The Trustee for JC Mobile Sharpening Discretionary Trust (Taxation)
[2022] AATA 2482
•5 August 2022
The Trustee for JC Mobile Sharpening Discretionary Trust (Taxation) [2022] AATA 2482 (5 August 2022)
Division:SMALL BUSINESS TAXATION DIVISION
File Number(s): 2021/5233
Re:The Trustee for JC Mobile Sharpening Discretionary Trust
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member Dr Linda Kirk
Date:5 August 2022
Place:Sydney
The Reviewable Decision dated 8 April 2021 is affirmed.
...........[Sgnd]..................................................
Senior Member Dr Linda Kirk
Catchwords
TAXATION – Coronavirus Economic Response Package – Entitlement to Cash Flow Boost –Where entity is a trust – Whether the entity satisfied the ‘payment and withholding in the period’ requirement – Whether the entity entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of making the entity entitled to the cash flow boost – Decision affirmed
Legislation
A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Administrative Appeals Tribunal Act 1975 (Cth)
Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth)
Fair Work Act 2009 (Cth)
Fair Work Regulations 2009 (Cth)
Income Tax Assessment Act 1997 (Cth)
Income Tax Assessment Act 1936 (Cth)
Taxation Administration Act 1953 (Cth)
Cases
Blank v Commissioner of Taxation (2015) 242 FCR 96
Brent v Federal Commissioner of Taxation (1971) 125 CLR 418
Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441
Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235
Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Hamed and Commissioner of Taxation [2010] AATA 684
MJ and IT Holdings Pty Ltd and Commissioner of Taxation [2021] AATA 3250
Permanent Trustee Company of New South Wales v Federal Commissioner of Taxation (1940) 6 ATD 5
RFZD and Commissioner of Taxation (Taxation) [2022] AATA 988 (14 April 2022) para [75]
VNBM and Commissioner of Taxation [2021] AATA 1626
Secondary Materials
Explanatory Memorandum to Coronavirus Economic Response Package Omnibus Bill 2020 and associated Bills
Treasury Factsheet: Cash flow assistance for businesses
REASONS FOR DECISION
Senior Member Dr Linda Kirk
5 August 2022
On 20 November 2020 the Commissioner of Taxation (‘the Respondent’) made a decision (‘the Decision’) that the Trustee for JC Mobile Sharpening Discretionary Trust (‘the Applicant’) is not entitled to receive the Cash Flow Boost (‘CFB’) pursuant to subsection 5(1) of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (‘the BCF Act’).
The Respondent made this decision on the basis that he was not satisfied that the Applicant could substantiate the payments of salary and wages purported to have been made to Mr Justin Cook (‘Mr Cook’) for the quarters ended 31 March 2020 and 30 June 2020 (‘the Relevant Periods’), therefore failing the payment and withholding requirement in subsection 5(1)(a) of the BCF Act.[1]
[1] Exhibit R1, T-Documents, T2.
On 19 January 2021, the Applicant objected to the Decision (‘the Objection’).[2] On 8 April 2021, the Respondent disallowed the Objection, concluding that the Applicant did not satisfy the payment and withholding requirement of the CFB eligibility criteria (‘the Reviewable Decision’).[3]
[2] Exhibit R1, T24.
[3] Exhibit R1, T21.
On 3 August 2021, the Applicant lodged its application for review of the Reviewable Decision with the Tribunal.
The matter was heard by the Tribunal on 28 March 2022. Mr Cook and the Applicant’s tax agent, Dermot Walsh of Voltage Accounting, attended the hearing by video-link and gave oral evidence and were cross-examined.
The material before the Tribunal consists of:
·Affidavit of Justin Samuel Cook, dated 25 March 2022, filed 25 March 2022 – Exhibit A1;
·Tender bundle of documents contained in the AAT list of documents sent to parties on 23 March 2022, including Section 37 T-documents filed 17 August 2021 and supplementary T-documents filed 23 September 2021 – Exhibit R1.
The Tribunal has reviewed the material before it and refers below to that which is relevant to the review.
POLICY AND LEGISLATIVE FRAMEWORK
The CFB is a cash incentive introduced as part of a suite of coronavirus-related stimulus measures. It is an incentive for small and medium sized businesses that employ staff and is intended to encourage the retention of employees throughout any downturn caused by the COVID-19 pandemic.[4] The Federal Government announced the CFB measure on 12 March 2020.[5]
An entity that is entitled to the CFB would receive a minimum payment of $10,000 in the first period for which it is eligible and could then receive further amounts, up to a maximum cap of $50,000. It could then receive subsequent ‘boosts’ in later periods up to and including the September 2020 quarter.
[4] Explanatory Memorandum to Coronavirus Economic Response Package Omnibus Bill 2020 and associated Bills [3.2].
[5] Treasury Factsheet: Cash flow assistance for businesses.
The BCF Act provides the legislative framework for the CFB payments to eligible small and medium sized business entities, delivered as credits totalling between $20,000 and $100,000 based on amounts an entity is liable to withhold under Subdivision 12-B, 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 (Cth) (‘TAA’) or pay under Division 13 of Schedule 1 to the TAA 1953.[6]
[6] Sections 5,6 and 7 of the BCF Act.
The CFB payments are delivered via a first boost applying to periods from March 2020 to June 2020, and a second boost applying to periods from June 2020 to September 2020. An entity that is entitled to the CFB would receive a minimum payment of $10,000 in the first period for which it is eligible and could then receive further amounts, up to a maximum cap of $50,000. It could then receive subsequent ‘boosts’ in later periods up to and including the September 2020 quarter.
Subsection 5(1) of the BCF Act contains the eligibility criteria an entity must meet to be entitled to a CFB payment:
5 Entitlement to cash flow boost – first boosts
(1)An entity is entitled to a payment (known as a cash flow boost) for a period covered by subsection (2) if:
(a) any of the following requirements are satisfied:
(i)the entity makes a payment in the period and must withhold an amount from the payment under Subdivision 12-B, 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 (regardless of whether the entity withholds the amount);
(ii)the entity must pay an amount under Division 13 in that Schedule in relation to an alienated personal services payment that it receives in the period (regardless of whether the entity actually pays the amount); and
(c) the period applies to the entity under subsection (3); and
(d) any of the following requirements are satisfied:
(i)the entity was a small business entity or a medium business entity for the most recent income year for which there is an assessment in respect of the entity of a kind mentioned in subparagraph (a)(ii) of the definition of assessment in subsection 6(1) of the Income Tax Assessment Act 1936;
(ii)the Commissioner is satisfied on a reasonable basis that the entity is a small business entity or a medium business entity for the income year in which the period starts; and
(e) the entity notifies the Commissioner, in the approved form lodged with the Commissioner, of its withholding period total for the period; and
(f) either:
(i)the entity is an ACNC-registered charity at any time in the period;
(ii)the entity had an ABN on 12 March 2020, and the requirement in subsection (5) or (6) is satisfied; and
(g) neither the entity nor any associate or agent of the entity has entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of achieving any of the following:
(iii)making the entity entitled to the cash flow boost for the period;
(iv)increasing the amount of the cash flow boost to which the entity is entitled (disregarding this paragraph) for the period.
The eligibility criteria in subsection 5(1) of the BCF Act are cumulative and they must all be satisfied for an entity to be entitled to the CFB.
Subsection 5(1)(a)(i) of the BCF Act requires the relevant payment to be made ‘in the period’. ‘The period’ is that identified by reference to subsection (2) of section 5 of the BCF Act. It provides as follows:
(2)The following periods are covered by this subsection:
(a) the months of March 2020, April 2020, May 2020, and June 2020;
(b) the quarters ending on 31 March 2020 and 30 June 2020.
The amount of the CFB to which an entity is entitled (assuming it satisfies the criteria in section 5 of the BCF Act) is determined pursuant to section 7 of the BCF Act which relevantly provides as follows:
If an entity is entitled to a cash flow boost for a period covered by subsection 5(2), the amount of the entity’s cash flow boost for the period is:
(a) if the period is the first period for which the entity is entitled to a cash flow boost – the greater of $10,000 and the entity’s withholding period total for the period; or
(b) otherwise – the entity’s withholding period total for the period.
