Taxpayer-1 & Taxpayer-2 and Commissioner of Taxation (Taxation)
[2015] AATA 737
•22 September 2015
Taxpayer-1 & Taxpayer-2 and Commissioner of Taxation (Taxation) [2015] AATA 737 (22 September 2015)
Division
TAXATION & COMMERCIAL DIVISION
File Numbers
2014/0978, 2014/0979
Re
Taxpayer-1 & Taxpayer-2
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms G Ettinger, Senior Member
Date 22 September 2015 Place Sydney The Tribunal affirms the decision under review.
..............................[sgd]..........................................
Ms G Ettinger, Senior Member
CATCHWORDS
Taxation – whether the Taxpayers were carrying on an enterprise – Commissioner carried out three audits – no business plan – input credits not substantiated – no enterprise – objection decisions under review affirmed
LEGISLATION
Income Tax Assessment Act 1936, s 6
A New Tax System (Goods and Services Tax) Act 1999, ss 9-20, 11-1, 29-10, 29-70,
195-10Taxation Administration Act 1953, ss 14ZZK, 284-75, 284-220, 298-20
CASES
Hart v Commission of Taxation (2003) 131 FCR 203
Professional Admin Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123
Spriggs v Commissioner of Taxation (2009) 239 CLR 1
Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402
Re Private Tutor & Commissioner of Taxation [2013] AATA 136
Simon Clayton and Monica Clayton & Commissioner of Taxation [2013] AATA 428Bryxl Pty Ltd as Trustee for the Kypu Trust & Commissioner of Taxation [2015] AATA 89
SECONDARY MATERIALS
Taxation Ruling TR 97/11
REASONS FOR DECISION
Ms G Ettinger, Senior Member
22 September 2015
SUMMARY
Taxpayer-1 (the Taxpayer), and Taxpayer-2 (his wife), have appealed the objection decisions of the Commissioner of Taxation, (the Commissioner), to this Tribunal, and pursuant to section 14ZZK of the Taxation Administration Act 1953 (TAA), bear the onus of proving that the assessments are excessive. The Taxpayer is a qualified chartered accountant who is 73 years old, and has worked in the commercial world for over 50 years. He told me that he has suffered a stroke. Both he and his wife, who did not attend the hearing, suffer ill health, and the Taxpayer claims also to suffer some memory loss. He complains that the Commissioner has treated him unfairly, and that he has undergone three audits during which he has repeatedly been asked for many documents in regard to his businesses, and in substantiation of his claims for refunds of GST. The Taxpayer claims that due to the effluxion of time, and the fact that he has moved house a number of times, the many hundreds, or indeed thousands of documents required of him, cannot be located. He says however that he has provided a large number of documents to the Commissioner.
The Taxpayers have, in partnership, owned horses since 1988. They commenced a business, L-Australia which was registered for GST in 2000. Mr Robertson told me that they have been in the business of supplying laser instruments for use in equine medicine since 1989/1990. That business was termed Client Activity Centre-1, (CAC-1).
In addition to CAC-1, the Taxpayers later began another project, referred to as CAC-2. This was a project intended, according to the Taxpayer, to include an equine hospital where laser treatments and in-patient stays could be carried out, and was registered in 2003 as L-Property Australia. According to the Taxpayer, from 2009 when he decided not to proceed with the purchase of a second property, D-Property, for those purposes, he was working to roll CAC-2 and its activities into CAC-1. The Taxpayers’ business would then be located at G-Property, which was also the home of the Taxpayers from 2010 onwards.
The Taxpayer represented himself and his wife at the hearing, and Mr P Afshar of counsel appeared for the Commissioner.
The matters before me concern whether during the relevant period 1 April – 30 April 2007, the Taxpayers were conducting an enterprise, that is an activity or series of activities in the form of a business, (section 9-20, A New Tax System (Goods and Services Tax) Act 1999 (Cth), (the GST Act)). In addition to the question of whether the Taxpayers were conducting an enterprise, I also had to consider whether they were entitled to claim ITCs and whether they were able to substantiate input tax credits, (ITCs), for CAC-2. Penalties were imposed by the Commissioner, which I had to review. An expanded list of the issues to be decided follows.
In summary, I was not satisfied that the Taxpayers’ evidence and submissions regarding the business of CAC-2 discharged their onus, and I have affirmed the decisions of the Commissioner. My reasons follow.
ISSUES TO BE DECIDED
The issue before the Tribunal was whether the Applicants have discharged their onus in satisfying the Tribunal that the Notice of Amended Assessment for the Relevant Period, (1 April – 30 April 2007), dated 22 December 2011 was excessive.
