The Taxpayer and Commissioner of Taxation
[2004] AATA 1026
•30 September 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 1026
ADMINISTRATIVE APPEALS TRIBUNAL )
) No AT2001/30
TAXATION APPEALS DIVISION
)
Re THE TAXPAYER Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal R. Hunt Date 30 September 2004
Place Canberra
Decision The Tribunal affirms the decision under review.
..............................................
Ms R. Hunt
Senior Member
Catchwords
TAXATION – Income tax – Audit of taxpayer's affairs - Amended assessment – Licensed builder – Payments received for renovation of house – Outgoings to subcontractors – Few records of claimed outgoings produced - Building materials purchased – Not all materials used in renovation – Estimate of taxable income based on receipts and invoices - decision affirmed
Income Tax Assessment Act 1936, ss 199, 221YHA, 221YHAAF, 221YHF, 226J, 226X
Taxation Administration Act 1953, s 14ZZK
Federal Commissioner of Taxation v Munro 97 ATC 5041
McCormack v Federal Commissioner of Taxation 79 ATC 4111
Gauci and Ors v Federal Commissioner of Taxation 75 ATC 4257
McCauley v Federal Commissioner of Taxation 88 ATC 4605
Federal Commissioner of Taxation v Dalco 90 ATC 4088
MacMine Pty Ltd v FC of T 79 ATC 4133; (1979) 53 ALJR 362
Kimche v Commissioner of Taxation of The Commonwealth of Australia [2004] FCA 1108
REASONS FOR DECISION
September 2004 Ms R. Hunt, Senior Member background and issues
1. Through this application The Taxpayer was seeking to establish that he was entitled to further deductions from his taxable income for the year ended 30 June 1998 or that he incurred no further tax liability above that disclosed in his income tax return. The Taxpayer also disputed the penalty tax imposed by the Commissioner of Taxation (“the Commissioner”). The Commissioner imposed a tax shortfall penalty at the rate of 75 percent under s.226J of the Income Tax Assessment Act 1936 (“the ITAA”), increased by a further 20 percent under s.226X of the ITAA because the Commissioner found that The Taxpayer took steps to prevent or hinder the Commissioner from becoming aware of the shortfall.
2. The Taxpayer lodged his income tax return for the year ended 30 June 1998 on the basis of which the Commissioner issued a refund notice on 21 October 1998. Subsequently, the Commissioner conducted an audit and, on 30 April 1999, and again on 23 May 2000, issued The Taxpayer with an amended and increased assessment of income tax payable for the year ended 30 June 1998. The amended assessment increased The Taxpayer’s assessable income by $42,350 and further imposed a penalty for understated tax and interest totalling the amount $11,963.61. The Commissioner’s assessment was based on an estimate of additional income received in connection with building and renovation work carried out on a third person’s house.
3. The Taxpayer lodged an objection claiming that the assessment should be set aside in respect of the tax assessed, the additional tax assessed and the late payment tax. In the alternative, The Taxpayer claimed that the tax assessment was excessive and should be reduced by allowing a deduction of $42,350 or of a greater or lesser amount. The grounds on which The Taxpayer relied broadly were that the assessment was invalid and had been raised for the purpose of oppressing, intimidating or harassing him. The Taxpayer asserted that the Commissioner had not properly ascertained the amount of taxable income and that, without sufficient explanation by the Commissioner, he could not be more particular about the issues the assessment raised. The Taxpayer reserved the right to contest any issues arising. He contended that he had not entered into any sham arrangements, transactions or agreements to avoid his tax liabilities.
4. At the time of the Tribunal’s hearing on 12 and 13 August 2004, it was clear that the amended assessment had been raised on the basis of invoices and receipts issued by The Taxpayer. The Commissioner reached a total of $108,885.25 income based on these documents. The Taxpayer acknowledged that he had received $100,385.25 from a Mr Humphries, as the estimated cost of renovation work on Mr Humphries’ house and subsequently had increased his estimate by a further amount of $8,330. The Commissioner had included a similar amount in The Taxpayer’s assessment whereas The Taxpayer contended that he had added this amount to his former estimate of the cost of works for Mr Humphries (A4) but had not received the payment. The dispute between The Taxpayer and the Commissioner concerned the actual amount of money The Taxpayer had received from Mr Humphries and whether The Taxpayer expended the moneys received in the purchase of materials and employment of subcontractors for Mr Humphries’ home renovation project. The tax penalty imposed was also at issue.
