Quality Food Production Pty Ltd and Commissioner of Taxation
[2010] AATA 862
•4 November 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 862
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2007/2340; 2007/2341;
TAXATION APPEALS DIVISION ) 2008/4869 and 2009/2021
ReQuality Food Production Pty Ltd
Applicant
And Commissioner of Taxation
Respondent
DECISION
TribunalThe Hon B Tamberlin QC, Deputy President
Date4 November 2010
PlaceSydney
DecisionThe decisions under review are affirmed.
............[sgd]..................................
The Hon B Tamberlin QC
Deputy President
CATCHWORDS
TAXATION – Income Tax – objection to notice of assessment – refusal of commissioner to reduce the assessable income previously declared - accruals based taxpayer - derivation of income – payments contingent on tomato sales – timing of derivation of income - income derived when the debt became due – applicant bears the burden of proof – very limited evidence – applicant failed to show why the assessment was excessive – decision affirmed
TAXATION – Penalties – additional tax imposed – tax avoidance scheme – tax shortfall penalty rate of 50% applied - no reasonable basis – decision affirmed
RELEVANT ACT/S
Income Tax Assessment Act 1936 (Cth)
Taxation Administration Act 1953 (Cth)
CITATIONS
Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314
Case V 38 88 ATC 325
REASONS FOR DECISION
| 4 November 2010 | The Hon B Tamberlin QC, Deputy President |
There are four applications for review under consideration.
The first two matters, namely 2007/2340 and 2007/2341, consist of applications for review of the Commissioner’s objection decisions of 2 April 2007, which disallowed objections to Notices of Assessment issued by the Commissioner for the income years ended 30 June 1998 and 30 June 1999. The notices were issued following an audit of the Applicant which resulted in a denial of allowable deductions in 1998 and 1999 for purported contributions by the Applicant to a “wealth fund”. In this application, the Applicant does not contend that the amounts were allowable deductions, but challenges the additional tax imposed in respect of the 1998 and 1999 notices.
In the third matter number 2008/4869, the Applicant seeks review of an objection decision disallowing an objection to a Notice of Assessment issued for the income year ended 30 June 1998 and contends that the assessable income should be reduced by an amount of $1,337,087 in respect of fees from the amount originally returned in the 1998 income tax return.
In the fourth matter number 2009/2021, the Applicant seeks review of an objection decision disallowing an objection to a notice of assessment for the income year ended 30 June 1999 and contends that the assessable income should be reduced by $16,820,408 from that originally returned.
issues
The issues for decision arise out of Project Deeds for agricultural schemes which are known as the QFP Tomato Project (the Tomato Project), and the QFP Professional Tomato Project 98 (the Professional Project). It is not necessary in these reasons to spell out the detailed history of the schemes but I will briefly describe the substance of them.
the tomato project
Under the Tomato Project Scheme, the participants made an application for an interest in the scheme and were required to pay application fees in respect of an occupation fee, seedling fee, and management fee, for an accrual period ending 30 June 1998. Funds were borrowed by the participants from a financier to the project, Geeset Project Finance Pty Ltd (Geeset).
Under the Project Deed for the accrual period ending 30 June 1998, the management fee was to be paid by the participants to the trustee, a company called Inteq Custodians Limited (which later changed its name to Cardinal Financial Securities Limited). The trustee was then obliged to pay the aggregate of management fees to a manager, Corporate Investment Australia Funds Management Ltd (CIAFM). If certain conditions were met, the management fee for the accrual period ending 30 June 1998 was to be paid by the trustee to the CIAFM in advance and then paid to the Applicant in advance.
Under the arrangements, CIAFM subcontracted management of the participants’ interest to the Applicant as operational manager. For the accrual period ending 30 June 1999 and later years, the Project Deed and an unexecuted management agreement provided for payment of cultivation fees and marketing fees.
the professional project
In relation to the Professional Project, an Information Memorandum indicated that participants would pay management fees, occupation fees, and seedling fees in advance in respect of the accrual period ending 30 June 1999. The Applicant was the Manager. However, no executed copy of a management agreement has been produced in evidence. For the year ended 30 June 1998, the management fee was to be paid by the participants directly to the Applicant. If any participant had a sufficient amount of undistributed income, the accountant would apply that to pay the management fee. If there were insufficient undistributed income, then the Applicant would lend the participants sufficient funds to pay it. The unexecuted document in evidence, attached to the Information Memorandum, suggested that the management fee for the year ended 30 June 1998 would be due on execution of the agreement. The management fee for the year ended 30 June 1999 would be paid on an invoice issued by the manager to the accountant within 14 days after the accountant received the invoice.