Subsection 7(2) of the BCF Act caps the maximum amount payable at $50,000, and subsection 7(3) of the BCF Act provides that an entity’s ‘withholding period total’ for the month of March 2020 is to be treated as three times the actual withholding period total.
The term ‘withholding period total’ is relevantly defined in subsection 4(4) of the BCF Act as:
(a) the total of all amounts that the entity withholds under Subdivision 12‑B, 12‑C or 12‑D in Schedule 1 to the Taxation Administration Act 1953 from payments that it makes in the period.
The amount of the CFB an entity is entitled to receive is based on the amount of Pay As You Go Withholding (‘PAYGW’) the entity reports in its activity statement for the relevant period, capped at $50,000.
The eligibility criteria in issue in the present case are:
1)the payment and withholding requirement in subsection 5(1)(a)(i); and
2)the ‘scheme’ provision in paragraph 5(1)(g).
1) The payment and withholding requirement
Subsection 5(1)(a) of the BCF Act requires, broadly, that an entity make a payment which is subject to a withholding obligation under Subdivisions 12-B, 12-C or 12-D in Schedule 1 to the TAA (subsection 5(1)(a)(i)) of the BCF Act), or that the entity must pay an amount under Division 13 of Schedule 1 to the TAA in relation to an alienated personal services payment that it receives in the period (subsection 5(1)(a)(ii) of the BCF Act).
The Applicant does not claim to satisfy the requirement in subsection 5(1)(a)(ii) of the BCF Act, namely having an obligation to pay an amount under Division 13.
The Applicant is a quarterly lodger and the quarters in dispute ended on 31 March 2020 (‘March 2020 Quarter’) and 30 June 2020 (‘June 2020 Quarter’). Therefore, ‘the periods’ in question for the purposes of subsection 5(1)(a)(i) are the March 2020 and June 2020 Quarters (‘the Relevant Periods’).
In order to satisfy the criteria in subparagraph 5(1)(a)(i) of the BCF Act, the Applicant must show that it made a payment of a type that is subject to withholding, under Subdivision 12-B, 12- C or 12-D in Schedule 1 to the TAA, and that it made the payment in the Relevant Periods.
2) The ‘scheme’ provision
The BCF Act contains an integrity measure which seeks to ensure that the CFB is not available to businesses that enter into artificial or contrived arrangements undertaken to obtain or increase their entitlement to the CFB.
That integrity measure looks to whether an entity (or its associates and/or agents) entered into or carried out a ‘scheme’ or part of a ‘scheme’ for the sole or dominant purpose of creating or increasing an entitlement to the CFB. Because paragraph 5(1)(g) of the BCF Act is one of a number of cumulative eligibility criteria for the CFB, an entity that fails to satisfy paragraph 5(1)(g) of the BCF Act in respect of a period is not entitled to any CFB for that period (i.e., the entitlement is not apportioned or reduced).[7]
[7] VNBM and Commissioner of Taxation [2021] AATA 1626 (‘VNBM’) at [29].
Subsection 4(1) of the BCF Act defines ‘scheme’ by reference to the definition in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (‘GST Act’). Subsection 165-10(2) of the GST Act defines ‘scheme’ as:
(1)any arrangement, agreement, understanding, promise or undertaking:
(a) whether it is express or implied; and
(b) whether or not it is, or is intended to be, enforceable by legal proceedings; or
(2)any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
Unlike the general anti-avoidance regime in Part IVA of the Income Tax Assessment Act 1936 (Cth) (‘ITAA’), where the relevant purpose must be determined objectively, paragraph 5(1)(g) of the BCF Act does not specify what the Commissioner has to take into account to determine whether an entity (or its associates and/or agents) entered into or carried out a scheme (or part thereof) with the requisite sole or dominant purpose.[8] Although the objective circumstances, for example, the timing of certain events, are relevant, evidence of actual or subjective intention is also a relevant consideration.[9]
[8] VNBM at [25]-[26].
[9] at [27].
The BCF Act does not define what a ‘dominant purpose’ is. However, the authorities establish that ‘dominant’ indicates a purpose which was the ‘ruling, prevailing or most influential purpose’.[10] The purpose of a third party, such as an adviser, can be attributed to the relevant taxpayer.[11]
[10] Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 (‘Spotless’) at 416 and 423.
[11] Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 (‘CPH’) at 264, [95]; MJ and IT Holdings Pty Ltd and Commissioner of Taxation [2021] AATA 3250 at 24 [57].
The authorities also establish that a scheme may have been entered into for the relevant dominant purpose (i.e., a tax-related purpose) despite the transaction owing its explanation and existence to some broader commercial, non-tax driven, objective.[12]
[12] Spotless at 415; CPH at 264, [96].
Finally, paragraph 5(1)(g) of the BCF Act looks not only at whether the entity entered into or carried out a scheme, but also at the actions of the associates and agents of the relevant entity and whether they have entered into a relevant scheme on the relevant entity’s behalf.[13]
RELEVANT FACTS AND EVIDENCE
[13] VNBM at [23].
The Applicant operates a knife sharpening business (‘the Business’), offering its services to the meat industry in South Australia. The Applicant is a discretionary trust, of which the trustee is JC Mobile Sharpening Pty Ltd (ACN 626 933 515),[14] a company incorporated on 20 June 2018,[15] of which Mr Cook is the sole director and shareholder.[16] The primary beneficiaries of the Applicant[17] are Mr Cook and his spouse, Ms Brigitta Kiss (‘Ms Kiss’).[18] The Applicant commenced trading on 1 July 2018.[19]
[14] Exhibit R1, ST7-274; Applicant’s Supplementary Tender Bundle Annexure A-43.
[15] Exhibit R1, ST8-292.
[16] Exhibit R1, ST8-292 and 293; Transcript, P-9, P-10.
[17] Exhibit R1, T11-41.
[18] Exhibit R1, Applicant’s SOFIC, Annexure A, Applicant Deed Annexure A-43; T10-36 to 37, where Mr Cook and Ms Kiss are described as beneficiaries of the Applicant at Item 55 of the Applicant’s income tax return for the income year ended 30 June 2019.
[19] Exhibit R1, T24-166.
Mr Cook first operated the Business as a sole trader when it commenced operating in 2015.[20] The Applicant discretionary trust was established by deed dated 20 June 2018.[21] Mr Cook gave evidence to the Tribunal that the day-to-day operations of the Business did not change after the establishment of the Applicant.[22] Mr Walsh’s evidence was that there were some additional costs in transitioning to the new structure,[23] but he did not detail those additional costs, or provide details of quantum, or point to other business records to support it.
[20] Transcript, P-6 line [6].
[21] Exhibit R1, Applicant’s SOFIC, Annexure A, Applicant Deed Annexure A-43.
[22] Transcript, P-10 lines [9] to [30].
[23] Transcript, P-78 lines [15] to [16].
Mr Cook is the sole worker for the Applicant. No contract of employment between the Applicant and Mr Cook, nor any contemporaneous evidence of the formation of an employment relationship or the terms of Mr Cook’s employment, was provided by the Applicant or Mr Cook. On 8 November 2020, the Applicant referred to himself as ‘self-employed’ on his AMP Bank Home Loan Application Summary.[24]
[24] Exhibit R1, Item No. 7.
Mr Cook, in his evidence, confirmed that there had been an increase in profits every year since the inception of the Business whilst he operated it as a sole trader.[25] Mr Walsh accepted, in his evidence, that it was ‘arguable’ that the Applicant did not need to wait until the preparation of the financial statements for the 2019 Income Year to see the profitability of the Business in order to determine if wages could be paid to Mr Cook.[26]
[25] Transcript, P-8 lines [20] to [22].
[26] Transcript, P-78 lines [18] to [21].
PAYGW amounts reported by the Applicant
On 17 July 2018, the Applicant was registered for pay as you go withholding (‘PAYGW’), reporting on a quarterly basis, commencing from 1 July 2018.[27] Mr Cook told the Tribunal that the Applicant was set up for PAYG from the beginning of its operation and it was intended that he would be paid a salary in the future once a market-based salary could be worked out.[28]
[27] Exhibit R1, T4-14.
[28] Transcript, P-11 line [5].
