Tommaso Caporale and Commissioner of Taxation
[2015] AATA 49
•30 January 2015
[2015] AATA 49
Division TAXATION APPEALS DIVISION File Numbers
2013/0096-0101
2013/3536-3537
2013/3552-3554Re
Tommaso Caporale
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 30 January 2015 Place Sydney 1. The objection decision relating to administrative penalty for the 2011 income year is set aside. Instead the objection is allowed in full.
2. All other objection decisions under review are affirmed.
........................[sgd]................................................
Deputy President S E Frost
CATCHWORDS
TAXATION AND REVENUE – GST – enterprise – carrying on an enterprise – input tax credits – creditable acquisitions – applicant not carrying on an enterprise – acquisitions not made for a creditable purpose – administrative penalty – intentional disregard of the law – penalty uplifted – objection decisions affirmed
TAXATION AND REVENUE – Income Tax – default assessments – whether assessments excessive – failure to prove actual taxable income for relevant income years – deduction claims – no explanation for deductions – no explanation for income figures – administrative penalty – recklessness – intentional disregard of the law – penalty uplifted – objection decisions mostly affirmed
LEGISLATION
Income Tax Assessment Act 1936; ss 167, 171A(2), 170(1)
Taxation Administration Act 1953; ss14ZZK(a), Sch 1 284-90(1), 284-220(1)
A New Tax System (Goods and Services Tax) Act 1999; s 9-20, 11-5, 11-15, 11-20, 23-10
CASES
Commissioner of Taxation v Ryan (2000) 201 CLR 109; [2000] HCA 4
Commissioner of Taxation v Rigoli [2013] FCA 784
Rigoli v Commissioner of Taxation (2014) 141 ALD 529; [2014] FCAFC 29
REASONS FOR DECISION
Deputy President S E Frost
INTRODUCTION
In 2008 the Commissioner’s officers commenced an audit of the tax affairs of the Caporale family and the companies they controlled.
The audit did not end well for Tommaso Caporale. The Commissioner was not satisfied that all of Mr Caporale’s income had been disclosed. The Commissioner also was not satisfied that Mr Caporale had been carrying on an enterprise for GST purposes, which had the effect of calling into question the input tax credits he had claimed on his GST returns.
On 2 April 2012 the Commissioner made assessments of GST net amounts so as to claw back the input tax credits claimed. Two days later the Commissioner made default assessments, under s 167 of the Income Tax Assessment Act 1936 (ITAA 1936), of Mr Caporale’s taxable income for each of the income years 2003 to 2008 inclusive. He had earlier made amended assessments for the income years 2007, 2009 and 2011. After all the dust had settled, and once penalties were added, Mr Caporale faced a total bill of almost $2 million.
Mr Caporale objected against the various assessments of tax and administrative penalty.
All of the objections relating to primary tax were disallowed, with the exception of one of the objections dealing with the 2007 income year, which was allowed in full. That particular objection was against an amended assessment, notice of which issued on 5 May 2009. The apparent benefit of the allowance of the objection was negated once the notice of the default assessment for that year issued on 2 April 2012.
The objections relating to administrative penalty were disallowed, with the exception of the 2011 year, which was allowed in part.
Mr Caporale has now applied to the Tribunal for review of the objection decisions.
I note at the outset that many of the objections lodged by the applicant are quite unspecific about the grounds on which they rely. Accordingly, and for the purpose of bringing the dispute between the parties to an end (at least in relation to the periods covered in this review application), I granted leave under s 14ZZK(a) of the Taxation Administration Act 1953 (TAA) to extend the grounds of objection so that they comprise an exhaustive attack against all particulars of all the assessments under consideration.
With one exception, I have decided in each case to affirm the Commissioner’s objection decisions. My reasons follow.
THE RELEVANT PERIODS
The relevant period for GST purposes is the period from 1 June 2001 to 31 March 2007.
The relevant period for income tax purposes is the period from 1 July 2002 to 30 June 2011, with the exception of the income year ended 30 June 2010. That is the single year in respect of which the Commissioner has so far not expressed any dissatisfaction with the information that Mr Caporale has provided to him (if, indeed, he has provided any information at all for that year).
