Priestley and Commissioner of Taxation (Taxation)

[2015] AATA 893

Priestley and Commissioner of Taxation (Taxation) [2015] AATA 893 (20 November 2015)

Division	TAXATION & COMMERCIAL DIVISION
File Number	2015/2006
Re	Janne Priestley
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Deputy President PE Hack SC
Date	20 November 2015
Place	Brisbane

The decisions under review are affirmed.

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Deputy President PE Hack SC

CATCHWORDS

TAXATION – assessable income – capital gains tax – whether a capital loss incurred – applicant claimed capital losses offset capital gain – net capital loss made from “personal use asset” disregarded – whether original “loans” on capital account extinguished as “unrecoverable” – Tribunal not satisfied of existence of claimed debt – Tribunal not satisfied applicant incurred claimed capital losses – no grounds for remission of administrative penalty – decisions under review affirmed.

LEGISLATION

Income Tax Assessment Act 1936 (Cth), s 167

Income Tax Assessment Act 1977 (Cth), ss 25-35, 102-5, 104-25, 108-20

REASONS FOR DECISION

Deputy President PE Hack SC

20 November 2015

Introduction

1. Mrs Janne Priestley made a capital gain from the disposal of assets in the 2011 income year. She did not lodge a tax return in that year. She says that, in that year, she had capital losses that offset the capital gain however the Commissioner of Taxation took a different view. He was not satisfied that Mrs Priestley had adequately demonstrated the existence of the transactions said to have resulted in the capital loss and assessed Mrs Priestley in the 2011 income year without offsetting the claimed losses. He also assessed a penalty of 75% of the taxation liability for Mrs Priestley’s failure to lodge her 2011 return. None of that penalty was remitted.

2. Mrs Priestley objected to the assessment and the penalty assessment but her objection was disallowed. She seeks review of those decisions in the Tribunal.

   Decision

3. For the reasons that follow I have concluded that the decisions under review were correct. Mrs Priestley has not satisfied me that she incurred the capital losses claimed. I need not decide whether, had I been so satisfied, it was open to her to set off those capital losses against her capital gains. The circumstances do not warrant any remission of the penalty. The decisions will be affirmed.

   Facts

4. During the 2011 income year Mrs Priestley was the director of Ramican Holdings Pty Ltd (Ramican). It acted as the trustee of the Ramican 42 Trust (the Ramican Trust). In the same year Mr Murray Priestley, Mrs Priestley’s spouse, was the director of Portofino Asset Holdings Pty Ltd (Portofino). It acted as the trustee of the Youthceutics Trust.

5. It is common ground that in that year Mrs Priestley had capital gains and losses as follows:

   ·a net capital gain of $428,979 from the sale of real property in Hawthorn, Victoria

   ·a net capital gain of $240 from the sale of NIB shares

   ·a net capital loss of $6,617 from the sale of CISCO shares

   ·a net capital loss of $228 from the sale of Telstra shares

   Those transactions result in a net capital gain of $422,374. Mrs Priestley did not lodge a 2011 income tax return as might have been expected.

6. On 13 August 2013, the Commissioner wrote to Mrs Priestley advising her, in terms, that the Commissioner had information, including information about the disposal of the Hawthorn property, that suggested that she might need to lodge a 2011 income tax return but had not done so. There was no response. On 4 April 2014, the Commissioner again wrote, advising of his intention to make a default assessment if Mrs Priestley did not lodge her return by 7 May 2014. She did not do so.

7. On 23 May 2014, the Commissioner made an assessment, seemingly in reliance on s 167 of the Income Tax Assessment Act 1936 (the 1936 Act), of Mrs Priestley’s taxable income for the 2011 income year.[1] It included an amount of $258,500 representing the discounted capital gain on the Hawthorn property as calculated by the Commissioner. The previous day the Commissioner made an assessment of administrative penalty for Mrs Priestley’s failure to lodge her return.[2] It was calculated at the rate of 75% of the tax liability and required her to pay $89,176.05.

   [1]Exhibit 5, pages 72 – 73.

   [2]Exhibit 5, pages 70 – 71.

8. On 8 October 2014, Mrs Priestley’s tax agent lodged an objection to the 2011 income tax assessment and to the 2011 penalty assessment.[3] The objection took issue with the Commissioner’s calculation of the capital gain, disclosed the other capital gains and losses set out in paragraph 5 above and notified the Commissioner of rental property income and expenditure not previously disclosed. Additionally, the document made reference to the matters in issue in these proceedings in these terms:

   Investment Capital Losses of $271,645,

   Investment date June 2004 and December 2005, these loan investments were written off as not collectable.

