Re Bayconnection Property Developments Pty Ltd and Commissioner of Taxation
[2013] AATA 40
•29 January 2013
[2013] AATA 40
Division TAXATION APPEALS DIVISION File Number
2011/1678
Re
Bayconnection Property Developments Pty Ltd
FIRST APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Number
2011/1684
Re
Catarina Gardens Pty Ltd
SECOND APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Number
2011/5084
Re
Voca Pty Ltd
THIRD APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Number
2011/5089
Re
Mira Investments Pty Ltd
FOURTH APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Number
2011/1679
Re
Caporale Builders Corporation Sydney Pty Ltd
FIFTH APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Senior Member G LazanasDate 29 January 2013 Place Sydney In each matter the objection decision is affirmed.
..................[SGD]....................
Senior Member G Lazanas
Catchwords
TAXATION – GST – input tax credits – creditable acquisitions – enterprise – carrying on an enterprise – penalty – intentional disregard of the law – penalty uplifted by 20% - objection decisions affirmed
Legislation
A New Tax System (Goods and Services Tax) Act
1999 ss 7-1; 9-5; 11-5; 11-15; 11-25;
9-20; 195-1; 23-10; 25-55(2); 29-10(3); 29-70(1); 29‑10(3)Taxation Administration Act
1953 s 14ZZK; Schedule 1 ss 284-75; 284-80; 285-90;
284-220; 298-20A New Tax System (Goods and Services Tax) Regulations1999 reg 29-70.01(2)
Cases
Huynh & Nguyen and Commissioner of Taxation [2008] AATA 305; (2008) ATC 10-020
Secondary Materials
A New Tax System (Goods and Services Tax) Act 1999 Waiver of Tax Invoice Requirement Determination (No.1) 2004 – Decision of a Court or Tribunal
REASONS FOR DECISION
Deputy President S E Frost
Senior Member G Lazanas29 January 2013
INTRODUCTION
These applications relate to input tax credit (ITC) claims made by each of the applicants over tax periods ranging from February 2005 to January 2009. The Commissioner considered that the applicants were not entitled to the ITCs they had claimed. He made assessments so as to recover the refunds that had been paid to the applicants. The applicants objected to the assessments but the objections were disallowed.
The question for the Tribunal is whether the objection decisions are correct. We have concluded that they are.
It is clear that none of the applicants were carrying on an enterprise – even taking into account the extended statutory definition of “carrying on” an enterprise that includes “doing anything in the course of the commencement or termination of the enterprise”. If the applicants made any acquisitions at all (and even this is doubtful), they did not make any creditable acquisitions because they did not acquire anything in carrying on an enterprise. Consequently, the ITC claims are entirely without foundation.
In relation to the imposition of administrative penalties, the Commissioner determined that the behaviour of the five applicants involved intentional disregard of the taxation laws and that penalties of 75%, increased by 20%, were properly imposed under the taxation administration laws. Further, the Commissioner decided that there were no circumstances warranting remission of penalties. For the reasons set out below, we concur with all of the Commissioner’s decisions with respect to penalties.
THE ISSUES BEFORE THE TRIBUNAL
The essential issue is whether the applicants are entitled to the ITCs they claimed. That depends on whether they made “creditable acquisitions” for the purposes of the A New Tax System (Goods and Services Tax) Act1999 (GST Act). That, in turn, depends on whether the applicants have each been “carrying on” an “enterprise” for the purposes of the GST Act.
The issues with respect to penalties concern both the imposition and the remission aspects arising under the Taxation Administration Act 1953 (TAA).
THE LEGISLATION
It is necessary to set out some “central provisions” of the GST Act before addressing the legislative provisions that are specifically raised by the issues in this case. They are as follows but, for simplicity, we have omitted the notes:
7-1 GST and input tax credits
(1)GST is payable on *taxable supplies and *taxable importations.
(2)Entitlements to input tax credits arise on *creditable acquisitions and *creditable importations.
As will be noted, s 7-1 refers to “taxable supplies” and “creditable acquisitions”, which are defined in s 9-5 and s 11-5 respectively.
Section 9-5 provides:
9-5 Taxable supplies
You make a taxable supply if:
(a) you make the supply for *consideration; and
(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and
(c) the supply is *connected with Australia; and
(d) you are *registered, or *required to be registered.
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.
Section 11-5 provides:
11-5 What is a creditable acquisition?
You 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; and
(c) you provide, or are liable to provide, *consideration for the supply; and
(d) you are *registered, or *required to be registered.
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.
The amount of input tax credit that is allowable in respect of a creditable acquisition is given by s 11-25 as follows (again, for simplicity without the note):
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.
The other important provision we must note is s 9-20, which defines the concept of “enterprise”. The relevant paragraph states:
9-20 Enterprises
(1) An enterprise is an activity, or series of activities, done:
(a) in the form of a *business; …
The word “business” is defined in s 195-1 as including “… any profession, trade, employment, vocation or calling, but does not include an occupation as an employee”.
Further, “carrying on” an enterprise is defined in s 195-1 to include “doing anything in the course of the commencement or termination of the enterprise”.
The provisions relevant to GST registration and cancellation of GST registration are also important to the issues. Relevantly, s 23-10 provides that an entity may be registered under the GST Act if it is carrying on an enterprise or if it intends to carry on an enterprise from a particular date. Subsection 25-55(2) provides that the Commissioner must cancel an entity’s GST registration if the Commissioner is satisfied that the entity is not carrying on an enterprise and the Commissioner believes on reasonable grounds that the entity is not likely to carry on an enterprise for at least 12 months.
In addition, we refer to the following provisions of the GST Act and the A New Tax System (Goods and Services Tax) Regulations1999 (GST Regulations), in their form prior to legislative amendments in 2010 with respect to tax invoices. Relevantly,
s 29-70(1) of the GST Act formerly provided that a tax invoice for a taxable supply must contain “such other information as the regulations specify …”. Regulation 29-70.01(2) provided that “if the total amount, including GST, payable for the supply or supplies to which the tax invoice relates is $1,000 or more, the tax invoice must contain the following information: ... (f) a brief description of each thing supplied.” In other words, to be a valid tax invoice, something must have been supplied.
Another provision that is closely related to tax invoices and that is relevant to an understanding of the attribution of ITCs is s 29-10(3) of the GST Act which provides as follows:
29‑10 Attributing the input tax credits for your creditable acquisitions
…
(3)If you do not hold a *tax invoice for a *creditable acquisition when you give to the Commissioner a *GST return for the tax period to which the input tax credit (or any part of the input tax credit) on the acquisition would otherwise be attributable:
(a) the input tax credit (including any part of the input tax credit) is not attributable to that tax period; and
(b) the input tax credit (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice.
However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply.