In the 2019 income year, the Applicant reported the following amounts of PAYGW in its Busines Activity Statements (‘BASs’):
Quarter ended
Date BAS lodged
Wages (W1) ($)
Amounts withheld
from W1 (W2) ($)30 September 2018
29 October 2018[29]
Nil
Nil[30]
31 December 2018
27 February 2019[31]
Nil
Nil[32]
31 March 2019 16 April 2019[33] Nil Nil[34] 30 June 2019 29 July 2019[35] Nil Nil[36] [29] Exhibit R1, ST1-265.
[30] Exhibit R1, T5-16.
[31] Exhibit R1, ST2-267.
[32] Exhibit R1, T6-17.
[33] Exhibit R1, ST3-269.
[34] Exhibit R1, T7-18.
[35] Exhibit R1, ST4-271.
[36] Exhibit R1, T12-75.
The Applicant’s evidence is that it commenced payment of salary and wages to Mr Cook from early January 2020. The gross amount of salary and wages paid (whether actual or constructive payment) for the March 2020 and June 2020 quarters was $2,500.00 per week. PAYG was withheld on these payments and calculated based on the ATO’s figures applying the tax-free threshold.[37]
[37] Applicant’s closing submissions [4.2.7].
For the 2020 income year, the Applicant reported the following amounts of PAYGW in its BASs:
Quarter ended
Date BAS lodged
Wages (W1) ($)
Amounts withheld from
W1 (W2) ($)30 September 2019
28 October 2019[38]
Nil
Nil[39]
31 December 2019
24 February 2020[40]
Nil
Nil[41]
31 March 2020
24 April 2020[42]
30,000
8,582[43]
30 June 2020
28 July 2020[44]
63,000
22,893[45]
TOTAL
93,000
31,475
[38] Exhibit R1, ST5-272.
[39] Exhibit R1, T9-29.
[40] Exhibit R1, ST6-273.
[41] Exhibit R1, T13-76.
[42] Exhibit R1, T14-78.
[43] Exhibit R1, T14-77.
[44] Exhibit R1, T15-80.
[45] Exhibit R1, T15-79.
The Applicant’s tax agent, Voltage Accounting, stated in the Applicant’s Objection[46] that:
… the amount of PAYGW has been nil up until 2020, that is because it [the Applicant] was a start-up entity. As with all new business’s [sic], it takes time to become profitable and most start-ups leave money in the business to fund initial growth.[47]
[46] Exhibit R1, T24-166.
[47] Exhibit R1, T24-166.
It further stated in an email dated 14 September 2020 that:
During the initial 18 months of trading the trust [the Applicant] made significant investments in equipment, stock, and capital improvements to the business premises. As a result the cash flow was not sufficient to support the regular payment of wages to employee(s). Following the initial 18 month period of business establishment / investment by the trust, cash flow stabilised sufficiently to enable regular wages payments, commencing from 1st January 2020.[48]
Mr Walsh gave evidence that the Applicant commenced paying wages and salary to Mr Cook in the March 2020 quarter due to concerns about the potential application of the Personal Services Income (PSI) rules and the anti-avoidance provisions.[49]
[48] Exhibit R1, T16-81.
[49] Transcript, P-58 lines [17] to [19], P-59 lines [23] to [24].
Income tax return of the Applicant
On 8 January 2020, Voltage Accounting, on behalf of the Applicant, lodged its trust income tax return for the 2018-2019 income year.[50] The Applicant reported total business income of $186,576, net income of $60,342 (after deduction of tax losses)[51] and nil salary and wages expense.[52] The statement of distribution shows the following distributions to the beneficiaries of the Applicant:
·$49,480 to Mr Cook; and
·$10,862 to Ms Kiss.
[50] Exhibit R1, T10-30.
[51] Exhibit R1, T10-34, Item 26.
[52] Exhibit R1, T10-35, Item 43.
The Applicant’s evidence is that it paid Mr Cook a bonus of $33,000 in the 2020 income year (‘the Bonus’).[53] Voltage Accounting stated in an email dated 14 September 2020, following the Applicant’s CFB claim, that:
[t]he bonus paid in June 2020 was based on [Voltage Accounting’s] practice of reviewing client’s [sic] financial positions prior to the end of the financial year and paying profits as a wage, as opposed to it being a trust distribution.[54]
[53] Transcript, P-37 line [35].
[54] Exhibit R1, T16-81.
The Applicant’s Objection stated that the determination of such annual bonuses ‘is always based on business performance.’[55] Mr Walsh told the Tribunal that ‘… our general practice for these small business companies, we declare salaries throughout the year and then based on what's supportable… in terms of what the company can sustain based on the profits earned, we declare a bonus at the end of the year…’[56]
[55] Exhibit R1, T24-166.
[56] Transcript, P-53 lines [35]-[40].
On 7 June 2021, Voltage Accounting, on behalf of the Applicant, lodged its trust income tax return for the 2019-2020 income year.[57] It reported business income of $279,244[58], a net loss of $12,728 (after deductions)[59] and $93,000 of salary and wage expense, including the $33,000 bonus.[60] No distributions were made to beneficiaries of the Applicant.
[57] Exhibit R1, T29-174.
[58] Exhibit R1, T29-175.
[59] Exhibit R1, T29-178, Item 26.
[60] Exhibit R1, T29-180, Item 44.
Payslips provided by the Applicant
The Applicant provided the Respondent with the following with respect to Mr Cook:
·for the whole of the quarter ended 31 March 2020, a single payslip for the net salary amount of $21,418, comprising a gross salary amount of $30,000 and a tax withheld amount of $8,582;[61] and
·for the whole of the quarter ended 30 June 2020, a single payslip for the net salary amount of $40,107, comprising a gross salary amount of $30,000, a bonus amount of $33,000 and a tax withheld amount of $22,893.[62]
[61] Exhibit R1, T16-91.
[62] Exhibit R1, T16-90.
There is no evidence as to the date(s) that the Applicant issued these payslips to Mr Cook and the payslips are not dated. Mr Walsh told the Tribunal that the undated payslips were an oversight, and their respective dates are 31 March 2020 and 30 June 2020. He and Mr Cook were not aware of this error until it was highlighted by the Respondent in his Statement of Facts Issues and Contentions (‘SFIC’) dated 23 September 2021.[63] This was rectified going forward by dating all future payslips.[64]
[63] Exhibit R1, Respondent’s SFIC.
[64] Applicant’s closing submissions [3.2.6.2].
During cross-examination at the hearing, Mr Cook agreed that he did not receive the net amounts on the payslips[65] relating to the March and June 2020 quarters.[66]
[65] Exhibit R1, T Documents filed 17 August 2021, T16-91 and T16-90.
[66] Transcript, P-29 line [45], P-30 lines [1] to [5].
Transactions
The Applicant’s evidence with respect to the quarter ended 31 March 2020 is that the following transactions listed in the Applicant’s Bank Account Statements,[67] and Mr Cook’s Credit Card statements,[68] satisfy as salary and wages paid to Mr Cook:[69]
[67] Exhibit R1, T19-128-138; Upon request, the Commissioner was also provided on 18 November 2020 with the Applicant’s bank account statements for a bank account with People’s Choice Credit Union, account number ending ******089, for the periods 1 July 2019 to 31 August 2019, 1 October 2019 to 30 June 2020 and 1 September 2020 to 30 September 2020 (‘the Applicant’s Bank Account Statements’).
[68] Exhibit R1, T32-T33.
[69] Exhibit R1, T1-5. On 11 August 2021, in response to the Commissioner’s request, the Applicant provided bank statements for the following two bank accounts held in the name of Mr Cook for the period 1 January 2020 to 30 June 2020: (a) People’s Choice Credit Union Online Saver Account, account number ending ******941; and (b) People’s Choice Credit Union Classic Visa Credit Card, account number ending ****43 (‘Mr Cook’s Credit Card’).
Date
Description
Amount ($)
05/01/2020
IB TFR 102346089 to 2397437 Personal C /C
1,200.00[70]
21/01/2020
OSKO TFR TO Prospect North Primary School 108239589M
290.00[71]
21/01/2020
IB TFR 102346089 to 2397437 Personal C /C
1,500.00[72]
29/01/2020
IB TFR 102346089 to 2397437 Personal C /C
520.00[73]
23/02/2020
IB TFR 102346089 to 2397437 Personal C /C
2,200.00[74]
08/03/2020
IB TFR 102346089 to 2397437 Personal C /C
700.00[75]
TOTAL
6,410
[70] Exhibit R1, T19-129 and T33-247.