In particular, I must decide:
·Whether the Applicants were carrying on an enterprise for the relevant period under their CAC-2 registration for the purposes of the GST Act;
·Whether the Applicants are entitled to ITCs relating to the relevant period under their CAC-2 registration in accordance with Division 11 of the GST Act;
·Whether the tax shortfall penalty at 50% of the tax shortfall amount under section 284-75(1) of Schedule 1 of the TAA for recklessness in regard to taxation laws is correctly imposed;
·Whether the tax shortfall penalty increase of 20% under section 284-220 of Schedule 1 of the TAA was correctly imposed; and
·With regard to the penalties outlined above; whether the discretion under section 298-20 of Schedule 1 to the TAA to remit the tax shortfall penalty, in part or in full, should be exercised.
BACKGROUND
The Taxpayer and his wife have engaged in business and owned horses through a partnership since 1988, and have operated as L-Australia, which has been registered for goods and services tax (GST), since February 2000. L-Australia commenced a business of supplying laser instruments for use in equine medicine, the business of which was represented by CAC-1.
CAC-2, which was registered in March 2003, was a project intended, according to the Taxpayer, to include an equine hospital and in-patient recovery/rehabilitation centre where laser treatments could be carried out.
The partnership calculated its GST obligations on an accruals basis, and lodged Business Activity Statements (BAS), for both CAC-1 and CAC-2 on a monthly basis.
The partnership acquired a property, the G-Property, and commenced purchase of a second property off the plan, the D-Property, which was to be developed for use in connection with CAC-2. Ultimately the Taxpayers did not proceed with the purchase of D-Property, although the Taxpayer referred to having sold it, which is not entirely accurate.
The relevant period subject of this matter was 1 April – 30 April 2007, for which the BAS for CAC-2 reported GST payable of $2 and ITCs of $5,105.
The Commissioner carried out two audits of the partnership in 2007. The first audit which was finalised in May 2007, concerned the substantiation of the ITCs claimed, and found that the majority of the ITCs claimed were unsubstantiated. As a result of the audit, the ITCs of CAC-1 were reduced by $9,798 and CAC-2’s ITCs were reduced by $11,332. The Applicant claims as follows:
… there was issues with invoicing, but that was only because the actual auditor from the Tax Office didn’t fully understand the accrual system, and a lot of the invoices which he initially rejected, we lodged an objection and these – our objections were accepted and a lot of the penalties were reversed, and at the same time ….
(Transcript page 16)
Throughout the many documents he has filed, the Applicant claims that he has been disadvantaged because the Commissioner has not returned the invoices which he submitted, and which he required to further explain his situation, and substantiate his claims.
The Applicant also asserts that the Commissioner does not appreciate the method he used to calculate his GST obligations which is on an accruals basis. I cannot accept this submission.
The second audit, carried out in June 2007, was restricted to the BAS CAC-2 lodged for 1 April 2007 – 30 April 2007. The Commissioner again found that that the majority of the ITCs ($5,105) claimed, were unsubstantiated. The Commissioner held that the ITCs were over claimed, and reduced them by $3,966. For the reasons given in the second audit report dated 1 June 2007, (Exhibit R2), including the Taxpayer not seeking specialist advice as necessary, not ensuring the BAS was correct prior to lodgement, and his admission that errors had occurred but that he was not able to quantify them, the Commissioner imposed an administrative base penalty of $991.50 plus 20% amounting to a total penalty of $1,189.80 for failure to take reasonable care. The Commissioner based his decision in part on the fact that the Taxpayer had previously, (in regard to the first audit, being the February 2007 BAS), been liable for an administrative penalty for making a false or misleading statement.
The Applicant was extensively cross examined on the June 2007 audit report (Exhibit R2). Throughout intensive cross-examination by Mr Afshar on 18 March 2015, the first day of hearing, the Applicant maintained that he had not been provided with that report, and had not previously seen it. He was provided with a copy of the report. When the hearing resumed to complete the cross-examination of the Applicant, and for final submissions on 19 May 2015, the Taxpayer admitted that he had been provided with the report after the audit.
Mr Afshar made submissions about the Taxpayer’s credit as a witness, and referred to the fact that he had denied having received Exhibit R2 when it was first produced, notwithstanding the Taxpayer had referred to it in several of his written submissions.
I deal with the Applicant’s credit further on in these Reasons for Decision, but do not accept that he was trying to mislead me with regard to the audit report. I note his excuses which are that he has a large number of papers, has moved house twice, suffers ill health, and has not been able to organise his documents appropriately, in part because he had had to submit large numbers of documents to the Commissioner during the audits.
I noted that in 2009, the Commissioner carried out a third audit for the period 1 January 2006 to 31 July 2009 for both CAC-1 and CAC-2. The Commissioner expressed concern regarding excessive claims for acquisitions reported in the monthly BAS which had been lodged for both entities, and sought invoices for sales and purchases for the audit period. The Commissioner also queried whether the Applicants were carrying on an enterprise.