THE BROAD BACKGROUND
Each of the applicants in these matters became registered for GST purposes in the years 2003 to 2006. Each of them lodged business activity statements (BASs) in which they claimed ITCs. The ITCs that are in dispute are for the tax periods ranging from February 2005 to January 2009 (the relevant period). The ITC claims relate to acquisitions that the applicants say they made in carrying on their enterprise. The first, second, third and fourth applicants (for convenience referred to as the first four applicants) claim to have made those acquisitions from a related company, Caporale Designs Pty Ltd (Caporale Designs). The fifth applicant, Caporale Builders Corporation Sydney Pty Ltd (Caporale Builders), bases its ITC claims on acquisitions it purports to have made from third party, arm’s length suppliers. None of the first four applicants made any taxable supplies (or, in fact, any supplies at all) in the relevant period. The fifth applicant purported to have made some minor taxable supplies.
The five applicants (and several other companies besides) are owned by one or more members of the Caporale family. The family comprises Giacomo and Domenica Caporale, and their children Rosa, Giuseppe and Tommaso. For most of his working life, Giacomo, who is now in his seventies, was a motor mechanic. He ran a business in partnership with Domenica. Rosa, their eldest child, has two degrees in architecture and a builder’s licence. Giuseppe is a structural engineer, and Tommaso studied architecture, like his sister.
Over the last decade or so, the members of the Caporale family have controlled companies that have been involved in property development and construction activities. They undertook a major commercial/retail/residential development in Hurstville in the early 2000s and they developed an aged care facility in Gymea from about 2004. Given this previous experience, the Caporales could hardly be regarded as strangers to the GST system or its requirements. This is particularly the case with Rosa, who apparently takes on responsibility for the GST reporting for any companies operated by the family.
In the course of the earlier developments, the Caporales found that it was difficult to get enough tradesmen to do the work that needed to be done. One of the main reasons, they thought, was a shortage of apprentices. This was a result of subcontractors’ unwillingness, given the uncertainty in work flows, to commit to taking on apprentices for a four-year qualification period in circumstances where they could not be sure that they could keep them busy.
THE EMPLOYMENT & TEACHING CENTRE CONCEPT
Rosa Caporale thought she had the answer to the problem. What was needed was a new model for vocational training – a training institution that could offer not only the theoretical training, but also the practical training necessary for the students to obtain their trade qualification.
She needed a location. First, she fixed upon a site in Helensburgh, but eventually she decided on Dapto, in the Illawarra region. It made sense to go to the Illawarra, an area where youth unemployment and welfare dependency were higher than average. The NSW Government was looking at initiatives for the Illawarra, and this one – a TAFE-style institution that also provided on-site employment for the students – might be just the type of idea to appeal to the authorities. The students, instead of having to go out and find an employer to provide the practical training, would get the practical training on-site. The institution, to be known as the Illawarra Employment & Teaching Centre, or IETC, would also offer residential facilities, a common enough arrangement for universities but something of a breakthrough at the vocational level and, in Ms Caporale’s terms, a “unique” offering.
The vision was clear enough – acquire the land, attract the students, construct the buildings, establish companies (up to 100 of them, perhaps more) to operate the different “disciplines” (for example, plumbing, electrical, agriculture, hospitality, etc) to be offered by the teaching centre, and eventually, if it all came together, sell the companies – by then, they would be operating profitably – to third parties. The sequence of those activities may seem unusual, with the students coming before the infrastructure, but that was part of the overall design. The students could be involved in the construction and development as well and, in that way, they could gain some of their practical experience.
Consultants were engaged to scope the project, report on environmental factors and make representations to government bodies, including the lodgement of the concept plan with the NSW Department of Planning in January 2011. The entity that was in fact the “proponent” of the IETC project was Connectland Pty Ltd (Connectland). It co-ordinated the consultants, at least in the period up to about October 2011, when it was placed into liquidation. Ms Caporale was a director and shareholder of Connectland.
Another entity that is relevant to the background of the IETC project and that was controlled by the Caporale family is Sappia Investments Pty Ltd (Sappia Investments). In or about March 2008, Sappia Investments entered into a contract to purchase the land at Bong Bong Road, Dapto where the IETC development will, if it proceeds, take place. However, it emerged at the hearing, that that sale contract had not completed and that another contract was entered into for the purchase of the property. A copy of the latter contract dated 9 August 2012 and showing the purchaser as “Rosa Caporale, Giuseppe Caporale and Tommaso Caporale as trustees for RGT Trust” was provided to the Tribunal[1]. The contract states that the completion date is 13 June 2013. It also states that there are no improvements on the land and that vacant possession will be provided by the vendor.
[1] Exhibit A13, Volume 1
A further entity that is critical to the issues before the Tribunal is Caporale Designs. Ms Caporale was a director and shareholder of Caporale Designs. It was placed into liquidation in or about May 2009[2] and, at that time, the Commissioner had a proof of debt for an amount in excess of $3,600,000 representing GST and other tax-related liabilities. It is significant to note that most of the GST liability was due to the taxable supplies that Caporale Designs purported to have made to the first four applicants (amongst many other companies of the Caporales) and, further, that it is in respect of those alleged taxable supplies that the first four applicants seek to claim the ITCs, the subject of these proceedings.
[2] Transcript 23 August 2012 P-26
One of the contentions that Ms Caporale repeatedly put to the Tribunal in both written and oral submissions was that as the Commissioner had already included the GST liability in the debt owed by Caporale Designs, the Commissioner “therefore cannot double dip and charge twice for the same debt to two companies”[3]. We will deal with this contention below.
[3] Applicant’s Supplementary Statement of Facts Issues and Contentions dated 27 February 2012 re Bayconnection, paragraph 9; see also Transcript 22 August 2012 P-47 and Transcript 23 August 2012 P-38
The role of the first four applicants in the IETC project, and the separate function of Caporale Builders which was unrelated to the IETC project, were addressed by Ms Caporale at the hearing and it is appropriate, therefore, to tell Ms Caporale’s story. However, before doing so, it is helpful to set out some of the factual background specific to each of the applicants, including the fifth applicant, which is not controversial in these proceedings.
THE FIRST APPLICANT
Bayconnection Property Developments Pty Ltd (Bayconnection), the first applicant, became registered for GST with effect from 24 February 2003. The GST registration was cancelled by the Commissioner on 31 May 2006 on the basis that Bayconnection was not carrying on an enterprise.
The Commissioner issued Bayconnection with a notice of assessment of net amount dated 16 December 2008 for the monthly tax periods February 2005 to May 2006 resulting in a total GST shortfall of $50,750. This amount represented ITC claims that Bayconnection had made in its BASs. A notice of assessment of penalty dated 24 March 2010 issued for $45,643.95 being an administrative penalty based on 75% of the tax shortfall, increased by 20% due to, amongst other things, prior penalty history.
