Steven Cronan and Commissioner of Taxation
[2014] AATA 745
•15 October 2014
[2014] AATA 745
Division TAXATION APPEALS DIVISION File Number(s)
2013/4298-4300
Re
Steven Cronan
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Prof R Deutsch, Deputy President
Date 15 October 2014 Place Sydney The decision under review is affirmed.
................[SGD]......................................................
Prof R Deutsch, Deputy President
CATCHWORDS
TAXATION – whether it is appropriate for the Commissioner to apply identified industry benchmarks - whether the Applicant is liable to pay an administrative penalty in respect of any income tax and GST shortfall amounts - whether administrative penalties imposed in respect of any income tax and GST shortfall amounts should be remitted in whole or part.
LEGISLATION
Taxation Administration Act 1953 (Cth) section 14ZZK(b)(i), Schedule 1 sections 284-75(3) and 284-90(1)
Income Tax Assessment Act 1936 (Cth) section 167
A New Tax System (Goods and Services Tax) Act 1999 (Cth) section 9-20
CASES
ANZ Saving Bank Ltd v Federal Commissioner of Taxation 94 ATC 4844
Briggs v DFC of T (WA) Ex part Briggs 87 ATC 4278
Case V 126, 88 ATC 784
FCT v Jackson 90 ATC 4990
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 164
Ferguson v Commissioner of Taxation (1979) 9 ATR 873 at 311
Galea v FCT 90 ATC 5060
Gashi v FCT 2013 ATC 20-377
Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81
Gilder v FCT 91 ATC 5062
Re Taxpayer and Federal Commissioner of Taxation [2008] AATA 461
Thomas v FCT (1972) 3 ATR 165 at 171
Secondary Materials
REASONS FOR DECISION
Prof R Deutsch, Deputy President
In this case the Respondent raised two default assessments of income tax, one for the year ended 30 June 2009 and another for the year ended 30 June 2010 and eight assessments of GST net amounts for the eight tax periods from 1 July 2008 to 30 June 2010. The central issue for determination by the Tribunal in this application for review is whether these assessments are excessive for the purposes of section 14ZZK(b)(i) of the Taxation Administration Act 1953 (the “TAA”).
In raising the default assessments, the Respondent applied industry benchmarks for the cost of goods sold and business expenses for antique and used goods retailers in Australia so as to determine the Applicant’s taxable income and GST net amounts for the 2009 and 2010 income years.
The Tribunal needs to determine:
·whether it is appropriate in all the circumstances for the Commissioner to apply the industry benchmarks he has identified;
·whether the Applicant is liable to pay an administrative penalty in respect of any income tax and GST shortfall amounts under sections 284-75(3) and 284-90(1) of Schedule 1 to the TAA; and
·whether the administrative penalties imposed on the Applicant in respect of any income tax and GST shortfall amounts should be remitted in whole or part.
FACTUAL BACKGROUND
The facts have been set out in detail in the Respondent’s submissions and from those submissions I have concluded that the facts are broadly as set out below. Importantly, the facts generally do not seem to be in dispute. Rather there is considerable argument as to what could be done with the information which the Respondent had available to it as a result of additional documentation which the Applicant belatedly provided after the Respondent had raised a number of default assessments. This is canvassed more broadly under the heading “The Tribunal’s Analysis” below
Initial eBay Activities
In or around 1998 the Applicant began travelling regularly to the Philippines. He continued to spend up to 10 months of the year in the Philippines until about 2006, when he returned to Australia for the birth of this first child.
At some time in the early 2000s, the Applicant joined eBay using a particular name up to, and including, the 2009 and 2010 income years. At some stage in or around 2005 he created a separate eBay account under a different name which he used solely for purchasing items on the site.
From about 2000 to 2005, the Applicant’s activities on eBay consisted of purchasing coins, banknotes, telephone cards, postage stamps and miscellaneous electronics. He purchased the coins and banknotes from the Royal Australian Mint and private vendors on eBay. The telephone cards were bought directly from private dealers and included both domestic and international calling cards. He stopped purchasing telephone cards in about 2002 or 2003.
The purchases of the coins, banknotes, telephone cards and postage stamps were funded by the proceeds of his gambling activities.
It seems that at various times the Applicant also bought certain items online in the Philippines and arranged for them to be delivered to his father's address in Victoria. Upon receiving the purchased items, the Applicant’s father would leave feedback on eBay for each transaction. The Applicant used the feedback statements to keep track of which items he had bought. He did not otherwise keep any records in respect of his purchases during that period. He also sold some coins and telephone cards on eBay on the occasions that he returned briefly to Australia.
The Applicant also chose to buy coins because he believed they were "a good investment" on which he could make a "decent return." He viewed banknotes as being an even "better investment." He bought telephone cards because he believed they were "going to be like the Netherlands tulip boom" and become "the next best great investment."
Maturing eBay Activities
In about 2005, the volume and frequency of the Applicant’s trading activities on eBay increased markedly. At about the same time the Applicant made what could best be described as a number of successful “bets” including one which netted him a $250,000 windfall which he used to purchase what he called his "investment portfolio" of coins and banknotes.
