The Taxpayer and Commissioner of Taxation
[2013] AATA 448
[2013] AATA 448
Division Taxation Appeals Division File Numbers
2011/2665
2011/2666
2011/26672011/2668
Re
The Taxpayer
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 28 June 2013 Place Brisbane The objection decisions under review are affirmed
........................................................................
Senior Member Bernard J McCabe
CATCHWORDS
TAXATION – Fuel Tax Credits – Maintenance of accurate records – Taxpayer must establish correct position - Allocation of fuel consumption – Administrative penalty – Objection Decisions under review affirmed
LEGISLATION
Energy Grants (Credits) Scheme Act 2003 (Cth)
Fuel Tax Act 2006 (Cth)
Fuel Tax (Transitional and Consequential Provisions) Act 2006 (Cth)
Income Tax Assessment Act 1997 (Cth) s 995-1Taxation Administration Act 1953 (Cth) ss 14ZZK, Schedule One 284-90, 298-20, 382-5
CASES
Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54
Re Imperial Bottleshops Pty Ltd and William John King Egerton v Commissioner of Taxation [1991] FCA 276
REASONS FOR DECISION
Senior Member Bernard J McCabe
The taxpayer runs farms and operates a construction and earthmoving equipment business. It claimed fuel tax credits under the Fuel Tax Act 2006 in respect of fuel acquired for use in the various machines it operated in the course of its business in the period November 2006 – April 2010. The Commissioner of Taxation disallowed the claims following an audit in 2010. The Commissioner said the records maintained by the taxpayer do not accurately describe the amount of fuel acquired or used by the taxpayer, or adequately describe the purpose for which the fuel was used.
It is important to ascertain the purpose for which the fuel was used because different uses give rise to different entitlements under the law. It is therefore important to maintain accurate records of how much fuel is used for:
(a)agriculture and mining,
(b)construction and manufacturing, and
(c)‘on road’ use.
The Commissioner said there is a revenue shortfall as a result of the claims being disallowed. He imposed an administrative penalty at the rate of 25% on the amount of the shortfall, and declined to remit the penalty.
The taxpayer has asked the Tribunal to reconsider the whole case. In doing so, the taxpayer must discharge the burden of proof referred to in s 14ZZK of the Taxation Administration Act 1953. That provision means it is not enough for the taxpayer to prove the Commissioner’s assessment is wrong. The taxpayer must be able to suggest a better, more satisfying answer that is open on the evidence presented to the Tribunal.
The taxpayer acknowledged there were problems with its record keeping, although it said the difficulties were caused by employee delinquency – which is relevant to the question of penalties, it said. It argued its true entitlements are actually much greater than the amount claimed because the claims omitted details about the fuel used by a number of items of machinery.
I am satisfied the objection decisions under review must be affirmed. I explain my reasons below.
BACKGROUND
The taxpayer is the corporate trustee of a family trust. The company conducted a range of business activities using heavy machinery in regional Queensland. It runs farming operations that require irrigation pumps and heavy machinery. It also hires out equipment to local farms and other businesses for the purposes of earth-moving and construction.
During the period under review, the taxpayer provided machinery for use on a number of different construction projects, including major road works being built by the local council. There is no dispute it derived the vast majority of its income from non-primary production sources, but at least part of that work was done on agricultural land belonging to local farmers. While that work was construction work, Mr Hyde-Page argued on behalf of the taxpayer that it was effectively agricultural construction. I will have more to say about that below. Suffice to say the use of fuel in construction work is problematic because construction work did not give rise to an entitlement to fuel tax credits before 30 June 2008.
I will refer to the family member who effectively ran the business as Mr Smith. Mr Smith and his wife were directors of the taxpayer. Mr Smith gave evidence at the hearing and filed statements that included photographs of the various items of machinery used in the taxpayer’s business. His evidence lies at the heart of the taxpayer’s case: he produced the estimates contended for by the taxpayer from source documents and from his own knowledge of the business and the characteristics and usage of the various items of machinery.