Bayconnection objected to the notices of assessment of net amount and penalty on 17 April 2010. The Commissioner reissued the notices of assessment and liability to pay penalty on 14 May 2010. The Commissioner then issued a notice of objection decision dated 1 March 2011 apparently treating the objection that had been previously lodged as an objection to the later assessment. Bayconnection applied to the Tribunal for review of the Commissioner’s objection decision on 5 May 2011.
THE SECOND APPLICANT
Catarina Gardens Pty Ltd (Catarina Gardens), the second applicant, became registered for GST with effect from 17 July 2006. The GST registration was cancelled by the Commissioner on 1 February 2009 on the basis that Catarina Gardens was not carrying on an enterprise.
The Commissioner issued Catarina Gardens with a notice of assessment of net amount dated 5 March 2009 for the monthly tax periods July 2006 to June 2008 resulting in a total GST shortfall of $72,327. We note that the Commissioner assessed Catarina Gardens for “overstated acquisitions” for the monthly tax periods July 2006 to April 2007 and for “understated supplies” in respect of the monthly tax periods August 2007 to June 2008. It was also issued with a notice of assessment of penalty dated 5 March 2009 on the basis of an administrative penalty of 75% of the tax shortfall, increased by 20%.
Catarina Gardens objected to the notices of assessment of net amount and penalty on 7 February 2009 and the Commissioner issued a notice of objection decision dated 1 March 2011 disallowing the objection with respect to the “overstated acquisitions” but allowing the objection with respect to the “understated supplies” (the Commissioner accepted that certain deposits in the bank account were not in respect of taxable supplies). Catarina Gardens applied to the Tribunal for review of the Commissioner’s objection decision on 5 May 2011 with respect to the “overstated acquisitions” and issues relating to claims for ITCs.
THE THIRD AND FOURTH APPLICANTS
Voca Pty Ltd (Voca) and Mira Investments Pty Ltd (Mira), the third and fourth applicants, became registered for GST with effect from 11 December 2006. The GST registrations were both cancelled by the Commissioner on 1 February 2009 on the basis that Voca and Mira were not carrying on an enterprise.
The Commissioner issued Voca with a “notice of amended assessment of net amount” dated 16 March 2010 for the monthly tax periods October 2008 to January 2009 resulting in a total GST shortfall of $125,912. The Commissioner issued Mira with a “notice of amended assessment of net amount” dated 16 March 2010 for the monthly tax periods November 2008 to January 2009 resulting in a total GST shortfall of $112,682. Replacement notices of assessment were issued on 1 April 2010 to Voca and Mira for reasons that are irrelevant to the present proceedings. The amounts assessed in each case represent ITC claims that Voca and Mira had claimed from the Commissioner. Voca and Mira were also issued with notices of assessment of penalty dated 16 March 2010 on the basis of an administrative penalty of 75% of the tax shortfall, increased by 20%.
Voca and Mira objected to the notices of assessment of net amount and penalty on
11 April 2010 and the Commissioner issued notices of objection decisions dated 28 April 2010. Voca and Mira each applied to the Tribunal for review of the Commissioner’s objection decisions on 28 November 2011.
THE FIFTH APPLICANT
The fifth applicant in these proceedings is Caporale Builders. It became registered for GST with effect from 12 November 2004. The GST registration was cancelled by the Commissioner on 30 November 2006 on the basis that it was not carrying on an enterprise.
The Commissioner issued Caporale Builders with a notice of assessment of net amount dated 15 December 2008 for the monthly tax periods February 2005 to November 2006 resulting in a total GST shortfall of $37,018. The amount assessed represents ITC claims that Caporale Builders had made. Caporale Builders was also issued with a notice of assessment of penalty dated 15 December 2008 on the basis of an administrative penalty of 75% of the tax shortfall, increased by 20%.
Caporale Builders objected to the notices of assessment of net amount and penalty on
7 February 2009 and the Commissioner issued a notice of objection decision dated
1 March 2011. Caporale Builders applied to the Tribunal for review of the Commissioner’s objection decision on 5 May 2011.
THE GST ACCOUNTING OF THE APPLICANTS
Bayconnection and Caporale Builders accounted for GST on a cash basis, whereas Catarina Gardens, Voca and Mira did not.
THE EVIDENCE OF MS CAPORALE
Ms Caporale is the director and shareholder of some but not all of the applicants. She gave evidence and represented all of the applicants in these proceedings and, as emerged from the conduct of the hearing, is the protagonist with respect to the tax affairs of the applicants. None of the applicants have any employees.
It is worth noting at the outset that there was substantial documentary evidence that was tendered by Ms Caporale (more than eleven folders) but much of this was irrelevant. On the other hand, documents that we would have expected to see to support the applicants’ contentions were simply unavailable. There were no business records other than BASs and bank statements. Some but not all of the applicants had “tax invoices” that had been issued to them and only one applicant (Bayconnection) had lodged income tax returns covering the tax periods in question but even then the returns were unhelpful as they reported no income and no expenses.
The IETC project
Ms Caporale explained that Connectland was the initial proponent of the IETC project and that later, after it was put into liquidation, the proponent became “the IETC” which is actually a trading name registered in the name of Ms Caporale. Ms Caporale further explained that Connectland co-ordinated the specialist consultants that were retained to prepare documents for the IETC project. Many of the reports and assessments that were in evidence were addressed to Connectland and also referred to it as the company that “proposes to develop a $700 million Illawarra Employment & Teaching Centre ... in Dapto”[4] and as “the company established to operate the proposed Illawarra Teaching Centre”[5]. The receipt that was issued by the NSW Department of Planning in April 2011 for the application fee paid with respect to the concept plan was also addressed to Connectland.[6] Although the role of Connectland was not precisely clear to us, it was, on any view, a key company involved in the proposed development of the IETC project.
