Saleh and Commissioner of Taxation

[2008] AATA 979

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 979

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No NT2006/222-226

TAXATION APPEALS DIVISION		)
Re		AHMED SALEH

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr S E Frost, Member

Date5 November 2008

PlaceSydney

Decision The objection decision is varied to the extent necessary to give effect to the Tribunal’s conclusions.  The matter is remitted to the Commissioner for implementation of this decision.

...................[sgd].......................

Mr S E Frost
  Member

CATCHWORDS

TAXATION – income tax – deductions – self-education, travel, uniform/laundry and other expenses – omitted income – additional tax and administrative penalty – taxpayer has failed to discharge the burden of proof – objection decision varied

Income Tax Assessment Act 1997 – s 8-1

Income Tax Assessment Act 1936 – s 226G, 226H, 226J, 227

Taxation Administration Act 1953 – s 14ZZK; Schedule 1, s 284-75, 284-90, 298-20

BRK (Bris) Pty Ltd v FC of T [2001] FCA 164

REASONS FOR DECISION

5 November 2008 Mr S E Frost, Member        

Introduction

1.      Ahmed Saleh was audited by the Australian Taxation Office (“ATO”) in relation to several of his income tax returns.  At the conclusion of the audit amended assessments were raised.  Certain deductions were disallowed, and previously omitted income was brought to account.  His taxable income and tax payable were increased, and penalties were assessed.  He objected, but his objection was disallowed.  He has asked the Tribunal to review the objection decision.

2. Under s 14ZZK of the Taxation Administration Act 1953 (“the Administration Act”) Mr Saleh bears the burden of proving that the amended assessments are excessive, and that the penalty decisions should not have been made, or should have been made differently.

Issues

3.      There are three broad issues before the Tribunal.  They are:

·     whether certain amounts claimed as deductions in each of the income years from 2000 to 2004 inclusive are allowable under s 8-1 of the Income Tax Assessment Act 1997;

·     whether the taxpayer is liable to additional tax (for 2000) or administrative penalty (for 2001 to 2004), and, if so, at what level; and

·     whether any such additional tax or administrative penalty should be remitted.

4.      Mr Saleh no longer disputes the uplift in his income as a result of the inclusion of the previously omitted income amounts, but he argues that the penalty in relation to these adjustments should be removed, or at least reduced.

Deductions

5.      The deductions that Mr Saleh claimed, but which were disallowed (at least in part) by the Commissioner, fall into four broad categories: self-education expenses; car (travel) expenses; uniform/laundry expenses; and “other”.

Self-education expenses

6.      Deductions in this category were claimed as follows:

·     Year ended 30 June 2000 – $3,370;

·     Year ended 30 June 2001 – $2,268;

·     Year ended 30 June 2002 – $2,971; and

·     Year ended 30 June 2003 – $2,268.

7.      In the hearing Mr Saleh explained to me that he undertook no studies in 1999 or in the first half of the 2000 calendar year.  Then, from July to November 2000 he was studying a computer course (the document at T45/270 shows that the course was a TAFE certificate course in Computer Applications for the Office).  He also said that he undertook no study in the 2001 calendar year, although the document at T45/271 suggests that he was studying to some extent during that year.  Then in 2002 he was enrolled in a TAFE certificate course in Nutrition and Dietary Practices. 

8.      What he could not tell me was how any of those courses related to his employment.  Nor could he tell me how he had originally calculated the amounts claimed as deductions.  He had no evidence of the fees he had paid for any of these courses.  He said that he had paid for books, stationery and travel to and from home or between his workplace and the institution, but he did not have any receipts for items that he had purchased. 

9.      I find, on the basis of the evidence he gave that he did not study at all in 1999 or in the first half of the 2000 calendar year, that he is entitled to no deduction at all for self-education expenses during the 2000 income year. 

10. Furthermore, his failure to produce any evidence of the expenditure he incurred (or some plausible explanation of the method of calculation of his deduction claim) in the later years, means that he has failed to discharge the burden that he carries under s 14ZZK of the Administration Act.

11.     For that reason, I uphold the Commissioner’s objection decision to the extent that it relates to the disallowance of the deductions claimed for self-education expenses.

Travel expenses

12.     Deductions in this category were claimed as follows:

·     Year ended 30 June 2000 – $2,550;

·     Year ended 30 June 2001 – $2,550;

·     Year ended 30 June 2002 – NIL;

·     Year ended 30 June 2003 – $2,550; and

·     Year ended 30 June 2004 – $2,938.

13.     His claims were based on the need to travel between different places of employment. 

14.     During the 2000 income year, he had four separate employers, two of them for the whole year and two of them for large parts of the year.  In 2001, he had three employers, and in each of 2002 and 2003 he had two.  By the 2004 income year, Mr Saleh had started his own business.

