Sonic and Commissioner of Taxation (Taxation)

[2017] AATA 35

Sonic and Commissioner of Taxation (Taxation) [2017] AATA 35 (17 January 2017)

Division:TAXATION & COMMERCIAL DIVISION

File Number:           2015/6214

Re:Mr Sonic

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Ms G Lazanas, Senior Member

Date:17 January 2017

Place:Sydney

The Respondent’s objection decision with respect to the assessment of income tax is set aside and the matter is remitted to the Respondent to issue an assessment in accordance with the Tribunal’s reasons.

The Tribunal affirms the objection decision with respect to administrative penalty.

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

Ms G Lazanas, Senior Member

CATCHWORDS

TAXATION AND REVENUE – income tax – deductions – employee – work-related motor vehicle expenses – work-related expenses for tools and toolboxes – false document regarding sale of tools – objection decision relating to income tax set aside and matter remitted to Commissioner – administrative penalty – whether failure to take reasonable care –question of remission – objection decision relating to administrative penalty affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth) ss 8-1, 900-15, 900-30, 900-105, 900-110, 900-115, 900-195

Taxation Administration Act 1953 (Cth) s 14ZZK, Sch 1 ss 284-75, 284-90, 298-20

CASES

Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614

Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 91 ATC 4546

McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284

REASONS FOR DECISION

Ms G Lazanas, Senior Member

17 January 2017

1. The Applicant, referred to by the pseudonym ‘Mr Sonic’ pursuant to a confidentiality order, is in dispute with the Commissioner in relation to deductions for expenses that he claimed in his income tax return for the year ended 30 June 2014 (the relevant year). The expenses comprised of work-related motor vehicle expenses in the amount of $3,850 for travel between Mr Sonic’s home and his place of work and for other work-related expenses, namely, the alleged purchase of tools and toolboxes, in the amount of $24,802. The Commissioner disallowed these deductions and also issued Mr Sonic with an assessment of administrative penalty at the rate of 25% for failure to take reasonable care with respect to compliance with taxation laws.

2. At the hearing, the Commissioner made a concession in relation to Mr Sonic’s claim for work-related motor vehicle expenses in the amount of $3,850 leaving only the issue of the deductibility of the other work-related expenses and the penalty issues for determination by the Tribunal. I have decided not to allow the deduction in the amount of $24,802 that Mr Sonic claimed for other work-related expenses as I was not satisfied that Mr Sonic purchased any tools or toolboxes amounting to that figure. Mr Sonic failed to discharge the burden of proving that the assessment is excessive and what the assessment should have been: s 14ZZK(b)(i) of the Taxation Administration Act1953 (TAA 1953). I also agree with the Commissioner’s decisions regarding penalties.

   THE FACTUAL BACKGROUND AND EVIDENCE

3. The following findings of fact are based on the evidence of Mr Sonic, including his oral evidence at the hearing, the T-Documents, as well as evidence filed by the Commissioner.

4. During the relevant year, Mr Sonic was employed as an aircraft maintenance engineer with an airline. Mr Sonic began employment with the airline in February 2009 as an apprentice and, after he qualified as a tradesman in or about 2013, he said he decided to buy his own tools. He said that he had only been provided with basic tools by his employer and that these were “insufficient” for his kind of work which entailed maintenance of planes although he also said that his employer did have a tool crib comprising of large tools calibrated for the specific planes, which would be loaned to the engineers, as appropriate.

5. Mr Sonic said that he had telephoned the Australian Taxation Office (ATO) to enquire whether, if he bought tools from a private person who was not running a business, he could still claim a deduction for the tools in his tax return. He said that he had told the taxation officer that he needed the tools for his job but that he did not elaborate as to the nature of his job. He also said that the taxation officer told him that he could claim a deduction provided that he obtained an invoice with complete details. He said that he had contacted the ATO about the issue because he expected to be audited by the ATO.

6. Mr Sonic stated that he searched for tool sets on Gumtree and found “snap-on tools” that he wanted to purchase, and which were suitable for his work, advertised for $28,000. He telephoned the vendor, a Mr Owen Shaw, and negotiated a price of $24,750. Mr Shaw agreed to deliver the tools to Mr Sonic’s home in return for payment in cash.

7. Mr Sonic said that the transaction involving the purchase of the tools took place on 15 September 2013 at his home. Mr Sonic said that approximately 95% of the tools were still in their original packaging, that is, they were apparently new. He said that he paid for them in cash from his gambling winnings which he kept at home and that he counted the cash in his lounge room with Mr Shaw. When asked at the hearing whether he was concerned about such a transaction involving a large amount of cash taking place at home, Mr Sonic said that his girlfriend was with him at the time. Mr Sonic also said that Mr Shaw prepared and provided him with a “tax invoice” for the sale of the tools, to which I will come shortly.

