Re Sinclair and Commissioner of Taxation
[2010] AATA 902
•16 November 2010
CATCHWORDS –TAXATION – INCOME TAXATION – deduction claimed by purchaser of land on basis amount claimed was interest on loan – loan had been obtained at earlier time by vendor of land – contract of sale purported to transfer to purchaser the obligation to pay interest on the loan – proper characterisation of payment – objection decision affirmed.
TAXATION – INCOME TAXATION – penalty – whether claim false in a material particular - whether failure to take reasonable care to comply with the taxation law – objection decision affirmed.
Acts Interpretation Act 1901, ss 15AA, 15AB
Corporations Act 2001
Income Tax Assessment Act 1936, ss 26(a), 51(1), 223(1)(a)(i)
Income Tax Assessment Act 1997, ss 4-1, 4-10(2), 4-15(1), 6-1(1)-(5), 6-5(1) and (2), 6-10(1) and (2), 6-10(3) and (4), 6-20(1), 8-1(1) and (2)(a), 8-5
Legal Profession Act 2004 (Vic), s 2.2.2
Taxation Administration Act 1953, ss 14ZZK(b)(i) and (iii), Schedule 1, s 284-75(1), 284-85, 284-90, 284-220, 357-60(1), 357-70(1)
Taxation Laws Amendment Act (No. 3) 1991, s 112
Tax Laws Amendment (Improvement to Self Assessment) Act (No. 2) 2005, No 161 of 2005; s 3, Schedule 2, Part 2, item 16
Miscellaneous Tax Ruling MT 2008/1
Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265
Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342
Bellinz v Federal Commissioner of Taxation (1998) 84 FCR 154; 155 ALR 220; 39 ATR 198; 98 ATC 4634
Commissioner of Taxation v McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957
Commissioner of Taxation v Payne [2001] HCA 3; (2001) 202 CLR 93; 177 ALR 270; 46 ATR 228; 75 ALJR 442; [2001] ATC 4027
Eldridge v Federal Commissioner of Taxation [1990] FCA 369; (1990) 90 ATC 4907; 21 ATR 897
Federal Commissioner of Taxationv Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088
Federal Commissioner of Taxation v Munro; British Imperial Oil Co Ltd [1926] HCA 58; (1926) 38 CLR 153
Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879
Federal Commissioner of Taxation v Wade (1951) 84 CLR 105
Kajewski v Federal Commissioner of Taxation [2003] FCA 258; [2003] ATC 4375
McAndrew v Federal Commissioner of Taxation[1956] HCA 62; (1956) 98 CLR 263; 30 ALJR 464
McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284; 23 ALR 583; 9 ATR 610; 53 ALJR 436; 79 ATC 4111
Minister for Immigration v Dela Cruz [1992] FCA 71; (1992) 34 FCR 348; 110 ALR 367; 26 ALD 663
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288
Re Application of the NEWS CORP LTD (1987) 15 FCR 227
Re Confidential and Commissioner of Taxation [2008] AATA 415; (2008) 72 ATR 252
Re Hutson and Commissioner of Taxation [2009] AATA 574; [2009] ATC 10-099
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243; 96 ATC 4550; 33 ATR 97
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47; 8 ATD 431
Shepherd v Commissioner of Taxation of the Commonwealth of Australia [1965] HCA 70; (1965) 113 CLR 385; 14 ATD 127; 39 ALJR 351
Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers
Stroud’s Judicial Dictionary, 4th edition, Sweet and Maxwell, 1972
DECISION AND REASONS FOR DECISION [2010] AATA 902
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2009/5672
TAXATION APPEALS DIVISION )
Re RICHARD SINCLAIR
Applicant
AndCOMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Deputy President S A Forgie
Date: 16 November 2010
Place: Melbourne
Decision:The Tribunal affirms the objection decisions made by the respondent on 19 September 2007 disallowing the applicant’s objection to the Notice of Assessment dated
27 March 2006 and the Notice of Assessment and Liability to Pay Penalty dated 28 March 2006.
S A FORGIE
Deputy President
REASONS FOR DECISION
On 30 June 2005, Mr Richard Sinclair entered a contract to purchase a property on certain terms and conditions. Among them was a term that he would pay $99,000 to the vendor’s mortgagee to cover the interest due and payable by the vendor under the mortgage for the period from 30 June 2005 to 15 December 2005. If the amount of the interest due under the mortgage in respect of that period proved to be less than $99,000, Mr Sinclair agreed to pay the difference to the vendor. In his income tax return for the year of income ending 30 June 2005, Mr Sinclair claimed a deduction in the amount of $99,000 on the basis that it was “interest on loans”. The Commissioner of Taxation (Commissioner) refused to allow the deduction. After advising
Mr Sinclair that he had been selected for audit in respect of the deduction claimed for the interest, the Commissioner issued a Notice of Assessment dated 27 March 2006 and a Notice of Assessment and Liability to Pay Penalty dated 28 March 2006. The total of the tax assessed and the penalty was $12,003.75. When Mr Sinclair objected, the Commissioner disallowed his objection in a decision dated 19 September 2007.
I have decided to affirm the objection decision.
BACKGROUND FACTS
In this section of my reasons, I will set out the facts that I have found. For the most part, there is no dispute between the parties as to those facts. Where there is dispute or uncertainty, I will refer to the evidence on which I have relied to make those findings.
Entering a contract to purchase the property
Mr Sinclair is a stockbroker but he is also a board member of a long established family company which engages in property development.
Over the years, Mr Sinclair had noticed a property near his home and also noticed that various developments had been proposed for the site. The house on the property was not in good condition. One day in May 2005, he noticed boardings going up on the property and he made enquiries. His enquiries led him to understand that the owner of the property, Towerlake Pty Ltd (Towerlake), had been frustrated in obtaining planning approval for its proposal that it build two units on the site. Three or four years and a court case later, Towerlake’s focus and finances had changed. Its mortgagee, Statewide Secured Investments Ltd (Statewide), was threatening to foreclose on the mortgage it held over the property.
Mr Sinclair telephoned the Managing Director of Towerlake and understood from their conversation that Towerlake was looking for cash flow before the end of June 2005. The Managing Director told Mr Sinclair that he could get all the shareholders to “sign off” on a transfer of the property before 30 June 2005.
Mr Sinclair was very interested in purchasing the property but could “not see how the legals would work”. As a consequence, he contacted his lawyer and his accountant. He asked his lawyer how he could buy the property quickly and solve the problem of Towerlake’s cash flow. If he were to pay the interest himself, the finance would remain in place. Mr Sinclair had a discussion with his lawyer to have the amount recognised as a pre-paid interest on the loan. That amount of $99,000 was in addition to the purchase price and was dealt with separately in the contract.
The contract of sale for the property shows the price to be $1,950,000. Mr Sinclair was required to pay a deposit of $1,000 on the day of the sale, i.e. 30 June 2005. The balance was to be paid on 15 December 2005 in accordance with Special Condition 19.[1] In the main, Special Condition 19 is concerned with the mortgage held by Statewide over the property and the interest payable by Towerlake on that mortgage up until settlement of the sale. The interest was defined to mean the interest due and payable by the vendor under the mortgage from 30 June 2005 to settlement up to an agreed amount capped at $99,000. With regard to that interest, Special Condition 19 provides:
[1] T documents, T4-49 and Supplementary T documents (ST documents), ST5-109
“19.2.1 On the Day of Sale the Vendor will assign to the Purchaser in consideration of this Contract all of its rights and obligations to pay the Interest.
19.2.2On the Day of Sale the Purchaser shall make payment of the Interest directly to the Mortgagee, in full and final satisfaction of the Vendor’s obligations under the Mortgage to pay the Mortgagee the Interest. The Mortgagee shall acknowledge receipt of payment of the Interest but the Vendor remains liable to pay interest on the Mortgage in excess of the Interest.
19.2.3The Purchaser shall, making payment of the Interest shall have no further responsibility to the Vendor or the Mortgagee for the payment of the Interest.
19.3…
19.4…
19.4.1-19.4.3…
19.4.4the Vendor must procure the Mortgagee’s consent to the Contract of Sale and also the Mortgagee’s consent to accept prepayment of Interest from the Day of Sale, until the Settlement Date which shall be applied solely towards payment of Interest for that period.
19.5In consideration of Tower Lake P/L entering into a contract of today’s date of the land comprised in Certificate of Title … I Richard Peter Sinclair agree that in the event that the interest due to the mortgage referred to in the contract is less than $99,000 then I agree to pay Tower Lake P/L the difference.”[2]
[2] ST documents, ST5-113
Special Condition 19.3 provided that “As from the Day of Sale the Purchaser shall be entitled to the receipt of the rent and income from the Property.”[3] The provisions of Special Condition 19.4 that I have omitted in the preceding paragraph provide that “the Purchaser shall accept the risk in the Property”, would be responsible for all statutory rates and outgoings from the Day of Sale until the Settlement Day and for effecting insurance of all improvements on the property.