5. The Taxpayer further argued that he was entitled to a carry-forward loss due to the expenses estimated in a quantity surveyor’s report he furnished (A1) and that he was further entitled to a credit under the Prescribed Payments System (PPS). The Tribunal found that The Taxpayer had not discharged the onus of proving that the Commissioner’s assessment was excessive and affirmed the Commissioner’s decision for the reasons set out below.
evidence and contentions
6. In his statement of “matters and contentions” (A4), The Taxpayer set out that he suffered a serious back injury in 1995 for which on or about 15 May 1995 he received compensation of $75,000. He also received a disability support pension during the period in question. Until his injury The Taxpayer had worked as a builder. He held a class B building licence and a building permit issued on 4 September 1997. The Taxpayer contended that even though he was a licensed builder he could only hope to supervise building work in 1997/1998 as he was constantly suffering from his debilitating injury. The Taxpayer further contended that he was not carrying on business of any kind at the time of the assessment nor was he receiving any salary or wages. At the hearing The Taxpayer also gave oral evidence to this effect.
7. The Taxpayer further submitted that he knew Mr Humphries socially and resided near him when Mr Humphries approached him with plans to extend his house. He gave evidence that Mr Humphries asked him if he could assist him by providing estimates of the costs of a planned house extension and by allowing him to use his building licence. The Taxpayer submitted that since he could no longer do the physical side of building work he agreed to this proposal as he was hoping to develop a career as a supervisor or project manager. His expectations were that the job would provide him with some useful supervising experience towards his future plans to work in a supervisory role in the building industry. In the statement of “matters and contentions” The Taxpayer set out that he estimated the costs of the works in August 1997 but revised the estimate in September 1997 to include further work and then revised it again on or about 15 October 1997 to include further work of $8,330, making a total of $100,385.25.
8. In his oral evidence The Taxpayer acknowledged the receipt of $100,385.25 from Mr Humphries but argued that he had expended the entire amount on materials, goods and third party services for Mr Humphries’ house extension and had not expected or received any payment for his own labour. Invoices and receipts before the Tribunal are located at T5 and T10 and from T11 to T14. The Taxpayer contended that he had signed and issued those receipts and invoices to Mr Humphries at his request to cover Mr Humphries’ gambling losses. In his evidence The Taxpayer told the Tribunal that he believed Mr Humphries’ marriage was suffering because of his compulsive gambling habit and therefore when Mr Humphries asked him to help him hide his gambling losses from his wife by issuing bogus invoices and receipts, The Taxpayer obliged. He had since realised this was very foolish and naive.
9. Before the Tribunal The Taxpayer tendered quantity surveyor’s reports, a first estimate and a revised estimate dated 18 June 2003 (A2). The later report gave the opinion that total cost of Mr Humphries’ house extension in 1997 would have been $155,397. The Taxpayer claimed to have received only $100,385.25 towards the cost of construction and that none of this amount was income.
10. The Tribunal noted that The Taxpayer did not call the quantity surveyor or Mr Humphries or any of the subcontractors whom he had supposedly paid in connection with the works to give evidence on his behalf. He submitted that he had fallen out with Mr Humphries to the extent that he had taken out apprehended violence orders against him. He contended that Mr Humphries had tried to run down his wife and son in separate motor vehicle incidents. He and his wife produced signed statements about these incidents (T21, folios 43-45). However, The Taxpayer did not explain why he did not call other witnesses.
11. The Taxpayer tendered before the Tribunal a signed statement from a person stating the receipt of $4,000 cash in instalments for paint, painting materials and labour for a paint job (T20, folio 41). The document did not state by whom the money was paid. Another document with an indecipherable signature showed the receipt of money from Mr Humphries for a plumbing job but did not state any amount (T21, folio 46). On a letterhead of S J & J J Thackeray, there was a statement by Mr J. Thackeray about completing a roof tiling job on the site but made no reference to any payment (T21, folio 47). Another document provided details of some work done for The Taxpayer on a work experience basis and that Mr Humphries was rude to him (T18, folio 35). The document did not mention any payment.
12. Several other unsworn written documents were presented before the Tribunal about Mr Humphries’ gambling habits and about the enmity between The Taxpayer and Mr Humphries. [T18 to T21]. Also before the Tribunal is an admission in the Commissioner’s statement of facts, issues and contentions (R2) that The Taxpayer brought to an interview receipts for expenses totalling $56,847.99, including receipts for 4 skylights and 2 heating systems. These receipts are not before the Tribunal but these amounts have been treated by the Commissioner as deductible outlays for the project except to the extent of 2 of the skylights and one of the heating systems. The Commissioner’s audit officer also gave oral evidence to the Tribunal that she made an adjustment to her estimate of The Taxpayer’s income by reference to the receipt for the heating system and skylights as set out in the statement.
