Parrish And Commissioner of Taxation
[2012] AATA 909
•14 February 2013
DECISION AND REASONS FOR DECISION [2012] AATA 909
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2010/1824 & 1825
TAXATION APPEALS DIVISION )Re: Trevor Parrish
Applicant
And: Commissioner of Taxation
RespondentDIRECTION
TRIBUNAL: Senior Member R W Dunne
DATE: 14 February 2013
DATE OF DECISION: 21 December 2012
PLACE: Adelaide
Pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975, the TRIBUNAL DIRECTS the Registrar to alter the text of the reasons for decision in this matter by:
1.Deleting the schedule appearing in paragraph 37 of the decision; and
2.Inserting the following schedule in paragraph 37 of the decision:
Revised Tax Payable
Tax Period Income Tax Income Tax
PenaltyGST GST Penalty Financial Year 2005 $28,642.74 $21,482.05 $20,509 $15,381.75 Financial Year 2006 $142,294.86 $106,721.15 $37,466 $28,099.50 Financial Year 2007 $20,858 $15,643.50 TOTALS $170,937.60 $128,203.20 $78,833 $59,124.75 ...........................[Sgd]......................
R W DUNNE
(Senior Member)
[2012] AATA 909
Division Taxation Appeals Division File Number(s)
2010/1824
2010/1825
2011/1158
Re
Trevor Parrish
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member R W Dunne
Date 21 December 2012 Place Adelaide The Tribunal varies the objection decisions under review.
....................[Sgd]....................................................
Senior Member R W Dunne
CATCHWORDS
TAXATION - income tax - business of selling second-hand motor vehicles - disclosure of income - applicant provided summary of business activities - understatement of net business income - goods and services tax - understatement of taxable supplies - overstatement of creditable purchases - tax audit - administrative penalties - objection decisions under review varied.
LEGISLATION
Income Tax Assessment Act 1936 (Cth) ss 166, 167
Income Assessment Act 1997 (Cth) s 6-5
A New Tax System (Goods and Services Tax) Act 1999 (Cth) s 9-40Taxation Administration Act 1953 (Cth) s 14ZZK(b)(i), Schedule 1 ss 284-25, 284-75, 284-80, 284-90, 298-20
CASES
Re Graham Docker and Associates Pty Ltd and Commission of Taxation [2005] AATA 1180
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Eldridge v Federal Commissioner of Taxation 90 ATC 4907
Federal Commissioner of Taxation v Dalco 90 ATC 4088
Gauci and Others v Federal Commissioner of Taxation 75 ATC 4257
McCauley v Federal Commissioner of Taxation 88 ATC 4605Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
REASONS FOR DECISION
Senior Member R W Dunne
INTRODUCTION
The applicant in this case is Mr Trevor Parrish (“applicant”). His taxation history involves the lodgement of income tax returns and business activity statements (“BAS”). He comes to this Tribunal seeking review of objection decisions made by the Commissioner of Taxation (“respondent”) in respect of 2004/2005 and 2005/2006 amended income tax assessments, and notices of assessment of revised net amounts, relating to goods and services tax (“GST”), for the quarterly tax periods 1 April 2005 to 30 June 2007.
At the hearing, Mr Parrish represented himself (with the assistance of his accountant, Mr Robert Stevens) and the respondent was represented by Mr S Doyle (of counsel). Evidence was given by both Mr Parrish and Mr Stevens.
The T documents and supplementary T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 were admitted into evidence (as Exhibit R1, Exhibit R2, Exhibit R3 and Exhibit R4), together with the following exhibits:
·the applicant’s supporting documents (Exhibit A1);
·the witness statement of Robert J Stevens dated 19 August 2012 (Exhibit A2); and
·the witness statement of Trevor Parrish dated 14 September 2012 (Exhibit A3).
ISSUES FOR THE TRIBUNAL
The following are the issues before me:
(a)Whether the applicant has reported and paid the GST payable on the taxable supplies he made during the quarterly tax periods from 1 April 2005 to 30 June 2007, pursuant to s 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”).