In his oral evidence at the hearing, Mr Smith explained how the fuel tax records were maintained in the company’s office in the period under review. (His oral evidence elaborated on his statements: exhibits 5 and 11.) The internal book-keeper would consult the source records – most obviously the fuel consumption sheets completed by the operators of the fuel service truck that supplied the various items of machinery used in the business – and estimate the claim for fuel tax credit which was then submitted to the external accountant. The claim would be submitted to the Commissioner in due course. The integrity of those claims depended on accurate primary records being maintained by the machine operators. It was common ground that at least one delinquent employee – probably two – who drove the fuel service truck did not maintain proper records during the period under review. The anomalies were not picked up by the book-keeper. New external accountants began to uncover issues in 2009 but the full extent of the problems did not become apparent until the Commissioner completed an audit in 2010. The audit concluded the claims were excessive. Mr Smith says he conducted his own thorough review of the records in response to the audit. He said he found a number of deficiencies and agrees the original claims were excessive having regard to the documents. The taxpayer’s counsel at the hearing, Mr Hyde-Page, conceded in written submissions that “the applicant had claimed fuel tax credits on an arbitrary basis, namely 95% agricultural use and 5% construction use.” It was conceded that claim was obviously unsustainable. Mr Hyde-Page explained negotiations ensued between the taxpayer and the Commissioner and it was agreed a much more conservative fuel tax credit claim should be accepted. (It occurred to me that these concessions might not be admissible in the hearing because the negotiations were presumably conducted on a without prejudice basis, but the information was freely given and no objection was taken to the submissions. In any event, I refer to the material in these reasons merely by way of background.)
The taxpayer subsequently took a more robust view of its position. Mr Smith argued a large proportion of the fuel tax credit claims could still be justified. He noted there were additional amounts of fuel used that should have given rise to an entitlement but those amounts were not included in the original claims. While he does not pretend the original claim can be sustained, he thinks the taxpayer can do better than the Commissioner is prepared to allow.
THE LEGISLATION
I will deal with the two aspects of the claims (and the question of penalties) under separate headings. But I should start by discussing the relevant legislation. The fuel tax credit scheme is governed in the main by three pieces of legislation: the Fuel Tax Act 2006, the Fuel Tax (Transitional and Consequential Provisions) Act 2006 and the Energy Grants (Credits) Scheme Act 2003. These statutes between them establish a system which enables users of taxable fuel to claim a credit in connection with the cost of the fuel used in the course of carrying on certain kinds of business. The rate of the credit was provided for in the provisions and varied over time and with respect to the sort of work that was done. Importantly, credits could not be claimed with respect to certain kinds of work, and some kinds of work attracted credits at a lower rate.
Happily I do not need to descend into a detailed examination of the operation of these provisions. The real issue in this case is whether the taxpayer is able to provide sufficient evidence to enable the Commissioner (or the Tribunal, upon review) to accurately assess the taxpayer’s entitlement to a fuel tax credit under the scheme.
The basic obligation with respect to record-keeping is set out in s 382-5 of Schedule One to the Taxation Administration Act 1953 (“the Administration Act”). Section 382-5(1) obliges the taxpayer to “keep records that record and explain all transactions and other acts you engage in that are relevant to a supply, importation, acquisition, dealing, manufacture or entitlement to which this sub-section applies” for at least five years. The sub-section applies to claims in respect of fuel tax credits by reason of 382-5(2)(h). Section 382-5(8) says the records in question must be in English (or be readily converted to English) and be “such as to enable your liabilities and entitlements under an indirect tax law to be readily ascertained”. (There is no question that the fuel tax legislation is an indirect tax law for the purposes of this sub-section: see the definition of indirect tax law in s 995-1 of the Income Tax Assessment Act 1997, which expressly refers to a fuel tax law.)
I do not need to formally decide whether the taxpayer has discharged its obligations under s 382-5, but it is clear from the state of the evidence before me that the records are in an unsatisfactory state.
The Commissioner conceded a failure to comply with the requirement to keep proper records does not automatically mean the taxpayer will be unable to substantiate its entitlements. Even so, the Commissioner contended a failure to comply with the requirements in s 382-5(1) and (8) suggests it would be unlikely a taxpayer would be able to satisfy the evidentiary burden placed on it pursuant to s 14ZZK of the Administration Act. That provision requires the taxpayer to establish the correct position when challenging an assessment. It is not enough for the taxpayer to establish the Commissioner’s assessment is incorrect. The Commissioner will often be wrong, because he is required to make a(n informed) guess of the true position. The taxpayer must go further. It is required to establish a correct (or at least a better) explanation of what has transpired. That is fair enough, because the taxpayer is better placed to come up with evidence about its own affairs.
As a practical matter, it will be necessary for the taxpayer to produce evidence that satisfies me particular amounts of fuel were allocated to particular activities that gave rise to an entitlement to claim a fuel tax credit. The taxpayer cannot succeed in these proceedings unless it can point to evidence that persuades me the fuel was allocated in the way it contends. I do not doubt fuel was acquired and allocated in ways that would entitle it to claim fuel tax credits; the question is how much. In the absence of coherent and complete records, the taxpayer relies heavily on the testimony of Mr Smith to this end, but – as I will explain – that is problematic. The oral evidence must be taken into account, but the evidence of an individual officer that is substantially uncorroborated will always be open to question on the basis it is self-serving: see ReImperial Bottleshops Pty Ltd and William John King Egerton v Commissioner of Taxation [1991] FCA 276 at [31] per Hill J.