[4] Exhibit A1, Volume 3 Tab 54 and Volume 4 Tab 58
[5] Exhibit A1, Volume 1 Tab 28 and Volume 1 Tab 26
[6] Exhibit A13, Volume 1
Sappia Investments, the company that had contracted to purchase the property at Dapto, was also a key entity. In one of the documents in evidence, namely, a notice to give security issued by the Commissioner on 1 July 2010 to Sappia Investments, the Commissioner refers to the fact that Ms Caporale “told the Commissioner that Sappia Investments intends to construct 400 residential units on that property, and that 100 of those units have already been sold off the plan”.[7]
[7] Exhibit A13, Volume 2
On the other hand, there is little, if any, evidence of the roles played by the first four applicants in the establishment of the IETC project (or any part of it) which might suggest the carrying on of an enterprise for the purposes of the GST Act. Ms Caporale explained that the first, second, third and fourth applicants were shelf companies that were acquired by the Caporales to establish the businesses that would form part of the IETC project. According to Ms Caporale’s affidavit affirmed on 6 October 2011:
The project is designed to create and build a cluster of small businesses and a multi disciplined educational and training institution for some 3,500 students co-located on the one site comprising a number of training and educational facilities and businesses together with on site student and staff accommodation catering predominantly for apprentices and trainees both from Australia and overseas[8]
[8] Exhibit A1, Affidavit of Rosa Caporale paragraph 6
…
The above 11 companies are among some 100 companies that have been set up and will be set up to form part of the cluster of small businesses on site at IETC, and are part of the overall educational model. Each of the entities forms one of the cluster of small businesses on site at IETC[9]
[9] Exhibit A1, Affidavit of Rosa Caporale paragraph 16
…
The first set of businesses in the project to anticipate making sales through the IETC model are as follows with future companies to be advised:
Business/ Training Facility Description
Company Name
…
Agriculture
Bayconnections Property Developments Pty Ltd (sic)
…
Hospitality
Catarina Gardens Pty Ltd
…
Landscaping
TBA
Plasterboard
TBA
…
[10]
The costs incurred are as a result of the planning, development and establishment and set up costs of each business.[11]
[10] Exhibit A1, Affidavit of Rosa Caporale paragraph 17
[11] Exhibit A1, Affidavit of Rosa Caporale paragraph 20
We note that the table reproduced above is only part of the table included in the affidavit of Ms Caporale. In the version set out in the affidavit there was a total of 117 businesses identified and 10 company names listed, with the balance of 107 denoted as “TBA” which we understand to mean “to be advised”.
The reference to the “above 11 companies” in Ms Caporale’s affidavit is a reference to the companies that were initially involved in proceedings in the Tribunal (including Bayconnection, Catarina Gardens and Caporale Builders; the other companies have had their applications for review dismissed). We were later told by Ms Caporale, and find, that Caporale Builders had nothing to do with the IETC project. We deal with the circumstances of Caporale Builders separately below.
As noted from the table above, Bayconnection was allocated the agriculture business and Catarina Gardens was allocated the hospitality business. Curiously, Voca and Mira were not included in the table forming part of Ms Caporale’s affidavit although they had been claiming ITCs for some years by that stage and, as eventually became clear, Voca was allocated the landscaping business and Mira was allocated the plasterboard business.
With regard to the concept of “allocating” specified businesses to specified companies, Ms Caporale explained that the first four applicants (and many other companies) will be responsible for small businesses that will form part of the IETC project that will have a particular discipline and training focus. These businesses will service the development and, in addition, students will also be employed and trained at these businesses in that particular subject. For example, in relation to the agriculture business that Bayconnection was allocated, Ms Caporale indicated that it was proposed that vegetables would be grown on the Dapto property by students who would be both employed and trained in agriculture by Bayconnection. We gleaned from Ms Caporale’s evidence that the anticipated sales to be made by the businesses would be the products and services in the particular disciplines, for example, Bayconnection would make sales of crops.
Ms Caporale stated that the first four applicants needed to have all of the infrastructure and agreements in place before commencing the training and business activities.[12] The type of work that had to happen, according to Ms Caporale, to get the first four applicants to that point, was liaison with different government departments and making agreements for the enrolment of students. One of the arrangements which had been negotiated with respect to enrolments of students was between the IETC and the Manuel Training Academy in South Africa for 460 students per annum for 30 years starting from the date of the agreement being 9 September 2011, although the document produced to the Tribunal appeared somewhat vague in its terms, for example, with respect to the fees and is probably unenforceable.[13] The only other arrangement was with the Republic of Timor-Leste, and the terms of that unsigned agreement were also very sketchy.[14]
[12] Transcript 23 August 2012 P-80
[13] Exhibit A13, Volume 2 and Transcript 23 August 2012 P-24
[14] Exhibit A13, Volume 2
Under cross-examination by the Commissioner’s counsel, Ms Caporale revealed the following about the first four applicants:
MR O’BRIEN: Now in regard to those four entities it’s a situation isn’t it that you’ve provided no records of any work that Caporale Designs has done for those individual companies except for the invoices you’ve sent them?
MS CAPORALE: That is the record, it’s for services rendered.
MR O’BRIEN: Yes but you’ve provided no records other than invoices of the work that Caporale Designs did for which the invoices were rendered?
MS CAPORALE: Well, that’s typically what invoice type you would get and we went through this with Mr Jamie Coravelan, that is what the format would be when you issue an invoice out for consultancy type work.
MR O’BRIEN: I know, but you’ve provided no evidence other than the invoice of what exactly was the work that Caporale Designs did in respect of the amount rendered in that invoice?
MS CAPORALE: Other than the work was in relation to the type of business that was going to be undertaken by that.
MR O’BRIEN: Well, you’ve produced – I will come back to that. You have produced no records of the company as to any activities the companies themselves have carried on?
MS CAPORALE: They haven’t carried on anything. They’re not up to that point.
MR O’BRIEN: Well, that’s right?
MS CAPORALE: When I say not carried on
MR O’BRIEN: You’ve produced no records of any activities they themselves are doing in their own name in respect of the businesses that you have allocated to them?
MS CAPORALE: But that’s not the stage, they are not up to carrying business on their own yet.[15]
…
MR O’BRIEN: You’ve merely formulated a structure in which you’ve inserted these companies?
MS CAPORALE: That’s what you do, Mr O’Brien, when you start.
MR O’BRIEN: But they’re not doing anything at the moment?
MS CAPORALE: They’re not supposed to. It’s like a development. Are you trying to tell me that at the moment the whole of the development, I’ve got to do something, it’s all in process? When you finally see the effect of that is the sales of that coming in, it didn’t happen from day one. ...
[15] Transcript 23 August 2012 P-57 lines 1-25
Ms Caporale was provided with an opportunity by the Tribunal to explain what she meant by her statements and it is, therefore, helpful to also set out the following exchange:
THE D.PRESIDENT: Mr O’Brien put to you a moment ago that these companies weren’t doing anything and I think your response to him was, “They don’t have to,” is that right? I think that’s what you said, isn’t it?
MS CAPORALE: Well, I’m hoping I’m explaining this. My understanding is they don’t physically have to.
THE D.PRESIDENT: I think that’s what you said, isn’t it?
MS CAPORALE: Yes, they don’t physically have to be doing something.
THE D.PRESIDENT: I think that’s what you said, isn’t it?
MS CAPORALE: Yes.
THE D.PRESIDENT: Right and now what explanation do you want to give for that answer?
