Taxpayer and Commissioner of Taxation

[2006] AATA 750

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 750

ADMINISTRATIVE APPEALS TRIBUNAL          № VT2003/214-215

TAXATION        APPEALS       DIVISION

Re:            TAXPAYER

Applicant

And:         COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       Mr B.H. Pascoe, Senior Member

Date:5 September 2006

Place:Melbourne

Decision:The Tribunal affirms the decisions under review.

(sgd) B.H.Pascoe

Senior Member

INCOME TAX – assessments as result of audit – ascertainment of gross sales – whether bank deposits included gifts and loans – deduction of purchases – no records of alleged gifts or loans

Income Tax Assessment Act 1997

Jones v Dunkel (1959) 101 CLR 298

REASONS FOR DECISION

5 September 2006  Mr B.H. Pascoe, Senior Member

1.      These are applications to review decisions of the respondent in response to objections lodged against assessments of income tax in respect of the years ended 30 June 1997 and 30 June 1998.  These assessments resulted from an audit of the affairs of the applicant.

2.      At the hearing the applicant was represented by Mr Bill Orow of counsel and the respondent by Mr Peter Sest of counsel.  Evidence was given by the applicant, his father and an accountant, Mr Mark Pizzacalla.

3.      In October 1995 the applicant commenced a duty free retail business.  On 17 February 1997 an income tax return for the year ended 30 June 1996 was lodged showing a loss of $39,466.  On 22 January 1998 an amended return was lodged showing a loss of $18,966.  There is no dispute in relation to that amended return.  On 1 May 1998 the 1997 year return was lodged showing a net income of $26,239 but claimed the original 1996 loss of $39,466.  So no tax was paid.  In April 1999 an amended 1997 return was prepared, although it is not clear that it was lodged, showing a loss for the year of $51,754.  On 15 November 1999 a return for the 1998 year was lodged showing a net income for the year of $27,312 less a loss carried forward of $13,227 resulting in a taxable income of $14,085 which was assessed.

4.      In January 2002 an audit of the applicant’s affairs was commenced.  The result of the audit was the issue of an assessment for the year ended 30 June 1997 and an amended assessment for the year ended 30 June 1998.  After extensive discussions with the applicant’s then accountant, Mr T Loh, the objections to these assessments were allowed in part.  The figures used by the respondent in the assessments issued at the conclusion of the audit are not relevant at this stage as significant reductions in taxable income assessed in both years were made in the objection decisions. It is the net result of these decisions which is in dispute.

5.      The applicant said that he opened his duty free business in October 1995 after opening a bank account, borrowing $240,000 from his family and establishing some 100 supplier accounts.  He acknowledged that he was not knowledgeable of business practices and record keeping requirements and failed audits by the Australian Customs Service (ACS) in both 1996 and 1997.  In 1996 he engaged Mr P Chow to assist in complying with the requirements of ACS.  Mr Chow filed the 1996 income tax return.  The applicant said that, after failing the second ACS audit in early 1997, he engaged Accounting Concepts Pty Ltd and a custom consultant to assist him in complying with ACS guidelines and regulations.  A computer system with MYOB software was installed but used only for maintaining stock records, sales and purchase.  It was not used as an accounting system and the records consisted of invoices kept in bags, bundles of cheque books and folders containing invoices for business expenses.  In early 1997, the applicant engaged the services of Mr Loh as Mr Chow was no longer available.  Mr Loh lodged the amended 1996 return and the subsequent relevant returns.

6.      The applicant was critical of the work done by Mr Loh although he admitted a lack of knowledge of accounting.  In his witness statement, the applicant said that, in the 1997 return …it appears that Mr Loh mistakenly calculated the amount [of purchase] on a cash accounting basis instead of accrual basis.  In his oral evidence, he acknowledged that he does not understand accrual accounting and did not know what the words in his witness statement meant.  In relation to the original 1997 return, the applicant believed that the figure for sales was incorrect being based on bank deposits rather than the total of sales invoices.  This original return showed sales of $1,101,758.  The amended return, of which the applicant said he had no prior knowledge, showed sales of $884,533.  He believed that this figure was based on actual sales invoices and, although he has no record of the total invoices, said that he had written it down somewhere and thought that it was $889,000 or $890,000.  The applicant maintained that …Mr Loh had not competently prepared my original tax return for the 1997 year of income and, after the respondent’s audit the business relationship with Mr Loh became more difficult and was irretrievably ended.