(b)Whether the applicant has included in his 2004/2005 and 2005/2006 taxation returns all income derived in the course of carrying on his business, pursuant to s 6-5 of the Income Tax Assessment Act 1997 (“ITAA 1997”).
(c)Whether, pursuant to s 14ZZK of the Taxation Administration Act 1953 (“TAA”), the applicant has discharged the onus of proving that the amended income tax assessments and the revised GST assessments issued by the respondent are excessive.
(d)Whether the applicant is liable for administrative penalties under s 284-75(1) of Schedule 1 to the TAA.
(e)Whether the tax shortfall amount or part thereof resulted from intentional disregard by the applicant or his tax agent of a taxation law.
(f)Whether the respondent (or, on review, the Tribunal) should exercise the discretion in accordance with s 298-20 of Schedule 1 to the TAA to remit the administrative penalties in whole or in part.
LEGISLATION
The provisions of the Income Tax Assessment Act 1936 (“ITAA 1936”), the ITAA 1997 and the TAA that are relevant in the present proceedings are as follows:
ITAA 1936
“Section 166 Assessment
From the returns, and from any other information in the Commissioner's 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).
Section 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 or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.”
ITAA 1997
“Section 6-5 Income according to ordinary concepts (ordinary income)
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.
Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.
(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
…”
GST Act
“Section 9-40 Liability for GST on taxable supplies
You must pay the GST payable on any taxable supply that you make.”
TAA
“Section 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
…”
“Schedule 1 – Collection and recovery of income tax and other liabilities
Section 284-25 Statements by agents
This Division applies to a statement made in an approved form by your agent as if it had been made by you.
Section 284-75 Liability to penalty
(1) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner 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 things in it or omitted from it; and
(c) you have a shortfall amount as a result of the statement.
Note:Subsection 2(2) specifies laws that are not taxation laws for the purposes of this Subdivision.
…
Section 284-80 Shortfall 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:
1
A 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
…
Section 284-90 Base penalty amount
(1)The base penalty amount under this Subdivision is worked out using this table:
Base penalty amount
Item
In this situation:
The base penalty amount is:
1
Your shortfall amount or part of it resulted from intentional disregard of a taxation law by you or your agent
75% of your shortfall amount or part
2
Your shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a taxation law
50% of your shortfall amount or part
…
Section 298-20 Remission of penalty
(1)The Commissioner may remit all or a part of the penalty.
…”
BACKGROUND
The background facts in this case have been extracted from the respondent’s statement of facts, issues and contentions and are not in dispute. Mr Parrish has carried on a business of selling second-hand motor vehicles since 1994. His business is called “Stockwell Motors” and is run by him as a sole trader. He lodged his 2004/2005 and his 2005/2006 taxation returns with the respondent and notices of assessment were respectively issued on 14 August 2006 and 12 March 2007. At various times, he lodged BAS for the quarterly tax periods from 1 April 2005 to 30 June 2007. On 19 February 2008, the respondent confirmed that a tax audit would be undertaken with respect to the applicant’s taxation affairs. Subsequently, the applicant provided the respondent with information relating to the audit. This included calculations of net profit for the 2003/2004 to 2006/2007 tax years.
On 20 July 2009, the respondent advised the applicant that the audit had been completed with respect to the period 1 July 2003 to 30 June 2007. The respondent found that the applicant had understated GST sales (taxable supplies) for the quarterly tax periods from 1 April 2005 to 30 June 2006, and had both understated GST sales and overstated creditable purchases (acquisitions) for the quarterly tax periods from 1 June 2006 to 30 June 2007. Further, the respondent found that the applicant had understated his net business income in his taxation returns in each of the 2003/2004 to 2006/2007 tax years and understated his taxable income in the 2004/2005 and 2005/2006 tax years. An administrative penalty of 75 per cent was imposed for intentional disregard of a taxation law. The respondent issued to the applicant notices of assessment of the revised net amounts, particularly relating to GST, for the quarterly tax periods 1 April 2005 to 30 June 2007. The respondent also issued to the applicant notices of amended assessment for the 2004/2005 and 2005/2006 tax years reflecting the adjustments to income as a consequence of the tax audit, and notices of assessment and liability to pay penalty in respect of the 2004/2005 and the 2005/2006 amended assessments.
