Robis Consulting Pty Ltd and Commissioner of Taxation (Taxation)
[2022] AATA 2832
•25 August 2022
Robis Consulting Pty Ltd and Commissioner of Taxation (Taxation) [2022] AATA 2832 (25 August 2022)
Division:SMALL BUSINESS TAXATION DIVISION
File Number: 2021/3685
Re:Robis Consulting Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
Decision
Tribunal:Senior Member R Olding
Date:25 August 2022
Place:Sydney
The objection decision is set aside and substituted with a decision allowing the applicant’s objection in full.
...................................[sgd].....................................
Senior Member R Olding
Catchwords
TAXATION – CASH FLOW BOOST – whether wages constructively paid – whether scheme for sole or dominant purpose of obtaining or increasing Cash Flow Boost – decision set aside
Legislation
Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth), ss 5(1), 7(3)
Taxation Administration Act 1953 (Cth), s 14ZZK
Cases
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276
VNBM and Commissioner of Taxation [2021] AATA 1626
REASONS FOR DECISION
Senior Member R Olding
25 August 2022
This application for review concerns whether the applicant is entitled to a Cash Flow Boost (“CFB”) for the March 2020 period.
Provision of CFB payments to eligible business entities was one of the economic responses to the COVID-19 pandemic enacted in 2020. The governing legislation is the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (“BCF Act”).
issues to be resolved
The decision under review is the Commissioner of Taxation’s decision disallowing the applicant’s objection to the Commissioner’s decision to refuse payment of the CFB for March 2020. The applicant has the burden of proving that objection decision should not have been made or should have been made differently: Taxation Administration Act 1953 (Cth), s 14ZZK.
Apart from two disputed items, it is common ground that the applicant would satisfy the criteria for entitlement to the CFB. The disputed items give rise to two issues for resolution; namely, whether the applicant has discharged the burden of proving:
(a)it paid “wages” in the form of directors fees’ in March 2020 (and thus had an obligation to withhold PAYGW) - the “payment issue”;[1] and
(b)neither the applicant nor any associate or agent of the applicant has entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of making the applicant entitled to the CFB for March 2020 or increasing its entitlement for the period – the “scheme issue”.[2]
[1] BCF Act, s 5(1)(a).
[2] BCF Act, s 5(1)(g).
Failure to prove either would be fatal to the applicant’s case.
In respect of the payment issue, the applicant brought to account as wages in its March 2020 activity statement directors’ fees in the total amount of $69,500 with PAYGW withholdings of $24,846. The applicant did not pay directors’ fees by way of an actual payment in March 2020. Rather, the applicant says that it did so constructively by declaring earlier directors’ drawings to be directors’ fees during March 2020. The Commissioner accepts that directors’ fees may be paid constructively in that way but does not accept that the applicant did so in this case.
The scheme issue is governed by section 5(1)(g) of the BCF Act. Section 5(1)(g) requires an inquiry into whether the applicant or an associate or agent had the actual sole or dominant purpose of making the applicant entitled to CFB or increasing its entitlement, rather than whether, objectively, that would be concluded to be its sole or dominant purpose.[3]
[3] VNBM and Commissioner of Taxation [2021] AATA 1626.
background
The applicant was incorporated in 1999. Its sole shareholders are Mr Robert Johnson (“Mr Johnson”) and his wife, Mrs Marilyn Johnson. Mr and Mrs Johnson are directors of the applicant, as is their son, Mr Ross Johnson.
Mr Johnson is the most active director. The decisions and activities of the applicant rely upon him, and he was solely responsible for preparing the applicant’s activity statements and made all the salary and wage decisions for the applicant. He has done so for over 20 years since the commencement of the company’s activities. [4]
[4] Transcript of proceedings, P-18, lines 23-44.
The applicant is a vehicle for the provision of actuary and related consultancy services by Mr Johnson who is a highly experienced actuary (and also qualified as a Certified Practising Accountant, although he has never practised as such). He provided services at a sophisticated level, as conceded by the Commissioner and evidenced by the annual salary in the order of the equivalent of $500,000 that he commanded during a period of employment in the United Kingdom in 2015-2017.
Mr Johnson provided the following outline of the activities of the applicant during the decade leading up to the period in respect of which the dispute arose. I do not understand the Commissioner to take issue with this summary which I accept.