[71] Exhibit R1, T19-131.
[72] Exhibit R1, T19-131 and T32-249.
[73] Exhibit R1, T19-131 and T33-249.
[74] Exhibit R1, T19-136 and T32-227.
[75] Exhibit R1, T19-140 and T33-254.
The Applicant’s evidence with respect to the quarter ended 30 June 2020, is that the following transactions contained in the Applicant’s Bank Account Statements and Mr Cook’s Credit Card statements satisfy as salary and wages paid to Mr Cook: [76]
[76] Exhibit R1, T1-5.
Date
Description
Amount ($)
01/04/2020
IB TFR 102346089 to 2397437 Personal C/C
1,700.00[77]
07/04/2020
IB TFR 102346089 to 2397437 Personal C/C
530.00[78]
21/04/2020
IB TFR 102346089 to 2397437 Personal C/C
1,100.00[79]
30/04/2020
IB TFR 102346089 to 2397437 Personal C/C
800.00[80]
09/05/2020
IB TFR 102346089 to 2397437 Personal C/C
520.00[81]
26/05/2020
IB TFR 102346089 to 2397437 Personal C/C
300.00[82]
12/06/2020
VISA PURCHASE NORTHFIELD VETERINARY 3612
399.36[83]
16/06/2020
VISA PURCHASE SOUTH AUSTRALIAN POL 3612
471.00[84]
30/06/2020
IB TFR 102346089 to 2397437 Personal C/C
250.00[85]
TOTAL
6,070.36
[77] Exhibit R1, T20-144 and T32-232.
[78] Exhibit R1, T20-146 and T32-232.
[79] Exhibit R1, T20-147 and T32-233.
[80] Exhibit R1, T20-147 and T32-234.
[81] Exhibit R1, T20-150 and T33-261.
[82] Exhibit R1, T20-151 and T33-262.
[83] Exhibit R1, T20-154.
[84] Exhibit R1, T20-154.
[85] Exhibit R1, T20-156 and T32-239.
Voltage Accounting stated in the Applicant’s Objection[86] that:
… no regular salary payments – as previously provided to ATO in bank statements our client [the Applicant] made a $6,410 cash salary payment in the March 2020 quarters and $6,070 in the June 2020 quarter, per bank statements.
[86] Exhibit R1, T24-166.
The Applicant’s evidence is that during the first two quarters of the 2020 income year it made the following payments to Mr Cook’s Credit Card or on behalf of Mr Cook, which the Applicant describes in an email dated 7 September 2020 as also payments of salary to Mr Cook:[87]
[87] Exhibit R1, ST7-274.
Date
Description
Amount ($)
07/07/2019
IB TFR 102346089 to 2397437 Personal C/C
1,400.00[88]
17/07/2019
VISA PURCHASE HJ SEFTON 3612
17.65[89]
29/07/2019
IB TFR 102346089 to 2397437 Personal C/C
1,800.00[90]
12/08/2019
IB TFR 102346089 to 2397437 Personal C/C
1,200.00[91]
20/08/2019
IB TFR 102346089 to 2397437 Personal C /C
1,700.00[92]
21/08/2019
VISA PURCHASE HJ WOODVILLE 3612
17.25[93]
22/08/2019
VISA PURCHASE STILL STANDING PTY L 3612
499.00[94]
29/08/2019
VISA PURCHASE CHEMIST WAREHOUSE 3612
40.98[95]
30/08/2019
VISA PURC HASE ST AGNES SURGERY 3612
66.50[96]
02/09/2019
IB TFR 102346089 to 2397437 Personal c/c
2,000.00[97]
27/09/2019
BPAY PAYMENT City of TTG Exp 5278
282.00[98]
27/09/2019
IB TFR 102346089 to 2397437 Personal C /C
1,250.00[99]
13/11/2019
IB TFR 102346089 to 2397437 Personal C /C
630.00[100]
01/12/2019
IB TFR 102346089 to 2397437 Personal C /C
1,780.00[101]
21/12/2019
IB TFR 102346089 to 2397437 Personal C /C
2,340.00[102]
TOTAL
15,023.38
[88] Exhibit R1, T17-99.
[89] Exhibit R1, T17-99.
[90] Exhibit R1, T17-100.
[91] Exhibit R1, T17-104.
[92] Exhibit R1, T17-104.
[93] Exhibit R1, T17-105.
[94] Exhibit R1, T17-105.
[95] Exhibit R1, T17-105.
[96] Exhibit R1, T17-105.
[97] Exhibit R1, T1-5.
[98] Exhibit R1, T1-5.
[99] Exhibit R1, T1-5.
[100] Exhibit R1, T18-118.
[101] Exhibit R1, T18-121.
[102] Exhibit R1, T18-124.
In his oral evidence, Mr Cook agreed that the amounts received from the Applicant during the July 2019 to December 2019 months (‘the July to December 2019 Payments’) were not reported in the Applicant’s activity statements as salary or wages for the September 2019 or December 2019 quarters.[103] Mr Cook conceded that the July to December 2019 Payments were recorded and reported differently to the January to June 2020 Payments in the Business activity statements for the relevant periods.[104]
[103] Transcript, P-22 lines [30] to [32], P-26 lines [1] to [26], P-27 lines [33]-[39].
[104] Transcript, P-15 to P-17, P-26, P-27 lines [33]-[39], P-30 lines [31] to [33].
Loan to Applicant
The Applicant claims in the Review Application that Mr Cook:
… did not draw the remaining balance of [his] salary payments (after PAYG withheld) of $49,045 in cash as [he] needed to retain cashflow in the trust, and instead retained it as a loan to the trust.[105]
[105] Exhibit R1, T1-5.
The Applicant did not provide detailed loan transaction listings or statements, nor provide any explanation or evidence to explain the discrepancy in the amount recorded in its 2020 Financial Statements for its loan payable to Mr Cook to $82,923.94, being an increase of $20,085.50 from the 2019 income year, and its assertion that $49,045 of Mr Cook’s alleged salary across the two quarters was retained ‘as a loan to the trust’.[106]
[106] Exhibit R1, Applicant’s SFIC.
When questioned during cross-examination, Mr Cook did not know when the decision to make a loan of the purported wages and salary back to the Applicant was made.[107] He was adamant that the decision to start to pay a market-based salary was made in or around January 2020.[108]
[107] Transcript, P-36, P-37.
[108] Transcript, P-27 lines [34] – [37], P-36 lines [14] to [17], [44] to [45], P-41 lines [37], [43].
The Applicant continued to pay salary and wages throughout the 2021 income year. Following the lodgement of the Review Application, the Applicant had concerns about managing the cash flow of the Business to provision the debt to the Respondent should it occur.[109] Mr Walsh suggested that the Applicant pause the payment of salary and wages to Mr Cook until the Tribunal had made its decision. The Applicant paused the payment of salary and wages in the September 2021 quarter.[110] Mr Cook confirmed, in his evidence, that the Applicant did not record or report wages and salary and PAYGW for the September 2021 quarter,[111] and thereby chose to ‘pause’ the payment of wages.[112]
[109] Applicant’s closing submissions [4.2.14.1].
[110] Applicant’s closing submissions [4.2.14.2].
[111] Transcript, P-48 line [30].
[112] Transcript, P-48 line [33].
On or about November/December 2021, the Applicant realised that the Tribunal’s decision in this matter would not be made for some time, and the Applicant chose to re-commence payment of salary and wages to Mr Cook. From the 31 December 2021 quarter to present, the Applicant has continued to pay salary and wages to Mr Cook, maintaining approximately the same annual salary.[113]
[113] Applicant’s closing submissions [4.2.16].
Investment property
In 2019, Mr Cook received a large inheritance, which he decided to invest in a low-risk investment.[114] He discussed with Mr Walsh the idea of purchasing commercial property in his superannuation fund. Mr Walsh suggested he consider purchasing a residential investment property in his own name.[115]
[114] Applicant’s closing submissions [4.2.3].
[115] Applicant’s closing submissions [4.2.3].