In selecting which items to purchase, the Applicant said he "specifically target[ed]" particular items that he "perceived to be a good investment." The Applicant also read annual copies of the McDonald Australian Coin and Banknote Catalogue (which he described as the "bible" for coin investors) and attended at least two trade fairs. He occasionally sent coins to the United States to be professionally graded. He also said that he typically looked for coins and banknotes with a low mintage, which were more likely to be "valuable in the future” because he knew that "proof” or "uncirculated" items generally fetched a higher value in the marketplace. His knowledge of numismatics and the market value of coins and banknotes increased as time went on.
If an item that the Applicant had targeted as being a "good investment" came up for auction on eBay, he purchased the maximum quantity available at "whatever price." He would ensure that he was the highest bidder, even if that meant paying "top dollar." He sometimes purchased up to a thousand items at a time and later sold them individually or in smaller quantities. The majority of transactions were conducted through eBay with payment received through PayPal.
The frequency of his trading increased through 2006 and 2007 and reached a peak in 2009 and 2010. According to sales data maintained by eBay and later provided to the Respondent, he sold 1,248 items totalling $144,004 in 2009 and 887 items totalling $135,478 in 2010. He confirmed during cross-examination that he had no basis to dispute those figures and that they looked "about right."
The Applicant initially kept his stock of coins and banknotes in a "mess" at his home in Melbourne. He also stored some items at his father's house. Following several burglaries at his home, he moved some of the more valuable items to a secure storage facility. Again the goods were not stored in an organised manner.
In about May 2009, the Applicant moved to Sydney and kept some stock in a commercial storage facility. There is no evidence that he had any system for keeping track of which items were in storage and which ones were located in his house.
The Applicant's record-keeping procedures
The Applicant neither received invoices for most of the purchases that he made on eBay and nor did he issue invoices to customers who bought from him. He relied principally upon feedback left by vendors and buyers on eBay to keep track of which items he had bought and sold.
He also contends that he maintained an Excel spreadsheet on his laptop computer that listed the quantity and purchase price of each item that he had in stock. When he sold an item, he would simply delete it from the spreadsheet or reduce the recorded quantity for that item by one. He entered information into the spreadsheet whenever he was not too busy gambling. By his own admission, gambling "controlled a big part" of his life and gambling was his "main concern rather than anything else." He did not undertake any reconciliation of the sales and purchases recorded in the spreadsheet at the end of each quarter or financial year. The Applicant also contends that his laptop containing the spreadsheet was stolen from his house in about December 2011. He never recovered the missing computer and did not keep an electronic or hard copy of the spreadsheet. There appears to be no back up copy of any description available.
He did not perform regular stocktakes or keep contemporaneous records of stock levels beyond the information that was contained in the spreadsheet on his computer.
In terms of financial records, he did not maintain profit and loss statements or balance sheets. He kept copies of "most" bank statements between 2006 and the end of the 2010 financial year, which were "scattered in a mess" around his house. The proceeds of his gambling activities were mixed with the funds from his eBay trading in the same bank accounts. He did not use any kind of accounting software to monitor the transactions in his bank accounts.
He did not undertake any reconciliation of his total sales and purchases on eBay at the end of each month, quarter or financial year. He relied solely on his memory to keep track of how much money he was making or losing at the end of each quarter or financial year. He never made any attempt to calculate whether he might need to pay tax on the earnings that he made from his trading activities on eBay.
By his own admission, the Applicant was "not a very good record-keeper."
Audit and assessment
In about July 2011, the Commissioner commenced an audit of the Applicant’s tax affairs. The audit was triggered in part by the receipt of sales data from eBay concerning the Applicant’s total sales in the 2009 and 2010 income years. The Commissioner also determined in the course of the audit that the Applicant :
(a)had not lodged any income tax returns for the years ended 30 June 2003 onwards;
(b)had not registered for GST; and
(c)had not lodged any Business Activity Statements ("BAS") at any time.
On 31 January 2012 the Respondent sent to the Applicant a "Confirmation of audit and demand for lodgement of outstanding returns." The letter stated that the audit had been extended to include an audit of the Applicant’s BAS and income tax returns for the period 1 July 2008 to 30 June 2010 (the "Relevant Period"). The letter also requested that the Applicant lodge his overdue income tax returns and BAS for the Relevant Period by 10 February 2012.
On 2 February 2012 the Respondent sent to the Applicant an amended interim audit report, inviting him to submit a response and stating that the Respondent proposed to raise default assessments of income tax and GST net amounts, if he failed to lodge all outstanding income tax returns and BASs for the Relevant Period. The interim audit report also stated the Respondent's view that the Applicant's eBay activities amounted to the carrying on of an enterprise for the purposes of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the "GST Act").
Notwithstanding the February 2012 correspondence from the Respondent, the Applicant did not lodge any income tax returns or BASs.
On 18 April 2012 the Respondent sent the Applicant a final audit report and notification of assessments. The audit report stated that the Respondent had:
(a)formed the view that the Applicant’s trading activities on eBay amounted to carrying on a business; and
(b)as a consequence of the Applicant’s failure to keep proper business records and his failure to lodge returns and BASs as requested, assessed his income tax and GST liabilities by default by reference to sales data from eBay and industry benchmarks; and
(c)determined that the Applicant was required to be registered for GST by virtue of having met the turnover threshold of $75,000 for both the 2009 and 2010 income years; and
(d)decided to impose administrative penalties under subsections 284-75(3) and 284-90(1) of Schedule 1 to the TAA.
