Nicholls and Commissioner of Taxation
[2009] AATA 548
•23 July 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 548
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/1952-1954
TAXATION APPEALS DIVISION ) Re TIMOTHY NICHOLLS Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Senior Member R W Dunne Date23 July 2009
PlaceAdelaide
Decision The Tribunal affirms the objection decisions under review.
..............................................
R W DUNNE
(Senior Member)
CATCHWORDS
TAXATION – income tax – default assessments – GST audit of trust – failure of trust to lodge Business Activity Statements – failure of applicant to lodge income tax returns – applicant assessed as sole beneficiary of trust – administrative penalty – burden of proof – whether applicant has discharged burden – objection decisions affirmed
Income Tax Assessment Act 1936 ss 97(1), 101, 166, 167
Taxation Administration Act 1953 ss 14ZL(1) and (2), 14ZQ, 14ZZK(b), Schedule 1 ss 284-75, 284-80, 284-85, 284-90
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Briggs v Deputy Federal Commissioner of Taxation (WA) and Ors; Ex parte Briggs (1987) 87 ATC 4278Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
George v Federal Commissioner of Taxation (1952) 86 CLR 183REASONS FOR DECISION
23 July 2009 Senior Member R W Dunne introduction
1. These are applications for review of decisions of the respondent to disallow in full taxation objections against assessments of income tax for the years ended 30 June 2003, 30 June 2004 and 30 June 2005 (“Relevant Years”). The applicant (Timothy Nicholls) had not lodged income tax returns for these years and the assessments were issued pursuant to s 167 of the Income Tax Assessment Act 1936 (“ITAA 1936”). The issue of the assessments arose out of a GST audit of a related family trust that had failed to lodge outstanding Business Activity Statements (“BAS”) for the quarterly periods between 1 July 2001 and 30 June 2005. An income calculation of the trust for the Relevant Years was performed by the respondent and Mr Nicholls was assessed as the sole beneficiary of the trust for those years. Administrative penalty at the rate of 75 percent was imposed under s 284-75(3) of Schedule 1 to the Taxation Administration Act 1953 (“TAA 1953”).
2. At the hearing, Mr Nicholls represented himself (with the assistance of Ms Teri Minuzzo) and the respondent was represented by Dr Chris Bleby of counsel. Evidence was given by Mr Nicholls.
3. The T documents and supplementary T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 were admitted in evidence (as Exhibit R1, Exhibit R2, Exhibit R3 and Exhibit R4) along with the statement of facts, issues and contentions and other documents of the applicant (Exhibit A1). In addition, the Tribunal admitted the following documents in evidence:
·respondent’s audit report relating to User Friendly Computers Pty Ltd, as trustee of “The Nickelodean Family Trust” (Exhibit R5); and
·respondent’s audit report relating to Mr Nicholls (Exhibit R6).
issues
4. The issues for the Tribunal are as follows:
(a)Was the estimated taxable income of the applicant, as determined by the respondent for the years ended 30 June 2003, 30 June 2004 and 30 June 2005 excessive?
(b)Was the administrative penalty correctly imposed?
legislation
5. The legislation that is relevant in this matter is contained in the ITAA 1936, the Income Tax Assessment Act 1997 (“ITAA 1997”) and the TAA 1953.
6. The provisions of the ITAA 1936 relevantly read:
“97 Beneficiary not under any legal disability
(1)Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
(a) the assessable income of the beneficiary shall include:
(i)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
(b) the exempt income of the beneficiary shall include:
(i)so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;
except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and
(c)the non-assessable non-exempt income of the beneficiary shall include:
(i)so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.
…
101Discretionary trusts
For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.
…
166Assessment
From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).
…
167 Default assessment
If:
(a) any person makes default in furnishing a return; or
(b)the Commissioner is not satisfied with the return furnished by any person; or
(c)the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.”
7. The provisions of Part IVC of the TAA 1953 relevantly read:
“14ZL Part applies to taxation objections
(1)This Part applies if a provision of an Act or of regulations (Including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision, or with a failure to make a private ruling, may object against it in the manner set out in this Part.