On or about August 2019, Mr Cook began the process of researching for a residential investment property to purchase in his personal name. During meetings and discussions that occurred from late 2019 through to 8 January 2020, Mr Walsh reviewed the financial statements for the year ending 30 June 2019 and considered the Applicant’s personal circumstances (including his intention to purchase an investment property), and advised Mr Cook that he should now commence paying himself a salary and wage from the business.[116]
[116] Applicant’s closing submissions [4.2.4-4.2.5].
In his oral evidence, Mr Cook explained that he received advice that wages would be preferred over trust distributions for the purposes of loan serviceability.[117] He engaged his mortgage broker on 17 August 2020. On or about 8 November 2020, Mr Cook submitted a loan application to AMP which indicated that Mr Cook was receiving a salary.[118] On or about December 2020, settlement occurred on Mr Cook’s investment property.[119]
[117] Transcript, P-45 line [15].
[118] Applicant’s closing submissions [4.2.9].
[119] Applicant’s closing submissions [4.2.11].
Review of eligibility for CFB
In August 2020, the Respondent commenced a review of the Applicant’s eligibility for the CFB and requested evidence that the Applicant had paid the wages reported at Item W1 in its Business activity statements in respect of Mr Cook.
On 20 November 2020, the Respondent finalised his review, and determined that the Applicant had not paid any salary and wages during the Relevant Periods, and accordingly amended the Applicant’s activity statements to reflect nil salary and wages and nil PAYGW for the March and June 2020 Quarters.[120]
[120] Exhibit R1, T21-157.
On 19 January 2021, the Applicant’s tax agent and accountant, Voltage Accounting, lodged the Objection on behalf of the Applicant.[121] Despite the Respondent’s requests,[122] the Applicant did not provide any further documentation to support its Objection application. On 8 April 2021, the Respondent issued his Objection Decision, disallowing the Objection.[123]
SUBMISSIONS
[121] Exhibit R1, T24-166.
[122] Exhibit R1, T26-169, T27-170.
[123] Exhibit R1, T2-9, T28-171.
Applicant
The facts meet the requirements of the law that actual and constructive payments of salary and wages had been made by the Applicant to Mr Cook. It is therefore required by law at subsection 12-35 of Schedule 1 of the TAA that amounts of PAYG are withheld from this payment, and therefore satisfying the requirements of subsection 5(1)(a)(i) of the BCF Act.[124]
[124] Applicant’s closing submissions [3.3.1].
The Respondent’s attempt to discredit the argument of a constructive payment is not by rebutting the facts or application of the law, but rather by claiming that the evidence should not be relied upon because the evidence pertaining to the loan account was provided after the Applicant’s Objection to the notice, made on 19 January 2021. The Applicant submits that this argument is irrelevant. The explanation and evidence of a constructive payment were provided after because they were never required until raised by the Respondent in his Outline of Submissions. The Respondent demands contemporaneous evidence where, for a small business, discussions are likely to be verbal and no written evidence exists, hence evidence was deduced by cross-examination of Mr Cook and Mr Walsh. A valid argument of a constructive payment cannot be negated because the timing in which the argument and evidence were provided inconvenienced the Respondent.[125]
[125] Applicant’s closing submissions [3.3.2].
The facts provide circumstantial evidence that objectively proves that the Applicant’s intention to pay salary and wages was for:
a)commercial purposes, including cash flow management of tax obligations, and ensuring superannuation is paid for future financial planning; and
b)to assist Mr Cook in his application for finance for the purchase of his investment property.[126]
[126] Applicant’s closing submissions [4.4.1].
The benefit of the CFB entitlement, which for some time after its announcement had a high level of uncertainty as to the eligibility of recipients and its application, was an ancillary result of the payment of salary and wages and in no way the reason or purpose.[127]
[127] Applicant’s closing submissions [4.4.2].
The facts also show how the Applicant came to reasonably determine the amount of salary and wages that would be paid to Mr Cook. There was no intention to inflate the salary and wages for the purpose of being entitled to a larger CFB entitlement.[128]
[128] Applicant’s closing submissions [4.4.3].
Respondent
The Respondent contends that the Applicant fails to satisfy the eligibility criteria for the CFB because the purported wage or salary was not paid, either physically or constructively, to Mr Cook during the Relevant Periods. The Applicant has not established that any salary and wages were actually ‘paid’ to Mr Cook, for the purpose of Subdivision 12-B, 12-C, or 12-D in Schedule 1 to the TAA.[129] The only payments made by the Applicant to any account of Mr Cook’s during the 2020 Income Year are the January to June 2020 Payments, listed in the Applicant’s People’s Choice Credit Union account statements for that period,[130] and the July to December 2019 Payments, listed in the Applicant’s People’s Choice Credit Union account statements for that period.[131] Both the January to June 2020 Payments and the July to December 2019 Payments solely comprise fund transfers made by the Applicant to Mr Cook’s Credit Card or to third parties purportedly on Mr Cook’s behalf. Only the January to June 2020 Payments were made during the Relevant period.
[129] Exhibit 1, Respondent’s SFIC, paragraphs [69] to [72].
[130] Exhibit 1, Respondent’s SFIC, paragraphs [35], [36]; Exhibit R1, T19, T20.
[131] Exhibit R1, T17, T18.
The Respondent contends that the Applicant has not established that any wages and salary have been constructively paid to Mr Cook.[132] There is no contemporaneous evidence of a decision by the Applicant to make a purported constructive payment of wages to Mr Cook, a decision to make a loan of purported wages and salary back to the Applicant, or an intention by the Applicant and Mr Cook to offset any salary or wages purportedly paid by the Applicant to Mr Cook.[133]
[132] Exhibit 1, Respondent’s SFIC, paragraphs [ [75] to [90].
[133] Exhibit 1, Respondent’s Supplementary submissions [6.1].
The Respondent also contends that the Applicant (and/or its associates and agents) entered into or carried out a scheme for the purposes of paragraph 5(1)(g) of the BFC Act, consisting of one or more of the following actions:
(a)the decision by the Applicant to commence treating Mr Cook, the Applicant’s sole worker, as an employee during the Relevant Periods;
(b)the decision by the Applicant to remunerate Mr Cook as an employee rather than making a trust distribution of business profits to him at the end of the income year ended 30 June 2020 as per the tax planning practice of the Applicant in the income year ended 30 June 2019, the relevant preceding income year, and the Applicant’s first income year of trading;
(c)the decision of the Applicant, to withhold PAYG from that remuneration;
(d)the decision by the Applicant, on the advice of its tax agent, Voltage Accounting, to pay a $33,000 bonus to Mr Cook, purportedly based on the Applicant’s financial position prior to the end of the 2020 income year, despite being in a tax and accounting loss position, and a purported practice of ‘paying profits as a wage’;[134]
(e)the decision by the Applicant to issue two payslips to Mr Cook purporting to show that a net wage of $61,525 (including the $33,000 bonus) had been paid to Mr Cook in the Relevant Periods, when no payment of salary and wages was made.
CONSIDERATION AND REASONS
[134] T16-81.
Burden of proof
On a review before the Tribunal, the Applicant has the burden of proving that the objection decision should not have been made or that it should have been made differently.[135] Discharging the burden of proof requires the Applicant to establish the facts upon which it relies and, if it is necessary for the Applicant to establish a particular fact in order to displace the Respondent’s decision, the Applicant must satisfy the Tribunal with respect to that fact.[136] The standard of proof is the balance of probabilities.[137] It has been described as involving a weighing up of the arguments of each party so that if a taxpayer succeeds in ‘weighing down [the] scales ever so slightly in [its] favour’ then it will have discharged the burden.[138]
[135] RFZD and Commissioner of Taxation (Taxation) [2022] AATA 988 (14 April 2022); Hamed and Commissioner of Taxation [2010] AATA 684.
[136] As above.
[137] As above.
[138] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [88].
The Applicant can discharge the burden in any one of several ways. For example, it can do so by direct evidence and/or by drawing inferences from the evidence,[139] but not from conjecture.[140] While evidence from a taxpayer is not prima facie unacceptable, uncorroborated, self-serving statements are to be tested closely and received with the greatest caution.[141] There is no onus on the Respondent to show that an assessment or, in this case, an objection decision, is correct.[142] Therefore, the Applicant cannot succeed merely by identifying errors or flaws in the Respondent’s decision.
[140] As above.
[141] As above.
[142] As above.