MS CAPORALE: What I’m saying is, my – my understanding of what the ATO thinks that a real enterprise is, is when it has lots of transactions going in and out day to day. There might be, you know, sales or, you know, obviously the purchase and the sales happen on a daily or weekly basis. Now, in a development or long term when you establish things like this or just liken it to a mine, I suppose. Now it takes 10 years before that thing actually effects and the first bulldozer is on that site when it actually starts pulling out that first truckload of coal and it then issues out its first invoice. Now, I’m sure that there is no way you can say that, for the last 10 years in a mine, that something – there was nothing being carried on. It wasn’t being carried on in the definition that the ATO is trying to put it. I’m saying there are different definitions and I’m pretty sure it’s in their own definition is that we’re not talking about one that is carried out on a day to day – it could be likened to the development itself. Now, you could say, when you look at that at the moment, there doesn’t appear to be anything happening. Yes, I suppose that could be the way it’s viewed, but it’s with the intention that all of this back planning, I suppose if you want to call it, all this establishment, all the time to put up all the organisations to finally effect, say, the students coming in where they are undertaking the landscaping course or the other courses that we’ve got, finally happen. There is a whole trail of things, activities, that had to happen. Someone has had to spend the time coordinating, putting those together, all the – all the organisations that I’ve gotten letters from, all of those things, finally culminate in what the ATO would deem
THE D.PRESIDENT: Who is it that’s been doing that work?
MS CAPORALE: Myself and Joe and Tom and also other parties, like Mrs Gartrell, she’s been actively involved in this for quite a few years now.
THE D.PRESIDENT: Right and when you say that you and your brothers have been doing some of that work, do you say that you’re doing it – that you’ve been doing it, each of you, in your own right?
MS CAPORALE: Well, at the moment
THE D.PRESIDENT: In other words as you personally doing the work?
MS CAPORALE: We have – personally we haven’t invoiced anyone personally. At the beginning we did it through Caporale Designs. So we were doing it on behalf of Caporale Designs on behalf of the company. So essentially for the best part of the time until the ATO basically liquidated the company, that was the formal pathway we were taking because we felt that was the best pathway to go. So that was supposed to be the entity undertaking all the consultancy work, yes, Joe, Tom and I would work on behalf of the company. Eventually we would be paid back by the company, but that’s how the structure was originally set up.
THE D.PRESIDENT: Be paid back by which company?
MS CAPORALE: Well, it would have been by Caporale Designs.
THE D.PRESIDENT: Caporale Designs would be flat out paying you back, wouldn’t it? It had a $3.6 million debt to the tax office before it was going to go anywhere near paying you?
MS CAPORALE: Well, we, as I said, even to this date, we actually disputed all that, but our intention was it was a long term project. …[17]
[17] Transcript 23 August 2012 P-60 line 1 - P-61 line 10
The invoices issued by Caporale Designs
We turn now to the evidence given by Ms Caporale with respect to the invoices issued by Caporale Designs to the first four applicants, including as to the methodology for calculating the amounts and, in addition, the preparation of the BASs lodged by the first four applicants.
Ms Caporale stated that the methodology for Caporale Designs invoicing the first four applicants was essentially worked out with an end result in mind of what the businesses would eventually be sold for. Her expectation was that the total charge by Caporale Designs to each company, including each of the first four applicants, would be between one and a half and two million dollars with the expectation that the company would be sold for a 20 per cent profit margin on its cost. She said that this was the most streamlined way of doing it because of the number of businesses, exceeding 100, that would be established at the IETC. According to Ms Caporale, this methodology informed the amounts inserted on the “tax invoices” that were issued by Caporale Designs to the first four applicants.
Further, in response to how she arrived at the precise allocation of costs for each of the invoices, Ms Caporale stated that it was a prorated amount and that she had no working papers to support the costs being allocated nor the amounts actually invoiced. For example, in relation to Bayconnection, she confirmed that, as it appeared to have only been issued with invoices totalling some $500,000, “there are further invoices that actually need to be issued to this company to complete the cost of what we have anticipated [it] has cost us…”.[18]
[18] Transcript 22 August 2012 P-36
The explanation given in relation to how Caporale Designs had invoiced Bayconnection was relevantly the same for Catarina Gardens, Voca and Mira, except that documents known as “tax invoices” were not in evidence in relation to Voca and Mira. There were also no written agreements between Caporale Designs and any of the first four applicants with respect to the invoicing and payment arrangements. With respect to payments, it transpired that none of the first four applicants had paid the amounts owing to Caporale Designs, with the exception of some minor payments.
Ms Caporale stated that the “tax invoices” issued by Caporale Designs were prepared by her at the end of each month, at the same time as preparing the BASs for each of the companies (including the first four applicants) that would then claim the ITCs. All invoices carried the same description of services, namely, “work carried out for the development, design and construction of lot … Helensburgh…” except that the place was later changed to the address of the Dapto property.
Counsel for the Commissioner cross-examined Ms Caporale with respect to some irregularities on the invoices compared with the BASs that were lodged by Bayconnection and Catarina Gardens. These included, for example, the fact that several invoices were dated after the date of lodgement of Bayconnection’s BASs in which the related ITCs were claimed and the fact that the amounts on the invoices did not correspond with the amounts claimed as ITCs on those BASs. The Commissioner’s theory in relation to the latter discrepancy was, as follows:
MR O’BRIEN: In preparing all these invoices – and I say you’ve prepared them recently, for these proceedings – you’ve had so many prepared that you’ve got lazy and you’ve only looked at the credit that was claimed. And what you’ve done is you’ve looked at the second page of the BAS, you’ve disregarded the first page, you’ve multiplied it by 11, and that’s how you prepared the invoice?
