The Taxpayer and Commissioner of Taxation
[2014] AATA 106
•28 February 2014
[2014] AATA 106
Division TAXATION APPEALS DIVISION File Number
2011/5113
Re
The Taxpayer
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member R W Dunne
Date 28 February 2014 Place Adelaide The Tribunal affirms the objection decision under review.
........................................................................
Senior Member R W Dunne
CATCHWORDS
TAXATION – income tax – quantum of assessable income – credit for PAYG withholding – applicant's dispute with officers of paying company – claims for work related car expenses and other work related expenses – administrative penalty – reasonable care – objection decision under review affirmed.
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 4-15, 6-5, 8-1
Income Tax Assessment Act 1936 (Cth) ss 175A, 6(1)
Taxation Administration Act 1953 (Cth) Schedule 1, ss 284-75(1) 284-80(1), 284-90(1), 298-20(1)
CASES
Beiruti v Commissioner of Taxation [2013] AATA 634
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Commissioner of Taxation v Anstis [2010] HCA 40Re Peco Necovski and Commissioner of Taxation [2009] AATA 195
REASONS FOR DECISION
Senior Member R W Dunne
28 February 2014
INTRODUCTION
This is an application for review of a decision by the respondent to disallow a taxation objection lodged by the applicant against his assessment for the year ended 30 June 2007.
At the hearing, the applicant represented himself and the respondent was represented by Ms G Walker (of counsel). The Tribunal received into evidence the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975,[1] together with the applicant’s documents.[2]
[1] Exhibit R1.
[2] Exhibit A1.
ISSUES BEFORE THE TRIBUNAL
The issues before the Tribunal are as follows:
(a)Is the amount of $136,000 included as assessable income of the applicant under s 6-5 of the Income Tax Assessment Act 1997 (“ITAA 1997”) correct?
(b)Is the applicant entitled to deductions (or further deductions) under s 8-1 of the ITAA 1997 for work related car expenses, work related travel expenses and other work related expenses for the year ended 30 June 2007?
(c)Is the applicant liable to an administrative penalty for lack of reasonable care under s 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (“TAA”) for the year ended 30 June 2007?
(d)Should the respondent exercise his discretion under the TAA to remit the administrative penalty in whole or in part?
LEGISLATION
The provisions of the ITAA 1997 and the TAA that are presently relevant are as follows:
ITAA 1997
“6-5 - Income according to ordinary concepts (ordinary income)
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.
Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.
(2)If you are an Australian resident, your assessable income included the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. …”
“8-1 - General deductions
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12-5.
…”
TAA
“284-75 - Liability to penalty
(1)You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law (other than the Excise Acts); and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.
…”
“284‑80 - Shortfall amounts
(1) You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Shortfall amounts
Item
You have a shortfall amount in this situation:
A tax‑related liability of yours for an accounting period, or for a taxable importation, or under the Superannuation (Unclaimed Money and Lost Members) Act 1999, worked out on the basis of the statement is less than it would be if the statement were not false or misleading
…”
“284‑90 Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table and section 284‑224 if relevant:
Base penalty amount
Item
In this situation:
3
You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from a failure by you or your agent to take reasonable care to comply with a taxation law (other than the Excise Acts)
25% of your shortfall amount or part
3A
…
…”
“298‑20 Remission of penalty
(1) The Commissioner may remit all or a part of the penalty.
…”
BACKGROUND
The material facts in this case are not in dispute and extracted from the respondent’s statement of facts, issues and contentions and the T documents. In his 2006/2007 taxation return the applicant described his main occupation as a computer programmer. He was one of three directors of HR3D Pty Ltd (“Company”) which was incorporated on 8 March 2006. During the year ended 30 June 2007 the applicant was employed as a programmer/software developer by the Company. On 3 October 2007 he resigned as a director. On 24 October 2007 he was advised by lawyers, Piper Alderman on behalf of the Company, that even though he had resigned as a director he remained an employee pursuant to an employment agreement.[3]
[3] Exhibit R1, T14 pages 154-172.
