any amount, towards course fees in the 2018 financial year that would entitle him to a deduction. Accordingly, the Tribunal finds that the Applicant was not entitled to claim a deduction for the amount of $9,435 for course fees, and that the Respondent’s notice for the amended assessment is not wrong or excessive in this regard.
HELP fee repayment
The Respondent contends that the repayments a taxpayer makes on any debts under the HELP fee loan scheme are not deductible pursuant to section 26-20 ITAA.[112] Accordingly, the Applicant is not entitled to claim $4,000 as a self-education expense deduction pertaining to a repayment of his HELP fee loan.[113] Further, and in the alternative, the Applicant did not make any HELP loan repayments during the 2018 income tax year, and consequently even if such expense was deductible, the Applicant has not actually incurred an expense to be deducted.[114]
[112] Respondent’s SFIC, 13 para 77 (erroneously numbered 67 in the version lodged with the Tribunal).
[113] Ibid para 78 (erroneously numbered 68).
[114] Ibid para 79 (erroneously number 69).
In his evidence to the Tribunal, the Applicant conceded that he did not make any HELP debt repayments in the 2018 income year and accepted that he was not entitled to a deduction of $4,000. There is no document in evidence that demonstrates that any HELP repayment was made. The HELP records and SFSS account records before the Tribunal show that there were no repayments made by the Applicant during that year.[115]
[115] T15 and T16.
Accordingly, the Tribunal finds that the Applicant was not entitled to claim a deduction for the amount of $4,000 for repayment of a HELP loan, and that the Respondent’s notice for the amended assessment is not wrong or excessive in this regard.
Study-related travel expenses
The revised deduction of $396.60 in the Voluntary Disclosure for study-related travel expenses explains that it was calculated based on:
(a)20% of car registration; and
(b)Cost of distance travelled (1,564km, petrol claimed of $278).
Attached to the Voluntary Disclosure was a VicRoads car registration document, the enrolment letter for the Certificate IV course, and a receipt in relation to the VicRoads registration. There is no evidence before the Tribunal which indicates how the proposed apportionment of the vehicle registration reflects the Applicant’s usage in respect of producing his assessable income, and how the 1,564km and $278 petrol components were calculated.
The Respondent contends that as the Applicant has not discharged his onus under section 14ZZK of the TAA in proving that the self-education car and travel expenses had the relevant nexus between the gaining or producing of his assessable income. Accordingly, it follows that the expenses relating to travel to the place of education in which the self-education was undertaken, do not meet the requirements of section 8-1 of the ITAA.[116]
[116] Respondent’s SFIC, para 71.
The only additional substantiation documentation provided by the Applicant with the objection form were 13 pages of extracts of bank statements. On these the Applicant had written ‘Petrol, clothes, glasses and phone and internet data purchase’. These descriptions do not indicate exactly what items were purchased or how these purchases were incurred in gaining or producing the Applicant’s assessable income. It is unclear whether the bank statements that record petrol transactions relate to petrol purchased for the Applicant’s personal use or to his travel to and from his place of study in Geelong. It is also unclear how the number of kilometres (1,564) was calculated nor how the 20% deduction for the cost of car registration was determined.
On basis of the evidence before it, the Tribunal finds that the Applicant has not discharged his onus under section 14ZZK of the TAA to prove that the claimed self-education car and travel expenses had the relevant nexus between the gaining or producing of his assessable income. It follows that the expenses relating to travel to the place of education in which the self-education was undertaken do not meet the requirements of section 8-1 of the ITAA.
Work-related clothing and Other work-related expenses
The Respondent contends that the bank transaction statements provided by the Applicant referred to in paragraph 77 above are insufficient to establish that any of the claimed work-related clothing expenditure is deductible pursuant to section 8-1 of the ITAA and the Applicant has not substantiated the expenditure in accordance with Division 900 of the ITAA.[117] The Respondent further contends that the Applicant has not discharged his onus to show that his proposed apportionment of the telephone use and hand cream reflects his usage in respect of his employment with Ability Assist (rather than for domestic or private purposes).[118]
[117] Respondent’s SFIC, paras 57–59.
[118] Ibid 14 para 86 (erroneously numbered as 82).