MS CAPORALE: No, that’s not what happened.[19]
[19] Transcript 22 August 2012 P-41 lines 18-22
At the hearing on 22 August 2012, Ms Caporale denied having prepared the tax invoices issued by Caporale Designs specifically for these proceedings and, therefore, after the lodgement of the BASs. She further stated that any errors were due to her having to prepare a number of iterations of invoices to meet the requirements of taxation officers with respect to the earlier audit of the Gymea development. Subsequently, on 23 August 2012, Ms Caporale stated that the invoices before the Tribunal were not copies of the invoices that she had at the time of preparing and lodging the BASs, but that they were replacement invoices. She stated that there were other invoices in existence at the time when she had lodged the BASs for Bayconnection, which were slightly different from the ones before the Tribunal.[20]
[20] Transcript 23 August 2012 P-5 to P-7
With respect to Catarina Gardens, counsel for the Commissioner queried the pattern of invoices issued to it by Caporale Designs and noted, for example, that there appeared to be a correlation with the time at which ITCs were claimed by Catarina Gardens and the time that the GST audit was being undertaken by the Commissioner. Ms Caporale confirmed that Catarina Gardens lodged nil BASs for the tax periods May to August 2007 because taxation officers were threatening to penalise the company. The Commissioner’s counsel further noted that, once it appeared that the GST audit was over, Catarina Gardens lodged a BAS for October 2008 claiming to have made non-capital purchases of $485,000 from Caporale Designs and then a BAS for November 2008 claiming to have made $521,899 of non-capital purchases. In each case, Ms Caporale recorded the time taken to prepare the BASs as four hours and twenty-five minutes but she was unable to produce working papers of any kind to show what had been done. Under cross-examination, Ms Caporale stated that “whatever I was doing was in relation of the costs that had to be calculated between you know, in this case, the Caporale Designs and the Catarina ...”[21]
[21] Transcript 23 August 2012 P-15
With respect to the fact that no tax invoices were produced for Voca and Mira, and virtually none were available for Caporale Builders, Ms Caporale stated that she thought that the tax officers had taken them all when they accessed the home of the Caporales on
1 September 2009.[22] She also stated that she would have held the invoices, at least those issued by Caporale Designs, at the relevant time of completing the BASs for Voca and Mira when they claimed the ITCs the subject of these proceedings.[23]
[22] Transcript 23 August 2012 P-42
[23] Transcript 23 August 2012 P-36, P-45
Caporale Builders
The evidence of Ms Caporale with respect to Caporale Builders, the fifth applicant, was that it provided administration services but not for the IETC project. In fact, it was unclear for which entities Caporale Builders was doing the administration work, if in fact it was doing this or anything else. In describing the administration services, Ms Caporale stated that her brother, Mr Tommaso Caporale, used his personal credit card to pay for third party expenses such as, for example, “Easy Living Elevators” in the order of $8000. It was noted that some of the third party tax invoices had been addressed to Caporale Designs but, for some unexplained reason, Mr Tommaso Caporale had paid the invoices and Caporale Builders had claimed the ITCs.[24]
[24] Transcript 23 August 2012 P-65
THE SHORTCOMINGS IN THE EVIDENCE
It must be said that the applicants’ cases were not assisted by errors, inconsistencies and omissions in the evidence. There were also some serious problems with the evidence of Ms Caporale, which we discuss below.
We note that two chartered accountants from the one accounting firm also gave evidence for the applicants and that one of them (Mr Shannon Cavanagh) was also called by Ms Caporale to elaborate at the hearing. We did not consider his evidence to be helpful as he had no first-hand knowledge of any relevant events. His firm only became involved in early 2012. He was not involved in the lodgement of the BASs or any of the income tax returns covering the tax periods in question and, in addition, everything that he said was based on what Ms Caporale had told him and the documents that she had shown him. On that basis, he was only able to speak in broad terms as to the overall project. He stated in an affidavit that he was “advised that there was no further trading after 29th February 2009” (sic).[25] While that statement is a record of what he says he was told, we are not sure of the relevance of the statement. To the extent that it suggests that there was any trading, or any other activity in the form of a business or otherwise within the statutory definition of “enterprise” prior to that date, we reject the suggestion.
[25] Exhibit A16, paragraph 8 re Catarina Gardens; see also Exhibit A8, paragraph 7 re Voca and Exhibit A9, paragraph 7 re Mira.
WERE THE APPLICANTS CARRYING ON AN ENTERPRISE?
The problem with Ms Caporale’s evidence as to the enterprises allegedly being conducted by the first four applicants is that she provided no concrete detail of any kind as to the specific activities that were supposedly being carried on. The only information that she gave supported the overall IETC project.
None of the first four applicants had any involvement with the promotion, marketing or development of either the IETC project, or any part of its establishment. None of the applicants had any interest in the Dapto property the subject of the purchase contracts. None of the applicants had entered into any agreements for the training activities that they had been allocated to conduct or done anything to advance the training programs.
In our view, Ms Caporale has merely formulated a structure as to where the first four applicants will “sit” within the structure if the IETC project materialises. Accordingly, we are of the view, and accordingly find, that the first four applicants had not commenced any activities by the time they became registered for GST, and still had not done so at any time during the relevant period.
It follows, in our view, that these applicants were not carrying on an enterprise at all during the relevant period, even allowing for the extended definition of “carrying on” which includes doing anything in the course of commencement of the enterprise. This is because the first four applicants have done nothing (including with respect to the proposed businesses which they have been allocated in the areas of agriculture, hospitality, landscaping and plasterboard) to suggest that they “intend [to] generate sales in the future”, as was argued by Ms Caporale.[26]
[26] Applicant’s Supplementary Statement of Facts Issues and Contentions dated 27 February 2012 re Bayconnection, paragraph 7
The first four applicants are clearly distinguishable from other Caporale companies such as Connectland and Sappia Investments which appear to have undertaken activities with respect to the establishment of the IETC project. The fact (if it is a fact) that these, or any other entities, were carrying on enterprises, as part of the IETC project, does not mean that the applicants in these proceedings were doing so, as an enterprise is necessarily carried on by an entity (s 9-5(b) and s 11-15(1) of the GST Act).
It is clear, based on the definition of “enterprise”, in particular in s 9-20(1)(a) of the GST Act, that one activity done in the form of a business can be an enterprise. But the first four applicants have failed to demonstrate that they did anything during the relevant period. They did not produce any evidence of any business-like activities. They did not prove that they had undertaken an activity of any kind nor did they keep any business records. As far as we can glean, the first and second applicants were merely names in a table in an affidavit that Ms Caporale had prepared listing them next to the disciplines of agriculture and landscaping. The third and fourth applicants did not even find their way into that table which, it must be remembered, was prepared as late as October 2011.
To the extent that any records were produced, they weighed against the applicants. For example, Bayconnection (the only applicant that had lodged income tax returns with respect to the relevant period) showed no income or expenses despite claiming ITCs on purchases in excess of $550,000. It was on the basis of Ms Caporale’s representations to the effect that the companies were dormant and not trading that the previous tax agent for the Caporales had in fact lodged the nil returns[27] whereas Mr Cavanagh, as noted above, stated that he was advised that there was no further trading by the applicants (or some of them).
