Smith and Commissioner of Taxation (Taxation)
[2023] AATA 3090
•12 September 2023
Smith and Commissioner of Taxation (Taxation) [2023] AATA 3090 (12 September 2023)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2022/3177
Re:William Smith
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Member Lee Benjamin
Date:12 September 2023
Date of written reasons: 26 September 2023
Place:Brisbane
The objection decision under review is affirmed.
..............................[SGD]..........................................
Member Lee Benjamin
Catchwords
TAXATION – Income tax deductions – whether applicant substantiated expenses claimed– where applicant sought to claim work-related expenses that included travel, accommodation and meal expenses – whether applicant has satisfied the onus of proof in establishing that Commissioner’s assessment was excessive or otherwise incorrect – where applicant had failed to retain receipts for expenses and otherwise did not sufficiently substantiate expenses – statutory requirements to discharge onus of proof not satisfied – decision affirmed.
Legislation
Income Assessment Act 1997 (Cth)
Tax Administration Act 1953 (Cth)
Cases
Commissioner of Taxation v Ross [2021] FCA 766
Gashi v Commissioner of Taxation (2013) 209 FCR 301
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 91 ATC 4546Tisdall v Webber (2011) 193 FCR 260
REASONS FOR DECISION
Member Lee Benjamin
26 September 2023
Mr William Smith is an Australian-based professional with international business interests. In the income tax year ended 30 June 2020, Mr Smith seeks to claim certain work-related expenses (totalling $48,425.86) as deductions in his tax return. Mr Smith contends that the expenses meet the conditions for deduction.[1] The Commissioner of Taxation says that the expenses are not deductable because they are not substantiated, with Mr Smith not having provided receipts or other suitable evidence for the expenses.[2] In this application, the primary question for the Tribunal is whether Mr Smith has substantiated his expenses. In my view, he has not. Mr Smith has not otherwise proven the necessary facts to show that, on the proper application of the law, the expenses claimed are deductible.
[1] On the basis that the deductions were “incurred in gaining or producing your assessable income” pursuant to section 8-1 of the Income Assessment Act 1997 (Cth) (ITAA 1997).
[2] For the purposes of Division 900 of the ITAA 1997 or at general law.
BACKGROUND
Mr Smith is seeking a review of the Commissioner’s objection decision dated 20 December 2021 in relation to his Income Tax Assessment for the year ended 30 June 2020. The hearing of this matter took place at Brisbane on 14 July 2023. The Tribunal received written submissions and evidentiary materials from the parties, and oral submissions during the hearing. The written materials filed by the parties is listed in Appendix A.
Mr Smith’s employment and working arrangements
During the income tax year ended 30 June 2020, Mr Smith was employed by three companies; EnergyAustralia (EnergyAustralia) based in Melbourne, Infunde Capital Pte Ltd (Infunde Capital), and Infunde Development Pte Ltd (Infunde Development).[3] Mr Smith travelled to and worked from Melbourne, Singapore and his home in Queensland at various times during the year.[4]
[3] Infunde Development is a subsidiary of Infunde Capital; both are incorporated in Singapore.
[4] Exhibit Tr2, Section 37 T-Documents, T7, p 340; Exhibit Tr4, Respondent’s Written Outline of Submissions, p 6, para 21.
Mr Smith was the Managing Director for Infunde Capital during the relevant income year that is the subject of this application, and the Chief Technical Director for Infunde Development from 2016 until March 2020.[5]
[5] Exhibit Tr1, Tribunal Book, Tab 3.1, p 532, para 15; Exhibit Tr4, Respondent’s Written Outline of Submissions, p 6-7, para 23-25. The Tribunal notes that there appears to be reference to Mr Smith as both the “Chief Technical Director” and “Chief Technical Officer” in the materials before the Tribunal.
During Mr Smith’s employment with Infunde Capital and Infunde Development, he worked from his home office in Queensland and travelled to Singapore to attend meetings and arbitration.[6]
[6] Exhibit Tr2, Section 37 T-Documents, T1, p 5.