The Respondent also contends that the Applicant has not discharged his onus under section 14ZZK of the TAA to demonstrate that the deduction of $137, as it relates to the depreciation of his computer, was incurred in the gaining or producing of his assessable income with his employment at Ability Assist. The Commissioner contends that the Applicant also has not discharged his onus to show that his proposed apportionment of this expense reflects his usage in respect of his employment with Ability Assist (rather than for domestic or private purposes).[119]
[119] Ibid para 82 (erroneously numbered as 78).
The Applicant has not provided substantiating documentation that satisfies the requirements of Division 900 of the ITAA for work-related expenses in relation to his claims for non-slip shoes ($120), computer depreciation ($137), phone use ($500) and hand cream ($100). The Applicant gave evidence that he previously had receipts for some of these amounts, but he had since lost them. Pursuant to section 900-205 ITAA, a taxpayer must try to obtain a substitute document that meets all of the original requirements. The Applicant gave little evidence with respect to his attempts to attain copies of receipts to provide to the ATO or to the Tribunal, and the Tribunal finds that this section has not been satisfied.
The extracts of bank statements provided by the Applicant include notations ‘Petrol, clothes, glasses and phone and internet data purchase’.[120] These descriptions do not indicate exactly what items were purchased or how these purchases were incurred in gaining or producing the Applicant’s assessable income. During oral evidence the Applicant was unable to identify what these particular transactions related to. No other supporting documentation has been provided to the ATO and no such documents are before the Tribunal. In particular, there are no documents that relate to the Applicant’s purchase of non-slip shoes and hand cream, phone expenses, and the purchase of the computer for which depreciation was claimed.
[120] T13, 92–104.
On the basis of the evidence before it, the Tribunal finds that the Applicant has failed to discharge his onus to provide substantiation for costs entitling him to deductions of $120, $137, $500, and $100 for non-slip shoes, computer depreciation, phone use, and hand cream respectively.
The Respondent contends that the Applicant has not discharged his onus of proving that he is entitled to a deduction of laundry expenditure in the sum of $150, as the Applicant has not demonstrated that the laundered clothing has a sufficient nexus with the earning of his assessable income and is deductible pursuant to section 8-1 of the ITAA. The Respondent further contends that it follows that the Applicant cannot claim laundry expenses for clothing which have not been proven to have met the deductibility requirements of section 8-1 of the ITAA.[121]
[121] Respondent’s SFIC, para 65.
In his evidence to the Tribunal, the Applicant conceded that he is not required to wear a uniform to work, and he just wears casual clothes. As the cost of these clothes is not a deductible expense in accordance with the requirements of section 8-1 of the ITAA, neither is the cost of laundering them. Accordingly, the Tribunal finds that the Applicant has failed to discharge his onus that he incurred costs entitling him to a deduction of $150 for laundry expenses.
Was the 2018 Shortfall Penalty Notice excessive or otherwise incorrect and are there grounds for its remission?
Imposition of penalty
The Respondent contends that the Applicant is liable to an administrative penalty under section 284-75(1) of Sch 1 to the TAA for the making of a statement that is false or misleading in a material particular. The Respondent further contends that the Applicant has not discharged his onus under section 284-75(5) to show that he, or his tax agent, took reasonable care in preparing his 2018 Return.[122]
[122] Ibid 16 para 95 (erroneously numbered as 92).
The Applicant accepted that his tax return included statements for expenses that had not been incurred, being the $9,435 for the Certificate IV course and the $4,000 for the HELP repayments. The Applicant gave evidence that at the time the tax return was prepared and lodged, he believed that the Certificate IV course was free, and he had not made any payments whatsoever towards the cost of the course. The HELP repayment, even if it had been incurred, was not an allowable deduction pursuant to section 26-20 ITAA. The Applicant also claimed additional deductions for expenses for which he did not have sufficient, or any, substantiation.
On the basis of the evidence before it, the Tribunal finds that the Applicant made statements in his tax return that were false or misleading in a material particular. The Applicant made claims for substantial deductions of $9,435 and $4,000 in his tax return to which he was not entitled and could not substantiate and therefore he made statements in his return that were false or misleading in a material particular.