8. On 15 July 2014, Mr Sonic lodged his income tax return for the relevant year reporting total assessable income of approximately $75,000, deductions of approximately $30,000 and, taxable income of about $45,000.

9. On 24 July 2014, the Commissioner issued a Notice of Assessment for the relevant year to Mr Sonic. The assessment resulted in a refund to Mr Sonic of approximately $11,000.

10. On 24 March 2015, the Commissioner commenced an audit of Mr Sonic’s 2014 income tax return and, relevantly, requested from Mr Sonic “copies of supporting documents as well as a written explanation about how your claims relate to your job”.

11. On 27 April 2015, Mr Sonic provided the Commissioner with a letter from his employer confirming that he holds the position of an aircraft maintenance engineer on a full time permanent basis. He also provided a separate signed letter dated 24 April 2015 from a person with the title ‘Acting Duty Maintenance Manager’ at his employer’s workplace confirming that Mr Sonic is an aircraft maintenance engineer and “requires tools to perform his job, and there is no secure storage facility for tools”. Additionally, Mr Sonic also provided photos of his workplace to show that there is no secure storage as well as copies of various invoices for work-related expenses as well as a “tax invoice” regarding the claim for work-related expenses for tools in the sum of $24,750. No explanation was provided as to the discrepancy between the amount of $24,750 on the “tax invoice” and the amount claimed as a deduction for “other work related expenses” in the sum of $24,802 which was still in dispute.

12. With respect to the so called “tax invoice”, it is a hand-written document with the following notations: “Tax Invoice”, “15/09/2013”, the name “Mr Owen Shaw” followed by an address in Panania and a mobile telephone number, and a description which reads “87 hand tools and/or power tools” for the total price of $24,750. It also contains a signature of a person above the name “Owen Shaw”. Mr Sonic stated at the hearing that he had also purchased two “snap-on” toolboxes from Mr Shaw, however, the toolboxes were not listed on the “tax invoice”.

13. On 28 April 2015, the Commissioner contacted Mr Sonic requesting, amongst other things, bank statements to show that Mr Sonic had incurred the expense of $24,750 for the purchase of the tools. Mr Sonic replied that he had paid cash for the tools and that the cash came from his gambling winnings which he kept at home.

14. In early May 2015, Mr Sonic forwarded copies of some of his bank statements for various periods to show that he frequented the Star Casino regularly. These bank statements indicated that he withdrew cash from an ATM at the Star Casino premises. Mr Sonic also stated that he had “silver membership” at the Star Casino which he said was offered to “only the high rollers… [who] play a lot and spend a lot of money”.

15. On 23 May 2015, the Commissioner finalised the audit and relevantly notified Mr Sonic that:

    (a)he disallowed the claim for work-related car expenses of $3,850;

    (b)he allowed the claim for other work-related expenses as to a minor part, in the amount of $480, but disallowed the claim as to the major part for $24,802;

    (c)he assessed an administrative penalty at the rate of 25% of the tax shortfall.

16. On 29 May 2015, the Commissioner issued Mr Sonic with a Notice of Amended Assessment for the 2014 year as well as a Notice of Assessment of Shortfall Penalty.

17. On 23 June 2015, Mr Sonic lodged his objection with the Commissioner and, on 5 October 2015, the Commissioner issued his Notice of Objection Decision.

18. At the hearing, Mr Sonic said that he sold the abovementioned “snap on” tools and toolboxes in about November 2015 as he no longer needed them because the maintenance works being performed by his employer in Australia had been downsized. Mr Sonic also claimed that he sold the tools and toolboxes at Fairfield markets for about $15,000 but he produced no evidence of this transaction. While that transaction is not in issue in these proceedings, it is strange that Mr Sonic would not have retained records or photos to prove the existence of the “snap on” tools and toolboxes and their subsequent disposal especially as the Commissioner had, by that stage, issued him with amended assessments and objection decisions putting Mr Sonic on notice about a tax dispute.

19. Aside from the “tax invoice” referred to above (which I will address below), Mr Sonic did not produce any independent evidence with respect to the “snap on” tools and toolboxes in respect of which he claimed a deduction. For example, there was no record of the Gumtree advertisement regarding the tools. There were no photos of the “snap on” tools in question (although Mr Sonic did have photos of other tools and toolboxes belonging to his father, in his car). Nor did Mr Sonic produce any witness statements of people who may have sighted the “snap on” tools, for example, his manager at his workplace. As noted above at [11], Mr Sonic’s manager at his workplace confirmed only that Mr Sonic “requires tools to perform his job, and there is no secure storage facility for tools”. Significantly, the manager did not reference the “snap on” tools and toolboxes the subject of this dispute.

