THORPE and COMMISSIONER OF TAXATION
[2011] AATA 638
•12 September 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 638
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/4784-4785
TAXATION APPEALS DIVISION ) No 2010/5083-5084
Re ANDREW THORPE Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date12 September 2011
PlacePerth
Decision The Tribunal affirms the decisions under review.
..(sgd) Mr A Sweidan.....
Senior Member
CATCHWORDS
Income Tax - Joint Venture to develop and sell units - allowable deductions - onus of proof - whether applicant entitled to other deductions – held onus of proof not discharged – decisions under review affirmed
LEGISLATION
Income Tax Assessment Act 1997 SS 6-5, 8-
Taxation Administration Act 1953 s 14ZZK (b)(i)
CASES
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Vadasz and Commissioner of Taxation [2006] AATA 682; (2006) 63 ATR 1236
Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Galea v Federal Commissioner of Taxation [1990] FCA 456; 90 ATC 5060
Butler and Commissioner of Taxation [2009] AATA 283; (2009) 72 ATR 284
Graham Docker and Associates Pty Ltd and Commissioner of Taxation [2005] AATA 1180; (2005) 61 ATR 1077
Nguyen and Commissioner of Taxation [2011] AATA 544 (4 August 2011)
Nozzi Pty Ltd Commissioner of Taxation [2003] FCA 356
Eldridge v Federal Commissioner of Taxation (1990) 90 ATC 4907
Thorpe v Sizer Developments Pty Ltd & Anor [2006] WASC 151
Re a solicitor [1993] QB 69
General Medical Council v Spackman [1943] AC 627
Barbaro v Minister for Immigration and Ethnic Affairs (1982) 44 ALR 690
3D Scaffolding Pty Ltd v Commissioner of Taxation (2008) 105 ALD 475; [2008] FCA 1477
Federal Commissioner of Taxation v Day (2008) 236 CLR 163
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164; 2001 ATC 4111
Dixon v Federal Commissioner of Taxation [2008] FCAFC; 167 FCR 287REASONS FOR DECISION
12 September 2011 Mr A Sweidan, Senior Member Background and History
1. Based on the taxation returns submitted by applicant, which did not include any income from the Maylands development referred to below the respondent issued notices of assessment for the years ended 30 June 2003 and 30 June 2004 (the relevant years), in the sums of $102,133 and $17,705 respectively.
2. Subsequently, following an audit the respondent issued amended notices of assessment for the relevant years on 14 March 2007, in the sums of $394,929 and $376,764 respectively. The respondent also imposed penalties of 50% of the tax shortfall amount, on the basis that the applicant had been reckless in failing to include income from the Maylands development.
3. On 12 October 2009 and again on 31 December 2009 the applicant lodged objections against the amended assessments.
4. On 23 September 2010 the respondent allowed the objections in part and reduced the taxable income for 2003 by $151,848 (from $394,929 to $243,081, of which $102,133 was the income declared by the applicant and $140,948 was attributable to the Maylands development and for 2004 by $144,367 (from $376,764 to $232,397, of which $17,705 was the income declared by the applicant and $214,692 was attributable to the Maylands development). The penalties were proportionately reduced.
5. The applicant seeks review of the objection decisions.
Applicant’s Contentions
6. The applicant alleges that the assessments are excessive because he did not receive monies from the sale of units in the Maylands development and/or the respondent has not allowed as deductions:
6.1 the full extent of the expenses claimed by the applicant in respect of the Maylands development; and
6.2 two unrelated payments made by the applicant to a client of his legal practice, Margaret Spencer.
These are the subject of 2010/5083-4.
7. The applicant also challenges the fact and quantum of penalties imposed by the respondent. These are the subject of 2008/4784-5.
Documentary Evidence Before The Tribunal
8. In 2008/4784-5 the respondent produced the ‘T’ documents (referred to in these reasons as “2008T”) and a set of supplementary documents dated 9 September 2009 (referred to as “2008S”).
9. In 2010/5083-4 the respondent produced the ‘T’ documents (referred to as “2010T”). Omitted from those documents were updated objections lodged by the taxpayer’s agent on 31 December 2009, which are now exhibit R2 in 2010/5083-4.
10. The applicant gave evidence by way of a witness statement in 2010/5083-4 (Ex A1) and orally by way of cross-examination. Some further documentary evidence was tendered by both parties at the hearing on 28 July 2011.