[27] Transcript 22 August 2012 P-85 and refer to Exhibit R1 pages 539-566
The bank statements produced by the applicants show that nothing happened in their bank accounts. With the odd exception, the only activity was the deposit of monies (representing ITCs) by the Commissioner and the withdrawal of those monies shortly afterwards, presumably by one or more of the Caporales. As was observed by the Commissioner in one of the objection decisions, “the only recurring activities are your GST refund claims”.[28]
[28] ATO Objection Decision re Voca, Voca T- Documents, T1-10
We are fortified in our conclusion by the cross-examination of Ms Caporale where, in our view, she accepted that the first four applicants had not commenced their business activities, as set out above. [29]
[29] See [53] of these reasons; Transcript 23 August 2012 P-57
We are concerned that the first four applicants may have been generating refunds based on ITC claims that they knew to be unfounded. We base that concern on all the circumstances surrounding the ITCs claimed, the methodology used, the absence of business records, and our suspicions that the errors and irregularities in the “tax invoices” and the BASs were not inadvertent mistakes. In addition, Ms Caporale was insistent in her submissions that the first four applicants were entitled to claim their ITCs because taxable supplies were made to these applicants. Ms Caporale stated that only Caporale Designs owed GST to the Commissioner. She submitted that as the Commissioner had already accepted that Caporale Designs had made taxable supplies (which was a matter that the Tribunal did not have to decide nor investigate), the first four applicants were entitled to the ITCs. The Commissioner’s position and Ms Caporale’s response are summarised in the following exchange:
MR O’BRIEN: What you had going was a system where Caporale Designs would invoice all these companies; the invoices would never be paid; the company’s invoice [sic – should be “companies invoiced”] would claim credits; and the only money in the whole system was the credits being paid by the ATO. Isn’t that right?
MS CAPORALE: There’s no issue about Caporale Designs, as you can see – there’s no issue that it was issuing invoices. There’s no discussions about that.
MR O’BRIEN: That’s right. And not pay any GST?
MS CAPORALE: I understand that ‑ ‑ ‑
MR O’BRIEN: Yes?
MS CAPORALE: But it was Caporale Designs.
MR O’BRIEN: Yes?
MS CAPORALE: It doesn’t mean that the whole thing is not a real enterprise – someone owed the money – the issue is not that somebody didn’t owe the money. What we’re saying is it’s not Bayconnection.[30]
[30] Transcript 22 August 2012 P-39 lines 11-23
We do not understand how Ms Caporale could continue to maintain with such conviction that Bayconnection could not owe money to the Commissioner. Of course it must do so, and so must Catarina Gardens, Voca and Mira, unless their ITC claims were well founded. And they do not become well founded simply because (as seems to be at the heart of the first four applicants’ cases) supplies were made from one registered entity to another.
We agree that the GST system contains a degree of symmetry whereby what is a taxable supply for a supplier may lead to a creditable acquisition for the recipient of that supply. In such a case the GST payable by the supplier is creditable (refunded) to the recipient. But that is not always the case. There are many taxable supplies that are not creditable to the recipient and, therefore, the GST is not refunded, even where the recipient is registered for GST. This is because registration of the recipient in itself is not enough to make an acquisition creditable. It is clear from ss 11-5 and 11-15(1) of the GST Act that in addition to being registered (or required to be registered), the recipient must also, among other things, make the acquisition in carrying on its enterprise. The first four applicants plainly did not do this, because they did not at any relevant time carry on an enterprise. As a result, the Commissioner was entirely correct to reject their ITC claims, and also to cancel the GST registrations under s 25-55(2) of the GST Act.
Ms Caporale also maintained that it was irrelevant that Caporale Designs had not paid the GST to the Commissioner. Technically, she is right. Section 11-25 of the GST Act provides that the amount of the ITC available is equal to the amount of the GST payable – not paid – by the supplier on the taxable supply. But it is surely a bold position for a taxpayer to take (as the first four applicants did here) to say that, as a purported recipient, it can comfortably claim back from the Commissioner the GST amounts that the entity on the other side of the alleged transaction – controlled by the same family, and whose BASs were prepared by the very person who was lodging the ITC claims – did not pay to the Commissioner in the first place. When confronted with the apparent brazenness of that approach, Ms Caporale explained that the companies “needed”[31] the credits to be paid because:
I was on a construction site which needed to be complete.[32]
[31] Transcript 22 August 2012 P- 42 line 44
[32] Transcript 22 August 2012 P- 43 lines 3-4
The “construction site” referred to is evidently the Gymea site rather than the IETC site, but the clear implication is that the payment of the ITCs was “needed” to assist the companies’ cash flow. Ms Caporale appeared unable to appreciate that the net cash flow would not be assisted since the Caporale group (through Caporale Designs) still had to pay the Commissioner every single dollar that the first four applicants received by way of ITC refunds.
As for Caporale Builders, there is no evidence of the activities, if any, that it conducted. It was not clear to us why payments being made by Mr Tommaso Caporale with his credit card should be treated as relating to administration services that Caporale Builders was providing to other entities (whoever they might be). Accordingly, we find that it, too, was not carrying on an enterprise. Furthermore, the Commissioner was also correct in cancelling its GST registration.
DID THE APPLICANTS ACQUIRE ANYTHING?
The issue of whether the applicants acquired anything is a subsidiary issue that we do not have to answer, given our finding that the applicants were not carrying on an enterprise. Nevertheless, in the circumstances, we consider it appropriate to record some of our observations.
We have grave doubts as to whether the first four applicants acquired any services from Caporale Designs notwithstanding the so called “tax invoices” that it purported to have issued to them and that were in evidence with respect to Bayconnection and Catarina Gardens.
Leaving aside for the moment the fact that Voca and Mira did not hold any tax invoices at all with respect to the relevant period, we are not satisfied that Ms Caporale’s explanation regarding the manner in which she determined the amounts of the tax invoices issued by Caporale Designs to the applicants substantiates that any services were provided. The methodology of invoicing by reference to what the businesses might be worth on disposal provides no evidence of the services allegedly provided to those companies. Moreover, it did not make any sense that they acquired “work carried out for the development, design and construction”, being the identical description on all such invoices, as none of the first four applicants had any interest in the land.
In our view, the “tax invoices” purported to have been issued by Caporale Designs to Bayconnection and Catarina Gardens, in the circumstances, do not assist the applicants.
In Huynh & Nguyen and Commissioner of Taxation [2008] AATA 305; (2008) ATC 10-020 at [32], Senior Member McDermott noted that “the tax invoice is the cornerstone of the GST regime. A tax invoice is a document that substantiates a creditable acquisition”. We concur with the view that tax invoices are documents of considerable importance; indeed they can represent cash to those seeking to claim ITCs on creditable acquisitions. However, the reality is that a tax invoice does not create a taxable supply; it records one. If a taxable supply did not take place, then a “tax invoice” is meaningless. In other words, documents that are so called “tax invoices” cannot substantiate a creditable acquisition, if in fact there was no supply or acquisition. It must follow that scrutiny of transactions is always essential, particularly transactions between related parties.
WERE THE APPLICANTS ENTITLED TO CLAIM INPUT TAX CREDITS WITHOUT HOLDING TAX INVOICES?
The Commissioner put the proposition that with respect to two of the applicants, Voca and Mira, there are no tax invoices at all and on the basis of s 29-10(3) of the GST Act, those companies cannot get their ITCs even if they had made creditable acquisitions. We do not have to decide this issue because of our other conclusions above. However, we are concerned that the Commissioner argued that the absence of tax invoices is a bar to claiming ITCs especially where there is a legislative determination on point.