THE TAXPAYER’S ARGUMENT OVER THE ALLOCATION OF FUEL
Mr Smith gave evidence at the hearing that (a) he reviewed the fuel consumption sheets which identified the amount of fuel being supplied to a particular item of plant or machinery and (b) cross-referenced that information with daily worksheets and diaries that described the work done by that machine and invoices provided to external parties who had commissioned the work. He used that information to determine how the fuel used should be categorised – and then added the amounts together to compile final claims. He offered more detail as to how he dealt with the material in particular months in the course of his statement (exhibit 5). Mr Smith explained in cross-examination that where the records did not disclose how much fuel was used, he used his knowledge of the machinery in question together with evidence about the work it was doing to create an estimate of fuel consumption. There were at least 11 items of machinery where these estimates were required. (I will address the claims in relation to the irrigation pumps separately.)
There are at least two concerns with Mr Smith’s evidence. Firstly, I am asked to accept Mr Smith’s analysis of the various source documents. That is problematic where, for example, he was distinguishing between (a) jobs that clearly gave rise to an entitlement, (b) jobs that might properly be regarded as pure construction work which did not give rise to an entitlement before 30 June 2008, and (c) farm construction that might give rise to an entitlement. This distinction requires fine judgment and the evidence before me about the kind of work that was being done was so general it would be impossible to be confident as to Mr Smith’s apportionment. The task is made even more difficult by evidence in exhibit 1.2 at pp 881-882 (referred to in the respondent’s submissions) from the taxpayer to the effect that jobs tended to be allocated at the beginning of each work day but items of machinery might be assigned (and re-assigned) to a variety of different tasks in the course of a day. I do not draw any comfort from Mr Smith’s evidence in [15]-[24] of exhibit five, where he explains the forensic process he followed when evaluating source documents in the course of completing his review. His apportionments are ultimately the product of guess-work.
In all the circumstances, it is difficult to make reliable estimates or verify the estimates Mr Smith has made. I am ultimately left with Mr Smith’s guesses that are supported by a range of documents that he interprets. I am effectively being asked to put myself in his hands. That is a problem, for the reasons referred to in Imperial Bottleshops.
Secondly, and more worryingly, the taxpayer said I should accept Mr Smith’s own estimates of how much fuel was used in a number of items of machinery. Mr Smith said his estimates are justified because he knows the machines and how much fuel they typically use, and how much fuel they would use doing the jobs they were shown as doing on particular occasions. He gave examples of these estimates in the course of his evidence in chief where he was asked to nominate how much fuel was used by some of the items of machinery referred to in his affidavit (exhibit 5). The Case tractor and laser bucket, which was photographed at annexure JZ12 to the statement, was estimated to use up to 75-90 litres per hour of operation, and it was used 7-8 months a year for at least 4 hours a day, and up to 12-14 hours in peak periods. The Case Puma tractor, photographed in annexure JZ20 of the statement, was said to use 35-45 litres per hour. It was used 10 months of the year for an average of 8 hours a day. In planting season, the machine might be used 7 days a week, but at other times of the year it would only operate on 5 days in a week. In his statement (exhibit 5), he suggested (at [32(b)]) the 11 items of machinery might be used for between 6-9 months a year (he based his estimate on 7 months usage).
These estimates are not sufficiently tight to offer a meaningful guide as to how much fuel was consumed, let alone the purposes for which the machinery was used. While I do not doubt Mr Smith is familiar with the machinery his firm operates, the estimates in the examples offered are not sufficiently precise to persuade me what the correct fuel tax entitlement should be. I would add I was provided with little in the way of evidence from the manufacturers of the machines or from qualified experts that would verify the estimates of performance and fuel consumption. That evidence should have been readily available, and its absence reduces the persuasive force of Mr Smith’s evidence.
The Commissioner also questioned whether it was possible to reconcile the amount of fuel purchased with the taxpayer’s explanations of how it was used. Mr Ballans, for the Commissioner, suggested to Mr Smith in cross-examination that in some months the firm appeared to acquire less fuel than its fuel consumption sheets suggested it consumed. Mr Smith explained the firm acquired fuel from more than one supplier, and pointed out the firm had a good deal of storage capacity and it often had fuel left over from one month that was available for use in the following months. Later, in the course of cross examination, he retracted the evidence about the number of suppliers; he conceded the firm used more than one supplier in different periods, but it appeared it used one supplier in particular during the period under review.