Statutory Provisions Relevant TO Substantive Issues
11. The issues in relation to the quantum of the assessment concern whether income was derived under s.6-5 of the Income Tax Assessment Act 1997 (Cth)(“ITAA 1997”), and whether claimed deductions are allowable under s.8-1 of the ITAA 1997.
12. s 6-5 of the ITAA 1997 relevantly provides:
(1)Your assessable income includes income according to ordinary concepts, which is called ordinary income.
(2)If you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia, during the income year.
...
(4)In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
13. At the relevant time s.8-1 of the ITAA 1997 provided:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature.
14. In relation to penalty, at the relevant time (being when the amended assessment was issued on 14 March 2007) subsection 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) provided:
You are liable to an administrative penalty if:
(a)you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c) you have a shortfall amount as a result of the statement.
15. SS 284-80 TAA defined a “shortfall amount” as “the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been”.
16. SS 284-90 TAA relevantly defines the “base penalty amount” by reference to a table which includes Item 2 – “50% of your shortfall amount or part” if “You have a shortfall amount as a result of a statement described in subsection 284-75(1) or (4) and the amount, or part of the amount, resulted from recklessness by you or your agent as to the operation of a taxation law”.
17. SS 298-20 TAA provides that: “The Commissioner may remit all or a part of the penalty.”
Onus of Proof on the Applicant
18. S 14ZZK(b)(i) of the TAA provides that:
"On an application for review of a reviewable decision the applicant has the burden of proving that if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive."
19. It is clear from the case law that where an applicant disputes a taxation assessment the onus is on the applicant to show that his taxable income is in fact less than the amount assessed, and further to prove what the correct assessment ought to be: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; Vadasz and Commissioner of Taxation [2006] AATA 682; (2006) 63 ATR 1236 at [31]-[32].
20. It is also clear that there is no onus on the respondent to show that the assessment is correct, or even that it is supported by evidence or indeed that it is anything other than a guess: Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89; Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87-88.
21. Even if the respondent attempts but fails to establish a positive case, the Tribunal is in no different position than it would have been if the respondent had not sought at all to advance a positive case: Hill J in Galea v Federal Commissioner of Taxation [1990] FCA 456; 90 ATC 5060 at [34].
22. It has also been held that in circumstances where an applicant has not kept proper records or has not produced relevant documents to the Tribunal, this will be taken into account in determining whether he has discharged his onus of proof: see the cases cited above and Butler and Commissioner of Taxation [2009] AATA 283; (2009) 72 ATR 284 at [26]-[29]; and Graham Docker and Associates Pty Ltd and Commissioner of Taxation [2005] AATA 1180; (2005) 61 ATR 1077 at [25]-[32].
23. While a taxpayer’s evidence given on oath may in some circumstances be sufficient to discharge the onus of proof, some other corroborative evidence is usually required which makes it more probable than not that his sworn testimony is to be believed: see Nguyen and Commissioner of Taxation [2011] AATA 544 (4 August 2011) at [7].
24. Similarly, in relation to penalties, the burden of proof is on the applicant to show that the penalties are excessive: Nozzi Pty Ltd Commissioner of Taxation [2003] FCA 356.
25. S 14ZZK(a) of the TAA provides that the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates. Accordingly the Tribunal is confined in its inquiries and deliberations by the applicant’s objections and the evidence placed before it: Eldridge v Federal Commissioner of Taxation (1990) 90 ATC 4907 at 4921.
26. The grounds of objection can be found at:
26.1In relation to the quantum of the assessments (2010/5083-4): See Ex R2 (replacing 2010T pp.73-78 and 80-85).
26.2 In relation to penalty (2008/4785-5): 2008T pp. 51-58.
EVIDENCE AND TRIBUNAL’S FINDINGS
MAYLANDS JOINT VENTURE (2010/5083-4)
Background
27. The Maylands Joint Venture agreement is at 2010T p.47. Relevantly under that agreement:
27.1applicant was to fund the purchase of 7 of the 18 units, being Units 1, 6, 8, 11, 12, 14 and 15, and provide legal services at no cost: clause 1. In return he was to take the whole of the net proceeds from 7 units: clause 4; and
27.2applicant was also to “advance” up to $100,000 “for the renovation and refurbishment of the improvements on the land” (being all 16 units, as defined in Recital A): clause 3. Applicant was to be repaid the amounts expended under clause 3 from the sale of the remaining units: clause 5.