Assessments
On 18 April 2012 the Respondent issued a notice of assessment of GST net amounts for the tax periods commencing on 1 July 2008 and ending on 30 June 2010 (the "GST Assessment").
The following table shows the GST amounts, input tax credits allowed and assessed:
30. Tax period
31. GST amount in BAS
32. Input tax credits allowed
33. Assessed net amount
34. 1 July 2008 to
35. 30 September 2008
36. 1,711
37. 1157
38. 554
39. 1 October 2008 to 31 December 2008
40. 733
41. 495
42. 238
43. 1 January 2009 to 31 March 2009
44. 8,588
45. 5,805
46. 2,783
47. 1 April 2009 to 30 June 2009
48. 2,060
49. 1,392
50. 668
51. 1 July 2009 to
52. 30 September 2009
53. 3,116
54. 2,106
55. 1,010
56. 1 October 2009 to 31 December 2009
57. 4,933
58. 3,335
59. 1,598
60. 1 January 2010 to 31 March 2010
61. 4,161
62. 2,813
63. 1,348
64. 1 April 2010 to 30 June 2010
65. 106
66. 72
67. 34
On 20 April 2012 the Respondent issued a notice of assessments and liability to pay penalty for failing to provide a GST return for each of the tax periods commencing on 1 July 2008 and ending on 30 June 2010.
On 2 May 2012 the Respondent issued a notice of penalty for failing to provide a document for the year ended 30 June 2010.
On 3 May 2012 the Respondent issued a notice of penalty for failing to provide a document for the year ended 30 June 2009.
The Respondent also raised the following notices of assessment for income tax (together, the "Income Tax Assessments"):
(a)notice of assessment for income tax for the year ended 30 June 2009, issued on 4 May 2012; and
(b)notice of assessment for income tax for the year ended 30 June 2010, issued on 9 May 2012.
As a result of the Applicant’s failure to lodge income tax returns and BASs for the Relevant Period, the GST Assessment and the Income Tax Assessments were raised by default under section 105-5 of Schedule 1 to the TAA and section 167 of the Income Tax Assessment Act1936 (Cth) (the "ITAA 1936").
In assessing the Applicant's income tax liability and GST net amounts for the Relevant Period, the Respondent applied an overall expenses-to-sales ratio of 67.6%, which was determined by reference to industry benchmarks for the cost of goods sold and business expenses for antique and used goods retailers in Australia.
The following table summarises the amounts that the Commissioner contends are payable by the Applicant:
35. Description
36. Amount
48. Income tax liability for the year ended 30 June 2009
49. $6,657.32
50. Income tax liability for the year ended 30 June 2010
51. $5,465.92
52. GST net amount for the tax periods 1 July 2008 to 30 June
53. 2010
54. $8,233.00
55. Administrative penalty amount (income tax)
56. $9,092.35
57. Administrative penalty amount (GST)
58. $6,174.75
37. TOTAL
38. $35,623.34
Objection
On 14 August 2012 the Applicant lodged an objection to the GST Assessment, Income Tax Assessments and penalties.
In support of his objection, the Applicant, through his tax agent, Mr John Boulous, provided documents, including sales data and eBay customer feedback information, concerning his business activities during the Relevant Period.
As far as can be ascertained from the evidence, this was the first time that the Applicant sought to provide any information relevant to his eBay activities to the Respondent. The information provided did not, at this stage, seek to explain how the income and GST amounts should be calculated but simply provided relevant, but incomplete, documentation to the Respondent.
On 25 June 2013 the Respondent disallowed the Applicant’s objection in full.
BURDEN OF PROOF
Under section 14ZZK(b)(i) of the TAA, the Applicant bears the burden of proving that the Respondent's income tax and GST assessments are excessive: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 164 and ANZ Saving Bank Ltd v Federal Commissioner of Taxation 94 ATC 4844. The Applicant has the burden of demonstrating that the assessments are excessive and what the correct assessments should be.
There is no onus on the Respondent to show that the relevant assessments were correctly made or that they are supported by evidence: Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89 per Mason J.
THE APPLICANT’S POSITION
The Applicant’s position appears to be based upon the proposition that the assessment is manifestly unfair and unreasonable.
According to the Applicant, he spent a considerable period of time diligently going through hundreds of eBay records and asserts that as a result of that process for the calendar year 2009, he had sales of $43,181.81 which could be matched against eBay purchases of $43,050.74. This gave rise to a total profit of $131.07. In 2010, he similarly asserts that as a result of his diligent record searches, he had sales of $27,273.41 which could be matched against eBay purchases of $28,901.11 giving rise to an overall loss of $1330.95. From the information and records available to this Tribunal, this overall loss appears to be a slightly different figure namely $1,627.70. In any event, the upshot is that based on either number there is an overall loss.
The Applicant recognises that some of these figures are based on numbers extracted from certain limited transactions that occurred within the designated time periods for which the Applicant has some supporting evidence and that these numbers have been extrapolated to give estimates of the whole year picture (see the discussion under the heading below “Unsupported Sales”)
In this respect he also notes that these profit and loss figures do not take into account eBay and PayPal fees, postage and other expenses so the figure for 2009 would, if these matters were taken into account, give rise to a loss. In addition, the figure for 2010 would be a loss of a greater magnitude than that suggested above.