While the Respondent did not disallow the Objection on the basis that paragraph 5(1)(g) of the BCF Act applied, the Respondent did have the power to do so. The authorities establish that subsection 43(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (‘AAT Act’) gives the Tribunal the same power when it is reviewing an objection decision, and this is so irrespective of the fact that the Respondent did not apply paragraph 5(1)(g) in disallowing that objection. It follows that the Tribunal has the power to vary a decision that the Applicant is entitled to a CFB of a particular amount to a decision that the Applicant is not entitled to the CFB at all and vice versa. This principle was argued and accepted in MJ and IT Holdings Pty Ltd and Commissioner of Taxation (‘MJ and IT Holdings’).[143]
[143] [2021] AATA 3250.
In summary, the Applicant bears the burden of proving that it is entitled to a CFB of $31,475 which it claimed in respect of the Relevant Periods. Specifically, the Applicant must satisfy the Tribunal, on the balance of probabilities, that:
a) it satisfied the requirement in subsection 5(1)(a)(i) of the BCF Act; and
b) it did not enter into or carry out a scheme (or part thereof) for the sole or dominant purpose of increasing its CFB entitlement, as relevant to subsection 5(1)(g) of the BCF Act.
For the reasons set out below, the Tribunal is not satisfied that the Applicant has discharged that burden.
1) The payment and withholding requirements
The Tribunal finds, based on the evidence before it and for the following reasons, that the Applicant fails to satisfy the eligibility criteria for the CFB because the purported wage or salary was not paid, either actually or constructively, to Mr Cook during the Relevant Periods. Accordingly, it does not meet the payment and withholding requirements in subsection 5(1)(a)(i) of the BCF Act
Actual payment of salary or wages to Mr Cook
There is no evidence before the Tribunal that payments of salary and wages were actually paid by the Applicant to Mr Cook for the purpose of Subdivision 12-B, 12-C, or 12-D in Schedule 1 to the TAA. The only payments made by the Applicant to any account of Mr Cook’s during the 2020 Income Year are the January to June 2020 Payments, listed in the Applicant’s People’s Choice Credit Union account statements for that period,[144] and the July to December 2019 Payments, listed in the Applicant’s People’s Choice Credit Union account statements for that period.[145] Both the January to June 2020 Payments and the July to December 2019 Payments solely comprise fund transfers made by the Applicant to Mr Cook’s Credit Card or to third parties purportedly on Mr Cook’s behalf. Only the January to June 2020 Payments were made during the Relevant Periods. There is no contemporaneous evidence before the Tribunal to demonstrate the treatment of the January to June 2020 Payments, or the July to December 2019 Payments, beyond characterising them as what they are, namely payments to a credit card and payments to third parties for unknown purposes.
[144] Exhibit 1, Respondent’s SFIC, paragraphs [35], [36]; Exhibit R1, T19, T20.
[145] Exhibit R1, T17, T18.
The Tribunal also notes the inconsistent tax treatment by the Applicant of the January to June 2020 Payments and the July to December 2019 Payments. While stating that both tranches of payments are payments that are salary and wage, no amount of the July to December 2019 Payments were recorded in the Applicant’s activity statements for the September 2019 Quarter or the December 2019 Quarter; the Applicant recorded nil salary and wages in these statements. No explanation was provided for the different treatment of the same type of payment in different periods. It is therefore reasonable to presume that the change in treatment of these types of payments in the Relevant Periods was the result of the announcement of the CFB measure, rather than a decision by the Applicant to pay salary and wages to Mr Cook.
In relation to the Bonus of $33,000 paid to Mr Cook, the Applicant’s bank statements do not show the payment being made from its bank account to Mr Cook.
In respect of the Applicant’s claim that $49,045.00 of Mr Cook’s purported salary and wages for the Relevant Periods was ‘retained…as a loan to the trust’94 (‘the Loan’), no evidence has been produced by the Applicant to support this statement. While such an amount would not actually have been paid to Mr Cook, nor does the Applicant contend that there has been actual payment, the Applicant states that the amount was credited to the beneficiary’s loan account with the Applicant. As outlined above, the credit entry made to Mr Cook’s loan account for the 2020 Income Year, according to the 2020 Financial Statements, only increased the loan balance by an amount of $20,085.50, leaving a discrepancy of $28,959.50. The Applicant has not provided information to reconcile this discrepancy.
The Applicant has made no submission nor provided any evidence to rely on the doctrine of set-off, to establish the payment of the purported salary and wages. The mere entry into the books of accounts of the Applicant of the purported salary and wages paid is insufficient to establish the set-off doctrine.[146]
[146] Respondent’s submissions [71(g)] citing 5 Manzi v. Smith (1975) 132 CLR 671; (1975) 49 ALJR 376; Temples Wholesale Flower Supplies Pty Ltd v. Federal Commissioner of Taxation 91 ATC 4387, 21 ATR 1606.
Whilst the Applicant’s Income Tax Return for the 2020 Income Year, and the reporting of the wages of $93,000 in the Individual Income Tax Return of Mr Cook for the 2020 income year,[147] is advanced as evidence of the wages or salary paid by the Applicant to Mr Cook, the authorities discussed below indicate that the way in which a taxpayer treats an amount for taxation purposes is not determinative of its proper characterisation at law.[148]
[147] Exhibit R1, T31-186, 187.
[148] RSFIC [75] citing Temples Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation (1991) 29 FCR 93, Commissioner of Taxation v Russ [2021] FCA 766 at [137] and Greig v Commissioner of Taxation (2020) 275 FCR 445 at [242(3)] (Steward J).
Constructive payment of a salary and wages to Mr Cook
Subdivision 12-B of Schedule 1 to the TAA requires an entity to withhold from certain payments. The obligation to withhold from salary, wages and similar amounts paid to employees arises under section 12-35 of Schedule 1 to the TAA. In each case, the obligation to withhold arises upon payment of a relevant amount. However, subsection 11-5(1) of Schedule 1 to the TAA extends that obligation to constructive payment. It provides:
In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other’s behalf or as the other directs.
For the reasons set out below, the Tribunal finds that there was not a constructive payment as defined in subsection 11-5(1) of the TAA by the Applicant of salary and wages of $93,000 to Mr Cook.
The authorities establish that an amount is not ‘applied’ or ‘dealt with’ where all that happens is that the amount remains payable. In Permanent Trustee Company of New South Wales v Federal Commissioner of Taxation (‘Permanent Trustee’),[149] the High Court considered the application of former section 19 of the Income Tax Assessment Act 1936.It deemed income to have been derived when, even though the income was not actually paid, it had been dealt with on the taxpayer’s behalf or as he directs. The taxpayer (who was deceased) was owed an amount of interest which had never been paid to him. Rich J said that the object of former section 19:
… is to prevent a taxpayer escaping tax though his resources have actually been increased by the accrual of that income and its transformation into some form of capital wealth or its utilization for some purpose.[150]
[149] (1940) 6 ATD 5.
[150] at 12.
His Honour went on to say that ‘to see whether income has been derived one must look to realities’ and concluded that the interest had not been derived because the taxpayer was no nearer to getting his money or transferring it into anything of value.[151]
[151] at 13.
Permanent Trustee was applied by the High Court in Brent v Federal Commissioner of Taxation.[152] Mrs Brent was owed an amount by a media organisation which she had not received because she had not asked for payment. The High Court found that former section 19 did not apply to deem the unpaid amount as having been received by Mrs Brent. Gibbs CJ, following the decision of Rich J in Permanent Trustee, held:
The evidence is simply that the appellant did not ask for payment and that the company refrained from making payment. On the evidence I decline to hold that the company held the balance of the money pursuant to a request by the appellant not to pay it. However, even if the company had deferred payment at the request of the appellant, sec. 19 would not have applied. Income is not ‘dealt with’’, under sec. 19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower.[153]
[152] (1971) 125 CLR 418.
[153] at 430.
His Honour continued:
In the present case, even if the money had been retained at the request of the appellant, her position would have remained exactly as it was; the income would not have been used on her behalf and the company would have remained under an obligation to pay it to her.[154]
[154] at 430-431.
The same approach was adopted in Brookton Co-operative Society Ltd v Federal Commissioner of Taxation,[155] where the High Court held that a book entry recording an interim dividend as payable did not amount to ‘payment’ of the dividend.