[3] ST documents, ST5-113
Payment of the interest
In a letter dated 4 July 2005, Statewide confirmed that it had received the sum of $99,000 on behalf of Towerlake’s account.[4] Records of Mr Sinclair’s bank account show that he withdrew that sum on 30 June 2005.[5]
[4] T documents, T4-50
[5] ST documents, ST7-118-119
Lodging the taxation return
On 18 August 2005, Mr Sinclair lodged his income tax return for the year ending 30 June 2005.
The lease of the property
I accept Mr Sinclair’s evidence that he knew that Towerlake had been renting the property to people called “George”. The Georges sub-let rooms to others and it was the intention that the arrangement continue. Knowing that, Mr Sinclair was surprised to find that everyone other than an English couple had left when he visited the property in the first week or two of July, 2005. They remained for another couple of weeks before they too left.
Mr Anthony Morton of Towerlake wrote to Mr Sinclair on
28 September 2005. He said:“As per your request and as the Director of Towerlake p/l, regarding … [the property], I confirm the house is currently let to Stephen and Joanne George. The rental agreement is a private agreement (no agents involved) and they are currently paying rent to the value of $2383/month. This money will be forwarded to you.
…”[6]
Although Mr Sinclair had not been aware of it at the time, the rental had, in fact, stopped for the period ending 23 June 2005. That finding is consistent with
Mr Sinclair’s oral evidence. It is also consistent with Mr Morton’s later letter to the Tribunal dated 9 August 2010. He referred to rental for the period ending 23 June 2005 as being received on 19 August 2005. That was the final rental payment received from the Georges for the property. The bond was returned to the Georges on 16 August 2005. No other tenancy agreement existed between Towerlake and any other tenant in respect of the lease of the property during the period from 30 June 2005 to 15 December 2005.[7]
[6] T documents, T4-51
[7] ST documents, ST8-120
Mr Sinclair’s plans for the property
Mr Sinclair focused on developing the property. It would have been problematic to put tenants into it and then have to remove them. In any event, the builder and the architect needed access to the building. Plans had already been drawn and approved but needed a change of elevations and some tweaking. He had a permit to proceed with the building and could have proceeded. Although he chatted with a friend about the plans, Mr Sinclair did not engage an architect.
It was not until September or October 2005 that Mr Sinclair decided that he was not going ahead with the building. He and his wife lived with their two children in a “very smart house” nearby but had just had twins. They had discussed their accommodation needs. They decided to sell the house in which they were living and move into the property Mr Sinclair had just purchased. In order to do that, they moved to an apartment while they did some renovations on the house. They put their house on the market in late November or December 2005 and it sold in March 2006. The family moved into the property at Easter 2006.
Advice sought by Mr Sinclair regarding the purchase of the property
I accept that Mr Sinclair sought advice before he entered the contract with Towerlake. A more recent advice dated 19 May 2010 from his solicitors sets out their understanding of the transaction. That understanding accords with my summary of the contract. Their letter states:
“I also confirm from my file that we were not asked to nor did we provide any formal taxation advice to you as to whether or not the prepayment which you had negotiated would in fact be tax deductible.”
Mr Sinclair’s accountant, Mr Terrence Jasper, wrote in his letter to the Tribunal and dated 4 June 2010:
“13. I confirm that Mr Sinclair did obtain advice from us in relation to whether the prepayment was deductable. We advised Mr Sinclair that interest paid on a loan obtained to acquire an investment property was indeed deductible. We also advised Mr Sinclair that any prepayment of this interest would be deductable in respect of the year during which the interest was paid.
14.Since Mr Sinclair entered into the loan agreement to acquire an investment property during the year ended 30 June 2005, and interest of $99,000 was paid on this loan during the year ended 30 June 2005. We believe that this interest payment is deductable to Mr Sinclair in the year ended 30 June 2005.”
In a letter to the Australian Taxation Office dated 30 July 2010,
Mr Jasper observed that “… there is so much compelling evidence that this interest payment of $99,000 in relation to a Vendor loan relating to the purchase of an investment property is a deductible expense to the subject taxpayer.”[8][8] ST documents, ST7-117
Subsequent dealing with the property
On 9 January 2006, the land was transferred from Towerlake to
Mr Sinclair’s wife.[9]
CLAIM FOR A DEDUCTION OF $99,000 FOR INTEREST ON LOAN
[9] ST documents, ST3-97
Legislative background
In general terms, an individual must pay income tax for each financial year.[10] The amount of income tax that is payable for a particular financial year is worked out by reference to the individual’s taxable income for that year.[11] “Taxable income” is “Assessable income” minus “Deductions”.[12]
[10] Income Tax Assessment Act 1997 (ITAA97), ss 4-1 and 4-10(1)
[11] ITAA97, s 4-10(2)
[12] ITAA97, s 4-15(1)
If an Australian resident, an individual’s “assessable income” includes two types of income: ordinary income and statutory income other than exempt income.[13] The reference to ordinary income is a reference to “income according to ordinary concepts”.[14] It:
“… includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.”[15]
Section 6-5(4) provides that:
“In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.”
[13] ITAA97, s 6-1(1)-(5)
[14] ITAA97, s 6-5(1)
[15] ITAA97, s 6-5(2)
“Statutory income” is not ordinary income but it is included in assessable income by provisions of ITAA97.[16] If an Australian resident, an individual’s assessable income includes all statutory income from all sources, whether inside or outside Australia.[17] In circumstances in which an individual has not received an amount that would otherwise be statutory income, that amount becomes statutory income as soon as it is applied or dealt with in any way on his or her behalf or as he or she directs.[18]
[16] ITAA97, ss 6-10(1) and (2)
[17] ITAA97, s 6-10(4)
[18] ITAA97, s 6-10(3)
“Exempt income” is an amount of ordinary or statutory income that is made exempt from income tax by a provision of ITAA97 or by another Commonwealth law.[19]
[19] ITAA97, s 6-20(1)
Amounts that may be deducted from assessable income are the subject of Division 8 of Part 1-3 of ITAA97. Section 8-1(3) provides for losses or outgoings that can be deducted as general deductions.[20] Section 8-1(1) provides:
“You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.”
[20] Other amounts may be deducted under provisions of the ITAA97 other than those in Division 8 of Part 1-3. These amounts are known as “specific deductions”: ITAA97, s 8-5 and see also Part 1-4, Division 12.
The general proposition is qualified by s 8-1(2). It provides:
“However, you cannot deduct a loss or outgoing under this section to the extent that:
(a)it is a loss or outgoing of capital, or of a capital nature; or
(b)it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.”
What is an outgoing “incurred in gaining or producing” assessable income?
