Samuel Yerro and Commissioner of Taxation
[2014] AATA 186
[2014] AATA 186
Division TAXATION APPEALS DIVISION File Number
2013/2613
Re
Samuel Yerro
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Mr R G Kenny, Senior Member
Date 4 April 2014 Place Brisbane The Tribunal affirms the Objection Decision.
.......................Sgd..............................................
Mr R G Kenny, Senior Member
CATCHWORDS
INCOME TAX – Applicant not an Australia resident - Claims for unsubstantiated deductions – Tax shortfall – Lack of reasonable care by taxpayer in making claims – Imposition of administrative penalty – Partial remittal of penalty – Commissioner’s objection decision affirmed
LEGISLATION
A New Tax System (Family Assistances) (Administration) Act 1999 (Cth) s 21
Social Security Act 1991 (Cth) s 7
Income Tax Assessment Act 1997 (Cth) ss 8-1, 28-12, 28-13, 28-14, 28-15, 28-25, 28-45, 28-70, 28-90, 28-170, 28-175, 61-610, 61-620, 61-640
Taxation Administration Act 1953 (Cth) s 14ZZK and Sch 1, ss 284-75, 284-85, 284-90, 298-20
CASES
Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 94 ATC 4844
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Kirby and Collector of Customs (1989) 20 ALD 369
Lunney v Commissioner of Taxation (1958) 100 CLR 478
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139
Necovski and Federal Commissioner of Taxation (2009) 75 ATR 152
Palmer v Federal Commissioner of Taxation (1998) 98 ATC 2353
Waters and Federal Commissioner of Taxation (2010) 80 ATR 919
SECONDARY MATERIALS
Tax Ruling TR 92/17, Australian Taxation Office
REASONS FOR DECISION
Mr R G Kenny, Senior Member
4 April 2014
BACKGROUND
On 9 July 2011, Samuel Yerro (“the applicant”) lodged his income tax return for the year ended 30 June 2011 (“relevant tax year”). After review by the Commissioner of Taxation (“the Commissioner”) and before issuing an assessment, the Commissioner wrote to the applicant and advised that his tax return would be adjusted unless he provided further information. Attached to the letter was a schedule referencing the amounts of income and deductions that had been included in the applicant’s tax return. This included an amount of $9,833 as a deduction associated with the cost of managing the applicant’s tax affairs. However, it was common ground that this arose from an error in the tax return and was not claimed as a deduction. Also attached to the letter was a statement of the types of information required from the applicant in relation to substantiating his deductions. In the absence of a satisfactory response from the applicant, the Commissioner, on
2 April 2012, issued a Notice of assessment in which the sum of $17,000 was added to the applicant’s declared income and his deduction claims were denied. On the same date, the Commissioner issued a Notice of assessment declaring a shortfall of $11,819.17 and a shortfall penalty of 25% of that amount totalling $2,954.75.The Commissioner allowed, in part, an objection by the applicant and issued a Notice of objection decision on 28 March 2013. Therein, the Commissioner conceded that the additional amount of $17,000, which had been treated as income, was an exempt fringe benefit and the applicant’s taxable income was maintained at $44,712, the amount declared by the applicant, but his deductions were disallowed. The shortfall amount was reduced to $5,784.17. A 25% administrative penalty of $1,446 was advised. A Notice of amended assessment, in those terms, was issued by the Commissioner on 9 April 2013 and a Medicare levy was included in the amended assessment. Subsequently, the Commissioner remitted,[1] in part, the penalty to the amount of $836.87. The applicant seeks review by the Tribunal of the objection decision.
[1] This recognised that the amount of $9,833 had been incorrectly identified as a deduction: see para 1.