Period
Activities
July 2010 – August 2015
Full-time operations based in Australia.
September 2015 – October 2017
Scaled back operations due to Mr Johnson working full-time in the UK.
November 2017 – June 2019
Largely dormant due to retirement of Mr Johnson following a health scare. The applicant was in receipt of a substantial non-compete payment.
July 2019 – June 2020
With the non-compete arrangement due to end in December 2019, Mr Johnson undertook a number of initiatives to revitalise the business including meetings with high level executives in the insurance industry.
One of the initiatives in 2019-20 to revitalise the applicant involved discussions with the Institute of Actuaries of Australia (“IAA”). This ultimately resulted in a service agreement for the applicant to provide training services for the IAA. I accept Mr Johnson’s evidence that he reasonably expected his initiatives would result in other revenue for the applicant, although ultimately those initiatives did not come to fruition due to the advent and escalation of the pandemic.
some over-arching matters
Before turning to examine the payment and scheme issues individually, it will be helpful to consider some over-arching matters that may be relevant to both issues. In some cases, the Commissioner’s observations in his written submissions take on a different complexion when considered in a broader context, as outlined below.
History of payments before and after the March 2020 period
The directors’ fees and PAYGW declared by the applicant in the 2020 financial year were:
Month
Directors’ fees
PAYGW withheld
July – December 2019
Nil
Nil
January 2020
Nil
Nil
February 2020
Nil
Nil
March 2020
$69,500
$24,846
April 2020
$17,443
$5,404
May 2020
$34,767
$11,185
June 2020
$39,812
$15,662
Additionally, there were directors’ fees (or other wages) declared in the months immediately following June 2020. However, these were at a lower level – approximately $10,000[5] - and none were declared in the December 2020 quarter.
[5] Transcript, P-52, lines 21-24.
Considered in isolation, it is no surprise that the Commissioner’s systems would have flagged the CFB entitlement for further attention. This history presents a picture of the applicant commencing to pay substantial wages in the months that are relevant to CFB entitlements, but not in the months before or after those months.
However, as noted above, Mr Johnson explained that the applicant’s business had been almost dormant following his health scare. It was not until the 2019-2020 year that he began the initiatives designed to attract work and income for the applicant. It is not surprising that the applicant did not declare directors’ fees before those initiatives began to bear fruit.
The Commissioner also suggested it is relevant that the applicant’s work with the IAA commenced in November 2019 but directors’ fees were not declared until March 2020. Why, the Commissioner asked rhetorically, would directors’ fees not have been paid from November 2019?
Mr Johnson explained that, although the work commenced in late 2019, it was first invoiced in January 2020 and paid on 29 January 2020. Following that evidence, the Commissioner asked rhetorically why the directors’ fees were not declared until March 2020. In the context of a small business essentially operated by Mr Johnson personally, with Mr Johnson carrying out both the professional work and administrative requirements, I do not find a delay of at most about two months between the receipt of the first invoice payment from the IAA and the declaring of directors’ fees remarkable.
As noted, it is not surprising that the payment of directors’ fees for the first time in March 2020 after a long hiatus would attract the Commissioner’s attention. However, having regard to the contextual considerations outlined, I accept Mr Johnson’s submission that it is not particularly remarkable that no wages were declared before March 2020. It is, of course, possible that this was motivated by an entitlement to CBF, but that is not the only possible explanation. Mr Johnson’s explanation of the context is not inherently improbable in the context outlined.
Wages not being declared in the September 2020 quarter of the order said to have been declared in the previous four months, when the payment of wages would affect CFB entitlements, is consistent with those declarations being for the purpose of accessing CFB payments. However, again, Mr Johnson’s explanation that he ceased declaring directors’ fees while embroiled in the current dispute with the Commissioner is not inherently implausible. Additionally, it is consistent with Mr Johnson’s evidence, which I have accepted, that the expected additional income from his initiatives to generate work did not come to fruition due to the impact of the pandemic.
Deciding to declare directors’ fees when new work had commenced and more was expected, and then ceasing when the applicant became embroiled in a dispute in which the Commissioner was essentially suggesting dishonesty regarding the payment of directors’ fees, and when expected work had not eventuated is, again, not an implausible course of action in the circumstances then prevailing. Indeed, it might have been regarded as surprising if the applicant continued to pay directors’ fees in those circumstances.
