The Taxpayers and Commissioner of Taxation
[2014] AATA 572
•14 August 2014
[2014] AATA 572
Division GENERAL ADMINISTRATIVE DIVISION File Number(s)
2007/1955, 2007/1956-61, 2007/1964, 2007/1966-69 and
2007/2905-2910
Re
The Taxpayers
APPLICANTS
And
Commissioner of Taxation
RESPONDENT
DECISION
TRIBUNAL: The Honourable R Nicholson, Deputy President
DATE: 14 August 2014
PLACE: Perth
Applicant A – GST – Application 2007/1955
1.This matter is remitted to the respondent with a direction that the decision under review be varied as follows:
(a)With respect to the assessment of the applicant’s Goods and Service Tax (GST) liability:
(i)For the period ended 30 September 2000 the applicant’s GST net amount be reduced to $8,851.00;
(ii)For the period ended 31 December 2000 the applicant’s GST net amount be reduced to $37,906.00;
(iii)For the period ended 31 March 2001 the applicant’s GST net amount be reduced to $37,906.00;
(iv)For the period ended 30 June 2001 the applicant’s GST net amount be reduced to $35,141.00;
(v)For the period ended 30 September 2001 the applicant’s GST net amount be reduced to $13,529.00;
(vi)For the period ended 31 December 2001 the applicant’s GST net amount be reduced to $31,328.00;
(vii)For the period ended 31 March 2002 the applicant’s GST net amount be reduced to $17,737.00;
(viii)For the period ended 30 June 2002 the applicant’s GST net amount be reduced to $31,328.00;
(ix)For the period ended 30 September 2002 the applicant’s GST net amount be reduced to $562.00;
(x)For the period ended 31 December 2002 the applicant’s GST net amount be reduced to $19,854.00;
(xi)For the period ended 31 March 2003 the applicant’s GST net amount be reduced to ($562.00);
(xii)For the period ended 30 June 2003 the applicant’s GST net amount be reduced to $19,854.00;
(xiii)For the period ended 31 July 2003 the applicant’s GST net amount be reduced to ($4,857);
(xiv)For the period ended 31 August 2003 the applicant’s GST net amount be reduced to $10,493;
(xv)For the period ended 30 September 2003 the applicant’s GST net amount be reduced to $10,493.00;
(xvi)For the period ended 31 October 2003 the applicant’s GST net amount be reduced to $10,493;
(xvii)For the period ended 30 November 2003 the applicant’s GST net amount be reduced to $10,493;
(xviii)For the period ended 31 December 2003 the applicant’s GST net amount be reduced to $10,493.00;
(xix)For the period ended 31 January 2004 the applicant’s GST net amount be reduced to ($2,893.00);
(xx)For the period ended 29 February 2004 the applicant’s GST net amount be reduced to $10,493.00;
(xxi)For the period ended 31 March 2004 the applicant’s GST net amount be reduced to $10,493.00;
(xxii)For the period ended 30 April 2004 the applicant’s GST net amount be reduced to $10,493.00;
(xxiii)For the period ended 31 May 2004 the applicant’s GST net amount be reduced to $10,493.00;
(xxiv)For the period ended 30 June 2004 the applicant’s GST net amount be reduced to $10,493.00.
(b)With respect to the penalty imposed by the respondent pursuant to section 284-75 of Schedule 1 to the Taxation Administration Act 1953 (TAA) for a GST shortfall:
(i)For the period ended 30 September 2000 the penalty is nil;
(ii)For the period ended 31 December 2000 the penalty is nil;
(iii)For the period ended 31 March 2001 the penalty is nil;
(iv)For the period ended 30 June 2001 the penalty is nil;
(v)For the period ended 30 September 2001 the penalty is nil;
(vi)For the period ended 31 December 2001 the penalty is nil;
(vii)For the period ended 31 March 2002 the penalty is nil;
(viii)For the period ended 30 June 2002 the penalty is reduced to nil;
(ix)For the period ended 30 September 2002 the penalty is reduced to nil;
(x)For the period ended 31 December 2002 the penalty is reduced to nil;
(xi)For the period ended 31 March 2003 the penalty is reduced to nil;
(xii)For the period ended 30 June 2003 the penalty is reduced to nil;
(xiii)For the period ended 31 July 2003 the penalty is reduced to nil;
(xiv)For the period ended 31 August 2003 the penalty is reduced to nil;
(xv)For the period ended 30 September 2003 the penalty is reduced to nil;
(xvi)For the period ended 31 October 2003 the penalty is reduced to nil;
(xvii)For the period ended 30 November 2003 the penalty is reduced to nil;
(xviii)For the period ended 31 December 2003 the penalty is reduced to nil;
(xix)For the period ended 31 January 2004 the penalty is reduced to nil;
(xx)For the period ended 29 February 2004 the penalty is reduced to nil;
(xxi)For the period ended 31 March 2004 the penalty is reduced to nil;
(xxii)For the period ended 30 April 2004 the penalty is reduced to nil;
(xxiii)For the period ended 31 May 2004 the penalty is reduced to nil;
(xxiv)For the period ended 30 June 2004 the penalty is reduced to nil.
(c)The penalty imposed by the respondent pursuant to s.284-220 of Schedule 1 to the TAA be reduced to nil.
Applicant A – Income Tax – Application 2007/1956-1961
1.This matter is remitted to the respondent with a direction that the decision under review be varied as follows:
(a)With respect to the applicant’s income tax liability:
(i)The applicant’s taxable income for the year ended 30 June 1999 is $172,546;
(ii)The applicant’s taxable income for the year ended 30 June 2000 is $654,952;
(iii)The applicant’s taxable income for the year ended 30 June 2001 is ($221,023);
(iv)The applicant’s taxable income for the year ended 30 June 2002 is ($1,999,117);
(v)The applicant’s taxable income for the year ended 30 June 2003 is ($2,084,242);
(vi)The applicant’s taxable income for the year ended 30 June 2004 is ($1,281,952).
(b)With respect to the penalty imposed by the respondent pursuant to section 284-75 of Schedule 1 to the TAA for an income tax shortfall:
(i)For the year ended 30 June 1999 the penalty is reduced to nil;
(ii)For the year ended 30 June 2000 the penalty is reduced to nil;
(iii)For the year ended 30 June 2001 the penalty is reduced to nil;
(iv)For the year ended 30 June 2002 the penalty is reduced to nil;
(v)For the year ended 30 June 2003 the penalty is reduced to nil;
(vi)For the year ended 30 June 2004 the penalty is reduced to nil.
(c)The penalty imposed by the respondent pursuant to section 284-220 of Schedule 1 to the TAA be reduced to nil.
Applicant B – GST – Application 2007/1964
1.This matter is remitted to the respondent with the direction that the decision under review be varied as follows:
(a)With respect to the assessment of the applicant’s Goods and Services Tax (GST) liability:
(i)For the period ended 30 September 2000 the applicant’s GST net amount be reduced to nil;
(ii)For the period ended 31 December 2000 the applicant’s GST net amount be reduced to nil;
(iii)For the period ended 31 March 2001 the applicant’s GST net amount be reduced to nil;
(iv)For the period ended 30 June 2001 the applicant’s GST net amount be reduced to nil;
(v)For the period ended 30 September 2001 the applicant’s GST net amount be reduced to nil;
(vi)For the period ended 31 December 2001 the applicant’s GST net amount be reduced to nil;
(vii)For the period ended 31 March 2002 the applicant’s GST net amount be reduced to nil;
(viii)For the period ended 30 June 2002 the applicant’s GST net amount be reduced to $33,516.00;
(ix)For the period ended 30 September 2002 the applicant’s GST net amount be reduced to $101,100.00;
(x)For the period ended 31 December 2002 the applicant’s GST net amount be reduced to $101,100.00;
(xi)For the period ended 31 March 2003 the applicant’s GST net amount be reduced to $101,100.00;
(xii)For the period ended 30 June 2003 the applicant’s GST net amount be reduced to $101,100.00;
(xiii)For the period ended 30 September 2003 the applicant’s GST net amount be reduced to $141,224.00;
(xiv)For the period ended 31 December 2003 the applicant’s GST net amount be reduced to $141,224.00;
(xv)For the period ended 31 March 2004 the applicant’s GST net amount be reduced to $141,224.00;
(xvi)For the period ended 30 June 2004 the applicant’s GST net amount be reduced to $141,224.00.
(b)With respect to the penalty imposed by the respondent pursuant to section 284-75 of Schedule 1 to the Taxation Administration Act 1953 (TAA) for a GST shortfall:
(i)For the period ended 30 September 2000 the penalty is reduced to nil;
(ii)For the period ended 31 December 2000 the penalty is reduced to nil;
(iii)For the period ended 31 March 2001 the penalty is reduced to nil;
(iv)For the period ended 30 June 2001 the penalty is reduced to nil;
(v)For the period ended 30 September 2001 the penalty is reduced to nil;
(vi)For the period ended 31 December 2001 the penalty is reduced to nil;
(vii)For the period ended 31 March 2002 the penalty is reduced to nil;
(viii)For the period ended 30 June 2002 the penalty is reduced to nil;
(ix)For the period ended 30 September 2002 the penalty is reduced to nil;
(x)For the period ended 31 December 2002 the penalty is reduced to nil;
(xi)For the period ended 31 March 2003 the penalty is reduced to nil;
(xii)For the period ended 30 June 2003 the penalty is reduced to nil;
(xiii)For the period ended 30 September 2003 the penalty is reduced to nil;
(xiv)For the period ended 31 December 2003 the penalty is reduced to nil;
(xv)For the period ended 31 March 2004 the penalty is reduced to nil;
(xvi)For the period ended 30 June 2004 the penalty is reduced to nil.
(c)The penalty imposed by the respondent pursuant to s.284-220 of Schedule 1 to the TAA be reduced to nil.
Applicant B – Income Tax – Application 2007/1966-1969
1.This matter is remitted to the respondent with a direction that the decision under review be varied as follows:
(a)With respect to the applicant’s income tax liability:
(i)The applicant’s taxable income for the year ended 30 June 2001 is $53,304;
(ii)The applicant’s taxable income for the year ended 30 June 2002 is ($1,195,341);
(iii)The applicant’s taxable income for the year ended 30 June 2003 is nil;
(iv)The applicant’s taxable income for the year ended 30 June 2004 is ($4,365,239).
(b)With respect to the penalty imposed by the respondent pursuant to section 284-75 of Schedule 1 to the TAA for an income tax shortfall:
(i)For the year ended 30 June 2001 the penalty is reduced to nil;
(ii)For the year ended 30 June 2002 the penalty is reduced to nil;
(iii)For the year ended 30 June 2003 the penalty is reduced to nil;
(iv)For the year ended 30 June 2004 the penalty is reduced to nil.
(c)The penalty imposed by the respondent pursuant to section 284-220 of Schedule 1 to the TAA be reduced to nil.
Applicant C – Income Tax – Application 2007/2905-2910
1.This matter is remitted to the respondent with a direction that the decision under review be varied as follows:
(a)With respect to the applicant’s income tax liability:
(i)The applicant’s taxable income for the year ended 30 June 1999 is $61,000.00;
(ii)The applicant’s taxable income for the year ended 30 June 2000 is $449,832.00;
(iii)The applicant’s taxable income for the year ended 30 June 2001 is $174,443.00;
(iv)The applicant’s taxable income for the year ended 30 June 2002 is $148,000.00;
(v)The applicant’s taxable income for the year ended 30 June 2003 is $148,000.00;
(vi)The applicant’s taxable income for the year ended 30 June 2004 is $456,978.00.
(b)With respect to the penalty imposed by the respondent pursuant to section 284-75 of Schedule 1 to the Taxation Administration Act 1953 (TAA) for an income tax shortfall:
(i)For the year ended 30 June 1999 the penalty is reduced to nil;
(ii)For the year ended 30 June 2000 the penalty is reduced to nil;
(iii)For the year ended 30 June 2001 the penalty is reduced to nil;
(iv)For the year ended 30 June 2002 the penalty is reduced to nil;
(v)For the year ended 30 June 2003 the penalty is reduced to nil;
(vi)For the year ended 30 June 2004 the penalty is reduced to nil.
(c)The penalty imposed by the respondent pursuant to section 284-220 of Schedule 1 to the TAA be reduced to nil.
........................................................................
The Honourable R Nicholson, Deputy President
Catchwords
INCOME TAX – GST – accountant sole shareholder and director of two proprietary companies- second company incorporated to act as manager of low cost government loan program- whether second company agent of first company – whether first company claimed deduction for superannuation – whether first company fully paid interest expense – quantum of money received by first company from government agencies – whether accountant’s income should include deemed dividends – whether penalties for ‘intentional disregard’ appropriate – whether penalties should be applied – whether penalty uplift appropriate - remission
Legislation
Income Tax Assessment Act 1936 ss 44(1), 264, Division 7A – ss 109C, 109C(3), 109D, 109J, 109K, 109N(1)(a) to (c), 109RB, 109Y, 109Z, 109ZB, 262A(1)
Superannuation Guarantee Charge Act 1992
Income Tax Assessment Act 1997 s202-45(g)(i)
Taxation Administration Act 1953 Schedule 1 Part IV-25, ss284-80, 284-90, 284-75(5), 284-90(1), 284-220(1)(a), 284-525, 289-20,298-20,
Cases
Re Optimistic Group Pty Ltd v FCT [2010] AATA 782
Hart v Commissioner of Taxation [2003] FCAFC 105
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164
Secondary Materials
PS LA2006/2
Macquarie Dictionary, 5th Ed.