EVIDENCE
The applicant came to Australia from the Philippines in 2008 with his wife and two children. He was under a Religious Worker Visa sub class 428 (“the visa”) and was sponsored by Fraser Coast Baptist Church (“FCBC”) for a period of five years, subject to Australian immigration requirements. His letter of appointment stated that he was to be paid a base salary of $24,000 and that he was entitled to a housing allowance of $13,000 and a vehicle allowance of $4,000. In the relevant tax year, he was employed as an associate pastor by FCBC from 1 July 2010 to 30 June 2011.
During the relevant tax year, the applicant owned and used a Ford Falcon sedan and another smaller vehicle for his family. His pastoral work involved a considerable amount of driving to meet the needs of parishioners including those in places away from his primary area of work in Hervey Bay. He worked a notional 40 hours per week over
six days but, in reality, was available to his parishioners on what he described as a
“24/7” basis. From the beginning of his time in Australia, the applicant struggled to meet his financial commitments on the base salary of $24,000 per year. He supplemented this by undertaking work with South Pacific Education Company trading as Hervey Bay Christian Academy (“HBCA”) and by Canaan Bay Pty Ltd trading as Riviera Resort (“RR"). In the relevant tax year, this was, respectively, from 1 July 2010 until
30 June 2011 and from 22 February 2011 until 30 June 2011. This work comprised early morning and evening cleaning duties. His two children attended school at HBCA on a fee-paying basis.
The visa imposed a range of limitations on the applicant. These included the requirement that he was not to remain in Australia beyond 30 November 2010. In October 2010, he was granted a bridging visa for a short period. He realised that he and his family had to leave Australia or face the prospect of deportation, a consequence of which would have been an inability to return to Australia for some years. On 6 December 2010, the applicant and his family travelled to Manila and then Tacloban in the Philippines where they remained over the Christmas and New Year period, returning to Australia on
13 January 2011. The travel cost was in excess of $5,000. His request to FCBC for it to meet those costs was unsuccessful and he paid them from his own resources. In the Philippines, they met up with family members and friends whom he had not seen for
two years. He said that his salary continued to be paid to him while out of Australia, that FCBC had been providing assistance to the church community in Tacloban and that he assisted in those activities, in particular, in the building of a church.
The applicant said that he was not aware that he had been required to keep a record of his expenses for his car or other items claimed as deductions. He said that he would be able to produce records of certain annual costs such as those for car registration and insurance.
The applicant relied heavily on Mr Henry Aalders, his brother-in-law and a retired tax agent, in completing his tax return for the relevant year. The applicant provided him with relevant information about his income and expenses but authorised Mr Aalders to make amendments which the applicant reviewed. In his tax return, he gave his income as comprising $24,000 from FCBC, $14,972 from HBCA and $5,740 from RR, a total of $44,712. Initially, that amount was entered as his taxable income in the tax return but this was amended by Mr Aalders to $34,879 because of certain deductions which he considered were relevant to the applicant. These were the costs associated with work-related expenses concerning vehicle use ($4,833) and costs of travel to the Philippines in December 2010 ($5,000) as well as education expenses ($794). A schedule to the tax return under the heading of “Vehicle Expenses” listed costs of fuel ($3,126), tyres ($1,300), repairs ($270), registration ($860) and depreciation ($850). The schedule also identified expenses for a computer, a printer, ink and telephone, and food expenses for bible group meetings conducted by the applicant. The total expense was listed at $8,833 which, with the reduction of the $4,000 car allowance paid to the applicant by FCBC, left the claimed amount of $4,833.
The costs associated with the computer, internet service, ink and paper, totalling $1,918, were separately listed along with school fees of $3,000 for a total Education tax refund calculation of $4,918. The tax return contained an advice that the claimable amount for this was $794 and that amount was listed as the deduction claimed by the applicant.
In the tax return, the applicant declared that he was exempted from the Medicare levy.
The applicant’s tax return was in evidence. Above his signature, the tax return included declarations that the information given was true and correct and also:
I have the necessary receipts and/or other records – or expect to obtain the necessary written evidence within a reasonable time of lodging this tax return – to support my claims for deductions and tax offsets.