   [3]Exhibit 5, pages 74 – 80.

9. The Commissioner sought further information about matters in the objection including the following:

   In regards to the Investment Capital Losses of $271,645; can you please provide an explanation as to:

   1What the loans are/what the loans are for?

   2Who are the loans to/who is the borrower?

   3Is the borrower a related/connected entity of Janne Priestley?

   4Why were the loans written off/What event led to the loans being written off?[4]

   On 20 January 2015, the agent responded to that request for information in these terms:

   Youthceutics Trust

   Investment Capital of $144,149 was invested by Janne Priestley into a private trust “Youthceutics Trust”. This trust was a trading trust, the Trustee Company’s Director is the spouse of Janne Priestley. The Trust ceased trading as there were no longer any demand and sales for the products being distributed thereby the trust was unable to pay any investment returns and eventually was unable to repay the invested capital and the trust and the investments were written off.

   Attached is the documents [sic] supporting the investment and the write off.

   Ramican 42 Trust

   Investment Capital of $127,496 was invested by Janne Priestley into a private trust “Ramican 42 Trust”. This trust was investment trust and owned rental properties. The Trust borrowed funds to complete the acquisition of rental properties. The Trustee Company’s Director is Janne Priestley. The trust was unable to repay any investment returns and was unable to repay the invested capital so the investments were written off.

   Attached is the documents [sic] supporting the investment and the write off.[5]

   The documents “supporting the investment and the write off” comprised of two documents, each described as a promissory note, one dated 10 June 2004 between Mrs Priestley as lender and Ramican as borrower, the other dated 26 October 2007 between Mrs Priestley as lender and Portofino as borrower.

   [4]Exhibit 5, page 81.

   [5]Exhibit 5, page 82.

10. The two documents are curiously worded. They are similar in their terms. That involving Ramican is described as “PROMISSORY NOTE – Interest only Loan”. It does not, in fact, record the fact of a loan having been made, rather it records the promise by Ramican, as borrower, to “pay to the order of” Mrs Priestley the principal sum of $83,125 and recites an intention to create an interest only loan agreement but expressly does not create any obligation to do so and leaves to the discretion of Mrs Priestley any decision to make a loan to Ramican. That involving Portofino is described as a “PROMISSORY NOTE – LINE OF CREDIT”. The principal sum is said to be $150,000 “or so much thereof as may be disbursed to, or for the benefit of the Borrower by Lender in Lender’s sole and absolute discretion”. The unpaid principal was to bear simple interest at the same rate as the advertised mortgage rate of a nominated trading bank. Interest was to accrue monthly but was not due and payable until the principal became due and payable, specified as being on 30 June 2011.

11. Also provided were what appear to be calculations of interest. In the case of Ramican, it was said that interest totalling $44,371 accrued between 10 June 2004 and 10 June 2011 on a principal sum of $83,125 said to have been borrowed on 10 June 2004, making a total debt of $127,496. In the case of Portofino, various amounts are shown as having been drawn between 5 December 2005 and 17 December 2010. The principal sum is said to have been $108,076.40 to which interest of $36,072.14 has been added to make a payout of $144,148.54.

12. The package was completed by letters relied on to show the debt was irrecoverable. Thus, by a letter bearing the date 10 June 2011 Mrs Priestley, in her capacity as sole director of Ramican, wrote to herself in these terms:

    Janne

    With regard to the Interest Only land [sic] that is held by Ramican 42 Trust for $83,125 plus accumulated interest.

    As this loan is due today, I need to advise that Ramican 42 Trust is not in a position to repay any of this loan and therefore pursuant to section 2(i) of our agreement, is in default.

    In a document bearing the date 25 June 2011 Mr Priestley wrote to Mrs Priestley saying:

    Janne,

    With regard to the Promissory Note that is held by Portofino Asset Holdings Pty Ltd ATF Youthceutics Trust for $150,000.

    Youthceutics business has experienced a slow down over the past year and is not in a position to make good the final payment by 30^th June 2011.

    As the sole director, I’m inclined to shut the business down.

    The Commissioner wrote on 2 February 2015 seeking further information. None was provided although some, at least, of the documents sought have been provided by Mrs Priestley in support of her present application.