REASONS FOR DECISION
The Honourable R Nicholson, Deputy President
5 March 2014
The applications
The following matters come before the Tribunal by way of rehearing and comprise:
(a)2007/1955 – Applicant A’s applications regarding assessments for GST liability and penalties for the period between September 2000 and June 2004;
(b)2007/1956-1961 – Applicant A’s applications regarding income assessment of income tax for the years ending 30 June 2000 to 30 June 2004;
(c)2007/1966-1969 – Applicant B’s applications regarding assessment of income tax for the years ending 30 June 2000 to 30 June 2004;
(d)2007/1964 – Applicant B’s application regarding assessments for GST liability and penalties for the periods between July 2000 to June 2004; and WT2000/2905-2910 – Applicant C’s applications regarding his personal income tax assessments and penalty assessments for the years ending 30 June 2002, 30 June 2003 and 30 June 2004.
Numerous objections were filed by all the applicants relating to each of the applications.
By letter dated 8 October 2007 addressed to the Tribunal, certain concessions were made by the respondent. On 21 January 2011 the Tribunal varied the objections decisions in line with those concessions.
On 21 January 2011, the Tribunal determined the applications against the applicants, save for certain matters which were the subject of the concessions.
On 3 September 2012 the Federal Court allowed the applicants’ appeals and remitted the applications to the Tribunal for rehearing. The remission does not affect the parts of the applications which were upheld by the Tribunal by reason of the respondent’s concessions, so that those issues no longer arise for determination.
Uncontentious factual background
In the respondent’s submissions the uncontentious factual background is set out as follows.
Applicant C is the sole shareholder and director of Applicant B and Applicant A. He is an accountant by profession who, until about 2009 was in public practice. His firm, Applicant A, provided a range of accounting services including tax, audit and business advisory services. The clients of the practice included companies, private individuals, Government Departments and other bodies, notably the Medical Board for which Applicant A provided services as the Registrar.
In addition to Applicant A and Applicant B, Applicant C was a director and shareholder of numerous other private companies, some of which his brother was also a director and shareholder.
Between about 1994 and 2001, in conjunction with Company F, a company that Applicant C was not an associate of, Applicant C was involved through his accounting firm in providing services to the State Government in managing the Company A loan program, a low cost home loans program offered by the State.
In 1996, Applicant B was incorporated as a special purpose vehicle to act as the management vehicle for Company A. The shares were originally held by Applicant C and two people associated with Company F, Person C and Person D.
By mid-2002, Company F were no longer participants in Company A and Applicant C had become the sole shareholder and director of Applicant B.
The range of services provided to the State by Applicant B included back office accounting services, budgeting, development of policies and procedures and various other management services. Applicant B was appointed the agent of Company A and its associated entity, Company A Support, for the purpose of undertaking those tasks.
In addition, Applicant A provided, on a fee for service basis, occasional specific professional services, including consulting work, stress testing of the loan book.
The arrangements governing Company A were the subject of extensive contractual documentation renewed on several occasions over more than 10 years and most recently renewed in June 2003, after Company F were no longer involved. Applicant B was a party to those documents, as was Applicant C as guarantor. Applicant A was not.
In May 2004 the respondent commenced an audit of the three applicants. Those audits were part of a series of investigations conducted by the respondent in accordance with his legislative obligations.
At the time of the audits commencing the applicants were not up to date with the filing of their income tax returns and business activity statements (‘BASs’).
The audits involved a variety of investigative processes including numerous interviews, reviews of the records provided by the applicants as well as third party enquiries, over an extensive period. They covered, relevantly income tax and GST payments in the 2001, 2002, 2003 and 2004 tax years for each of the three applicants.
The three audits into Applicant A, Applicant B and Applicant C were ultimately concluded by mid 2006.
Assessments for outstanding tax and penalty were issued in July and August 2006.
The applicants objected to those assessments in August to October 2006.
The applicants say that there are a number of factual disputes that are addressed later in the submissions.
EVIDENCE
Section 37 documents – the T-Documents
Sixteen volumes of Section 37 documents were filed in accordance with the provisions of Section 37(1) of the Administrative Appeals Tribunal Act (AAT Act), as modified by section 14ZZF(1) of the Taxation Administration Act (TAA).
Applicant C
Applicant C is the sole director of Applicant B and Applicant A and an applicant in his own right. His evidence-in-chief comprised 7 written witness statements together with some oral evidence-in-chief concerning documents tendered by the applicants.
Applicant C was cross-examined extensively. That focused on matters concerning his general credibility, the penalties imposed by the respondent upon the applicants (in particular the applicant’s conduct during the course of the respondent’s audits, which the respondent decided warranted a 20% uplift in penalties imposed) and the issue concerning whether Applicant B acted as agent for Applicant A (“the agency issue”). He was also cross-examined about a loan agreement between Company B and Company C and a loan agreement between Company C and himself, each dated 1 March 2005.
The applicants submit that there were a number of significant issues about which Applicant C was not cross-examined and identified the following:
(i)the process of information contained in source documents being entered into Applicant A’ practice management computer system;
(ii)the print-outs of information extracted from the practice management computer system concerning interest expenses and revenue derived in relation to the Company A Housing Scheme;
(iii)tab 10 of Exhibit A3 constituting copies of all invoices rendered to and paid by the Ministry of Housing and Works for the years ended 30 June 2001 to 30 June 2004;
(iv)Applicant C and his brother, Witness A, lending funds to Company C and Company C in turn lending funds to Company B, during the period to 21 November 2003, the financial statements of Company C and Company B recording such loans and the repayment of such loans; and
(v)Applicant C repaying a loan made to him by Company C and the financial statements recording the reducing loan balance.
The respondent submits that during the course of his cross-examination Applicant C was evasive, belligerent and rude to counsel and the Tribunal. Further, that he refused to answer questions on issues he didn’t regard as relevant, he shouted and attempted to engage in argument with counsel, he failed to listen to questions and was prone to wild allegations and assertions about the respondent and his officers, which assertions were utterly without merit or foundation. The respondent submits that Applicant C’s behaviour demonstrated an immature attitude to the Tribunal and its processes and was deliberately obstructive. Further the respondent submits that Applicant C’s belligerence in the conduct of the proceedings was demonstrative of his general attitude to his affairs, namely, his failure to comply with his taxation obligations, his failures of record keeping, his use of Applicant A and Applicant B’s funds for private purposes, his cavalier attitude to bouncing cheques meant to pay the respondent for his many obligations and his habit of promising to meet deadlines which were never kept. A further aspect referred to by the respondent was Applicant C’s lack of insight into the relevance of his truthfulness and honesty and being honourable in his dealings. It is submitted that he failed to understand that his integrity was at the core of the proceedings. Evidence regarding integrity is said by the respondent to include:
(a) evidence regarding his conviction for fraud;
(b)the findings by a Judge in the District Court proceedings brought by his former partner;
(c)evidence of his failure to honour cheques made payable to the respondent on 50 occasions;
(d)evidence of his attempt to avoid the need for tendering of the management contract for Applicant B when there was a change in the operational structure which may otherwise have called for tendering.
The respondent concludes by submitting that it is open to the Tribunal to find that Applicant C was neither honest nor frank in his dealings with the respondent and in the course of these applications.
The applicants say that much of these submissions constitute “unsubstantiated hyperbole”. So far as the submissions of the respondent relate to Applicant C’s cross-examination it is said not to be borne out by the transcript. The applicants submit that over the course of three days of cross-examination, Applicant C did his best to answer the questions put to him and made proper concessions where appropriate. Nonetheless, the applicants’ case accepts that Applicant C expressed his frustration with particular lines of questioning.
It is submitted for the applicants that Applicant C should be seen as a witness who exhibited moments of tiredness and frustration.
In relation to the issues going to integrity, the applicants submit that Applicant C properly accepted that he had been convicted on a charge of fraud. Further, he did make reference to findings made by the Judge in the District Court of Western Australia and that he had been criticised but no evidence was given as to the reason for the criticism. Further, that there was no evidence as to the exact number of bounced cheques and hence that evidence had no bearing on Applicant C’s general credibility.
The applicants say that the respondent’s suggestion that Applicant C lacked integrity by not seeking to cause Applicant A to become a party to a contract concerning the Company A Housing Scheme, so as to avoid the possibility of that contract being put back out to tender, is wholly unclear. Further the applicants’ case says that the respondent erroneously submitted that Applicant C could not recall additional information concerning the loan agreement between Applicant B and Applicant A.
Overall the applicants’ case says that Applicant C presented as a credible witness who gave plausible evidence, both in chief and in cross-examination.
I accept that Applicant C expressed frustration with particular lines of questioning and exhibited moments of tiredness and frustration during the course of his long cross-examination. I accept that there is evidence calling into question his integrity. However, I do not consider that Applicant C could be found to be neither honest nor frank in his dealings during the course of the hearing of the applications.
Witness B
Witness B gave evidence-in-chief constituted by written witness statement. He was also cross-examined. His evidence was only relevant to the issue of penalty.
Witness B assisted the applicant Applicant C since 2000 and remains closely associated with him, working for a company owned by Applicant C’s sons.
The applicants submit that Witness B presented as a credible witness. He said to have corroborated Applicant C’s evidence that Mr Claude Bei had directed Applicant A and Applicant B to prepare and lodge revised income tax returns (“ITRs”) and BASs on the basis that Applicant B derived income from the Company A Housing Scheme not Applicant A. This is relevant to the issue of penalties.
The respondent submitted that Witness B’s evidence concerning the applicants’ record keeping was inconsistent with Applicant C’s evidence and internally inconsistent. The applicants’ dispute the existence of an inconsistency.
Witness A
Witness A is the brother of Applicant C but has no personal interest in the outcome of the proceedings.
His evidence-in-chief consisted of a written witness statement on which he was cross-examined and re-examined. He is a director of Company B and Company C.
The respondent submits that his evidence, relevant to the existence of loan agreements for the 2004 tax year in proceedings WT2007/2905-2910, and relating to the execution of the loan agreement, ought to be given no weight because the applicant, Applicant A, is a company of which the sole director and shareholder is Applicant C.
The applicants submit that the evidence of Witness A should be accepted.
In the circumstances considered later in these reasons, I have accepted his evidence.Mr Claude Bei
Mr Bei was the Australian Tax Office auditor who undertook the audits of the applicants, resulting in the assessments issued against them which are the subject of these applications.
Mr Bei provided five witness statements as his evidence-in-chief. He was cross-examined and re-examined.
The respondent submits that Mr Bei was a careful witness who attempted to answer to the best of his ability some confused and confusing questioning. The applicants submit that Mr Bei was defensive, readily becoming flustered and frequently giving speeches (often critical of Applicant C) rather than answering direct questions.
The respondent submits that much of the cross-examination of Mr Bei was directed at the conduct of the audits. Such cross-examination can only be relevant to the imposition of the uplift component of the penalty and it is not relevant to the assessments which were issued and are now the subject of these review proceedings.
The applicants submit that the content of much of Mr Bei’s evidence and cross-examination reflects poorly on his credibility and relies on the following circumstances:
(i)Initially, Mr Bei unequivocally stated that he only used, or threatened to use a notice requiring the production of documents pursuant to s 264 of the Income Tax Assessment Act 1936 (“ITAA 36”) as a last resort but then gave evidence of using it as a threat to compel the production of documents by a particular date .
(ii)Mr Bei asserted he had told Applicant C not to lodge amended BASs or ITRs whilst the audits were in progress but he had made no note of this significant statement.
(iii)Reference is made to Mr Bei’s difficulty over evidence as to how he had concluded that was an “income understatement” for the year ended 30 June 2002.
(iv)Further, Mr Bei refused to admit that his methodology was inconsistent with reasoning set out in the audit report and repeatedly misstated the plain effect of what he had written in the audit report.
I accept that Mr Bei was both a careful witness but was also defensive, open to become flustered, frequently fallen to giving speeches and not always convincing.
Applicant A – GST - application 2007/1955
This application concerns GST assessments for periods from December 2000 to June 2004; that is, for 24 periods.
The applicant Applicant A, is a company of which the sole director and shareholder is Applicant C. It was an accounting firm that provided business advisory, audit, tax accounting services to clients. It had around 30 employees in October 2000, but at other times it appears to have been a higher figure. Its clients included private clients, government agencies and other clients including the Medical Board. It also provided professional services, for example, the preparation of tax returns, BASs and the provision of other services like stress testing of the loan book, on a fee for service basis to Company A, the sole client of Applicant B.
An audit of Applicant A commenced in May 2004 and concluded in June 2006. Numerous amended BASs were lodged by Applicant A after commencement of the audit. The respondent submits that the BASs lodged after the commencement of the audit were disregarded by the respondent in making its assessments. However, that cannot be accepted because the respondent assessed Applicant A on the GST liability disclosed by Applicant A BASs lodged on 13 December 2004, after the audit commenced. The audit determined that there was a shortfall in GST on the BAS lodged and penalties were imposed at the level of 75% for intentional disregard.
The respondent submits that the issue appears to be the question of whether all the tax payable was paid by what the applicants call the “Applicant A Group”. The respondent says that no attempt was made by the applicants to identify with any precision what was referred to as the group.
The respondent then refers to the evidence that was led by the applicants on the income of Applicant A. Applicant C gave evidence:
“Exhibited at tab 10 … are copies of all invoices rendered to and paid by the Ministry for the years ended 30 June 2001 to 30 June 2004.”