Next, the Commissioner pointed to the following history of the applicant’s reported wage (directors’ fee) payments and withholding:
Year[6]
Wages declared
Amount withheld
2015
$100,000
$32,824
2016
Nil
Nil
2017
$2,000
$500
2018
$2,000
$500
2019
$54,000
$11,000
2020
$161,522
$57,097
[6] Unless otherwise indicated, all references to a “year” are to the financial year ending 30 June in that year.
Again, it is to be expected that this stark demonstration of a significant jump in wages declared in the final four months of the 2020 income year compared with previous years would attract the Commissioner’s attention, but it must be considered in context.
Part of that context is the revitalisation of the applicant’s business with the initiatives undertaken by Mr Johnson from 2019-2020 to generate work and income following his earlier retirement due to a health scare. Having regard to his previous income-earning ability; the initiatives and discussions he had underway; and the IAA work already obtained, an expectation in the first half of 2020 that the company would pay Mr Johnson directors’ fees in the order of $150,000 is, in my view, not inherently improbable.
Another contextual consideration is that the jump in declared wages is not so out of step with the applicant’s previous practices as the table above indicates when those practices are considered over a longer period time incorporating the period before the hiatus caused by Mr Johnson’s health scare and the period of employment in the UK. The following table illustrates this point:
Year
Declared wages –
Mr Johnson
$Declared wages – Mrs Johnson
$Total declared wages
$2004
7,500
7,500
15,000
2005
37,500
7,500
15,000
2006
22,500
Nil
22,500
2007
Nil
Nil
Nil
2008
Nil
Nil
Nil
2009
50,000
Nil
50,000
2010
Nil
Nil
Nil
2011
100,000
Nil
100,000
2012
100,000
25,000
125,000
2013
100,000
Nil
100,000
2014
100,000
Nil
100,000
2015
100,000
Nil
100,000
2016
Nil
Nil
Nil
2017
Nil
2,000
2,000
2018
Nil
2,000
2,000
2019
50,000
4,000
54,000
2020
150,000
11,552
161,552
From 2011 to 2015, when the applicant was last actively engaged in its business, it declared wages in the $100,000 - $125,000 range. Against that context, his demonstrated income earning ability and the initiatives taken to generate income, the decision Mr Johnson described to pay directors’ fees in the order of $150,000 is not as out of step with past practice as the Commissioner’s submissions would suggest.
Next, the Commissioner noted that in the five financial years from 2015 to 2019 the applicant reported wages only in the final quarter – that is, the June quarter – of the financial year. By contrast, in 2020 the applicant reported wages in March, April, May and June 2020.
Some context for that observation should be noted. First, as the table above indicates, it is only in 2015 and 2019 that significant wages were declared. The applicant declared nil wages in 2016 and minimal amounts in 2017 and 2018. Nevertheless, the observation is accurate: such wages as were declared were reported in the final quarter. There is no advantage to be obtained by declaring wages earlier when such wages are not paid by direct cash transfer but rather by offsetting against directors’ drawings. Indeed, that would be consistent with Mr Johnson’s own evidence that wage decisions are made towards the end of each financial year depending on the resources of the company as known at that time.
On the other hand, declaring of directors’ fees in March 2020 coincides with the commencement of a new income stream from the IAA work and the anticipated further work from Mr Johnson’s business initiatives. In that respect, it contrasts with the previous year in which Mr Johnson undertook only minimal work for the applicant.
Additionally, as the Commissioner acknowledged, wages were reported other than in respect of the month of June on some occasions, as this table illustrates:
Year
Month wages reported –
Mr JohnsonMonth wages reported – Mrs Johnson
2010
n/a
n/a
2011
December and June
n/a
2012
March and June
March and June
2013
December
n/a
2014
June
n/a
2015
June
n/a
2016
n/a
n/a
2017
n/a
April and May
2018
n/a
May
2019
June
June
As may be seen, wages were reported in eight years between 2010 and 2019 inclusive. Only in a minority (three out of eight) of those years were wages reported only in June and in five of the eight years wages were reported in a quarter other than the June quarter. Viewed in that context, the reporting of wages other than in respect of the month of June does not present as starkly out of step with the historical pattern (such as it is).