On 2 November 2007, B.C.F.R. chartered accountants advised that the applicant’s bank accounts and visa card account showed that a deposit of $10,000 was made on 9 June 2006, deposits amounting to $136,000 were made in the year ended 30 June 2007 and a further $10,000 deposit was made in July 2007.[4] On 11 March 2009 the applicant lodged his 2007 taxation return and reported the following:
[4] Exhibit R1, T10, page 76.
Gross income
$254,640
Tax withheld
$98,640
Director’s fee
$0
Dry cleaning
$150
Work related car expenses
$2,760
Work related travel expenses
$2,650
Other work related expenses
$47,702
On 27 March 2009 the respondent issued a notice of assessment for the year ended 30 June 2007. Then, on 26 November 2009, following the receipt of further information, the respondent issued a 2006/2007 notice of amended assessment to the applicant which included an additional amount of $262 interest.
On 13 January 2010 by letter, the applicant was advised by the respondent of an audit for the year ended 30 June 2007 in relation to tax withheld and claims for work-related car expenses, work-related travel expenses and other work-related expenses. On 9 February 2010 the applicant responded to the letter, but no substantiation or explanation showing an entitlement to the expenses claimed was provided. However, the applicant advised that the claim for other work related expenses included amounts his employer had failed to reimburse, including wages paid by the applicant to another employee.
On 17 March 2010, the respondent advised the applicant that the audit was complete and that claims for work related car expenses, work related travel expenses, other work related expenses and tax withheld were disallowed.
The 2006/2007 amended income tax return, after completion of the audit, included the following amounts:
Gross income
$254,640
Tax withheld
$0
Director’s fee
$0
Work related car expenses
$0
Work related travel expenses
$0
Other work related expenses
$0
On 14 September 2010, the respondent issued a notice of amended assessment for the year ended 30 June 2007 disclosing an amended taxable income of $254,752. On that day, the respondent also issued a notice of assessment of shortfall penalty for year ended 30 June 2007.
On 12 October 2010, the applicant lodged a formal objection against the notice of amended assessment for the year ended 30 June 2007. On 9 November 2010, the applicant provided further information to the respondent, including confirmation that he had received from the Company an amount of $136,000 income in the year ended 30 June 2007.
On 16 December 2010, the applicant sent the respondent an amended notice of objection dated 15 December 2010 objecting against the notice of amended assessment and the notice of assessment of shortfall penalty for the year ended 30 June 2007. Then, on 17 January 2011, the applicant advised the respondent that he had withdrawn the amended notice of objection. The respondent advised the applicant by letter on 17 January 2011 that, as the objection had been withdrawn, the matter was considered finalised.
On 21 June 2011, the applicant requested that the notice of objection lodged on 16 December 2010 be reinstated as it had been withdrawn due to a misunderstanding. In the reinstated notice of objection, the applicant said:
“…
While it may appear pending criminal investigation is no concern of the Australian Taxation office, well documented investigations show that Fraud did occur and I was defrauded in the process. I maintain that the monies were wrongly withheld from the ATO by the two former directors. I am being made liable for a debt that involves pending Complex Fraud matters that will show that my position was that of employee.
…”[5]
[5] Exhibit R1, T23 at page 360.
On 5 August 2011, a notice of objection decision was issued by the respondent which allowed in part the applicant’s objection. The 2006/2007 amended income tax return included the following amounts as a result of the objection decision:
Gross income
$136,000
Tax withheld
$0
Director’s fee
$0
Work related car expenses
$2,615
Work related travel expenses
$0
Other work related expenses
$583
On 5 September 2011, the respondent issued a further notice of amended assessment for the year ended 30 June 2007 to reflect the objection decision. On 29 November 2011, the applicant applied to this Tribunal for review of the objection decision.