Applicant C defined “Ministry” as “The Ministry of Housing and Works”. Of the 809 invoices included at tab 10, 119 are addressed to the Ministry, fewer than 15%. The remainder of the invoices comprise invoices from Applicant A or Applicant B to various different entities including Company A, Company A Housing, Applicant B Trust, Company F, Applicant B and Company A Loans Limited. The respondent says the evidence in relation to these invoices is lacking necessary explanation and detail. Furthermore the respondent states:
(a)The evidence of Applicant C simply cannot be accepted as being a complete explanation of income derived by the two corporate entities;
(b)The tax invoices display no discernible trend or consistency as to which types of charges were levied to which of the entities. Even if accepted, there is no evidence on this question that Company A Housing, Applicant B Trust, Company A Loans Limited and “the Ministry” are in effect the same entity;
(c)In financial year 2003 a large number of invoices were issued by Applicant B to itself, yet no explanation is offered for this in the evidence;
(d)From financial year 2002 the invoices to the Ministry, Company A Housing Trust and Company A Loans Limited were generally rendered by Applicant B, but in financial year 2001, they were all rendered by Applicant A, as to which no explanation is offered in evidence by Applicant C;
(e)The evidence in relation to these invoices illustrates the disarray and confusion inherent in the records of the various entities, as found by Mr Bei during the course of the audit, so that the Tribunal cannot be satisfied that these invoices in fact represent the entirety of the income of Applicant B, or any other entity, derived from the Company A business; and
(f)None of the invoices issued by Applicant B suggest in any way that they are issued as agent for Applicant A.
The Agency Issue
The applicants contend that Applicant B received all its income as agent for Applicant A. The respondent states the only evidence led by the applicants to support this contention was Applicant C’s own statements; no other witnesses were called who could have given relevant evidence. The respondent submits the argument cannot assist Applicant A because:
(a)It fails to account for the non-Applicant B portion of Applicant A’s income, being fees for accounting services rendered to clients other than Applicant B;
(b)It cannot apply to professional fees rendered directly by Applicant A for business consulting and other work performed, like stress testing, by Applicant A in respect to the Company A loans; and
(c)The advice which the applicants rely on does not address the question of GST liability but only income tax liability.
The applicants say that Applicant B was party to the agreements with Company A Loans Ltd, Company A Support Pty Ltd, Company A Bonds Ltd and the Ministry of Housing (later renamed the Department of Housing and Works) (together, “Company A/Company AA”) which provided for Applicant B to manage schemes relating to the provision of housing (or finances for housing) to low income earners, known as the Company A Housing Scheme and the Company AA Loan Scheme (the “Company A/Company AA Contracts”).
Applicant B and Applicant A contend that Applicant B was party to the Company AA/Company A Contracts, provided services under the Company A/Company AA Contracts and received payments of remuneration from Company A/Company AA for providing those services, as agent for a joint venture (the “Joint Venture”) between Applicant A and Company F until 30 June 2002 and as agent for Applicant A thereafter.
The applicants submit in the present circumstances, the issue is not whether the terms of the Company A/Company AA Contracts contemplate that Applicant B was a party to those contracts as agent for Applicant A. So long as the terms of the Company A/Company AA do not manifest an unwillingness on the part of Company A/Company AA to treat as the party to the Company A/Company AA Contracts anyone on whose behalf Applicant B contracted as agent, the terms of the Company A/Company AA Contracts have no relevance to the question of whether Applicant B became party to those contracts in its own right or as agent for Applicant A. Instead, the question is to be determined by whether the Joint Venture and Applicant B, and subsequently Applicant A and Applicant B, both intended for Applicant B to enter into the Company A/Company AA Contracts as agent for the Joint Venture, and subsequently Applicant A.
In summary, between 1995 and early 2000, the Joint Venture performed services for Company A/Company AA under predecessors of the Company A/Company AA Contracts. In late 1999, in advance of the then existing contract expiring, Company A/Company AA indicated a desire to have a single contracting party, rather than the Joint Venture, awarded the Contract. Applicant B was incorporated so as to enable the Joint Venture to tender for the renewed contract and fulfil Company A/Company AA’s desire. However, Applicant B was intended to be nothing more than an agent for the Joint Venture. Later, in 2002, the Joint Venture ceased and Applicant A became the sole principal for Applicant B.
The applicants contend that Applicant B was to be a nominee of some sort for the Joint Venture was made clear by the Response to Tender (“RFT”) which led to Applicant B being awarded the first of the Company A/Company AA Contracts. In particular:
(i)first page of the RFT described Applicant A and Company F as “Alliance Members”. The RFT makes numerous other references to the “Alliance”: for example, on pages 24, 25, 26, 27 and 28;
(ii)page 1 of the RFT described Applicant B “through shareholders, Company F and Applicant A” as the current “Applicant B” and page 27 of the RFT stated that “the Alliance of Applicant B has been the Scheme of Company A Housing Trust as however and its associated entities since March 1995” – although, at the time the RFT was submitted, it was the Joint Venture that was the Scheme, which had been the case since 1995;
(iii)page 9 of the RFT referred to Applicant B’s “extensive experience in loan settlements and documentation”;
(iv)page 10 of the RFT stated that “Applicant B has, through a retail network, implemented procedures in the form of manuals to assist staff in dealing with loan settlements and documentation”; and
(v)the RFT contains numerous references to both Company F and Applicant A and services provided by Company F and Applicant A.
In addition to these matters, the applicants submit there is further direct corroborative evidence of the existence of a relationship of principal and agent between the Joint Venture and Applicant B, and subsequently Applicant A and Applicant B, being the very conduct in issue in these proceedings – Applicant B lodging BASs and ITRs on the basis that it Company A/Company AA Contracts in its capacity as agent for the Joint Venture, and subsequently Applicant A. This began during the year ended 30 June 2001, a time when Applicant B was controlled jointly by Applicant A and Company F – not solely by Applicant C.
The applicants also say that given that the parties which Applicant B contends were the undisclosed principals – being the Joint Venture and Applicant A – were corporations, and therefore (like Applicant B) were subject to a flat rate of income tax and GST, there was no obvious incentive for Applicant B (or, for that matter, the Joint Venture and Applicant A) to misrepresent the position in BASs or ITRs. The lack of any obvious benefit from Applicant B (or the Joint Venture or Applicant A) misrepresenting the position in BASs or ITR’s supports the conclusion that BASs and ITR’s were prepared to reflect the true position.
Further, the applicants argue that there is nothing in the Company A/Company AA Contracts which manifests an unwillingness by Company A/Company AA to treat as a party to the Company A/Company AA Contracts either the Joint Venture or Applicant A, and there is no suggestion that Company A/Company AA otherwise manifested any unwillingness to treat the Joint Venture or Applicant A as party to the Company A/Company AA Contracts.
In relation to the respondent’s assertion that payments were being made by Company A/Company AA direct to Applicant A tells against a relationship of Agency, the applicants submit that the fact that Applicant A provided some services direct to Company A/Company AA is irrelevant because those services were additional services outside the scope of Company A/Company AA contracts. Therefore, they were not subject to the reasons which resulted in Applicant B being part to the Company A/Company AA contract.
The respondent’s submissions also address advice given by Norton & Smailes on 10 December 2004 in a letter to Applicant C of Applicant A. The advice relied upon a response to tender, the Applicant B contract apparently dated 1999, the Applicant B contract dated 3 June 2003 and explanations from Applicant C. The opinion of Norton & Smailes was that, based on the information which they had been supplied, “it is most likely that the correct characterisation of the arrangements is that the Applicant B managers derive the relevant fees paid under the contracts with Ministry as agent and trustee for the joint venture (partnership) parties and then subsequently for Applicant A”. The advice then continues by stating that the correctness of this position is supported by the way that the parties have treated the income in their tax returns and by the existence of Clauses 17 and 19 in the relevant contracts provided to us. Therefore, it appears to them that the parties have correctly reflected the legal situation in the returns lodged to date.
The advice then continues that if the respondent was not satisfied with that position further evidence of the correctness of the situation should be obtained. For example, they recommended that full statements and documents could be obtained from the Company F parties, the lawyers who were instructed to draft the various contracts, personnel from the Ministry who dealt with the matter etc.
The respondent submits that the advice of Norton & Smailes hinges on what they were told by Applicant C and in light of the general unreliability of his evidence and in light of what the audit found to be the actual position in respect to payments made by the Department of Housing and Works to both Applicant B and Applicant A, along with the abject failure of the applicants to follow the advice provided to them on what evidence would be necessary to support their position, the very basis of the Norton & Smailes advice is not proved and as a consequence the agency contention should be rejected.
It is the absence of proof which seems to me to be fatal to the contentions by the applicants that Applicant B was the agent of the joint venture. I consider that more probably than not Applicant C considered that Applicant B was the agent in the way he now contends for and in a way which he previously expressed to Norton & Smailes. The reality is, however, he brings his argument on the agency issue to the Tribunal without having taken the opportunity to collect additional evidence which may support his contentions or to explain why witnesses were not available. In the absence of such evidence the Tribunal is entitled to draw the inference that the evidence that may have been given by them would not be of assistance to the applicants. In my opinion, the absence of proof in relation to the agency issue beyond the evidence of Applicant C himself means that the contention for that issue is not made out.
Quantum of remuneration received from Company A/Company AA
Paragraphs 61 to 64 of the respondent’s final submissions address evidence concerning this issue.
However, the applicants submit that this is not an issue that arises in application 2007/1955. Applicant A was assessed for GST on the basis of the BASs lodged by it on 13 December 2004. The respondent did not assess Applicant A for GST on the basis that the remuneration paid by Company A/Company AA and therefore the value of the taxable supplies made under the Company A/Company AA contracts was greater than what Applicant A contends.
The applicants accept that it is the case that the respondent based other assessments that are disputed in other applications on a decision that the remuneration played by Company A/Company AA was greater than what Applicant B and Applicant A contend. Consequently this issue about the quantum of remuneration paid by Company A/Company AA under the Company A/Company AA contracts will be addressed later.
No GST Shortfall on a global basis
The respondent submits that there appears to be a question of whether all the tax payable was paid by what the applicants call the “Applicant A Group”. The respondent says that no attempt was made by the applicants to identify with any precision what was referred to as the group.
The respondent also states that the parallel argument of “Applicant A Group” is that there was no loss of GST on a global basis. The respondent says the basis for this argument is “entirely unclear”. He goes on to say that Applicant A was not a group for GST or income tax purposes. Further, that Applicant C admitted that he was aware of the respondent’s procedures in respect to grouping taxpayers and that no application was ever made by him or any entities associated with the applicants to be treated as a group.
Applicant A points to the fact that the total GST paid by a number of entities controlled by Applicant C (including Applicant A) did not materially change overall despite the lodgement of revised BASs for those entities. (i.e, there was no GST shortfall on a global basis) in relation to the issue of penalties.
Applicant A – Income Tax – Application 2007/1956-61
This application concerns income tax assessments of Applicant A for the years ended 30 June 1999 to 30 June 2004.
The Agency Issue
The Agency Issue has already been determined in accordance with the submissions for the respondent to the effect that the applicants’ contention for the existence of the Agency has not been made out.
Superannuation Expenses
The respondent submitted as follows.
In each of the tax years ending 30 June 1999 to 30 June 2004, increases in taxable income arose from the incorrect claiming of superannuation deductions. The superannuation defaults by Applicant A are set out in the Applicant A’s audit report. These defaults comprised:
(a)a failure to pay the statutory superannuation amount by the relevant date;
(b)a failure to pay the statutory superannuation amount to a complying superannuation fund, as defined under the Superannuation Guarantee Charge Act 1992; or
(c)a failure to make any payment on account of a statutory superannuation obligation.
The initial default identified following the commencement of the audit was that Applicant A had failed to make contributions for Applicant C and his wife, who were both employees of Applicant A. This was accepted by Applicant A in 2004 and was also accepted by Applicant C in cross-examination. On that basis alone the application must fail because this error on the part of Applicant A led to adjustments to income tax payable, along with penalties.
Applicant C also accepted in cross-examination that the analysis of superannuation default, as set out in Mr Bei’s audit reports for Applicant A and Applicant B was correct, but he then attempted to withdraw or qualify this acceptance.
Applicant C sought to rely on the fact that he did not undertake the payment of superannuation himself but rather Person A an employee of his did. This misses the point; regardless of who was employed by the applicant to undertake the work, the person who signed the income tax return and the employer have obligations which are theirs alone to meet.
Furthermore, Person A did not give evidence in these proceedings, despite Mr Williams opening his case on the basis that he would, and it is open to the Tribunal to draw the inference, consistent with the rule in Jones v Dunkel, that his evidence would not have assisted the applicant.
The applicants made submissions as follows.
During the relevant period, employers were able to claim deductions paid into employees’ superannuation funds if, and only if, certain conditions were satisfied. Further, at all material times employers who failed to provide their employees with a minimum level of superannuation support were required to pay a superannuation guarantee charge. Payments of the superannuation guarantee charge were not deductable.
The respondent determined that during each of the years ended 30 June 1999 to 30 June 2004, Applicant A had failed to provide the minimum superannuation support by the due date (described by the respondent as a “superannuation shortfall”), thereby rendering Applicant A liable to pay the superannuation guarantee charge. Of itself, this had no impact upon the assessment of Applicant A’s income tax liability, notwithstanding that this is the only matter addressed in the respondent’s final submissions.