The Applicant has indicated both at the hearing and in formal written submissions that the ATO has a complete record should they wish to verify or dispute the amounts referred to above.
The Applicant has indicated that the ATO has not taken it upon itself to do this matching process and has refused to acknowledge the accuracy of the matching referred to above.
The Applicant has indicated that by extrapolating from these few transactions, it is mathematically extremely unlikely that he has made any profit in the relevant years and that even if a profit did exist it would be under the tax-free threshold for income tax purposes. He further asserts the ATO has chosen to ignore the validity of his losses and has, instead, preferred to assess the Applicant on an imaginary irrelevant benchmark. It appears that the ATO has adopted a benchmark percentage profit rate of approximately 33.3%.
The Applicant asserts that the ATO has failed to take his individual circumstances into account.
The Applicant also objects to the penalties and he asserts that he is suffering penalties despite his full cooperation and disclosure.
In relation to GST he indicates that he is at a loss to understand why GST needs to be paid upon reselling items largely at a loss or the same price.
THE RESPONDENT’S POSITION
The Respondent’s position is far more technical and canvases four issues, in particular, which can best be summarised as follows:
(i)The Applicant is limited to the grounds of his objection lodged on 14 August 2012 unless the Tribunal orders otherwise. The Respondent points out that the Applicant had accepted the decision of the ATO that he was carrying on a business of selling coins on eBay and he did not seek to raise a new ground of objection. The Applicant should be held to the original terms of his objection.
(ii)Even if the Tribunal is of the view that the Applicant should not be bound by the statements made in his objection, the Respondent submits that the Applicant nonetheless carries on business and an enterprise as required.
(iii)The Applicant failed to maintain adequate business records and cannot be allowed to now assert an approximate basis for determining income based on a method which differs to that which was determined and used by the Respondent in raising default assessments.
(iv)Without proper business records being maintained, the Respondent is of the view that it is appropriate for the Respond to assess the Applicant’s income tax and GST liabilities during the Relevant Period by reference to industry benchmarks.
In this context the Applicant has failed to discharge his burden of proof to demonstrate that the assessments for the relevant tax periods are excessive and has not indicated what the correct assessment of his income tax and GST liabilities should be.
THE TRIBUNAL’S ANALYSIS
After careful consideration, I have decided that the most effective and useful way to decide this case is for the Tribunal to focus its attention on the four material matters raised by the Respondent’s contentions. In doing so however, it is mindful of addressing the matters raised by the Applicant’s contentions and will attempt to address those matters as part of the overall analysis.
Should the Applicant be allowed to raise an argument which was not raised in the Notice of Objection?
By virtue of section 14ZZK(a) of the TAA, the Applicant is limited to the grounds stated in his objection lodged on 14 August 2012, unless the Tribunal orders otherwise.
The Applicant’s notice of objection stated:
The taxpayer accepts the decision of the ATO that he was carrying on a business of selling coins etc. via eBay.72
The Respondent submits that, since the Applicant did not seek leave to raise a new ground of objection at the hearing, he is barred by section 14ZZK(a) from contending that he was not carrying on an enterprise.
Davies J in Gilder v FCT 91 ATC 5062 at 5072 cautioned against giving much latitude in amending the grounds of objection indicating that “the Court will rarely permit additional and different issues to be raised at the hearing, certainly not unless good reason for doing so has been shown”.
Certainly, the taxpayer does not have an automatic right to an order to amend.
Nonetheless it is an extremely broad discretion (FCT v Jackson 90 ATC 4990) which should be exercised where it is in the interests of justice to do so.
At the hearing I decided to allow the Applicant another opportunity to argue the point even though the Applicant had not formally asked at that point for the exercise of the discretion to amend. I did so largely on the basis that the Applicant was self-represented and it was very much in the interests of justice that he be allowed the opportunity to argue the point even if he did not fully appreciate the legalities of needing to obtain the indulgence of the Tribunal to seek an amendment to the objection.
There is always a difficulty in considering the interests of justice in circumstances where an applicant is self-represented. To what extent should the Tribunal take into account the fact that the Applicant was self-represented and in those circumstances is not aware of the legal requirements that should be adhered to?
In this regard I have taken the view that even though not specifically asked by the Applicant to do so, the Tribunal should allow the argument that the Applicant was not carrying on an enterprise to be put even though such an argument was not put at the objection stage. To do the contrary would, in my view, deny to the Applicant the natural justice which I believe he is entitled to.
I do not allow this indulgence lightly as taxpayers should generally be restricted to the arguments they put at the objection stage but I am conscious of 2 factors operating here:
·First, the Applicant was self- represented at the hearing and, without the aid of a legal practitioner, clearly failed to understand the legal requirement he was subject to vis-a vis his objection; and
·Secondly, he and his adviser at the time of preparing and lodging the objection got so tangled up in the number crunching exercise in trying to prove there was no gain they appear to have lost sight of the even more fundamental issue regarding the carrying on of an enterprise. Properly advised by a lawyer the Applicant is likely to have sought to put this argument at the objection stage. In these circumstances to punish the Applicant by denying him the opportunity to put the argument at the hearing would not in my mind in any way assist the interests of justice.