While various amendments have been made to the deduction provisions of the income tax legislation over the years, the words “incurred in gaining or producing assessable income” have remained constant. In 1935, they were preceded by the word “actually” but the observation of Dixon J in Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation[21] [Amalgamated Zinc] remain apposite:
“… The expression ‘in gaining or producing’ has the force of ‘in the course of gaining or producing’ and looks rather to the scope of the operations or activities and relevance thereto of the expenditure than to the purpose in itself.”[22]
[21] [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342; Latham CJ, Rich, Starke, Dixon, Evatt and McTiernan JJ
[22] [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342 at 309; 298
In Amalgamated Zinc, Dixon J concluded:
“… None of the assessable income arose out of the business in the course of which the taxpayer became liable to the charge. The sources from which the assessable income did arise included no operations in the course of which the payment was made. It was a payment independent of the production of the income, not an expenditure incurred in the course of its production.”[23]
This passage was approved by the High Court in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation[24] (Ronpibon).The Court went on to say:
“For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words ‘incurred in gaining or producing assessable income’ mean in the course of gaining or producing such income. …
… In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.”[25]
[23] [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342 at 310; 298-299
[24] [1949] HCA 15; (1949) 78 CLR 47; 8 ATD 431; Latham CJ, Rich, Dixon, McTiernan and Webb JJ
[25] [1949] HCA 15; (1949) 78 CLR 47; 8 ATD 431 at 56-57; 435-436 and see also Commissioner of Taxation v Payne [2001] HCA 3; (2001) 202 CLR 93; 177 ALR 270; 46 ATR 228; 75 ALJR 442; [2001] ATC 4027 at [9]; 99; 272-273; 230; 444; 4,029 per Gleeson CJ, Kirby and Hayne JJ
As to the timing of the expenditure, Latham CJ said in Amalgamated Zinc:
“… It is true that, in cases of continuing businesses, it has been conceded … that expenditure may be allowed as a deduction though it produces and is possibly designed to produce results in the way of income in a future year and not in the year in relation to which it is being assessed …. So it has been held that expenditure which has a direct relation to income of a past year can be deducted in a later assessment year where it is of such a character that, in a continuing business, it must be met from time to time as part of the process of gaining assessable income …”.[26]
In the same case, Dixon J said:
“… A very wide application should be given to the expression ‘incurred in gaining or producing the assessable income’. But the words refer to the assessable income from which the deduction is to be made. In a continuing business, items of expenditure are commonly treated as belonging to the accounting period in which they are met. It is not the practice to institute an
inquiry into the exact time at which it is hoped that expenditure made within the accounting period will have an effect upon the production of assessable income and to refuse to allow it as a deduction if that time is found to lie beyond the period. And, in the case of expenditure for which the taxpayer contracted a liability during an earlier accounting period than that in which it
has matured, it is not the practice to consider whether its effect upon the production of income of a still continuing undertaking has already been exhausted . . . The expression ‘in gaining or producing’ has the force of ‘in the course of gaining or producing’ and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself . . .In the present case, the actual expenditure was met in the current year. But it was completely dissociated from the gaining or producing of the assessable income of that year . . . None of the assessable income arose out of the business in the course of which the taxpayer became liable to the charge. The sources from which the assessable income did arise included no operations in the course of which the payment was made. It was a payment independent of the production of the income, not an expenditure incurred in the course of its production.”[27]
[26] [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342 at 303-304; 293-294 per Latham CJ
[27] [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342 at 309-310; 297-299. See also per Rich and Evatt JJ [1935] HCA 81; (1935) 54 CLR 295 at 305 and per Starke J at 307
Expenditure for which deduction claimed must be referable to assessable income gained or produced
The expenditure for which a deduction is claimed must be referable to assessable income gained or produced. That does not mean that it must be referable to the whole of the assessable income gained or produced by the taxpayer but it must be referable to some part of it.
The early case of Federal Commissioner of Taxation v Munro; British Imperial Oil Co Ltd[28] (Munro) provides an example. Mr Munro owned various businesses as well as various buildings on Elizabeth Street in Melbourne, which he leased to tenants. He borrowed a sum of money and its repayment was secured by a mortgage over the Elizabeth Street property. Mr Munro used the money to purchase shares in a company he had established with himself and his sons as shareholders. He also advanced the company money. His intention was to use the company as a vehicle to start another business in Sydney. He argued that, whenever money was borrowed by a taxpayer on the security of a rent-producing property, the interest paid under the mortgage should be deducted from his assessable income, irrespective of the purpose to which the borrowed money was put.
[28] [1926] HCA 58; (1926) 38 CLR 153; Knox CJ, Isaacs, Higgins, Rich and Starke JJ
All of the Judges rejected this argument. Knox CJ expressed his reasons in this way:
“In this case the assessable income of the taxpayer was in no way referable to the transaction with the bank out of which the liability to pay interest arose, and the loan by the Bank was in no way instrumental in or conducive to the production of the assessable income or that part of it which consisted of the rents of the freehold property. The respondent was, before the mortgage was given, entitled to the whole of these rents, and he did not gain them nor were they produced in consequence of the payment of interest. The interest was paid, not for the purpose of gaining or producing assessable income of the taxpayer, but for the purpose of satisfying pro tanto a debt which the taxpayer had incurred with a view, not to the production of his assessable income, but to the production of income by the company for the benefit of its shareholders. The debt having been incurred for a purpose wholly unconnected with the production of assessable income of the respondent, I think it impossible to say that the interest paid on the amount of the debt was money wholly and exclusively laid out or expended for the production of his assessable income.”[29]
[29] [926] HCA 58; (1926) 38 CLR 153 at 171
That does not mean that the whole of borrowed moneys must be referable to some part of the assessable income but some part must be. That part which is referable is deductible but not otherwise. Ronpibon provides an example. The High Court considered a claim for a deduction of expenditure incurred by a mining company in maintaining its office and the administration of its affairs in Melbourne. It had previously operated a mining operation in what was then called Siam but been forced to suspend operations because of the outbreak of war with Japan. The mining company had not derived any assessable income from mining but it had derived assessable income from investments.
The High Court considered s 51(1) of the Income Tax Assessment Act 1936 (ITAA36),[30] which is in terms similar to those of s 8-1(1) of ITAA97:
“… Instead of imposing a condition that the expenditure shall wholly and exclusively be for the production of assessable income the present s 51(1) adopts a principle that will allow of the dissection and even apportionment of losses and outgoings. It does this by providing for the deduction of losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income. In the second place it introduces an alternative ground or head of deduction; it allows the deduction of all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing such income.”[31]
[30] Section 51(1) of ITAA36 provided:[31] [1949] HCA 15; (1949) 78 CLR 47; 8 ATD 431 at 55; 434-435
The judgment of Beaumont J in Commissioner of Taxation v McDonald[32] (McDonald) provides a further example. Mr and Mrs McDonald jointly owned a property and received rental from it. They agreed that Mrs McDonald would receive three quarters of the profits from it and that Mr McDonald would indemnify his wife for any losses. In the relevant year of income, the losses amounted to $1,941 and Mr McDonald claimed a deduction of the whole amount in connection with the property business.
[32] (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957
Beaumont J examined the agreement made between Mr and
Mrs McDonald, their lack of involvement in any activity related to the derivation of the income, Mr McDonald’s full time employment and Mrs McDonald’s full time commitment at home and decided that they were not engaged in a business activity. Rather, they had invested in a property and were co-owners in the investment. Each was entitled to one half of the income and to deduct one half of the losses.
His Honour went on to consider an alternative submission:
“ As has been noted, the respondent put an alternative submission that, even if a partnership under the general law did not exist, he could deduct the whole of the losses by virtue of his agreement to indemnify his wife. But s 51 does not permit a deduction merely by virtue of that agreement. In truth, it was a term of the agreement that the respondent actually give income away to his wife. That involves none of the features required as a condition of the deductibility under s 51(1). In fact, the transaction so far as concerned the respondent, involved two significant detriments. In the first place, he gave away one-quarter of his income entitlement; secondly, he indemnified his wife against any loss from the investments. It cannot be said, as the language of
s 51 requires, that a payment made pursuant to such an indemnity is a loss incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of producing such income. Rather, the assumption of liability for the losses, voluntarily made by the respondent, was a purely domestic arrangement in which the respondent sought to advance his wife’s finances … In any event, there is expressly excluded from deductions allowable under s 51(1) losses of a private or domestic nature and the wife’s half share of losses now claimed by the respondent may be so described …”[33]
[33] (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957 at 185-186; 4,552; 969-970
How to determine whether an outgoing is “incurred in gaining or producing” assessable income?
Determining whether particular expenditure has been incurred in gaining or producing assessable income is a question of fact[34] but the basis on which that question of fact is determined was further explained by Gleeson CJ, Kirby and Hayne JJ in Federal Commissioner of Taxation v Payne:[35]
“ Accepting, as one must, that ‘the assessable income’ referred to in
s 51(1) is a broad concept, it may well follow … that ‘[t]he relevance of the expenditure should be determined having regard to the overall income producing activities of the taxpayer, and not by reference to individual sources of income’… That is not to say, however, that the kind of connection which
s 51(1) requires between outgoing and income is other than the connection described as ‘incurred in gaining or producing the assessable income’. The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income. That is, is the occasion of the outgoing found in whatever is productive or expected income?”[36]
This statement of principle was approved by the majority of the High Court in Commissioner of Taxation v Day[37] as providing a “surer guide” as to whether a loss or expenditure has been incurred in the course of gaining or producing assessable income. The Honours observed that “Essential to the inquiry is the determination of what it is that is productive of assessable income.”[38]
[34] Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47; 8 ATD 431 at [18]; 59; 437
[35] [2001] HCA 3; (2001) 202 CLR 93; 177 ALR 270; 46 ATR 228; 75 ALJR 442; [2001] ATC 4027; Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ
[36] [2001] HCA 3; (2001) 202 CLR 93; 177 ALR 270; 46 ATR 228; 75 ALJR 442; [2001] ATC 4027 at [11]; 100; 273; 231-232; 445; 4030
[37] [2008] HCA 53; (2008) 236 CLR 163; 250 ALR 388; [2008] ATC 8,842; 70 ATR 14; 83 ALJR 68
[38] [2008] HCA 53; (2008) 236 CLR 163; 250 ALR 388; [2008] ATC 8,842; 70 ATR 14; 83 ALJR 68 at [31]; 179; 398; 8,851; 26; 77 per Gummow, Hayne, Heydon and Kiefel JJ
It is necessary to examine the circumstances and transactions in order to determine the character of the advantage sought by the taxpayer in making the outgoings. The case of Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd[39] provides an example. The case turned on whether the amounts paid by a taxpayer were of a revenue or capital nature. If the former, they would be fully allowable deductions under s 51(1) but not otherwise. A series of transactions amongst associated companies led to the taxpayer company leasing a factory and office building that another company had leased initially from the Housing Trust of South Australia (Housing Trust). The Housing Trust built the factory and office building. Under the agreement between the Housing Trust and the other company, it, or an associated company, was given an option to purchase the property. An associated company, Property Options, did exercise the option. Under the agreement between it and the Housing Trust, the purchase price was an amount that decreased annually in proportion to the amount of the initial capital outlay which the Housing Trust was to recoup in the rent paid by the taxpayer company. The taxpayer company claimed the whole of the rent as an allowable deduction from its assessable income.