The respondent also determined (or presumed) that Applicant A had claimed deductions equating to the total amount of superannuation that it was required to pay for its employees – such that the deductions claimed by Applicant A exceeded the deductions to which it was entitled by the amount of the “superannuation shortfall”. The respondent amended Applicant A’ income tax assessments to increase Applicant A’ taxable income in the amount by which the respondent decided that Applicant A had over claimed its deductions for superannuation expenses. In effect, the respondent disallowed deductions for superannuation expenses insofar as they exceeded amounts which, for each year, the respondent considered to be allowable deductions.
The applicants submit that the fact is that Applicant A did not claim the deductions for superannuation expenses that were attributed to it by the respondent. Consequently, the respondent’s contention that Applicant A claimed deductions for superannuation to which it was not entitled are based upon a false factual premise. This submission has not been disputed by the respondent.
In cross-examination Mr Bei accepted it was appropriate for deductions in the lesser amounts to be claimed by Applicant A. When the above position was put to him, his responses varied. It appears he conflated superannuation with salaries/wages.
In my opinion the applicants are entitled to have their assessment varied to the extent of any amount wrongly disallowed for superannuation expenses.
Interest Expense in year ended 30 June 2002
For the year ended 30 June 2002 an increase in taxable income arose from Applicant A claiming a deduction for interest expense in that year which, in the respondent’s submission, had been claimed by the wrong entity. The claim was for a deduction in the amount of $549,077 and the respondent contends that $401,072 is not deductible.
Other than being asked whether Exhibits A9 and A10 were provided to Mr Bei during the course of the audits, Applicant C was not cross-examined about Applicant A’s records relating to interest expenses incurred in the 2002 year or the verifying documentation received from third parties.
The applicants submit that Applicant A’s evidence supports the conclusion that Applicant A incurred deductable interest expenses in the total amount of $549,077 during the 2002 year and, to the extent that deduction was disallowed, Applicant A’s income tax assessment for that year was excessive.
The respondent’s position in response is said by the applicants to be wholly unclear:
(a)as noted above, the audit report of Applicant A does not contain one word about a partial disallowance of a deduction claimed for interest expenses incurred in the 2002 year;
(b)similarly, the respondent’s reasons for rejecting Applicant A’s appeal do not contain one word about a partial disallowance of the deduction for interest expenses claimed by Applicant A for the 2002 year;
(c)paragraph 3 of the respondent’s SFC pithily states that, during the course of the audit, the respondent “formed the view that [Applicant A] had claimed a deduction for interest in the amount of $401,072 in the year of income ended 30 June 2002 in circumstances where such a deduction was not allowable in that year”;
(d)during the course of Applicant C’s cross-examination, counsel for the respondent put to Applicant C that the $401,072 portion of the interest deduction which the respondent disallowed was the difference between a figure of $148,005 described as “Interest Paid” in a document headed with Applicant A’s name and titled “Trading Profit and Loss Statement as at 30 June 2002”, in which most of the expenditure items (including the $148,005 “Interest Paid” item) were ticked, and the $549,077 deduction claimed in Applicant A’s ITR. Much emphasis was placed on counsel’s suggestion that the ticking of expenditure items in that document indicated that the document had been audited and the auditor had been satisfied with the accuracy of the quantum of each expenditure item. However, Applicant C stated that he did not know who had made the markings on the document and had not had the document audited. Further, Mr Bei stated that neither he nor anybody else at the Australian Taxation Office made those markings;
(e)when initially cross-examined about the reason for deciding that Applicant A’s income should be increased by $401,072, Mr Bei could not remember why he had reached this conclusion. When the respondent’s SFC was then put to him, Mr Bei claimed to recall that he had partially disallowed Applicant A’s claimed interest deduction because Applicant A had claimed an interest deduction for expenses incurred by another entity. The next day, Mr Bei changed his story and asserted that he recalled that a deduction for interest in an amended ITR was disallowed to the extent that it was higher than that claimed in an earlier ITR because Mr Bei had not seen any documentation verifying the higher expense. Ultimately, Mr Bei’s final position was that the only reason for partially disallowing the claimed interest deduction was a lack of evidence supporting the deduction insofar as it exceeded the sum of $148,005; and
(f)the respondent’s final submissions adopt the first explanation given by Mr Bei (being that, insofar as the interest deduction exceeded $148,005, it related to interest expenses incurred by another entity), which Mr Bei disavowed: paragraphs 75 and 76 of the respondent’s Final submissions.
The applicants submit that whether or not Mr Bei sighted sufficient verifying documentation during the course of the audit to satisfy himself that the full claimed deduction of $549,077 was allowable is not to the point. The issue is whether the Tribunal is satisfied (on the balance of probabilities) on the evidence adduced in these proceedings that a deduction of $549,077 for interest and expenses incurred by Applicant A during the 2002 year was allowable.
The applicants submit the Tribunal should so find because:
(a)Applicant A’s practice management computer system (the “System”) records Applicant A as having incurred interest expenses in the amount of $549,076.82 during the 2002 year. This came about as a result of Applicant A’s employees entering information into the System by reference to source documents. Applicant C was not cross-examined about the process utilised to enter information into the System or the integrity of the information currently contained within the System. There is no reason to doubt the accuracy of information contained within the System.
(b)Applicant A tendered a document provided by Macquarie Bank recording that, during the 2002 year, Applicant A had incurred some of the interest expenses recorded in the System; and
(c)Applicant A also tendered an email sent to Applicant C by Company G recording the interest that had been received by Company G for the 2001 to 2004 years. Whilst Applicant A is not identified in the email as the party that incurred the interest expense, the figure for the 2002 year corresponds with an entry in the System. Also, the figures set out in the email for the 2001, 2003 and 2004 years were included in the deductions claimed by Applicant A for “Interest expenses within Australia” in Applicant A’ ITRs for each of the 2001, 2003 and 2004 years. Those claimed deductions (including the claim for a deduction for interest charged by Company G) were allowed, in full, by the respondent.
Consequently, the applicants submit that the entire $549,077 deduction for interest expenses claimed by Applicant A in the 2002 year was allowable. The respondent’s partial disallowance of that deduction resulted in Applicant A’s interim tax assessment being excessive in the amount of $401,072.
I am persuaded by the applicants’ submissions that this is so; that is, Applicant A’s interim tax assessment was excessive in the amount of $401,072.
Years Ended 2003 and 2004
This issue has not been addressed in the respondent’s final submissions.
Applicant A made a tax loss during the year ended 30 June 2002. Consequently, Applicant A was entitled to, and did, claim a deduction for that tax loss in each of the years ended 30 June 2003 and 30 June 2004.
Mr Bei accepted that the only reason why the respondent did not allow deductions for carried forward tax losses was the respondent’s conclusion that there was no tax loss in the 2002 year, and there was no suggestion that any of the other criteria for the carrying forward of tax losses were not satisfied.
It follows a tax loss from the 2002 year can be carried forward and deducted from the net taxable income that would otherwise have been derived by Applicant A in the 2003 and 2004 years.
Consequently, Applicant A’s assessments were excessive in the following amounts:
(i)2003: $104,443; and
(ii)2004: $323,703
Quantum of Remuneration Received from Company A/Company AA
The amendments made to Applicant A’s income tax assessments do not include any adjustment to the amounts returned in Applicant A’s ITRs as revenue received from Company A/Company AA. Consequently, the issue of the quantum of the remuneration that was received from Company A/Company AA – which arises from adjustments to Applicant B’s assessments for GST and income tax, which are addressed below does not arise in 1956-61.
Applicant B– GST Application 2007/1964
This application relates to 16 quarters of GST assessments in the period September 2000 to June 2004.
Applicant B had a poor lodgement history with the respondent, being a late lodger or non-lodger of BASs. During the course of the audit numerous amended BASs with different figures were lodged by the applicants.
The audit determined that there was a shortfall in BASs, and penalties were imposed at the level of 75% for intentional disregard, plus an uplift for hindrance during the course of the audit. The total of BAS adjustment was $1,869,597.1 and the total penalty $1,682,637.38.
The Agency Issue
This has already been determined above to the effect that the applicants’ case has been found not to have been made out.
Quantum of remuneration received from Company A/Company AA
The respondent determined that the remuneration that was paid by Company A/Company AA for services performed pursuant to the Company A/Company AA Contracts in each of the years ended 30 June 1999 to 30 June 2004 was greater than that disclosed by Applicant B or Applicant A. As a result, the respondent amended Applicant B’s assessments of GST and income tax.
The applicants contend that the total amount paid by Company A/Company AA was:
(a)for the year ended 30 June 2001: $1,129,374 plus GST (a total of $1,242,311);
(b)for the year ended 30 June 2002: $1,340,639 plus GST (a total of $1,474,703);
(c)for the year ended 30 June 2003: $4,043,984 plus GST (a total of $4,448,382); and
(d)for the year ended 30 June 2004: $5,648,975 plus GST (a total of $6,213,872).
The applicants adduced evidence of the amount of remuneration that was paid by Company A/Company AA:
(a)The applicants tendered all of the invoices rendered to and paid by Company A/Company AA during the years ended 30 June 2001 to 30 June 2004; and
(b)The applicants tendered printouts from Applicant A’s practice management computer system which recorded the quantum of remuneration paid by Company A/Company AA during each of the years ended 30 June 2001 to 30 June 2004 and Applicant C explained how that information came to be entered into the system.
Neither Applicant C, nor Witness B, was cross-examined on any of that evidence.
In the respondent’s final submissions, the respondent seeks to question the invoices that were tendered by Applicant B and Applicant A. The applicants say it is not open to the respondent now to do this. It was open to the respondent to put the questions raised in the final submissions to Applicant C in cross-examination. Applicant C may well have been able to provide explanations if asked about those matters. However, having failed to do this, it is not now open to the respondent to challenge that aspect of Applicant C’s evidence or for the Tribunal to make findings contrary to Applicant C’s evidence.
Mr Bei asserted in cross-examination that the source of the figures comprising the amounts which the respondent determined had been paid by Company A/Company AA was information received from Company A/Company AA. Mr Bei accepted that all oral communications he had with representatives of Company A/Company AA would have been recorded in a file note, and that all such notes and any written communications would have been retained by him. However, Mr Bei could not identify any documents from which he got the figures that he included in his audit report - although he accepted that the spreadsheet contained in Exhibit R7 was not the source of those figures.
Mr Bei also gave evidence to the effect that, at the conclusion of the audits, all hard copy documents that he had were boxed and stored in a basement, and a complete record of all electronic documents received or created during the course of the audits was saved on the ATO’s computer system. All of those documents were given to an ATO legal services officer to review and determine what went into the “T-documents”. However, no document constituting or recording a communication from Company A/Company AA recording the amounts which the respondent determined were paid by Company A/Company AA has been included in the “T-documents” for any of the applications.
There are only two inferences which are open to be drawn:
(i)Mr Bei was mistaken, and Company A/Company AA did not, in fact, advise Mr Bei that Company A/Company AA had paid any amounts different to what was claimed by Applicant B and Applicant A; or
(ii)Company A/Company AA did advise Mr Bei of the quantum of remuneration paid, but the respondent decided not to include any documents constituting or recording such advice in the “T-documents”.
The applicants submit either inference supports Applicant B’s and Applicant A’s position. If the former inference is drawn, there is no basis whatsoever for doubting Applicant C’s evidence (and the documents tendered by Applicant B and Applicant A). If the latter inference is drawn, the Tribunal ought also infer that documents constituting or recording advice from Company A/Company AA would not have assisted the respondent.
The applicants therefore submit that, consequently, Applicant C’ evidence (and the documents tendered by Applicant Band Applicant A) ought to be accepted.
Furthermore the applicants submit that where the Tribunal concludes that Applicant B was not acting as agent for the Joint Venture and subsequently for Applicant A, as it has done, then Applicant B’s assessments of GST are excessive to the extent that they are based upon a determination of the amounts paid by Company A/Company AA that exceeds the actual amounts that were paid.
I agree with the applicants’ submissions.
APPLICANT B– INCOME TAX – APPLICATIONS 2007/1966-1969
These applications involve income tax assessments of Applicant B for the periods ended 30 June 2001 to 30 June 2004.
The Agency Issue
The agency issue has been determined against the applicants. There is, therefore, no basis for considering that Applicant B’s income tax assessments were excessive because the income of Applicant B should have been assessed to the Joint Venture and then Applicant A.
Quantum of Remuneration received from Company A/Company AA
The applicants submit that for the reasons previously set out under this heading as it appears earlier in these reasons, the Tribunal ought to find that the remuneration paid Company A/Company AA was in the amounts contended for by Applicant B and Applicant A. Those submissions having been successful in relation to application 2007/1964 and not being otherwise opposed here, also succeed in application 2007/1966-1969. That is, Applicant B’s income tax assessments are excessive to the extent they are based upon a determination of the amount paid by Company A/Company AA that exceeds the actual amounts that were paid. I accept this submission.
Deemed Dividend – Application of Division 7A of the ITAA 36 to Loans Made by Applicant B to Applicant A
A further issue arose by reason of Applicant B showing in its financial statements for the relevant years, as current assets, loans from Applicant B to Applicant A. Applicant C was the sole director and shareholder of both entities at all times.
Section 44 of the Income Tax Assessment Act 1936 (ITAA 36) provides that the assessable income of a shareholder in a company includes all dividends paid to the shareholder. This includes deemed dividends.
Division 7A, section 109D ITAA 36, provides that when a private company makes a loan to an entity which is a shareholder in it and the loan is not repaid in the year in which it is made, the private company is deemed to have paid a dividend to the shareholder entity.