The Miscellaneous Taxation Ruling MT 2008/1 — Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard (‘MT 2008/1’) provides guidance upon the meaning of the terms “reasonable care” and “recklessness” referred to in subdivision 284B of Sch 1 to the TAA. In relation to the meaning of “reasonable care”, MT2008/1 provides:
(27)The expression ‘reasonable care’ is not a defined term and accordingly takes its ordinary meaning. The Australian Oxford Dictionary, 1999, Oxford University Press Melbourne, defines ‘care’ as ‘...3 serious attention; heed, caution, pains’ and ‘reasonable’ as ‘3a within the limits of reason; not greatly less or more than might be expected’. Taking ‘reasonable care’ in the context of making a statement to the Commissioner or to an entity within the meaning of subsection 284-75(4) means giving appropriately serious attention to complying with the obligations imposed under a taxation law.
(28)The reasonable care test requires an entity to take the same care in fulfilling their tax obligations that could be expected of a reasonable ordinary person in their position. This means that even though the standard of care is measured objectively, it takes into account the circumstances of the taxpayer. This aspect of the test is addressed in the Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No. 2) 2000 where it states at paragraph 1.69:
Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of the ITAA and regulations. The effort required is one commensurate with all the taxpayer’s circumstances, including the taxpayer’s knowledge, education, experience and skill.
(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.
Dr Iheakor’s evidence to the Tribunal was that he made a mistake in reading the Applicant’s information in the ATO database and interpreted the outstanding SFSS balance as an amount charged to the Applicant in the sum of $9,435. When he told the Applicant about this charge the Applicant said that the Certificate IV course was free. Despite this, the amount of $9,435 was claimed as a deduction in the Applicant’s tax return.
The Tribunal finds that the Applicant has not discharged his onus to show that he, or his tax agent, took reasonable care in preparing the 2018 Return. Whereas at the time the tax return was prepared there was doubt raised about whether the Certificate IV course was free, the Applicant did not take steps to make relevant inquiries with Melbourne Polytechnic prior to completing and submitting his tax return. A ‘reasonable person of ordinary prudence in the same circumstances’ as the Applicant ‘would have exercised greater care’ and would have made these inquiries before lodging their tax return containing what were most likely to be false and misleading statements. In making this finding the Tribunal has had regard to the Applicant’s circumstances, including his knowledge, education, experience and skill. The Applicant’s evidence to the Tribunal is that the course he completed prior to the Certificate IV course was at Master’s level.[123] A person with the Applicant’s qualifications and experience should have taken steps to verify that he would be liable for the course fees before including a claim for them in his tax return.
[123] Transcript of Proceedings 18 February 2021, 50.
Amount of penalty
The Respondent contends that the penalty for recklessness has been correctly imposed as the Applicant and/or his agent:
(a)claimed substantial work-related self-education expenses that were not incurred;
(b)made a false voluntary declaration during the Respondent’s audit;
(c)claimed substantial deductions for expenses in the absence of any sufficient substantiation; and
(d)claimed deductions for expenses that were clearly not allowable under the law.[124]
[124] Respondent’s SFIC, 15 para 91 (erroneously numbered as 88).
The meaning of “recklessness” was discussed by the Full Federal Court in Hart v Commissioner of Taxation[2003] FCAFC 105; (2003) 131 FCR 203. Justices Hill and Hely explained at [43]:
Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective.
Their Honours went on to quote from the judgment of Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347, where is his Honour opined at [77]:
Recklessness in this context means to include in a tax statement material upon which the ITAA 1936 or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
In ReAbichandani v Commissioner of Taxation [2019] AATA 4296, the Tribunal observed at [71]:
The question of recklessness is to be considered in all the circumstances. The question is whether an ordinary person would describe the conduct as reckless; in particular the question is did the taxpayer knowing the true position and the real risks involved, simply take ‘the punt’ that she, he or they might get away with it or simply not care whether she, he or they would in fact get away with it.
The Respondent contends that the Applicant knew at the time that he submitted his tax return that there was a real, as opposed to fanciful, risk that he had included a claim for a deduction of $9,435 for a course that was provided to him for free.[125]
[125] Transcript of Proceedings 19 February 2021, 134.