MR CAPORALE’S ACTIVITIES AND THE IMPACT ON HIS GST POSITION
Mr Caporale was represented in these proceedings by his sister, Ms Rosa Caporale. On his behalf Ms Caporale provided 55 lever-arch folders of documents to the Tribunal. It seems that Ms Caporale considered that those folders would shed light on Mr Caporale’s activities during the relevant period, including how he generated his income, what expenses he incurred in relation to those income-generating activities, what supplies he made for GST purposes and to whom, and what acquisitions he made and from whom, so as not only to attack the various assessments as wrong, but also to establish how they could be made right. I must say that I have not found the documents to be as helpful as Ms Caporale evidently hoped.
Mr Caporale himself did not provide a written statement to the Tribunal to explain his activities during the relevant periods or the sources of his income, and he did not give oral evidence either.
His sister did provide a document that she described as her “witness statement”. It runs to 188 numbered paragraphs over 16 pages. Aside from complaining, without any justification, that the Commissioner had taken “unlawful” and “harsh and oppressive” action during and after the audit, and had made “false and misleading statements to the taxpayer and the Tribunal” by failing to produce documents to the Tribunal that Ms Caporale says are in the Commissioner’s possession, Ms Caporale in her statement explains only in vague terms what her brother’s activities were during the relevant period. Information that is potentially relevant is confined to relatively few paragraphs, quoted below without correction:
[7] The applicant has a Diploma in Architectural Drafting and a Bachelor of Science in Architecture Degree
[8] The applicant was registered for GST for entities being Sydney Dream Designs and Tommaso Caporale
[9] The applicant is on an a cash monthly for Sydney Dream Designs and on an accrual monthly system for Tommaso Caporale
[10] Tommaso & Rosa Caporale was involved in the family business and together undertook various roles including architectural, project management, administrative works, including acting as an agent for various family entities in relation to paying invoices on behalf of the various entities, including paying the invoices from the applicants own personal funds including from personal credit cards, and assisting in the other family members in relation to all works generally required to be performed in all activities in the family business, including the planning, development and management of various family projects, including the Hurstville, Gymea, Helensburgh, Dapto and other projects
[11] Instead of engaging or employing a third party to provided administration services and other works as above, which the third party would have been required to be paid progressively by the other Caporale entities including Caporale Designs Pty Ltd, G & D Caporale and others, Rosa Caporale as director authorised, on behalf of the other entities that Tommaso provide the administration services and act as an agent when required by the various entities
…
[13] In 1994 Tommaso Caporale become involved in the development twin tower highrise residential commercial development in Hurstville
[14] Tommaso Caporale and other Caporale entities loaned Caporal Designs Pty Ltd to advance of the development
[15] Tommaso Caporale and other Caporale entities loaned Caporale Designs Pty Ltd and other Caporale entities to advance other project such as Gymea Bay Project
[16] In April 2003 Tomas0 Caporale borrowed further funds to advance Caporale Designs Pty Ltd so the company could repay some of its existing debts
[17] In 2003-2005 Tommaso Caporale and other Caporale entities borrowed or advanced against other sources such as credit cards to advance Caporale Designs Pty Ltd and other entities including G & D Caporale to further advance other projects such as Gymea Bay
[18] Tommaso Caporale also borrowed and or advanced against credit cards and or assets to live until Caporale Designs Pty Ltd could repay some of the loans back to is or until project could be complete and proceeds of the project and sales proceeds could be realized
[19] In about 2003 Tommaso Caporale and other Caporale entities become involved in the Illawarra Employment & Teaching Centre project currently underway
…
[33] In May 2010 Rosa Caporale advised that the income tax of TommasoCaporale appeared to be incorrect as the family relied on other loans including from Tommaso Caporale credit cards to draw down funds to pay toward business and personal costs. That the applicant contributed towards the family expenses and these were from Loans and borrowings and personal income
…
[50] That the Commissioner has admitted as fact Tommaso Caporale that he owned at the time of the assessments in relation to the periods being assessed several investment properties and vehicles
Let me start by observing that Ms Caporale’s assertion in her paragraph 9, that the one GST entity is reporting GST on both a cash and an accruals basis, is an impossibility. As far as the Commissioner is concerned, the applicant was reporting GST monthly, on a cash basis, and I find that to be the case.