The applicant could not recall if he had read that declaration.
In a letter, dated 1 December 2012, Mr Aalders requested that the Commissioner accept a reduced assessment of work-related expenses of $3,597 and an increased assessment for travel costs to $5,529. He maintained his claim for education expenses at $794 which related to school tuition costs for his two children. He did not claim the costs associated with the computer use or associated expenses.
SUBMISSIONS
For the Commissioner, Mr Nam submitted that the burden of proving that the Commissioner’s assessment[2] and the amount of any excess alleged by the Commissioner[3] was excessive in the relevant tax year is on the taxpayer. In that way, he submitted, the Commissioner did not have to support the assessment by sustaining it with evidence.[4]
[2] Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, 89.
[3] Palmer v Federal Commissioner of Taxation (1998) 98 ATC 2353, [29].
[4] Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, 624.
Mr Nam conceded that the $17,000 paid to the applicant by FCBC was an exempt fringe benefit and was not a component of his taxable income in the relevant year which was $44,712. He noted that a total of $6,193 was withheld by employers for tax purposes.
For work-related car expenses, he submitted that these are deductible in accordance with
s 8-1 of the Income Tax Assessment Act 1997 (Cth) (“the ITAA 1997”) provided that a method approved under Division 28 of the ITAA 1997 was used for working out the expenses.[5] He submitted that each of those four methods requires the keeping of records which must be disclosed to the Commissioner. Mr Nam submitted that such records were not maintained by the applicant and that, accordingly, the claimed deduction could not be accepted. He noted exceptions to the four modes of record keeping[6] but submitted that none of these was applicable to the applicant. Mr Nam referred to the $4,000 car allowance received by the applicant from FCBC and submitted that a deduction would arise only if the level of justifiable expenses exceeded that threshold. He submitted that the annual costs, such as car registration and insurance identified by the applicant, would not exceed that amount.
[5] See ss 28-12, 28-13, 28-14, 28-15 of the ITAA 1997.
[6] See subdivision 28-J of the ITAA 1997.
Mr Nam submitted that the costs incurred by the applicant in travelling to and from the Philippines in 2010 and 2011, respectively, were not deductible. He submitted that the primary purpose of the trip was to escape the consequence of remaining in Australia after 30 November 2010. This was that he would face deportation and be prevented from returning to Australia. He noted that the applicant had wanted to gain permanent residence in Australia and was aware that this would be placed in jeopardy if he were deported. Mr Nam submitted that it was not the case that the applicant undertook the travel in order to secure his future work in Australia. He submitted that this did not accord with the terms of s 8-1(1)(a) of the ITAA 1997 which requires that the deduction must be for an outgoing incurred “in gaining or producing” assessable income.[7] In that sense, he submitted that it was no part of the applicant’s responsibilities with FCBC that he undertake travel to the Philippines.
[7] Citing Lunney v Commissioner of Taxation (1958) 100 CLR 478 and FederalCommissioner of Taxation v Maddalena (1971) 2 ATR 541.
In relation to the applicants’ claim for an education expenses tax offset under
ss 61-610 and 61-620 of the ITAA 1997, Mr Nam submitted that the offset is only available to him if he was in receipt of the family tax benefit in accordance with terms of the A New Tax System (Family Assistance) (Administration) Act1999 (Cth).
He submitted that this requires him to be an Australian resident as provided for in s 7(2) of the Social Security Act 1991 (Cth). He submitted that this was not the case with the applicant. In any event, he submitted, the only expenses claimed by the applicant were his children’s school fees which were not included in types of expenditures listed for the tax offset in s 61-640 of the ITAA 1997. Mr Nam noted that reference was made, in documentation provided to the Commissioner after the applicant’s tax return was lodged, to computer related expenses which may satisfy the terms of s 61-640 of the ITAA 1997, but those items had not been specifically claimed.