The 300% rule
For entities that are entitled to a CFB, section 7 of the BCF Act governs how CFBs are calculated. In relation to “First boosts”, covering the periods from March 2020 to June 2020, the CFB is the entity’s withholding period total for the period, capped at $50,000 for all periods. However, an entity’s withholding period total for March 2020 is taken to be three times its actual withholding amount for March 2020. In other words, for entities reporting on a monthly basis, total withholding is effectively treated as 300% of withholdings for March 2020. This was referred to by the parties as the “300% rule”.
Mr Johnson gave evidence that, when he lodged the applicant’s activity statement on 16 April 2020, he was aware of the general rules regarding CFB eligibility. However, he maintained that he was not aware of the 300% rule and that he was surprised when the applicant received a credit for CFB in excess of the $24,846 PAYGW amount reported in the applicant’s activity statement. He was, he says, expecting a CFB credit equal to the PAYGW of $24,846 reported for March 2020.
That evidence is consistent with a witness statement from the applicant’s accountant, Mr Bruce Hanson. Mr Hanson declared that Mr Johnson contacted him in early May 2020 after receiving correspondence from the Commissioner’s officers querying the applicant’s eligibility for CFB for March 2020. Mr Johnson had prepared a draft letter on 12 May 2020 stating his surprise that:
“the ATO had estimated the March 2020 quarterly PAYG as being well in excess of $50,000 when the ATO can determine, from records in its possession, that the full PAYG for this quarter is $24,846”.
In the letter, Mr Johnson went on to state:
“I therefore request the ATO to adjust the credit to Robis’ tax account to reflect this known figure and reverse the excess credit of $24,154. I wish to make it specifically clear that:
1. I at no point anticipated a credit in excess of $24,846.
2. I have at no point sought a credit in excess of $24,846.
3. I DO NOT want the ATO to pay the excess credit of $25,154 in to the Robis Consulting bank account.”
The draft letter was finalised and sent on 14 May 2020.
In his outline of submissions, the Commissioner submitted that the Tribunal should not accept Mr Johnson’s evidence that he was unaware of the 300% rule. I see no reason to reject Mr Johnson’s evidence which is consistent with his communications with Mr Hanson within a short space of time after lodging the March 2020 quarter business activity statement and with his letter of 14 May 2020 to the Commissioner.
Other evidence of the applicant’s accountant (Mr Hanson)
In his witness statement, Mr Hanson also recounted that Mr Johnson said to him on a number of occasions words to the effect that:
“I don’t want the cash flow boost;
or
I wasn’t aware of the cash flow boost.”
Although that evidence is hearsay, I accept it as unchallenged evidence, and find, that those statements were made by Mr Johnson.
The “three different explanations” issue
Central to the Commissioner’s submissions was the assertion that Mr Johnson’s explanations were not credible because, the Commissioner said, he had provided three inconsistent explanations for why or how the payment of the directors’ fees had occurred. Careful consideration of both the bases for that assertion and Mr Johnson’s explanations is required.
First alleged explanation
The first alleged explanation put forward by the Commissioner is contained in the applicant’s letter of 14 May 2020 referenced above. Mr Johnson stated in the letter that:
“I have always endeavoured to ensure that I do not understate my tax liabilities when preparing my BAS statements, with any over-estimations corrected in the June BAS statement, so my preference is to err on the high side. I therefore declared income of $69,500 in this BAS statement and PAYG of $24,846.”
Read in context, it is clear that Mr Johnson’s reference to “income” is intended to mean income in the form of directors’ fees paid to Mr and Mrs Johnson and not income of the applicant.
The Commissioner also points to the following paragraph in the applicant’s 14 May 2020 letter:
“There are therefore no specific payroll transactions aligning with the implied net payroll amount of $44,654 and in consequence there are no specific transactions in support of this amount in the company’s bank statements which have been requested.”
Second alleged explanation
The Commissioner’s assertion of a second alleged explanation is drawn firstly from the applicant’s notice of objection, where it was stated that:
“there are sufficient transactions to confirm a net transfer to immediate family members of at least $44,654 (ie: W1 of $69,500 less W2 or $24,846) in the March quarter.”