(2)Such an objection is in this Part called a taxation objection.
…
14ZQ General interpretation provisions
In this Part
…
reviewable objection decision means an objection decision that is not an ineligible income tax remission decision.
taxation decision means the assessment, determination, notice or decision against which a taxation objection may be, or has been, made.
taxation objection has the meaning given by section 14ZL.
...
14ZZK Grounds of objection and burden of proof
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 (other than a franking assessment)—the assessment is excessive; or
…”
8. The provisions of Subdivision 284-B of Schedule 1 of Chapter 4 of the TAA 1953 relevantly read:
“284-70 What this Subdivision is about
You are liable to an administrative penalty if:
(a)you make a false or misleading statement about a tax-related matter; or
(b)you take a position that is not reasonably arguable about a tax-related matter; or
(c)the Commissioner determines a tax-related liability of yours without documents you were required to provide.
This Subdivision sets out when the penalties apply and how the amounts of the penalties are calculated.
…
284-75 Liability to penalty
…
(3) You are liable to an administrative penalty if:
(a)you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
(b)that document is necessary for the Commissioner to determine a *tax-related liability of yours accurately; and
(c)the Commissioner determines the tax-related liability without the assistance of that document.
…
284-80Shortfall amounts
(1)You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Shortfall amounts
Item You have a shortfall amount in this situation:
1A *tax-related liability of yours for an accounting period, or for a *taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading
2An amount that the Commissioner must pay or credit to you under a *taxation law for an accounting period, or under a tourist refund scheme under Division 168 of the *GST Act or Division 25 of the A New Tax System (Wine Equalisation Tax) Act 1999, worked out on the basis of the statement is more than it would be if the statement were not false or misleading
3A *tax-related liability of yours for an accounting period worked out on the basis of the statement is less than it would be if the statement did not treat an *income tax law as applying in a way that was not *reasonably arguable
4An amount that the Commissioner must pay or credit to you under an *income tax law for an accounting period worked out on the basis of the statement is more than it would be if the statement did not treat an *income tax law as applying in a way that was not *reasonably arguable
Note:Section 284-215 may reduce or eliminate your shortfall amount.
…
284-85Amount of penalty
(1)Work out the *base penalty amount under section 284-90. If the base penalty amount is not increased under section 284-220 or reduced under section 284-225, this is the amount of the penalty.
(2)Otherwise, use this formula:
BPA + [BPA x (Increase % - Reduction %)]
where:
BPA is the *base penalty amount.
increase % is the percentage increase (if any) under section 284-220.
reduction % is the percentage reduction (if any) under section 284-225.
284-90Base penalty amount
(1)The base penalty amount under this Subdivision is worked out using this table:
Base penalty amount
ItemIn this situation: The base penalty
amount is:
…
7You are liable to an administrative penalty 75% of the
under subsection 284-75(3) tax-related
liability concerned”
background
9. A GST audit was conducted by the respondent on “The Nickelodean Family Trust” (“Trust”). User Friendly Computers Pty Ltd (“UFC”) was the trustee of the Trust at the time. The Primary Beneficiaries of the Trust were Mr Nicholls and his wife, Mrs Sally Nicholls. The sole director of UFC was Mr George William Salter, the father-in-law of Mr Nicholls. Apparently, Mr Salter was the director of UFC in name only and Mr Nicholls made the management and operating decisions for the business of the Trust. During the course of the audit review of the Trust, it appeared that Mr Nicholls had not lodged any personal income tax returns since 1999. An audit of his affairs was also commenced. As part of the audit of the Trust, two audit reports were prepared by the respondent. The first was the report relating to the audit of UFC (Exhibit R5). The second was the report relating to the audit of Mr Nicholls (Exhibit R6). Various attempts were made by the respondent to have UFC lodge its outstanding BAS. UFC continued to fail to lodge the BAS. In an interview with an officer of the respondent on 19 May 2005, Mr Nicholls stated that his bookkeeper, Mr Des Blight at Adelaide Business Accounting Services, was working on the BAS and his income tax lodgements and had been for some time. In a letter dated 25 August 2005 (Exhibit R1, T4 at pages 23-24) Mr Nicholls was requested to lodge his outstanding income tax returns for the years ended 30 June 2003 to 30 June 2004 by 21 October 2005 or default assessments may be prepared by the respondent.