EVIDENCE
Evidence of Mr David Kuhne
In giving his evidence, Mr Kuhne referred to the email he had forwarded to the applicant dated 26 November 2013. In the email he said that, if required to appear at the hearing he could attest to the following matters:
(a)He had been given access to and reviewed the Company’s share register. In conducting the review, there were a number of issues, including:
(i)the number of share sales made by directors who, at the same time, were trying to raise money for the Company. Thus, they were offering their own shares rather than Company shares;
(ii)there was no record of the seed investor who was supposed to be issued shares in the Company; and
(iii)the funds for the shares sold did not appear to match the dollar amount in the Company’s accounts as to the shares issued.
(b)He prepared a report on the share transactions and met with two of the directors of the Company who accepted that it was not proper to be selling their own shares in preference to the Company.
(c)He met with an officer of the respondent in relation to GST registration of a related trust and the PAYG withholding issues around the Company.
(d)He could recollect speaking to another officer of the respondent about the Company.
(e)He could confirm that he wrote a letter to the respondent in which he mentioned that the applicant’s PAYG was probably not remitted by the Company.
(f)He confirmed that he spoke to a Company director around 2009/2010 when there was a meeting about to happen. In that discussion, the director said that the Company would reimburse the applicant for his expenses if he would agree to a particular course of action.
In cross-examination by Ms Walker, Mr Kuhne said that he had prepared three letters to the respondent regarding the affairs of the applicant. Although the letters were prepared by Mr Kuhne, they had been signed by the applicant. In one of the letters dated 30 January 2009, the applicant said:
“… I consider that I was an employee and that the company should have deducted tax instalments but failed to do so.
I understand that Hr3d has claimed up to $256,000 as a tax deduction and $25,600 as an input tax credit for credits to my loan account for the income year. In reality only $156,000 was actually paid to me.
…”[6]
[6] Exhibit R1, T18 page 215.
When questioned further by Ms Walker, Mr Kuhne stated that he had not prepared the applicant’s original 2006/2007 taxation return. He said that the return had been prepared by his accountant, Mr Jerry Rossi.
Evidence of the Applicant
In giving his evidence, the applicant said that, in relation to the 2006/2007 year of income, he was an employee of the Company and had no control over the Company’s funds. He said that the Company had not remitted PAYG instalments in relation to his employment income during the 2006/2007 tax year. The taxation affairs of the Company had been dealt with by a Grant Thornton, Chartered Accounts. Mr Jerry Rossi from B.C.F.R. chartered accountants, had acted for the three directors of the Company (including the applicant). When referred to his notice of amended assessment for the year ended 30 June 2007[7] and questioned about the reduction in his assessable income ($118,640) the applicant could not explain how this reduction in income had occurred. He said he was unwell at the time and could not get his records from his office. When questioned further about the expenses claimed in his 2006/2007 taxation return (which were set out in paragraph 6 of the respondent’s outline of argument), the applicant was unable to explain the basis on which he had claimed the expenses, or how the respondent had allowed certain of the expenses in the notice of amended assessment dated 5 September 2011.[8]
[7] Exhibit R1, T9 pages 69-72.
[8] Exhibit R1, T25 pages 389-391.
In cross-examination by Ms Walker, the applicant said that, when he lodged his 2006/2007 taxation return in June 2009, he knew that PAYG instalments had not been remitted to the respondent. He acknowledged this evidence when he was referred to a copy of his 2006/007 taxation return.[9] He said he would have prepared his taxation return based on the advice he would have received from his accountant, Mr Rossi. When referred to his letter dated 12 November 2007 to the Company,[10] he acknowledged that he had not received an amount of $100,000 in respect of the remuneration paid to him in respect of the 2006/2007 year of income. He said that, at that time, he knew that his remuneration for the 2006/2007 tax year was in fact $136,000. In relation to his claim for other expenses of $47,702, the applicant acknowledged that the claim included the payment of $9,500 (or $9,360) to an Indonesian employee (“Joko”) which the applicant expected to be repaid to him by the Company.