Under Division 7A either a payment (section 109C) or a loan (section 109D) made by a private company to a shareholder or an associate may potentially be a deemed dividend of the shareholder or associate in the year in which the payment or loan is made.
In the case of a payment under section 109C, the amount of the deemed dividend is equal to the amount of the payment, subject to section 109Y. Section 109Y limits the dividend to the amount of the private company’s distributable surplus, which means net assets plus dividends deemed to have been made under Division 7A for the year in question.
In the case of “loans” made under section 109D, the amount of deemed dividend is equal to the amount of the loan less any amounts repaid by the lodgement day.
The amount of a deemed dividend under section 109D is also subject to section 109Y.
Pursuant to section 109Z, a deemed dividend under Division 7A is taken, for the purposes of the ITAA 36, to be paid to the shareholder or associate as a shareholder of the private company out of the private company’s profits. This ensures that the deemed dividend is included in the shareholder’s assessable income under section 44(1) ITAA 36.
That deemed dividend is not frankable: section 202-45(g)(i) of ITAA 97, subject to section 109RB, and is not a fringe benefit: section 109ZB ITAA 36.
By reason of section 109J, a private company is not taken under section 109C to pay a dividend because of the payment of an amount to the extent that the payment discharges an obligation of the private company to pay money to the “entity”, i.e. the relevant shareholder or associate, and is not more than would have been required to discharge the obligation had the private company and the entity had been dealing with each other at arm’s length.
Under section 109RB the respondent has a discretion to disregard the operation of Division 7A, or to allow a deemed dividend to be franked. That discretion arises in circumstances where the deemed dividend under Division 7A is the result of an honest mistake or “inadvertent omission” by the recipient, the private company or any other entity whose conduct contributed to the result. No proposition is put in these applications that section 109RB ought to be relied on. To avoid the effect of Division 7A a taxpayer needs to have in place a valid loan agreement.
The respondent submits that the only loan agreements in place between Applicant B and Applicant A were undated and otherwise did not comply with the requirements of Division 7A. It is submitted that despite requests from the respondent, the applicants failed to provide information as to when the loan agreements were signed. Also, the applicants dealt with this failure, despite repeated requests from the respondent, at the hearing by Applicant C saying that he did not recall whether he had provided the additional information requested.
The applicants submit that the potential application of Division 7A of ITAA 36 to deem the payment of dividends by Applicant B to its shareholder, Applicant C, does not affect Applicant B’s taxable income or income tax assessments. It is submitted that the only income tax assessment that will be affected by the application of that division are Applicant C’s income tax assessment, dealt with below.
Applicant C – income tax – application 2007/2905-2910
“Deemed Dividend” Division 7A of the ITAA 36
Respondent’s Submission
Applicant C relies on two loan agreements, each dated 1 March 2005 for the 2004 year. Additionally there were undated loan agreements between Applicant B and Applicant A provided during the course of the audit and with no further information being provided in response to requests as to when the loan agreements were signed.
The only evidence from Applicant C on when he signed the documents is a supplementary statement signed on 18 December 2012. That was after he had had the benefit of Reasons for Decision in earlier proceedings before a Senior Member and many years after the respondent had first sought evidence of that nature. The respondent submits it should not be relied upon.
Whilst there is evidence from Applicant C’s brother Witness A that he believes he would have signed the loan agreement on the day it is dated, it is submitted for the respondent little weight should be attached to that evidence. Further, in assessing its weight the Tribunal should consider his patent lack of memory during cross examination, his evidence as to the circumstances in which he came to give the witness statement, the lack of company records, the lateness of that evidence in the context of these proceedings and the audit as a whole, noting in particular that the request for information as to the circumstances of the signing of the agreement was first made of Applicant C on 9 June 2005.
Additionally, the respondent submits that Witness A’s evidence on the execution of the loan agreement ought to be given no weight because of the following additional factors:-
(a)he didn’t prepare the witness statement, it was prepared by the solicitors for the applicants, sent to him by email along with the annexures and merely signed by him.
(b)he didn’t meet with or talk to anyone to provide a proof of his evidence before the statement was drafted so there is no way of knowing whether this is truly his evidence or the evidence that the applicants’ solicitors wanted him to give;
(c)whilst he “believed” that the company records for Company C were held by his accountant, he was far from sure;
(d)whilst he believed he checked with his accountant that there was a loan agreement in place, his memory was clearly hazy and he apparently didn’t check to ascertain that the document that he thought might be on the company records was in fact the same as the one forwarded to him by Solomon Bros, nor did he apparently check to see if there was a record in the company records of the date on which it was executed;
(e)he didn’t check that he had a copy of the loan agreement in his office, but relied on what was sent to him by the applicants’ solicitors;
(f)his memory of the events was clearly, and understandably, poor. It is therefore not credible that he can recall anything, in particular his evidence that he would have signed the loan agreement on the date it is dated, should not be accepted.
Furthermore, in light of Applicant C’s history of the provision of multiple revisions of company accounts and his filing of multiple BASs and income tax returns for each of the entities, as well as the matters set out above, the Tribunal should give no weight at all to Applicant C’s new explanations as to his income tax affairs. Specifically, the Tribunal should give no weight at all to the construction of Company C’s financial statements which show payments in reduction of principal and interest because they are unaudited and there are no underlying records or source documents which evidence what Applicant C has said in these financial statements. The mere production of financial statements does not of itself prove anything, particularly in light of the circumstances in this matter.
The respondent therefore submits that the position is that there are no relevant loan agreements provided in respect to the years ended 30 June 2002 and 30 June 2003.
Applicants’ Submission
The assessment of Applicant C’s income is excessive in the amount of the dividends which the respondent determined were deemed to have been paid by Applicant B to Applicant C.
The respondent amended Applicant C’s income tax assessments for each of the years ended 30 June 2002 to 30 June 2004 so as to increase Applicant C’s assessable income by the amounts of what the respondent determined were dividends deemed to have been paid to Applicant C by Applicant B.
The actual basis on which the respondent determined – and the basis on which the respondent contends in the proceedings – that the provisions of Division 7A operated to deem payment of dividends by Applicant B to Applicant C is unclear. The audit report for Applicant C provides no explanation whatsoever for the determination that Applicant B paid dividends to Applicant C (the report does not even state that the dividends are deemed dividends pursuant to Division 7A). The audit report for Applicant B expressed conclusions that Applicant B had made loans to Applicant A and, as sole shareholder of Applicant A, Applicant C derived a direct benefit from payments to Applicant A, with the result that s.109D of the ITAA 36 applied to deem the loans to be dividends paid to Applicant C. However, the quantum of the increases in Applicant C’s assessed income that was said to relate to the dividends from Applicant B are different to the quantum of the loans which the Applicant B’s audit report states are to be treated as deemed dividends pursuant to s.109D of the ITAA 36. The respondent’s SFC states only that the respondent “formed the view that [Applicant C] was assessable on deemed dividends from Applicant B…”.
In cross-examination, Mr Bei asserted that he did not base his calculation of deemed dividends on the loan balances in the table at page 71 of Applicant B’s audit report, but instead ascertained actual cash amounts transferred by Applicant B to Applicant A. Mr Bei accepted that this was not disclosed in the audit reports.
Notwithstanding that Mr Bei accepted that the amounts of the deemed dividends were not based upon the amounts recorded as loans in Applicant B and Applicant A’s financial records, the respondent’s final submissions refer only to Applicant B’s financial statements recording loans made by Applicant B to Applicant A and contend that a written loan agreement between Applicant B and Applicant A should not be accepted as authentic: paragraphs 95, 106 and 107. The respondent makes no attempt to explain how loans by Applicant B to Applicant A result in dividends being deemed to be paid to Applicant C pursuant to ss.109C or 109D of the ITAA 36. The respondent also makes no attempt to explain the inconsistencies in the positions asserted in Applicant B’s and Applicant C’s audit reports, Mr Bei’s cross-examination and the respondent’s final submissions.
As a result, the respondent leaves Applicant C and the Tribunal to guess the basis on which the respondent adopts the position that ss.109C or 109D (the applicable section is not even specified) operate so as to deem the payment of dividends by Applicant B to Applicant C.
Despite the inconsistencies in, and lack of clarity concerning, the respondent’s position, the following matters are clear:
(a)Applicant B made cash payments to Applicant A
(b)Applicant B’s and Applicant A’s financial statements recorded that those payments constituted loans made by Applicant B to Applicant A;
(c)Mr Bei could not say what those actual cash payments from Applicant B and Applicant A were;
(d)there was no evidence of what the actual cash payments were;
(e)Mr Bei did not know what Applicant A did with the moneys paid to it by Applicant B; and
(f)there has been no suggestion that Applicant B paid or lent any moneys to Applicant C.
Neither s.109C or s.109D of the ITAA 36 can operate so as to deem the payment of a dividend by Applicant B to Applicant C in the circumstances set out in paragraph 147 above.
Mr Bei advanced a proposition – in the Applicant B’s audit report and in cross-examination – that loans from Applicant B to Applicant A were “transferred” or “redirected” to become loans from Applicant B to Applicant C. However, there is no suggestion that Applicant A paid to Applicant C any moneys which it received from Applicant B and/or that there was any agreement between any or all of Applicant C, Applicant B and Applicant A for Applicant C to assume responsibility to repay to Applicant B moneys which Applicant B had lent to Applicant A – indeed, as noted in paragraph 147(e) above, Mr Bei accepted that he did not know what Applicant A had done with moneys paid to it by Applicant B. Consequently, Mr Bei’s proposition is plainly wrong – and does not appear to have been adopted in the respondent’s final submissions. The advancing of such a proposition was one of a number of statements made by Mr Bei which demonstrated that he had no real understanding of how the provisions of Division 7A of the ITAA 36 operated.
Applicant B’s audit report suggests that payments by Applicant B to Applicant A were payments for the “benefit” of Applicant C, because he was the sole shareholder of Applicant A. Whether or not the respondent advances such a proposition in these proceedings is wholly unclear.
Any contention that the payment by Applicant B to Applicant A was for the “benefit” of Applicant C, simply because Applicant C was the sole shareholder of Applicant A is simply wrong. Applicant A was a separate legal entity, distinct from its sole shareholder and director, Applicant C. A payment to a company is not a payment for the benefit of its shareholders.
There is no reason to read the phrase “for the benefit of the entity” in s.109C(3)(a) as having any different meaning to the accepted legal concept of a payment for the benefit of a party. Indeed, other provisions in Division 7A of the ITAA 36 reinforce the conclusion that the ordinary concept applies – in particular, s.109K which exempts “a payment or loan the private company makes to another company” (with no mention of a payment for the benefit of any party) from the operation of ss.109C and 109D, and Subdivision E, which applies ss.109C and 109D to payments or loans that are made by a private company to an entity through one or more interposed entities (which would be unnecessary if a payment to a company was to be considered a payment for the benefit of its shareholders).
Consequently, it is clear that there were no payments by Applicant B to or for the benefit of Applicant C, and no loans to Applicant C, which could attract the operation of ss.109C or 109D of the ITAA 36.
In any event, as payments were made to Applicant A – a company – s.109K of the ITAA 36 provides that ss.109C and 109D have no application.
Accordingly, the loan agreement between Applicant B and Applicant A, and the respondent’s submissions regarding the loan agreements (which, insofar as they criticise Applicant C’ evidence are wholly misconceived) are irrelevant.
Therefore, the assessment of Applicant C’ income is excessive in the amount of the dividends which the respondent determined were deemed to have been paid by Applicant B to Applicant C.
Determination of Issue
I accept the applicants’ submissions. As a consequence, the loan agreements are not relevant here, so I do not seek to make findings of fact concerning them here.
Company B and Company C
At the relevant time, Applicant C and Witness A each held half of the shares in Company C, and Company C held all of the shares in Company B.
Respondent’s submission
The respondent contends that Applicant C received deemed dividends, as a shareholder of Company C, as a result of loans made by Company B.
Applicants’ Submission
The respondent does not pause to explain – in any of the audit reports, the objection decision, the SFC or the respondent’s final submissions – the basis on which the respondent contends that Company B made a loan which results in Applicant C receiving a deemed dividend because he was a shareholder of Company C.
Applicant C gave evidence that Company B purchased a property at 5 Ord Street, West Perth. Applicant C lent moneys to Company C, which in turn lent those moneys to Company B, for the purpose of enabling Company B to purchase that property and subsequently to undertake expenditure required by its ownership of that property. The loan made by Applicant C (and also an equivalent loan made by Witness A) to Company C, and the loan made by Company C to Company B, were recorded in Company C’s financial statements.
This evidence is inherently plausible. For a private company like Company B to acquire a valuable commercial property would require some funding from its shareholder – which funding is commonly provided by way of a loan. Further, Applicant C was not cross-examined about this evidence. The respondent also does not address this evidence in the respondent’s final submissions.
Applicant C also gave evidence that, during the year ended 30 June 2004, Company B sold the property, leaving Company B with $1,102,168 in cash. Company B paid this money to Company C, in repayment of the debt owed by Company B to Company C, with the balance being a loan made by Company B to Company C. Company C then used the funds paid to it by Company B to repay the debts owed by it to Applicant C and Witness A, with the balance of the funds used to make loans to Applicant C and Witness A.