Mr Smith is presently the Managing Director for Infunde Capital.[7] Mr Smith says that Infunde Capital remunerated him on a “sweat equity” basis for the income year, which was to be reimbursed to Mr Smith when development capital was raised in the 2021 income year.[8]
[7] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 6, para 23. Further, the Applicant’s Statement of Facts, Issues and Contentions refer to the Applicant as being “still in the role as MD for Infunde Capital” (see Tr1, Tribunal Book, Tab 2.1, p 405).
[8] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 6, para 23.
Mr Smith was Infunde Development’s Chief Technical Director from 2016 to March 2020. Mr Smith was also a 15% shareholder of Infunde Development throughout the relevant period.[9]
[9] Exhibit Tr2, Section 37 T-Documents, T7, p 341; Exhibit Tr4, Respondent’s Written Outline of Submissions, p 7, para 25.
Disputed Expenses
Mr Smith seeks to claim work-related expenses in his income tax return in the amount of $48,425.86 incurred during the 2020 income year.[10] They are comprised of the following:
[10] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 3, para 11.
Deduction Items Amount Transport $12,710.12 Incidentals (toll, parking etc) $2,563.89 Meals, drinks and groceries $12,365.80 Accommodation $13,301.63 Home office - electricity $389.85 Home office – stationary $2,602.07 Phone & Internet $4,492.50 Total $48,425.86 WHAT QUESTIONS NEED TO BE ANSWERED?
The ultimate issue before the Tribunal is whether Mr Smith has discharged his onus to prove that the assessment for the 2020 income tax year was excessive or otherwise incorrect.[11] That in turn requires Mr Smith to prove the necessary facts to show that, on the proper application of the law, each work-related expense claimed is deductible.
[11] Tr4, Respondent’s Written Outline of Submissions, p 4-5, para 13-16; Under subsection 14ZZK(b)(i) of the Tax Administration Act 1953 (Cth) (TAA), Mr Smith bears the onus of proving that the assessment is excessive or otherwise incorrect, and what the assessment should have been. That is, what would make the assessment right or “more nearly right” (Gashi v Commissioner of Taxation (2013) 209 FCR 301 [61]-[67]). The onus is the civil standard of the balance of probabilities (Commissioner of Taxation v Ross [2021] FCA 766 at [46]).
To claim a deduction for a work-related expense, three questions need to be asked and answered in the affirmative for the 2020 income year:
(a)did Mr Smith meet the substantiation requirements of Division 900 of the ITAA 1997 or at general law?
(b)did Mr Smith pay the money (without being reimbursed)?
(c)does the expense meet the requirements under section 8-1 of ITAA 1997?
If any one of the foregoing questions is answered in the negative, the work-related expense will not be deductible.
Substantiation Rules
Division 900 of the ITAA 1997 sets out substantiation rules[12] that apply to certain expenses that are incurred by an individual taxpayer.[13] Those expenses must be substantiated.[14] As Mr Smith’s work- related expenses exceed $300, he is required to have written evidence to support all claims.[15]
[12] The Commissioner’s written submissions succinctly set out the substantiation requirements (see Exhibit Tr4, Respondent’s Written Outline of Submissions, p 9-11, paras 40-46 and 48).
[13] Section 900-15 of the ITAA 1997.
[14] Section 900-10 of the ITAA 1997.
[15] Section 900-35(1) of the ITAA 1997.
Subdivision 900-B applies to “work expenses” - defined as “a loss or outgoing you incur in producing your salary or wages”.[16] Division 900 has an extended application to company directors who receive renumeration payments (from which withholding payments must be made).[17] “Business travel expenses” also need to be substantiated if a business is carried on.[18]
[16] Section 900-30(1) of the ITAA 1997.
[17] Section 900-12 of the ITAA 1997 read with s 12-40 of Schedule 1 to the TAA 1953.
