Phillip Ryan and Commissioner of Taxation
[2014] AATA 818
•31 October 2014
[2014] AATA 818
Division TAXATION APPEALS DIVISION File Number
2012/0497
Re
Phillip Ryan
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms G Lazanas, Senior Member
Date 31 October 2014 Place Sydney The objection decision of the Respondent in relation to the assessment of net amount for the quarterly tax periods from 1 January 2009 to 31 March 2011 is set aside and the matter is remitted to the Respondent to issue an assessment in accordance with the Tribunal’s reasons.
.............................[sgd]...........................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION AND REVENUE – goods and services tax – entitlement to input tax credits – private use - apportionment considerations - decision with respect to assessment of GST is set aside and matter remitted to Commissioner
LEGISLATION
A New Tax System (Goods and Services Tax) Act 1999 ss 7-1, 11-5, 11-15, 11-25, 11-30, 69-5
A New Tax System (Goods and Services Tax) Regulations 1999 Reg 40.5.09
Income Tax Assessment Act 1997 s 32-10Taxation Administration Act 1953 ss, 14ZZK; Schedule 1, 382-5
CASES
HP Mercantile v Commissioner of Taxation(2005) 143 FCR 553
Re Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit Trust and Commissioner of Taxation [2014] AATA 337
REASONS FOR DECISION
Ms G Lazanas, Senior Member
31 October 2014
INTRODUCTION
Mr Phillip Ryan is in dispute with the Commissioner of Taxation (Commissioner) with respect to his entitlement to claim input tax credits (ITCs) totalling $6,795 in the tax periods between 1 January 2009 to 31 March 2011 (the Relevant Period).
The Commissioner initially formed the view that Mr Ryan was not carrying on an enterprise during the Relevant Period and, therefore, he was not entitled to claim any ITCs. However, after the Tribunal proceedings had commenced, the Commissioner concluded that Mr Ryan was carrying on an enterprise but that, based on the limited documents Mr Ryan had produced, he was only entitled to claim very few ITCs. I have proceeded on the basis that the Commissioner was correct in his conclusion that Mr Ryan was carrying on an enterprise. The only decision under review is whether Mr Ryan is entitled to claim the ITCs during the Relevant Period.
Mr Ryan subsequently produced about six folders of documents which included invoices, bank statements, spreadsheets, email correspondence, conference papers and submissions to substantiate his ITCs; some of these arrived after the conciliation conferences; others at the time of the hearing and a few even after the hearing (with leave of the Tribunal).
For the reasons that follow, I have decided to allow some of the ITCs claimed by Mr Ryan. However, I have denied the remainder of his claims, as they were not for “creditable acquisitions” made by Mr Ryan, for the purposes of Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act).
RELEVANT LEGISLATION
It is convenient to set out the key legislative provisions and relevant principles with respect to the claiming of ITCs before describing the factual background. This is followed by a consideration of the sole issue in this proceeding, taking into account the evidence of Mr Ryan, who was the only person who gave evidence (by telephone) at the hearing.
Section 7-1 of the GST Act relevantly provides that “[e]ntitlements to input tax credits arise on creditable acquisitions”. Section 11-5 relevantly provides that “[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply.”
The term “creditable purpose” is defined (to the extent presently relevant) in s 11-15 as follows:
11‑15 Meaning of creditable purpose
(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(a) ...
(b) the acquisition is of a private or domestic nature.
The amount of the ITC that is allowable in respect of a creditable acquisition is given by s 11-25 as follows (without the note at the end of the section):
11‑25 How much are the input tax credits for creditable acquisitions?
The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.
Section 11-30(1) relevantly provides that an acquisition is partly creditable if it is a creditable acquisition which you make only partly for a creditable purpose.
There are additional rules regarding the claiming of ITCs. Relevantly, ss 29-10(3) and (4) provide that a taxpayer is unable to claim an ITC for a “creditable acquisition”, unless the taxpayer holds a tax invoice at the time that it lodges its Business Activity Statement (BAS) for that tax period. There are some exceptions including where a tax invoice is not required to be held, for example, in respect of purchases under the low value threshold (being $50 excluding GST for the period up to 1 July 2010, and $75 excluding GST from 1 July 2010). Regardless of the threshold, s 382-5 of Schedule 1 to the TAA requires the taxpayer, in relation to ITCs claimed in a BAS, “to keep records that record and explain all transactions and other acts that you engage in that are relevant to the acquisition” for at least five years.