It is difficult to know what to make of the evidence about the amount of fuel that was acquired. Mr Hyde-Page, for the taxpayer, said it was a mistake to make too much of the evidence in any event because the focus should be on how the fuel was used rather than where it came from. I tend to agree, although the uncertainty about how much fuel was acquired certainly does not advance the taxpayer’s case.
The same want of precision was on display in Mr Smith’s evidence in relation to the irrigation pumps used in the course of the taxpayer’s farming activities. Mr Smith says the irrigation pumps were used extensively and consumed a lot of fuel, and that claims for fuel tax credits were never made. I accept the pumps were used – but how extensively?
Mr Smith explained there were eight pumps used in the farming operations. The pumps did not run all year but there are no independent records of when they actually did run. Mr Smith’s estimates are based on when he believes the pumps would have run having regard to the rainfall records: the pumps were activated during months with relatively low rainfall. He suggested in his statement (exhibit 5 at [32(a)]) that there were at least 5 months during the relevant period where the pumps would have been operating 24 hours a day for 20 to 25 days in each of those months. He added “This is a very conservative estimate.” Interestingly, he conceded during the course of cross-examination that the calculation of pump usage referred to in his statement might be overstated when confronted with questions about the acquisition of fuel by the firm in the relevant months. Mr Ballans, for the Commissioner, also pointed out there was no evidence from the manufacturer or a qualified expert that would corroborate Mr Smith’s estimates of the amount of fuel used by the pumps even if I accept his estimates of their usage.
I have no doubt Mr Smith was an honest witness who did his best to assist the Tribunal. I am also conscious of the need to avoid demanding unreasonable precision of the taxpayer in the circumstances. But I am not persuaded Mr Smith’s estimates are sufficiently precise or reliable for me to accept the taxpayer’s claims to fuel tax credits are right, or more nearly right than the Commissioner’s assessment. The taxpayer has not done enough to displace the rebuttable presumption contained in the Commissioner’s assessment.
THE APPROPRIATE PENALTY
The Commissioner concluded the taxpayer made false or misleading statements that led to a taxation shortfall. The false or misleading statements were said to be the product of a want of reasonable care: item 3 of s 284-90(1) of Schedule One to the Administration Act. In those circumstances, the Commissioner concluded, an administrative penalty of 25% was properly levied on the shortfall.
There is little profit in parsing the words “a shortfall amount…resulted from a failure by you or your agent to take reasonable care to comply with a taxation law”. In this case, the taxpayer’s records were a mess. Mr Smith laid the blame for that at the feet of delinquent employees and a faulty book-keeping process, but that is ultimately a failure on the part of the taxpayer’s management to establish and maintain record-keeping processes which were adequate to the task – and which satisfied the company’s obligations under s 382-5. The lack of integrity went unnoticed for a long period of time, even though a book-keeper was employed within the company and the claims were ultimately passed to external advisers who submitted them to the Commissioner. If the taxpayer was taking reasonable care of its tax affairs, the problems would have come to light much sooner, and might never have occurred at all.
The taxpayer’s business was not a small one. It turned over millions of dollars in revenue each year. The fuel tax credit entitlements were potentially very large. It had professional advisers to assist it in making those claims. It should have done better. The administrative penalty was appropriately levied at the rate of 25%.
That leaves only the question of whether the penalty should be remitted in whole or in part. Remittal is possible pursuant to s 298-20 of Schedule One to the Administration Act if the imposition of the penalty would be harsh in all the circumstances of the taxpayer: see Archibald Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54 at [26] per Spender, Ryan and Emmett JJ.
There was a suggestion from the taxpayer that the penalty will cause it to experience severe financial hardship. If the viability of the taxpayer’s business were called into question, the welfare of employees and others (including Mr Smith and other family members associated with the taxpayer) might be affected.
The penalty is potentially large in monetary terms because the amount of the shortfall is so great. It goes without saying that a large penalty will be a burden, but that fact does not of itself establish the imposition of the penalty is harsh. It was suggested the business could end up in external administration as a result of the penalty, but I am not persuaded that is necessarily a harsh outcome in all the circumstances. The errors which led to the shortfall were systematic errors that occurred over an extended period. Outside advisers were not provided with the information they required to detect any errors. The mistakes that were made were the product of a failure to properly supervise the taxpayer’s operations.
I do not accept there is any proper basis shown for remitting the penalty, either wholly or in part.
CONCLUSION
The objection decisions under review must be affirmed.
I certify that the preceding 35 (thirty five) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe .
........................................................................
Associate
Dated 28 June 2013
Dates of hearing 2 April and 20 December 2012 Counsel for the Applicant Mr Hyde-Page Solicitors for the Applicant Mr Bickell Counsel for the Respondent Mr Ballans Advocate for the Respondent Mr Aftanas
0
2
0