As a result of the respondent requesting and the applicant providing further information, the respondent found that the GST payable with respect to the quarterly tax periods from 1 April 2005 to 30 June 2007 should be reduced, based on a further analysis of the applicant’s bank accounts. The respondent issued to the applicant notices of amended assessment of net amounts for the quarterly tax periods from 1 April 2005 to 31 December 2006.
EVIDENCE
Evidence of Mr Stevens
Mr Stevens’ evidence in chief was obtained by Mr Parrish. His evidence was that he had acted for many years as the accountant and tax agent for the applicant, that he had been responsible primarily for preparing and lodging the applicant’s BAS in order to calculate the GST of the applicant’s business every quarter. He calculated the turnover of the business (including GST) and prepared annual statements for income tax purposes. Those statements showed the income and expenses of the business. In his view, the capacity of the applicant’s car yard, with the number of vehicles involved and the low margins, could not result in the taxable incomes that the respondent had calculated. Mr Stevens said that he prepared the Forms 9 (under the Second Hand Vehicle Dealers Act 1995) for the sale of vehicles and maintained a manual record of all the sales. He was not aware of changes in the figures appearing in the Forms 9 and he accepted the figures as they appeared in the Forms. He said the “green book” was the applicant’s internal record of sales and was independent of the Forms 9 that were prepared.
Mr Stevens said that the applicant had been injured and out of action for a number of months and had been unable to work. He could not recall the injury period, but said that insurance compensation was recorded as income during 2006. He said that the applicant had obtained loans from various people and had made drawdowns from a financial facility with his bank. He was also aware, from information given to him by the applicant, that the applicant had received a gift from his uncle, but was unsure of the amount involved.
In cross-examination by Mr Doyle, Mr Stevens said that between 2005 and 2007 he maintained Forms 9 and business expense details in separate manila folders. He believed the information he held for the applicant, which he received each quarter and maintained in the folders, was complete. However, at some stage, when he became aware of the existence of the “green book”, he acknowledged that the information in the manila folders was incomplete. Once becoming aware of the “green book” he did not conduct a detailed comparison of the information contained in the manila folders with that in the “green book” information. When Mr Doyle referred him to the comparison of the amounts in the “green book” with those appearing in the applicant’s BAS, which showed that the “green book” figures were more than twice the figures in the manila folders, he said he did not seek answers from the applicant regarding the differences. He also acknowledged that he did not ask the applicant about the alterations that had been made in the Forms 9. When asked about a fire that had occurred in a property adjacent to the applicant’s yard, he said he had heard about the fire from the applicant in 2010, not in the 2005/2006 tax year when the fire occurred. He said that water damage had been caused to files, which were not burnt, but he could not recall the actual date when the fire occurred. When Mr Doyle referred him to the letter he had sent to the respondent dated 3 February 2010, in which he indicated that evidence to assist the applicant’s case had been destroyed in the fire, he acknowledged that the applicant did not intend to rely on the documents damaged in the fire when the matter was being reviewed by the Tribunal. Mr Stevens said that he had made this decision, not the applicant. In relation to insurance compensation, he agreed that the compensation had been excluded from the income tax and GST calculations and that there were no longer any errors in these sources. He also acknowledged that the drawdowns from financial institutions were excluded from the income tax and GST calculations. As to loans from private individuals, he said he was not involved in the loans and could not obtain any information from the lenders in relation to them.
Evidence of Mr Parrish
When questioned about his witness statement, Mr Parrish said that the information contained in the manila folders was reflected in his taxation returns and his BAS. He was asked about the information in the “green book”, and he said that it was accurate. The income in his income tax returns and BAS relating to the sale of motor vehicles had been understated. When asked about the information in the manila folders he said he had not conducted a reconciliation. He said he had revealed the “green book” to Mr Stevens at the meeting with the respondent’s officers during the audit process. When questioned by Mr Doyle about the meeting and his comment that he would “come clean”, he acknowledged that he kept another book as well as the information kept in the manila folders, and said that this “green book” included information about the sale of cars that did not appear in the manila folders. When questioned further about income not being disclosed in the BAS, the applicant denied that this had occurred. He also denied that the sales of vehicles were not included in the “green book”. In relation to the deposits into his bank accounts, the applicant maintained that the banks were wrong and that his sales did not reflect that the deposits were income.