13. In any event, on 23 February 2015, the Commissioner made the objection decision that is the subject matter of these proceedings. He accepted the various adjustments proposed with the exception of the claimed capital losses of $271,645. The penalty assessment remained at 75%, albeit on a lesser amount, and he declined to exercise his discretion to remit that penalty. The Commissioner gave effect to that decision by making an amended assessment, evidenced by a notice dated 3 March 2015.

14. These proceedings were commenced on 24 April 2015.

    The Statute

15. There is no dispute about the operation of Part 3-1 of the Income Tax Assessment Act 1997 (the 1997 Act). That Part deals with capital gains and capital losses. The general rule in s 102-5(1) of the 1997 Act is that assessable income includes the net capital gain for the income year worked out by reference to steps listed in the table to the subsection. The first step requires that capital gains made during the income year be reduced by capital losses made during the year. There is no doubt a capital gain was made and its amount is not in issue so it is unnecessary to examine this provision regarding the calculations of capital gains. Having regard to the way in which Mrs Priestley put her case it is necessary to set out s 104-25 of the 1997 Act. So far as is presently relevant, it provides:

    (1) CGT event C2 happens if your ownership of an intangible * CGT asset ends by the asset:

    (a) being redeemed or cancelled; or

    (b) being released, discharged or satisfied; or

    (c) expiring; or

    (d) being abandoned, surrendered or forfeited; or

    (e) if the asset is an option--being exercised; or

    (f) if the asset is a * convertible interest--being converted.

    (2) The time of the event is:

    (a) when you enter into the contract that results in the asset ending; or

    (b) if there is no contract--when the asset ends.

    (3) You make a capital gain if the * capital proceeds from the ending are more than the asset's * cost base. You make a capital loss if those capital proceeds are less than the asset's * reduced cost base.

16. Not all capital losses may be offset against capital gains. By virtue of s 108-20(1) of the 1997 Act a net capital loss made from a “personal use asset” is disregarded. That expression is explained in s 108-20(2) in this way:

    (2)A personal use asset is:

    (a) a * CGT asset (except a * collectable) that is used or kept mainly for your (or your * associate's) personal use or enjoyment; or

    (b) an option or right to * acquire a * CGT asset of that kind; or

    (c) a debt arising from a * CGT event in which the * CGT asset the subject of the event was one covered by paragraph (a); or

    (d) a debt arising other than:

    (i) in the course of gaining or producing your assessable income; or

    (ii) from your carrying on a * business.

17. Finally, it is necessary to note, but not consider, Division 25 of the 1997 Act. Section 25-35, within that Division, makes deductible bad debts arising in the ordinary course of a business of lending money, however, Mrs Priestley does not contend she was carrying on such a business.

    The arguments of the parties

18. The argument for Mrs Priestley is that the original “loans” were on the capital account, that they were effectively extinguished as being “unrecoverable” on or before 30 June 2011 and that, accordingly, CGT event C2 happened in the 2011 income year. Her case was put on three alternative bases. Firstly, that the debts amounted to intangible CGT assets that “expired” on the dates when, according to the promissory notes, the debts were repayable. Next, that they were intangible CGT assets that were abandoned by Mrs Priestley’s unilateral act of determining that the loans were irrecoverable. Finally, that the debts were intangible CGT assets that were forfeited by virtue of Mrs Priestley executing a deed of settlement and release of the Ramican 42 debt on 21 August 2015 and by virtue of the termination of Youthceutics Trust by deed dated 30 June 2015.

19. Additionally, Mrs Priestley submits that the penalty ought be remitted as the delay in lodging the 2011 tax return was not caused by her.

20. For his part, the Commissioner submits that I would not be satisfied that Mrs Priestley lent money to Ramican and to Portofino in the manner and on the terms she claims and that even if I were to be so satisfied, the debts were personal use assets and the debts continued in existence after June 2011 in any event. And, the Commissioner contends no basis for remission is shown.

    Consideration

21. Mrs Priestley, in my view, has not discharged her onus of showing that the assessment was excessive. I reach that conclusion, despite her evidence and that of Mr Priestley not being directly contradicted, because their evidence is so at odds with contemporaneous documents and so lacking in logic as to make the evidence inherently implausible and unreliable. To understand why that is so I need to look more closely at the evidence.