The Commissioner goes on to reference the applicant’s original Statement of Facts Issues and Contentions filed on 21 September 2021 which referred to $34,343.39 paid directly from the applicant to the directors in the March 2020 quarter of which $18,843.29 was dealt with in March 2020, and $42,363.06 charged to Mr Johnson’s credit card by the directors. Of the total amount of $76,706.45 ($34,343.39 plus $42,363.06), $44,654 was said to have been treated as wages (net of PAYGW).
Third alleged explanation
The Commissioner asserts that the applicant for the first time, some 18 months into the dispute, in its amended Statement of Facts Issues and Contentions (“amended SFIC”) and Mr Johnson’s witness statement presented an explanation that the applicant:
“was maintaining a director’s drawings account (the List) which had a credit balance of $96,020.56 as of 31 March 2020 at which time the Applicant converted $44,654 into net salary and wages.”
The Commissioner goes on to assert that:
“[t]he Applicant has not explained how the maintenance of the List is consistent with its claims not to maintain ongoing accounting records.”
Are the explanations inconsistent?
I do not accept that these assertions by the Commissioner establish that the applicant has put forward inconsistent explanations.
The applicant’s position is that it is entitled to treat previously uncharacterised drawings as wages upon declaring such payments to be wages, a proposition that is not disputed by the Commissioner. The first alleged explanation is consistent with that position. Mr Johnson has never asserted that the applicant could point to particular payments from its bank account which, at the time the transferred occurred, were earmarked as wages. His letter of 14 May 2020 openly acknowledges that.
So far as the Commissioner relies upon the reference in Mr Johnson’s letter to correcting “over-estimations”, that is readily explicable as Mr Johnson deciding to declare more rather than less in the way of wages with a view his estimated overall tax position. Lower amounts of directors’ fees and therefore PAYGW could be declared in the June quarter if that seemed appropriate having regard to the directors’ estimated incomes for the year as matters stood at that time. These references do not to me suggest that the reported wages were anything other than the amounts declared or somehow tentative or estimates.
As for the second alleged explanation, Mr Johnson explained that this was put forward on the footing of his understanding that the Commissioner required the identification of payments made within the period that aligned with, by which it is readily apparent Mr Johnson meant added up to, the amounts treated as wages in the period. The alleged second explanation attempts to demonstrate that there was such an amount if the actual payments in the period to the directors (drawings) and various amounts charged to the credit card were taken into account.
As for the third alleged explanation, it will be recalled that the Commissioner suggests the applicant put forward for the first time that the applicant was maintaining a directors drawings account. That is not what either the amended SFIC or the witness statement says. In that regard, both documents state that drawings in the aggregate amount of $96,020.56 were made by the directors during the first nine months of the income year. That amount was extracted from the bank statements and referenced to spreadsheets extracted from the bank statements. That is consistent with the basis on which the applicant maintained that wages were constructively paid; that is, by declaring earlier directors’ drawings to be wages.
Other controversies traversed at the hearing
Monthly vs quarterly lodger
A controversy arose regarding whether Mr Johnson understood the applicant to be a monthly or quarterly lodger for PAYGW purposes. Mr Johnson maintained that he considered the applicant to be a quarterly lodger.
The applicant accounted for GST quarterly and generally reported no wages in January and February activity statements which Mr Johnson ticked appropriately to indicate no wages were paid. Taking the business activity statement for March 2020 as an example, the form itself, somewhat curiously, calls for reporting of:
“PAYG tax withheld for the QUARTER from 1 March 2020 to 31 March 2020”
[Capitalisation in original]It will be noted that the form references a quarter but nominates a month. Against that background, it perhaps would not be startling that Mr Johnson would have mistakenly regarded the applicant as reporting quarterly for PAYGW. It was on a quarterly basis that the applicant in fact brought wages and PAYGW to account when directors’ fees were paid in most (though not all) cases. On the other hand, Mr Johnson acknowledged that on behalf of the applicant he lodged activity statements indicating nil wages for the first two months of each quarter. It is implicit in that course that he knew the applicant was required to account monthly.
Ultimately, I consider that little turns on this controversy which the Commissioner put forward in support of a submission that the applicant gave inconsistent explanations of the directors’ fees paid and the basis on which they were said to be paid. One of those explanations was said to depend upon Mr Johnson’s believing the applicant to be a quarterly PAYGW reporter. I have rejected the submission that there were three inconsistent explanations for the reasons set out above.