[18] Subdivision 900D of the ITAA 1997.
Subsection 900-15(1) outlines the requirements that a taxpayer must satisfy for work expenses. The relevant requirements under subsection 900-B are that:
(a)the expense claimed must be deductible under a provision of the income tax acts; and
(b)the taxpayer must obtain and retain “written evidence” to support the expense.
“Written evidence” for goods or services purchased is a document from the supplier that shows the following:
(a)name or business name of the supplier;
(b)amount of the expense;
(c)nature of the goods or services purchased; and
(d)date the expense was incurred, and
(e)date the document was produced.[19]
[19] Section 900-115 of the ITAA 1997.
In circumstances where such a document has not been obtained, the Commissioner will accept other forms of evidence, in accordance with subsection 900-115(3):
(3) There are 2 exceptions to these requirements:
(a) if the document does not show the day the expense was incurred, you may use a bank statement or other reasonable, independent evidence that shows when it was paid;
(b) if the document the supplier gave you does not specify the nature of the goods or services, you may write in the missing details yourself before you lodge your *income tax return for the income year.
Section 900-85 requires a taxpayer to keep travel records if the expense is for travel that involves the taxpayer being away from their ordinary residence for 6 or more nights in a row.
Subsection 900-150(1) provides that travel records need to record work related travel activities in a diary or similar document which contains the following information:
(a)the nature of the activity;
(b)the day and time which it began;
(c)how long it lasted; and
(d)where the taxpayer engaged in it.
Further, an activity must be recorded before it ends, or as soon as possible afterwards.[20]
[20] Subsection 900-150(2) of the ITAA 1997.
WHAT ARE THE ANSWERS TO THOSE QUESTIONS?
In my view (and I find that) Mr Smith has not met the substantiation requirements of Division 900 or at general law in respect of the work-related expenses in the income tax year ended 30 June 2020. Mr Smith has not armed the Tribunal with the necessary information to properly consider if the claimed expenses are, in fact, deductible under section 8-1. It is unnecessary for me to consider questions relating to whether Mr Smith paid the money (without being reimbursed). It is also unnecessary for me to consider whether the expenses must meet the requirements under section 8-1. Mr Smith is not entitled to claim the work-related expenses in his tax return.
Accordingly, Mr Smith has not discharged his onus to prove that the assessment for the 2020 income tax year is excessive or otherwise incorrect.[21]
[21] Under section 14ZZK of the TAA, the only state of satisfaction that the Tribunal is required to reach is whether, on the facts as found by the Tribunal, the taxpayer has proved that the assessment is excessive or otherwise incorrect, and what the assessment should have been. If that state of satisfaction cannot be reached, the application for review must be dismissed.
WHY ARE THEY THE ANSWERS TO THE QUESTIONS?
The Tribunal’s role is to carefully evaluate what the evidence adduced actually supports, or not, as the case may be. This underlies the point that there must be “a body of evidence which might, reasonably, sustain” the inference or fact found.[22]
[22] Tisdall v Webber (2011) 193 FCR 260 at [127].
To this end, and having regard to the observations of Hill J in Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation,[23] a taxpayer who does not obtain and retain appropriate records of his deductible expenditure faces an uphill battle to discharge their onus:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be “tested most closely, and received with the greatest caution”: Pascoe v FCT (1956) 11 ATD 108 at 111. It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. It must, however, be borne in mind that the evidence of a taxpayer is not to be regarded as “prima facie unacceptable”, cf McCormack v FCT (1978-9) 143 CLR 284 at 302 per Gibbs J.
[23] (1991) 91 ATC 4546, at [31].
No receipts for expenses
The substantiation rules are one of the few areas of the Australian income tax law that is easily understandable and well understood by most taxpayers - obtaining and retaining written evidence of work-related expenses, typically in the form a receipt, is a primary requirement for seeking to claim a deduction. There is little mystery or magic to it.