In reply, the Taxpayer stated that he had never issued sales tax invoices for CAC-2. He wrote in similar terms to the Commissioner on 5 November 2009, (T6-21). He also indicated that the partnership was abandoning the original property for the CAC-2 project, and merging all the entities and activities to the G-Property site. Substantial correspondence followed to and from the parties with regard to substantiation of ITCs and other matters. The Commissioner was not satisfied with the response, and ultimately issued a final report of the third audit on 7 September 2010 (T17-102). The Commissioner then issued amended assessments for the periods August 2006 to September 2009.
The Taxpayers lodged an objection to the amended assessments in March 2011, and described what they said was the enterprise conducted by the partnership. The Taxpayer wrote as follows:
The establishment of the Veterinary Laser Surgical business was a “pioneering” project and clearly had to be done over some years. From preparing the property (clearing, pasture improvement, high quality dog proof fencing, paddock shelters, barn, stables and area for treatment (Diovet Surgical Lasers) to having the business credibility, bear in mind some of these animals can be valued at over $1,000,000, to treat these equine patients.
Add to this the period 2008 to 2009 has been generally declining economically, the Equine Flu disaster in 2008-2009, the ATO differing advice at different points and in the last three years my health problems have caused me to change the projected plan of the “enterprise” and finally decide to merge the activities into L-Australia (CAC-1) at this stage, not proceeding with the Laser Surgical business.
Just because it was finally decided not to proceed does NOT mean there was no “enterprise” ever or at the same time of incurring and making the BAS claims.
The Taxpayer thus sought to justify being an enterprise within the terms of the legislation.
The Taxpayer also provided a document with regard to L-Australia Property, which he said was set up on the advice of the ATO in order to separate property development projects from the L-Australia veterinary/medical supplies business. He said that he accordingly commenced the purchase of D-Property which was later abandoned. The Taxpayer indicated that once they had the G-Property, they understood that with certain modifications such as a water bore, fencing, planting, and other improvements, both the CAC-1 and CAC-2 activities could be operated from the G-Property. That, according to the Taxpayer, did not occur without difficulties, including problems with construction and renovation of the barn and cottage which was to provide accommodation for horses and their owners.
The Taxpayer also indicated further difficulties. His wife had suffered a near fatal fall in May 2009, there was a recession in 2008, and equine flu caused difficulties, particularly in the movement of horses in 2007/2008. The merging of activities turned out to be a greater project than anticipated, he said.
For the sake of completeness only, and without expressing any opinion regarding the following, I note that the Taxpayer made quite a number of disparaging remarks both orally at the hearing, and in writing about the Commissioner and his staff who dealt with him, and who conducted the audits. He considered they did not understand what they were doing, and that he had been treated unfairly.
RELEVANT LEGISLATION
The relevant legislation in this case is the Income Tax Assessment Act 1936 and the A New Tax System (Goods and Services Tax) Act 1999, (the GST Act), as well as the Taxation Administration Act 1953 (the Administration Act).
Section 9-20(1) of the GST Act states:
(1) An enterprise is an activity, or series of activities done:
In the form of a business; or
In the form of an adventure or concern in the nature of trade; or
On a regular or continuous basis, in the form of a lease, licence or other grant of an interest or property.
...
Section 195-1 of the GST Act defines “carrying on” an enterprise as including “doing anything in the course of the commencement or termination of the enterprise". Division 11 of the GST Act sets out the requirements for creditable acquisitions. In the introductory section, section 11-1 of the GST Act, states:
You are entitled to input tax credits for your creditable acquisitions. This Division defines creditable acquisitions, states who is entitled to the input tax credits and describes how to work out the input tax credits on acquisitions.
Section 11-5 of the GST Act states:
You make a creditable acquisition if:
You acquire anything solely or partly for a creditable purpose; and
The supply of the thing to you is a taxable supply; and
You provide, or are liable to provide, consideration for the supply; and
You are registered or required to be registered.
Section 29-10 of the GST Act concerns attribution of input tax credits claimed for creditable acquisitions. It states:
(1) The input tax credit to which you are entitled for a creditable acquisition is attributable to:
(a) The tax period in which you provide any of the consideration for the acquisition; or
(b) If, before you provide any of the consideration, an invoice is issued relating to the acquisition – the tax period in which the invoice is issued.
However, if you account on a cash basis, then:
If, in a tax period, you provide all of the consideration of a creditable acquisition – input tax credit for the acquisition is attributable to that tax period; or
If, in a tax period, you provide part of the consideration – the input tax credit for the acquisition is attributable to that tax period, but only to the extent that you provided the consideration in that tax period; or
If, in a tax period, none of the consideration is provided – none of the input tax credit for the acquisition is attributable to that tax period.