13. The Taxpayer contended that he did not derive any income according to ordinary concepts or otherwise and that the Commissioner had not used the most acceptable method of determining his income. He argued an “assets betterment” assessment would have been more appropriate than the method used, which was based on hearsay from other persons. At the hearing, The Taxpayer’s representative suggested that the person who should have paid tax, if any, on moneys paid to The Taxpayer should have been Mr Humphries under the provisions of Division 3A of Part VI of the ITAA.
14. The tax officer, who conducted the audit and calculated the amended assessment of taxable income, determined that The Taxpayer had received $108,885.25 for works done and deducted expenses totalling $53,235.99 (TD1). The deduction was based on receipts sighted which are not before the Tribunal and included a receipt for skylights and heating systems. Due to an error of arithmetic in The Taxpayer’s favour, the officer determined that his taxable income should be increased by $42,350. The officer gave oral evidence to similar effect. The resulting amended assessment was issued manually and a later identical electronic notice was issued on 23 May 2000 (T7 folio 17). The Commissioner continued to assert that the assessment was the amount recoverable and did not press for the more mathematically correct amount of $55,649.26 that was justified by the receipts The Taxpayer produced. The officer who conducted the audit admitted at the hearing that she had been inexperienced when she carried out the audit, that she had answered to a supervisor, that she had not looked for the missing skylights and heating system but had based her adjustment on The Taxpayer’s tax assessment and on what she saw installed in Mr Humphries’ house. The Commissioner argued that the audit was a genuine estimate based on the information supplied by The Taxpayer and gleaned by the audit.
legislative provisions and case law
15. The Commissioner relied on s.14ZZK of the Taxation Administration Act 1953 (“the TAA”) save for any facts expressly agreed or admitted in writing. Under s.14ZZK of the TAA, the applicant bears the onus of proving that the Commissioner’s assessment was excessive. This is clear from decisions of the courts in cases such as Federal Commissioner of Taxation v Munro 97 ATC 5041; McCormack v Federal Commissioner of Taxation 79 ATC 4111; Gauci and Ors v Federal Commissioner of Taxation 75 ATC 4257; and McCauley v Federal Commissioner of Taxation 88 ATC 4605. In Federal Commissioner of Taxation v Dalco 90 ATC 4088, Brennan J said (at 4093):
...the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment...
16. The onus on The Taxpayer is not one of providing strict proof, but of satisfying the Tribunal on the balance of probabilities. See Federal Commissioner of Taxation v Munro 97 ATC 5041, Lockhart J at 5049-5050 and MacMine Pty Ltd v FC of T 79 ATC 4133; (1979) 53 ALJR 362 per Gibbs J. Also see the recent case of Kimche v Commissioner of Taxation of The Commonwealth of Australia [2004] FCA 1108, Ryan J, Melbourne, 26 August 2004.
17. The alternative aspect of The Taxpayer’s submission was that Division 3A of Part VI of the ITAA contains owner-builder tax accounting provisions. Section 221YHAAF of the ITAA and following impose an obligation on persons described as owner-builders to withhold a certain percentage of payments made to their contractors and remit this to the Commissioner. These payments are known as prescribed payments and the system the Prescribed Payments System (PPS). Once the prescribed payments are made, the contractor then is entitled to a credit. The Taxpayer contended that Mr Humphries was an owner-builder and should have made such withholdings when he made payments to any persons working on his house, including The Taxpayer.
discussion of evidence and submissions
18. The implication I have drawn from the quantity surveyor’s report is that The Taxpayer’s claim to have passed on the entire amount of $100,385.25 is given credibility by the differential between the estimate and the amount he received from the house owner, Mr Humphries. The Commissioner has suggested that the amount of $100,385.25 is made up by reference to earlier invoices and receipts issued by The Taxpayer. The Commissioner has not sought to increase the estimate of money received by The Taxpayer by adding the amounts of other receipts, estimates or invoices to that figure except for the later invoiced amount of $8,500 under the invoice at T15, folio 31. This invoice is similar to the estimate for further work for $8,330, to which The Taxpayer refers in his written statement of 20 February 2004 (A3). The Taxpayer denies having received any further amount above $100,385.25. The Taxpayer has not set out with any particularity exactly how he disbursed the amount of $100,385.25 and has not called any witness to substantiate receipt of any money from him.
19. The Tribunal gave particular regard to the statement of Ryan J in Kimche (supra) where his Honours suggested that:
“...if, in a case... the taxpayer is able to establish facts tending to show that some part of a particular receipt did not bear the character of income but is unable to quantify with precision the amount of that part then the assessment will be excessive only in respect of the minimum amount which could have borne a different character.”