Applicant C’s evidence should be accepted. Consequently, the Tribunal should find that, at the start of the 2004 year, Company C was indebted to Applicant C in the amount of $287,134 and Company B was indebted to Company C in the amount of $574,268. Accordingly, $574,268 of the $1,102,168 paid by Company B to Company C discharged a pre-existing obligation that Company B had to Company C and $287,134 of the $551,084 paid by Company C to Applicant C discharged a pre-existing obligation which Company C had to Applicant C. Therefore, s.109J of the ITAA 36 excludes the payment of $574,268 by Company B to Company C, and the payment of $287,134 from Company C to Applicant C, from the operation of s.109C.
Applicant C accepts that the balance of the $1,102,168 payment made by Company B to Company C (being the sum of $527,900), and the balance of the $551,087 payment from Company C to him (being the sum of $263,953), constituted a loan made by Company B to Company C, and a loan made by Company C to him, respectively during the 2004 year. Consequently, on the face of it, s.109D of the ITAA 36 could apply to those portions of the payments.
However, these facts do not result in ss.109C or 109D of the ITAA 36 deeming the payment of any dividends to Applicant C. As payments were made by Company B to Company C – a company – s.109K of the ITAA 36 provides that ss.109C and 109D have no application. Even if payments had been made by Company B direct to Applicant C (which is contrary to both Applicant C’s unchallenged, and objectively likely, evidence and to Company C’s financial records), Applicant C was not, and never had been, a shareholder of Company B. At all times, all of the shares in Company B were held by Company C. Applicant C was also not, and never had been, an “associate” of Company C. Consequently, no payment or loan by Company B to Applicant C could attract the operation of ss.109C and 109D.
Further, in any event, Applicant C gave evidence (which was corroborated by Witness A) that he and Company C, and Company C and Company B, executed written loan agreements on 1 March 2005 which provided for the making of a loan by Company B to Company C and then by Company C to Applicant C. On its face, each loan agreement bears the characteristics required by s.109N(1)(a) to (c) of the ITAA 36. The respondent makes no submission to the contrary. The only issue concerning the application of s.109N is whether the loan agreements were, in fact, executed on 1 March 2005.
The loan agreements are dated 1 March 2005. They bear signatures purporting to be those of Witness A (on behalf of Company C) and Applicant C (on behalf of Company B and in his own right). They also bear signatures purporting to be those of a Person A and a Person B, who are described as the witnesses of the signatures of Witness A and Applicant C respectively. The date, the names of Witness A, Person A and Person B and the addresses of Person A and Person B are each written in hand, and each is written in clearly different handwriting. The common seals of Company B and Company C are also affixed to the execution pages of the loan agreements.
Applicant C gave evidence that the documents were copies of loan agreements entered into between Company B and Company C and Company C and him dated 1 March 2005 and that he signed that loan agreements on the date they bore, being 1 March 2005. Witness A gave evidence that he recognised the signatures on the loan agreements as his, that he did not have an independent recollection of the time the loan agreements were executed, but he would not have signed a loan agreement dated 1 March 2005 unless it was executed on that date.
The respondent submits that this evidence should be rejected.
If, as the respondent submits, the loan agreements were not executed on 1 March 2005, then one of the following must have happened:
(i)each of Applicant C and Witness A and each of the witnesses, Person A and Person B, must have signed two backdated loan agreements; or
(ii)one or both of Applicant C and Witness A must have falsified the signatures and handwriting on the loan agreements at some time subsequent to 1 March 2005.
Either alternative involves knowing dishonesty by, in the first alternative, each of Applicant C, Witness A, Person A and Person B or, in the second alternative, by whichever of Applicant C and/or Witness A falsified the signatures and the handwriting on the loan agreements. “Clear or cogent or strict proof” that such conduct has been engaged in is required before the Tribunal can find that such conduct was engaged in. The matters asserted in the respondent’s final submissions fall far short of what is required to make out that standard.
The respondent asserts that the loan agreements were not provided to the respondent during the course of its audits or the objection phase. However, there is no evidence whatsoever to support that assertion. Mr Bei did not state that the loan agreements were not provided during the course of the audits – accordingly, a Jones v Dunkel inference arises. Further, the document relied on by the respondent to found this submission – being page 7 of Exhibit R9 (the “T-documents” in 2905-10) – says absolutely nothing about whether copies of the loan agreements were provided during the course of the audits. The sixth dot point on that page refers to a request for documents made by letter dated 14 February 2007 (which is not included in the “T-documents”) by the ATO “objection officers” Mark Brackley and Ivan Seeto. Consequently, the statements made in the document relied on by the respondent relate only to the objection process, not the audit process and the document makes no reference to the loan agreements. The document does not provide any evidence of the loan agreements not being provided during the course of the audits.
Further, contrary to the respondent’s submissions, the evidence in fact suggests that copies of the loan agreements were provided during the course of the audits:
(i)during a telephone conversation on 9 June 2005, Mr Bei “asked Applicant C for Company C’s financials and copies of all loan agreements between all entities under review with”;
(ii)on 28 June 2005, Witness B sent a 62 page facsimile to Mr Bei attaching “the following information as requested: 1. 2001, 2002 and 2003 Financial Statements for Company C 2. Loan Agreements between the related entities”. For reasons known only to the ATO officer(s) who prepared the “T-documents”, the complete facsimile is not included amongst the “T-documents”. All that is included is the cover page and a copy of a loan agreement between Applicant B and Applicant A (pages 38 to 42 of the 62 pages of the facsimile);
(iii)significantly, on 15 July 2005, Mr Bei sent an email to Applicant C. The email refers to a telephone conversation that Mr Bei had with Applicant C at 11:30am that day – although, no record of the telephone conversation is included in the “T-documents”, despite Mr Bei’s evidence that he made notes of all telephone conversations. The email requested that Applicant C provide “Dates the loan agreements were signed between all parties under review (except for Company B and Company C)” (emphasis added);
(iv)Mr Bei followed up that email with a subsequent email in which he noted that he did not receive a response and would finalise his audit “based on the loan agreements being signed on 28 June 2005”; and
(v)there is no other record included in the “T-documents” of Mr Bei making any further requests for the production of loan agreements for Company B or Company C – a circumstance which Mr Bei accepted would mean that copies had been provided.
The obvious inference to be drawn from those communications is that copies of the loan agreements were provided, either as part of the facsimile of 28 June 2005 or otherwise. The provision of those loan agreements (which were dated) would explain why Mr Bei specifically excluded loan agreements “for Company B and Company C” from his request for “Dates that the loan agreements were signed between all entities under review”. There is no other rational explanation for the specific exclusion of Company B and Company C loan agreements, particularly given the lack of any subsequent requests for the production of such loan agreements or information regarding them.
Applicant C’s evidence in cross-examination was that he could not recall when he provided copies of the loan agreements to the ATO, but his recollection was that Mr Bei received them. Further, Applicant C’s objection to his amended income tax assessment for the year ended 30 June 2004 (prepared by Norton & Smailes) expressly referred to loan agreements between Company B and Company C, and Company C and Applicant C, dated 1 March 2005. It is inconceivable that the objection would refer to the loan agreements in the terms it did without Norton & Smailes having had copies at hand. Any failure by Norton & Smailes to provide copies of the loan agreements with the objection is consistent with a belief, understanding or presumption by Norton & Smailes that the respondent already had copies of the loan agreements.
Additionally, Witness A’s evidence corroborates Applicant C’s evidence. For the reasons set out above, the respondent’s criticisms of Witness A and his evidence are without foundation.
The respondent also criticises the fact that, in the witness statement he made prior to the first hearing of the proceedings, Applicant C did not explicitly state that the loan agreements were signed on the date they bore, being 1 March 2005. However, that witness statement did attach copies of each loan agreement and described them as loan agreements between “Company B and Company C dated 1 March 2005” and “Company C and me dated 1 March 2005”. Implicit in those statements is the statement that the loan agreements were each executed on 1 March 2005 – otherwise, the reference to the date of 1 March 2005 without clarification that the loan agreements were actually executed on some other date would be misleading.
The reason why there was no explicit statement the loan agreements were executed on 1 March 2005 is unknown, but it is probably nothing more than the style of the draftsperson – particularly in the context where none of the audit reports, the decisions on objections, the respondent’s SFC or Mr Bei’s witness statements conveyed any suggestion that the respondent disputed the authenticity of the loan agreements or suggested that they were backdated. In any event, to put beyond doubt that Applicant C’s evidence was that the loan agreements were signed on the date they bore (and were not backdated), Applicant C’s further witness statement stated that “I signed each of those loan agreements on behalf of Company B and on my own behalf on the date they bear, being 1 March 2005”.
Consequently, the respondent’s submission of recent invention is fundamentally flawed:
(a)there is no evidence whatsoever to support the submission that the loan agreements were not provided during the course of the audits;
(b)to the contrary, there is evidence that very clearly suggests that the loan agreements were, in fact, provided in or about late June 2005;
(c)Applicant C’s evidence is corroborated by Witness A;
(d)for there to be a recent invention in the manner submitted by the respondent, there must have been deliberately dishonest conduct engaged in by one, two or four individuals, three of whom did not stand to have gained by that conduct; and
(e)if the loan agreements were prepared after 1 March 2005 and backdated, this could have occurred by no later than 30 June 2006 (when Person A ceased to be employed by Witness A’s business) or, at the latest, 13 October 2006 (the date of the objection which specifically referred to the loan agreements) - eliminating any possibility of the documents being prepared only for the purpose of these proceedings.
Consequently, the Tribunal should find that the loan agreements were executed on 1 March 2005.
For the reasons set out above, the payments made by Company B (and, for that matter, the payments made by Company C) do not fall within the scope of ss.109C and 109D of the ITAA 36, further or alternatively are excluded from the operation of ss.109C and 109D by s.109K, 109J and/or 109N.
Accordingly, the assessment of Applicant C’s income is excessive in the amount of the dividends which the respondent determined were deemed to have been paid by Company B to Applicant C.
Determination of issue
I accept the submissions for the applicants on this issue. For the reasons set out in those submissions I make the finding that the relevant loan agreements were executed on 1 March 2005.
PENALTIES
Applicable Law
The respondent may impose a penalty pursuant to powers in Part IV- 25 of Schedule 1 of the TAA. Penalties were imposed pursuant to s.284-75 of the Schedule on the basis of the applicants each having “shortfall amounts” as provided in s.284-80 of the Schedule. As provided in section 284-85 of the Schedule, the quantum of penalty is the “base penalty amount” calculated pursuant to s 284-90.
The respondent’s powers include the power to impose an uplift of 20% in certain circumstances. Section 284-220(1) provides that :
“the base penalty amount is increased by 20% if:
(a)You took steps to prevent or obstruct the Commissioner from finding out about a shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty amount was calculated;”
There is also power to the respondent to remit all or any part of a penalty (see section 298-20 of the TAA), as was stated in “re Optimise Group Pty Ltd v FCT [2010] AATA 782 at [15]-[55] – there would clearly need to be circumstances that could be regarded as mitigating the taxpayer’s behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of ITAA 36 and TAA Act in supporting that purpose.
The question to be addressed is, have the applicants discharged the onus of showing that the penalty assessment was excessive? This is an onus that can only be discharged by leading evidence to displace the assessments as to penalty. The respondent’s conduct is entirely irrelevant to this inquiry.
Base Penalty Amount
The question here is whether the base penalty amounts should be calculated on the basis of “intentional disregard” (as the respondent contends), “recklessness”, or a “failure to take reasonable care” and whether the applicants have discharged their onus.
Respondent’s Submission
In considering whether the applicants have discharged their onus of showing that each of the assessments which imposed a penalty at the 75% level for intentional disregard were wrong, the following factual matters are relevant:
(a)Applicant C was at all times the sole shareholder and director of both corporate applicants;
(b)he is a businessman of considerable experience and a long-standing trained accountant;
(c)he is, and was at the relevant times, a director, secretary and/or shareholder in a vast number of closely held entities and, in light of the other matters set out in this paragraph, must be taken to have been aware of and understood his responsibilities;
(d)he was a member of relevant professional tax and accounting associations until 2009;
(e)the firm of accountants he was the director of at all times held themselves out as being tax experts;
(f)in respect to Applicant B, the conduct was particularly concerning given that Applicant B was charged with administering a government scheme utilising taxpayer funds on behalf of the State;
(g)the applicants’ record keeping both on a personal level and in respect to each of the entities was admitted by Applicant C, both to the auditor and in cross examination, to be extremely poor;
(h)Applicant C had access to, but failed to, obtain legal and accounting advice in respect to the obligations he and his entities had; and
(i)Applicant C had a history of failing to meet his obligations to the respondent, both in terms of repeated failures to lodge required returns, and repeated bounced cheques.
There is no specific evidence led by the applicants which directly challenges the imposition of penalty at the intentional disregard level. Evidence of that nature might include evidence showing attempts to obtain advice, evidence of advice actually obtained in the setting up of the structure adopted, evidence of a voluntary disclosure, perhaps evidence showing that the position the applicants took was reasonable in the circumstances. Instead the applicants rely on:
(a)Applicant C’s assertions that Mr Bei requested or required that amended income tax returns and BAS be lodged, which were categorically denied by Mr Bei;
(b)a letter of advice from Norton & Smailes, which of itself is not proof of what the correct position was but rather merely their opinion, based on the matters set out in that letter, of what might arguably be the case along with advice, which was never followed by Applicant C, as to what evidence he ought to provide if the respondent did not accept his position; and
(c)a suggestion that because Applicant A employed other people to undertake particular tasks, including to keep superannuation records or draft the taxation returns, Applicant C was somehow absolved of responsibility, despite having signed the income tax returns and despite the applicants failing to call Person B.