Was the Applicant carrying on an enterprise?
The Respondent argued that the evidence demonstrates that the Applicant was carrying on an enterprise within the meaning of section 9-20 of the GST Act during the tax periods in question.
Section 23-5 of the GST Act provides:
You are required to be registered under this Act if:
(a) you are *carrying on an *enterprise; and
(b) your *GST turnover meets the *registration turnover threshold.
Section 9-20 of the GST Act provides that an enterprise "is an activity, or series of activities" done, relevantly, "in the form of a business" or "in the form of an adventure or concern in the nature of trade."
The definition of "business" for the GST Act comes from subsection 6(1) of the ITAA 1936, which states:
business includes any profession, trade, employment, vocation or calling but does not include occupation as an employee.
In Re Taxpayer and Federal Commissioner of Taxation [2008] AATA 461; (2008) 71 ATR 347, Senior Member Sweiden summarised the authorities concerning whether an activity or series of activities may be properly characterised as carrying on a business. The Senior Member stated, relevantly (at [36]-[37]):
It is clear from the authorities that whether an activity or series of activities are properly characterised as carrying on a business turns upon an assessment of a number of different indicia, no one of which is necessarily decisive and depends, ultimately, "on the large or general impression gained": see Martin v Federal Commissioner (1953) 90 CLR 470 at 474 (although the decision of Webb J was successfully appealed to the Full Court, this does not affect his Honour's statement of principle): see also Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 321 (Ferguson).
The relevant indicia which have been considered significant in previous cases include:
a. first, whether the activities are undertaken as a commercial enterprise in the nature of a going concern: see Hope v Council of the City of Bathurst (1980) 144 CLR 1 at 8 (Hope) or on a commercial basis: FCT v Walker (1985) 79 FLR 161 (Walker) at 165.
b. second, whether the taxpayer intends to and has a reasonable prospect of making a profit from the activities: Hope at 8-9, Ferguson at 314, Walker at 162, Babka v Federal Commissioner of Taxation (1989) 89 ALR 373 (Babka) at 380, Ell v Federal Commissioner of Taxation (2006) 61 ATR 661 (Ell) at 689, [111]-[114]...
c.third, whether the activities are repeated on a regular basis or conducted systematically: see Hope at 8, Ferguson at 314.
d. fourth, whether the taxpayer's activity is carried on in a way characteristic of the industry.
e. fifth, whether the activity is carried on in a business like way in terms of record keeping, keeping books of account, maintenance of a business plan and otherwise operating in conformity with ordinary commercial principles: Ferguson at 314, Walker at 165;
f. sixth, the size of the scale of the activities. While the larger the scale of the activities the more likely they are to constitute a business, a business may be carried on in a small way, and activities which are nonetheless in the nature of a recreation or hobby may be substantial in scale: see Ferguson at 314.
Applying the principles summarised above, there are a number of aspects to the way in which the Applicant has conducted his activities which are relevant in determining whether the Applicant was carrying on an enterprise. The critical factors would appear to be as set out below.
First, it would seem both from the written and verbal evidence that the Applicant had a clear commercial objective in that he intended to make a profit from selling his "investment portfolio" of coins, banknotes, telephone cards and postage stamps. The Applicant stated numerous times in his oral submissions and during cross-examination that he was an "investor." He accepted that he deliberately selected coins and banknotes that he "perceived to be a good investment" (or, in the case of telephone cards, a "great investment") on which he would be able to make a "decent return."
Second, on no basis could it be said that his trading activities had the character of a private recreational pursuit or hobby. He did not purchase a limited number of items to keep for his own private enjoyment. He clearly was not building a private collection but rather an "investment portfolio" made up of, in some instances, hundreds or thousands of the same type of coin or banknote that he later split into smaller bundles to sell on eBay.
Third, assuming the truth of his contention that he lost money on many of the items that he sold, that fact does not preclude a finding that he was engaged in carrying on a business. A person may be held to be carrying on a business notwithstanding that his or her profit is small or even where he or she is making a loss: Ferguson v Commissioner of Taxation (1979) 9 ATR 873 at 311.
Fourth, the fact that he did not pay "wholesale" prices afforded to dealers for his coins and banknotes does not require the conclusion that he was not carrying on a business. A person may carry on a business if only in a small and even inefficient or incompetent way: Thomas v FCT(1972) 3 ATR 165 at 171; 46 ALJR 397 at 401.
Fifth, he conducted his eBay trading activities in a commercial or business-like manner. He used industry events and publications to derive specialised knowledge about numismatics, which he used to evaluate and select the coins and banknotes that he believed would yield the best returns. He went to great lengths to make sure that he was the successful bidder for items that he had targeted and often bought in large quantities in order to maximise the return from subsequent sales. He also monitored the prices at which similar items were selling on eBay to ensure that his own reserve and sale prices were consistent.
Sixth, his trading activities were characterised by repetition and regularity. His eBay feedback statements indicate that he regularly made several purchases a day. He also stated in cross-examination that he listed an item for sale at least once per week. Whilst his sale records are not in evidence, the Commissioner submits that it may be inferred from the quantity of items recorded in the sales data compiled by eBay (1,248 in 2009 and 887 in 2010) that he was selling, on average, multiple items per week during the 2009 and 2010 income years.