the 1998 income year
On 4 May 1999, the Applicant declared as assessable income for the year ended 30 June 1998, an amount of $14,097,819. On 1 May 2002, the Australian Taxation Office (ATO) sent a notice of intention to the Applicant to audit its affairs. On 21 December 2002, the Applicant attempted to lodge an amended income tax return for the 1998 income year, seeking to reverse deductions previously claimed in respect of alleged contributions to the welfare fund and also seeking to reduce the assessable income previously declared in an amount of $1,337,087. This “amended” income tax return was not processed by the ATO because the Applicant did not provide any satisfactory information to support the amendment request and the audit of the original returns was still continuing.
The issue in relation to this matter is whether the claimed reduction of $1,337,087 be allowed. This is only a portion of the management fees in the 1998 year, but the Applicant has given no explanation as to how it was calculated or why it was not assessable.
the 1999 income year
The Applicant’s financial statements for the year ended 30 June 1999, disclosed that operating revenue was $21,703,247. On 30 November 1999, the Applicant declared assessable income for the year ended 30 June 1999 of $21,723,577. Following receipt by the Applicant of the letter from the ATO expressing its intention to audit, on 21 December 2002 the Applicant attempted to lodge an “amended” income tax return for the 1999 income year with a reduction in assessable income of $16,820,408. This amended return was not processed for the same reasons the earlier return was not processed.
The Applicant’s submissions
In substance, the Applicant submits that the amounts of the claimed reductions should not have been included in assessable income because they were payments contingent on tomato sales and the income had not been derived at the relevant time. The Applicant says that management fees were conditional obligations to be settled principally via conditional promises relating to the repayment only after the proceeds from the sale of crops were available. The Applicant has not produced any documentation and, in particular, no promissory notes or any other material expressing any condition in respect of the payment of fees in the 1998 and 1999 years. Notwithstanding this failure, it seeks to rely on alleged precise wording in such documentation to make out its case.
In substance, the Applicant’s submission as to the payment being contingent under the agreement and under the conditional promissory notes referred to, in effect asserts that the Applicant should be treated as a cash based taxpayer for the amount of money received when, in fact, it was operating on an accruals basis.
the Commissioner’s submissions
The Commissioner emphasises that the Applicant was an accruals-based taxpayer for income tax purposes and as such, management fees and similar income was derived when debts became due to it even though they had not in fact been paid. Management fee income, for example, was “derived” by the Applicant when a recoverable debt arose and, at such time, the fees were required to be included in assessable income.
Under the documentation provided in relation to the Tomato Project, the Applicant derived fees at the time when the fees were released by the trustee to CIAFM. Once the monies were received, the Applicant had to carry out the services, which the Applicant confirmed that it did. This position also applied in relation to the QFP Professional Tomato Project 1998. It is to be noted that the Applicant did not tender any relevant useful evidence about the Professional Project.
To the extent that the Applicant received payment of any management fees in advance of performance of services, then such fees were derived by the Applicant as an accruals-based taxpayer when the services were performed: see Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314 at 319. Such fees were earned during the course of the income year in which the services were performed. There is no dispute that the services were performed at the relevant time.
The Commissioner points out that under s 14ZZK of the Taxation Administration Act 1953 (Cth) (the TAA), the Applicant has the burden of proving that the Notices of Assessment of income tax are excessive. The evidence adduced for the taxpayer does not provide a reasonable explanation of why the assessment is excessive. Therefore, the assessment must apply. The taxpayer must show that the amount of money for which the tax levied by the Notice of Assessment exceeds the actual substantive liability. It has not done so. The Commissioner also points out that in this case, any arrangements in relation to management fees or for satisfaction of expenditure qualifying conditions or for release of fees and payment of invoices in respect of management fees and the calculations relating to the figures appearing in the financial statements are peculiarly within the knowledge of the Applicant. Nevertheless, the Applicant has failed to explain or evidence these matters in any satisfactory way.