There is no basis for the Tribunal to come to the view that the penalty imposed for intentional disregard was excessive.
Applicants’ Submission
The Applicant A and Applicant B audit reports contain references to penalties to be imposed upon Applicant A and Applicant B for failing to lodge BASs and ITRs by the due dates. However, in these proceedings, the respondent contends only that penalties ought to be imposed upon the applicants for making false or misleading statements in BASs and ITRs.
The respondent contends that a shortfall amount which resulted from the making of those allegedly false or misleading statements, resulted from “intentional disregard” of a taxation law, thus rendering the applicants liable for a penalty of 75% of the shortfall amount, pursuant to item 1 of s.284-90(1) of the Schedule. If such statements had been made as a result of “recklessness”, the penalty would have been 50% of the shortfall amount (item 2 of s.284-90(1)) and if such statements had been made as a result of a failure to “take reasonable care”, the penalty would have been 25% of the shortfall amount (item 3 of s.284-90(1)).
For the “intentional disregard” item to apply, Applicant A, Applicant B and/or Applicant C must have made a statement in a BAS or ITR with actual knowledge that it was not correct (for example, claiming a deduction with actual knowledge that the deduction was not allowable) – accordingly, Applicant A, Applicant B and/or Applicant C must have had an actual understanding of the effect of the relevant legislation or regulations, an appreciation of how that legislation or regulation applied to their circumstances and deliberate conduct so as to flaunt the legislation or regulation. “Intentional disregard” is qualitatively different to and more severe than “recklessness” – such that even wilful blindness can constitute only “recklessness”, not “intentional disregard”.
“Recklessness” requires knowledge of a real, as opposed to a fanciful, risk that statements may not be accurate or gross indifference as to whether or not statements are true and correct, so as to amount to gross carelessness.
Whether the conduct of any of the applicants constituted “intentional disregard” – or whether it constituted “recklessness” or a failure to “take reasonable care” – is a question of fact.
The applicants can prove that the respondent’s penalty assessments are excessive by, amongst other things, proving that the factual circumstances which were necessary preconditions for the imposition of a particular base penalty amount did not exist.
Paragraph 134 of the respondent’s final submissions asserts a number of factual matters which the respondent contends are relevant to the question of whether any false or misleading statements in the applicants’ BASs and ITRs came about as a result of “intentional disregard”. Even if all of those factual assertions could be made out (and, for reasons that follow, they cannot all be made out), they would not demonstrate “intentional disregard”. Not one of those asserted factual matters, or the combination of all of those asserted factual matters, demonstrate (or provide grounds for an inference) that there was any deliberate and knowing inclusion of a false or misleading statement in any of the applicants’ BASs or ITRs.
To the contrary, Applicant C’s evidence – which was not only unchallenged, but was positively put to Applicant C by the respondent during Applicant C’s cross-examination – was to the effect that the applicants’ BASs and ITRs were prepared by other people, not by Applicant C. Whether or not Applicant C leaving such matters in the hands of the others could have constituted a failure to “take reasonable care”, or even “recklessness”, it cannot equate to “intentional disregard”.
Applicant C’s experience as an accountant is a relevant consideration, but cannot, of itself, be determinative of whether there was “intentional disregard”. Similarly, Applicant C’s knowledge of the applicants’ obligations (whether such knowledge arose from Applicant C’s professional background, Applicant C being a director of a number of companies or otherwise) is also not determinative – it says nothing about knowledge of any inaccuracies in the content of statements made in BASs or ITRs.
Applicant C did not admit that any of the applicants’ record keeping was “extremely poor” (or otherwise deficient). What Applicant C admitted (and expressed contrition in relation to) was the applicants’ and his BASs and ITRs not all being prepared and lodged when the audits started.
Contrary to the respondent’s submission, there is no evidence that Applicant C failed to obtain legal and/or accounting advice in relation to the content of any of the applicants’ BASs or ITRs.
The respondent submits that there was no specific evidence led by the applicants which directly challenged the imposition of penalty at the “intentional disregard” level. Further, the respondent submits that such evidence “might include evidence showing attempts to obtain advice, evidence of advice actually obtained in the setting up of the structure adopted, evidence of a voluntary disclosure, perhaps evidence showing the position the applicants took was reasonable in the circumstances.” Both submissions are wrong:
(i)the applicants adduced evidence which directly challenged the imposition of penalties at the “intentional disregard” level. Applicant C stated that he believed that all statements made within ITRs and BASs lodged by the applicants were true and correct, other than to the extent that the content of ITRs and BASs reflected directions made by Mr Bei which were adhered to under protest; and
(ii)the respondent’s submissions misconceive what constitutes “intentional disregard” – in particular, a need for knowing dishonesty. The reasons why a particular “structure” was set up (and it is not clear what “structure” the respondent is referring to) are irrelevant. Whether or not legal or accounting advice was obtained for the purpose of preparing ITRs and BASs may be relevant to whether a false or misleading statement was made as a result of a failure to “take reasonable care” or “recklessness”, whether s.284-75(5) of the Schedule resulted in no penalty being applicable or whether any penalty should be remitted. However, whether or not advice was obtained says nothing about whether a false of misleading statement was deliberately made. Whether or not there was a voluntary disclosure may go to the issue of whether any penalty imposed ought to be reduced under s.284-525 or remitted, but says nothing about whether false or misleading statements were deliberately and knowingly made.
The evidence demonstrates that there was no “intentional disregard”. Consequently, the respondent’s imposition of a penalty of 75% of shortfall amounts – in circumstances where any penalty imposed should have been 25% of the shortfall amounts (on the basis of a failure to “take reasonable care”) alternatively 50% of the shortfall amounts (on the basis of “recklessness”) – results in the respondent’s assessment of penalties being excessive.
The applicants also submit that to the extent that any ITRs or BASs lodged by any of the applicants contain false or misleading statements which led to shortfall amounts, the base penalty amount calculated pursuant to s.284-90(1) of Schedule should be 25% of the shortfall amount (based on a failure to take “reasonable care”) alternatively 50% of the shortfall amount (based on “recklessness”) and not 75% of the shortfall amount (based on “intentional disregard”) and the respondent’s assessment of penalty calculated at 75% of the shortfall amount should be set aside as excessive.
Determination of issue
I accept the applicants’ submission that the evidence demonstrates there was no ‘intentional disregard’. Consequently, I agree the respondent’s assessment of penalties is excessive and should be set aside.
The respondent’s submissions, particularly those set out above listing factual matters, seem to me to more appropriately point to the applicants – especially Applicant C or through him – having been ‘reckless’. Recklessness assumes that the behaviour in question shows disregard for or indifference to a risk that is foreseeable by a reasonable person: Hart v Commissioner of Taxation [2003 FCAFC 105 at [42]; BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164 per Cooper J. The applicants were grossly indifferent as to whether or not the material was true or correct and whether the Act and regulations may not operate correctly. In my view the penalty which should be substituted for the penalty set aside is that of 50% of the shortfall amounts.
Penalty Uplift
Respondent’s submissions
Each of the penalties was the subject of an additional uplift of 20% by reason of the applicants’ behaviour in hindering the audit. Those matters were put to Applicant C in cross-examination, being the many unfulfilled promises to provide documents and proper substantiation and the multiple promises to assist, as well as the many amendments to BAS and Income Tax Returns.
The only evidence in support of the applicants’ contentions that the imposition of the uplift was excessive comprises the assertions by Applicant C. By contrast, the evidence of the applicants’ failures to produce records in accordance with their obligations is overwhelming. In addition to the oral admissions regarding record keeping of both Applicant C and Witness B, it includes:
(i)Numerous telephone calls commencing on 20 May 2004, until 9 September 2005.
(ii)Numerous written requests, by letter or email between 21 May 2004 and 9 September 2005; and
(iii)Requests made during the course of numerous meetings between officers of the respondent and the applicants, between 8 June 2004 and November 2004.
In the context of the uplift and the numerous requests that had to be made for proper documents, it is important to remember that the initial date set for the provision of all the records, set at the commencement of the audit in June 2004, was set by Applicant C when he was initially contacted by Mr Bei, as being a date on which he would be able to provide the documents. This date was not set by Mr Bei. It is the date on which Applicant C, a trained accountant running a tax practice with many employees, told the respondent he would be able to produce all the relevant records.
In fact, all necessary documents supporting the applicants’ position were not supplied at any time by the applicants; ultimately Mr Bei had to make inquiries of third parties and conduct other investigations to find information which ought to have been forthcoming from the applicants in June 2004 as Applicant C had promised it would be. The fact that the audits took several years to finalise is not evidence of any inadequacy on the part of the auditor, but rather an illustration of the extraordinarily lax attitude of Applicant C in meeting commitments he made.
Applicant C continually sought to hide behind his own convenience as being the appropriate time-frame within which to comply with obligations, regardless of the expectations of others to whom he had made promises or indeed regardless of his legal obligations. This pattern was clear from his cross-examination:
(a)in relation to his meeting his obligations to his previous partners;;
(b)in relation to his meeting his obligations to pay income tax and other liabilities to the respondent;
(c)in relation to his failures to lodge income tax returns and BASs; and
(d)in relation to his failures to pay superannuation on time and to complying superannuation funds.
In supplementary submissions the respondent relies on the following examples of behaviours which fit within the provision:
(a)unreasonable delay by the taxpayer in responding to enquiries by taxation officers: EM Bill 91 of 2000, at[1.116];
(b)repeated failure or deferral to supply information without an acceptable reason;
(c)repeated failure to respond adequately to reasonable information requests;
(d)failure to respond to an information request pursuant to formal information notices;
(e)providing false or misleading information or documents; or
(f)destroying records,
: PS LA 2012/4 at [114] and PS LA 2012/5 at [121] – [124]; and
(g)failing to respond to a request for information to assist in the Commissioner’s enquiry: Leighton (ATF Leighton Family Trust) v Commissioner of Taxation [2010] FCA 1086:6 ASTLR 109 at [67].
Further the respondent submits the Tribunal has previously upheld the imposition of a penalty under s 284-220(1) in the following circumstances:
(a)the taxpayer was a repeat offender with a poor compliance record, who failed to attend meetings and failed to disclose taxable supplies in BAS: Khoury and Commissioner of Taxation [2009] AATA 612;
(b)the taxpayer resisted repeated attempts to provide comprehensive information and documents in circumstances where the claims for input tax credits were, or ought to have been, known to be wrong: Bayconnection Property Developments Pty Ltd and Commissioner of Taxation [2013] AATA 40;
(c)the taxpayers made false statements in their income tax returns, failed to disclose the existence of a relevant bank account and failed to disclose income shortfall in a reasonable time (which was a time some years prior to the commencement of the audit): Taxpayer Mr X and Taxpayer Mrs X and Commissioner of Taxation [2012] AATA 917.
The respondent states the relevant circumstances applying to the uplift here are:
(a)the making of false statements in numerous income tax returns and BAS;
(b)Applicant C’s occupation as an accountant and tax advisor, and his involvement in an earlier ATO audit, so that Applicant C knew or ought to have known of his and his companies’ obligations in respect of providing accurate statements to the respondent, in respect to record keeping and other compliance issues and in respect to the provision of information to the Commissioner during an audit;
(c)The failure to correct the false statements prior to the commencement of the audits;
(d)The repeated requests for information which remained unmet or were referred to another person, over an extended period of time; and
(e)The provision of multiple corrections to income tax returns and BAS during the course of the audit.
Applicants’ submissions
Section 284-220(1)(a) of the Schedule provides for the base penalty amount to be increased by 20% if a taxpayer “took steps to prevent or obstruct the respondent from finding out about a shortfall amount, or the false or misleading nature of a statement, in relation to which the base penalty was calculated…”.
A taxpayer can prevent or obstruct the respondent by failing to respond to numerous enquiries made by the respondent.
However, it is submitted that in the circumstances, none of the applicants prevented or obstructed the respondent from finding out about shortfall amounts or the false or misleading nature of any statements made in their BASs or ITRs.
The respondent’s allegation that the applicants prevented or obstructed the respondent from finding out about a shortfall amount, or false or misleading nature of a statement must be viewed in context. The applicant’s state that when one goes past the hyperbole deployed by the respondent (and by Mr Bei in his cross-examination) the applicants’ conduct in making documents available for inspection for the purpose of the audits falls far short of what is necessary to demonstrate “steps to prevent or obstruct the respondent from finding out about a shortfall amount, or the false or misleading nature of the statement”.
The applicants argue that the respondent seeks to make much of the fact that Applicant C proposed timeframes within which documents would be made available to the respondent and was then not able to make all documents available within that timeframe (as did Mr Bei in cross-examination). It is submitted this approach is flawed. If documents were made available for inspection by the respondent within a reasonable period of time following a request by the respondent, then there could not possibly have been any “steps to prevent or obstruct the respondent”, regardless of any statements by the applicants of the time by which they expected or intended to make documents available. It would be a capricious and unreasonable result for s.284-220(1) to increase the penalties imposed on a taxpayer who had made documents available to the respondent within a reasonable time simply because the taxpayer had been optimistic in their initial estimate of the time that would be required to do so.
The applicants submit the real question is, in the circumstances, did any delays by the applicants in making documents available for the respondent, or any failures by the applicants to make documents available to the respondent, constitute “steps to prevent or obstruct the respondent…”. This has to be answered by reference to all of the circumstances.
The starting point must be the respondent’s request for documents. A request by the respondent for the provision of a small number of specific documents or a request by the respondent for answers to a small number of specific questions are very different circumstances to a request for a large number of documents to be made available.