Drawings
Mr Johnson gave evidence that he used a credit card for the applicant’s business expenses. Amounts charged to the card were tracked and designated as either business or personal expenses. He had started using the particular card some years back because the limits on the card previously used by the applicant proved to be too restrictive to cover, for example, expenses of urgent overseas trips undertaken on short notice.
The credit card was a personal credit card in Mr Johnson’s name. Mr Johnson claimed to be unaware of this until some time in 2021, prior to that assuming it was a company card as it had been consistently used for that purpose and accounted for as such for some years. In any case, Mr Johnson asserted that because the transactions were consistently accounted for the error made no difference to the final accounting for the expenses.
The Commissioner submitted that I should reject this evidence as highly improbable. The Commissioner also sought to establish that the amounts said to have been paid as wages in March 2020 were unrealistic compared to the cash reserves of the applicant or its income and profits at the time. Mr Johnson countered that in any case the applicant was owed amounts well in excess of the declared wages by way of directors and those loans had to be repaid at some time.
I do not consider these issues to be determinative in this matter. The applicant’s case is that actual cash drawings in the first nine months of 2020 were well in excess of the amounts declared as wages for March 2020, and that is established by the referenced debits to its bank account. Whether payments were in fact made under the credit card as Mr Johnson asserts, or whether the wages said to have been declared are out of step with the cash reserves or profit or income of the applicant, the fact is, as I have found, amounts in excess of the net amounts declared as wages for March 2020 were withdrawn by the directors in the first nine months of 2020. That being so, on any view at least those amounts already withdrawn by the directors from the applicant could be declared to be treated as wages. Further, the income from IAA continued until the end of the 2020 calendar year. There can be little doubt that the applicant had the capacity to declare the wages it maintains it declared in 2020 and mainly by reference to amounts already withdrawn by the directors.
The Commissioner suggested that directors of a private company would prefer to withdraw funds by way of franked dividends rather than wages, and noted as Mr Johnson stated in evidence that historically 86% of the company’s drawings had been treated as dividends. In oral evidence, Mr Johnson unequivocally asserted that he and the applicant were indifferent as to whether wages or dividends should be declared.
Ultimately, these are matters which it is to be expected that directors would determine having regard to all of the prevailing circumstances. This is not a case where the applicant has consistently treated drawings as dividends and then suddenly started declaring wages. Substantial wages have been reported variously in past years as indicated in the table above. I take the Commissioner’s submission into account, but do not consider that a private company declaring wages rather than dividends is out of the usual and in itself significant evidence of a purpose of obtaining CFBs.[7]
[7] For completeness, I note the Commissioner also drew to attention that the applicant did not make superannuation contributions in respect of the directors’ fees said to have been paid to Mr and Mrs Johnson. I accept Mr Johnson’s evidence that he mistakenly thought that, both being over 65 years of age, contributions were not required for either recipient. Again, in my view, that evidence is quite plausible. As already noted, Mr Johnson is a CPA, but has not practised as such. He would not be the first professional person to be confused in respect of the complexity of shifting sands that comprise Australia’s superannuation rules.
payment issue
Mr Johnson gave evidence that amounts, in excess of the directors’ fees said to have been declared in and reported for March 2020, had been paid by the applicant to or on behalf of himself and Mrs Johnson as directors’ drawings in the first nine months of the 2020 income year. On behalf of the applicant, Mr Johnson decided, he said, to declare the reported amounts to be directors’ fees in March 2020 and accordingly brought those “wages” and applicable PAYGW to account in the applicant’s March 2020 activity statement lodged on 16 April 2020.
A difficulty for the applicant is that it did not maintain any direct record of this alleged decision other than the business activity statement. It did not, for example, create a directors’ minute. Nor, as the Commissioner pointed out, did it issue pay slips, although while I take this into account, I do not give it substantial weight as it is not an uncommon occurrence for directors’ fees to be paid by small family companies to family members without such formalities. Nor is there a wages or directors’ fees account in which the payment was recorded – the applicant accounts on a cash basis and relies upon its bank statements, activity statements and tax returns as a record of its transactions.