What does the rest of the statement tell me? Unfortunately, not much at all. The applicant is said to have been “involved in the family business”. In broad terms, the family business is a business of property development and construction. But whether the applicant’s “roles”, described by his sister as having been undertaken together with her and to include architectural, project management and administrative works, were undertaken for that family business, or alternatively for the applicant himself as a third-party supplier to the family business or to others, is not clear. The distinction is critical. If the applicant was not undertaking those activities (or perhaps others) on his own account, and in the form of a business, then he cannot have been carrying on an enterprise (s 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 – the GST Act), he should not have been registered for GST purposes (s 23-10 of the GST Act), and he is not entitled to any input tax credits (ss 11-5, 11-15 and 11-20 of the GST Act).
During the hearing Ms Caporale told me that her brother’s activities during the relevant periods included architectural design and drafting services, managing the residential investment properties that he owned, managing the residential investment properties owned by other family members or family companies, office-based administration and management of projects, and on-site management of construction projects.
It would be overstating it to say that the fruits of his labour were meagre. They were non-existent.
Not one of the GST returns he lodged for the period June 2001 to March 2007 disclosed a single supply that he had made – whether taxable, GST-free or input taxed. Not one. During the same period he claimed a total of $54,389 in input tax credits. That means almost $600,000 worth of acquisitions, without a single supply having been reported during that entire six-year period.
There was a suggestion that some of the architectural plans included within the 55 folders provided by Ms Caporale were prepared by the applicant, lending support to his claim that he was carrying on an enterprise at least to that extent. Indeed, Rosa Caporale said that she and her brother had prepared the plans at pages 13060-13093 of Volume 55, dealing with what was referred to as the “Hurstville project”. Given that the plans contain both the applicant’s and his sister’s signature, the former as “Director” and the latter as “Secretary” next to the Common Seal of Caporale Designs Pty Ltd, it is not clear how they support a contention that the applicant himself was carrying on an enterprise rather than participating with his sister in an enterprise carried on by the family company. And in any event, the plans are dated October 1998, well outside the relevant period for GST purposes.
A further set of architectural plans dealing with a project in Gymea (Volume 47, pages 11413-4) is in the name “Matrix Architecture”, based at the address of the Caporale family home, but I have been given no explanation of the underlying ownership of the firm. A development approval letter from Wollongong City Council, dated 17 November 2000 and in respect of a proposed development in Helensburgh (pages 11407-12), is addressed to Matrix Architects, again at the address where the family lives. How or why this is relevant to the applicant’s purported enterprise remains unclear.
Rosa described the Caporales as a “close family”, and I have no reason to doubt that. She also tried to explain the lack of early profitability in her brother’s activities: he was “involved as part of a larger enterprise”, he “could be regarded as an investor”, she said, with the prospect of a very lucrative return in the long run. But what was this “larger enterprise”? What was he an “investor” in? Most likely what Ms Caporale was referring to was the family’s flagship development, the Illawarra Employment and Teaching Centre in Dapto – worth $700 million on her estimation. This development was referred to in some detail in earlier proceedings in the Tribunal involving other Caporale companies (see Re Bayconnection Property Developments Pty Ltd and Ors and Commissioner of Taxation [2013] AATA 40). It is of no particular relevance to the applicant’s case because, even if there is an enterprise being conducted there, it is not the applicant’s enterprise, as the structural chart at page 13059 in Volume 55 makes plain.
No invoices have been produced to the Tribunal to indicate that any supplies were made by the applicant during the period 2001 to 2007. The most likely reason is that no invoices were ever generated, which I find to be the case (a finding which, incidentally, aligns with a “submission” to that effect in paragraphs 342-344 of the applicant’s written submissions, prepared by his sister). That then creates two possibilities. Either the applicant was not making any supplies, or he was making supplies but not invoicing for them. Neither possibility is favourable to the applicant.
The first possibility – that he made no supplies – is not necessarily fatal to a claim that the applicant was carrying on an enterprise. For example, an entity that has been carrying on an enterprise can sometimes find that its customers simply stop buying what it has to offer, whether because the price has become unattractive, or because market conditions have changed, or for other reasons. That does not always lead to a conclusion that the entity has stopped carrying on an enterprise – in fact, it may only be a rare case where such a conclusion is justified. It will also often be the case that an entity will struggle to make supplies in the start-up phase of its enterprise, even though activities towards that end are being undertaken. The extended definition of “carrying on an enterprise”, which includes doing anything in the course of the commencement or termination of the enterprise, accommodates this possibility, thus saving the entity’s GST status and generally securing its input tax credit entitlements. But there is no such scenario being painted here. The references to what the applicant was doing are vague and lacking in objective support. There is nothing to justify a finding that whatever the applicant was doing was being done on his own account rather than on behalf of the family companies. The assertion of his sister that he was “involved as part of a larger enterprise”, in fact, explains the true position – that he was working not for himself but for the broader family business interests, and for one or more of the family companies. I find that to be the case.