15.     Once again, it was difficult to obtain from Mr Saleh any explanation of the method of calculation of the amounts claimed.  The Commissioner set out a calculation methodology in paragraphs 15 to 24 of Exhibit R1, the Respondent’s Outline of Submissions, which was handed up at the hearing.  That methodology in my opinion is reasonable.  It is based on the distances between his workplaces, the distances he is likely to have travelled, the likely number of times he would have undertaken the travel, and allowing for a full 48 weeks for the working year.  On the basis of the methodology in Exhibit R1, I agree that the following amounts are allowable deductions in the category of car (travel) expenses:

·     Year ended 30 June 2000 – $2,052;

·     Year ended 30 June 2001 – $974.40;

·     Year ended 30 June 2002 – $424.80 (even though no deduction was claimed for that year, the Commissioner accepts that this amount is allowable);

·     Year ended 30 June 2003 – $432; and

·     Year ended 30 June 2004 – NIL (see [25] below).

16. As far as I can tell from the s 37 documents (and in particular T33/126-128), all of those amounts have already been allowed in the amended assessments, with the possible exception of the amount of $432 for 2003. To the extent that they have already been allowed, I affirm the objection decision. Otherwise I vary the objection decision to reflect allowance of the amounts set out in [15].

Uniform/laundry expenses

17.     Deductions in this category were claimed as follows:

·     Year ended 30 June 2000 – $748;

·     Year ended 30 June 2001 – $748;

·     Year ended 30 June 2002 – $300;

·     Year ended 30 June 2003 – $300.

18.     These claims are made up of $300 in laundry expenses for each year, plus $448 in each of 2000 and 2001 for uniforms.  To the extent that the claim covers laundry expenses, it relates to Mr Saleh’s estimated cost of washing, in his home, the uniforms that he wore when he was at work.  He said that he based his claims on what he thought it cost him for power, water, washing powder and also his time in carrying out the washing activity.  He could not give me any more detailed explanation than that.

19.     The Commissioner has allowed, on reasonable assumptions, $120 for laundry expenses for each year.  This has been calculated at $0.50 per load, multiplied by 5 loads per week multiplied by 48 weeks.  In addition, a verified amount of $54 as a uniform expense was accepted for the 2003 income year.  In the absence of any better evidence from Mr Saleh, I agree with the Commissioner's position and affirm the objection decision in relation to uniform/laundry expenses.

Other

20.     I will start with union fees.  The following claims were made:

·     Year ended 30 June 2000 – $312;

·     Year ended 30 June 2001 – $312;

·     Year ended 30 June 2002 – $406;

·     Year ended 30 June 2003 – $525; and

·     Year ended 30 June 2004 – $570.

21.     The amount for 2001 was verified; the remainder were not.  In the absence of any evidence from Mr Saleh to support the claims, the amounts apart from $312 for 2001 are not allowable.

22.     Next is an amount of $13,850 for what is described as an “initial customers” fee.  The background is that Mr Saleh purchased a cleaning franchise around 30 June 2003.  At T43/205 is an invoice from the franchisor detailing as one of the amounts payable, apparently on the commencement of the franchise, $13,850 opposite the description “Initial Customers”.  Also in evidence, at T43/211-241, is the Franchise Agreement itself, and at T43/207-209, an “Additional Business Agreement” between the franchisor and Mr Saleh.

23.     I was unable to establish a connection between the so-called “initial customers” fee and any of the terms in the Franchise Agreement, or any of the amounts specified as payable under that agreement.  Mr Saleh could not explain what the fee represented.  Nor could his tax agent.  His tax agent had in fact spent a good deal of energy arguing why an “initial customers” fee should not be regarded as a payment for goodwill and therefore a capital expense, but he had failed to focus on the more fundamental questions, such as what the fee represented, how it was calculated, and on what basis it was charged by the franchisor.

24.     Given that state of affairs, I can only agree with the Commissioner’s decision to disallow the claim.

25.     As to the remaining items of “other” expenditure, I decide as follows:

·     Telephone expenses – allowed to the extent of 30% (representing the business portion) of $712 (the amount of expenditure verified);

·     Motor vehicle expenses of $4,800 (plus the $2,938 referred to in [12]) – allowed to the extent of $3,050 (based on the “cents per kilometre” method, at the maximum allowable distance of 5,000 kilometres, in accordance with paragraph 42 of Exhibit R1); and

·     Cleaning supplies – $1,561 disallowed as a duplicated claim – see paragraph 37 of Exhibit R1.