[9] Exhibit R1, T2 pages 44-49.
[10] Exhibit R1, T14 page 192.
CONSIDERATION
Whether the amount of $136,000 included as assessable income under s 6-5 of the Income Tax Assessment Act 1997 (“ITAA 1997”) is correct?
The applicant’s statement of facts, issues and contentions received by the Tribunal on 25 November 2013 does not address the issue of the quantum of assessable income derived during the year ended 30 June 2007. On the evidence available, the applicant derived assessable income of $136,000 in the year of income ended 30 June 2007. This is clear from the letter from the applicant’s accountant (Mr Jerry Rossi) dated 2 November 2007.[11] It is also clear from the email sent by the applicant to the respondent on 1 December 2010.[12]
[11] Exhibit R1, T10 page 76.
[12] Exhibit R1, T17 page 201.
In his notice of objection dated 15 December 2010[13], the applicant has argued that the 2006/2007 amended assessment was excessive because the Company did not deduct PAYG instalments of $98,640 from the payments made to him. In the alternative, the applicant has argued that, if the $98,640 is not PAYG instalments, then it should not be either directors fees or wages because the amount was not received by him in the year ended 30 June 2007 and has never been received by him from the Company.
[13] Exhibit R1,T20 pages 338-355.
The respondent has contended that, by reason of s 175A of the Income Tax Assessment Act 1936 (“ITAA 1936”), the applicant’s right of objection is against an “assessment”. In this regard an “assessment” is defined in s 6(1)(a) of the ITAA 1936 as:
“The ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable) …”
The expression “taxable income” for a year of income is referred to in s 4-15 of the ITAA 1997 as:
“Taxable income = Assessable income – Deductions.”
The expression “assessable income” consists of ordinary income and other amounts which are included in assessable income under provisions in the ITAA 1936 or in the ITAA 1997. The expressions “assessable income” and “deductions” do not include PAYG withholding amounts. Thus, these withholding amounts do not form part of an assessment and are therefore not capable of being the subject:
(a)of an objection under s 175A of the ITAA 1936; and
(b)consequently, of an application to this Tribunal for review of a decision in respect of an objection.
The question of PAYG withholding amounts becomes relevant after an assessment has been made with any such amounts relating to the taxpayer being applied as a credit: see s 18-15 of the TAA. Moreover, there are categories of decision relating to PAYG withholding amounts that are reviewable decisions, including where the amounts have been withheld in error and have not been refunded: see s 20-80 of the TAA.
As the respondent submitted, the above matters support the proposition that the question of PAYG withholding amounts do not fall within the applicant’s right of objection to the original amended assessment dated 14 September 2010, or to his right to object against the reviewable objection decision (and accordingly to the amended assessment for the year ended 30 June 2007). The Tribunal agrees with this submission. As was said by Deputy President Forgie in Beiruti v Commissioner of Taxation [2013] AATA 634 at [49]:
“It follows that matters relating to PAYG withholdings and to any credits arising from them are quite separate from an assessment of the sort referred to in s 175A of ITAA36. An assessment of the sort made by the Commissioner and to which Mr Beiruti objected does not permit him to raise matters relating to PAYG withholdings because it ascertains only an entity’s taxable income and tax payable on that taxable income. It does not extend to what is, in effect, an accounting exercise offsetting tax liability determined under the assessment with credits such as those provided by PAYG withholdings. As issues related to PAYG withholdings are not encompassed within the process of the Commissioner’s making an assessment, a person cannot seek to have those issues reviewed by objecting to an assessment. Equally, a reviewable objection decision made following an objection to an assessment cannot raise those issues for review in the Tribunal. Therefore, the Tribunal does not have power to review them.”