The respondent contends that penalties imposed on the applicants should be increased because of alleged deficiencies by the applicants complying with a request by Mr Bei for “all records and source documents” used for the preparation of five years’ ITRs (1999 to 2003) and nearly four years’ BASs (1 July 2000 to 31 March 2004) for each of nine separate entities to be made available. The applicants say the breadth of that request is staggering.
At the time the request was made, the only obligations of the applicants (and the six other entities subjected to audits) was to “keep” records that “recorded and explained all transactions and other acts engaged in” by the applicants that were relevant to their taxation affairs: s.262A(1) of the ITAA 36 and s.382-5 of the Schedule. There was no obligation to maintain any particular system for retaining and accessing records or even to provide records to the respondent (in the absence of a notice compelling production pursuant to s.264 of the ITAA 36). Mr Bei’s view that the requirement to keep records extended to keeping the records in a manner which enabled any records sought by the respondent to be easily provided if the respondent requested and to then promptly provide records upon an “informal” request by the respondent (which view seems to inform the respondent’s submissions) goes beyond what is required by the relevant legislation.
The respondent’s complaints about the applicants’ conduct must be viewed against this backdrop.
The first notice that the applicants were given of the conducting of audits and the documents which the respondent (by Mr Bei) requested be made available was a telephone conversation between Mr Bei and Applicant C on 20 May 2004.
On 8 June 2004 – a little over two weeks after Mr Bei’s first contact with Applicant C – Mr Bei attended a meeting with Applicant C at which boxes of documents were produced. Applicant C attended further meetings with Mr Bei on 9 and 10 June 2004 at which further documents were produced. Mr Bei had a further meeting with Applicant C on 2 July 2004 – about six weeks after Mr Bei’s first contact with Applicant C – in which Mr Bei identified a number of documents that Mr Bei perceived to be all of the documents he had requested which, as at 2 July 2004, were outstanding. Given how broad Mr Bei’s request for documents was, the fact that, only six weeks after the request was made, the only documents that Mr Bei perceived to be outstanding were the discrete categories of documents identified by Mr Bei at the 2 July 2004 meeting is squarely inconsistent with the applicants taking steps to prevent or obstruct the respondent.
In addition to making documents available to Mr Bei, Applicant C attended numerous meetings with Mr Bei (including four meetings within the first month of first being contacted by Mr Bei), made a room available for Mr Bei in Applicant A’ offices (other than on occasions where a room was not available) and gave Mr Bei (at least some) access to the applicants’ computer network.
Mr Bei did not keep any running note of documents that he was seeking from the applicants. Consequently, there is no record that shows, at any time, what documents the applicants had provided and what documents Mr Bei considered were outstanding. The only way to test the respondent’s assertion that not all relevant documents were made available within a reasonable time of the commencement of the audits is to look at requests for the production of further documents that were made from time to time.
It is not in dispute that, on a number of occasions, Mr Bei requested that the applicants provide further documents. One reason for this was that, during the second half of 2004, the audit expanded to cover the year ended 30 June 2004, after which documents relating to that year were sought. There will, inevitability, also be instances where Mr Bei sought further documents which he had not previously sought (or not previously specifically sought) at later stages of the audit process when he was in the process of considering a particular issue.
The respondent submits that requests for documents were being made by telephone call or written request as late as 9 September 2005. This significantly overstates the position. The evidence records that all (or at least the overwhelming majority) of documents that Mr Bei sought had been provided by late 2004:
(i)Mr Bei sought production of documents falling within a number of discrete, identified categories during the course of a meeting held on 23 September 2004. These were the only documents outstanding at that time;
(ii)at a meeting held on 12 October 2004, Applicant C told Mr Bei that records would be produced on 15 October 2004. Mr Bei telephoned Applicant C.
(iii)Applicant C told Mr Bei that records that had been requested were sent to the ATO on 13 October 2004. Mr Bei said that he had not yet received those records, but they may have been going through security checks;
(iv)there is no record of Mr Bei following up Applicant C and stating that the records had not arrived – which Mr Bei accepted he would normally have done had the records not duly arrived;
(v)on 8 November 2004, Witness B telephoned Mr Bei and said he was still working on BASs for Applicant A and was not aware of anyone doing work on Applicant A’ “SGC”;
(vi)on 10 November 2004, Mr Bei spoke to Applicant C about “the non-production of ITR and BASs P & L and Financials and SGC documentation” and Applicant C told Mr Bei that he would call Mr Bei back in a short while and let him know when he could expect the documents. Mr Bei also asked Applicant C about payment of a sum due under a payment arrangement which arrangement would only have been accepted by the respondent had all the documents identified at the 23 September 2004 meeting been provided – which suggests that all of those documents had, by this time, been provided;
(vii)at a meeting held on 18 November 2004, Mr Bei sought the production of some documents, failing which a s.264 notice may have been given;
(viii)on 19 November 2004, Witness B sent to Mr Bei a number of documents concerning Applicant A and Applicant B- largely relating to the year ended 30 June 2004; and
(ix)after 19 November 2004, there were only limited records request for specific documents – for example, the request on 9 September 2005 (relied on by the respondent) for the production of the Norton & Smailes legal opinion, which was only provided to Applicant A on 10 December 2004 (well after the audits commenced) and was subject to legal professional privilege unless and until Applicant A and Applicant B Managers decided to waive that privilege (a further step inconsistent with the Applicants taking steps to obstruct or prevent the respondent). There were no further requests for the documents that were being sought in September, October and November 2004. There were no further threats of the issue of a s.264 notice. There was otherwise no general request for the production of documents.
Mr Bei explained the lack of further requests for the production of documents on him giving up and seeking documents from non-parties. However, the “T-documents” contained little record of Mr Bei so doing, despite Mr Bei stating that all oral communications that he had with third parties would have been recorded in a file note, and that all such notes and any written communications would have been retained by him and provided to an ATO legal services officer to review and determine what went into the “T-documents”.
The respondent tries to link other conduct of Applicant C (some wholly unrelated to his tax affairs and not even established by evidence) to the applicants’ conduct in relation to the audits: paragraph 141 of the respondent’s final submissions. However, how Applicant C may have acted in respect of other matters (which may result in other sanctions being applied – such as late lodgement penalties or the general interest charge), does not, and cannot, answer the question of whether the applicants prevented or obstructed the respondent.
Stripping away the hyperbole and irrelevancies, what the evidence records is that Mr Bei made the broadest of requests for the broadest scope of documents to be made available. A large number of documents were produced to Mr Bei within weeks of that request. There were some delays – up to a few months – in producing some (indeed, a relatively small number of) documents. There were also further documents that were produced in late 2004 as a result of the increase in the scope of the audit. Otherwise, but for the occasional specific document, all documents had been voluntarily produced. In circumstances where the applicants voluntarily produced a significant number of documents to the respondent within what (given the breadth of the request) was a reasonable time, were never compelled to produce documents, made office facilities available to Mr Bei and made Applicant C available to meet with Mr Bei on many occasions, the applicants’ conduct cannot be characterised as steps taken to prevent or obstruct the respondent.
In supplementary submissions the applicants dispute the use by the respondent of Tax Administration Practice Statements as interpretative materials. I agree with the submissions for the respondent that these are proper and appropriate materials for the Tribunal to consider.
The applicants also point to the reliance by the respondent on only s 284-220(1)(a), pointing out that failures to make disclosures are relevant to s284-220(1)(b), not (a).
The applicants state that the respondent has relied on overrated, generalised propositions but fails to identify with any specificity whether requested documents were produced late or not at all and when such documents were provided. It is submitted by the applicants that as a consequence it is impossible to determine whether any apparently outstanding documents had actually been sought at any earlier time (or had only been sought because of the expansion in scope of the audits), whether any documents that were apparently outstanding related to any of the applicants (as opposed to other entities being audited) and for whether any documents apparently outstanding had anything to do with any shortfall amounts or false or misleading statements that the respondent asserts were identified.
Determination of Issue
The word ‘prevent’ involves ‘effectual hindrance’: Macquarie Dictionary, 5th Ed, p 1316. The word ‘obstruct’ includes making difficult of passage or coming in the way of. For the law, however, it is said to mean ‘any attempt to impede the due process of the law as by way of threatening witnesses, attempting to influence jurors or interfering with evidence, etc’; Macquarie Dictionary, 5th Ed, p.1155. Whether by preventing or obstructing it seems that both words encompass an impeding of the lawful process. In that context I consider the submissions of the applicants directed to the nature of what occurred from the conduct of the applicants is rightly directed. In my view the applicants have discharged the onus of showing that the applicants did not seek to nor did in fact prevent or obstruct the process in the sense of impeding it taking its course. Consequently, I do not consider that a case is established to support an uplift.
REMISSION
The respondent’s discretion to remit a penalty pursuant to s.298-20 of the Schedule is unconfined, provided that it is exercised within the boundaries of the subject matter, scope and purpose of the legislation. A penalty being harsh in all of the circumstances of a taxpayer will be a proper basis on which the discretion to remit the penalty could be exercised. Mr Bei accepted that the terms of PS LA 2006/2 “Administration of shortfall penalty for false or misleading statement” are such that, if there are multiple entities which each make a statement to the respondent in an ITR or BAS the effect of which is both entities’ ITR or BAS contain false or misleading statements, but the effect is such that the aggregate amount of tax which the statements the entities lodged discloses to be payable is not changed, and there is no recklessness or intentional disregard of a taxation law, it is appropriate to remit any penalties that may arise. The same position prevailed in 2004 prior to PS LA 2006/2.
This matter is relevant to the consequences of Tribunal’s determination of the agency issue. The significance of whether Applicant B was acting as agent for Applicant A or in its own right is whether it was Applicant B or Applicant A that had to return certain income and could claim certain deductions. In circumstances where Applicant B and Applicant A were both corporations, and accordingly paid income tax at a flat rate, there will be no impact on the aggregate income tax payable by Applicant B and Applicant A by the decision to have Applicant B or Applicant A return income and claim deductions.
Further, the revisions to Applicant A’ and Applicant B’s BASs involved a re-allocation of consideration and credits between Applicant A, Applicant B and two other entities controlled by Applicant C, being Company E and Company D.
Applicant A Applicant B Company E Company D Total YEAR Net BAS Net BAS Net BAS Net BAS Net BAS Shortfall
(B-A)Shortfall (C-B) 2001
A. Original
B. Final
C. ATO Assessed
437,190
661,264
661,264
352,737
140,915
140,915
789,927
802,179
802,179
$12,252
0
2002
A. Original
B. Final
C. ATO Assessed
273,425
712,962
712,962
368,130
211,482
211,482
292,511
15,256
15,256
934,066
939,700
939,700
$5,634
0
2003
A. Original
B. Final
C. ATO Assessed
155,268
1,038,137
1,038,137
1,016,529
386,636
386,636
299,584
30,072
30,072
22,664
0
0
1,494,045
1,454,845
1,454,845
($39,200)
0
2004
A. Original
B. Final
C. ATO Assessed
199,517
1,220,788
1,220,788
1,566,343
694,874
694,874
365,247
143,239
143,239
25,680
(18,841)
(18,841)
2,156,787
2,040,060
2,040,060
($116,727)
0
Total Lodged & Assessed 3,633,151
1,433,907
188,567
(18,841)
5,236,784
0
The following table summarises the amounts contained in the BASs lodged by Applicant A, Applicant B, Company E and Company D each for the years ended 30 June 2001 to 30 June 2004:
In the circumstances, any penalties imposed ought be remitted, in whole or in part as appropriate to reflect to the extent to which one entity’s “shortfall amount” did not actually result in a loss to the revenue (because of a corresponding overstatement of income tax or GST payable by another entity).
FORMULATION OF ORDERS
The applicants submit that if their contentions are partially accepted, there are numerous permutations of the amounts by which the applicants’ assessment of primary income tax liability (income tax and GST) are excessive and further permutations as to the extent to which the applicants’ assessment for penalties are excessive. Attempting to quantify the amounts by which the applicants’ assessments were excessive in advance of the Tribunal making findings would, it is submitted, be a difficult and time consuming exercise.
Consequently, the applicants submit that the final calculation of the amounts by which each particular assessment was excessive cannot be officially undertaken until the Tribunal’s findings are known. Consequently, therefore the applicants seek to be heard on the orders to be made by the Tribunal giving effect to its determination of the issues raised in the proceedings.
Alternatively to setting a further hearing, it is open to the Tribunal that each of the parties have time to make submissions on how the orders should be formulated. That would contemplate not only a submission setting out what the orders should be but setting out orders which contemplate the system to be followed in order to arrive at resolution of all the issues in accordance with the reasons of the Tribunal, if necessary.
In my opinion it would be preferable for the parties to have the opportunity to file written submissions in that regard and present orders will be formulated with that intention.
248. I certify that the preceding two hundred and forty seven (247) paragraphs are a true copy of the reasons for the decision herein of the Honourable R Nicholson, Deputy President.
........................................................................
Associate
Dated 5 March 2014
Date(s) of hearing 11-15 March 2013, 14-15 May 2013, 24 June 2013 and 14 August 2013
Date final submissions received
Date final supplementary submissions received
21 August 2013
7 February 2014
Representative for the Applicant Mr C Williams Solicitors for the Applicant Solomon Brothers Counsel for the Respondent Ms C Thompson Representative for the Respondent Ms D Goodbody Solicitors for the Respondent Jackson McDonald
0
6
4