The second possibility – that he made supplies, but did not invoice for them – is actually the scenario that the applicant “submits” is what happened (paragraphs 342-344 of his written submissions). That submission is made in the absence of any reliable evidence that he was making supplies in the first place. If I had accepted that he was undertaking his activities on his own account, and was making supplies to the family companies, then I would have comfortably found that those activities were not being done “in the form of a business”, as required by paragraph (a) of the enterprise definition in s 9-20(1) of the GST Act. There is no business known to mankind that carries on its income-generating activities and then routinely declines to seek payment for them.
It is also instructive to look at the applicant’s original income tax returns to see whether what was being declared in them is consistent with his claim that he was carrying on an enterprise. The 2003 return[1] declared no income at all and no deductions. The 2004 return[2] and the 2005 return[3] each declared income of $5,000 and no deductions. The 2006 return[4] and the 2007 return[5] were each a repeat of the 2003 return, with no income and no deductions. During these periods the applicant was lodging GST returns[6] reporting “non-capital purchases” (and therefore, on the face of it, allowable deductions and possible carry-forward losses) totalling:
·For the period 1 July 2002 to 30 June 2003 – $210,816;
·For the period 1 July 2003 to 30 June 2004 – $44,386;
·For the period 1 July 2004 to 30 June 2005 – $86,879;
·For the period 1 July 2005 to 30 June 2006 – $142,578; and
·For the period 1 July 2006 to 30 June 2007 – $60,060.
[1] T28-298
[2] T28-306
[3] T28-314
[4] T28-322
[5] T28-330
[6] T6-36 to T6-68
Some time later, in late 2012 and early 2013, the applicant’s new accountant prepared amended income tax returns for the relevant years[7] but, according to Ms Caporale, the Commissioner “rejected them”. The reasons for and consequences of the alleged rejection are not important. What is important is that, even after an apparently diligent review of the applicant’s affairs by a new accountant (including “various meetings” with the applicant and his sister and “review of documentation provided”[8]) many years after the event and in the midst of a protracted dispute with the Commissioner in which the applicant’s alleged acquisitions were a central issue, the draft amended returns and their supporting worksheets contain no reference to any of the amounts included in the GST returns. That is hardly a ringing endorsement of the applicant’s claims.
[7] Applicant’s Material, Volume 45
[8] See for example pages 10859 and 10873 of Volume 45 of the Applicant’s Material
On the material before me, I am comfortably satisfied that the applicant was not carrying on an enterprise during the relevant GST period.
That means that he is not entitled to any of the input tax credits he claimed in his GST returns, because one of the essential elements of a “creditable acquisition” is missing: the acquisitions were not made for a “creditable purpose” (s 11-5(a) and s 11-15(1)). For that reason the objection decision relating to the assessments of GST net amounts will be affirmed.
INCOME TAX
Not all income years give rise to the same issues.
For the 2003 to 2008 income years inclusive, the objection decisions under review relate to the applicant’s objections against default assessments made under s 167 of the ITAA 1936.
For the 2009 and 2011 income years, the objection decisions focus on the disallowance of deduction claims made by the applicant as follows:
·For the 2009 year – work-related car expenses of $91,420 and cost of managing tax affairs of $1,100; and
·For the 2011 year – work-related clothing, laundry and dry-cleaning expenses of $91,420.
The 2009 income year
The most straightforward of these is the 2009 year and I will deal with that first.
On 4 October 2011 the Commissioner wrote to the applicant asking him to provide further information in support of the claims he had made in his tax return. He provided no response. There was still no response provided by the time the objection was dealt with in May 2013.
The flimsiest of evidence has been provided to the Tribunal to support these deduction claims.
The applicant’s written submissions refer me (at paragraph 1069) to various numbered pages in Volume 33 of the applicant’s material. Those pages tell me that the Roads and Traffic Authority sent the applicant a registration renewal notice for a 2007 Porsche Cayenne motor vehicle. The registration was paid on 11 January 2008, which of course falls outside the 2009 income year and therefore cannot have any relevance to that year. There is also a receipt for Compulsory Third Party insurance for the vehicle, paid on 10 January 2008, again outside the income year. Those documents do not assist the applicant.