Is the applicant entitled to deductions (or further deductions) under section 8-1 of the ITAA 1997 for work-related car expenses, work-related travel expenses and other work-related expenses for the year ended 30 June 2007?
The critical question for the applicant is whether the deductions claimed above fall within s 8-1 of the ITAA 1997. In other words, were they incurred in gaining or producing the applicant’s assessable income as opposed to having been incurred by him in the gaining or producing of the Company’s assessable income, or in the applicant choosing to support the Company financially? The applicant has asserted that the claimed deductions were expenses incurred by him in his role as a director of the Company. However, there is no evidence that the applicant earned any income as a director or that he expected to earn any income for this role. This lack of evidence is reinforced by the fact that no amount has been included in the applicant’s 2006/2007 taxation return as director’s fees. Moreover, as the respondent submitted, it is apparent from the evidence that, during the course of the year ended 30 June 2007 and prior to the lodgement of his 2006/2007 taxation return, the applicant:
(a)made the personal decision to fund the Company in an attempt to keep it “solvent and viable”, and acknowledged (in his original objection) that he had “put large amounts of money into the company paying wages and for development equipment”;
(b)described the expenses incurred and claimed as personal deductions as payments he made on behalf of the Company, as opposed to payments made by him in relation to the gaining or production of his assessable income or in relation to the gaining or production of the Company’s assessable income; and
(c)claimed reimbursement from the Company for the amounts he has sought as deductions, and when unpaid, at or shortly after the time when he lodged his original 2006/2007 taxation return in which such deductions were claimed, took action to recover funds from the Company personally.
On the basis of the above matters, the respondent has submitted that the applicant has not established that, by reason of the disallowance of the deductions claimed under s 8-1 of the ITAA 1997, the amended assessment for the year ended 30 June 2007 was excessive. Again, the Tribunal agrees with this submission: see Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623-625.
The applicant has argued that the decision of the High Court in Commissioner of Taxation v Anstis [2010] HCA 40 applies in his case. The decision in Anstis related to expenses claimed by a full-time university student against assessable Youth Allowance payments. In the Tribunal’s view, the decision in Anstis is distinguishable and does not apply in the applicant’s case.
In giving his evidence, the applicant continually referred to matters (concerning his assessment and his amended assessment for the year ended 30 June 2007) that were irrelevant to the issues before the Tribunal. He made reference to issues that related to the Company and not to those relating to his own income tax affairs for the 2006/2007 year of income. He was intent on referring to what he called “Phoenix activities”, to “Commonwealth Fraud Control Guidelines” and to alleged fraud on the part of directors of the Company. He continued to raise these matters, notwithstanding that the Tribunal endeavoured to make it clear to him that they were not of assistance in addressing the issues that were the subject of the application for review.
Is the applicant liable to an administrative penalty for lack of reasonable care under s 284-75(1) of Schedule 1 to the TAA?
The administrative penalty regime was succinctly described by Mr S E Frost, Member (now Deputy President) in Re Peco Necovski and Commissioner of Taxation [2009] AATA 195 where, at paragraphs 4-6, he said:
“4.The Parliament has established a ‘self assessment’ income tax system under which an assessment may issue based solely on information contained in the income tax return of the taxpayer.
5.This self assessment system depends on the accuracy of the information contained in a taxpayer’s tax return. This is because, as a general rule, the Commissioner will accept a taxpayer’s return at face value. As part of the self assessment system, taxpayers are exposed to penalties when their returns contain statements that turn out to be incorrect.
6.A taxpayer is liable to an administrative penalty if the taxpayer or the taxpayer’s agent makes a statement to the Commissioner which is false or misleading in a material particular and the taxpayer has a ‘shortfall amount’ as a result of the statement: s 284-75(1) in Schedule 1 to the Taxation Administration Act 1953 (‘TAA’).”