Seventh, the evidence demonstrates that his eBay activities were conducted on a commercial scale. The coin 'stocktake' that was submitted on his behalf at the objection stage identified the value of his opening stock as $303,792.66 for the 2007 income year. He made sales worth $144,044 in 2009 and $135,478 in 2010. The size of those amounts provides further considerable support for the argument that the Applicant was, at the very least, carrying on an enterprise.
Did the Applicant maintain adequate business records?
Section 262A of the ITAA 1936 relevantly provides:
262A Keeping of records
(1)Subject to this section, a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act.
…
(2) The records to be kept under subsection (1) include:
(a)any documents that are relevant for the purpose of ascertaining the person's income and expenditure; and
(b)documents containing particulars of any election, choice, estimate, determination or calculation made by the person under this Act and, in the case of an estimate, determination or calculation, particulars showing the basis on which and method by which the estimate, determination or calculation was made.
(3) A person who is required by this section to keep records must:
…
(b)keep the records so as to enable the person's liability under this Act to be readily ascertained. (emphasis added)
A similar obligation applies to taxpayers who are registered for GST or required to register for GST with respect to records pertaining to taxable supplies and creditable acquisitions. Subsection 382-5(1) of Schedule 1 to the TAA relevantly provides:
382-5 Keeping records of indirect tax transactions
Record of transactions
(1) You must:
(a)keep records that record and explain all transactions and other acts you engage in that are relevant to a *supply, importation, acquisition, dealing, manufacture or entitlement to which this subsection applies; and
(b) retain those records for the longest of:
(i) 5 years after the completion of the transactions or acts to which they relate...
Subsection 382-5(1) applies, relevantly, to a taxable supply and a creditable acquisition.
For the reasons set out below, the Applicant did not comply with his obligations to keep records that could enable its taxation liabilities for the Relevant Period to be readily ascertained by the Commissioner.
This leads directly to the final question.
Did the Applicant establish the correct amounts that should have been included in assessable income and the correct amounts for GST purposes?
The Applicant has belatedly provided a considerable volume of material to the Respondent. The Applicant sought to provide some classification of the materials and the Respondent has attempted to develop those classifications further.
It seems that the best that can be said in the end result is that there are:
·some sales in relation to which there are documents that help to identify how the sales are related to the matching expenses, in particular, cost of the goods sold (‘Supported Sales”);
·some sales for which there are no supporting documents where the Applicant has attempted to apply to all sales, an average estimated cost price (“Unsupported Sales”);
·some sales which were additional to what had been identified in the 2 categories above but which were unearthed from eBay data (“Additional Sales”);
·further sales of telephone cards, banknotes and postage stamps (“Further Miscellaneous Sales”);
·a number of documents that go some way to supporting a small part of the claimed operating expenses (e.g. one phone bill, an invoice for storage fees, some eBay and PayPal transaction summaries in relation to postage and packaging fees and some website excerpts regarding fees and commissions for eBay and PayPal) (“Expenses”).
I will now deal with each of these matters sequentially.
Supported Sales
The Applicant contends that he has been able to quantify the cost of $33,495.27 worth of goods sold in the 2009 income year and $28,706.64 of goods sold in the 2010 income year by 'matching' these sales to purchase records.
The purchase records that he relies upon consist of eBay feedback statements, in which the vendors of items that he purchased on eBay rated his performance as a buyer. The vast bulk of the purchases recorded in the feedback statements were made in the 2007 calendar year.
The feedback statement for each item records the purchase price, the date on which the feedback was received and, in most cases, an individual eBay item number. The feedback statements do not, however, disclose:
(a)when each item was purchased by the Applicant;
(b)when each item was later sold by the Applicant and for how much; and
(c)whether items bought in bulk quantities were later broken up and sold individually or in smaller bundles.
The Applicant contends that the spreadsheets comprising Exhibit A2 are an accurate reconciliation of purchases to sales. The sale records that he used to compile the spreadsheets are not, however, in evidence. As such, there is no basis for concluding that he employed a rational or reliable methodology in determining the cost of 'supported' sales of $62,201.91 in the 2009 and 2010 income years.
The evidence also demonstrates that the Applicant did not keep contemporaneous records of stock levels. He has provided a 'reconciliation' of coin stock that was prepared by his tax agent at the objection stage in 2012. The 'reconciliation' is based on his bank account statements for the period between approximately March 2006 and June 2007. There is nothing on the face of the bank statements to indicate that individual withdrawals relate to coin purchases.
The only other supporting documentation that he has provided in relation to stock levels is a 'stocktake' of coin stock as at 31 July 2012, which is outside the Relevant Period. No contemporaneous records have been provided regarding stock other than coins, such as bank notes, telephone cards or postage stamps. In the absence of reliable records showing the Applicant’s stock levels at the beginning and end of each tax period, the Respondent is unable to ascertain the value of any sales of coins, banknotes and telephone cards through other sources.
In any event, even assuming that the Applicant's calculation of the cost of the 'supported' sales is correct, those sales amount to only 26% of total sales in the 2009 income year and 23% of total sales in the 2010 income year according to the sales data that was collected by eBay. The Respondent submits that the relative value of the 'supported' sales is insufficient to infer that the cost of goods amount allowed by the Commissioner was inappropriate for either the 2009 or 2010 years.