Mr Doyle questioned the applicant about the alterations that had been made to the Forms 9. He said that there were business reasons why the alterations had been made, but acknowledged that he had not told Mr Stevens about the altered figures. In relation to the figures, he said there were occasions when he would “write them around” when he bought a number of vehicles at the same time.
When questioned about the gift he had received from his late uncle, he said that the amount involved had been $90,000 and not $50,000. He had received the gift in “dribs and drabs” over 12 months. He spent some of the money on a racing car and put about one-half into the bank. He said he had been lent money by Mr Drage on a few occasions, amounting to about $30,000. He had repaid the loan and paid an additional $4,000 in interest. He had been on holidays several times to Thailand. He had withdrawn $28,000 out of the bank when he went to Thailand, but this money was used on the holiday and also to pay bills and to buy motor vehicles.
THE APPLICANT’S SUBMISSIONS
The following submissions, in brief terms, were made by Mr Parrish:
(a)The methodology adopted by the respondent to determine income in the 2004/2005 and 2005/2006 tax years is wrong. It does not take into account the size of the applicant’s yard and the number of motor vehicles involved. The determination of income should be based on an analysis of gross profit on each sale.
(b)The respondent is wrong to assume that the amounts paid into the applicant’s bank accounts comprise gross income and do not include profit elements.
(c)The drawdown or transfer from the applicant’s Macquarie bank account has not been taken into account. In addition, the interbank transfers between the applicant’s accounts have not been correctly excluded, nor have the loans made to the applicant by private individuals.
(d)The calculations made by the respondent ignore the fact that the applicant was overseas during the 2005/2006 tax year, so that the income assessed is excessive. Moreover, because of the injury he suffered overseas he was out of action for a considerable period in the 2005/2006 tax year and did not derive income in that period.
SUBMISSIONS FOR THE RESPONDENT
The following submissions, in brief terms, were made by Mr Doyle:
(a)The onus is on the applicant to show that the amended assessments are excessive. The applicant has not discharged the onus in that he has failed to provide sufficient evidence to show that the amended assessments are incorrect.
(b)The evidence of the applicant should be rejected by the Tribunal in its entirety. In giving his evidence, he was evasive and failed to acknowledge that there were more car sales disclosed in the “green book” than in the BAS and in the manila folders. The applicant has intentionally disregarded his tax obligations.
(c)The documentation and information provided by third parties is inconsistent and does not support the applicant’s evidence.
(d)The analysis of the applicant’s bank accounts and the payments into those accounts is a logical starting point on which to base the amended assessments.
(e)There are problems in the use of the information contained in the “green book” as a basis for challenging the amended assessments. The “green book” is only a crude method of income and does not include all (or enough) of the actual income derived.
CONSIDERATION
Has the applicant reported and paid the GST payable on the taxable supplies he made during the quarterly tax periods from 1 April 2005 to 30 June 2007?
Under s 9-40 of the GST Act, a taxpayer is required to pay the GST payable on any taxable supply that is made. As the applicant is a registered GST entity, sales by him of second-hand motor vehicles are taxable supplies for the purposes of the GST Act. On the evidence available, the applicant was unable to provide all records relating to sales of motor vehicles for the period 1 April 2005 to 30 June 2007. The respondent found that the applicant had understated GST taxable supplies and overstated creditable acquisitions during this period. The revised assessments of net amount during this period resulted in an additional GST liability of $93,730. The assessments of net amount must be determined on the best evidence available. Where the records are not reliable, as was considered in the applicant’s case, other methods must be used to determine the net amount. When the respondent was not able to verify the applicant’s BAS from the records and information that had been provided by him, the respondent undertook third party checks with other motor vehicle dealers who supplied vehicles to the applicant and to customers who were in the applicant’s sales and purchase records. When copies of purchase contracts were supplied by other motor vehicle dealers, comparisons of these contracts with those provided by the applicant revealed that 33 contracts had been altered by the applicant to show a higher purchase price. In the case of three other vehicles included by the applicant in his BAS, the other dealers involved confirmed that the vehicles had never been sold to him. The applicant also failed to supply purchase contracts for a further four vehicles that he included in his BAS working papers. In this regard, I note that the respondent conducted motor registration checks that showed these vehicles either had never changed ownership or simply did not exist.