[39] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879; Gibbs ACJ, Stephen and Aickin JJ; Jacobs and Murphy JJ dissenting
Gibbs ACJ explained:
“… The real problem in the case is not to determine the character of the advantage sought, once it has been identified, but to decide what was the advantage sought by the taxpayer by making the payments. If the only advantage sought was the right to possession under the lease, and was called ‘rent’ really answered that description, clearly the outgoings were entirely of a revenue nature. If on the other hand one advantage sought by the outgoings was the acquisition of a capital asset (the land and buildings), the fact that the payments were called ‘rent’, and were made periodically, would not necessarily prevent them from being in part outgoings of a capital nature …”[40]
[40] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879 at [14]; 655; 65-66; 4,417; 643; 884
Gibbs ACJ went on to characterise the transactions:
“ It is clear that by making the payments the taxpayer itself did not acquire any interest in the land or buildings except that of a lessee. The only binding arrangement between the taxpayer and the Trust was that embodied in the lease, under which the taxpayer had the rights and interests of a lessee and nothing more. The taxpayer was not granted any option to purchase, and it had no right to enforce the option granted to Property Options. …”[41]
“… However in the present case there is no evidence on which it could be found that the taxpayer could benefit from the exercise of the option. Property Options was not a subsidiary of the taxpayer, and there is no evidence that Property Options was intended to hold the land and buildings for the taxpayer, or would be likely to share with the taxpayer any profits which might accrue as a result of the exercise of the option. Indeed the probability is that any financial benefit from the transactions would enure for the benefit of the parent company, Chloride Group Ltd, and not for the taxpayer.”[42]
[41] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879 at [15]; 655; 66; 4,417; 643; 884
[42] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879 at [15]; 656; 66; 4,417; 643; 884
The taxpayer company was a member of a group of companies and knew that the lease to it was part of a wider scheme to benefit another company in the group. Gibbs ACJ indicated that:
“… a taxpayer may derive an advantage if someone else, such as a subsidiary, acquires an asset. But the fact that someone else incidentally derives an advantage of a capital kind in which the taxpayer does not share is not enough to give the outgoings the character of capital. …”[43]
[43] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879 at [17]; 656-657; 67; 4,418; 643; 885
The question that must be asked is: “What was the expenditure for?”. It is answered by reference to “… the nature of the advantage from a practical and business point of view …”.[44] Furthermore,
“… An examination of the legal rights obtained is essential to the characterization of expenditure notwithstanding that in some cases it may not alone be sufficient to complete the process, because absence of enforceable rights is not decisive of the revenue character of a business outgoing. …”[45]
[44] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879 at [19]; 659; 69; 4,419; 644; 887 per Gibbs ACJ
[45] [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879 at [3]; 662; 71; 4,421; 645; 889 per Stephen and Aickin JJ
Determining identity of person to whom income is attributable
The approach, to which I have referred in the previous section of my reasons, is illustrated in a different context. It is the context of determining the person to whom income is attributable and is illustrated by an earlier High Court case of Shepherd v Commissioner of Taxation of the Commonwealth of Australia[46] (Shepherd). The headnote sets out the essential facts:
“ A taxpayer was entitled under a licence agreement to royalties directly proportionate to the number of products manufactured. By a deed he then purported to assign by way of gift absolutely and unconditionally to persons whose names were there set out all his ‘right title and interest in and to an amount equal to ninety per cent of the income which’ might accrue during a period of three years under the licence agreement.”[47]
[46] [1965] HCA 70; (1965) 113 CLR 385; 14 ATD 127; 39 ALJR 351; Barwick CJ, Kitto and Owen JJ
[47] (1965) 113 CLR 385 at 385
Barwick CJ and Kitto J interpreted the deed as an equitable assignment of the taxpayer’s right, during the following three years, to 90% of any income that accrued under the licence agreement. It was not a covenant to pay an amount equal to 90% of that income. Had it been such a covenant, the income from the royalties would have been that of the taxpayer. As it was, the taxpayer had assigned an existing chose in action and the income, to the extent that it represented 90% of the income from the royalties, was not that of the taxpayer.[48]
[48] [1965] HCA 70; (1965) 113 CLR 385; 14 ATD 127; 39 ALJR 351 at [18]; 392-393; 130; 354 per Barwick CJ and [6]; 397; 133; 356 per Kitto J
Burden of proof
On his application for review, Mr Sinclair has the burden of proving that the Commissioner’s assessment is excessive and, in the case of the penalty, should not have been imposed or imposed at a different rate.[49] That burden has been considered by Brennan J[50] in Federal Commissioner of Taxationv Dalco[51] (Dalco) when he observed that the purpose behind an assessment, objection and appeal or review “... is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act.”[52] Speaking of an appeal, but the principles are equally apt to a merits review in this Tribunal, his Honour continued:
“... It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed ... unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.”[53]
[49] Taxation Administration Act 1953, s 14ZZK(b)(i) and (iii)
[50] With whom Mason CJ, Dawson, Deane, Gaudron and McHugh JJ concurred
[51] [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088
[52] [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [8]; 621; 344; 1373; 168; 4091. The case was concerned with s 190(b) of the ITAA36 which was repealed and re-enacted in substance as s 14ZZK(b)(i) of the TA Act by theTaxation Laws Amendment Act (No. 3) 1991, s 112.