It is also important to note at the outset that the taxpayer bears the burden of proving in these proceedings that the assessments of net amount for the quarterly tax periods are excessive (s 14ZZK(b)(i) of the TAA).
THE FACTUAL BACKGROUND
Mr Ryan is a businessman with expertise in marketing and technology. He has several degrees including a Masters of Marketing, a Masters in Business Administration and a Bachelor of Science.
During the Relevant Period, Mr Ryan traded as a sole trader under two business names: Alchemy Business Consulting (Alchemy) and Responsible Gaming Networks (Networks). Mr Ryan established Alchemy in July 2002 and Networks in October 2003. He had registered separate business names in Victoria for each of these businesses.
Alchemy Business Consulting
Mr Ryan was engaged in corporate communications consulting work for both private and public organisations under the Alchemy business name. This involved him advising on government and media relations and corporate image and marketing, amongst other things. This work was dependent on contracts that he was able to procure for specific assignments.
Responsible Gaming Networks
Under the Networks banner, Mr Ryan worked on the development of information technology systems to address problem gambling using pre-commitment technology. That work entailed him researching solutions for problem gambling and the global efforts made by governments and those within the gaming industry to combat problem gambling. In 2004 and 2005, Mr Ryan registered several patents for his intellectual property rights in relation to his gaming technology products, both in Australia and overseas.
As part of the Networks business, he sought introductions and attended meetings with persons and organisations involved in gambling. He presented at conferences and gave media interviews. He also wrote submissions and lobbied governments about solutions for problem gambling. He said that he did this as part of his Networks business. The numerous emails in evidence before the Tribunal only corroborated that Mr Ryan traded as Networks up until late 2009. These emails showed Mr Ryan’s name in the signature block, followed by the title ‘Chief Executive Officer’, and the business name ‘Responsible Gaming Networks’. It was curious that he claimed to hold the office of ‘Chief Executive Officer’ when he was a sole trader, but that was undoubtedly part of his own marketing. Mr Ryan also sought assistance from AUSTRADE, particularly in relation to building his profile in Canada, which was identified as the primary overseas target market for his technology.
Responsible Gaming Networks Pty Ltd
On 23 October 2009, Mr Ryan incorporated Responsible Gaming Networks Pty Ltd (RGN Pty Ltd) and, from that date, RGN Pty Ltd carried on the business previously carried on by Mr Ryan relating to his Networks business, in particular, in relation to commercialising the products. Mr Ryan was a director and the majority shareholder of RGN Pty Ltd. It follows that, after the incorporation of RGN Pty Ltd, the activities of Mr Ryan were significantly different and reduced.
Interactions between Mr Ryan and Responsible Gaming Networks Pty Ltd
Mr Ryan stated that as the owner of the patents, he continued to work on marketing his products and building his profile in the gaming industry, notwithstanding that he had authorised RGN Pty Ltd to commercialise the products. This was because “he had a vested interest in ensuring that Responsible Gaming Networks Pty Ltd was successful, as its success would not only generate profits for [him] as its major shareholder ... but its success would also create value for [his] patents in the commercial marketplace and generate revenues for Alchemy ...”[1]
[1] Exhibit A1, Attachment 7, page 37
In relation to the connection between RGN Pty Ltd and himself trading as Alchemy, Mr Ryan stated that “the company [RGN Pty Ltd] engaged [him] in [his] capacity as the owner of Alchemy Business Consulting to undertake their marketing and stakeholder communications ... and management of the company’s administrative functions”.[2] He stated that he was required by RGN Pty Ltd to utilise his communications skills and networks to:
a. Sell the new academic sponsored concept of player ‘pre-commitment’ to global governments who wished to control problem gambling
b. Sell the new technology of ‘biometric USB flash drives’ as a player authentication device to governments, consumers, problem gambling interest groups and gambling operators
c. Educate markets as to how these two new elements could be amalgamated to help drive increased taxation revenues from expanded but highly regulated gambling markets...[3]
[2] Exhibit A1, Attachment 7, page 37
[3] Exhibit A1, Applicant’s Statement of Facts and Contentions, paragraph 79
There is no evidence of any such contract besides the oral evidence of Mr Ryan. The email correspondence and documents in evidence, after the incorporation of RGN Pty Ltd on 23 October 2009, show his name, the title of ‘CEO & Managing Director’ and the company name ‘Responsible Gaming Networks Pty Ltd’ in his signature block and not that of his Alchemy business.[4] While I find that Mr Ryan was engaged by RGN Pty Ltd to assist with marketing, I also find that he was acting in his capacity as an officer of the company, indeed as the Managing Director.