20. Nor did Mr Sonic attempt to support his own story that he kept a large amount of cash at home or that he was a successful gambler. He said he had “silver membership” at the Star Casino but, according to his own explanation, this only suggested that he spent a lot of money gambling. There was nothing to substantiate any level of gambling winnings. Finally, Mr Sonic said his girlfriend could not attend the hearing due to work commitments and that he did not wish to worry his father about his tax dispute and bring him to the hearing.

21. The Commissioner, on the other hand, went to some lengths to contact Mr Shaw, the person named on the “tax invoice” as the vendor of the tools to test the veracity of that piece of paper. There were two witness statements by a taxation officer before the Tribunal which were unchallenged and which relevantly covered the following matters:

    (d)the telephone number provided on the “tax invoice” went straight to a generic voicemail message and, despite numerous calls to that number by taxation officers, the mobile phone was never answered;

    (e)a property search of the address set out on the “tax invoice” revealed that Mr Shaw was not the owner of the property at the address indicated on the invoice, nor had he ever been the owner;

    (f)the registered proprietor of the property at the address set out on the “tax invoice” had advised the taxation officer that she had lived there for approximately 30 years and did not know anyone by the name of “Owen Shaw”.

22. I turn now to my conclusions on the “tax invoice” which is the evidence Mr Sonic relies on besides his own story. Having regard to the evidence provided by the Commissioner about the contact details of the person named on the “tax invoice” and the lack of evidence provided by Mr Sonic about the transaction with respect to the “snap on” tools, I find that the “tax invoice” provided by Mr Sonic to the Commissioner is not genuine. That is, I find it is not a record of any transaction concerning the sale and purchase of tools because no such transaction ever took place between Mr Sonic and anyone else. Rather, the invoice is a false document which was brought into existence to support Mr Sonic’s claim for “other work-related expenses” in the sum of $24,750.

23. My finding is based on the fact that there was no independent evidence to corroborate Mr Sonic’s version of events regarding the purchase of tools and toolboxes from a Mr Shaw or from any other person. I am fortified in my views because Mr Sonic also did not prove that he kept a large amount of cash at home from gambling winnings nor did he prove that he subsequently sold the tools. Accordingly, I reject Mr Sonic’s claims that he purchased any tools in the relevant year for the sum of $24,750 as shown on the “tax invoice” or for the sum of $24,802 as claimed in his 2014 tax return. My approach with respect to Mr Sonic’s evidence is informed by the principles set out by Hill J in Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 91 ATC 4546 where his Honour stated at [4552]:

    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 Federal Commissioner of Taxation (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 Federal Commissioner of Taxation [1979] HCA 18; (1978-9) 143 CLR 284 at 302 per Gibbs J.

24. I also find Mr Sonic’s evidence that he claimed to have called the ATO prior to supposedly purchasing the tools to be unreliable. Mr Sonic stated that he telephoned the ATO because he expected to be audited but yet he made no record of this important “conversation”.

    LEGISLATIVE FRAMEWORK AND PRINCIPLES

25. Pursuant to s 14ZZK(b)(i) of the TAA 1953, Mr Sonic has the burden of proving, on the balance of probabilities, that the assessment of his income tax for the relevant year is excessive and what the assessment should have been. Separately, in relation to the assessment of administrative penalty, Mr Sonic has the burden of proving that the Commissioner’s decision should not have been made or should have been made differently: s 14ZZK(b)(ii) of the TAA 1953.

26. As to what is precisely involved in proving the excessiveness of an assessment and the establishment of a taxpayer’s true tax liability, see George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 201; Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89; McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 302-304, 306, 323; and Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621, 624-625.

27. In practical terms, in relation to his assessment of income tax for the 2014 income year, Mr Sonic must show that the amount of $24,802 that he claimed as a deduction for “other work-related expenses” is allowable as a deduction under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Based on my findings above and my rejection of Mr Sonic’s evidence, Mr Sonic’s case necessarily fails. As he did not incur the amount of $24,802 (or the amount of $24,750 as shown on the “tax invoice”), it is unnecessary to go any further.

28. If it were necessary to go further with respect to the relevant principles regarding deductibility of expenses and the substantiation provisions, I note that s 8-1 of the ITAA 1997 relevantly provides as follows:

    8‑1 General deductions

    (1)You can deduct from your assessable income any loss or outgoing to the extent that:

    (a)   it is incurred in gaining or producing your assessable income; or

    … [original emphasis]

29. Turning to the substantiation requirements, Division 900 of the of the ITAA 1997 sets out the rules in respect of “work expenses” which are defined in s 900-30 to mean “a loss or outgoing you incur in producing your salary or wages”. Section 900-15 relevantly provides:

    900‑15 Getting written evidence

    (1)To deduct a *work expense:

    (a)   it must qualify as a deduction under some provision of this Act outside this Division; and

    (b)   you need to substantiate it by getting written evidence.