If you do not hold a tax invoice for a creditable acquisition when you give to the
Commissioner a GST return for the tax period to which the input tax credit (or any
part of the input tax credit) on the acquisition would otherwise be attributable:
The input tax credit (including any part of the input tax credit) is not attributable to that tax period; and
The input tax credit (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice.
If the GST return for a tax period does not take into account an input tax credit
attributable to that tax period:
The input tax credit is not attributable to that tax period; and
The input tax credit is attributable to the first tax period for which you give the Commissioner a GST return that does take it into account.
Section 29-70 of the GST Act describes the circumstances in which a supplier must issue a tax invoice and the information that a tax invoice must contain.
Were the applicants carrying on an enterprise under their CAC-2 registration for the purposes of the GST Act?
As noted above, the Applicants have been the subject of three audits by the Commissioner, two in 2007, the second of which dealt with the BAS for the relevant period 1 April – 30 April 2007, and the third audit covered both CAC-1 and CAC-2 for the period 2006 – 2009. Exhibit R2 is the 1 June 2007 report of the audit for the relevant period.
It is noteworthy that in the first audit, which concerned the February 2007 BAS for CAC-1 and CAC-2, the Commissioner had already found a GST shortfall for which the Applicant was penalised for making a false or misleading statement, and not taking reasonable care in the preparation of the BAS.
The objection decision dated 22 December 2011 followed the audit conducted in 2009 which affirmed that the Applicants were not carrying on an enterprise for purposes of the GST Act, and affirmed the cancellation of the CAC-2, GST registration. The Commissioner held therefore that CAC-2 was not entitled to ITCs.
The Applicant’s case is of course that CAC-2 as represented by L-Australia Property was carrying on an enterprise, and that the partnership is entitled to the ITCs as claimed. The Applicant provided a large number of documents in support of his case, and explained the difficulties he experienced in establishing CAC-2. He says that due to his, and his wife’s ill health, the downturn in the economy in 2008, and the equine flu which restricted the movement of horses in 2007/2008, he had to sell D-Property which had been destined to become the laser centre and equine hospital.
First of all I am not satisfied from the evidence that the purchase of D-Property had proceeded to any extent. The Applicant’s evidence was that development of the property had taken two years and was not completed, so the partnership did not proceed with the purchase, which was off the plan, and so the Taxpayers handed back the property to the developer. I am satisfied that there was no sale involved.
The Applicant also referred to both CAC-1 and CAC-2 doing their BAS on an accruals basis rather than on a cash basis, and on various occasions, both in writing and orally, stated that the Commissioner’s officers did not understand the system. I have noted the basis for the accruals accounting in relation to BAS in the paragraphs above. It is an alternative way of accounting. The Taxpayer must however, have the relevant tax invoices in relation to the transactions. That was found not to be the case in relation to BAS-2.
I note further the Applicant’s evidence that in 2009, the partnership decided to consolidate CAC-1 activities which were the sale of laser and related equipment for use in veterinary medicine with the proposed activities of CAC-2. I noted that that date may however, as disclosed in earlier evidence and documentation, have been 2007 or 2008.
The Applicant gave further accounts of difficulties with building and renovation of the barn and cottage which were to provide accommodation for horses and their owners. He said that they understood that with certain modifications such as a water bore, fencing, planting, and other improvements, both the CAC-1 and CAC-2 activities could be operated from the G-Property. However, the merging of activities was a greater project than anticipated. He considered that the massive penalties imposed by the Commissioner were not appropriate for a developing and evolving business which is how he characterised CAC-2.
The Applicant’s evidence in regard to why he considered CAC-2 was an enterprise was that no-one would undertake the work they had, and spend the money they had spent, if it was not in pursuit of business, and an enterprise. He said that he was busily arranging finance dealing with the provision of surgical laser equipment, qualifying the family in horse management in order to create credibility with clients, preparing a business plan, and generally operating in a business-like manner. He said that he anticipated CAC-2 would be profitable in 3 – 6 years after it started.
The Applicant provided a document headed “Basic Outline of Proposed Operation, July 2003 – Programme to establish L-Australia Property as a Surgical Veterinary Unit”. A fax imprint on the document indicated a date of 2011, so it may not, as submitted by the Respondent, have been drafted in 2003 (T25-303). Further, I am satisfied that it is not really a business plan, but rather, a timetable for construction of the property. The document does not analyse the strengths of the business, or provide a SWOT analysis regarding the potential of the business and its competitors.