In this proceeding, Mr Smith has provided no receipts for any of the transport, incidentals, meals and accommodation, home office, stationary/office supplies and phone and internet expenses that he claims for deduction in this tax return. In response to questions as to why, Mr Smith offered no real explanation. Instead, Mr Smith asserted that the Australian Taxation Office (ATO) advised him that the provision of bank statements and calendar notes would be adequate validation for the expenses:
MR SMITH: I raised the issue of receipts very early on with the ATO as part of the original objection process… and the response I had was that… ‘So long as you’ve got bank statements to back it up and potentially the…the calendar receipts – or the calendar notes for both Infunde and EnergyAustralia, that should be sufficient justification.’ If it was purely going to be on receipts and that was articulated early on, I don’t think it would’ve got this far.
MEMBER: Well, I suppose, given that we’re hearing the matter afresh, and standing in the shoes of the commissioner… you bear the burden… Can you tell me why there are [no] receipts?
MR SMITH: Well, it’s not that there are no receipts. I just didn’t have – because as you can see, there’s quite a few hundred travel-related expenses.
MEMBER: Yes.
MR SMITH: So at the time, my discussion with the ATO was I’ll be providing bank statements for all those, and that… was cross-referenced with the spreadsheets, so the actual nature of the expenses… with the description included could be determined. So I mean, there’s probably some receipts I can provide, but because I didn’t have all of them, I … just went with what the ATO told me at the time; was to provide the backup information.
MEMBER: But I guess for the purposes of the tribunal, you would concede that you’ve been given an opportunity to present… your case and whatever evidence you wish to in support of your case, and that receipts haven’t been provided?
MR SMITH: Well, I guess because I don’t have receipts for every expense, no.
MEMBER: But you have receipts for some expenses. You’re saying that you’ve chosen not to provide those. Is that what you’re saying?
MR SMITH: Well, I was never asked to provide… what receipts I did have. It was – there would be potential to provide some receipts, but I just don’t – I couldn’t tell you at this stage where they are; you know, which ones I can provide.
MEMBER: Okay, but I think what I’m getting it at is that the point is they haven’t been provided.
MR SMITH: They haven’t been provided, no. [24]
[24] Transcript, p 36, lines 23-47, p 37, lines 1-21.
Accordingly, Mr Smith submits that his bank statements, travel and meeting agendas/ calendars satisfy the substantiation rules:
MR SMITH: … my contention is that… even though I didn’t have receipts, I provided bank statements; I’ve provided the calendars for my travel; I’ve provided meeting agendas for the – for all the travel, and a description of all the expenses … Even though I didn’t have receipts … that would be enough substantiation … as work-related expenses.[25]
[25] Transcript, p 10, lines 40-47.
Bank and credit card statements are inadequate
Mr Smith has furnished bank and credit card statements that he contends substantiate his expenditure on transport, incidentals, meals and accommodation, home office, stationary/office supplies and phone and internet expenses.[26] He has also provided a related explanatory spreadsheet in which he links the date from the statement to the service provider, classifies the expenditure and offers a “justification for the expense”.[27]
[26] Exhibit Tr1, Tribunal Book, Tab 1.7, p 117-333.
[27] Exhibit Tr1, Tribunal Book, Tab 4.2, p 559-567.
The Commissioner put to me that the bank and credit card statements are not documents from the supplier of the goods and services,[28] and do not otherwise satisfy the requirements of subsection 900-115(2):
At best, the statements only show payments were made to certain payees on the dates recorded and not the nature of the goods or services purchased. For example, a payment to “Coles” does not suggest that food was bought, given supermarkets sell a variety of goods (e.g. cat food, laundry detergent). Similarly, a payment to Officeworks says nothing about the nature of the items purchased (e.g., school supplies, arts and craft supplies, IT items). Likewise, a payment to an airline like Tiger Airways says nothing about the flight details (origin, destination or dates of the flights). [29]
[28] Transcript, p 39, lines 29-31.