Unsupported Sales
The Applicant has identified what he describes as "unsupported sales" totalling $50,921.52 in the 2009 income year and $58,198.20 in the 2010 income year. It is not clear what records, if any, he used to derive those figures.
The Applicant has provided copies of invoices and eBay "payment summaries" that in his contention relate to the cost of goods that make up the unsupported sales. These invoices or payment summaries have not been matched to sales during the Relevant Period. Moreover, many of the invoices were issued outside the Relevant Period.
The Applicant's calculation of the cost of goods sold for the unsupported sales is based upon the "average cost" of a very small number of individual items. By way of example, the Applicant derived an "average price" of $471.52 for a 2000 $1 mule coin from nine purchases made between March and October in 2007. The average price was then applied to 25 'matching' sales of the same mule coin in 2009 and 2010. This methodology was repeated across other categories of goods and used to determine an overall "average cost" ratio for unsupported sales of 84% in 2009 and 85% in 2010.
There are a number of deficiencies in the approach which the Applicant has adopted.
First, the sample size of the selected purchases and sales (a mere nine sales from a seven-month period in the case of the mule coin) is too small to provide an accurate or reliable basis for calculating the overall cost of goods sold for unsupported sales in the 2009 and 2010 income years.
Second, the "average prices" of the sample goods do not adequately explain the very significant variances in the purchase and sale prices quoted by the Applicant. Some explanation as to how these variances are consistent with the average prices was necessary and yet was not provided either before or at the hearing.
Third, the sale prices that the Applicant has used to determine the "average prices" are not evinced or supported by any contemporaneous records.
Fourth, the Applicant has not applied any recognised accounting methodology to match purchases to sales and it is unclear when the coins listed in the purchase information were actually sold. As such, it is impossible to verify that the "average prices" were correctly applied to sales of matching items during the Relevant Period.
Additional Sales
The Applicant conceded at the objection stage that, in addition to the 'supported' and 'unsupported' sales, the data collected by eBay indicated further sales of $17,103.64 in 2009 and $16,183.52 in 2010. He stated that since he was unable to determine the cost of these additional sales, he was prepared to accept the industry benchmark of 57% that had been applied by the Commissioner.
Further Miscellaneous Sales
The Applicant has not provided any supporting documentation regarding the sale of telephone cards, banknotes and postage stamps during the Relevant Period.
At the objection stage, he accepted the industry benchmark of 57% as the cost of goods sold for these items during the Relevant Period.
Operating Expenses
The Applicant contends that he incurred operating expenses of $19,234.71 in the 2009 income year and $18,582.38 in the 2010 income year. The claimed expenses consist of the following categories: motor vehicle expenses, home office expenses, stationery and computer supplies, mobile phone charges, telephone and internet charges, storage, postage, eBay fees and PayPal fees.
The Applicant has provided the following supporting documentation in relation to operating expenses:
(a)an Optus mobile telephone bill dated 13 March 2009;
(b)an invoice dated 2 January 2010 and document titled "Transaction History" from Fort Knox Scoresby in relation to storage fees;
(c)a selection of eBay and PayPal transaction summaries in relation to postage and packaging fees; and
(d)printed excerpts from the eBay and PayPal websites regarding fees and commissions.
Despite the fact that the documents provided by the Applicant did not support the vast majority of operating expenses claimed, the Commissioner ultimately allowed a total of $88,497 in business expenses for the 2009 income year and $83,257 for the 2010 income year, in line with industry benchmarks of 56.6% for cost of goods sold and 11% for expenses. Allowance was made for categories of operating expenses that were not included in the industry benchmarks, such as storage, eBay and PayPal fees and home office expenses.
The GST Assessment and the Income Tax Assessments Were Not Excessive
Having regard to the concessions made by both sides it seems that the categories of Additional Sales, Miscellaneous Further Sales and Expenses are not in dispute.
In relation to the two remaining categories, Supported Sales and Unsupported Sales, it is the view of this Tribunal, having regard to all the matters raised above, that it was appropriate for the Respondent to assess the Applicant’s income tax and GST liabilities during the Relevant Period by reference to the industry benchmarks that the Respondent has adopted. This conclusion is particularly reinforced by reference to the fact that the Respondent consistently failed over a number of years and quarters to comply with his obligations to keep business records that could enable his taxation liabilities to be readily ascertained.
The Applicant has accordingly failed to discharge his burden of proof in demonstrating:
(a)that the assessments for the relevant tax periods are excessive; and
(b)what the correct assessment of his income tax and GST liabilities should be.
Accordingly I conclude that the Respondent’s decision to disallow the Applicant’s objection in full was correct.
THE APPLICANT’S MISUNDERSTANDINGS OF THE LEGAL POSITION REGARDING DEFAULT ASSESSMENTS
It seems the Applicant has misunderstood the legal position in regard to his circumstances. In particular the Applicant has allowed the situation regarding his eBay activities to proceed without giving proper consideration as to whether he is subject to income tax with respect to the profits on his trading and GST on his sales.
These are fundamental matters which anyone who transacts with even a small degree of regularity must turn their minds to.
The Applicant in this case does not appear to have turned his mind to these questions at all until it became a source of irritation to him as a result of tax office auditing. He transacted with regularity but never kept records to enable him at any time to determine the extent of his profits or losses.