The Applicant said that he had correspondence with universities and other bodies regarding CAC-2. I noted a letter from Sydney University regarding the provision of lasers, which was the CAC-1, and not the CAC-2 business. The Applicant also said that on occasion, there had been horses and their owners which had stayed overnight at his G-Property. Unfortunately there was no corroborating evidence of any sort, and I could not accept that evidence.
In July 2011, the Applicant also provided to the Commissioner, details of contracts entered into for finance (with Westlawn Finance Ltd, Esanda and others), and the provision of various services. They appear at T24 in the section 37 documents, and were without exception either addressed to the Applicants personally, or to L-Australia. They may have some relevance to L-Australia Property, but do not go to establishing that it was an enterprise in the terms of the GST Act.
The Applicant provided a Profit & Loss Statement, and Balance Sheet (June 2008), for L-Australia, and a handwritten letter on personal letterhead to ‘Glen’ (Glenn Jones, Senior Business Manager of Pennant Hills Toyota), in connection with the acquisition of motor vehicles (T10-54/56). An extract of that letter is reproduced below:
Also remember, we operate a large part of our business from a 4 car Garage attached to our home (& have done for 15 years) – so practically all our home/living expenses are included in [L-Australia]’s A/cs.
…
Basically we “try” to “engineer” income about 200k – 250k over the both of us in a ‘’tax effective” way.
Mr Afshar used the above example to submit that the Applicant had some tendency … to exaggerate or engineer figures, and to submit I should find that he should not be accepted as a witness of truth.
The Commissioner submitted that the building of an arena, and other modifications the Applicants made were for their own comfort and activities with horses which they had owned since 1988. He submitted that the arena and other facilities were also for the convenience of the Applicants’ daughter who is an accomplished rider and show jumper, and that they are thus expenditure of a private or domestic nature.
I have considered the evidence and submissions of both parties in coming to a decision that CAC-2 was not an enterprise within the terms of the GST Act, which follows as relevant.
Section 9-20(1) of the GST Act states:
(1) An enterprise is an activity, or series of activities done:
In the form of a business; or
In the form of an adventure or concern in the nature of trade; or
On a regular or continuous basis, in the form of a lease, licence or other grant of an interest or property.
...
In considering whether CAC-2 was an enterprise, I have also taken into account Taxation Ruling TR 97/11 (TR97/11), which takes me back to section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where business is defined. TR97/11 makes the point that whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing up all the relevant indicators. TR97/11 also discusses the main indicators of carrying on a business, a consideration of which follows.
I noted also that in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation [2013] FCA 1123, Edmonds J stated:
[37] The concept of ‘enterprise’ is central to the GST Act; the carrying on of an enterprise is the first requirement to trigger the obligation to register ... the second requirement to trigger outward tax ... and a fundamental requirement to entitlement to credit for input tax.
…
[39] The word ‘business’ is defined in s 195-1 of the GST Act in an inclusive and non-inclusive way, but is of little or no assistance to the present context. Australian income tax law jurisprudence emphasises the existence of a profit-making purpose, repetition and regularity, the conduct of activities using business-like methods, the volume of activity and the existence of a significant commercial purpose as relevant indicia to a finding that the activity or activities constitute a business. But para (b) of s 9-20(1) makes it clear that an “enterprise” can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit making.
….
Edmonds J then proceeded to address the various indicia, which his Honour considered relevant to a determination of whether the applicants in that case were carrying on an enterprise. That was consistent with the approach taken by the High Court in Spriggs v Commissioner of Taxation (2009) 239 CLR 1, where, at [60], the Court stated:
Where it is determined that a taxpayer is conducting a business, the next question will be the ‘scope’ of that business (56). It may be that the taxpayer pursues two separate fields of endeavour which are properly described as two separate businesses or a business and some other non-business activity. ... On the other hand, a taxpayer may pursue separate income-producing activities as part of a single business (58). The question is one of fact, turning upon the degree of connection and interdependence between the activities. One must consider “the whole of the operations of the business concerned in determining the questions of deductibility”(59). To determine whether a taxpayer is conducting a business and the scope of that business, as said in a different context, “it is necessary to make both a wide survey and an exact scrutiny of the taxpayer’s activities” (60).
I have considered the indicia in connection with the decision I had to make regarding whether the activities of CAC-2 amounted to an enterprise under the GST Act. In consideration of whether it had a significant commercial purpose or character, I have taken into account the evidence of the Applicant that it was a pioneering project and clearly had to be done over some years. He referred to preparing the property, from clearing, pasture improvement, high quality dog proof fencing, paddock shelters, barn, stables and an area for treatment, to developing the business credibility. He referred to the difficulties he encountered with the economic downturn, the equine flu epidemic, and his and his wife’s health problems as referred to above, as well as the difficulties in the execution of the decision to merge the activities into CAC-1. He stated: Just because it was finally decided not to proceed does NOT mean there was no enterprise ever or at the same time of incurring and making the BAS claims.