[29] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 11-12, para 49.
The Commissioner’s submission must be accepted. Under cross-examination, Mr Smith effectively conceded that the bank and credit card statements and related explanatory spreadsheet were deficient in satisfying the “written evidence” requirements, including the date on which the expenditure was incurred. He also admitted that he was unable to recall when and in what circumstances at least some of the expenditure was incurred, calling into question his ability to meet the general law test for substitution:
MR SPROULE: You would accept that receipts would show the dates that the expenses were incurred?
MR SMITH: Receipts would, but bank statements don’t always do that, no.
MR SPROULE: And then still on the 3rd, there’s an expense for $275 at Aburiya Boat Quay. Is that a restaurant?
MR SMITH: It must be. Boat Quay is the area in Singapore. Aburiya must be the restaurant.
MR SPROULE: Is that a meal by yourself or with other people?
MR SMITH: It would’ve been – if I recall, it would’ve been a couple of the shareholders from Client Capital.
MR SPROULE: Was alcohol consumed?
MR SMITH: I can’t recall, but I imagine so.
MR SPROULE: There are a number of other entries here from your trip to Singapore, which appear to relate to meals. So there’s further entries on 4 November 2019 for 118 at Shangri-La Hotel; and then 5 November, again at the same place, for $50?
MR SMITH: M’mm.
MR SPROULE: Were those meals by yourself or with other people, and was alcohol consumed?
MR SMITH: I really can’t recall. This is, you know, we’re talking four years ago. I can’t recall every restaurant I went to and who I was with and whether I had alcohol. I’m assuming that I – if it’s an evening mean, not if – not if it was lunch, if it was an evening meal, I would’ve had a glass of wine. But I just can’t recall who I was with at these meetings four years ago.
MR SPROULE: Right. I don’t think I have to take that any further?
MR SMITH: I’m sorry, I can’t. Can you remember where you were four years ago if you had a receipt for a restaurant?
MR SPROULE: You accepted before that the dates in – that are listed in attachment 3 are taken from the bank statements?
MR SMITH: Correct.
MR SPROULE: And you say that the expenses – those dates might not match for when the expenses were incurred?
MR SMITH: M’mm.
MR SPROULE: Would you also, therefore, have to accept that the expenses – that the dates in the bank – that the dates taken from the bank statements in attachment 3 may not necessarily correspond with the travel that is recorded in your calendars?
…
MR SMITH: Well, the bank statements, the dates don’t but that’s why I put that first column, the week that it actually occurred.
MEMBER: Sorry, can I just clarify, Mr Sproule, is the question that you’re asking related to travel generally and expenses that Mr Smith says are incurred when that travel is taking place as a general matter, or is your question confined to travel to Singapore?
MR SPROULE: As a general matter.
Mr SMITH: Yes, so like I said, the dates from the bank statements may not necessarily match up, but that’s why I put that first column, ‘The week the expense was incurred’, so that at least you can see the travel that was done on that week.[30]
[30] Transcript, p 28, lines 42-47, p 29, lines 1-46.
In circumstances where such a document (e.g., a receipt) has not been obtained, the Commissioner will accept another form of evidence, or multiple forms of evidence, which together show all of the elements of “written evidence” for the purposes of section 900-115.[31]
[31] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 10, para 45.
The Commissioner contends that bank and credit card statements can be used for substantiation purposes in “very special circumstances” - only in relation to where the document from the supplier does not show the date that the expense was incurred. [32] As is clear from Mr Smith’s evidence, he concedes that his bank and credit card statements do not disclose when the expenditure was incurred. It follows (and I find) that Mr Smith’s bank and credit card statements do not satisfy the requirements of subsection 900-115(2).
[32] Transcript, p 39, lines 31-35.