To repeat what I have said above, in the case of the assessments of net amount, there must be sufficient evidence to show the basis on which the assessments are made. Any basis used to determine the net amount must be reasonable, credible and defensible. I note that at the conclusion of the tax audit, the applicant was sent Attachments A to K which detailed the calculations involved in making the assessments. The applicant contended that the alleged sales attracting GST, based on deposits, was incorrect and grossly overstated the actual shortfall in terms of both sales and associated GST. It was submitted that an individual analysis of sales transactions, such as was conducted for the year ended 30 June 2007, was more appropriate. In this regard, I note that in the audit completion letter dated 20 July 2009 (Exhibit R1, page 366) the respondent stated:
“For each year, we totalled all deposits made from each account then deducted any deposits that appeared to have been transferred between these accounts to get actual amounts deposited from other sources. The details of these deposits have been recorded on Attachments B to E and summarised on Attachment A. (Note that we have given you the benefit of doubt and excluded more inter-account transfers than was listed in the Interim Report dated 11 May 2009.)
We compared these amounts to the sales reported on your BASs and there were significant differences. Since you have been unable to explain these differences we have no alternative but to assume that these amounts are sales made by you.”
I note that the auditor requested copies of bank statements from various financial institutions at which the applicant held bank accounts. As a result of the applicant’s objection(s), the respondent re-examined the bank statements with the Attachments B to E to ensure that the calculations were done correctly. As a consequence, the following amounts of GST were excluded:
Tax Period
Excluded Amounts
01/04/2005 - 30/06/2005 $636.00 CR 01/10/2005 - 31/12/2005 $1,136.00 CR 01/01/2006 - 30/03/2006 $2,318.00 CR 01/07/2006 - 30/09/2006 $591.00 CR 01/10/2006 - 31/12/2006 $418.00 CR Total $5,099.00 CR
On all the evidence available, I find that the applicant has not reported and paid the GST payable on the taxable supplies he made during the quarterly tax periods from 1 April 2005 to 30 June 2007. As a result of the tax audit, I am satisfied that the additional GST liability of $93,730 has been properly calculated, subject to the application of the amended assessments which were issued on 28 January 2011 giving rise to an amount of $5,099 being applied as a credit to the applicant’s running balance account. In Re Graham Docker and Associates Pty Ltd and Commission of Taxation [2005] AATA 1180, Dr Gordon Hughes, Member said (at paragraph 25):
“The challenge facing the applicant in this application is twofold – the respondent has adopted a plausible methodology in its calculations, and the applicant lacks documentary evidence to demonstrate that the respondent’s calculations had produced a distorted result. Under section 14ZZK of the Taxation Administration Act 1983 (Cth), the applicant is limited on this application to the grounds stated in the objection (subject to any contrary order of the Tribunal) and, importantly, has the burden of proving that the assessment is excessive. It is not for the respondent to prove that the assessment was correctly made. Pursuant to section 59, a Notice of Assessment is ‘conclusive evidence’ that the assessment was properly made and, except in proceedings under Part IVC, that the amounts and particulars in the assessment are correct. By virtue of section 14ZZK, the applicant carries and must discharge the onus to show that the assessment is excessive.”
The applicant has not discharged the onus to show that the revised assessments of net amount for the tax periods from 1 April 2005 to 30 June 2007, having taken into account the amended assessments that were issued on 28 January 2011, are excessive.
Has the applicant included in his 2004/2005 and 2005/2006 taxation returns all income derived in the course of carrying on his business?