10. In the audit report relating to UFC, the contents of which Mr Nicholls did not challenge, the following range of business activities of UFC was described (Exhibit R5 at page 2):
“User Friendly Computers sell home computers, software, games and peripherals as well as business computers, business networking design and sales, Internet Webb hosting and on and off site servicing of both home and business computers and software.
The retail shop appears to be primarily geared towards home computes [sic] and associated software packages which contribute a relatively minor amount to the turnover of the business. However the existence of the shop is evidence that an enterprise is being conducted by the client.
The main source of business income is generated through the sale, installation and maintenance of business computers and network systems.”
11. The auditor responsible for the UFC audit report compared the net profit ratio (“NPR”) for Mr Nicholls’ business with the ratios for four related industries. According to the auditor’s calculations, Mr Nicholls appeared to be operating at a NPR of 2.74 percent. The industry ratios showed a NPR of 13.28 to 13.98 percent at the computer retail level, but his retail sales accounted for about 5 percent of his turnover. The industry ratios at the computer consultancy, maintenance and wholesale level indicated a NPR of 15.46 percent to 36.40 percent. The NPR of Mr Nicholls’ business was not accepted, a decision was made to use industry ratios to calculate NPR and a conservative figure of 20 percent was applied. An income and expense calculation for UFC was made and the UFC audit report (at page 16) displayed a table showing the net income of the Trust for the Relevant Years. As banking records of the Trust appeared to indicate that Mr Nicholls had solely enjoyed the benefit and control of the income, a decision was made by the auditor to assess Mr Nicholls as the sole beneficiary of the net income of the Trust. The income and expenses of the Trust are set out in the table that follows:
Period
Income (Exclusive GST)
Expenses
(Exclusive GST)
Wages
Motor vehicle expenses (Cents per KM)
Amount to be distributed to Tim Nicholls
Jul 02-Jun 03
984343.30
735613.79
57046.93
3100.00
188,582.58
Jul 03-Jun 04
999754.21
749504.94
54669.52
3100.00
192,479.75
Jul 04-Jun 05
914033.58
691366.93
42670.70
3100.00
176,895.95
Totals
$ 557,958.28
12. Based on “Quickline” electronic transfers between the primary business bank account of the Trust and other bank accounts, the auditor determined that the following amounts were paid to Mr Nicholls in the form of wages (Exhibit R6, page 9):
1 July 2002 – 30 June 2003 – gross payments received $21,072.10
1 July 2003 – 30 June 2004 – gross payments received $24,580.00
1 July 2004 – 30 June 2005 – gross payments received $18,664.80
13. Trust distributions and gross payments of wages made to Mr Nicholls for the Relevant Years were determined by the auditor to be:
1 July 2002 – 30 June 2003 – $200,654.68
1 July 2003 – 30 June 2004 – $217,059.75
1 July 2004 – 30 June 2005 –$195,560.75
Income tax on the Trust distributions and gross wages paid was assessed to be:
1 July 2002 – 30 June 2003 – $91,158.73
1 July 2003 – 30 June 2004 – $94,251.20
1 July 2004 – 30 June 2005 – $82,513.70
TOTAL: $267,923.63
14. In February 2008, Mr Nicholls lodged personal income tax returns for the Relevant Years, disclosing income from UFC as follows:
Year ended 30 June 2003 - $13,000
Year ended 30 June 2004 - $15,600
Year ended 30 June 2005 - $5,200
Ms Minuzzo, a bookkeeper assisting Mr Nicholls, had prepared reconstructed accounts for the Relevant Years, showing a net profit of UFC as:
Year ended 30 June 2003 - $650
Year ended 30 June 2004 - $151,601
Year ended 30 June 2005 - ($51,123) (Loss)
evidence of applicant
15. Mr Nicholls’ evidence was that his income from the Trust comprised drawings and wages only. The business of the Trust was made up of retail activities, computer sales, repairs and onsite work supplied to businesses and private clients. Purchase orders were received and invoices issued for the supply of computers and payment was made by clients on the invoices issued. The records of the business of the Trust for the Relevant Years were largely maintained in boxes. Financial accounts had not been prepared until Ms Minuzzo’s involvement. As far as the income of the Trust was concerned, moneys received were deposited into the business bank accounts and expenses paid out of them. Losses had been sustained and, as a result, $180,000 had been injected into the business. Because of this, it had been necessary for Mr Nicholls to borrow funds through the refinancing of his private residence and by credit card payments. He had also borrowed funds from his sister, which had been paid into the business. All these borrowed funds were used to pay the costs of running the business of the Trust.