28. These terms are confirmed by the applicant in his witness statement (Ex A1) at [4]. The Tribunal notes that, contrary to applicant’s closing submissions, the applicant was not required under the Joint Venture agreement to pay the costs of refurbishing 16 units.
29. 6 of the 7 units in respect of which the applicant was to receive the proceeds sold during 2003 and 2004 as follows:
Unit Total sale price Evidence (2010T p.) 2003 11 $188,000 278 (settlement statement) 12 $178,000 279 (settlement statement) 14 $172,000 280 (settlement statement) 2004 1 $223,212 285 (settlement statement) 8 $240,000 286 (settlement statement) 15 $183,000 287 (settlement statement)
30. The amended assessment was raised on the basis that Unit 6 sold in November 2004 (see 2010T p.94) i.e. outside the 2004 financial year.
31. The respondent calculated the applicants’ profit in respect of each unit as follows:
31.1 Sale price of each unit.
31.2 Minus costs of each unit:
(i)$578,850 capital contribution for 7 units (2010 p.234). This was apportioned amongst the 7 units.
(ii)Stamp duty of $81,900 on all units (2010T p. 243) plus a further amount of $32,880 (2010T pp.79, 92-96). This was apportioned between the 16 units.
31.3 Minus costs of development of each unit and interest and other expenses on borrowings in respect of each unit:
(i)Spreadsheet of expenditure (2010T pp.41-46), but not including the column “Clark Gray” - $366,202. This was apportioned between the 16 units.
(ii)Further schedule of expenditure (2010T p.242, 272) - $6,583. This was apportioned between the 16 units.
(iii)Interest and other expenses on borrowings (2010T p.243,284) - $64,177. This was apportioned between the 7 units
31.4 Minus costs of sale of each unit, as shown on each of the settlement statements.
32. The amended assessments were issued on the basis that income was derived when each of the applicant’s 6 units was sold (i.e. at the time of settlement), and deductions were allowed in each of 2003 and 2004 insofar as they were incurred during either of those years in gaining or producing income from the ultimate sale of each of the applicant’s units. See Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452; (1997) 97 ATC 4585.
33. The respondent asserts (without prejudice to the position as to the onus of proof), and the Tribunal finds that the above approach represented a reasonable estimate by the respondent as to the applicant’s assessable income from the Maylands development based on the information available at the time of the amended assessment. The Tribunal notes however that it is clear that that estimate assumed, in favour of the applicant, that substantial outgoings were incurred by the applicant in respect of the Maylands development. The evidence in these proceedings in the view of the Tribunal clearly shows that a large part of the monies paid out by the applicant was in fact by way of loans (see further below) and therefore the respondent, by the amended assessments, has in fact clearly allowed more by way of deductions than the applicant is entitled to.
Grounds of objection
34. By his objections (Ex R2) the applicant claims that there was no net assessable income from the Maylands Joint Venture in 2003 or 2004, and says that there was a “shortfall” of $94,745 for 2003 and $399,083 for 2004 by reference to a ‘balance sheet’ for each of those years (Schedule 1 to each objection). In relation to those documents (Schedule 1 to each objection) the Tribunal finds as follows:
34.1applicant refers to a spreadsheet of expenditure in relation to the Maylands development. This appears to be the document at 2010T pp.41-46, albeit the total in that document (under the column “Maylands”) is slightly different to the amount in Schedule 1 to the 2003 objection and substantially less than the amount in Schedule 1 to the 2004 objection. Documentation claimed by applicant to support that spreadsheet is at 2010T pp.101 – 235.
34.2However, the Tribunal notes that the spreadsheet does not identify particular expenses incurred in respect of the renovation of the particular units in respect of which applicant was to receive the proceeds of sale (as acknowledged by the applicant at 2010T p.291). Rather, the applicant claims on a global basis that all of the payments which can be connected to the Maylands development are allowable deductions.
34.3Loans by applicant to Gray and/or Aaronside Pty Ltd are not in the Tribunal’s opinion outgoings incurred by him in gaining or producing income, whether from the Maylands development or otherwise.
34.4The payments to BankWest and R W Richardson are also in the Tribunal’s view clearly payments made on behalf of Mr Gray which constitute loans to Mr Gray. This characterisation of the payments is consistent with the letter from the applicant at 2010T p.92 paragraphs 2A and 2B. It is clear that these payments were not part of the renovation and refurbishment costs.
34.5The amounts listed in the applicant’s spreadsheet as proceeds of sale of the various units are in fact well below the actual sale prices as shown in the settlement statements.