It is clear that the respondent’s action in raising the amended assessments for the 2004/2005 and 2005/2006 tax years, having regard to the applicant’s failure to provide accurate and consistent records relating to the conduct of his business, involved the application of ss 166 and 167 of the ITAA 1936. Section 167 is the source of the respondents’ authority to make a default assessment and provides that, if any person makes default in furnishing a return or including an amount of income (or net capital gain) that is properly included, the respondent may make an assessment of the amount upon which, in his judgement, income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of s 166. Section 166 provides that, from the returns and any other information in his possession or from any one or more of these sources, the respondent shall make an assessment of the amount of taxable income of any taxpayer and the tax payable thereon.
Section 167 is not an independent power but is in aid of s 166 in the duty or function of making assessments, so that the formation of a judgment as to the amount of taxable income is part of the very process of assessment itself and is not a condition precedent to the power to assess. That is, there is no requirement on the respondent to prove that he formed a judgment of the amount of income upon which the taxpayer should be taxed. Rather, the burden lies upon the taxpayer of establishing that the amount of his taxable income is excessive. This means that there is no duty on the respondent to allege or prove the source of the taxable income imputed to the taxpayer: George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 204.
I note from the evidence available that, following the lodgement of the objections against the applicant’s amended assessments for the 2004/2005 and 2005/2006 tax years, the respondent wrote to the applicant on several occasions requesting further information in order to consider the objections. Responses were received by the respondent, but the information provided related to matters arising outside the 2004/2005 and 2005/2006 tax years which were the subject of the objections. In providing the additional information, Mr Stevens (for the applicant) submitted that a fairer approach should be based on financial reports prepared for the year ended 30 June 2008, or alternatively an assets betterment basis. I also note that particulars of these alternative bases were requested by the respondent, but do not appear to have been provided by the applicant. It appears that, from information held by the respondent and from the applicant’s “Personal Living Expenses Questionnaire”, the respondent ascertained that the banks and mortgage providers the applicant dealt with were BankSA, Westpac Bank and Macquarie Bank, and Bluestone Mortgages. The respondent contacted these entities and obtained account statements for 2004 to 2007 to assist in determining the applicant’s income. Further to what the respondent said when writing to the applicant on completion of the tax audit (see paragraph 18 above), the respondent also stated (Exhibit R1, page 367 and page 371)
“…
During a meeting at your accountant Robert Stevens’ office on 12 June 2009 you produced a green covered book. You advised that this book recorded the profits made on each motor vehicle you sold but we are unable to accept this evidence as an accurate record of you [sic] sales. When we compared some of the details in the book with your BAS working papers we found some vehicles that were listed in the BAS working papers but had not been recorded in the book. We also found some vehicles showed a higher profit in the BAS working papers than you recorded in the book.
…”
“The table below summarises the adjustments and resulting liabilities for the income tax returns we are amending:
Income tax year Adjustment to income Adjustment to expenses $ Adjustment to net income $ Net income as lodged $ Revised net income
$Tax liability (Shortfall) $ 2005
645,845
346,603
299,242
-55,262
98,366
33,404.96
2006
449,666
61,268
388,398
36,547
424,945
189,648.32
223,053.28
In my view, the methodology adopted by the respondent in arriving at the applicant’s amended taxable income in the 2004/2005 and 2005/2006 tax years is an appropriate basis for determining the applicant’s taxable income in each of those tax years. Mr Stevens argued that an assets betterment basis was more appropriate, and the applicant contended that the determination of his income should be based on an analysis of gross profit on each sale. I disagree. I am satisfied that the methodology adopted by the respondent in raising the 2004/2005 and 2005/2006 amended assessments was logical, credible and appropriate in the circumstances.
As far as the applicant’s appearance before me is concerned, I found his evidence to be inconsistent, especially in relation to the car sales disclosed in the “green book” and the manila folders. On occasions, he was evasive in the answers he gave and I found it difficult to accept what he said about his business, about the records he maintained and about the income he said he derived from the conduct of his business.