7.      The applicant maintained that the difference between amounts deposited to his bank account in the year ended 30 June 1997, calculated by the respondent as $1,084,705, and the total of sales invoices represented gifts or loans from his father used as working capital in the business.  Neither he or his father had kept any record of such gifts or loans.  The figure of $240,000 which the applicant quoted in his witness statement was clearly obtained from a Betterment Statement produced by the respondent as a result of an earlier audit of his father’s affairs.  For the year ended 30 June 1996, the amount of $240,000 had been included as expenditure by the father as set up costs for the son’s business.  No record of either father or son was produced to confirm that or any other amount.  The applicant did produce banking records of his and a credit card statement of his father as support for his evidence of a total of $44,800 provided by his father on 8 July 1996.  $25,000 was said to be by cheque shown as a deposit on that date.  The applicant maintained that he did not accept cheques in payment of sales from his business so that such a cheque had to be from his father.  The balance of $19,800 consisted of three amounts of $9,000, $9,000 and $1,800 on the same day described on the credit card statement of the father as being charges by the duty free shop.

8.      The father of the applicant gave evidence that he had agreed to provide his son with the capital required to establish his business.  Again he adopted the figure of $240,000 from his Betterment Statement prepared by the respondent but had no records of his own to confirm such a figure.  He said that it could have been more in many small amounts but had no record or recollection of the total.  He could not specifically recall the total of $44,800 in July 1996 but believed that the $25,000 resulted from the refund of a deposit he had paid on the proposed purchase of real estate which did not go ahead.

9.      While both father and son stated that the capital for the business had come from funds of the father, this does not appear to be what the applicant told the respondent at an interview in March 2002.  There, the questionnaire that was completed said that the cost of setting up the business was in excess of $200,000 which had been sourced as to $20,000-$30,000 from his brother and sister and approximately $180,000 from the estate of his grandparents transferred via his father.  In cross-examination, the applicant was slightly evasive but maintained that he does not distinguish between his father as head of the family and the family as such.

10.     Mr Pizzacalla gave evidence that he performed a review of the applicant’s 1997 income tax return.  He based his opinion on information provided by the legal advisers but had no direct contact with the applicant or Mr Loh and examined no source records of the business.  It has to be said that the evidence of Mr Pizzacalla was of little assistance to the Tribunal.  In his report he arrived at a sales figure for the year ended 30 June 1997 of $1,004,566.  This figure was calculated as follows:

Total credit entries in Bank account	1,085,467
Less:   interest credited	721
Capital injections	44,800         35,380
80,901      1,004,566

Two things must be said about this calculation.  Firstly, it is surprising that someone of Mr Pizzacalla’s qualifications and experience is prepared to say that credit entries to a bank account less identified non sales receipts equals sales revenue in a business such as this.  A large proportion of sales were made for cash which does not necessarily finish up in a bank account.  The applicant acknowledged under cross‑examination that he used cash from sales for personal drawings and that all cash from sales was not deposited in the bank account.  The second concern was that Mr Pizzacalla deducted two amounts as capital injections.  The $44,800 is the same amount referred to earlier.  The $35,380 is, in my view clearly incorrect. Mr Pizzacalla arrived at this figure from a balance sheet presumably prepared by Mr Loh as at 30 June 1997 in which comparative figures for 1996 were shown.  Under the heading Proprietor’s Funds the following appeared:

1997	1996
Balance at Beginning of Year	162,920	-
Capital Introduced	244,835	209,455
Share of Loss	51,754	18,966
356,001	190,489
Drawings	144,793	27,570
Total Proprietor’s Funds	211,208	162,919

Mr Pizzacalla, surprisingly, assumed that each of these figures represented the balance of several accounts at year end and assumed that $35,380, being the difference between $209,455 in 1996 and $244,835 in 1997 was further capital introduced in the 1997 year.  However, this ignores the way the figures are shown which, for each year, is a summary of the movement in one account Proprietor’s Funds.  It commences with the opening Balance at the beginning of the year and finishes with the closing balance at the end of the year.  Far from showing capital introduced in 1997 of $35,380, it shows the amount of $244,835.  In his oral evidence, Mr Pizzacalla accepted that his analysis may have been wrong.  He also assumed that $240,000 had been accepted as capital introduced on the basis of the earlier Betterment Statement and that the $44,800 had not been included.  This ignored the fact that the $240,000 expenditure was all prior to 30 June 1996.  How he reconciled his figure of additional capital totalling $80,180 in 1997 with his view that additional capital of $35,380 was demonstrated by the balance sheet is completely unknown.

11.     The principal dispute between the parties was the amount of sales revenue for the year ended 30 June 1997.  The respondent’s decision on the objection for that year was to accept the figures shown in the amended return for that year other than sales.  The figure used by the respondent for sales was $1,101,758 being the figure shown in the original return.  This was on the basis that no evidence had been provided to account for the difference between the alleged total of sales invoices of $884,533 shown in the amended return and the bankings of $1,084,705.  On the basis that all takings had not been banked, the respondent took the view that the original figure was more likely than not to be the revenue for the year.  It was noted that the respondent’s auditor had totalled the copy sales invoices provided during the audit at $912,685.