20. The Taxpayer gave evidence to the Tribunal that the receipts totalling $100,385.25, which the Commissioner used as the main basis for the income tax assessment, did not bear the character of income. He maintained that he expended the whole amount for Mr Humphries’ project but did not quantify with precision, or at all, the amounts he outlaid to particular subcontractors or used for materials. None of the written statements before the Tribunal explain details of particular expenditures or quantify payments towards which The Taxpayer allocated the amount of $100,385.25. While the Commissioner has acknowledged that The Taxpayer did provide some receipts which are not before the Tribunal, The Taxpayer has not offered any convincing explanation for the balance of the amount which he now claims as a further deduction. He has not called any witnesses to verify that he paid them for services rendered or for goods purchased in the course of Mr Humphries’s house extension. The Taxpayer has produced the quantity surveyor’s report but has not called the surveyor who made the report in order that the evidence might be further tested. He has not analysed the contents of the report in any manner in giving his sworn testimony to the Tribunal. He has not claimed that he was responsible for all the payments made or expenses incurred in the work described in the report. Some of the written statements furnished and referred to above indicate that Mr Humphries and not The Taxpayer paid some of the recipients who worked on the renovation project. I do not, therefore, accept the report as incontestable evidence that The Taxpayer provided all the goods and services or paid for all the items set out in the report. I also find no justification for the allegation that the Commissioner plucked a figure out of the air when estimating The Taxpayer’s income. The officer who conducted the audit has explained how she came to the figure. Any vagueness is attributable to The Taxpayer’s not being able to quantify with precision the amounts he expended and to whom.
21. Although it was not set out in the original grounds of objection, The Taxpayer claimed a carry forward loss of $55,011.75, which arose during the year of income and which appears to be based on the quantity surveyor’s report. The Taxpayer has not produced any further evidence or arguments to show he incurred a loss of this amount.
findings
22. The Taxpayer has not furnished reliable evidence of the amount he received from Mr Humphries or of the amount he expended on Mr Humphries’ behalf. The receipt for $100,385.25 (A3) is drawn in such a way as to show it is based on reference to other receipts before the Tribunal. It is not entirely clear that The Taxpayer received the further amount of $8,500 for which he issued an invoice on 23 October 1997 [T5 folio 11] but neither is it clear that he did not receive that further amount. In T15 folio 31 this same invoice is reproduced and a cheque number is noted for payment of the amount of $8,500 to The Taxpayer. However, in order to justify his objection, it is necessary for The Taxpayer to show on the balance of probabilities that the Commissioner’s assessment is excessive and in order to do this, he must give an explanation or breakdown of what he received and how he disbursed the amount he received from Mr Humphries.
23. As The Taxpayer has not furnished convincing evidence as to his having made the further expenditure of $42,350 as claimed, or of his having made any particular item of expenditure not already taken into account by the Commissioner, he has not established on the balance of probabilities that any part of the Commissioner’s assessment might be excessive. It follows that I am not satisfied on the balance of probabilities that this claim should be accepted.
24. As well, The Taxpayer has not established the related claim that he did not conceal his income from the Commissioner and therefore should not suffer a penalty. As he has not provided reliable records and has admitted to issuing bogus invoices and receipts at Mr Humphries’ request, I consider that he has been involved in concealment. Therefore, I am also not satisfied on the balance of probabilities that he has not concealed income from the Commissioner and that the penalty should be reduced. Furthermore, The Taxpayer has not established that he is entitled to carry forward a loss of $55,011.75. Consequently, the objection decision under review is affirmed.
25. As to the claim that Mr Humphries was an owner-builder and is the appropriate taxpayer, it is not necessary for the Tribunal to make a finding on that. In any event, as the Commissioner’s counsel submitted, any payment under the PPS scheme simply reduces the ultimate taxpayer’s liability to pay tax. It does not reduce assessable income. The calculation of The Taxpayer’s assessable income would not be reduced by any PPS payment but he would receive a credit towards tax due. There is no evidence that Mr Humphries made any PPS payment and so there is no available argument that The Taxpayer’s tax liability should be adjusted. In addition, “owner-builder” is a defined term and Mr Humphries does not appear to come within the definition. Section 221YHA(1) of the ITAA would only possibly make Mr Humphries an owner-builder if the part of the building project carried out by The Taxpayer was less than 50% of the project. The Taxpayer was hired for the house extension project whether or not he made assessable income from the project. The Taxpayer has admitted that he agreed to Mr Humphries’ proposal that his building licence be used for the project and there is ample evidence of this before the Tribunal. Whether or not this was less than 50% of the entire construction project has not been touched upon by The Taxpayer.
decision
The Tribunal affirms the decision of the Commissioner.
I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Ms Robin Hunt, Senior Member.
Signed: Z. Khan
AssociateDate/s of Hearing 12 and 13 August 2004
Date of Decision 30 September 2004
Counsel for the Applicant Mr Alan Powrie
Counsel for the Respondent Mr Damien Ong
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