The comprehensive motor vehicle insurance notice (this one, at least, falling due during the 2009 income year) shows the Cayenne was insured for an agreed value of $122,400. Porsche appears to have been the marque of choice for the applicant during that income year; an insurance notice for a Porsche Boxster Roadster, insured for an agreed value of $140,760, is at page 7947 of the applicant’s materials. There was also a 2005 Daihatsu Delta Truck, with an agreed value of $39,440.
Those documents, taken at their highest, show no more than that the applicant had those three vehicles registered in his name. They tell me nothing about how he used them. Ms Caporale told me during the hearing that the applicant used the Boxster 80 per cent of the time for business purposes but I dismiss that claim as absolute nonsense.
I will have more to say about motor vehicles later in these reasons. At this stage it is sufficient for me to note that there is no material that could possibly support the deduction claims for the 2009 year. I conclude that the Commissioner was right to disallow the claims.
But there is a broader issue for the 2009 year. The return as lodged declared salary and wage income of $179,248 and interest income of $86,400, and claimed deductions of $92,520 as detailed above. The applicant’s notice of objection, lodged on something of a scattergun approach for all years of income from 1997 to 2010 inclusive, included the following grounds:
1. The proper deductions were not allowed against assessable income.
2. The correct amount of income was not included in my assessable income.
3. The proper allowable deductions were not allowed against my assessable income.
…
9. The records will confirm that the Assessable income in respect of the Tax Years 1997-2010 inclusive, for Tommaso Caporale do not exceed $5,000 for each respective year.
…
The objection officer noted in the reasons for the objection decision:
As allowed by the Tribunal[9], you have not provided the records which you say confirm that assessable income in respect of the 2009 income year does not exceed $5,000. Indeed, the 2009 income tax return lodged by you on 21 October 2009 contradicts your contention that you only derived $5,000 in the 2009 income year.
You have not taken the opportunities provided by the auditor or the Tribunal to substantiate the tax deductions for work-related car expenses (D1) and cost of managing tax affairs (D9) claimed in the 2009 income tax return. It is not sufficient to simply assert your taxable income is a particular figure without any apparent basis of arriving at that figure.
[9] On 25 October 2012 the Tribunal had granted the applicant an extension of time to object against the amended assessment for the 2009 year
There has been no explanation as to why the income figures provided by the applicant himself when he lodged his tax return should now be cast aside. He presumably did not make them up. But if he now says they are wrong, he should be able to explain why they were once thought to be right. He has not done so.
The objection decision relating to the 2009 year will be affirmed.
The 2011 income year
This one is confusing.
The reasons for the objection decision[10] state that the applicant claimed “clothing, laundry & dry-cleaning” expenses of $91,420 in his “original 2011 income tax return”. That figure of $91,420 is precisely the same as the amount of the deduction claimed in 2009 for work-related car expenses. As it happens, the figure he declared as his income in 2011, $179,248, is also the same as his salary and wage income figure for 2009.
[10] ST4-132 in matters 2013/3536; 3537; 3553; 3554
The problem is that the 2011 return as lodged[11] does not contain any deduction claims at all. It declared income of $179,248, and that is all. In any event, the notice of assessment[12] issued with an assessed taxable income figure of $179,248 – the precise figure declared by the applicant in the return.
[11] The only version located is at ST8-167 in matters 2013/3536; 3537; 3553; 3554
[12] ST13-189 in matters 2013/3536; 3537; 3553; 3554
Once again, there is no explanation for the income figure provided by the applicant when he lodged his tax return – where it came from, or why it should now be regarded as wrong, and ignored. And bearing in mind that the applicant’s notice of objection for this particular year seems to consist of no specific grounds of objection, it is impossible to identify a plausible basis on which the assessment could be undermined.
It seems to me that the correct taxable income has been assessed by the Commissioner, based on the assessable income as reported by the applicant himself. On objection, the Commissioner refused to reduce the assessed taxable income amount. That was the right decision. I will affirm the objection decision.
The 2003 to 2008 income years
I should start by restating the income amounts originally declared by the applicant in his tax returns. They were:
·For 2003 – nil;
·For 2004 – $5,000;
·For 2005 – $5,000;
·For 2006 – nil;
·For 2007 – nil;
·For 2008 – $328.