Mr Nam submitted that the shortfall in the applicant’s case was $3,347.50. He also submitted that it was appropriate for the Commissioner to impose an administrative penalty on the applicant on the basis that he had made false or misleading statements in his income tax return for the relevant year in relation to his claims for a car and travel related expenses and education expenses tax offset. He submitted that the applicant did this even though he did not have substantiating records of expenditures. Mr Nam noted that, in his tax return, the applicant had signed a declaration that he had the necessary receipts and/or other records available to support his claims. He submitted that this constituted a failure by the applicant or his agent to take reasonable care in preparing the tax return. Mr Nam submitted that the base penalty amount of 25% in item 3 of Sch 1 of the Tax Administration Act 1953 (Cth) (“the TAA”) should be applied and that this amounted to $1,446. However, he also conceded that it was appropriate to remit, in part, that penalty to $836.87 under s 298-20 of Sch 1 of the TAA.
For the applicant, Mr Aalders placed reliance on Tax Ruling TR 92/17 to demonstrate that the applicant was exempt from aspects of income tax law. However, as I read that ruling, it provides exemption to a religious institution in respect of certain benefits provided to a person in the applicant’s position but does not otherwise provide exemption to the applicant in respect of his general taxation obligations.
Mr Aalders conceded that no issue arises in relation to the Medicare levy which was imposed on the applicant. However, he submitted that the expenses incurred for the applicant’s car usage, for his travel to the Philippines and the education expenses were deductible and should have been dealt with, accordingly.
In relation to the car expenses, Mr Aalders submitted that some records were kept by the applicant, including the annual costs of registration, insurance and RACQ membership. Apart from those expenses, he conceded that no records were kept by the applicant in relation to the use of the car, including kilometres travelled or fuel purchased. However, he submitted that calculations made subsequent to the relevant year would approximate the records in the relevant year. One of these calculations was to measure a typical daily travel distance encompassing travel to RR and HBCA, to multiply that by the six days worked each week and then to multiply that by 52 weeks of the year. He also submitted that the level of depreciation in the value of the car could be calculated though he conceded that his method of doing so was not one of the approved methods in the
ITAA 1997.
As for the travel to the Philippines, Mr Aalders conceded that the primary purpose was to avoid deportation and that another purpose was to visit family and friends in the Christmas period. However, he also contended that the applicant continued, during his absence from Australia, to carry out his responsibilities to the sponsor. Additionally, he submitted that the travel could be considered as work-related because he undertook it to secure the work that he would do in the future for the FCBC and which would otherwise be surrendered if he had been deported from Australia.
In relation to the education expenses tax offset, Mr Aalders conceded that the applicant was not an Australia resident but submitted that the applicant should be treated as being able to satisfy the precondition concerning the family tax benefit. He advised that, to his personal knowledge, two New Zealand citizens were able to be paid that benefit on their arrival in Australia.
Mr Aalders described the Commissioner’s decision in the applicant’s case as unfair and unjust and submitted that it had the effect of stigmatising the applicant as a cheat and a fraudster. He was also critical of the procedures adopted by the Commissioner in applying a heavy handed approach to the applicant. He noted that the applicant had
three sources of income and submitted that this regularly results in withholding insufficient amounts for taxation purposes because each employer makes deductions at a lower rate than would be the case if the total income was earned from a single employer. In those circumstances, he submitted, it was inappropriate to impose a penalty on the applicant.
CONSIDERATION
It is not in dispute that the applicant bears the onus of proof in this matter[8] or that the standard of proof is on the balance of probabilities.[9] The Commissioner has conceded that the housing and vehicle allowances totalling $17,000 were exempt fringe benefits which should not be included in the applicant’ taxable income. The applicant has conceded that he was liable for the Medicare levy and I am satisfied that those concessions have been properly made. The issues for determination are whether the applicant’s car and travel expenses in the relevant tax year are deductible; whether the education offset is applicable to him; and whether any administrative penalty should be imposed on him.