We note that A New Tax System (Goods and Services Tax) Act 1999 Waiver of Tax Invoice Requirement Determination (No.1) 2004 – Decision of a Court or Tribunal made pursuant to s 29-10(3) of the GST Act by Mr Bruce Quigley, as a delegate of the Commissioner, on 24 February 2004 specifically and helpfully provides that if, for example, the Tribunal finds that an entity has made a creditable acquisition and is entitled to an input tax credit, then the requirement for a tax invoice under s 29-10(3) of the GST Act does not apply. Of course, this legislative determination does not assist any of the applicants in this case (because none of them made creditable acquisitions), but it does indicate that the Commissioner’s blanket proposition does not always apply.
We also observe that the applicants and the Commissioner referred to the invoices issued by Caporale Designs to Bayconnection and Catarina Gardens as if they were “tax invoices”. However, a document can only be a valid tax invoice, as set out above, if it references a supply that has been made. As noted above, Regulation 29-70.01 of the GST Regulations presupposed the existence of a supply before the supplier can issue a tax invoice in respect of it.
Finally, the Commissioner relied on additional reasons for the applicants not being entitled to claim the ITCs. These reasons were related to the methods adopted by the applicants for GST accounting. As the Commissioner rightly pointed out, even if there was a supply of something, and even if that led to a creditable acquisition, no evidence was produced to show that Bayconnection or Catarina Gardens (which were said to have been provided with “tax invoices”) have paid any of the invoices. As Bayconnection accounted for GST on a cash basis, it is not entitled to claim an ITC unless, and to the extent, that it has paid for the acquisition: s 29-10(2) the GST Act. Similarly, Catarina Gardens, which did not account on a cash basis, would have had an increasing adjustment and the ITC claim effectively disallowed pursuant to s 21-15 of the GST Act, in circumstances where the debt was overdue for 12 months or more.
PENALTIES
The Commissioner formed the view that the applicants were liable to pay penalties at the highest rate of 75% on the basis that there had been an intentional disregard as to the operation of the tax laws and, further, that it was appropriate to increase this base penalty amount by 20% due to certain aggravating factors. We were not convinced that the penalties imposed were excessive nor that they should be remitted to any extent. Accordingly, we agree with the Commissioner’s decisions.
Division 284 of Schedule 1 to the TAA sets out the administrative penalty regime that applies to matters required to be reported on activity statements from 1 July 2000. Subdivision 284-B was amended with a date of effect of 4 June 2010, but the penalty imposed in respect of all applicants in this case relates to statements made prior to 4 June 2010. Accordingly, the provisions referred to below are as the law was prior to those amendments. Relevantly, s 284-75(1) provided as follows (omitting the note):
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.
A statement is false or misleading in a material particular if it affects a decision regarding the calculation of an entity’s tax liability or entitlement to a credit or refund. Most items of information provided in a BAS will be material particulars.
Subsection 284-80(1) of Schedule 1 to the TAA states that you have a shortfall amount if an item in the table in the subsection applies to you. A shortfall amount arises where:
·a taxpayer’s tax liability worked out on the basis of the false statement is less than it would have been if the statement was not false or misleading; or
·the amount that the Commissioner must pay or credit a taxpayer worked out on the basis of the false statement is more than it would be if the statement was not false or misleading.
Section 284-90 of Schedule 1 to the TAA sets out a table for the determination of the base penalty amount as a percentage of the shortfall amount, depending on the behaviours applicable at the time the shortfall occurred. Relevantly, the Commissioner assessed the applicants at the rate of 75% of the shortfall amount on the basis that the shortfall resulted from an intentional disregard of a taxation law.
Section 284-220 of Schedule 1 to the TAA provides circumstances where the base penalty amount is increased by 20% in accordance with criteria set out in the TAA, including the taxpayer’s actions to prevent or obstruct the Commissioner from finding out about a shortfall amount, the taxpayer’s knowledge of the shortfall amount and or prior penalty history.
Section 298-20 of Schedule 1 to the TAA gives the Commissioner the discretion to remit all or part of an administrative penalty.
The factors that we considered to be relevant to the question of penalty in these matters include the following:
(a)Ms Caporale has been the authorised representative of the applicants (and a director and shareholder of some of the applicants). She is an experienced businesswoman in the property industry. She understood the GST obligations of the applicants, having previously undergone other GST reviews and audits in relation to the prior developments and other current taxation investigations.
(b)Ms Caporale retained tax agents to assist her in relation to the preparation of the income tax returns but always prepared and lodged all the BASs, sometimes with the assistance of her brother, Mr Tommaso Caporale. She also prepared all of the “tax invoices” that were issued by Caporale Designs.
(c)She represented to the tax agents that the applicants were not trading while she lodged BASs claiming that the applicants had made significant non-capital purchases of services in order to claim ITCs.
(d)She caused the applicants to claim ITCs which she probably knew, or at least ought to have known, they were not entitled to claim because they were not carrying on an enterprise, they had not purchased any taxable supplies and, in addition, they did not hold tax invoices.
(e)She resisted repeated requests to provide comprehensive information and documents, especially the tax invoices. One of the explanations that she gave was that she did not want to do this in a piecemeal fashion. Another explanation that emerged only during the hearing was that she no longer had the tax invoices as they had been seized by the tax officers when they accessed the home of the Caporales on 1 September 2009. This explanation had not been advanced when the Tribunal made orders in April 2012, at the request of the Commissioner, for the applicants to produce the tax invoices for forensic examination.
Having regard to those factors, we are not satisfied that the applicants’ ITC claims did not result from intentional disregard of the GST law. In fact, those factors point towards a positive finding of intentional disregard although, because of s 14ZZK(b)(i) of the TAA (which casts upon the taxpayer the burden of proving an assessment excessive), it is unnecessary for us to make such a finding. The same applies to the 20% uplift arising from s 284-220: we are not satisfied that the uplift is excessive, and so we uphold the penalty at 90% of the shortfall.
Furthermore, in all the circumstances, there is no basis for the Tribunal to exercise its discretion to remit any part of the penalties. There is nothing harsh about the imposition of penalties in this situation, particularly taking into account our concerns that the applicants sought to generate refunds on an unfounded basis.
CONCLUSION
We affirm the objection decision under review in each matter.
I certify that the preceding 101 (one hundred and one) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost and Senior Member G Lazanas ......[SGD].................................................
Associate
Dated 29 January 2013
Dates of hearing 20, 22, 23, 24 & 28 August 2012 Advocate for the Applicant Ms R Caporale Counsel for the Respondent Mr A J O'Brien Solicitors for the Respondent ATO Legal Services
[16] Transcript 23 August 2012 P-59 lines 23-29
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