34.6Schedule 1 shows that money was being repaid to the applicant. This is explained in 2010T p.93 paragraph 5, and is consistent with the characterisation of payments made by the applicant to or on behalf of Gray and Aaronisle Pty Ltd as loans.
34.7The 2004 document (at 2010T p.86) is cumulative i.e. includes the alleged shortfall from 2003. Indeed the respondent wrote to the applicant (2010T p.89) and pointed out that the schedule previously provided only had expenses totalling $293,696.34 in 2004 i.e. the expenses have been over claimed by $131,896.39 in this regard. It was also pointed out that no additional schedule was provided and the applicant was asked to provide this together with evidence to support it. At 2010T p93 the applicant responded stating that the amount of $425,592.73 included the $131,896.39 so this amount was in fact double counted. He also said that the schedule of the additional amount of $131,896.39 was being sought. The schedule and supporting evidence was never provided.
35. Applicant’s case appears to be based on an argument that monies advanced by the applicant by way of loans to the other joint venture parties are deductible outgoings for the purposes of s.8-1 of the ITAA 1997. That is clearly not so. Applicant’s assertion that “the joint ventures owed the applicant money for several reasons. Until all of those monies were repaid the applicant received no income” is rejected by the Tribunal.
36. Overall the Tribunal finds that the applicant has not discharged his onus of demonstrating that the amended assessments are excessive and that he has failed to show that he is entitled to more by way of deductions than the amounts allowed by the respondent.
Amended assessments are not excessive
37. The Tribunal is of the view that the only conclusion reasonably open on the evidence in these proceedings is that the amended assessments are not excessive, and indeed if anything are unduly favourable to the applicant, for the following reasons:
37.1 The applicant has not demonstrated that all of the expenses he claims were expenses incurred in relation to the Maylands development.
37.2In any event, a large part of the claimed expenses were by the applicant’s own admission loans from the applicant to the other members of the Joint Venture.
37.3Furthermore many of those loans were repaid and/or were not made from the applicant’s funds anyway.
38. The Tribunal also notes that even if the loans were not repaid, the applicant is not entitled to a deduction in relation to any bad debt he incurred because that would be a loss of a capital or private nature, was not incurred during 2003 or 2004 and so does not come within the jurisdiction of the Tribunal in these proceedings.
Expenses overstated in schedule
39. It appears that the schedule of expenditure provided by the applicant (2010T pp 41-46) contains at least a degree of double counting.
40. The schedule has many items which have been paid by credit card and included in the total: see 2010T
40.1 p41 items 27, 30;
40.2 p42 items 35, 45, 46, 49, 54;
40.3 p43 items 67, 86, 90;
40.4 p44 items 95, 110, 111, 112, 115; and
40.5 p45 items 129, 130, 131, 132, 133, 141, 142, 143, 144, 145, 146, 147.
41. The applicant also included amounts in his total when, it seems, credit card statements were paid: see 2010T
41.1 p 41 items 12, 13, 14, 15, 16, 17;
41.2 P42 items 37, 38, 39, 57, 58, 59, 60, 61, 62;
41.3 p43 items 66, 87, 88;
41.4 p44 item 123; and
41.5 p46 item 157, 160.
42. The applicant said in cross-examination that the amounts paid by credit card in the “Maylands” column do not form part of the credit card statement repayment amounts in the “Clark Gray” column. However credit card statements have not been provided by the applicant, so it is not possible to know if this is in fact the case. Further, in the case of items 62, 88, 124, 125, 126, 127, 128, 157 and 160, some or all are in both columns. Hence the two columns cannot both represent expenditure on the Maylands development. The applicant acknowledged that some of those entries may well be errors.
43. The schedule of expenditure includes amounts paid to financial institutions totalling $184,406.95. The applicant has not provided any documentation in relation to these or shown how these payments relate to the gaining of assessable income.
44. The “Clark Gray” column contains payments that are clearly unrelated to the Maylands development: see e.g. item 49 and invoice at 2010T p.118, and the acknowledgment by the applicant in cross-examination that the whole of the “Clark Gray” column refers to payments unrelated to the Maylands development.
45. In particular, in relation to the $45,000 of payments recorded in the schedule (items 1 – 9), the applicant in cross-examination confirmed that these were unrelated to the Maylands development, and made at least in part on the expectation that the money would be repaid from a Northbridge land development in which Gray was involved. The applicant has also previously given sworn evidence in other proceedings that he lent money to Gray in 2002 and 2003, not just in relation to the Maylands development but also in relation to a Northbridge development: see Ex R1 (Thorpe v Sizer Developments Pty Ltd & Anor [2006] WASC 151) at [31]-[32], [35]-[37], [80].