Travel records are inadequate and cannot be reconciled to expenditure
Mr Smith has supplied calendars, diary entries and other work records that he contends substantiate his expenditure on transport, incidentals, meals and accommodation and related travel expenditure.[33]
[33] Exhibit Tr1, Tribunal Book, Tab 4.1-4.13, p 558-718.
In response to the same, the Commissioner identified more than 30 inconsistencies between the expenses listed in Mr Smith’s statement of facts, issues and contentions,[34] and his work calendar and other work records.[35] Mr Smith acknowledged that there are discrepancies between his list of expenses and his work calendar,[36] including in relation to flights.[37] For example, while some trips are recorded in Mr Smith’s work calendar for EnergyAustralia, not all work trips he claims are recorded.[38] As has been pointed out earlier, under cross-examination at the hearing, Mr Smith was unable to recall details or provide comfort, to an acceptable level, as to the veracity of his contention that the travel records substantiate his expenditure.
[34] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 13-16; Exhibit Tr1, Tribunal Book, Tab 2.1, p 405-408, Applicant’s Statement of Fact, Issues and Contentions.
[35] Exhibit Tr1, Tribunal Book, Tab 4.1-4.13, p 558-718; Exhibit Tr4, Respondent’s Written Outline of Submissions, p 13, para 53.
[36] Transcript, p 39, lines 41-42.
[37] Transcript, p 16, lines 1-13.
[38] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 13, para 52.
To my mind, Mr Smith’s travel records are unreliable as to when the transactions were made and the stated purpose of the transactions. Further, without wanting to labour the point, the absence of receipts means that, again, the Tribunal is unable to verify that the goods and services were purchased on the dates that are mentioned in the bank statements.
Overall, I conclude that Mr Smith has not satisfied the requirements of section 900-85; nor has Mr Smith met his obligations under subsection 900-150(1) in relation to travel records.
Relief from substantiation provisions do not apply
Mr Smith is not eligible for relief under section 900-205 as the Commissioner needs to be satisfied that the taxpayer took reasonable precautions to prevent the loss or destruction of the original copies of the relevant documents (i.e., the receipts, or other substantiation documents).[39] Mr Smith’s evidence is that he has not retained receipts or other records to substantiate the expenses on transport, incidentals, meals and accommodation, home office, stationary/office supplies and phone and internet.[40]
[39] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 16, para 54.
[40] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 16, para 54.
Separately, Mr Smith is not eligible for relief under section 900-200 as he attests to no circumstances which give rise to a reasonable expectation that substantiation would not be required.[41]
[41] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 17, para 55.
Finally, the Commissioner contends (and I find) that relief should not be given under section 900-195 because the nature and quality of the evidence provided is insufficient to establish that Mr Smith is entitled to deduct the amounts claimed.[42]
[42] Exhibit Tr4, Respondent’s Written Outline of Submissions, p 17, para 56.
DECISION
The objection decision dated 20 December 2021 is affirmed.
I certify that the preceding 39 (thirty-nine) paragraphs are a true copy of the reasons for the decision herein of Member Lee Benjamin.
.........................[SGD]................................
Associate
Dated: 26 September 2023
Date of hearing: 14 July 2023
Applicant: Self-represented
Respondent: Mr Joshua Sproule of Counsel
APPENDIX A
EXHIBIT DESCRIPTION OF EVIDENCE PARTY DATE OF DOCUMENT DATE RECEIVED Tr1
Tribunal Book
R
Various
15.06.2023
Tr2
Section 37 T-Documents (T1-T8; pp 1-404)
R
Various
19.05.2022
Tr3
Corelogic data
R
N/A
14.07.2023
Tr4
Ifunde Payment Summary
R
N/A
13.07.2023
Tr5
Respondent’s Written Outline of Submissions
R
11.07.2023
14.07.2023
Key Legal Topics
Areas of Law
-
Tax Law
-
Statutory Interpretation
Legal Concepts
-
Remedies
-
Statutory Construction
-
Appeal
5
0