I noted the difficulties the Applicant discussed. I noted the ill health of both the Applicant and his wife which was no doubt difficult to deal with. However, in regard to the effect of any economic downturn on his business of CAC-1, I had no corroboration of his statements, and no indication it had affected any development of CAC-2, (which had been registered for GST since 2003). There was also no actual evidence or corroboration regarding any effect the equine flu epidemic had on the Applicants’ business or activities.
In that connection, I have noted there was no business plan, as what the Applicant referred to as a business plan was simply a construction timetable, which bears a 2011 fax imprint, and which the Respondent submitted may in fact not have been produced in 2003 as claimed by the Applicant.
In consideration of whether the Taxpayer had more than a mere intention to engage in business, I accept the Applicants had some such intention. They were already engaged in the provision of laser equipment through CAC-1, and saw the work they thought CAC-2 might do, as an extension of that.
The Applicant stated in reply to a question regarding his intention to engage in the CAC-2 activities:
Clearly you would because you – we wouldn’t have involved vets, Camden University, we wouldn’t have gone to the extent of having our own lasers built and imported from DioVet in America.
(Transcript page 26)
Unfortunately there were no documents corroborating the Applicant’s assertions about contact with vets. The correspondence with the University of Sydney unit in Camden discussed the sale of lasers, (the business of CAC-1), and not the business of CAC-2.
One matter that, amongst others, bears upon the decision as to whether an activity carrying out by the Applicants in this case, amounts to an enterprise requires an assessment of the evidence of the intention, subjectively held, of the Applicants as to the end of profit making. In Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402 the Court held:
[73] … I do not accept, particularly in the Tribunal which is not bound by the rules of evidence, that evidence of subjective purpose should not be allowed. While it is clear that ultimately an objective conclusion must be reached, it does not follow, particularly in a case in which there are objective factors which could support conclusions both for or against ‘carrying on an enterprise’, that the evidence of subjective purpose cannot be considered…
Evidence of subjective purpose could, in some circumstances, and if corroborated by objective evidence in support, provide a strong foundation for the taxpayer’s contentions as to the existence of an enterprise. However, in the case of these Applicants, the level of generality was remarkable, and unconvincing as far as a genuine intention is concerned.
In consideration of whether there was an intention to make a profit or a genuine belief that a profit would be made, I find that the Applicants did not apply themselves to that, as there was no business plan, and they were spending money to which they were not entitled, particularly as will be shown below, in regard to ITCs.
The Respondent submitted that in contrast to these Applicants, the Taxpayer in Commissioner of Taxation v Swansea Services was carrying on an enterprise acquiring and occasionally selling antiques and artwork. The Court found that although the profits of the business had been limited, there were other factors which weighed in favour of a finding that the Taxpayer was carrying on an enterprise, including that the Taxpayer retained specialist consultants, kept detailed records, including records of budgeting, for the business and that, otherwise, the Taxpayer carried on the business in a businesslike manner.
That was not the case with these Applicants. I am satisfied from the evidence that the majority of the expenditure on acquisitions for CAC-2 relating to the G-Property were for a private or domestic use. I have already stated above that there is no evidence any horses other than the ones owned by the Applicants, stayed at the property. The Applicant gave evidence about, and produced correspondence with the Sydney University Veterinary Centre at Camden as evidencing discussions about in-patient care for horses. In fact the letter from the University dated 19 April 2004 was addressed to L-Australia, and the Applicant, and was a query about the Diovet laser.
During cross-examination by Mr Afshar as to what correspondence or documents referred to the proposed in-patient facility, the Applicant answered variously by talking about lasers and the business of CAC-1. I noted the following exchange:
Mr Afshar:… I hope I am putting it simply as possible, and that is you have provided either to the Commissioner or to this Tribunal no evidence from these vets and clinicians and other people who you say approached you?
Applicant: Yes
…
Applicant: And – because what I’m saying is we were all the time talking to these people, for want of a better term, spruiking the idea of surgical laser for – particularly for equine use …
Senior Member: … I am satisfied from your replies that in fact there has been no evidence about the CAC-2 activities, that there’s no accommodation or hospital involved and that you were seeking to supply the equipment, the laser equipment, and hopefully for you to make money that way?
Applicant: We were – yes.
(Transcript pages 66-67)
The arena, which was built to assist horses with recuperation according to the Applicant, seemed from the evidence, notwithstanding the Applicant’s disagreement with that, more like an arena for the use of the Applicants’ daughter who is an accomplished rider, and show jumper. That activity is better described as a hobby rather than a business or an enterprise.