46. Applicant in his witness statement Ex A1 [11]-[12] claims that he only made the loans to Gray because of his involvement in the Maylands Joint Venture: However
46.1For the above reasons that alleged nexus (the reason for making the loans) between the payments and the Maylands development is not acceptable; and
46.2In any event, that is irrelevant to the present proceedings because, given the nature of the payments as loans, they are not outgoings that constitute allowable deductions.
Amounts paid out were loans
47. In the Tribunal’s view the evidence shows that given the terms of the Joint Venture agreement it can be inferred that monies paid out by the applicant in respect of the Maylands development (apart from the initial purchase costs) were loans. The fact that those amounts may have exceeded the $100,000 stated in clause 3 does not change the characterisation of the payments.
48. In the Tribunal’s opinion, the fact of payment of such further amounts either impliedly varied the Joint Venture agreement in clause 3 by increasing the amount there stated, or resulted in an implied collateral agreement on the same terms as clauses 3 and 5 in respect of further payments.
49. The nature of the payments as loans also follows by implication from the fact that the applicant was paying invoices that were addressed to Gray or Aaronisle Pty Ltd or the Caledonia Family Trust: see e.g. 2010T p.114 (item 45 in the schedule at 2010T p.42) and p.178 (item 125), and there is no evidence that these invoices were in respect of the joint venture expenditure, i.e. costs relating to the refurbishment of the units.
50. In his witness statement (Ex A1) the applicant has confirmed the nature of the payments he made to Gray in late 2002 as loans: see [6], [7]. See also 2008S p.7 where the applicant confirmed that the schedule sets out loans to Aaronisle/Gray. He also confirms clause 3 of the Joint Venture agreement created a loan: Ex A1 at [10].
51. The applicant’s witness statement (Ex A1) at [11] further confirms that the additional payments (over and above the initially agreed $100,000) were by way of loan. His expectation was that he would be repaid those additional amounts from the profits in relation to the other units, and the applicant secured the repayments by way of charges from Gray and Vile. See also Ex A1 [21]-[22].
52. The applicant’s evidence in cross-examination was consistent with the characterisation of the “additional expenditure” as loans.
53. The Tribunal also notes that there is no indication that the applicant expected, nor that Gray and Vile agreed, that he would get any share of the profits from the other units other than by way of repayment of the additional amounts he advanced. Hence there is no reason to construe the additional payments as being by way of anything other than loans.
Applicant received money back and/or did not pay out his own money
54. The applicant says he did not receive all the settlement monies, and that over $200,000 was paid to or at the direction of Gray from the applicant’s solicitors trust account (2010T p.291-3; witness statement (Ex A1) [14], [17].
55. This evidence was disputed in cross-examination, on the grounds that it is inconsistent with the contemporaneous settlement statements at 2008S pp. 63, 66, 69, 75, 76, 82, 85, 91. For example, in respect of Lot 9 (not one of the applicant’s lots), see 2008S p.82, which states that the balance of $60,013.37 was “paid on your [Aaronisle Pty Ltd] instructions to A C Thorpe”. This is consistent with the terms of the Joint Venture agreement (clause 5). In cross-examination the applicant acknowledged that on the face of these documents he did receive money from the sale of units (including those that were not ‘his’).
56. The applicant himself carried out all the settlements (see e.g. settlement statement at 2010T p.285; and Joint Venture agreement clause 1; and the applicant confirmed this at S2008 p.32 and in cross-examination). The applicant also confirmed in cross-examination that the funds went into his trust account and it is clear from the evidence that he controlled them.
57. The Tribunal finds that applicant’s assertion to the effect that money was not “received” by him because it was “redrawn” by his Joint Venture partners, is not acceptable. If he chose to direct that money back to Gray and others, that was by way of further loans. It nevertheless remains income of the applicant: see s.6-5(4) of the ITAA 1997.
58. Several of the settlement statements also had amounts withheld as "contributions to refurbishments". The applicant agreed in cross-examination that these also went into the trust account and were used to cover amounts spent on renovations (either to pay expenses or reimburse what had previously been paid).