[4] Exhibit A2, for example, pages 69-71
During the Relevant Period, Mr Ryan did not make any sales under his Networks business; that is, he did not get any contracts for the use of his technology. Mr Ryan also found it difficult to win any corporate communications consulting jobs in his Alchemy business. He said that this was due to the global financial crisis. In fact, the only paid consulting work that he did during the Relevant Period was for RGN Pty Ltd. In or about June 2010, Mr Ryan invoiced RGN Pty Ltd the sum of $528 (including $48 GST) for his “consulting duties” under his Alchemy business name. He had no other customers or clients in the Relevant Period. As noted at [2] above, the Commissioner concluded that Mr Ryan was carrying on an enterprise.
Mr Ryan was receiving the Newstart Allowance (namely, unemployment benefits) from Centrelink during the 2009 and 2010 income years and, according to his correspondence with the Commissioner during the audit, he was also actively seeking to gain full-time paid employment.[5]
[5] T11-110
The Commissioner’s GST Audit
It is necessary to say something briefly about the Commissioner’s audit of Mr Ryan. Mr Ryan was registered for GST from July 2007 on a cash basis and he submitted his Business Activity Statements (BASs) on a quarterly basis.
During the Relevant Period, he lodged BASs claiming ITCs of $6,795 and reporting GST of $48. Mr Ryan claimed the following ITCs during the Relevant Period on the basis that they were creditable acquisitions:
Quarterly BAS Period Creditable acquisitions claimed ITCs claimed 31 March 2009 7,110 646 30 June 2009 21,560 1,960 30 September 2009 19,448 1,768 31 December 2009 6,785 585 31 March 2010 3,961 355 30 June 2010 1,494 96 30 September 2010 5,747 425 31 December 2010 7,001 554 31 March 2011 6,619 406 Total $79,725 $6,795
On 10 May 2011, the Commissioner issued a letter to Mr Ryan advising that his BASs had been selected for audit. The Commissioner advised that he would initially review the BAS for the quarterly tax period 1 January 2011 to 31 March 2011 focusing on the substantiation of the ITCs and the authenticity of his enterprise. The Commissioner requested Mr Ryan provide a number of documents. Mr Ryan co-operated and provided the requested documents, as well as explanations and further documents to additional questions posed by the Commissioner. As it turned out, the Commissioner did not review any other BAS.
On 8 August 2011, following the review of the documents and after several telephone discussions with Mr Ryan who, by that stage was in the process of relocating to the USA, (having previously moved between Brisbane, Hobart and Melbourne), the Commissioner issued a letter to advise that the audit of Mr Ryan’s BASs for the quarterly tax periods
1 January 2009 to 31 March 2011 had been completed. The Commissioner decided that Mr Ryan was not carrying on an enterprise throughout that period and, therefore, he was not entitled to be registered for GST nor was he entitled to any ITCs claimed. Also, on
8 August 2011, the Commissioner issued a Notice of assessments of net amount for the quarterly tax periods 1 January 2009 to 31 March 2011.
On 25 September 2011, Mr Ryan lodged a notice of objection which, in the main, set out his grounds for why the Commissioner’s decision that he was not carrying on an enterprise was incorrect. Specifically, Mr Ryan argued that the Commissioner had failed to understand the nexus between his Alchemy and Networks businesses and, in addition, that the Commissioner could not have reached the decision he did because he did not undertake an audit of the entire period; he only reviewed the three months from 1 January to 31 March 2011.
