Reddoch and Commissioner of Taxation

[2003] AATA 1343

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2003] AATA 1343

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2002/80-85

TAXATION APPEALS DIVISION		)
Re		GERALDINE REDDOCH

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B J McCabe, Senior Member

Date24 December 2003

PlaceBrisbane

Decision The Tribunal varies the objection decisions under review in accordance with the Tribunal’s reasons for decision. 

(Sgd) Senior Member

CATCHWORDS

TAXATION – income tax – objection decision – characterisation of an amount of money held in a bank account – whether loan or income – lack of documentation – credibility – monies characterised as loan

TAXATION – income tax – objection decision – deductions – whether deductions properly claimed – receipts produced – poor record keeping – some expenses incorrectly claimed or claimed twice

TAXATION – income tax – objection decision – trading stock – calculation of value of stock – insufficient records held – burden of displacing Commissioner’s assessment not discharged

Taxation Administration Act 1953

Income Tax Assessment Act 1936

REASONS FOR DECISION

24 December 2003 Mr B J McCabe, Senior Member

Introduction

1.      Geraldine Reddoch designed, manufactured and sold garments through her own stores in Brisbane. She has objected to the Commissioner’s assessments of her income in the years ending 30 June 1994 to 1999.

2.      Mrs Reddoch’s financial records are a mess. She had difficulty coping with the details of financial management – she was first and foremost a designer rather than a hands-on manager.

3. The Commissioner relies on s 14ZZK(b) of the Taxation Administration Act 1953. That provision says the applicant has the burden of proving the Commissioner’s assessment is incorrect. If the applicant cannot do that, the assessment must stand.

4.      A number of the issues were successfully resolved prior to the final hearing. I will deal with each of the outstanding issues below.

The Material Before the Tribunal

5. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975. It also received the following documents into evidence:

§Statement of Vera Aaroe (Exhibit 2)

§Bundle of Bank Statements (Exhibit 3)

§Transaction Details - July 1998 to June 1999 (Exhibit 4)

§Income Figures from Bank Accounts (Exhibit 5)

§Audit Report in relation to Geraldine Reddoch (Exhibit 6)

§Daily Sales Record from 1998 Diary (Exhibit 7)

§Letter and documents DMP Accountants, 5 September 2002 (Exhibit 8)

§Statement of Geraldine Reddoch, undated (Exhibit 9)

§List of Items delivered to San Mar (Exhibit 10)

§Letter of from ATO to Geraldine Reddoch, 25 June 2003 (Exhibit 11)

§Depreciation Schedule (Exhibit 12)

§Six Volumes of Receipts (Exhibit 13)

6.      The Tribunal heard oral evidence from Mrs Reddoch and Ms Aaroe. Mr Reddoch also gave some evidence. Ms Reddoch appeared in person with the assistance of her husband. Mr Aftanas appeared for the Commissioner.

The Issues

(a)  The unexplained $24023

7.      The applicant sold shoes to a Japanese company in the 1994 and 1995 years of income. The Commissioner says the applicant has understated her income from those sales because she could not account for an amount of $24023 in her account.

8.      The applicant said the money was a loan from a business associate. She identified the individual, who is a Japanese businessman. She said he was an executive of a large company that had nothing to do with the shoe business. It turns out she had a relationship with the gentleman, who is married, some years ago. He gave her the money as a loan but it had to be seen against the backdrop of their personal relationship. She said the circumstances in which the loan was given explain why it was never documented, why there was no security taken and why she did not expect any action to be taken if it were never repaid. She said she intended to repay it, and had already made at least one payment of $2150. She said she was unable to contact the gentleman concerned.

9.      Ordinarily, I would require that the applicant produce some details that would corroborate her claim. But after seeing and hearing her in the witness box, I am satisfied she is telling the truth about the loan. I therefore conclude the amount in dispute is not income.

(b)  Additional receipts

10.     Ms Aaroe, on behalf of the Commissioner, had gone through Mrs Reddoch’s accounts in detail in an attempt to divine her true income and entitlement to deductions. There were several folders of documents lodged with the Commissioner.

11.     I have already indicated the applicant’s books were a mess. Ms Aaroe was able to identify a series of errors in the claims for deductions: for example, a number of items had been claimed twice, and some items were not deductible at all. In all the circumstances, I am unable to be satisfied the Commissioner’s assessment is wrong in this respect. The Commissioner’s revised decision in this respect (set out in a letter to the applicant dated 25 June 2003) must therefore stand.

(c)  Trading stock

12. There were several issues arising out of the applicant’s treatment of trading stock. Section 28 of the Income Tax Assessment Act 1936 says the value of trading stock left over at the end of each year must be included in the taxpayer’s assessable income. Section 36 says the value of items taken out of the trading stock for personal use must also be added into the taxpayer’s income.

13.     The Commissioner says the applicant used some items for private use. He says the applicant wore some dresses herself and gave others as gifts. I am satisfied the applicant did make person use of dresses made from materials acquired for the purposes of the business. I do not suggest she was doing anything dishonest or inappropriate in doing so: she says she had to see how the creations appeared when worn, and it was obviously a good thing for a fashion retailer to wear her own product. While some of the items were not to her own taste, she said the greater part of her wardrobe at the time was comprised of her creations. In those circumstances, I think the Commissioner’s decision to adjust the assessment of income to take into account personal use items cannot be disturbed.

14.     The applicant freely admits she did not do stock-takes. She said she knew what she had on the floor and in the manufacturing process at any given time; it was all in her head. That makes reconstructing her finances for tax purposes very difficult. The Commissioner has used statistical analysis of the available data to project how much trading stock should be carried over each year. He admits the process is inexact, and notes there is no data available from directly comparable businesses that might assist.

15.     In circumstances where the applicant does not have any evidence apart from a few photographs of trading stock, I am unable to fault the Commissioner’s approach. His conclusions have not been proved to be incorrect, so they must stand.

Conclusion

16.     The objection decisions under review are varied in accordance with these reasons.

I certify that the 16 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Senior Member

Signed:         Sarah Oliver
  Associate

Dates of Hearing  16 April 2003 and 13 October 2003
Date of Decision  24 December 2003

For the Applicant  Mr Reddoch, the applicant’s husband
For the Respondent                  Mr Aftanas, ATO Legal Practice