[8] See s 14ZZK(b)(i) of the TAA; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; and Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 94 ATC 4844.
[9] Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139; and Kirby and Collector of Customs (1989) 20 ALD 369.
Under s 8-1 of the ITAA 1997, outgoings are deductible to the extent that they are incurred in gaining or producing assessable income. In relation to car expenses, a method approved under Division 28 of the ITAA 1997 must be used for working out the expenses[10] unless one of the exceptions[11] is satisfied. It is not disputed that none of the exceptions arise in the applicant’s case. The four approved methods of calculating outgoings for car usage are:[12]
·the “cents per kilometre” method;
·“12% of the original value” method;
·“one-third of actual value” method; and
·“log book” method.
[10] See ss 28-12, 29-13, 28-14 and 28-15 of the ITAA 1997.
[11] See ss 28-170 and 28-175 of the ITAA 1997.
[12] See s 28-15 of the ITAA 1997.
Each of those methods requires the keeping of records which must be disclosed to the Commissioner.[13] The applicant conceded in his evidence that records were not maintained by him. I do not accept Mr Aalders’ contention that it is sufficient to infer from records of a subsequent year what the outgoings in the relevant tax year were.
In any event, those calculations by Mr Aalders related to both RR and HBCA for a period of 52 weeks and the evidence is that he worked at RR only from 22 February 2011 until30 June 2011. Nor do I accept the contention that his method of determining the depreciation of the car meets any of the four statutory methods. Though not provided to the Commissioner at the time of lodgement of the tax return, there is evidence of the annual outgoings for matters such as registration and insurance. However, it is common ground that the total of these is less than $4,000 and I am satisfied that, for any car related expenses to be deductible, consideration may be given only to an amount by which the total exceeds the amount of the $4,000 car allowance which was paid to the applicant. I am satisfied that the applicant had no deductible car related expenses in the relevant tax year.[13] See ss 28-25, 28-45, 28-70 and 28-90 of the ITAA 1997.
I am also satisfied that the costs incurred by the applicant in the return travel by him and his family to the Philippines in December 2010 and January 2011 are not deductible.
The applicant agreed and Mr Aalders conceded that the primary reason for undertaking this travel was to avoid the consequence of deportation. He also agreed, and Mr Aalders conceded, that a purpose of the travel was for his family to meet up with other family members and friends after a two year absence from the Philippines. I am satisfied that those were the dominant reasons for the return visit to the Philippines. The applicant said that he was continuing to work for FCBC while he was in the Philippines. However, no evidence such as a statement from FCBC was provided by the applicant to discharge the burden of proof in relation to that contention. I am satisfied that the expenses were not an outgoing incurred “in gaining or producing” the applicant’s assessable income as required by s 8-1(1)(a) of the ITAA 1997. I have noted Mr Aalders’ submission that the applicant undertook the travel in order to secure his future work in Australia. While that may have been a consequence of his returning to Australia, I am satisfied that it was not one of the purposes for which he undertook the travel and that, in any event, it was not incurred “in gaining or producing” his assessable income.[14]
[14] Waters and Federal Commissioner of Taxation (2010) 80 ATR 919.
I have noted Mr Aalders’ submission in relation to the education expenses tax offset.
No evidence was provided concerning the circumstances of the two New Zealand persons he referred to. Clearly, their experiences cannot be transposed into those of the applicant. The applicant claimed school fees for his daughters. For him to be entitled to that offset, the requirements of ss 61-610 and 61-620 of the ITAA 1997 must be met. One of these is that he had an entitlement to the family tax benefit under the
A New Tax System (Family Assistances) (Administration) Act1999 (Cth) (“the Administration Act”). Under s 21 of the Administration Act, eligibility of a person for the family tax benefit requires, among other things, that the person be an Australian resident as defined in s 7(2) of the Social Security Act 1991 (Cth). It is not disputed that the applicant did not meet that requirement during the relevant tax year. In any event, the types of deductions which may be may be claimed under s 61-610 are set out in
s 61-640 of the ITAA 1997. This does not include school fees. Items identified by the applicant such as computer costs may be claimed. However, these were not claimed by the applicant and, in any event, no substantiating evidence in relation to any such items was provided by him.