[53] [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [8]; 621; 344; 1373; 168; 4091
In the same case, Dalco, Toohey J[54] explained:
“... A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.”[55]
[54] With whom Mason CJ, Dawson, Deane, Gaudron and McHugh JJ concurred
[55] [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [17]; 631; 351-352; 1379; 173; 4097 per Toohey J
The principles in these cases are equally applicable whether the objection decision reviewed by the Tribunal relates to the assessment of the amount of tax payable, a decision not to remit an amount of shortfall interest charge or an assessment of administrative penalty. The case of McCormack v Federal Commissioner of Taxation,[56] to which he referred, illustrates the application of the principles in the context of an assessment of income tax payable. The Commissioner had treated the net profit from the sale of a property as assessable income on the basis that it arose from the sale of a property she had acquired for the purpose of profit-making by sale within the meaning of s 26(a) of ITAA36 as it was then in force. Gibbs J explained Mrs McCormack’s task:
“... The taxpayer bears the burden of proving that the assessment was excessive. To discharge that burden in a case such as the present he must prove affirmatively, on the balance of probabilities, that the property was not acquired for the purpose of profit-making by sale. The burden may be discharged by drawing inferences from the evidence. In some cases in which all the relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose. But it is not enough, even when all the facts are known, that there is no material upon which it may be concluded that the property was acquired for the purpose mentioned in s. 26(a). If a taxpayer can succeed, simply because there is no evidence from which it can be concluded that the relevant purpose existed, that must mean that the burden of proving the existence of that purpose lies on the Commissioner. That in my respectful opinion would be to invert the onus of proof. The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail.”[57]
[56] [1979] HCA 18; (1979) 143 CLR 284; 23 ALR 583; 9 ATR 610; 53 ALJR 436; 79 ATC 4111
[57] [1979] HCA 18; (1979) 143 CLR 284; 23 ALR 583; 9 ATR 610; 53 ALJR 436; 79 ATC 4111 at [11]; 303; 597; 443; 622; 4,121
Merely establishing on the balance of probabilities that the Commissioner has made an error cannot satisfy the taxpayer’s burden of proof under
s 14ZZK(b)(i) in relation to an assessment for the burden is to prove that “the assessment is excessive”. The point was made in Dalco:“... A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer’s taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. ...”[58]
[58] [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [16]; 625; 347; 1375-6; 170; 4094 per Brennan J
If all of the material facts were known and the amount of a taxpayer’s taxation liability turned on the application of the law to those facts, the taxpayer would discharge theburden of proof by establishing that the Commissioner had erroneously included in the assessed taxable income an amount that should not have been included.[59]
[59] Federal Commissioner ofTaxationv Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [16]; 625; 347; 1375-6; 170; 4094 per Brennan J
It is open to the taxpayer to attack the Commissioner’s power to make an assessment[60] or the calculation of the amount of an assessment. If the taxpayer chooses to attack the calculation of the amount of the assessment:
“... mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment ..., the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous. ...”[61]
[60] McAndrew v Federal Commissioner of Taxation[1956] HCA 62; (1956) 98 CLR 263; 30 ALJR 464 at 270-271; 465-466 per Dixon CJ, McTiernan and Webb JJ
[61] Federal Commissioner of Taxationv Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [11]; 623; 345; 1374; 169; 4092 per Brennan J
An example of the application of the principles is found in Richard Walter Pty Ltd v Commissioner of Taxation[62] (Richard Walter).The taxpayer had returned relatively small amounts of income from a large pathology practice. The Commissioner had claimed at first that a series of complex arrangements effected on the advice of its tax accountants were shams. Those arrangements included a series of loans or trusts. The Commissioner later claimed that the loan arrangements between the taxpayer and other persons were shams. As a consequence, he issued assessments to the taxpayer on the basis that its assessable income was an amount much greater than that which it had returned. Hill J set out the principles in Dalco and McAndrew
and continued:[62] (1996) 67 FCR 243; 96 ATC 4550; 33 ATR 97; Lockhart and Hill JJ; Lehane J dissenting
v Federal Commissioner ofTaxation“ These principles work out in the present case in the following way. The Commissioner alleges that the payments made from Morlea to Richard Walter are income. In order to show that the assessment is excessive Richard Walter must thus show on the balance of probabilities that the payments are not income. It seeks to do that in the present case by making a case that the payments were loans. If this is case is accepted, Richard Walter will, but subject to the s 260 issue, be entitled to succeed. In the present case it sought to show the amounts in question were loans through the evidence of
Mr Holden who swore that they were and that the accounts reflecting them were correct. His Honour did not believe Mr Holden, finding that there was no intention that the loans would be repaid. This being the case, the payments in question were not loans. Whether they had some other character may have relevance to the question of sham, but that can for the moment be put to one side. It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income. If the taxpayer does not do this it will not have satisfied the onus of showing that the assessment is excessive.Even if it had been necessary to determine whether the so-called loan transactions were shams, the onus could not have been on the Commissioner to show what the real transaction was, of which the payments formed part. Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise: Coppleson v Commissioner ofTaxation(Cth) (1981) 52 FLR 95. But as that case itself illustrates, that is in the overall context of the statutory imposition of the burden of proofon the taxpayer and does not place upon the Commissioner an onus of satisfying the Court that there was a sham.
The onus not being upon the Commissioner to show a sham, so too the onus cannot be on the Commissioner to show what the genuine transaction was which is said to have been obscured by that sham.
As I have already sought to demonstrate, it was not necessary for his Honour to determine the matter by reference to sham in the sense of holding that the so-called loans were but a disguise for some other transaction. It was sufficient for his Honour to hold that the payments to Richard Walter were not loans. Once that finding had been made the question would then arise whether Richard Walter had satisfied the onus upon it of showing that the payments were not income.”[63]
[63] (1996) 67 FCR 243; 96 ATC 4550; 33 ATR 97 at 259; 4563; 111-112 and see also 245-246; 4552; 100 per Lockhart J
The Tribunal’s approach in reviewing a decision
The Tribunal’s task in reviewing an objection decision was explained by Foster J in Eldridge v Federal Commissioner of Taxation.[64] He did so in the context of the review of objection decisions made in respect of amended assessments of income tax but the principles are equally applicable to the review of an objection decision relating to the imposition of penalties:
“ It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the court than of the office desk.
It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer’s objections. Although it is not bound by the rules of evidence (sec. 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it. ...”[65]
[64] [1990] FCA 369; (1990) 90 ATC 4907; 21 ATR 897
[65] [1990] FCA 369; (1990) 90 ATC 4907 at 4,921 per Foster J
The submissions
On behalf of Mr Sinclair, Mr Jasper submitted that his client had taken constructive ownership of the property on 30 June 2005. He settled by way of a vendor loan of $1,949,000 payable on 15 December 2005.[66] The December date was chosen to enable Towerlake to have sufficient time to facilitate the transfer of the title to Mr Sinclair. The contract would have been completed on the day of the contract had Towerlake been able to secure a clear title on that day to enable it to complete the settlement. During the year of income ending 30 June 2006, Mr Sinclair was entitled to receive rent earned from the property and was responsible for all costs and outgoings in respect of the property.
[66] See Mr Jasper’s letter dated 4 June 2010 at [4] and [8]
The amount of $99,000, Mr Jasper submitted, was a separate matter. It was prepayment of the interest due under the loan of $1,949,000. The amount of the prepaid interest, which was prepaid on 30 June 2005, was deductible as it is interest due on a loan relating to the purchase of an investment property. During the year ending 30 June 2006, Mr Sinclair received rent from the property and incurred all outgoings on the property.
In his oral submissions, Mr Jasper also submitted that Mr Sinclair had purchased the property with a view to developing it. Had he gone ahead with building the units on the land, for which approval had already been given, the proceeds of their sale would have given rise to income and not to a capital gain.
On behalf of the Commissioner, Ms Lecordier submitted that
Mr Sinclair had acquired the property not to derive income but to develop it with an eye to its returning a capital gain. Towerlake remained the legal owner of the property and was the entity entitled to the rental between 30 June 2005 and the settlement date. Mr Sinclair was not the legal owner of the property held for the purpose of gaining or producing rental income and did not have an exclusive right to use the property during that period. The expense was not incurred in gaining or producing Mr Sinclair’s assessable income but, rather, was incurred to generate Towerlake’s assessable income.
What is the proper characterisation of the payment of $99,000?
I will begin with Mr Jasper’s submission that there exists a “vendor loan” of $1,949,000 on which Mr Sinclair owed, and made a prepayment of on
30 June 2005, the sum of $99,000 to Towerlake. The contract does not support that submission. It is clear from Special Condition 19.1 of the contract betweenMr Sinclair and Towerlake that the term “Interest”, which is an amount capped at $99,000, is the interest due and payable by Towerlake to Statewide. It is not interest payable on any loan from Towerlake to Mr Sinclair. That finding is further supported by Special Condition 19.2.2 which refers to Mr Sinclair’s paying the amount to Statewide in full and final satisfaction of Towerlake’s obligations under the mortgage to pay the interest. There is no reference to Mr Sinclair’s paying interest in full and final satisfaction of his obligations according to any loan agreement between him and Towerlake. Furthermore, Special Condition 19.2.2 refers to Towerlake’s remaining liable to pay Statewide any interest in excess of the sum of $99,000.[67] The loan in respect of which the sum of $99,000 represented interest was the loan from Statewide to Towerlake. There was no loan from Towerlake to Mr Sinclair. The balance of the purchase price was due on the settlement date i.e. 15 December 2005.[67] See [8] above
The characterisation of the sum of $99,000 is also important.
Mr Sinclair paid it to Statewide. Statewide acknowledged its receipt of the money on behalf of the Towerlake account. It made no reference to its being interest on the loan but it clearly accepted the money as payable in respect of the account. There is no evidence that it actually consented to accept prepayment of the interest as required by Special Condition 19.4.4. There is no evidence that it accepted it as payment of interest rather than a payment of capital. Assuming that Statewide accepted it as a payment of interest and Towerlake regarded the payment as satisfying its obligation in that regard to Statewide, it does not automatically follow that the payment was a payment of interest from Mr Sinclair’s point of view. Certainly, Special Condition 19.1 characterised the amount as a payment of interest and, ignoring Special Condition 19.5 for the moment, the Additional Special Conditions described it as such. Special Condition 19.5 puts the sum in a different light. It becomes clear from that clause that the entire sum of $99,000 is payable by Mr Sinclair even if it exceeds the amount of interest due by Towerlake to Statewide. In the absence of any evidence as to the amount of the interest payable to Statewide, that clause leads me to conclude that the relationship between the sum of $99,000 and a payment of interest is one of timing and convenience but not one of substance. It is one of timing and convenience in that Towerlake required that sum to be paid to Statewide to extricate from its immediate financial embarrassment. It is not one of substance. Special Condition 19.5 cast aside any link of substance when it provided that Mr Sinclair must pay to Towerlake any difference between the sum and the amount of the interest owed by Towerlake to Statewide. That sum is clearly part of the purchase price payable by
Mr Sinclair. It is not payable on Settlement Day but the manner of payment of the purchase price is a matter for the contracting parties.