Additional tax and administrative penalty

26. For the 2000 year, Mr Saleh was considered liable to additional tax of 75% under s 226J of the Income Tax Assessment Act 1936 (“the Act”), on the basis that he or his tax agent had intentionally disregarded the Act. Similarly, for the years 2001 to 2004, administrative penalty of 75% was imposed under s 284-75 and Item 1 of the table in s 284-90(1) in Schedule 1 to the Administration Act for intentional disregard of the law by Mr Saleh or his agent. The Commissioner now proposes the following:

· In relation to omitted income (no longer an issue before the Tribunal, except as to penalty), overclaimed deductions for self-education expenses and cleaning supplies – additional tax of 50% under s 226H of the Act, and administrative penalty of 50% under Item 2 in s 284-90(1) in Schedule 1 to the Administration Act – in other words, the behaviour downgraded to “recklessness”; and

· In relation to the remaining, “unsubstantiated” claims – additional tax of 25% under s 226G of the Act, and administrative penalty of 25% under Item 3 in s 284-90(1) in Schedule 1 to the Administration Act – in other words, the behaviour downgraded to “failure to take reasonable care”; and

· No remission under s 227(3) of the Act or s 298-20 in Schedule 1 to the Administration Act is warranted.

27.     Mr Saleh, for his part, says that penalties even at that level are harsh.  He thinks it is unfair that he should be required to pay these additional amounts in circumstances where he is unfamiliar with the tax laws.  He says that he did not even know that self-education expenses might be deductible, and it was only when it was mentioned to him by his tax agent that the expenses were claimed.  Apparently, he was also unaware that he had to lodge tax returns.  It seems that he was unknown to the Tax Office until, on taking up the cleaning franchise in 2003, he went to a tax agent, became registered for GST, and also lodged tax returns for the several years that were outstanding.

28.     What he said about the omitted income – which covered employment income, interest income from banks, and undisclosed welfare payments – was that it was difficult to remember, some years after the event, all the places he had worked; he had not kept all his statements of earnings; he did not always receive statements from his bank, or if he did, they did not make plain that he would have to pay tax on the interest he earned; and he had been required to repay to Centrelink the overpaid welfare payments (and so those amounts were removed from his tax assessments).  Therefore, as far as Mr Saleh’s behaviour is concerned, both ignorance and some level of carelessness are involved.

29.     However, the law makes it clear that the behaviour of his agent must also be considered.  The law, both past and current, makes a taxpayer liable to additional tax (or administrative penalty) even if the “failure to take reasonable care” or the “recklessness” is that of the taxpayer’s agent.  (As mentioned above [26], the Commissioner is no longer pressing the “intentional disregard” allegation.)

30.     It is not clear whether the agent emphasised to Mr Saleh that interest income should be declared.  If he did not, he was reckless, or worse.  If he did, and Mr Saleh still did not declare it, then Mr Saleh was reckless.  The amounts not disclosed were significant – in 2000 it was $9,159; in 2001, $12,403; in 2002, $11,931; and in 2004, $2,569.  Failure to declare interest income of that magnitude cannot be attributed to carelessness or inadvertence.  The same position applies in relation to amounts of employment income that were not declared.  The appropriate amount of additional tax is 50% of the shortfall, and there is no justification for remission from that level.

31.     As for the self-education expenses, I note that it is inherently improbable that claims said to be based on expenditure relating to fees, books, stationery and travel (see [8]) should be for identical amounts in two separate years (2001 and 2003) when the courses, if they were undertaken, were different, and so were the campuses that were offering them. Also, Mr Saleh claimed identical amounts ($2,550) for travel expenses in three separate years, despite different employment circumstances in each year. Mr Saleh could not give me any detail on calculation methodologies, and his tax agent, who sat through the entire hearing, could not help either.  These claims amount to “gross carelessness” (BRK (Bris) Pty Ltd v FC of T [2001] FCA 164, per Cooper J at [77]) and, therefore, “recklessness”, attracting 50% penalty. There should be no remission.

32.     On the face of it, a duplicated claim for cleaning supplies might amount to no more than failure to take reasonable care.  However, the role of the Tribunal is to make findings on the evidence presented, not on superficial appearances.  There was no evidence at all presented by Mr Saleh in relation to the duplicated claim, and so of course there is no basis on which I could conclude that it was not caused by recklessness.  For that reason the 50% penalty must remain in place, with no remission.

33.     The appropriate penalty for the remaining categories is 25% for failure to take reasonable care.  Mr Saleh has not persuaded me that there should be any remission from that level. 

Conclusion

34.     The objection decision is varied to the extent necessary to give effect to the conclusions I have expressed.  The matter is remitted to the Commissioner for implementation of this decision.

I certify that the 34 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member.

Signed:         ......................[sgd]..........................................................
  Mr T Aviram, Associate

Date/s of Hearing  14 October 2008
Date of Decision  5 November 2008

Applicant self-represented, assisted by his tax agent Mr K Lim              

Solicitor for the Respondent     Ms E Webster, ATO Legal Services