22. The Ramican Trust was created by deed dated 12 February 2004.[6] Its evident purpose was to be the vehicle to hold a real property investment at Palm Cove, north of Cairns. The property was purchased for $445,000. At settlement, on 23 June 2004, Ramican was required to pay $444,534.63. Of that sum, $356,000 came from a loan to Ramican by the Bank of Queensland. Mrs Priestley says that she provided from her funds, and by way of a loan to Ramican, an amount of $83,125 and a further sum of $40,000. It is the first of these amounts that is in issue in the proceedings. Mrs Priestley has produced the June 2004 bank statement of Ramican’s account with Macquarie Investment Management Limited. It shows a deposit of $40,000 on 10 June 2004 described as “BPay Deposit” and a deposit of $83,125 on 15 June 2004 described as “Topshield Financ SM-Priest”.

    [6]           Annexure 1 to Exhibit 1.

23. In August 2015 the Commissioner lodged his Statement of Facts, Issues and Contentions in which he referred to “inconsistencies” in the material provided by Mrs Priestley including a reference to the description of the $83,125 deposit as “Topshield Financ SM-Priest” and to the apparent shortfall where an amount in excess of $88,000 was required to complete the purchase. Thereafter, Mrs Priestley lodged a reply[7] in which she gave this explanation for those matters:

    a.Top Shield Finance was a company that the Applicant was looking to invest in and had moved funds to for the purpose of that investment. Ultimately the investment did not proceed and the funds were instead used for the deposit on the Palm Cove property. The funds were provided directly from the Applicant's account with Top Shield, therefore the reference to Top Shield in the books;

    b.The second loan appearing on the books as “Loan M & J Priestley” was a line of credit established by the Applicant to offset any shortfall in income from the property needed to meet the holding costs;

    c.The total amount of equity contributed towards the purchase of the Palm Cove Property in accordance with the letter from Bank of Queensland was $88,534.63. The balance settlement proceeds were contributed by the Applicant personally from the line of credit established by her as above;

    [7]Exhibit 2.

24. Mrs Priestley's oral evidence was that the $40,000 was also a loan from her to Ramican alone, evidenced, so she said, by another promissory note,[8] a promissory note which was not “terminated in 2011”. That document was not produced.

    [8]Transcript, page 24, lines 8 – 11.

25. It is next relevant to have regard to the accounts of Ramican that are available. The accounts for the 2004 year, when the loan was claimed to have been made, have not been produced. All that has been produced are the 2011 accounts, prepared by external accountants in May 2012 and signed by Mrs Priestley, as director, on 31 May 2012. Mrs Priestley also produced the 2010 and 2012 accounts, prepared by the same accountants. They are unsigned and bear a date in July 2015. The accounts demonstrate a number of matters that touch upon the existence of a loan from Mrs Priestley to Ramican in the amount of $83,125.

26. First, and most fundamentally, the 2011 accounts, prepared in May 2012 and signed by Mrs Priestley, did not record any loan from Mrs Priestley. What is recorded is a loan described as “M & J Priestley” with the balance of $140,703 as at 30 June 2010 and $164,355 as at 30 June 2011. What also appears in the notes to the accounts is an interest-bearing liability described as “Loan – Top Shield” in the amount of $89,367 as at the 2011 and 2010 balance dates. The liability is described in the same way in the 2010 and 2012 accounts, produced in July 2015, although in the 2012 accounts the amount of the debt is reduced to $83,215. No explanation for the reduction is given.

27. Mrs Priestley’s explanation of this as “a label” is accurate but unhelpful. It is a label presumably applied by Ramican’s accountants. The overwhelming inference is that it was described in this way as a result of information provided to the accountants by Mrs Priestley. Given that Mrs Priestley bears the onus I need not draw that inference; I note however that she suggests no other inference that should be drawn beyond a vague suggestion by Mrs Priestley that she had a “bad accountant”.[9]

    [9]           Transcript, page 31, line 45.

28. Next, the 2011 accounts for Ramican are not consistent with Mrs Priestley’s claim that a debt of $83,125, or one of $127,496 if interest was included, owed by Ramican to her was written off. Had that occurred, a reduction in Ramican’s balance sheet liabilities might have been expected yet they reduced only by a little over $12,000. The only movements in the liabilities shown in the notes to the 2011 account are an increase in the debt owed to M & J Priestley, a minor decrease in the debt owed to the Bank of Queensland and an increase in a negative liability, presumably an asset, constituted by the loan account of Portofino Services Trust.

1. But beyond these matters that tell against the existence of the claimed debt to Mrs Priestley there is the complete absence of any contemporaneous document (beyond the promissory note) that supports the claim. There are no bank statements that demonstrate payments of $83,125 between Mrs Priestley and Top Shield Finance, there is no document that shows how Mrs Priestley paid $88,534.63 of her funds to complete Ramican’s purchase and no documents that support her claim that the sum of $83,125 was an amount that she had intended to invest in Top Shield.