The evidence before the Tribunal is that before he met with his tax agent, Dr Iheakor, the Applicant believed that the Certificate IV course was free. When he told by Dr Iheakor that he may be charged for the course via a HELP or HECS debt, he was upset because he believed it was free and he would not be charged. Despite believing that the course was free, the Applicant included a deduction for $9,435 in his tax return lodged on 20 August 2018. He did not wait until he had confirmation from Melbourne Polytechnic that he would not be charged for the Certificate IV course fees. The Applicant accepted in his evidence to the Tribunal that he did not resolve this issue before finalising his return and lodging it with the ATO. The Applicant provided a screenshot which shows a preview of an email received by him from Melbourne Polytechnic on 31 August 2018 in response to his email on 30 August 2018. All that is visible is ‘Hi Ahmed, we don’t charge.’ This indicates that by 31 August 2018 the Applicant had confirmation that he would not be charged for the course. Despite having this knowledge, the Applicant did not take any steps to notify the ATO of the error in his tax return until the Voluntary Disclosure in June 2019. In relation to the claim for $4,000 for the HELP debt repayment, this amount was included in the tax return and not questioned or queried by the Applicant.
The Tribunal finds that the Applicant included in his tax return claims for deductions, knowing that there was a real, as opposed to a fanciful risk, that the information on what these were based was incorrect. It further finds that a reasonable person in the position of the Applicant would have seen there was a real risk that this may in turn lead to an incorrect assessment by the Respondent of his tax liability. Accordingly, the Tribunal is satisfied that the Applicant’s conduct involved more than mere negligence and amounted to gross carelessness. Accordingly, the Tribunal is satisfied that the Applicant is liable to pay the administrative penalty applied under section 284-75(1)(b) of the TAA.
The Tribunal has considered whether the Applicant has established the ‘safe harbour’ exception contained in section 284-75(6) of Sch 1 to the TAA. It requires that the Applicant provided his registered tax agent with all relevant information and the tax agent makes the statement and the false or misleading nature of the statement did not result from intentional disregard or recklessness by the agent as to the operation of a taxation law. The Applicant bears the evidential onus of establishing that he gave his tax agent all relevant taxation information: section 284-75(7).The Respondent contends that this exception does not apply as it is clear that the Applicant did not give his tax agent all relevant information, and therefore he has failed to discharge the onus on him under this section.
The evidence before the Tribunal is that while Dr Iheakor was preparing the Applicant’s tax return, the Applicant informed him that he had paid for the Certificate IV course ‘out of pocket.’ The Applicant’s evidence is that he told Dr Iheakor the course was free, but when he was advised by Dr Iheakor that it was to be charged by way of a loan, the Applicant said he would make further inquiries with Melbourne Polytechnic. Despite this, the Applicant did not resolve the matter and finalise his inquiries with Melbourne Polytechnic prior to the lodgement of his tax return on 20 August 2018. Nor did he advise Dr Iheakor, after receiving confirmation from Melbourne Polytechnic on 31 August 2018, that the course was indeed free and therefore his tax return contained a material error.
With respect to the HELP debt repayment, the Applicant was unable to explain why the $4,000 claim was included in his tax return. It is clear from the evidence before the Tribunal of the Applicant’s HELP and SFSS accounts that no repayments were made by the Applicant in the 2018 financial year. Accordingly, there is insufficient evidence for the Applicant to demonstrate that he gave his tax agent all relevant information with respect to this claimed deduction.
In relation to the remaining work-related expenses claimed, Dr Iheakor gave evidence that the Applicant informed him that he was able to substantiate the amounts by way of receipts or other documentation. The Applicant however has been unable to provide this documentation to the ATO or the Tribunal, and therefore it is reasonable to conclude that the Applicant would not have been able to do so at the time of lodgement. This is particularly the case in relation to those expenses that the Applicant told the Tribunal he relied on Dr Iheakor to tell him how much he was able to claim with respect to the expense.
The Voluntary Disclosure made by the Applicant does not provide grounds for a reduction of the base penalty by 20% for the purposes of section 284-225(5) of Sch 1 to the TAA, as the voluntary disclosure made by him was abandoned and he sought review of the disallowance of all the claimed deductions in his application for review of the Objection Decision. Any disclosure that was previously made by the Applicant was made after the Respondent made the Applicant aware an audit was being conducted and the disclosure did not enable the Respondent to correctly determine the tax-related liability or save the Respondent significant time or resources in undertaking the audit.