In favour of the applicant’s assertion, bringing the PAYGW obligations to account in the March 2020 activity statement is consistent with the payment of the directors’ fees in March 2020. However, upon hearing this evidence, it occurred to me that the fact that directors’ fees and PAYGW were reported in a March 2020 activity statement did not necessarily mean that the decision to declare the earlier directors’ drawings to be directors’ fees was made in March 2020 such that, as required by the BCF Act, the payment was made in March 2020. Both the decision and the reporting could have occurred in April 2020 when Mr Johnson prepared the activity statement although that would mean that the directors’ fees were in fact declared in April 2020, not March 2020, and should have been brought to account in the April 2020 activity statement.
With that in mind, I asked Mr Johnson to provide some context to the making of the decision to declare the directors’ fees in March 2020. Mr Johnson’s reply indicated that, because he relied on the applicant’s bank statements, and they could not be altered once closed off at the end of the month, he would make such decisions during the month.[8] Although necessarily self-serving, that is a rational and plausible explanation consistent with the decision to declare the directors’ fees being made in March 2020 rather than April 2020.
[8] Transcript, P-48, lines 16-29; see also P-59, lines 19-27.
Although not directly challenging this evidence in cross examination, the Commissioner nevertheless persisted with a submission that I should not accept that the directors’ fees were declared in March 2020 as Mr Johnson had stated in his evidence. I do not accept that submission. I am persuaded that Mr Johnson on behalf of the applicant determined in March 2020 that amounts totalling $69,500 were to be treated as directors’ fees.
An amount in excess of that amount had been transferred to the directors during the year. It was open to the applicant to decide to treat those previously unspecified or uncharacterised amounts as directors’ fees in March 2020. That is what Mr Johnson says he did. For the reasons previously outlined, his explanation is not inherently improbable.
In coming to this conclusion, I have taken into account three factors. First, Mr Johnson’s evidence is necessarily self-serving and therefore it must be treated with great caution. Secondly, although approaching the evidence with that caution, I am not to adopt a default position that it is not to be regarded as truthful.[9] Thirdly, I am acutely conscious of the limitations on the ability of a tribunal of fact to assess the honesty of a witness from their demeanour.
[9] Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276; Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.
With that in mind, I observe that Mr Johnson presented as straightforward witness, readily acknowledging matters that were against the applicant’s case. Nothing in the way he answered the searching cross-examination indicated to me a reason to treat his evidence as other than truthful. Nevertheless, I base my assessment of his evidence primarily on its consistency and plausibility. I also take into account that it is consistent with his interactions with his accountant as outline above.
As noted, and emphasised by the Commissioner, the applicant did not present payslips, directors’ minutes or other contemporaneous documentary evidence in support of the assertion that the directors’ fees were declared in March 2020. However, that is not uncommon in small businesses. In so saying, I do not wish to encourage such an approach. Indeed, the absence of contemporary records in support of Mr Johnson’s evidence gave me considerable pause.
However, taking into account all of the factors to which I have referred – in particular, Mr Johnson’s written and oral evidence and responses to cross examination, and that his explanations in response to the issues raised by the Commissioner were not implausible, I am satisfied that the balance of probabilities favours Mr Johnson’s account regarding the declaring of wages. That balance may be only “ever so slightly” in his favour,[10] but that is sufficient for the applicant to succeed on the payment issue.
[10] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [14].
scheme issue
The parties approached this case on the basis that Mr Johnson was the controlling mind of the applicant. Thus, no distinction was drawn between the purpose of Mr Johnson and the purpose of the applicant. Nor was the purpose any other associate or agent, such as an adviser or one of the other directors, said to be relevant.
However, the Commissioner did not confine the issue to whether the payment of wages in March 2020 constituted a scheme to obtain or increase CFB, but rather included a further alleged over-arching scheme which includes the payment of those wages along with the wages declared in April, May and June 2020 as part of a single scheme to obtain CFB for March 2020 and the subsequent months.
Mr Johnson gave written and oral evidence and was cross examined as to his purpose in causing, as he maintains, the directors’ fees to be declared in March 2020. The parties also referred to objective evidence including as to the time and amounts of the constructive payments said to have been made and the earlier and subsequent history of payment of directors’ fees.