2. There are other aspects of Mrs Priestley’s evidence that left me with a distinctly unfavourable impression of her reliability. Too frequently she would not answer simple questions simply, preferring to argue her case in answering questions. Some of her evidence could be demonstrated to be simply wrong. For example, she said in her Reply to the Commissioner’s Statement of Facts, Issues and Contentions that the failure of her former accountant to release information impacted on her ability to lodge her 2011 tax return,[10] yet on her own case she engaged another accountant in May 2011 and provided him with her tax documentation such that he was able to prepare and lodge the 2010 return by April 2012.[11] It was not until 13 August 2013 that the Commissioner first wrote to her suggesting that she might need to lodge a 2012 return and not until 23 May 2014 that the Commissioner made a default assessment. Her evidence about the letters from the Commissioner was also inconsistent. In her Reply to the Commissioner’s Statement of Facts, Issues and Contentions she “accepts”[12] that the letters had been sent as the Commissioner had alleged but in the course of her cross-examination asserted, seemingly for the first time, that she had not seen those letters.[13]

   [10] Exhibit 2, paragraph [5].

   [11]          Exhibit 3, paragraphs [17] – [18].

   [12] Exhibit 2, paragraph [1].

   [13]          Transcript, page 78, line 24 – page 79, line 8.

3. I am then well short of being satisfied, on the balance of probabilities, that Mrs Priestley made a loan of $83,125 to Ramican.

4. The picture with the claimed loan to Portofino is equally confused. The line of credit was first said to be evidenced by a document dated 26 October 2007 yet, according to the document used by Mrs Priestley to calculate the interest owed, the vast bulk of the money said to be owed was borrowed prior to that date. It was only after the Commissioner’s Statement of Facts, Issues and Contentions pointed out that “inconsistency” that a further promissory note, dated 26 October 2005, emerged. It is curious, but not determinative, that the latter promissory note makes no reference to the earlier one. Given that, at that stage, $95,000 was claimed to have been advanced it seems somewhat unusual that the latter note did not recite the fact or amount of the claimed earlier advances. As the Commissioner’s submissions point out, no mention was made of the 26 October 2005 note in Mrs Priestley’s witness statement or in that of her husband, and it was not referred to in her Statement of Facts, Issues and Contentions or the Reply on the notice of objection.

5. Next, $75,000 of the amounts claimed to have been advanced were drawn from a joint account in the names of Mrs Priestley and Mr Priestley.

6. Mr Priestley has provided the accounts for the Youthceutics Trust for the 2010, 2011 and 2012 years. On the case advanced by Mrs Priestley they should show a liability owed to her, at least in the 2010 accounts. What they show is a balance of $25,008 said to be owed to her as at 30 June 2010 and $176,523 as at 30 June 2009. Neither figure is consistent with the claimed loans which, on Mrs Priestley’s calculations,[14] stood at $110,526 as at 30 June 2010 and $109,500 as at 30 June 2009.

   [14]          Exhibit 5, page 140.

7. Finally, it comes as no surprise to note that the interest calculations on monies claimed to have been lent prior to 26 October 2007 are inconsistent with the terms of the October 2005 note.

8. In the result I am again well short of being satisfied of the existence of the claimed debt.

9. In light of that conclusion I need not deal with the Commissioner’s arguments about the operation of the capital loss provisions.

10. It remains to deal with the issue of penalties. The statute operates to impose a penalty of 75% of the tax-related liability but the penalty may be remitted in whole or part in an appropriate case. I am not satisfied this is such a case. Mrs Priestley was notified by letter of 13 August 2013 of the need to lodge a return and the potential liability to pay a penalty of 75% of the tax assessed if she failed to do so. She was notified again on 4 April 2014. If, as she now says, she was not told of these letters by her agent she may have remedies against the agent however she is responsible for the acts and omissions of her agent. Even if I had been satisfied that aspect of her evidence was reliable, and I am not, that would not have warranted remission.

11. The basis upon which she contends remission is justified is plainly not made out on the evidence. There is no other basis to warrant the exercise of the discretion.

12. It follows that the objection decisions were correct. They will be affirmed.

I certify that the preceding 40 (forty) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC

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Associate

Dated 20 November 2015

Dates of hearing	12 October 2015, 4 November 2015
Solicitors for the Applicant	JHL Lawyers
Counsel for the Respondent	Ms A Wheatley
Solicitors for the Respondent	Australian Taxation Office, Review and Dispute Resolution