As part of the purchase of the property, it is a capital expenditure and so excluded from the deductibility provision in s 8-1(1) by s 8-1(2)(a) of ITAA97.
Mr Sinclair understood that any interest paid on a loan was deductible but what he has misunderstood is that s 8-1(1) only permits the deduction of a loss or outgoing to the extent that he has incurred it in gaining or producing assessable income. If anybody has incurred a loss or outgoing in gaining or producing assessable income, it was Towerlake for it incurred the interest payable on the loan it obtained from Statewide. Mr Sinclair did not obtain that loan.
The attempt in Special Condition 19.2.1 to assign Towerlake’s obligation to pay interest to Mr Sinclair does not achieve that result. I know of no way in which an obligation to pay interest can be transferred from a debtor to another person without the consent of the person lending the money and, effectively, negotiating and entering a new contract to which the lender and the other person are the parties.
The obligation to pay interest cannot be a chose in action for that is a right of property and not an obligation:
“… A chose in action is a right of property which can only be claimed or enforced by action … Thus a chose in action includes a debt, a right of action on a contract and a right to damages for its breach …In relation to rights arising under a contract, it is sometimes helpful to keep in mind the distinction drawn by Lord Diplock between the primary obligations assumed by a party under a contract and those obligations which he referred to as the defaulting party’s substituted or secondary obligations to pay monetary compensation (for example, damages) for the non-performance of a primary obligation … Both primary and secondary obligations are choses in action which, speaking generally, are capable of being assigned …
There are, however, certain rights and benefits which may not be assigned without the consent of the other party to the contract. For example, an assignment will not be permitted if it will destroy a personal tie … [T]he ability to assign a chose in action is ‘to be confined to those cases where it can make no difference to the person on whom the obligation lies to which of the two persons he is to discharge it …’…”.[68]
[68] Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288 at [9]-[10] per Finkelstein J; citations omitted
The reference in this passage from Finkelstein J’s judgment in Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd to a “debt” is not a reference to the obligation to pay the debt but to the amount owing. It is a reference to “… a sum payable in respect of a liquidated money demand, recoverable by action …”.[69] It is a reference to the right of property that can be claimed or enforced by action. An obligation to pay that debt is not the right to enforce it. Despite the description in Special Condition 19.2.1 of Towerlake’s “rights and obligations to pay the Interest” it is not a right but a duty or an obligation. Towerlake will have had rights under its contract with Statewide and as the mortgagor but the payment of interest was not one of them.
[69] Stroud’s Judicial Dictionary, 4th edition, Sweet and Maxwell, 1972; citations omitted
My conclusion that the payment of $99,000 was capital expenditure leads to the conclusion that it is not deductible and my deciding to affirm the Commissioner’s objection decision in so far as it relates to the assessment.
Should I be incorrect in my conclusion regarding the proper characterisation of the payment of $99,000, I have also looked at whether any loss or expenditure was incurred in gaining or producing assessable income. I have decided that it was not.
Was Mr Sinclair’s interest payment incurred in gaining or producing assessable income?
The contract of sale provided for Mr Sinclair to be entitled to the receipt of income and rent from the property from 30 June 2005. The contract also provided that he accepted the risk and would be responsible for effecting insurance in respect of all improvements. As matters turned out, Mr Sinclair received no rent from the property at all. The final payment of rent was made on 19 August 2005. As it was made in respect of the period ending 23 June 2005, it was not an amount of rent to which Mr Sinclair was entitled under the contract of sale. I accept that he expected to receive rent and was surprised when he found that the Georges, to whom the property had been rented, were no longer there and there were only two sub-tenants remaining on the property for a short period.
An entitlement to receipt of the income and rent does not equate with an entitlement to lease the property of one’s own volition. The transfer of risk to
Mr Sinclair does not change my view. There is no evidence that Towerlake took any steps to find a tenant for the property. There were no tenants, no receipt of rent and no possibility of the receipt of income in the absence of any attempts to find tenants. If I am incorrect in my view that Mr Sinclair was not entitled to find a tenant for the property, I am satisfied on the basis of his evidence that he did not take any steps to do so. Initially, he did not want to do that because the presence of tenants would interfere with the access that any architect or builder would have to the property. Once he had decided to use the property as the family home, the idea of leasing the property seems to have faded altogether. That decision was made in September or October 2005 even though the family did not move into the property until Easter 2006.
These findings lead me to conclude that, so far as rental is concerned, Mr Sinclair did not gain any assessable income. No steps were taken by either Towerlake or Mr Sinclair with the intention of there being any rental income generated by the property at any time following 23 June 2005 or in the financial year ending 30 June 2006.
Mr Jasper also submitted that I should have regard to Mr Sinclair’s plan to develop the property. While I accept that Mr Sinclair had that plan in mind when he purchased the property, it lasted but a short time. Other than having an architect look at the property as a friend, he did not take any steps to bring it to fruition. He did not even take preliminary steps such as gaining formal architectural advice, considering whether he would continue with Towerlake’s plans, examining how he would finance the development, assessing when it would be completed and how it would be marketed and so on. Mr Sinclair did not pay the sum of $99,000 to pursue or fund any of those steps. He did not pay it with an eye to carrying out the development at any future stage let alone incur it in gaining or producing assessable income in the financial year ending 30 June 2006 or with the hope of gaining it in the future when a development was complete. Although Mr Sinclair is involved in property development as a director of his family company, he had but acquired the property in this matter with the idea of developing it; nothing more. By the time he lodged his return in August 2005, he had spent the sum of $99,000 as part of the price he had to pay to obtain the property so that he could have a practical basis on which to implement his idea if he decided to implement it at all. That sum was capital expenditure, and so not deductible. Had it not been capital expenditure, I am not satisfied that it was spent by Mr Sinclair to bring his idea to fruition or even to explore whether it was an idea that might bear fruit in the future. I am not satisfied that the sum paid by Mr Sinclair is properly characterised as a loss or outgoing incurred for the purpose of gaining or producing assessable income at some future time.
In view of my findings, I have decided that the Commissioner’s objection decision relating to his assessment for the year of income ending 30 June 2005 should be affirmed.
PENALTIES
Liability to an administrative penalty
A taxpayer is liable to an administrative penalty if any of the four circumstances set out in s 284-75 of the Taxation Administration Act 1953 (TA Act) applies. Only that in s 284-75(1) is relevant in this case. It applies if a taxpayer makes:
“(a) … a statement to the Commissioner …; and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.”[70]
[70] TA Act, Schedule 1, s 284-75(1)
The Commissioner has taken the view that Mr Sinclair made a statement that was false or misleading in a material particular and so is liable to an administrative penalty. In view of the findings of fact that I have made, I am satisfied that Mr Sinclair has done so. On the basis of those findings, I have decided that he had no basis on which to claim the deduction. His doing so amounts to a false statement in the sense that it was an untrue statement.[71] Having heard Mr Sinclair give evidence, I do not consider that he made the statement knowing it to be false but s 284-75(1) does not refer to the statement’s being intentionally false or misleading; only that it is. I cannot read that additional requirement into either the words themselves or in the section. I am supported in my conclusion by the judgment of Drummond J in Kajewski v Federal Commissioner of Taxation[72] when he considered s 223(1)(a)(i) of ITAA36. That section has been repealed but was expressed in terms similar to s 284-75(1) of the TA Act. His Honour said:
“121. A taxpayer makes a false or misleading statement in a return within s 223(1)(a)(i) if a return which the taxpayer furnishes to the Commissioner in obedience to s 161(1) contains a statement that is erroneous or incorrect: no element of deceitful or dishonest conduct on the part of the taxpayer or anyone else needs to be established. This is the position where the return containing the false statement is prepared by the taxpayer's agent and the taxpayer is not aware of the falsity. …”[73]
[71] Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers
[72] [2003] FCA 258; [2003] ATC 4375
[73] [2003] FCA 258; [2003] ATC 4375 at [121]; 4,402
What is meant by the expression “false or misleading in a material particular” (emphasis added) was considered by the Full Court of the Federal Court in Minister for Immigration v Dela Cruz[74] (Dela Cruz) in the context of s 20(1) of the Migration Act 1958. In summary, that section applied to a person who had made a statement to an officer or person exercising powers under that legislation in respect of an entry or visa that was false or misleading in a material particular. The Full Court said:
“… The term ‘material’ requires no more and no less than that; the false particular must be of moment or of significance, not merely trivial or inconsequential.
… In the context of s 20(1), a statement will be false or misleading in a material particular if it is relevant to the purpose for which it is made …. A statement will be relevant to that purpose if it may – not only if it must or if it will – be taken into account in making a decision under the Act as to the grant of the visa or entry permit in respect of which the statement is made.