59. The applicant has not provided any documentary evidence to show that he personally contributed any money. The only bank statement provided is the one at 2010T p282. This is the “AC Thorpe Barristers and Solicitors Trust Account”. This account was used to pay ‘expenses’ (compare the cheque number on that statement and in the schedule item 157 at 2010T p.46 with the other cheque numbers in the schedule, which reveals that many of the cheques in the schedule were drawn on the trust account; and see applicant’s closing submissions [15]) but there is nothing to show how much, if any, of the applicant's own money went into this account.
60. In cross-examination the applicant also acknowledged that he had received money back from Gray. In particular, he received a payment of $50,000 or $55,000 from Gray or Sizer Developments Pty Ltd in May 2003 referred to in Exhibit R1 at [32], which seems to be the same payment as that referred to at 2010T p.79. He did suggest that this may have ‘gone on the Aaronisle ledger’ such that the applicant did not get the benefit of it, but what this means is not clear and in any event that would constitute the receipt of money by him followed immediately by a further loan of the money to Aaronisle.
61. Exhibit R2 at [37] suggests that a large portion of the amounts stated in the “Clark Gray” column of the schedule of expenditure were repaid. In cross-examination the applicant did not disagree that may well have been the case.
62. As to applicant’s closing submissions [12], for the above reasons (including the applicant’s admission in cross-examination that money was lent to Gray for purposes unrelated to the Maylands development) it is clearly not correct to say that the applicant sued Gray for money due to him from the Maylands Joint Venture. The only conclusion open on the evidence is that the applicant may have sued Gray for monies owing from Gray to the applicant. That fact is not in the Tribunal’s opinion relevant to the issues in this proceeding.
Payments To Margaret Spencer (2010/5083-4)
63. The applicant did not claim a deduction in respect of the payments to Margaret Spencer in his tax return, but raised it as an issue for the first time in his objections (see 2010T pp.74, 81). In item 1.2 of schedule 2 to each of the further objection documents (Exhibit R2) the applicant claimed a deduction for payments to M.A. Spencer on 22 August 2002 and 16 July 2003, but gave no details as to what the payments were for other than referring to evidence that the payment was made, including by reference to the decision of the Legal Practitioner’s Disciplinary Tribunal of July 2004. It is not clear whether this is a reference to what is now Exhibit A1, although Exhibit A1 is dated November 2004.
64. The respondent did not allow the payments as deductions.
65. In his application to this Tribunal in 2010/5083-4 the applicant asserted that the 23 September 2010 decision was “wrong and a different decision should be made” (2010T p.2). No further particulars are given. In the Applicant’s Statement of Facts, Issues and Contentions in 2010/5083-4 (undated) the applicant asserted as facts that there were further business deductions of $99,207.75 in 2003 and $12,851.77 in 2004 (paragraphs 5.2 and 5.3) and that in its reasons for decision the respondent failed to address those matters (paragraph 6). Paragraph 14 identifies as an issue whether the further deductions referred to in paragraphs 5.2 and 5.3 were proper deductions. Paragraph 19.2 and 21 made contentions that the respondent should have found the further deductions referred to in paragraphs 5.2 and 5.3 were proper deductions. No facts were asserted, and no contentions made, as to the nature of the payments to Ms Spencer.
66. This was not specifically dealt with in the Respondent’s Statement of Facts, Issues and Contentions dated 8 March 2011, although the respondent made the contention (paragraph 4) that the applicant has not discharged the burden of proving that the assessments are excessive.
67. In his witness statement (Exhibit A1) at [25] the applicant says he paid Ms Spencer $99,207.75 in 2003 and $12,851.77 in 2004. Apart from that, no evidence of these payments was provided, either to the respondent or to the Tribunal e.g. bank account records, copies of cheques or cheque butts (despite references to the existence of such documents in Schedule 2 to Exhibit R2). There is no corroborating evidence that the payments were made at those times and in those amounts. The only other evidence is in Exhibit A2 p.3 where the Legal Practitioners Disciplinary Tribunal found that the applicant “probably from his own resources, paid all monies due and owing to” Ms Spencer (without saying how much that was, or when it was paid).
68. In his witness statement (Exhibit A1) at [25] the applicant says:
68.1 The payments “were monies due to [Ms Spencer] from an investment I made on her behalf in the Arthur River Roadhouse which had been lost”.
68.2 He made the payments to reimburse Ms Spencer because he was under investigation by the Legal Practitioners Complaints Committee and he had legal advice that the payments should be made to preserve his entitlement to practice; and
68.3 The payment was made “partly because it was being alleged that I had personally borrowed the money from [Ms Spencer] rather than that she had loaned them (sic) to the Arthur River Roadhouse”.