    Subdivision 900‑E tells you about the evidence you need.

30. Subdivision 900-E is directed towards the written evidence required for the purposes of

    
    

    s 900-15. Section 900-105 explains that the legislation provides for a set of rules for getting written evidence to substantiate deductions and that the rules that can be used depending on the type of expense. Section 900-110 provides that there is no time limit for getting written evidence of an expense (unless the expense is recorded by the taxpayer in specified situations), “[b]ut until you get written evidence of it, you are not entitled to a deduction for the expense”. Section 900-110(2) further provides that if:

    when you lodge your *income tax return for the income year you have good reason to expect to get written evidence of the expense within a reasonable time, you can deduct the expense without actually getting the evidence. But if you don’t get the evidence within a reasonable time, your entitlement to the deduction ceases...

31. Section 900-115 sets out a number of rules in relation to written evidence from a supplier. Section 900-115 relevantly provides, as follows:

    900‑115 Written evidence from supplier

    …

    (2)You must get a document from the supplier of the goods or services the expense is for. The document must set out:

    (a)   the name or business name of the supplier; and

    (b)   the amount of the expense, expressed in the currency in which it was incurred; and

    (c)   the nature of the goods or services; and

    (d)   the day the expense was incurred; and

    (e)   the day it is made out.

    (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.

    …

32. Pursuant to s 900-195 of the ITAA 1997, the Commissioner may allow a deduction notwithstanding non-compliance with the rules in Division 900 if the nature and quality of the evidence satisfies him that the taxpayer incurred the expense and a deduction is allowable. The Commissioner was not satisfied and nor am I, based solely on the unsupported statements of Mr Sonic that he incurred any expense in purchasing “snap on” tools and toolboxes.

1. Mr Sonic also did not persuade me that it was necessary for him to purchase “snap on” tools and toolboxes for his line of work in circumstances where, on his own evidence, his employer had a tool crib There was no evidence, other than his own statements which I did not find to be compelling, that he required particular “snap on” tools for his work and that the expense was, therefore, incurred in gaining or producing his assessable income. In all the circumstances, Mr Sonic failed to discharge his onus of proof as to the excessiveness of the assessment of his income tax for the 2014 income year.

   IS MR SONIC LIABLE TO AN ADMINISTRATIVE PENALTY? IF SO, SHOULD IT BE REMITTED?

2. Mr Sonic was assessed for an administrative penalty at the rate of 25 per cent of the shortfall amount for failure to take reasonable care in relation to compliance with taxation laws: s 284-75(1) and table item 3 in s 284-90(1) in Schedule 1 to the TAA.

3. Mr Sonic challenged the imposition of the penalty on the basis that he had not failed to take reasonable care. At the hearing, he said that he had relied on representations made to him by ATO officers about obtaining an invoice with complete details in order to substantiate his work-related expense claim for the tools and toolboxes. He further sought remission of any penalty pursuant to s 298-20 of Schedule 1 to the TAA.

4. I was not satisfied that the Commissioner’s decision with respect to the imposition of penalty was incorrect and should have been made differently in accordance with the terms of s 14ZZK(b)(ii) of the TAA. During the audit, the Commissioner determined that the “tax invoice” that was produced to support Mr Sonic’s claim for “other work-related expenses” was not reliable, especially as Mr Sonic was unable to prove that he had incurred the expense. My finding, based on a careful scrutiny of the factual matrix presented to the Tribunal, is that Mr Sonic never purchased “snap on” tools and toolboxes, effectively validating the Commissioner’s concerns.

5. There is no basis for the Tribunal to exercise its discretion pursuant to s 298-20(1) in Schedule 1 to the TAA to remit any part of the penalty and Mr Sonic did not make any submissions as to why the penalty should be remitted.

   CONCLUSION

6. For the reasons set out above, I have decided that the Commissioner’s objection decision in relation to the amended assessment for the year ended 30 June 2014 is to be set aside and the matter remitted to the Commissioner to issue an assessment in accordance with the concession made by the Commissioner for a deduction for work-related motor vehicle expenses in the sum of $3,850. I affirm the objection decision relating to the assessment of administrative penalty.

I certify that the preceding 38 (thirty -eight) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member

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

Associate

Dated: 17 January 2017

Date(s) of hearing:	13 September 2016
Applicant:	Self-represented
Solicitors for the Respondent:	ATO Review and Dispute Resolution Group