Remission of penalty
The Respondent contends there is no evidence of any mitigating circumstances that applied at the time the Applicant lodged his 2018 Return which would warrant remission of penalties under section 298-20 of Sch 1 to the TAA.[126]
[126] Respondent’s SFIC, 16 at 98 (erroneously numbered as 95).
The discretion under section 298-20 of the TAA is a broad one. In Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483, (‘Sanctuary Lakes’) the Full Federal Court explained that whether a penalty should be remitted depends on whether the Respondent, and the Tribunal on review, is satisfied, having regard to the taxpayer’s particular circumstances, that it is appropriate to remit the penalty in whole or in part. Harshness of the penalty is not the relevant test, although it may be a factor. Justice Griffiths said at [248] and [249]:
It may be appropriate in a particular case to remit a penalty on the basis that the outcome otherwise could be described as “harsh”, but that does not mean that “harshness” should be elevated to an essential element in determining whether or not to remit the penalty under s 298-20.
In my opinion the correct question which arises under s 298-20 should not be expressed in terms of “harshness”. Rather, the question is simply whether the decision maker is satisfied, having regard to the taxpayer’s particular circumstances, that it is appropriate to remit penalty in whole or in part. For example, a decision-maker might determine that it is appropriate to remit penalty in whole or in part, because otherwise the outcome for a particular taxpayer would be unreasonable or unjust (and therefore inappropriate), as opposed to harsh ... In my view, there is no warrant for confining the otherwise broad discretion in s 298-20 to circumstances where the outcome of imposing administrative penalty would otherwise be “harsh”.
His Honour endorsed the proposition, at [273] and [274], that: ‘there need to be circumstances that could be regarded as mitigating the applicant’s behaviour in some way.’
The discretion under section 298-20(1) of the TAA is not limited by any explicit conditions or factors. The relevant factors are to be determined by implication from the subject matter, scope and purpose of the legislation: RePicton Finance Ltd v Federal Commissioner of Taxation (2013) 93 ATR 876 at [108]–[115]. In ReYazbek and Commissioner of Taxation [2014] AATA 423, Deputy President Deutsch, at [106], listed a number of factors that are relevant to the exercise of the discretion, including the taxpayer’s personal circumstances. He emphasised, at [107], that ‘[i]t is clear that it is for the taxpayers to spell out in detail the exact circumstances that would justify a full remission of the penalty pursuant to this section’, citing ReCoppell v Federal Commissioner of Taxation (2000) 44 ATR 1001 at [6]–[7].
The legislative scheme for imposition of a penalty introduced to the TAA was described by Deputy President O’Loughlin QC in ReDiarra and Commissioner of Taxation [2019] AATA 5545 at [37] (‘Diarra’), citing Griffiths J in Sanctuary Lakes at paragraphs [263]–[266]. A uniform system of penalties was introduced which:
(a)provided a generic and uniform system of penalties in which decisions are reviewable;
(b)sought to treat taxpayers in like circumstances consistently;
(c)considered taxpayer circumstances and compliance history;
(d)tailored the penalty to secure compliance improvements; and
(e)allowed remission
(Emphasis added.)
In exercising this discretion, the Tribunal must decide (Diarra at [39]):
whether it is appropriate, in all of the circumstances, to remit the penalty in whole or in part, for example where the imposition of penalties would produce an unjust or unreasonable outcome in the circumstances of the case. In exercising this discretion, the Tribunal is to take into account the purpose of the penalty regime being to deter infringement where tax-payers are required to self-assess their tax obligations.
(Citations omitted.)
Applying these principles to the Applicant’s particular circumstances, the Tribunal finds, for the reasons that follow, that it is appropriate to remit the penalty by 85%.
In his Submissions in Response to the Respondent’s Statement of Facts, Issues and Contentions lodged on 8 September 2020, the Applicant stated:
I can’t even afford to pay the shortfall not to talk of the penalty, as this will add to my financial burden.