69. The applicant himself tendered Exhibit A2, being the report of the Legal Practitioners Disciplinary Tribunal. That document states (bottom of p.2) that the applicant had said in evidence before the Legal Practitioners Complaints Committee that money had been lent from the female client [Ms Spencer] to the applicant and his partner and they as trustees lent the money to the company. The Disciplinary Tribunal noted at p.3 that there were conflicts and deficiencies in the evidence including a lack of proper statements detailing the various actions which the applicant undertook.
70. In cross-examination it was put to the applicant that the Supreme Court of Western Australia had made a finding, or upheld the decision of the Legal Practitioners Disciplinary Tribunal on the basis that the applicant had borrowed money from Ms Spencer which he on-lent to the company. The applicant agreed that was the finding. He also agreed that was the principal basis upon which he was struck off as a legal practitioner.
71. On the basis of the evidence given by the applicant in cross-examination, and Exhibit A2 (tendered by the applicant himself), the Tribunal finds as submitted by the respondent the only finding open to the Tribunal is that it was not just alleged against the applicant, but findings have been made by another tribunal and upheld by the Supreme Court of Western Australia, that he personally borrowed money from Ms Spencer rather than that she had lent it to the Arthur River Roadhouse.
72. This Tribunal is not bound by rules of evidence and may inform itself in any manner it sees fit (s.33 Administrative Appeals Tribunal Act 1975). The Tribunal may use findings of another tribunal or of a court as evidence upon which it bases its findings: Re a solicitor [1993] QB 69; General Medical Council v Spackman [1943] AC 627; Barbaro v Minister for Immigration and Ethnic Affairs (1982) 44 ALR 690 at 693-4. The Tribunal has a discretion as to the weight it will give any such finding. In determining the weight to be given to the previous findings of the Legal Practitioners Disciplinary Tribunal and the Supreme Court, the respondent has submitted that the Tribunal should take into account the undesirability of requiring the parties to relitigate a matter that has already been the subject of extensive litigation in other forums, and the evidence in Ex A2 that in any event there would be evidentiary difficulties in establishing the actual facts in these proceedings because of the contradictory and deficient nature of the evidence (a circumstance attributable to the applicant). The Tribunal accepts this contention.
73. It was not distinctly put to the applicant in cross-examination that he had borrowed money from Ms Spencer. Nor was he asked whether he agreed with the previous findings against him.
74. The evidence before this Tribunal does not clearly establish the nature of the payments made by the applicant to Ms Spencer. There is evidence from the applicant that the payments “were monies due to [Ms Spencer] from an investment I made on her behalf in the Arthur River Roadhouse which had been lost”. Precisely what that means was not explained in the applicant’s evidence. In any event, the Tribunal is not bound to accept the applicant’s evidence particularly in light of evidence (including that led by the applicant himself) that another tribunal and court have made findings to the effect that the applicant borrowed money from Ms Spencer which he on-lent to the Arthur River Roadhouse.
75. The onus is on the applicant to prove that the payments were of a kind that constitute an allowable deduction, such that the amended assessments are excessive. The evidence does not support a positive finding to that effect. In particular, even if the applicant’s evidence as to the quantum and timing of the payments is accepted, he has not established that what he is now claiming as a tax deduction was something other than the repayment of a loan i.e. a payment to discharge a debt he owed to Ms Spencer. That is not an allowable deduction.
76. The applicant was clearly aware of the previous findings against him (indeed he himself tendered evidence of the Legal Practitioners Disciplinary Tribunal finding) and was cross-examined about the Supreme Court finding. Accordingly there has in the Tribunal’s view been no denial of procedural fairness to the applicant in relation to this issue: see 3D Scaffolding Pty Ltd v Commissioner of Taxation (2008) 105 ALD 475; [2008] FCA 1477.
77. There is evidence, which the respondent did not challenge, that at least one of the applicant’s motives in making the payments was to enhance the prospect that he would not be struck off as a legal practitioner. However that does not convert the character of the payments from being the repayment of a loan (if that is what it was) to being a deductible outgoing.
78. Even if the nature of the payments was a gratuitous gesture by the applicant in ensuring his former client was not left out of pocket as a result of the investment she had made (through the applicant as her agent) in the Roadhouse, in the hope that might influence the Legal Practitioners Disciplinary Tribunal and/or the Supreme Court not to strike him off as a barrister and solicitor, it would still not be a deductible outgoing. A payment made in his personal capacity in order to mitigate punishment does not have the necessary connection with earning assessable income as a solicitor. Cf Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at [38], [42].