On 22 December 2011, the Commissioner issued a Notice of decision on objection disallowing the objection.
On 8 February 2012, Mr Ryan lodged an application with the Tribunal for review of the objection decision.
On 22 May 2013, after the second conciliation conference in the Tribunal, the Commissioner advised Mr Ryan that, based on the further information provided by him in March and April 2013, the Commissioner accepted he was carrying on an enterprise during the Relevant Period. Also, based on the documents that Mr Ryan had made available, the Commissioner was prepared to allow some ITCs. Mr Ryan separately accepted, as explained below, that he had made some mistakes in his claims but he maintained that he was entitled to claim the balance.
At the hearing, the Commissioner’s advocate, Mr Ram Pandey, indicated that the sum of the disputed ITCs claimed was $4,672. That is to say, the Commissioner was prepared to concede that Mr Ryan was entitled to $2,123 out of a total of $6,795 in ITCs.
WAS MR RYAN ENTITLED TO CLAIM THE INPUT TAX CREDITS?
Mr Ryan was only entitled to claim ITCs for the “creditable acquisitions” that he made during the Relevant Period. As noted in paragraph [6] above, s 11-5 begins with the requirement that “[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose”. The meaning of “creditable purpose” in s 11-15(1) of the GST Act is “[y]ou acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise”. However, under s 11-15(2), Mr Ryan does not acquire the thing for a creditable purpose to the extent that the acquisition is, relevantly, of a private or domestic nature.
In HP Mercantile v Commissioner of Taxation (2005) 143 FCR 553, Hill J considered the operation of s 11-15 of the GST Act and stated, as follows, at 559 [21]:
It is, perhaps, not unremarkable that s 11-15 of the GST Act bears, in its structure, some similarity to the general business deduction provisions of the Australian income tax law, ie s 51(1) of the Income Tax Assessment Act 1936 (Cth) and s 8-1 of the Income Tax Assessment Act 1997 (Cth). In both the GST provision and the income tax provisions, there is a need to pass first through a positive test. In the case of GST, the positive test is the requirement that the acquisition has been in whole or in part acquired in carrying on an enterprise. In the income tax context, there is the need to find that the loss or outgoing be incurred in gaining or producing assessable income, or in carrying on a business. In both cases apportionment arises where the positive test is only partly satisfied. Next, both require consideration of negative tests which exclude the allowance of a credit in the GST context or the allowance of a deduction in the income tax context. In the GST context the negative tests are those set out in s 11-15(2) of acquisitions relating to supplies that would be input taxed or acquisitions of a private and domestic nature. In the income tax context, the negative tests also involve the case where the loss or outgoing is of a private and domestic nature as well as where it is capital or of a capital nature. In both cases, a question of apportionment arises where the negative tests only partly apply.
It follows that the first thing Mr Ryan must do to prove his entitlement to the ITCs claimed is demonstrate in respect of each thing for which he claimed an ITC, that the thing was acquired by him in whole or in part in carrying on his enterprises, namely, consulting and/or commercialising his products (the latter having been carried on by him up until the incorporation of RGN Pty Ltd). It does not matter that a taxpayer may have more than one enterprise as was the case with Mr Ryan and his Alchemy and Networks businesses. The critical issue is that the thing is acquired in carrying on his enterprise. Apportionment considerations may arise where the positive test is only partly satisfied, for example, where an acquisition of a thing relates in part to the carrying on of an enterprise as well as to some other purpose.
After the positive test is passed, Mr Ryan must then demonstrate that the ITCs are not excluded because of the negative tests, namely, that the acquisitions do not relate to making supplies that would be input taxed and that the acquisitions are not of a private or domestic nature. Again, apportionment considerations may arise where the negative tests only partly apply, for example, where an acquisition of a thing relates in part to the carrying on of an enterprise as well as in part to private use.
Consequently, the private use of acquisitions does not of itself preclude the acquisitions from being acquired in carrying on an enterprise and qualifying as having a creditable purpose. As explained by Senior Member O’Loughlin in Re Davsa Forty-Ninth Pty Ltd as Trustee for the Krongold Ford Business Unit Trust and Commissioner of Taxation [2014] AATA 337 at [40], private use only prevents full ITCs being allowed because there are apportionment rules in each of ss 11-5(a), 11-15(2) and 11-25 of the GST Act.