He now seeks to assert that overall he made losses that cannot be established with any real certainty due to the lack of recorded information.
The taxpayer suggests that the Respondent is in a position to work out that he has made an overall loss because he has provided all the relevant documents and records.
The Respondent does not accept that he is in possession of the relevant documents and records and from where the Tribunal sits it would be inclined to agree with the Respondent on this point.
However, even if the Respondent had all the relevant material in the form, for example, of numerous spreadsheets, the Applicant is under the misapprehension that the Respondent should then be required to do the leg work (so to speak) and work out the Applicant’s tax liability. Perhaps regrettably, that is not how the self-assessment system under which Australia now operates, works, especially in the context of default assessments where the taxpayer has failed at the very first hurdle by not even bothering to file returns and BAS statements even after being specifically requested by the Respondent to do so.
Rather, the onus is on the Applicant and it is the Applicant who is required to assess his liability based on properly recorded information. The Applicant would in the normal case then lodge returns and BAS statements based on that assessment. Where the Applicant fails to so lodge, as in this case, the Respondent is entitled to, indeed is required to, assess on a default basis (i.e. on the basis that the Applicant has defaulted in filing returns etc.) and then raises an assessment based on the best evidence it has.
In this case, that best evidence was numbers based on industry benchmarks, which are clearly second best estimates, but which the Applicant, through his own default has effectively forced upon the Respondent.
It has been pointed out in other cases that a default assessment will not be invalidated merely because the assessment process involves some honest guesswork or does not make precise calculations: Briggs v DFC of T (WA) Ex part Briggs 87 ATC 4278 at 4290 – 4291; Gashi v FCT 2013 ATC 20-377, para 53-56 .
That is not to say that the Respondent has carte blanche. He must not act capriciously or dishonestly and he must make an attempt at what he honestly believes to be a fair estimate of the taxpayer’s income.
Having raised that default assessment, the Applicant can either satisfy that assessment by making the appropriate payment or can contest that assessment. In contesting the assessment, the Applicant must definitively prove that the default assessment is excessive by showing, with the benefit of clear objective evidence, what would have been the correct assessment.
In other words, it is not open to the Applicant to say to the Respondent, “you have the information, you work it out”. The onus, especially once a default assessment is raised, is very clearly on the Applicant to prove that the default assessment was excessive and what the correct assessment should have been.
The taxpayer clearly bears a heavy onus in proving that a default assessment is incorrect. In doing so he must “use a rifle and not a scatter gun” and show that the default assessment is wrong due to the numbers arising from a particular transaction or series of transactions which have been miscalculated : Case V 126, 88 ATC 784.
Moreover, as noted by Hill J in Galea v FCT 90 ATC 5060 at 5067 even where the Commissioner is unable to prove a positive case, the Taxpayer will still fail unless they are able to discharge the onus of proof under s 14ZZK of the TAA.
Clearly, in my view the Applicant has not discharged the onus of showing that the Respondent’s default assessments either in respect of income tax or GST are excessive.
PENALTIES
The Commissioner submits that administrative penalties were correctly imposed under subsection 284-75(3) of Schedule 1 to the TAA, which provides:
284-75 Liability to penalty
(3) You are liable to an administrative penalty if:
(a)you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
(b)that document is necessary for the Commissioner to determine a tax-related liability of yours accurately; and
(c)the Commissioner determines the tax-related liability without the assistance of that document.
The base penalty amount was assessed as 75% of the Applicant's tax-related liabilities pursuant to item 7 in the table in subsection 284-90(1) of Schedule 1 to the TAA.
This penalty has arisen as a result of the Applicant’s failure to lodge relevant returns and other required filings.
The Tribunal has the ability to remit some, or the entire penalty so imposed but it can only do so as a result of specific arguments to support such remission put to it by the Applicant.
One argument the Applicant put was that he is suffering penalties despite his full cooperation and disclosure. That argument is, with respect, a flawed one as it implies that such cooperation and disclosure existed at all relevant times. The reality however is that the Applicant’s cooperation and disclosure, such as it was, only became apparent once the Respondent had raised default assessments. Until that point in time there was no cooperation whatsoever and certainly no disclosure to speak of. Indeed there seems to have been only what can be described as a deliberate decision on the part of the Applicant to largely ignore a number of requests made by the Respondent for the Applicant to lodge all the outstanding returns and BAS statements.
The Applicant has also suggested that the Respondent failed to take into account the Applicant’s individual circumstances. That is certainly true to some extent but the reason the Respondent has not taken the Applicant’s individual circumstances into account is because the Applicant did not keep and provide to the Respondent a comprehensive statement of his individual circumstances. That failure cannot now be used as a basis for supporting an argument to remit the penalty which otherwise applies.
In my view the Applicant has not demonstrated any reason why the penalties should be remitted.
DECISION
The decision under review is affirmed.
I certify that the preceding 136 (one hundred and thirty six) paragraphs are a true copy of the reasons for the decision herein of Prof R Deutsch, Deputy President ................................[SGD]........................................
Associate
Dated 15 October 2014
Date(s) of hearing 11 June 2014 Date final submissions received 9 July 2014 Applicant In person Counsel for the Respondent Mr R Jedrzejczyk Solicitors for the Respondent ATO Review and Dispute Resolution Group
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