The Commissioner highlighted a number of factors which he maintained were indicative of a dominant purpose of obtaining or increasing CFB for March 2020 or for the periods comprising March 2020 through to June 2020. These are mainly dealt with above where I have concluded that, although inferences against the applicant might be drawn, Mr Johnson’s explanations are not inherently improbable. Because of the subjective nature of the inquiry required by section 5(1)(g) of the BCF Act, the matter comes down to whether, having regard to Mr Johnson’s evidence and the objective matters largely traversed above, I am persuaded on balance that he did not have a dominant purpose of obtaining or increasing a CFB.
I accept that aspects of this matter would cause the Commissioner to have concerns that there was a scheme for the dominant purpose of obtaining or increasing CFB (and for that matter whether constructive payments were in fact made as Mr Johnson testified). Indeed, some of those factors could support inferences to the effect urged by the Commissioner. However, for the reasons I have set out above, they are also explicable on the plausible bases put forward by the applicant.
The case put forward by the Commissioner, that Mr Johnson’s evidence was not credible, effectively urges me to accept that he filed a false activity statement; made false statements to the Commissioner; and perjured himself repeatedly before this Tribunal. A conclusion of that kind should not be reached merely because adverse inferences could be drawn from actions or sequences of events. Here, for the reasons given, there were what I considered to be plausible explanations in respect of the issues raised by the Commissioner.
Having heard Mr Johnson’s clear, consistent and straightforward oral testimony, and considered his explanations, I am, on balance, satisfied that he gave honest testimony. Specifically, I am persuaded on balance that neither Mr Johnson nor the applicant had a dominant purpose of increasing or obtaining a CFB.
In respect of the Commissioner’s first identified scheme, I am persuaded Mr Johnson and the applicant did not have a dominant purpose of increasing the CFB for March 2020 from the amount of $24,846 to $50,000. That follows, in particular but not solely, from my acceptance that Mr Johnson was not aware of the 300% rule.
The Commissioner’s over-arching scheme involving the payment of wages in March, April, May and June of 2020 presents greater difficulty for the applicant. There is no doubt that Mr Johnson was aware of the CFB rules when he determined to declare wages for the months of March through to June 2020. He stated as much. And he told the Commissioner in his 14 May 2020 letter that he intended to declare wages in a range that would qualify the applicant for maximum CFB.
But it does not follow that because a person is aware of the consequences of their actions the achievement of those consequences must be the dominant purposes of their actions. There could be little doubt that in 2020 there would have been countless individuals and entities that were aware of the entitlement to CFB that paying wages to themselves or close relatives would generate.
In fact, Mr Johnson’s ready acknowledgement that he was aware of the broad rules for CFB (apart from the 300% rule) weighs in his favour: a dishonest witness might have denied knowledge of the CFB scheme, especially with the benefit of the unchallenged evidence provided by his accountant of Mr Johnson’s statements that he did know about or want CFB. Similarly, the urging in his letter of 14 May 2020 that the Commissioner not pay the CFB is not behaviour to be expected of a person seeking to obtain a benefit (unless a particularly high level of sophistry is assumed).
Ultimately, even in respect of the broader scheme, it comes down to this: I heard Mr Johnson’s evidence including his responses in the course of a searching cross examination; I found his explanations credible and consistent; and I am satisfied, on balance, that he was truthful when he asserted that his decision to declare wages was made for the reasons and in the context he outlined and not mainly to obtain or increase CFB. If the task of the Tribunal were to consider only objective factors to determine whether it would be concluded that the applicant or Mr Johnson had the disqualifying purpose, the applicant’s task may have been more difficult. But the legislation requires me to reach a determination on actual purpose. With the benefit of Mr Johnson’s testimony and explanations I am persuaded that the applicant has discharged the burden of proving section 5(1)(g) does not apply.
In so saying, I make no criticism of the Commissioner for persisting with his submissions in this matter, which I consider to be finely balanced. To be clear, though, I do not merely reject the Commissioner’s submission on Mr Johnson’s credibility. I am positively persuaded, on balance, that he has provided an honest account of his actions on behalf of the applicant.
It follows that the objection decision must be set aside and substituted with a decision allowing the objection in full.
I certify that the preceding 87 (eighty-seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding
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Associate
Dated: 25 August 2022
Date(s) of hearing: 27 and 28 July 2022 Advocate for the Applicant: Mr R Johnson Solicitors for the Respondent: Mr J Gilfedder, Australian Taxation Office
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