16. In cross-examination, Mr Nicholls said that, during the Relevant Years, he had only been taking $200 each week from the business to live on. He made use of a CBA Visa Gold Card and a Mastercard Platinum Card, but was unable to remember when the use of the cards commenced. Dr Bleby referred him to the statement of CBA Visa Gold transactions (Exhibit R2, ST2 at pages 11-30). A number of the entries in the statement were for private expenses and others related to payments made whilst Mr Nicholls and his family were on a business trip to the United States. During questioning, he could not recall whether the payments identified had been for private or business purposes. He acknowledged that the business was not making money and that no accounting records had been maintained for UFC or the Trust. Such records were not maintained because the business did not have the money to pay for them. All borrowings were going into the business and could not be used to pay for record keeping. Mr Nicholls said that, in June 2005 with the audit of UFC, Mr Des Blight had started work on the books of the business. He said he was unaware that, on 22 June 2005, Mr Blight had been asked to telephone the auditor in order to move forward, and that no contact had been made. He said he was also unaware that, by 7 July 2005, Mr Blight was not actively working on the accounts of UFC, and was not intending to do so. In relation to the supply of computers to clients, Mr Nicholls said that he made wholesale purchases and sold by retail. He would also receive orders from retail clients, put together the equipment required and complete the sale. He could not recall what mark-up he used in these retail sales. A mark-up of 10% to 12% was put to him, but he could not be sure of the amount. He complained that the auditor had not taken into account the external loans that had been made to UFC. However, he acknowledged that accounting records had not been maintained to record the loans made and deposited into the business.
17. Mr Nicholls was questioned about the use of credit cards in the business. He said that he had commenced to hold a Platinum Mastercard and that the card had been issued in July 2004. He acknowledged that there had been an overlap in the use of both the CBA Visa Gold Card and the Platinum Mastercard, but could not recall the period of the overlap. He was also unable to recall why he had changed from the Visa Gold Card to the Platinum Mastercard, but admitted that the credit limit with the Platinum Mastercard had been increased from $25,000 to $35,000. As far as the Trust was concerned, he did not know how the affairs of the Trust were conducted. He was unable to explain the accounts or how the net income of the Trust had been calculated. However, he did not believe that the Trust derived a net income in the Relevant Years, but thought that losses were incurred in each of the years.
consideration
Was the estimated taxable income of the applicant for the years ended 30 June 2003, 30 June 2004 and 30 June 2005 excessive?
18. The default assessments raised against Mr Nicholls for the Relevant Years are based on s 167 of the ITAA 1936. A default assessment may be made by the respondent where a person has failed to furnish a return, or where the respondent is dissatisfied with the return furnished, or has reason to believe that a person who has not furnished a return has derived taxable income. On the evidence, which he did not challenge, Mr Nicholls had not lodged personal income tax returns since 1999. It appeared that BAS and income tax returns had not been lodged for the Trust since at least 1 July 1999 or 1 July 2000. The net income of the Trust was determined following the GST audit, and the default assessments issued as a result of the audit of the applicant’s affairs. Mr Nicholls and his wife were the Primary Beneficiaries of the Trust. It appears that Mr Nicholls’ father-in-law was a director of UFC, but Mr Nicholls admitted that he had sole control of UFC. The auditor’s examination of the banking records of the Trust indicated that Mr Nicholls also enjoyed the sole benefit of the income of the Trust. In this capacity he was assessed as the sole beneficiary of the distribution of the net income of the Trust.