Private expenditure may cease to be for a creditable purpose under either the positive test or the negative test. With respect to the positive test, it may be that the acquisition is not for a creditable purpose because it was not acquired “in carrying on [your] enterprise”. The same result may arise under the negative test, because, although the acquisition may have been made “in carrying on [your] enterprise” and, therefore, passed the positive test, it was nevertheless, to some extent, of a private or domestic nature. Either way,
s 11-15(2)(b) leaves no room for any doubt with respect to private expenditure. It specifically states that acquisitions to the extent they are of a private or domestic nature are not for a creditable purpose. In other words, it does not matter whether the ITCs are disallowed because of failing to satisfy the positive test or the negative tests, at least not insofar as acquisitions of a private or domestic nature are concerned (s 11-15(2(b)).
Against that background, I now turn to a consideration of the various categories of acquisitions made by Mr Ryan. This is the most efficient method of undertaking the exercise, rather than looking at the acquisitions line by line, and conforms to the approach adopted by the parties at the hearing.[6] This is because most of Mr Ryan’s claims are concerned with his entitlement as a threshold issue, including the nexus of the acquisitions with the enterprises that he was carrying on, as distinct from the substantiation of the ITCs by reference to tax invoices. As will emerge from the consideration of the acquisitions below, Mr Ryan’s conception of his enterprises was all-embracing, with the result being that he treated many of his acquisitions as if they were enterprise expenses.
[6] Exhibit R2
Legal and Accounting Fees
Mr Ryan claimed ITCs in respect of various legal and accounting services, including in relation to the registration of his patents and the preparation of his income tax returns. All of these acquisitions were for a creditable purpose, namely, they were acquired by him in carrying on his Networks business and, in the case of the accounting services, also his Alchemy business.
The legal fees relate to him registering patents which he then authorised RGN Pty Ltd to use to commercialise the technology. All of the expenses relate to the period March to September 2009, before RGN Pty Ltd was incorporated in October 2009. These ITCs totalling $1,463.09 are allowed in full (as was conceded by Mr Pandey at the hearing).
Domestic Air Fares
Mr Ryan claimed ITCs on his domestic air travel, namely, between capital cities, on the basis that he was attending meetings and conferences to raise the profile of his Networks business in the gaming industry. The airfares predominantly relate to the period January to September 2009 (before RGN Pty Ltd was incorporated). There is one fare in respect of which ITCs were claimed in the quarterly tax period ended 31 March 2011 which relates to an initial meeting with an external client for whom Mr Ryan undertook consulting work under his Alchemy business name. (This work was invoiced in April 2011, that is, after the Relevant Period, which explains why it is not referred to above). As also conceded by Mr Pandey at the hearing, these ITCs totalling $123.35 are allowed in full.
Rent, Life Insurance and International Travel
Mr Ryan claimed ITCs on his rent, life insurance premiums and some of his international travel costs in the amounts of $1,683.39, $316.68 and $181.69, respectively. The supply of residential premises by way of lease is input taxed (s 40-35); the supply of life insurance is an input taxed financial supply (s 40-5 of the GST Act and Regulation 40.5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999); and overseas travel is GST-free (s 38-355). Therefore, as none of these things were a taxable supply to Mr Ryan, he could not have made creditable acquisitions (s 11-5(b)). Mr Ryan accepted that he had made mistakes and that he was not entitled to claim these ITCs totalling $2,181.76. Consequently, these claims are disallowed.
Mobile Phone, Fuel, Newspapers, Books and Magazines, Office Supplies and Telstra Landline
Mr Ryan claimed full ITCs for his mobile phone service charges, fuel expenses, newspapers, books and magazines and, in addition, for various so called “office supplies”, without making any allowance for private use. He also claimed full ITCs for his Telstra landline charges.