As to whether there was repetition and regularity in the activities of CAC-2; the figures provided to the Commissioner do not demonstrate that. The Applicant relied however on his view that the activities of CAC-2 were in a development stage. In replies to questions by Mr Afshar, he stated that there would be regularity and repetition once the business was established and running. That cannot satisfy me that the factor repetition and regularity in the activity is met.
Unfortunately, consideration of whether the activity was organised in a businesslike manner, and whether there was repetition and regularity, gives a very clear negative answer. The Applicant himself deposes, and gave evidence that his documentation was disorganised. He indicated as follows in cross-examination:
Mr Afshar: Is the activity organised in a business-like manner?
Applicant: Well, it would have been once it was operational.
(Transcript page 28)
Whether the activity was of the same kind and carried on in a similar way to that of the ordinary trade, I cannot find for or against the Applicant.
Regarding the size or scale of the activity, I can only be satisfied that CAC-2 did not conduct any business activities, or issue invoices. There was no evidence before me of marketing or promotion of its activities. I am mindful however, that for example, a small scale enterprise can still be considered an enterprise provided other indicia also point in that direction (Re Private Tutor & Commissioner of Taxation [2013] AATA 136). In that case the Tribunal was satisfied that:
[48] The small scale of the taxpayer’s tutoring activities is outweighed, in my view, by other relevant factors of the kind referred to in [40] of these reasons. Specifically:
·The tutoring activities were recurrent, regular, systematic and organised, and engaged in for a commercial purpose;
·The activities are of a reasonable scale, given the constraints within which those kinds of activities must be undertaken;
·The taxpayer had his name put on the books of the various coaching colleges, and I find that he did so for the purpose of broadening his reach into the available market, and so increasing his income;
·The taxpayer kept records of his activities, and while he no doubt attempted to attribute far more expenditure to his tutoring activities than was justified (as will be discussed further below), I find that his recording of income (or in GST language, the value of his supplies) during the relevant period was reliable; and
·Objectively viewed, he undertook the activities with a view to making a profit from them.
I cannot be so satisfied in the case of these Applicants.
I noted further in Simon Clayton and Monica Clayton & Commissioner of Taxation [2013] AATA 428, the Tribunal stated that some activities would not constitute carrying on of an enterprise because they are better described as preparatory or exploratory in nature, notwithstanding they may yet lead to the establishment of an enterprise. The Tribunal in Clayton stated at [17]:
Every business has to start somewhere. Where the business progresses from its foundations to operation within a reasonable timeframe, it is easier to see how initial expenditures can be seen as part of a course of conduct that amounts to carrying on an enterprise. But where there is delay – where the momentum of the activities is lost – it becomes harder to make a connection between initial expenditure and the operations which result. That connection is even more difficult to establish where the business has not, or does not, commence trading in due course.
I accept the submission of the Respondent that the ratio of sales, $10,467 to losses, $4,945,225 for the CAC-2 business overwhelmingly supports the proposition that the venture was at best, ill considered.
Paragraph 18 of TR97/11 states that the following three items are factors that support the main indicators, namely:
·A business plan exists;
·Commercial sales of product; and
·Taxpayer has knowledge or skill.
I have already addressed above the fact that in this case, no proper business plan existed, there were no commercial sales in CAC-2, and the Taxpayer, whilst he is a well qualified person in the field of accounting, did not demonstrate that he had the knowledge or skills to set up CAC-2.
Ultimately I could not be satisfied that the Applicants were carrying on an enterprise in regard to CAC-2, so it follows that they have not made creditable acquisitions. Accordingly, the GST registration was correctly cancelled, and they were not entitled to ITCs in the relevant period. However for the sake of completeness, I have considered that situation.
Are the Applicants entitled to ITC claims under their CAC-2 registration in accordance with division 11 of the GST Act?
The Applicant insisted that he had provided the Commissioner with invoices relating to CAC-2, and that some had been lost or had not been returned to him during the course of the audits, despite him asking for them. He has also at various times complained that he was not provided with sufficient time to produce documents. Having reviewed the documents and correspondence between the Applicants and the Commissioner leads me to the conclusion that I cannot accept that argument, particularly in relation to insufficient time.
At the second audit, the report of which is Exhibit R2, the Commissioner found that the ITCs claimed for the period 1 April to 30 April 2007 were $5,105, with $3,966 overclaimed, so that the revised amount was $1,139. The Commissioner noted that under Division 29 of the GST Act, when GST is accounted for on a non-cash basis, as in the Applicant’s case, the Taxpayer can attribute the ITC for a creditable acquisition to the tax period in which he had received a tax invoice or part payment for it. The Commissioner correctly emphasised that the Taxpayer would however need to be holding a proper tax invoice in that period.