[155] (1981) 147 CLR 441.
A more recent authority which considered the constructive payment provisions in relation to employment income is Blank v Commissioner of Taxation (‘Blank’).[156] The case concerned the proper characterisation of amounts received by Mr Blank under a profit participation plan with his former employer. One of the questions for the Court was whether there was constructive receipt under subsection 6-5(4) of the Income Tax Assessment Act 1997 where amounts due to Mr Blank from his former employer had not been paid to him because he had asked the employer to refrain from paying.[157] The Full Court, applying Brent, found that subsection 6-5(4) did not apply because the income had not been ‘dealt with’ on behalf of Mr Blank because his employer refrained from making payment of the amount due to him at his request. Kenny and Robertson JJ stated:
Brent v Federal Commissioner of Taxation [1971] HCA 48; 125 CLR 418 indicates that more is required: see Brent v FCT at 125 CLR at 430 (Gibbs J). There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. It was the additional events in January 2008 that gave rise to the relevant derivation of income.[158]
[156] (2015) 242 FCR 96.
[157] at [94].
[158] at [95].
The events in Blank which ultimately did amount to a constructive payment (and therefore derivation of income) to Mr Blank was when his employer, upon his request, paid the Swiss tax authorities to discharge Mr Blank’s obligation for Swiss tax.[159]
[159] at [146].
Accordingly, the relevant authorities establish that the mere crediting in an entity’s books to recognise an amount payable does not, without more, amount to a constructive payment. The mere recognition of an amount being payable is not enough for that amount to be ‘applied’ or ‘dealt with’ on the creditor’s behalf or as the creditor directs.
Senior Member James recently found, in MJ and IT Holdings, that a gross wage of $25,000 had been constructively paid to Ms Knight, the director of the relevant taxpayer in that case, pursuant to the requirements of section 11-5 of Schedule 1 to the TAA in the month of March 2020.[160] MJ and IT Holdings concerned MJ and IT Holdings Pty Ltd, the relevant taxpayer, and its eligibility for a CFB payment based on the claim by the taxpayer to have made a $25,000 payment, being a director's fee and expensed by way of a journal entry in the accounting records of the taxpayer, between 29 and 31 March 2020. The Tribunal decided that, notwithstanding the accounting records provided (which were clearly described in the accounts as a director's loan account and which did not establish the existence of offsetting liabilities), it was the intention of the parties that the director's fee be offset against amounts the taxpayer considered it had advanced to the director over the course of the year.[161] The fact that the director's loan account was in credit and that there were no advanced amounts against which to offset the director's fee was considered by the Tribunal to be a mistake on the part of the taxpayer's accountant from which no adverse conclusions could be inferred.[162] In this context, the Tribunal noted that the taxpayer had changed their accounting software,[163] and the taxpayer's accountant had misunderstood the software and instructions.[164]
[160] at [31]-[33].
[161] at [31]-[33].
[162] at [40].
[163] at [37].
[164] at [40].
Specifically, Senior Member James stated:
… the Tribunal finds that the sole director determined, together with her husband, the other shareholder, that she was to be paid $25,000 remuneration for her services in March 2020. She instructed the company’s accountant to raise the appropriate accounting entries which included the attending to the appropriate PAYG withholding and recording the balance to her loan account. Upon the expensing of the directors’ fee, the withholding of the PAYG, and the dealing with the balance in the loan account, there was a constructive payment of the $25,000 to her.[165]
[165] at [33].
The Respondent submits that the Tribunal’s findings in MJ and IT Holdings are fundamentally factual findings based on the evidence in the specific case, including the reasoning that the taxpayer had erroneously recorded the transaction in their accounts in the context of a change in accounting software. The Respondent’s position in this case is that the Applicant has not provided sufficient evidence, that is over and above the bank statements and the 2020 Financial Statements, to align the present case with the decision of Senior Member James in MJ and IT Holdings.
The only documentary evidence which records a wage or salary entitlement are the two payslips,[166] the Applicant’s BAS lodgments,[167] the PAYG Payment summary of the Applicant,[168] the PAYG Payment Summary signed by Mr Cook,[169] superannuation payment lodgments of the Applicant,[170] the Income Tax Return of the Applicant,[171] the Income Tax Return of Mr Cook,[172] and the 2020 Financial Statements. The Tribunal finds that the reliability of the information within these documents is questionable and that the weight to be placed on them should be limited. This is for reason that they were created by the Applicant or Mr Cook, or at the Applicant’s or Mr Cook’s instruction, and reflect only the Applicant’s and Mr Cook’s characterisation of facts and circumstances surrounding the purported payment of salary and wages. The payslips are undated and do not meet the legislative requirements,[173] and the Applicant’s PAYG declarations and activity statements, the superannuation payments and the lodgment of the Applicant’s and Mr Cook’s income tax returns for the 2020 Income Year, were all post the CFB announcement on 12 March 2020. Accordingly, the Tribunal has given these documents limited weight in determining whether a constructive payment of salary or wages was made to Mr Cook.
[166] Exhibit R1, T16-90, 91.
[167] Exhibit R1, T5-T7, T9, T12-T15, T22-T23, ST1-ST6.
[168] Exhibit R1, T16-89.
[169] Exhibit R1, T16-88.
[172] Exhibit R1, T31.
[173] Section 536(2)(b) Fair Work Act 2009 (Cth); Regulation 3.46 Fair Work Regulations 2009 (Cth).
In VNBM and Commissioner of Taxation (‘VNBM’),[174] Senior Member Olding concluded that:
Inclusion of wages in these documents could scarcely be regarded as strong evidence of what actually occurred… This contributes to the impression that the Director regarded the quantification of the wages to be included in returns as a means of achieving a desired end rather than necessarily reflecting wages actually paid during the March 2020 quarter. That journal entries may be accepted as evidencing payments between related parties for tax purposes in particular cases does not mean they suffice for CFB purposes where payment of wages subject to PAYGW in the specified periods is a condition of eligibility.[175]
[174] [2021] AATA 1626.
[175] at [77].
The Applicant has not provided a trial balance or loan ledgers which could be contemporaneous documentary evidence of the payment of salary and wages and the Loan in the Relevant Periods. From this, the inference can be drawn that the Applicant has not provided such evidence as it cannot substantiate any salary or wages being paid ‘in the period’. It follows that, even if the Applicant’s actions were effective to constitute actual or constructive payment, the Applicant has not demonstrated that the net wage of $61,525 was paid to Mr Cook in the Relevant Periods. Based on the entries in the Applicant’s bank statements and Mr Cook’s credit card statements, the only amounts that the Applicant could actually claim it paid to Mr Cook during the Relevant Periods are the total payments to his credit card of $6,120.00[176] in the March 2020 Quarter and $5,200.00[177] in the June 2020 Quarter.
Therefore, based on the reasoning above, the Tribunal finds that no payments were made by the Applicant during the Relevant Period from which it was required to withhold pursuant to subdivision 12-B of Schedule 1 to the TAA. It therefore concludes that the Applicant’s purported decision to have made such payments is for the purpose of attempting to substantiate and/or inflate its CFB entitlement for the Relevant Periods.
Accordingly, the Tribunal finds that the Applicant has failed to discharge its burden of proof to establish, for the purposes of subparagraph 5(1)(a)(i) of the BCF Act, that it made payments of salary and wages to Mr Cook in the Relevant Periods from which it was required to withhold pursuant to subdivision 12-B of Schedule 1 to the TAA.
Having concluded that the Applicant has not demonstrated that it satisfies the requirements of subparagraph 5(1)(a)(i) of the BCF Act, it is unnecessary for the Tribunal to consider whether it fails to satisfy the eligibility criteria for the CFB because it entered into or carried out a scheme for the purposes of paragraph 5(1)(g) of the BCF Act. However, for completeness, the Tribunal has considered the issue in the paragraphs which follow.
2) The ‘scheme’ provision
For the following reasons, and based on the evidence before it, the Tribunal is satisfied that the Applicant (and/or its associates and agents) entered into or carried out a scheme for the purposes of paragraph 5(1)(g) of the BFC Act.