At the hearing, the applicant accepted that an administrative penalty had to be imposed on him, but said that his conduct should not have resulted in such a severe penalty.
I do not accept that contention. He did not maintain a log book or retain invoices or receipts. It is unclear how Mr Aalders was able to assess the expenses claimed on the applicant’s behalf. The applicant’s evidence was given in an unconvincing manner relying, in the main, on the input of Mr Aalders and his own inability to recollect details of aspects of his claimed deductions. He was concerned that the Commissioner had alleged intentional wrong-doing on his part. I am satisfied that such is not the case.
The Commissioner has described him as acting without reasonable care in completing his tax return which contained false and misleading information for the relevant year.Mr Aalders submitted that fault lay with him rather than with the applicant for errors in the claiming process. While the aspects of the tax return relating to claims were completed, in large part, by Mr Aalders, these were based on information the applicant provided and his evidence was that he reviewed and adopted the content of the tax return. However, by signing it, he also adopted the declarations that the contents were true and correct and that substantiating records for claims made were available to him.[15]
The contents of the tax return were not true and correct and he did not have substantiating material. I have noted Mr Aalders’ contention that the procedure applied by the Commissioner in this matter was unfair and also noted his reference to the comparison between two persons with the same income but where one of them has a single employer and the other has multiple employers. However, though that may lead to differing withholdings in each case, I am satisfied that it does not follow that the imposition of a penalty in this case is unfair or unjust.[15] Necovski and Federal Commissioner of Taxation (2009) 75 ATR 152.
Where a tax-payer’s conduct bears the character of a failure to take reasonable care to comply with taxation law, a penalty applies under Sch 1 of the TAA which, in so far as relevant, reads:
284‑75 Liability to penalty
(1) You are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law (other than the Excise Acts); and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
…
Exceptions to subsections (1) and (4)
(5) You are not liable to an administrative penalty under subsection (1) or (4) for a statement that is false or misleading in a material particular if you, and your agent (if relevant), took reasonable care in connection with the making of the statement.
284‑85 Amount of penalty
(1) Work out the *base penalty amount under section 284‑90. If the base penalty amount is not increased under section 284‑220 or reduced under section 284‑225, this is the amount of the penalty.
284-90 Base penalty amount
(1)The base penalty amount under this Subdivision is worked out using this table and section 284‑224 if relevant:
Base penalty amount Item
In this situation:
The base penalty amount is:
3
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a taxation law (other than the Excise Acts)
25% of your shortfall amount or part
I am satisfied that there were errors and misstatements in the applicant’s tax return which resulted from a failure by the applicant to take reasonable care in its compilation and in the verification of its content. I am also satisfied that the appropriate penalty under ss 284-75, 284-85 and 284-90 of Sch 1 of the TAA is 25% of the shortfall.
The Commissioner calculated the shortfall amount at $5,784.17 and the shortfall penalty at 25% of that amount or $1,446. I am satisfied that those calculations were properly made.
In accordance with s 298-20 of Sch 1 of the TAA, the Commissioner remitted that penalty in part so as to reduce the amount of the penalty to $836.87 and I am satisfied that this was an appropriate outcome.
DECISION
The Tribunal affirms the Objection Decision.
I certify that the preceding 32 (thirty -two) paragraphs are a true copy of the reasons for the decision herein of Mr R G Kenny, Senior Member ...........................Sgd..........................................
Associate
Dated 4 April 2014
Date of hearing 10 March 2014 Advocate for the Applicant Mr Henry Aalders Solicitors for the Respondent Mr San Nam, Australian Taxation Office
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