Mr Ryan stated that he only used his mobile phone for business purposes, namely, for conducting his Alchemy and Networks businesses, and that all personal calls were made using Skype. I do not accept that this was the case, particularly as he was awaiting calls regarding outside employment opportunities, which he would have been required to take using his mobile phone. He also argued that RGN Pty Ltd took over paying his mobile phone charges when the company was incorporated. However, I do not accept that this demonstrates, as he submitted, that his mobile phone was only used for business purposes. Rather, that arrangement is only evidence of what he says he negotiated with RGN Pty Ltd.
Mr Ryan said that he purchased newspapers, books and magazines for the purpose of being appraised of world events to appear knowledgeable in his business meetings. I do not accept this explanation to justify his claims for full ITCs. The newspapers, books and magazines were also for his general knowledge, including, for example, the guide book in relation to Singapore which he said he purchased before going there for a conference. The position may have been different if the books and magazines were on technical subjects to do with, for example, a particular area of expertise in which he was practising, but there was no evidence of that kind before the Tribunal.
Mr Ryan’s “office supplies” were purchased from a variety of retailers including Tandy, Officeworks, Safeway, Godfreys and The Body Shop. The vast majority of the expenses were each less than $55 including GST for which no tax invoices had to be held (the threshold changed to $82.50 including GST from 1 July 2010). Regardless of the threshold, as noted at [10] above, s 382-5 of Schedule 1 to the TAA requires the taxpayer, in relation to ITCs claimed in a BAS, “to keep records that record and explain all transactions”. Mr Ryan did not produce any records, besides the listing of these transactions by reference to the retailers, so it was not clear what precisely had been purchased by him. I was also not satisfied that the purchases were acquired for the sole purpose of carrying on his enterprise. As with the mobile phone, newspapers, books, magazines and Telstra landline charges, I find that the acquisitions of these office supplies involved some private or domestic use, especially as he was seeking full-time employment during the Relevant Period.
The extent to which ITCs are allowable when there is an element of private use is a question of appropriate apportionment: Re Davsa at [40]. Mr Ryan did not demonstrate to the Tribunal what that appropriate percentage was and I would not have allowed any ITCs except that Mr Pandey was prepared to allow one-third of the ITCs on most of these categories of expenses and, therefore, treat these acquisitions as being partly creditable. I have decided to follow his concessional approach and allowed ITCs of $0.45 on fuel, $30.73 on mobile phone charges, $103.15 on books, newspapers and magazines, $37.44 on office supplies and, additionally $7.62 on his Telstra charges.
Taxi Fares, Car Hire and Accommodation
Mr Ryan claimed ITCs in respect of certain taxi fares, car hire and accommodation expenses on the basis that these were creditable acquisitions. I accept that his taxi fares in the period from January to December 2009 relate to him attending business meetings and conferences. Similarly, his car rental expenses in the period January to December 2009 are allowed because they also relate to his business meetings and conferences, as corroborated by additional information provided by Mr Ryan at the hearing. However, I was not persuaded that the expenses incurred by Mr Ryan from January 2010 onwards with respect to taxi fares and car hire were creditable acquisitions as they were not supported by satisfactory evidence.
All of the ITCs claimed on his accommodation expenses for the entire period are allowed on the basis that they were creditable acquisitions.
Accordingly, the ITCs allowed for Mr Ryan’s taxi fares, car rental and accommodation charges total $83.57, $153.00 and $150.73, respectively.
Home Contents Insurance
Mr Ryan claimed ITCs in respect of his home contents insurance based on 50% of the premiums. In particular, he said that his apartment was a two bedroom apartment and that about half of it was used as his office and about half of it was for private use. However, even if that were accepted, that did not explain how the contents insurance should be based on that same rate of apportionment. I was not satisfied that there was a sufficient correlation between his percentage of home office space and the contents insured to justify a rate of 50% apportionment. Accordingly, I have disallowed his ITCs claimed for his contents insurance on the basis that it was an acquisition of a domestic nature.
Utilities
Mr Ryan claimed full ITCs on his utilities, namely, gas, electricity and water charges. There is no GST charged on water so that ITC claim is untenable as no taxable supply was made to Mr Ryan (s 11-5(b)). I was not satisfied that 100% (or 90% as later suggested by Mr Ryan at the hearing) was appropriate. Mr Ryan provided no cogent explanation for why all or virtually all of his gas and electricity charges at his home were creditable acquisitions and there is no evidentiary basis for adopting any other rate of apportionment. I have disallowed these ITCs as the acquisitions of utilities were of a domestic nature.