Has the applicant, pursuant to s 14ZZK of the TAA, discharged the onus of proving that the amended assessments issued by the respondent are excessive?
Apart from the matters referred to above which support the respondent’s actions, the applicant has failed to discharge the onus of proving, under s 14ZZK(b) of the TAA, that the amended assessments for the 2004/2005 and 2005/2006 tax years are excessive.
In proceedings before the Tribunal, neither party carries the onus of proof. However, under s 14ZZK(b)(i) of the TAA, when the Tribunal reviews an objection decision, the taxpayer applying for review has the onus of proving, where an assessment is involved, that the assessment is excessive. In seeking to show that the assessment is excessive, the taxpayer must put his or her case before the Tribunal and produce records and other evidence in support of the case. In considering the predecessor to s 14ZZK(b)(i), Foster J observed in Eldridge v Federal Commissioner of Taxation 90 ATC 4907 at 4921:
"…
This, it must not be lost sight of, was the main and substantial case put to the Tribunal by and on behalf of the applicant. It was through this case, mainly if not solely, that the applicant sought to demonstrate, the onus being on him, that the assessments were 'excessive' within the meaning of sec. 190(b). The Tribunal rejected this case. Quite clearly, it was not rejected on the basis of some 'rubber-stamping' of the Commissioner's previous views. It was rejected fairly and squarely upon evidence given before the Tribunal itself through documentary exhibits and through witnesses who were examined, cross-examined and re-examined in the ordinary way.
It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the Court than of the office desk.
It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer's objections. Although it is not bound by the rules of evidence (sec. 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it. …"
The Tribunal's role was explained more fully in the decision of the Full High Court in Federal Commissioner of Taxation v Dalco 90 ATC 4088. There, speaking of the ITAA 1936 (but the principles apply equally to the TAA) and also in speaking of an appeal (but the same principles apply to a review in this Tribunal), Brennan J observed (at 4091):
"… It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (sec. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. 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.
…"
As Brennan J also said in Dalco (supra at page 4093), the manner in which a taxpayer can discharge the onus of proof varies with the circumstances. In some cases, the onus may be discharged by pointing to some error of computation. The onus can also be discharged by the taxpayer proving that the Commissioner erroneously included in the assessment an amount that should not have been included. On the other hand, as Mason J pointed out in Gauci and Others v Federal Commissioner of Taxation 75 ATC 4257 at 4261 (when considering the application of the predecessor to s 14ZZK(b)):
"Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. The appellants relied on their evidence and that of Graham in order to show that the assessments were excessive. Once that evidence was rejected, the appellants' case necessarily failed."
Section 14ZZK(b) effectively creates a rebuttable presumption that an assessment is not excessive. As was further said by Mason J in Gauci (supra at page 4261):
"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."
Finally, in commenting on the taxpayer's absence of consistent records, Lockhart J in McCauley v Federal Commissioner of Taxation 88 ATC 4605 at 4612 referred to the judgment of Latham CJ in Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 and said:
"I have already made some observations about the effect of the absence of records on the taxpayer's case and it is pertinent to recite the observation on this matter by Latham CJ in Trautwein's case (supra) at p 87:
'In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.'
… ”
On the evidence and information before me I am not satisfied that the applicant has discharged the onus of proof that was imposed upon him in the 2004/2005 and 2005/2006 amended assessments.
It follows that, based upon the documents and other evidence available, the amounts included by the respondent in the assessable incomes of the applicant pursuant to s 167 of the ITAA 1936, when read with s 166 of the ITAA 1936, in the 2004/2005 and 2005/2006 tax years were not excessive.
Is the applicant liable for an administrative penalty under s 284-75 of Schedule 1 to the TAA, and did the tax shortfall amount or part thereof result from intentional disregard by the applicant or his tax agent of a taxation law?