The Applicant’s evidence regarding invoices was quite contradictory. At one point, he said that he had never issued invoices in CAC-2, and on another occasion, he said that he had small handwritten invoices in a little notebook which he would find difficult to locate. At T6-21, there was a letter dated 5 November 2009 which the Applicant wrote to the Commissioner, in which he stated:
Pls note that I have never issued Sales Tax Invoices in CAC2, but have just shown the cash received in any one month (from agistment, sales of surplus or unwanted items such as roof iron, firewood, posts etc), and just paid the GST ourselves.
Mr Afshar noted that the Taxpayer had provided the Commissioner with a number of invoices which are in the section 37 Documents which he alleged identified suppliers of L-Australia Property. He emphasised, and I accepted that all the documents were made out to L-Australia or the Applicants personally, and none to L-Australia Property.
The Commissioner asserts that no sales invoices exist or were produced by the Applicants for the relevant period, and indeed never existed in relation to CAC-2.
Having considered the Applicant’s evidence that he never issued invoices for CAC-2, the invoices in the section 37 Documents which were addressed to the Applicants or CAC-1, and the submissions of the Respondent, I find that the Applicants are not entitled to ITCs relating to the CAC-2 business. I moved then to consider the imposition of the penalty by the Commissioner.
Whether the tax shortfall penalty at 50% of the tax shortfall amount under section 284-75(1) of Schedule 1 of the TAA for recklessness in regard to taxation laws is correctly imposed;
Whether the tax shortfall penalty increase of 20% under section 284-220 of Schedule 1 of the TAA was correctly imposed; and
With regard to the penalties outlined above; whether the discretion under section 298-20 of Schedule 1 to the TAA to remit the tax shortfall penalty, in part or in full, should be exercised.
Mr Afshar submitted I should find the Applicant to not be a witness of truth, and gave various examples from the documents and cross-examination. I am not prepared to do that, but do find that given his background and training, the Applicant should have behaved in a different way in relation to his business dealings. I accept that he and his wife have suffered ill health. However, that cannot excuse claiming ITCs to which they were not entitled, and lodging BAS documents to the Respondent over a three year period which did not reflect their actual business. I accept the submission of the Respondent that the Applicants’ behaviour was reckless, and note that neither CAC-1, nor CAC-2 if it ever came into being, ever returned a profit in circumstances where their combined losses amounted to almost ten million dollars.
Section 284-75 of Schedule 1 of the TAA allows the Respondent to impose an administrative penalty if a taxpayer makes a statement to the Commissioner which is false or misleading, or if there is a shortfall (section 284-80).
I have considered the meaning of recklessness in this context by reference to the Full Federal Court in Hart v Federal Commissioner of Taxation (2003) 131 FCR 203 at 214:
Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person’s conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364 Cooper J made the following observations in relation to recklessness in the context of s. 226H:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
Mr Afshar submitted that the Tribunal in Bryxl Pty Ltd as Trustee for the Kypu Trust & Commissioner of Taxation [2015] AATA 89 applied Harts in circumstances, which were similar to the circumstances of this Applicant.
I have also noted that section 284-220 of Schedule 1 to the TAA provides for an increase in the base penalty amount by 20% in accordance with criteria set out in that legislation. Mr Afshar submitted that the factors that the Tribunal should consider when determining whether the uplift should remain, included the taxpayer’s conduct, whether the taxpayers knew, or ought to have known, that they were not entitled to the relevant benefit, the nature of the claims made (in these Proceedings, the claims concerning the alleged enterprise and ITCs), and whether or not the Taxpayer failed to provide documents and information to the Respondent when requested.
The Applicant submitted I should be mindful of his and his wife’s ill health, and argued that the penalties were massive and unfair. He provided no further arguments regarding the business or penalties other than those already noted above.
I have considered the evidence and the findings made above that CAC-2 was not an enterprise, and that it was not entitled to claim the ITCs it did. By that I mean that the Applicants can be held to have been reckless in terms of the legislation, and a 50% tax shortfall penalty under section 284-75(1) of Schedule 1 of the TAA should be imposed.
I also find it appropriate, and affirm the tax shortfall penalty increase of 20% imposed by the Commissioner under section 284-220 of the Schedule 1 of the TAA.
I have not heard any submissions or evidence which would convince me that the penalties should not be imposed as proposed by the Commissioner, and noted above. I do not exercise the discretion under section 298-20 of Schedule 1 to the TAA to remit the tax shortfall penalty in part or in full.
DECISION
The Tribunal affirms the objection decisions under review.
I certify that the preceding 92 (ninety -two) paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member .................................[sgd].......................................
Associate
Dated 22 September 2015
Date(s) of hearing 18 March 2015, 19 May 2015 Applicant In person Counsel for the Respondent Mr P Afshar Solicitors for the Respondent Australian Taxation Office
0
7
3