Airfares of Other Passengers
Mr Ryan paid for the interstate airfares of two passengers, namely, his niece and for another person who visited him in Australia from Canada. Out of respect for the privacy of the Canadian visitor, I will call her Ms Smith. Mr Ryan claimed full ITCs on the basis that these acquisitions were made by him in the course of him carrying on his enterprise.
First, in relation to his niece, Mr Ryan claimed that she visited him in Melbourne during school holidays and that she also spent considerable time assisting him to do his filing. Secondly, in relation to Ms Smith, Mr Ryan claimed to have been introduced to her by his AUSTRADE contact for the purpose of expanding his network in Montreal, Canada. Mr Ryan stated that Ms Smith worked in her own public relations consultancy business and that she visited him in Australia with a view to doing some contract work in return for a possible share of equity and or possible employment. She then accompanied Mr Ryan on his business trips to various capital cities of Australia in late March to early April 2009, for which Mr Ryan paid the airfares. Mr Ryan said that he briefed her on his business and introduced her to his technologists.
I do not accept that the airfares of the niece and Ms Smith were creditable acquisitions. Mr Ryan’s niece came for a holiday and she may or may not have done some administrative work for Mr Ryan while staying with him. There is no evidence that she was employed by Mr Ryan. The airfare for the niece is not an acquisition for which I am even prepared to canvass any apportionment issues, and none were raised by Mr Ryan. In relation to Ms Smith, the Commissioner pointed out at the hearing that, besides Mr Ryan’s account of events, there was no evidence of how she came to visit Mr Ryan and what she did in Australia. There was no planning of any itinerary of business meetings that involved her. In particular, although there were numerous emails between Mr Ryan and his AUSTRADE contact and many other people with whom he arranged meetings, the name of Ms Smith did not feature in any emails. Furthermore, Ms Smith’s name did not appear in Mr Ryan’s own detailed overseas travel reports when he went to Canada, nor was there any written correspondence between Mr Ryan and Ms Smith. I have disallowed the ITCs on the airfares of these passengers as there is no legitimate nexus between these acquisitions and the enterprises that Mr Ryan was carrying on.
Entertainment and Subsistence
Mr Ryan claimed ITCs in relation to a number of entertainment expenses including tickets for events purchased from Ticketmaster and Greater Union. Most of these expenses related to entertaining Ms Smith who I have referred to above at [53]-[55]. He said he wanted to leave a good impression on her and so took her to the Opera House and the movies, amongst other places. They also went to numerous dinners including in Melbourne, where Mr Ryan resided at that time, to celebrate what he described as the success of their trip. He claimed full ITCs on all of this entertainment on the basis that it was for carrying on his enterprise. For the same reasons indicated at [55] above, I do not consider these acquisitions to have been made by Mr Ryan in carrying on his enterprise.
Mr Ryan also claimed full ITCs on certain meals which he called “subsistence” in his transaction reports. He said he claimed ITCs only on those meals that he ate while he was travelling interstate. Again, he said that these were for carrying on his enterprise.
Section 69-5(1) of the GST Act states that an acquisition is not a creditable acquisition to the extent that it is a non-deductible expense. Non-deductible expenses include expenses that are not deductible under Division 8 of the Income Tax Assessment Act 1997
(ITAA 1997) because of, amongst other provisions, Division 32 of the ITAA 1997. Division 32 is concerned with entertainment expenses. Specifically, s 32-10(1)(a) defines entertainment expenses as meaning “entertainment by way of food, drink or recreation”. Therefore, the tickets purchased by Mr Ryan for recreational activities with Ms Smith are also not creditable acquisitions because of s 69-5(1) of the GST Act.Furthermore, food and drink is a private expense and, therefore, ITCs cannot be claimed (s 11-15(2)(b)). It makes no difference if the food is consumed interstate or at the place where one resides. Additionally, some of the so-called subsistence included food and drink at interstate conferences, for example, when Mr Ryan occasionally paid for colleagues’ dinners, are non-deductible entertainment expenses (s 69-5(1)). I was not satisfied that Mr Ryan’s ITCs claims fell within any of the exceptions in Subdivision
32-B, such as that relating to seminar expenses. The Applicant did not provide evidence that the expenses incurred were ‘reasonably incidental’ to his attendance at a seminar and, consequently, I do not find these claims to fall within the exception
(s 32-35).Foxtel Subscription
ITCs were claimed by Mr Ryan for his Foxtel subscription on the basis that he watched international news channels so he could keep up to date on international current affairs and appear knowledgeable when he attended overseas meetings. He claimed he did not watch any of the movies or sports channels which came with the package. I was not persuaded that his Foxtel subscription was a creditable acquisition because the nexus with his enterprise was too tenuous, that is, it would have failed the positive test referred to in s 11-15(1) explained in [34] above. Also, I would regard it as an expense of a private or domestic nature and have disallowed it under s 11-15(2)(b).