The administrative penalty regime is contained in Schedule 1 of Part 4-25 of the TAA. Amongst other things, the regime provides for the imposition of penalties for failure to lodge taxation returns and other documents on time and for failure to include income that is properly assessable to income tax. In the applicant’s case, the respondent found that he had understated his taxable income in the 2004/2005 and 2005/2006 tax years. I have found that the relevant amended assessments were not excessive. In these circumstances, s 285-75(1) of the TAA applies, and a shortfall amount arises under Item 1 of the table in s 284-80(a) of the TAA. A base penalty amount has been determined by the respondent under Item 1 of the table in s 284-90(1) of the TAA, which imposes a penalty of 75 per cent of the shortfall amount if the shortfall results from an intentional disregard of a taxation law. I note from the respondent’s “Reasons for decision” (Exhibit R1, page 23) that the respondent considered the applicant’s behaviour demonstrated intentional disregard as to the operation of a taxation law for the following reasons:
·a number of motor vehicle purchase contracts appeared to have been deliberately altered to show a purchase price higher than the applicant actually paid;
·some motor vehicle purchase contracts appeared to have been deliberately written to show that the customer had agreed to pay an amount higher than the applicant actually paid for them;
·some motor vehicle purchase contracts appeared to have been deliberately written out for vehicles that were traded in;
·the respondent considered that the applicant had total effective control of all transactions in the business and had a high degree of knowledge and experience in the used vehicle industry;
·at the meeting with the respondent’s auditor on 12 June 2009, 16 months after the applicant attended the first audit meeting, he said to the respondent’s officers, “Shall I come clean now?” and then left the meeting and returned with the “green book” which he said contained his actual record of sales; and
·the discrepancies between the amounts in the “green book” and the BAS.
Having considered the above reasons, I am satisfied that the respondent was correct in imposing a base penalty amount of 75 per cent of the tax shortfall in the 2004/2005 and 2005/2006 tax years.
Should the respondent (or on review, the Tribunal) exercise the discretion in accordance with s 298-20 of Schedule 1 to the TAA to remit the penalty in whole or in part?
Having made the finding in paragraph 34 above, I note that the respondent (and upon review, the Tribunal), under s 298-20 of the TAA, has discretion to remit all or part of the penalty imposed. It is the respondent’s contention that it is not appropriate to exercise this discretion. I agree with this contention. I do not believe any remission of the 75 per cent penalty is warranted.
CONCLUSION
The respondent has submitted that the applicant’s applications for reviews should be dismissed. However, during the course of these proceedings the applicant submitted that the following transactions in his bank statements for the 2005/2006 tax year should not be included as sales for GST purposes:
Date
Amount
Transfer From
Transfers To
2006
20/07/2005 5,000 Bank SA Macquarie 22/09/2005 5,000 Bank SA Macquarie 05/10/2005 7,300 Bank SA Macquarie 07/11/2005 10,000 Bank SA Macquarie 28/11/2005 7,000 Bank SA Macquarie 24/03/2006 5,400 Bank SA Macquarie 12/05/2006 5,000 Bank SA Macquarie 29/06/2006 9,650 Bank SA Macquarie
The respondent concedes the above listed deposits should not be included as sales and that they should not form part of the applicant’s assessable income and GST liability in relation to the 2005/2006 tax year. I agree with and accept the respondent’s concession. The consequential adjustments to the applicant’s income tax liability, GST liability and penalties are set out in the following schedule:
Revised Tax Payable
Tax Period Income Tax Income Tax Penalty GST GST Penalty Financial Year 2005 $31,728.80 $23,796.60 $20,509 $15,381.75 Financial Year 2006 $158,388.13 $118,791.09 37,466 $28,099.50 Financial Year 2007 $20,858 $15,643.50 TOTALS $190,166.93 $142,587.69 $78,833 $59,124.75 DECISION
For the reasons set out above, the objection decisions under review are varied to give effect to the adjustments referred to in the tables in paragraphs 36 and 37 above.
I certify that the preceding 38 (thirty-eighty) paragraphs are a true copy of the reasons for the decision herein of .......................[Sgd].................................................
Administrative Assistant
Dated 21 December 2012
Date(s) of hearing 18 October 2012 Applicant In person Counsel for the Respondent Mr S Doyle Advocate for the Respondent Ms D Di Girolamo Solicitors for the Respondent ATO Legal Services Branch
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