19. It was Dr Bleby’s submission for the respondent that the applicant’s case had two components. One came from Mr Nicholls’ evidence that the Trust’s business was not making money and he had to inject funds into it that he had borrowed himself. The other was based on the reconstructed accounts of the Trust that Ms Minuzzo had prepared, showing the income of UFC that was available to be distributed to beneficiaries of the Trust. In the Tribunal’s opinion, the respondent’s interpretation of the applicant’s case is apposite.
20. As to the Trust’s financial position and the alleged external borrowings, the auditor’s calculations in the UFC audit report were based on a detailed examination of the bank accounts and Quickline transfers of UFC. Included in these were UFC’s CBA business bank account, Mr Nicholls’ CBA Visa Gold account and the Quickline transfers from the primary business bank account to personal accounts. In analysing the spreadsheets supporting the accounts, it could be seen that moneys were being transferred from UFC’s business bank account into Mr Nicholls’ CBA Visa Gold account and being expended on items that appeared to be private in nature. It appeared that there were no controls on expenditure and there was no contemporaneous accounting in UFC to determine its true financial position. It was simply not possible to say that the business of the Trust was not making any money when there were no financial accounts, apart from those reconstructed accounts prepared by Ms Minuzzo, to support such an argument. Mr Nicholls asserted that he lent money to UFC. However, no loan accounts were prepared for the Trust evidencing these borrowings. The mere assertion by the applicant that he made loans to UFC cannot, without the appropriate evidence, be supported. Moreover, the existence of loans cannot be inferred from the payment by Mr Nicholls of personal and business expenses appearing in the accounts.
21. In the UFC audit report, the auditor examined the bank statements and the moneys coming into and going out of the business. The 2.74 percent NPR that resulted was rejected and an industry standards NPR of 20 percent, based on what was known about the Trust’s business, was applied in its place. In the Tribunal’s view, such an approach taken when an assessment under s 167 of the ITAA 1936 is involved is uncontroversial. In Briggs v Deputy Federal Commissioner of Taxation (WA) & Ors; Ex parte Briggs (1987) 87 ATC 4278, Mr Briggs (the prosecutor) sought relief against the respondents (including Mr Gill), pursuant to s 39B of the Judiciary Act 1903 (Cth), in respect of taxation assessments that had been raised. Sheppard J said (at page 4294):
“The evidence which I have accepted shows that Mr Gill had a substantial, although imperfect, knowledge of the affairs, not so much of the prosecutor himself, but of companies and trusts with which he was associated….In my opinion, the evidence establishes that Mr Gill made a genuine estimate of the prosecutor’s taxable incomes for each of the years. What he did, although quite inexact and perhaps incorrect, was in each case to make an assessment.”
22. Adopting the industry ratios to calculate NPR of 20 percent, an income calculation of UFC was made for the Relevant Years, resulting in amounts assessed to have been distributable to Mr Nicholls pursuant to s 97(1) of the ITAA 1936. To these amounts were added sums calculated by reference to the Quickline transfers provided by the applicant to have actually been paid to him in the form of wages in each of the Relevant Years. The resultant gross payments assessable to Mr Nicholls for the three year period were:
1 July 2002 to 30 June 2003 - $200,654.68
1 July 2003 to 30 June 2004 - $217,059.75
1 July 2004 – 30 June 2005 - $195,560.75
The income tax payable on these assessable gross payments totalled $267,923.63. Based on all the evidence before it, including that appearing in the UFC and Nicholls audit reports, the Tribunal is satisfied that the relevant assessments have been properly raised.