Haircuts, Dental Services and Prescription Medicines
Mr Ryan claimed ITCs for some of his haircuts and for dental services, and for a visit to a doctor for an injection. In relation to the haircuts, he stated that he only claimed ITCs for those hair cuts preceding media interviews as he wanted to appear well groomed. While that may be so, these acquisitions fail the positive test as they were not acquired by Mr Ryan in carrying on his enterprise (s 11-15(1)). The acquisitions are also of a private nature (s 11-15(2)(b)). Dental services and prescription medicines are GST-free supplies and so they would not have been taxable supplies to Mr Ryan (s 11-5(b)). The ITCs on these items are disallowed.
Postage, Storage, Miscellaneous Expenses, Public Transport and Retail Purchases
Mr Ryan also claimed ITCs on many other expenses, such as for postage, storage, public transport costs (based on his myki statements) and, additionally, on purchases from various retailers such as Bunnings and David Jones. These expenses were listed in his transaction listings for the quarterly tax periods corresponding to his BASs, but there was invariably little other information about these transactions besides what Mr Ryan said at the hearing. His oral evidence did not take the position much further. Furthermore, in the light of his other indiscriminate and overreaching claims, his explanations were neither rational nor compelling.
In relation to his storage costs, for example, Mr Ryan claimed that these related in their entirety to books and documents, including all his university texts and notes from some twenty years ago. According to Mr Ryan, his storage costs were enterprise expenses because of the possible future use of these materials in carrying on his enterprise. I do not accept that the storage costs (even if they were for relevant books and documents), would be creditable acquisitions. It would be different if the documents had to be retained for clients or for taxation purposes but, insofar as Mr Ryan would have me believe, these were in storage because he might wish to avail himself of them in the future. In any event, I was not persuaded that he only had books and documents in storage based on his personal circumstances, including the fact that he had relocated several times as referred to at [26] above.
Mr Ryan also did not produce satisfactory evidence, such as records or diary entries in relation to this expenditure. He, therefore, failed to convince me that these were creditable acquisitions (s 14ZZK(b) of the TAA).
CONCLUSION
For the reasons set out above, the objection decision made by the Commissioner in relation to the net amount for each of the quarterly tax periods in the Relevant Period
(1 January 2009 to 31 March 2011) is set aside and the matter is remitted to the Commissioner to issue an assessment of the net amounts for each of the tax periods in accordance with the Tribunal’s reasons. In summary, the ITCs allowed are $2,153.13 in total. By category, the ITCs allowed are as follows:
(a)Legal and accounting fees – $1,463.09
(b)Domestic Airfares - $123.35
(c)Fuel - $0.45
(d)Mobile Phone Charges - $30.73
(e)Taxi fares – $83.57
(f)Car Hire - $153.00
(g)Accommodation - $150.73
(h)Books, Newspapers and Magazines - $103.15
(i)Office supplies - $37.44
(j)Telstra Phone - $ 7.62
I certify that the preceding 65 (sixty-five) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member
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Associate
Dated 31 October 2014
Dates of hearing 5 and 7 March 2014 Date final submissions received 21 March 2014 Advocate for the Applicant Self represented Advocate for the Respondent Mr R Pandey Solicitors for the Respondent Ms A Chou, Legal Services Branch, ATO
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