79. The Tribunal finds that the applicant has failed to show that the payments to Ms Spencer are allowable deductions.
Penalty (2008/4784-5)
80. The penalty was imposed at the rate of 50% of the tax shortfall, as the respondent considered the shortfall resulted from recklessness on the part of the applicant. As a result of the partial allowing of the objection in relation to the quantum of the shortfall and consequential reduction in the amount of the assessments, the penalty was proportionally reduced.
81. Recklessness was described, in the context of the “old” income tax penalty provisions in Part VII of the ITAA 1936, by Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164; 2001 ATC 4111 at [77] as follows:
“to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement."
82. The reasons for the imposition of the penalty are set out in 2008T pp.7-15 (and by way of background, 2008S pp.105-113). In summary:
82.1The applicant did not include the income from the Maylands development in his original returns (at 2008T pp.17-28 and 30-43). At no point has the applicant explained this omission. Rather, his objection has been that his expenses outweighed his income (which is dealt with above in the context of application 2010/5083-4). It is that failure which in the Tribunal’s opinion constitutes recklessness and is the reason why the base penalty should be 50%.
82.2In lodging the original returns without disclosing the income from the Maylands development, the applicant clearly made no genuine attempt to comply with his tax obligations. This is also evidenced by his poor record keeping which has resulted in a situation where the applicant cannot clearly explain his financial affairs as they relate to the Maylands development.
83. Special circumstances need not exist before the discretion to remit a penalty can be exercised: Dixon v Federal Commissioner of Taxation [2008] FCAFC; 167 FCR 287 at 291. However, there must be proper grounds calling for remission on the basis that the outcome is harsh or unjust having regard to the particular circumstances of the applicant.
84. The applicant gave no evidence to explain why he did not include income from the Maylands development in his tax returns. The amounts involved were very significant compared to his other income, and cannot have simply been overlooked. Furthermore the applicant dealt with the settlements of the sale of the units, so was clearly aware that income had been derived.
85. In the view of the Tribunal it is no answer to say that “only when all of these monies [the costs of development] were repaid would any of the return become income requiring declaration” (witness statement (Ex A1) [23]). It is one thing for the applicant to say that he believed he was not making a profit. The Tribunal agrees with the respondent that the element of recklessness arises because the applicant did not declare income, which is a taxpayer’s obligation regardless of the amount of any deductions.
86. Furthermore, the Tribunal finds that the applicant knew that his “claimed outgoings” were loans and not expenses, so he knew or should have known that they do not ‘cancel out’ income received.
87. As well, given the manner in which the applicant conducted his financial affairs, as evidenced by the time it took him subsequently to locate and collate relevant documentation, the Tribunal finds that he had no reasonable basis for forming a view as to whether he had made a profit or not.
88. There is in the Tribunal’s opinion nothing in the applicant’s circumstances that warrants a reduction in penalty. To the contrary, he was an experienced solicitor, had previously worked in the real estate industry, had a tax agent to assist him, and was closely involved in the affairs of the Maylands development. There was no acceptable excuse for his failure to declare income from the Maylands development.
89. It follows that the applicant has not demonstrated that the imposition of the 50% base penalty is excessive, and there is in the Tribunal’s opinion no reason to remit any part of the base penalty amount.
90. It is clear that the partial allowance of the objection arose because the respondent accepted further amounts as deductions. As noted above, that appears in hindsight to have been overly generous to the applicant. The partial allowance of the objection in relation to the quantum of the shortfall amount does not in any way affect the basis for the imposition of a penalty, being the failure to declare any income in relation to the Maylands development.
Decision
91. The Tribunal finds that applicant has comprehensively failed to discharge his onus of demonstrating that the amended assessments and the penalties are excessive. The evidence does not establish that there is an alternative correct quantum of allowable deductions and/or assessable income. If anything, the evidence establishes that the correct quantum of allowable deductions in respect of 2003 and 2004 is less than has been allowed in the amended assessments.
92. The Tribunal accordingly affirms the decisions under review.
I certify that the 92 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed:..(sgd) T Freeman.........
AssociateDate of Hearing 28 July 2011
Date of Final Submissions 22 August 2011
Date of Decision 12 September 2011
Representative for the Applicant Self represented
Counsel for the Respondent Mr S Wright and
Mr F Maloney
Australian Taxation Office
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