23. In relation to the reconstructed accounts prepared by Ms Minuzzo, the respondent’s case was that the accounts could not be used to discharge the applicant‘s burden of proof under s 14ZZK(b)(i) of the TAA 1953. The respondent’s reason was that the accounts were based on incomplete records and also contained errors within the workings in the accounts. Dr Bleby referred to the letter from Ms Minuzzo dated 18 July 2007, which accompanied the applicant’s documents (Exhibit A1) and read:
“Financials for the year 2002-2003, unfortunately not all bank settlements [sic] were present, so I only processed what I had the paperwork for. …
Financials for the year 2003-2004, complete with audit trail. …
Financials for the year 2004-2005, complete with audit trail. …
The accounts still need to have opening and closing balances which requires an Accountant’s input to correctly derive at Tim’s bottom line. Unfortunately Tim could not afford this, so the enclosed accounts only show all entries relating to all the information supplied. You will note that I have done bank reconciliations for all accounts to prove that all monies received and spent equal one another.”
24. Based on these statements by Ms Minuzzo, it is clear that the records of UFC were incomplete, so that the reconstructed accounts themselves were not accurate. For example, the balance sheet of UFC as at 30 June 2003 included details of the Bank SA Business account, but not the CBA Premium Business account. It also included details of Mr Nicholls’ own CBA Visa Gold Card account, which was obviously not a business account of UFC. If reference is made to the bank reconciliation report of UFC as at 30 June 2003, there are references to the Bank SA business account, but details of the CBA Premium Business account have not been included. Thus, it would appear that the sales that came through the CBA Premium Business account have not found their way into the reconstructed accounts and not into UFC’s profit and loss account as at 30 June 2003. Other omissions for UFC in respect of the year ended 30 June 2003 are of particular note. As outlined in the respondent’s statement of facts, issues and contentions, which the Tribunal has reviewed in Exhibit A1 and accepts:
(a) the cash payments journal ends on 31 October 2002;
(b) the cash receipts journal ends on 30 November 2002;
(c) the general ledger only has entries up to 30 November 2002;
(d) the daily transaction log only has entries up to 30 November 2002.
25. With respect to the year ended 30 June 2004 for UFC, again as outlined in the respondent’s statement of facts, issues and contentions and reviewed by the Tribunal:
(a)the cash payments journal ends on 30 June 2004, but there are limited entries for May and June 2004;
(b)the cash receipts journal ends on 30 April 2004;
(c)no general ledger entries have been provided;
(d)the accounts do not show income for UFC during May and June 2004; and
(e) deposits into UFC’s CBA Premium Business account for 2004 substantially exceed those recorded in the cash receipts journal.
26. In the Tribunal’s opinion, the above examples demonstrate that the reconstructed accounts prepared by Ms Minuzzo cannot be relied upon to support the applicant’s contention that the estimated taxable income, for the Relevant Years, was excessive.
27. As to the issue of raising the s 167 assessments for the Relevant Years only against Mr Nicholls, the approach taken by the auditor in the Nicholls audit report (at page 7) has been noted. On the evidence, Mr Nicholls’ case was that there was no net income of the Trust to distribute and, in the absence of accounting records or a determination to show that there would have been a distribution to a beneficiary other than Mr Nicholls, the Tribunal is satisfied that the approach taken by the auditor was correct. Mr Nicholls solely enjoyed the benefit and control of the income of the Trust and was properly assessed as the only beneficiary of the distribution of the net income of the Trust in the Relevant Years. In the circumstances, UFC would be correct in exercising its discretion in favour of Mr Nicholls and, as such, he would be deemed to be personally entitled under s 101 of the ITAA 1936 to the distributions of the net income of the Trust in the Relevant Years in the exercise of that discretion.