For present purposes, it is sufficient to say that a statement made to an immigration official by a person seeking to enter Australia, which conveys a false or misleading impression of the person or of his or her circumstances, would be a false or misleading in a material particular. Immigration officials are entitled to seek and to be told the truth about a person applying to enter Australia, so that they may be in a position to evaluate the application made to them. They may consider it desirable to ask further questions about the subject matter of the statement made to them and, with answers to further questions, the statement may be more useful. But it does not follow that, without further questions, the statement is not material in the sense in which the word is used in s 20(1).”[75]
[74] [1992] FCA 71; (1992) 34 FCR 348; 110 ALR 367; 26 ALD 663; Black CJ, Davies and Neaves JJ
[75] [1992] FCA 71; (1992) 34 FCR 348; 110 ALR 367; 26 ALD 663 at [12]-[14]; 352; 371; 666
The principles established in Dela Cruz seem equally applicable in this case. A statement claiming a deduction when none is claimable is false in a material particular. Disclosure of a taxpayer’s taxable income is a fundamental aspect of a taxpayer’s obligation under the ITAA36 and ITAA97 to pay the amount of tax that he or she should properly pay. It is the base line from which the Commissioner carries out his functions under that legislation. A taxpayer may properly reduce what would otherwise be the amount of taxable income for any year of income by claiming a deduction. The proper assessment of a taxpayer’s taxable income lies at the heart of the assessment of the tax that is, or is not, payable on it. Speaking in general terms, false statements about amounts that may be deducted from that taxable income strike at the heart of that process.
That does not mean that every false claim for a deduction is false “in a material particular”. Regard must be had to the impact of the false statement upon the assessment of a taxpayer’s taxable income and tax payable upon it. In this case, Mr Sinclair’s claim for a deduction of $99,000 had a significant impact upon the assessment of his taxable income and so the tax that would otherwise be payable upon it. His claim for a deduction was false in a material particular. Therefore, I have concluded that he is liable to an administrative penalty under s 284-75(1) of the
TA Act.
Determining the amount of the administrative penalty
Now that I have decided that Mr Sinclair is liable to an administrative penalty, the next step is to work out the amount of that penalty. It is worked out according to s 284-85 of the TA Act. The first step is to work out the base penalty amount under s 284-90.[76] If that amount is not increased under s 284-220 or decreased under s 284-225 of Schedule 1 of the TA Act, that is the amount of the penalty.[77] I will come back to s 284-220.
[76] TA Act, Schedule 1, s 284-85(1)
[77] TA Act, Schedule 1, s 284-85(1)
Section 284-90 turns, in part, on whether a taxpayer has a shortfall amount and, if so, its amount. In the context of this case, a taxpayer has “a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability … is less than or more than it would otherwise have been.” That is the effect of s 284-80(1). Only item 1 of the table found in the section is relevant to Mr Sinclair’s circumstances. It provides that a taxpayer has a shortfall amount if “A tax-related liability of yours for an accounting period … worked out on the basis of the statement is less than it would be if the statement were not false or misleading.” When worked out on the basis of his claim for a deduction, Mr Sinclair’s tax-related liability for the year of income ending 30 June 2006 was less than it would be had his claim not been false. Therefore, Mr Sinclair has a shortfall amount.
Returning to the base penalty, its amount is worked out according to the table at s 284-90 of the TA Act. That section contains seven situations and determines the base penalty amount for each. Only the third is relied on by the Commissioner in this case. It provides that the base penalty amount is 25% of the shortfall amount or part when the “… shortfall amount or part of it resulted from a failure by … [the taxpayer] or … [the taxpayer’s] agent to take reasonable care to comply with a taxation law.”
Mr Jessup submitted that Mr Sinclair had taken reasonable care when he obtained appropriate legal and taxation advice in relation to the matter. What amounts to reasonable care is a matter that has caused me some concern. I note that Senior Member Sweidan referred to both the Commissioner’s Miscellaneous Taxation Ruling MT 2008/1 and to an earlier decision of mine on this point when he delivered his reasons for decision in Re Hutson and Commissioner of Taxation:[78]
“104. Reasonable care is determined objectively. As to the Trust, it is the care that a reasonable person, in the same circumstances as the Trust, would be likely to exercise in making the statement: MT 2008/1 at [27]-[29].
105. Regard must be had to the nature of the obligation requiring the exercise of reasonable care and the particular circumstances in which the taxpayer under that obligation finds itself, i.e. what would be done by a reasonable person in the circumstances of the Trust: Confidential v Commissioner of Taxation [2008] AATA 415 at [57] & [60].
106. It thus involves consideration of the relative size of the shortfall, type of item, complexity of the law and underlying transactions and the difficulty or expense to avoid the risk of making an error. The Commissioner’s position is that it is necessary to consider the personal attributes of the taxpayer and what care a reasonable person with those attributes would have taken in the taxpayer’s particular circumstances: MT 2008/1 at [45]. The Tribunal notes that Deputy President Forgie took a contrary view in Confidential v Commissioner of Taxation [2008] AATA 415 at [60] & [62].”[79]
[78] [2009] AATA 574; [2009] ATC 10-099
[79] [2009] AATA 574; [2009] ATC 10-099 at [104]-[106]; 3,006-3,007
In light of this passage, I have reconsidered the issue and have begun by looking to MT 2008/1 issued by the Commissioner. It is a Miscellaneous Taxation Ruling that is a public ruling for the purposes of Division 358 of Schedule 1 of the TA Act. Although it took effect on 14 May 2008 and so after the year of income in issue in this case, it may be relied upon in respect of matters both before and after that date.[80]
[80] MT 2008/1 at [6] and see also TA Act, s 358-10(1)
Senior Member Sweidan referred to [45] of MT 2008/1 but I will put it
in its context of the paragraphs immediately before and after it:
“44. Whether or not a shortfall amount results from a failure by an entity or their agent to take reasonable care depends on all of the relevant acts or omissions leading to the false or misleading statement. Liability to penalty will only arise where the particular conduct falls short of the standard of care expected of a reasonable person in the same circumstances. In other words, identifying what ought to have been done or ought not to have been done to avoid the risk of making a statement that is false or misleading underpins the imposition of penalty for failing to take reasonable care.
45. The appropriate standard of care required in making a statement is not immutable but takes account of the particular characteristics of the person concerned. Because there is no ‘one size fits all’ standard, the standard of care that is appropriate in a particular case necessarily takes account of:
·personal circumstances (such as age, health, and background);
·level of knowledge, education, experience and skill; and
·understanding of the tax laws.
46. Another consideration that influences the standard of care that is reasonable in the circumstances is the class of entity concerned. For example, as the Revised Explanatory Memorandum to A New Tax System (Tax Administration) Bill (No. 2) 2000 notes, a salary and wage earner is likely to show reasonable care by diligently following the instructions in TaxPack as their obligations would be relatively straightforward. In contrast, an entity that conducts a business and has more onerous tax obligations arising from more complex transactions would be expected to implement appropriate record keeping systems and other procedures to ensure they comply with their tax obligations.
Personal circumstances
47. Personal circumstances have the potential to compromise a person’s capacity to comply with their tax obligations. For example, age, mental health or physical incapacity may adversely affect the level of care and attention that can reasonably be expected in the circumstances.”
These paragraphs certainly take a view different from that which I adopted in Re Confidential and Commissioner of Taxation.[81] The first question that I have asked myself is whether I am bound by MT 2008/1. In answering that question, I have looked first to the nature of rulings.
[81] [2008] AATA 415; (2008) 72 ATR 252
Rulings may be relied upon by a taxpayer if it applies to that taxpayer. If that is the case, the ruling binds the Commissioner in relation to that taxpayer.[82] Should a provision, applied as it would apply, produce a more favourable result for a taxpayer had he or she not relied on the ruling, the Commissioner may apply the provision in that way if not prevented by any relevant time limit.[83]
[82] TA Act, s 357-60(1)
[83] TA Act, s 357-70(1)
There is nothing in the provisions of the TA Act relating to public rulings that suggests that the Tribunal is bound by a public ruling. Indeed, the contrary is suggested. The reference in s 357-70(1) to the application of a relevant provision to the taxpayer “in the way it would apply if … [the taxpayer] had not relied on the ruling” leads to the conclusion that reference may be made to the relevant statutory provisions and to their correct interpretation without regard to the public ruling and its view of their correct interpretation. If it were not so, how else could it be decided that application of the relevant provision would have produced a more favourable result for the taxpayer had he or she not relied on the ruling?