The Applicant contends that in January 2020 it made a decision to commence treating Mr Cook as an employee during the Relevant Periods and to pay him a salary rather than making a trust distribution of business profits to him at the end of the income year ended 30 June 2020 (‘2020 Income Year’), as per the tax planning practice of the Applicant in the income year ended 30 June 2019 (‘2019 Income Year’), being the relevant preceding income year and the Applicant’s first income year of trading. The Applicant claims that ‘it intended to pay wages to employee(s) once it had the funds to do so’,[178] and that initially investments would be made in equipment, stock, and capital improvements.[179] The Applicant’s Objection stated that the decision as to whether or not salaries and bonuses should be paid for small business clients ‘is always based on business performance’.[180] The Applicant does this in consultation with its accountant,[181] and ‘based on [a] practice of reviewing client’s financial positions prior to the end of the financial year and paying profits as a wage, as opposed to it being a trust distribution.’[182]
[179] Exhibit R1, T16-81.
[180] Exhibit R1, T24-166.
[182] Exhibit R1, T16-81.
The Applicant and its accountants rely on the position of not paying salary and wages to Mr Cook, in the 2019 Income Year, being its first year of operation, because it was a ‘start-up entity’. Mr Ian Prescott, an employee of Voltage Accounting, stated that ‘[a]s with all new business’s [sic], it takes time to become profitable and most start-ups leave money in the business to fund initial growth.’[183]
[183] Exhibit R1, T24-166.
Whilst the Applicant did not operate prior to 1 July 2018, the Business it carried on during the Relevant Periods had been operated by Mr Cook as a sole trader in since 2015.[184] The Business derived increasingly larger business profits in each of its active income years prior to the 2019 income year, being:
·$9,866 in the income year ended 30 June 2016;[185]
·$38,848 in the income year ended 30 June 2017;[186] and
·$72,569 in the income year ended 30 June 2018.[187]
[184] Exhibit R1, Further ST1-320.
[185] Exhibit R1, Further ST2.
[186] Exhibit R1, Further ST3.
[187] Exhibit R1, Further ST4.
In addition, the evidence shows the Applicant was profitable in the 2019 Income Year, with a reported total business income of $186,576,[188] net income of $60,342 (after deduction of tax losses),[189] and nil salary and wage expenses.[190] Payment of trust distributions to beneficiaries were made in the amounts of $49,480 to Mr Cook and $10,862 to Ms Kiss.[191] The cash flow of the Applicant in the first two quarters of the 2020 Financial Year was positive,[192] with total sales of $53,028[193] for the September 2019 Quarter and $67,578[194] total sales for the December 2019 Quarter.
[188] Exhibit R1, T10-31.
[189] Exhibit R1, T10-34.
[190] Exhibit R1, T10-35.
[191] Exhibit R1, T10-36, T10-37.
[192] Exhibit R1, T14-77, T15-79.
[193] Exhibit R1, T9-29.
[194] Exhibit R1, T13-76
Therefore, the evidence is that, whereas the Applicant only commenced operating the Business on 1 July 2018, the Business was established during the Relevant Periods, having operated profitably for a period of four income years prior to this time. This is contrary to the evidence of Mr Prescott that salary and wages were not paid by the Applicant to Mr Cook for reason that it was a ‘start up entity’ and that ‘it takes time to become profitable.’[195]
[195] Exhibit R1, T24-166.
Further, the stated practice of the Applicant’s accountants ‘to review [the] client’s financial positions prior to the end of the financial year and paying profits as a wage, as opposed to it being a trust distribution’[196] is contrary to the fact that the Applicant paid trust distributions out of the profits of the company of $49,480 to Mr Cook and $10,862 to Ms Kiss in the 2019 income year. In addition, the fact that the Business was an established profitable business, and the purported creation of the Loan, is contrary to the evidence of Mr Walsh that wages would be paid once the business was profitable.[197]
[197] Transcript, P-53 lines [35]-[40].
Further, the fact that the Loan was purportedly entered into during the Relevant period appears contrived when the cash funds standing to the credit of the Applicant’s bank account with People’s Choice Credit Union, account number ending ******089, as at 31 March 2020 was $42,003.89[198] and at 30 June 2020 was $52,858.63.[199] These amounts would have allowed the payment of a substantial amount of any net salary or wages to Mr Cook.
[198] Exhibit R1, T19-142.
[199] Exhibit R1, T20-156.
Accordingly, the Tribunal finds that on an objective view of the available evidence, the timing of the Applicant’s decision to make purported salary and wage payments to Mr Cook during the Relevant Periods following 12 March 2020 indicates it was undertaken for the purpose of the Applicant to obtain or increase an entitlement to the CFB. This is supported by the evidence that it was a departure from its past conduct of paying profit as trust distributions, and the round robin loan arrangement in relation to the purported salary and wage in the June 2020 quarter.[200]
[200] Exhibit R1, T24-166; T1-5.
The Applicant refers to the evidence of Mr Walsh as to advice it received in respect of the anti-avoidance provisions contained in Part IVA of ITAA.[201] The Tribunal finds that this evidence does not assist the Applicant to discharge its burden. If concerns around the potential application of Part IVA to the Applicant’s renumeration structure for Mr Cook had resulted in the commencement of it paying salary and wages to Mr Cook as of 1 January 2020, this would have been raised in both the Applicant’s Objection and Review Application.[202] Instead it was first relied upon in the Applicant’s Statement of Facts Issues and Contentions (‘SFIC’) provided on 14 October 2021.[203] Furthermore, the Applicant’s claims about Part IVA in the 2020 income year are inconsistent with its paying of trust distributions in the 2019 income Year. Had this been the intended and dominant purpose of the Applicant paying salary and wages to Mr Cook in the 2020 Income Year, the Applicant should have also paid salary and wages to Mr Cook in the 2019 Income Year to avoid the possible application of Part IVA.[204]
[201] Transcript P57, P-58.
[202] Exhibit R1, T24-166; T1-5.
[203] Exhibit R1, Applicant’s SFIC.
[204] Exhibit R1, T11.
The Applicant also claims that another reason for the commencement of the payment of the purported salary and wages to Mr Cook in the Relevant Periods, was the need to bolster Mr Cook’s income for loan serviceability purposes, to support Mr Cook’s purchase of an investment property.[205] This is inconsistent with the Applicant’s claim that there was always an intention to pay salary and wages once its cash flow had stabilised. Furthermore, given that the Applicant had the benefit of financial planning and accounting advice since at least the commencement of its operations, and its accountants, Voltage Accounting, submitted the Objection,[206] it would be expected that this additional purpose for commencing to make salary and wages payments to Mr Cook would be raised in the Objection or the Review Application.[207] Instead, it was first raised in the Applicant’s SFIC provided on 14 October 2021.[208]
[205] Applicant’s closing submissions [4.2.3]-[4.2.11].
[206] Exhibit R1, T24-166.
[207] Exhibit R1, T1-5.
[208] Exhibit R1, Applicant’s SFIC.
Finally, the Tribunal notes that there is no contemporaneous written record of the decision by the Applicant to commence paying salary and wages to Mr Cook. In VNBM, in relation to a minute recording a decision to increase wages, Senior Member Olding stated, ‘Accountants in public practice are well accustomed to preparing minutes of directors’ meetings. I would have thought that company minutes would be an obvious, if not the first, place to look for documentary evidence of the applicant’s intention.’167
On the basis of the evidence before it and the above reasons, the Tribunal finds that the Applicant has failed to discharge its burden of proof to establish, for the purposes of paragraph 5(1)(g) of the BCF Act, that it did not enter into or carry out a scheme for the sole or dominant purpose of obtaining a CFB.
DECISION
The Reviewable Decision dated 8 April 2021 is affirmed.
115. I certify that the preceding 114 [one hundred and fourteen] paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr Kirk.
........ [Sgnd]..............................
Legal Associate
Dated 5 August 2022
Date of hearing: 28 March 2022
Applicant’s Representative: Justin Cook
Respondent’s Representative: Mira Richtering
[139] RFZD and Commissioner of Taxation (Taxation) [2022] AATA 988 (14 April 2022), [75].
[170] Exhibit R1, ST9-ST11.
[171] Exhibit R1, T29.
[176] Exhibit R1, T33.
[177] Exhibit R1, T32.
[178] Exhibit R1, T16-81.
[181] Transcript, P-8 line [5].
[196] Exhibit R1, T16-81.
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