Burden of Proof
28. In proceedings before the Tribunal, neither party carries the burden of proof. However, under s 14ZZK(b)(i) of the TAA 1953, when the Tribunal reviews an objection decision, the taxpayer applying for review has the burden of proving, where an assessment in involved, that the assessment is excessive. What this means is the subject of the decision of the High Court in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614. There, the Court was considering a predecessor of s 14ZZK, being s 190(b), of the ITAA 1936. At pages 619-620, Brennan J said:
“Where one or other of the situations described in pars (a), (b) and (c) of s. 167 exists, the Commissioner or his delegate is empowered to make an assessment of an amount which, in the Commissioner's judgment, is the amount on which tax ought to be levied: George's Case (1952) 86 CLR at p 204. It is that amount which, for the purpose of s. 166, becomes the taxpayer's taxable income. That amount may not be in truth the taxpayer's taxable income for a particular income year and it may not be so regarded by the Commissioner (as in Trautwein v. Federal Commissioner of Taxation (1936) 56 CLR 63) but, for the purpose of s. 166, that amount is the taxpayer's taxable income for the income year to which the assessment relates unless it is shown on appeal from, or on review of, the assessment that the amount of the assessment is wrong: Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612 at p 648. …”
29. Later, at page 621, Brennan J said:
“ …Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.”
30. Rather, the burden on the applicant is to show that the amount assessed is actually excessive. Even if some error in the method of assessment can be pointed to, that of itself does not show that the assessment was excessive (per Brennan J in Dalco at page 623). As to what is required of this burden of proof in practice, Brennan J quoted Kitto J in George v Federal Commissioner of Taxation (1952) 86 CLR 183 where he said (at page 189):
“[Section] 190(b) places a burden of proving that the assessment is excessive upon the appellant; and in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment.”
This places an onerous burden on the taxpayer. Brennan J went on to say (at page 624):
“… Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In Gauci v. Federal Commissioner of Taxation (1975) 135 CLR 81, Mason J. said (at p 89):
‘The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s.190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.’
…”
31. It has been held that, on occasion, the respondent should show some particulars of the basis on which he proposes to support an assessment (see Dalco at page 625). It is noted that, in the present case, the respondent has put before the Tribunal the audit reports, bank statements and some of the spread sheets, so that there is an understanding of how the relevant assessments were made. These documents also show the incompleteness and incorrectness of the reconstructed accounts upon which the applicant relies in the attempt to discharge his burden of proof. This prevents the Tribunal from finding for the applicant and again, as was held by Brennan J in Dalco, at page 625:
“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.”
As Dr Bleby put it, this describes the situation with which the Tribunal was faced in the present case.
Administrative Penalty
32. The administrative penalty regime is contained in Schedule 1 of Part 4-25 of the TAA 1953. Amongst other things, the regime provides for the imposition of penalties for failure to lodge taxation returns and other documents on time. In Mr Nicholls’ case, the default assessments have been raised because of his failure to lodge personal income tax returns for the Relevant Years. In these circumstances, s 284-75(3) of the TAA 1953 applies, a shortfall amount arises and a base penalty amount is determined under s 285-90(1). Where there is a liability to an administrative penalty under s 284-75(3), under Item 7 of the Table in s 284-90(1) the base penalty amount is 75 percent of the tax-related liability concerned. In the present case, there has been a failure by the applicant to give a taxation return for the Relevant Years. In these circumstances, the Tribunal is satisfied that the administrative penalty of 75 percent determined by the respondent is correct. Having made that finding, the Tribunal notes that, under s 298-20 of the TAA 1953, the Commissioner (and upon review, the Tribunal) may remit all or part of the penalty. Given the circumstances and the applicant’s ongoing failure to lodge personal income tax returns when required, the Tribunal finds that no remission of penalty is warranted.
33. For the reasons outlined above, the Tribunal is not satisfied that the applicant had discharged the onus of proving that the default assessments for the years ended 30 June 2003, 30 June 2004 and 30 June 2005 are excessive. The amount of the administrative penalty in each of the Relevant Years has been correctly imposed.
decision
34. The objection decisions under review are affirmed.
I certify that the 34 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne
Signed: .............J Coulthard..........................................
AssociateDate of Hearing 11 March 2009
Date of Decision 23 July 2009
Advocate for the Applicant Self-represented
Counsel for the Respondent Dr C Bleby
Solicitor for the Respondent ATO Legal Services Branch
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