The Applicant has not filed any witness statements in the proceedings from the accountant or tax agent, but some assertions were handed up by Mr O’Halloran in the form of a statement by Mr Brian Cook, a director. Many of the documents filed in this proceeding have not been authenticated and consist of large numbers of unexplained and unlinked printouts of what appear to be accounting records, which simply amount to assertions of “what was done by unknown hands at unknown times, working under the direction of persons unknown in accordance with unknown criteria”: see Case V 38 88 ATC 325 at 333-334. They provide no satisfactory evidentiary basis to meet the burden of proof on the Applicant.
conclusion in relation to income reductions
The Applicant has not satisfied the Tribunal that the reductions claimed in fees have been justified and it is noted that the so-called reductions are only a portion of management fees in each of the 1998 and 1999 income years. There is still no satisfactory basis for the claims.
The conditional promissory notes or documents said to evidence the conditional nature of the income have not been produced or substantiated. Neither have any documents between the participants and the financier to the project been produced which have the effect of reducing what was, on the face of the invoices, owed by the participants to the Applicant. The Applicant has failed to connect the documents or authenticate them so as to show how the documents operated in the relevant years in relation to management fees in respect of the projects.
Accordingly, I am satisfied that the Applicant has not discharged its burden of proof to substantiate the claims for reduction or in establishing a figure for its substantive liability for tax in the relevant years. No loan agreements were produced in evidence, which would alter the derivation of management fee income under the management agreement and project deed. Nor is there any evidence of any variation of a participant’s obligation to pay management fees to the Applicant.
penalties
In the proceedings 2007/2340 and 2007/2341, the imposition and refusal to remit additional tax is the relevant issue. The tax was imposed on the basis that there was a tax shortfall within the meaning of s 222A of Income Tax Assessment Act 1936 (Cth) (the ITAA) for each of the 1998 and 1999 income years. This shortfall was caused by purported contributions to a welfare fund, which was found to be a tax avoidance scheme within the meaning of Part IVA. No evidence was led by the Applicant in this case as to any other purpose. The evidence supports the conclusion that the sole or dominant purpose was to enable the Applicant to avoid income tax. The relevant evidence was particularly within the knowledge of directors of the Applicant at the relevant time and no satisfactory evidence was given by any director other than some limited general assertions by Mr Cook. Mr Cook did not give any satisfactory explanation although it was open to him to do so.
I am satisfied that the penalty rate of 50 percent is applicable on the ground that it is not reasonably arguable that the deduction claimed had any reasonably arguable basis: s 226L of the ITAA. No submissions have been advanced as to how the Applicant’s claim for a deduction was deductible, or why Part IVA would not apply. Nor has any evidence been led as to any authorities consulted or advice taken at the time to justify the deductions.
In particular, the Applicant seeks to rely on the fact that it sought to amend its 1998 and 1999 income tax returns after an audit had been commenced. Notice that the audit was to take place was given in May 2002, which indicated that when objections were determined as a result of the audit the Commissioner may, where appropriate, raise alternative assessments to cover possible alternative taxation breaches or liabilities. This reference clearly put the Applicant on notice. The so-called amended returns were accompanied by a one-paragraph covering letter and there was no explanatory statement or relevant material facts sufficient to allow the Commissioner to make the reduction sought of the initial assessment.
Nothing has been advanced in evidence or argument to support or justify any conclusion that it was reasonably arguable that Part IVA did not apply in respect of the two relevant income years. Accordingly, for the above reasons the application in respect of penalties is dismissed.
conclusion
For the above reasons, all four applications for review in these matters are dismissed. The correct and preferable decision in each case is that the decisions of the Commissioner, the subject of these four applications, are affirmed.
I certify that the 27 preceding paragraphs are a true copy of the reasons for the decision herein of the Hon B Tamberlin QC, Deputy President
Signed: ........[sgd]...............................................................
Alison Connor, Associate
Date/s of Hearing: 7, 9 June 2010
Date of Decision: 4 November 2010Applicant representative: Barton Steele Management Services Pty Ltd and Mr Brian Cook
Respondent representative: Australian Taxation Office Legal Services Branch
Respondent counsel: Ms Michelle Hirschhorn
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