That conclusion is consistent with the conclusion of the High Court in Federal Commissioner of Taxation v Wade[84] in which Kitto J said:
“ No conduct on the part of the Commissioner could operate as an estoppel against the operation of the Act …”.[85]
[84] (1951) 84 CLR 105
[85] (1951) 84 CLR 105 at 117
This passage was expressly adopted by the Full Court of the Federal Court when considering a public ruling issued by the Commissioner after the introduction of Part IVAAA of the TA Act: Bellinz v Federal Commissioner of Taxation.[86] The Full Court referred to the rulings that the Commissioner had previously issued before the introduction of Part IVAAA and so before they first received statutory imprimatur. It accepted as applicable to the ruling before it the statement made by the Commissioner in issuing the first of those rulings, TR 1, when he had said:
“ It is now well established that statements or declarations by the Commissioner of Taxation or of his officers do not have the effect of an estoppel against the operation of the taxation law. While taxation rulings are compiled with care and are intended to assist in the interpretation of taxation law in given circumstances, they must be overruled by legislative amendment to the law or by decisions of appellate tribunals. Furthermore, when a ruling is given in respect of a particular fact situation it will be operative in the circumstances of that fact situation. Taxation rulings are issued subject to these necessary reservations.”[87]
Although Part IVAAA was repealed with effect from 1 January 2006,[88] the passage appears equally applicable to public rulings issued by the Commissioner under
Part 5-5 of the TA Act. It is qualified only by the provisions of the taxation law itself and a qualification of that sort appears in s 357-70(1). In view of that, I consider that I can look to the interpretation of item 3 of the table at s 284-90 of the TA Act.
[86] (1998) 84 FCR 154; 155 ALR 220; 39 ATR 198; 98 ATC 4634
[87] (1998) 84 FCR 154; 155 ALR 220; 39 ATR 198; 98 ATC 4634 at 164; 229; 207; 4,642…..
[88] Tax Laws Amendment (Improvement to Self Assessment) Act (No. 2) 2005, No 161 of 2005; s 3, Schedule 2, Part 2, item 16
Returning to the MT 2008/1, an earlier passage reads:
“27. The expression ‘reasonable care’ is not a defined term and accordingly takes its ordinary meaning. The Australian Oxford Dictionary, 1999, Oxford University Press Melbourne, defines ‘care’ as ‘… 3 serious attention; heed, caution, pains’ and ‘reasonable’ as ‘3a within the limits of reason; not greatly less or more than might be expected’. Taking ‘reasonable care’ in the context of making a statement to the Commissioner means giving appropriately serious attention to complying with the obligations imposed under a taxation law.
28. The reasonable care test requires an entity to take the same care in fulfilling their tax obligations that could be expected of a reasonable ordinary person in their position. This means that even though the standard of care is measured objectively, it takes into account the circumstances of the taxpayer. This aspect of the test is addressed in the Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No. 2) where it states at paragraph 1.69:
Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of the ITAA and regulations. The effort required is one commensurate with all the taxpayer’s circumstances, including the taxpayer’s knowledge, education, experience and skill. …
29. Judging whether there has been a failure to take reasonable care turns on an evaluation of all the circumstances surrounding the making of the false or misleading statement to determine whether a reasonable person of ordinary prudence in the same circumstances would have exercised greater care.”
Paragraph 1.69 of the Explanatory Memorandum to A New Tax System (Tax Administration) Bill (No. 2) 2000,[89] to which reference is made in [28] of
MT 2008/1, is a paragraph that I overlooked in writing Re Confidential and Commissioner of Taxation. It seems to me that the paragraph throws a different complexion on the interpretation of the expression “reasonable care” in s 284-90(1) of the TA Act. That Bill is, after all, the Bill that introduced the section and I am permitted to have regard to that Explanatory Memorandum in interpreting the section. That follows from the application of s 15AA of the Acts Interpretation Act 1901 (AI Act) and s 15AB.[89] No. 91 of 2000
Section 15AA requires me to prefer a construction that will promote the purpose or object of s 284-90(1) rather than one that will not. As Bowen CJ said in Re Application of the NEWS CORP LTD,[90] generally,
“…In the end the task of the court is to ascertain and to enforce the actual commands of the legislature: Scott v Cawsey … [(1907) 5 CLR 132] at 155. This will best be achieved by studying the words used and the context and the purpose or object underlying the Act.”[91]
[90] (1987) 15 FCR 227; Bowen CJ, Lockhart and Beaumont JJ
[91] (1987) 15 FCR 227 at 236
That it is the best way does not preclude reference to other material. I can also glean the purpose or object from extrinsic material such as the Explanatory Memorandum. That was so before the introduction of s 15AB in the AI Act[92] but is underlined by that section. It permits me to have regard to certain categories of extrinsic material that is material not forming part of the Act being interpreted for certain purposes. Among those purposes is the determination of the meaning of a provision when it is ambiguous or obscure.[93] Among the extrinsic material is the explanatory memorandum relating to the Bill that was laid before either House of Parliament before the provision was enacted.[94]
[92] Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265 at 375; 272 per Woodward J
[93] AI Act, s 15AB(1)(b)(i)
[94] AI Act, s 15AB(2)(e)
Read in isolation, s 284-90(1) of the TA Act can be read as I found in Re Confidential and the Commissioner of Taxation. Arguably, it can also be read in the way in which it is explained in MT 2008/1. Therefore, it is ambiguous and I can have regard to the Explanatory Memorandum. Once reference is made to the Explanatory Memorandum and it is read in its entirety, it becomes quite clear that Parliament intended s 284-90(1) to have the meaning adopted by the Commissioner in MT 2008/1.
That means that I must first identify the personal attributes of
Mr Sinclair and his circumstances and then consider what could be expected of a reasonable person in that position. Mr Sinclair is a person of mature years who works as a stockbroker. I do not accept Ms Lecordier’s submission that his being a stockbroker gives him any particular insight into taxation law. I accept Mr Sinclair’s evidence that he does not give advice that is financial advice and nor should he as he does not hold an Australian Financial Licence under the Corporations Act 2001. He has knowledge of property development for he is a director of a family company which is actively involved in development projects. None of Mr Sinclair’s personal attributes give him any particular knowledge or awareness of the taxation law. What they do give a reasonable person with his attributes is an awareness that there may be taxation implications attaching to a purchase of the sort Mr Sinclair agreed to make when he signed the contract with Towerlake. A reasonable person would be on notice to obtain legal advice about those consequences.
On the basis of the evidence, and particularly that of his solicitors, I find that Mr Sinclair did not approach them for formal legal advice regarding the taxation consequences of the contractual arrangements he had made with Towerlake. He did approach Mr Jasper who worked with him and the solicitors on the arrangements. Mr Jasper said that the three of them, Mr Sinclair, the solicitor and he himself, worked on the matter. I accept his evidence that they all felt that an amount paid as pre-paid interest in respect of an activity that produced income would be deductible. As I have found, though, the solicitors did not put that in writing and do not admit to giving specific legal advice about the particular arrangement entered by Mr Sinclair. Mr Jasper is a Fellow of the Tax Institute of Australia but he could not give legal advice regarding the taxation implications of the arrangements.[95]
[95] Section 2.2.2(1) of the Legal Profession Act 2004 (Vic) provides that “A person must not engage in legal practice in this jurisdiction unless the person is an Australian legal practitioner.” Section 2.2.2(2) provides for a number of qualifications to the prohibition and notes another provided for in the Estate Agents Act 1980 (Vic) but none applies to an accountant.
I am satisfied that a reasonable person with Mr Sinclair’s attributes would have sought legal advice before he lodged his taxation return in August 2006. That person would have checked whether rental income had actually been received from the property and would have given thought to how he or she would generate that income in the future or, if he went the development route, how he or she would achieve that outcome and so assessable income. A reasonable person would have done that in deciding whether or not to claim the sum of $99,000 as a deduction. That person would also have sought advice regarding Mr Sinclair’s view that he could claim as a deduction an amount he has paid on behalf of another when that other owes a debt. He appears to have taken none of these courses of action when he came to claim the deduction. I am satisfied that a reasonable person would have sought legal advice from a tax lawyer before claiming the deduction. That means that I am not satisfied that Mr Sinclair acted with reasonable care within the meaning of item 3 of
s 284-90 of the TA Act. Therefore, I affirm the Commissioner’s objection decision imposing a base penalty amount of 25% of Mr Sinclair’s shortfall amount.
For the reasons I have given, I affirm the objection decision made by the respondent on 19 September 2007 disallowing the applicant’s objection to the Notice of Assessment dated 27 March 2006 and the Notice of Assessment and Liability to Pay Penalty dated 28 March 2006.
I certify that the preceding ninety four paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: ....................................................................
Leah Berardi Associate
Date of Hearing 27 August 2010
Date of Decision 16 November 2010
Representative of the Applicant Mr Terrence Jasper
Representative of the Respondent Ms Priscilla Lecordier
Australian Taxation Office
“(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
(2) Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.”