…
…I have five children and my wife is not working at the moment and will not for a while due to the fact that we have a baby few months ago. The children are still young and all their need including school fees needs to be met. Cost of living has also gone up, this will only increase my financial burden and more stress on myself and my family. …
I am hereby appealing that I cannot afford any more penalties which is another $6000. I did not intentionally provide false information to the ATO. It was based on the information provided to me by my agent about the school fees. …[I] have never had any issues with the ATO and this should be put into consideration. Have compassion towards my family situation, and the fact that I am the only bread winner in the family. I had a lot trust in my accountant and believed he knew what he was doing…
The Tribunal accepts that the Applicant did not intentionally provide false information to the Respondent. The Applicant was certain that he was not required to pay for the Certificate IV course fees until Dr Iheakor told him otherwise at their meeting to prepare the Applicant’s tax return. As a consequence of what Dr Iheakor accepted was a mistake in reading the Applicant’s tax information on an ATO database, a claim in the sum of $9,435 for the Certificate IV course was included in the Applicant’s tax return. The Tribunal accepts that, had the Applicant completed his tax return without the advice of Dr Iheakor, he would not have included this false and misleading statement in his tax return. The Tribunal also accepts that the Applicant would not have included a claim for $4,000 for a HELP debt repayment if he had not engaged Dr Iheakor to complete his tax return. The Tribunal accepts the Applicant’s claim that he ‘had a lot of trust in [his] accountant and believed he knew what he was doing …’. This trust the Applicant placed in his tax agent also resulted in him accepting Dr Iheakor’s incorrect advice in relation to the deductibility of HELP loan repayments and his calculations of the claims for study-related travel expenses. In relation to the other work-related expenses, the Tribunal is not satisfied that the Applicant had or retained the receipts necessary to substantiate his claims for deductions and therefore his inclusion of these amounts in his tax return was false and misleading.
The Applicant’s evidence is that he believed he was unable to delay the lodgement of his tax return and that this meant he did not have time to confirm with Melbourne Polytechnic about his liability or otherwise to pay for the Certificate IV course fees. The Tribunal accepts that the lodgement of the Applicant’s tax return prior to him verifying this matter was done in the mistaken belief that he could not delay the lodgement of his tax return. It is satisfied that had the Applicant waited for this confirmation before lodging his tax return he would not have made a claim for a deduction of this amount.
There is no evidence before the Tribunal that the Applicant has previously not met his tax obligations or that he has a poor compliance history. These factors weigh in favour of the exercise of the discretion to remit the penalty.
On the basis of the evidence before it, the Tribunal is satisfied that the Applicant made a genuine attempt to meet his tax obligations and made an effort ‘to do the right thing’ despite recklessly including false and misleading statements in his tax return. Accordingly, the Tribunal finds that, in the Applicant’s particular circumstances, it is appropriate to exercise its discretion under section 298-20(1) of the TAA to remit the penalty by 85%.
CONCLUSION
The Tribunal is not satisfied that the Applicant has discharged the onus on him under section 14ZZK of the TAA, to prove that the Respondent was wrong or excessive in his assessment with respect to the work-related deductions claimed by the Applicant in the 2018 Return.
The Tribunal also is not satisfied that the Applicant has discharged the onus on him under section 14ZZK of the TAA, to demonstrate that 2018 Shortfall Penalty Notice is excessive or otherwise incorrect.
The Tribunal is satisfied that it is appropriate, in the Applicant’s particular circumstances, to exercise its discretion under s 298-20(1) of the TAA to remit the administrative penalty by 85%.
DECISION
The Tribunal sets aside the decision under review and in substitution:
(a)remits the administrative penalty by 85% under section 298-20(1) of the TAA; and
(b)otherwise affirms the decision under review.
I certify that the preceding 119 (one hundred and nineteen) paragraphs are a true copy of the reasons for the decision herein of Senior Member Linda Kirk
........................................................................
Associate
Dated: 22 June 2021
Dates of hearing: 18–19 February 2021 Date final submissions received: 22 February 2021 Applicant: By videoconference Counsel for the Respondent: Ms Laura Mills Solicitors for the Respondent: Ms Emma Thomas, Australian Taxation Office
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