12.     The applicant has the onus of proving that the assessment is excessive.  Apart from the $44,800 no evidence has been provided that the amounts credited to the Bank account in the year did not represent income.  While I am prepared to accept that $44,800 of the bankings represented funds provided by the father this leaves some $155,000 to be explained.  However, I must be conscious, also, of the evidence of the applicant that all cash sales receipts were not banked.  No record of the unbanked amount was produced.  It is quite possible that such unbanked receipts equal or exceed the $44,800.  As a consequence, I am not satisfied that the applicant has discharged the onus of proof to demonstrate the actual or even reasonable figure of gross revenue.  The suggestion by counsel that revenue not recorded in sales invoices produced was unlikely to have been banked if the applicant was seeking to avoid tax does not take the matter any further when there is no evidence to show what the unexplained deposits represented.  It is relevant, also, that Mr Pizzacalla treated all bankings as income other than what he considered as identified capital.  What instructions or information he received to arrive at this opinion is not clear.

13.     The applicant had produced a computer generated list of purchases for the year which totalled $943,278 which was $71,161 more than the $872,117 shown on purchases in the amended income tax return for the year ended 30 June 1997.  This list appeared to have been produced from the MYOB system and shows the name of each supplier, the date, varying from July 1996 to June 1997, and the amount.  It is assumed, although not demonstrated in evidence, that it is argued that this list calculated purchases on an accrual basis whereas the figure in the amended return was on a cash basis.  Again there is no accounting evidence to demonstrate any reconciliation between the two figures of purchases or that any amounts in the list produced do not relate to expenses other than purchases.  In addition there is no evidence that this list of purchases has been reconciled with the amounts shown as opening and closing stock to produce a correct figure for cost of sales.  Given this complete lack of appropriate accounting evidence it is not possible to be satisfied that net income has been overstated by $71,161.

14.     With reference to the lack of accounting evidence it was noticeable that Mr Loh who prepared the original and amended 1997 returns and a set of financial statements as at 30 June 1997 was not called to give evidence.  The applicant was critical of his competence and said that he was not aware of the circumstances which gave rise to the preparation of the amended 1997 return.  He said that Mr Loh had refused to co-operate in clarifying the basis of preparation of the original and amended return.  However, in cross examination, the applicant was somewhat vague and evasive in explaining what attempts he had made to obtain co-operation from Mr Loh.  Mr Tellez, solicitor for the applicant, produced copies of e-mails between himself and Mr Loh.  Although incomplete, they appeared to indicate that Mr Loh required resolution of an outstanding account and some dispute relating to speakers before he was prepared to do any more work.  While an e-mail from Mr Tellez of 21 February 2006 said that Mr Loh’s conditions would be met it is unclear whether they were met and whether Mr Loh had any further involvement.  On balance, I am not satisfied that there was an acceptable reason given for the failure to call Mr Loh.  It is unnecessary to make a finding that it is likely that the evidence of Mr Loh would not have assisted the applicant (Jones v Dunkel (1959) 101 CLR 298).  It is simply the fact that the lack of any credible accounting evidence from Mr Loh or any other accountant who had examined the records of the applicant has left the applicant well short of satisfying the onus of proof as to an appropriate or likely ascertainment of taxable income.

15.     In relation to the year ended 30 June 1998, no evidence was led.  In his submission, Mr Orow stated at paragraphs 39‑40:

Save and except to the extent that a proportion of the purchases made in year ending 30 June 1998 should be attributed to the year of income ending 30 June 1997, the Applicant does not put in issue nor seek any findings of fact as to total purchases for year ending 30 June 1998 because there has been further purchase invoices found since the matter has been listed for hearing.

Should that Tribunal agree with the Applicant, the Applicant would prepare an amended return for the year of income ending 30 June 1998.

It is clear that the Tribunal can make no finding in relation to the calculation of taxable income for the year ended 30 June 1998.  No evidence was produced which allowed any findings as to what amount, if any, of purchases shown in the year ended 30 June 1998 should be attributed to the year ended 30 June 1997 or what amount should be deducted as purchases in the year ended 30 June 1998.  It appeared that the Tribunal was invited to remit the decision in relation to the 1998 objection back to the respondent for review after the provision of some additional information.  With no evidence provided at the hearing as to what matters the respondent should have regard to, it is not possible for the Tribunal to provide any directions or recommendations.  Consequently, it is not appropriate to remit the decision to the respondent and, with no evidence, the Tribunal has no option other than to affirm the decision in relation to the year ended 30 June 1998.

16.     Given the foregoing, the decision under review in relation to both the year ended 30 June 1997 and the year ended 30 June 1998 should be affirmed.

I certify that the sixteen [16] preceding paragraphs are a true copy of the reasons for the decision herein of  

Mr B.H. Pascoe, Senior Member

(sgd)       Felicia Amoroso

Clerk

Date/s of hearing:  7 and 8 August, 2006
Date of decision:  5 September 2006
Counsel for the applicant:            Mr Bill Orow
Solicitor for the applicant             Mr Felipe Tellez
Counsel for the respondent         Mr Peter Sest

Solicitor for the respondent          Mr Steven Small
  Australian Government Solicitor