In the present case, the respondent has submitted (and the Tribunal accepts) that it is apparent from the evidence that:
(a)during the course of the 2006/2007 year of income, the applicant was aware that tax was not being deducted from his wages and that he was incurring a tax liability;
(b)on or about 12 October 2007, the applicant was notified that tax instalments had not been made to the respondent by the Company;
(c)shortly after the conclusion of the 2006/2007 year of income, the applicant demanded payment from the Company of the funds he now asserts ought to have been withheld as PAYG amounts and the Medicare Levy;
(d)at the time that he received payments from the Company, the applicant did not expect tax to be deducted from the sums he received;
(e)prior to the lodgement of his taxation return for the year ended 30 June 2007 on 11 March 2009, the applicant was aware that:
(i)he had not derived the amount of $254,640 as assessable income in the year ended 30 June 2007, as he knew he had only derived the amount of $136,000 from the Company in that year;
(ii)tax instalments had not been withheld by the Company or remitted to the respondent.
Notwithstanding these factors, the applicant lodged or permitted to be lodged a 2006/2007 taxation return in which he:
(a)overstated his income by more than $100,000; and
(b)claimed tax instalments which he knew had not been withheld or remitted to the respondent by the Company.
In addition, on the evidence the respondent submitted (and the Tribunal agrees) that the applicant claimed tax deductions, purportedly relating to his duties as a director of the Company, in circumstances where:
(a)he derived no income from that role;
(b)a number of the deductions claimed related to acquisitions that had been made by others, including his wife or the Company;
(c)the applicant acknowledged in his original objection that he had “put large amounts of money into the company paying wages and for development equipment”;
(d)he had made claims for reimbursement from the Company for the same expenses and (on his case) he had in fact been reimbursed for some of those expenses; and
(e)he had taken steps to recover the expenses from the Company directly.
The applicant has submitted at paragraph [46] of his statement of facts, issues and contentions (“SOFIC”) that he should not need to substantiate all of the work-related expenses as the Company was allegedly involved in fraudulent behaviour. That he did not personally hold records of the claimed deductions reinforces the fact that they were Company expenses, rather than his own personal expenses. Furthermore, the applicant has also submitted at paragraph 11(iii) of his SOFIC that he did not become aware of the alleged “Phoenix Activity” until 2011, which was well after the lodgement of his 2006/2007 taxation return, and well after the period of time in which he was required to maintain substantiating records of the expenses claimed in his taxation return.
The respondent has submitted ( which submission, the Tribunal accepts) that the matters referred to in paragraphs 32-35 above demonstrate that the applicant and/or his tax agent:
(a)made statements in his 2006/2007 taxation return that were false or misleading in a material particular;
(b)that such statements resulted in a shortfall amount; and
(c)the shortfall amount resulted from a failure to take reasonable care to comply with a taxation law.
The consequence is that the applicant is liable for an administrative penalty, in accordance with s 284-75(1) of Schedule 1 to the TAA, of 25% of the tax shortfall imposed in Item 3 in the Table in s 284-90(1).
Should the respondent exercise his discretion under the TAA to remit the administrative penalty in whole or in part?
In the present case, the base penalty amount of 25% has been applied. Having regard to what was said in Re Peco Necovski (supra), this base penalty amount has been applied correctly in the Tribunal’s view. Under s 298-20(1) of Schedule 1 to the TAA, the respondent (and the Tribunal, upon review) has a discretion to remit all or part of the administrative penalty that has been imposed. The respondent has submitted that the discretion should not be exercised. The Tribunal is of the view that, upon review having regard to all the facts and evidence, the discretion should not be exercised.
DECISION
For the reasons outlined above, the Tribunal affirms the objection decision under review.
I certify that the preceding 38 (thirty -eight) paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne ......................[Sgd]..................................................
Administrative Assistant
Dated 28 February 2014
Date(s) of hearing 3 December 2013 Applicant In person Counsel for the Respondent Ms G Walker Advocate for the Respondent Mr P Zollo Solicitors for the Respondent ATO Legal Services Branch
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