The Commissioner was not satisfied with the returns as lodged. So, in respect of each income year, he made a default assessment under s 167 of the ITAA 1936 of “the amount upon which in his or her judgment income tax ought to be levied”. That amount became the taxable income of the applicant for each income year.
It may be inferred that the Commissioner was not satisfied with the applicant’s tax returns because the income declared is incapable of supporting his lifestyle (which includes the lease of multiple expensive cars) and his expenditure.
The methodology the Commissioner used to form his judgment as to “the amount upon which … income tax ought to be levied” was to identify the applicant’s bank accounts (the Commissioner’s officers found 87 of them, including credit card accounts, loan accounts and term deposits[13]) and add up all the deposits that were made to them in the relevant years.
[13] T15-182
The default assessments for the 2003 and 2004 income years were not amended assessments but original assessments. This is because the initial notices issued by the Commissioner, described as “Nil Tax Advices”, were not notices of assessment under the law that applied at the time: Commissioner of Taxation v Ryan (2000) 201 CLR 109; [2000] HCA 4. The original assessments, notice of which issued in April 2012, were therefore out of time unless, in the Commissioner’s opinion, “there has been fraud or evasion”: s 171A(2) of the ITAA 1936.
On the other hand, the default assessments for the 2005 to 2008 years were amended assessments. The standard timeframe for the amendment of an assessment of an individual is two years (item 1 in the table in s 170(1) of the ITAA 1936) unless, in the Commissioner’s opinion, “there has been fraud or evasion”: item 5 in that table.
The Commissioner formed the opinion in respect of each income year that there had been evasion. That opinion was based on two broad factors: one, that the applicant’s declared income was incompatible with the fact that he had acquired three properties, all of them units in the “Hurstville project”, during 2003 and 2004; and two, that Ms Caporale had told the Commissioner’s officers in an interview on 14 September 2010 that “she knew at the time of lodging the income tax returns that they were incorrect but still lodged nil returns to avoid the late lodgement penalty”[14]. Nothing that I have seen or heard during this review suggests that the Commissioner’s opinion is wrong.
[14] T34-450
How does a taxpayer prove that an assessment under s 167 is excessive?
The Federal Court has recently explained how a taxpayer proves a s 167 assessment is excessive. In Commissioner of Taxation v Rigoli [2013] FCA 784 Pagone J said:
[8] … In Gashi [Gashi v Commissioner of Taxation [2013] FCAFC 30], the Court had held that a taxpayer wanting to challenge an assessment made under s 167 upon the asset betterment method of calculation could only do so by establishing the actual taxable income for the period in dispute saying at [63]:
A taxpayer who seeks to establish that a s 167 assessment based on the asset betterment method of calculation is excessive must positively prove his or her “actual taxable income” and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer: Dalco at 623-5 and Trautwein [Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63] at 88. The taxpayer must show that the unexplained accumulated wealth was from non-income sources. The manner in which a taxpayer discharges that burden is not defined or specified – it varies with the circumstances: Dalco at 624.
The reason for this conclusion lay in the difference between assessments made under s 166 and those made under s 167 which at [53]-[55] the Court had explained:
The s 167 power is necessarily different to that in s 166. Under s 166, the power is to “make an assessment of the amount of the taxable income”. The phrase “taxable income” is defined to mean “assessable income” minus “deductions”: s 4-15 of the 1997 Act and s 6(1) of the 1936 Act. Under s 167, that process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part) because of one of the preconditions to the exercise of the power in sub-paras (a) to (c) of s 167 – a failure by a person to lodge a tax return, the tax return is deficient or the Commissioner has reason to believe that a person who has not lodged a return has derived taxable income. It is for those reasons that the balance of s 167 empowers the Commissioner to make an assessment of the amount upon which income tax ought to be levied and for that amount to be deemed to be the taxpayer’s taxable income for the purposes of s 166.
The third part of the section – the deeming provision – would be futile if it was necessary for the Commissioner to undertake a process of the kind referred to in s 166. As the Commissioner submitted, the assessment of the “amount” in s 167 is not constrained by a process of subtracting “deductions” from “assessable income”. Instead, in making his judgment of the “amount” that becomes taxable, the Commissioner may use what is known as the “asset betterment” method: Trautwein at 87, 99-100 and 105.
The asset betterment method, and the resulting assessment, is necessarily a guess to some extent and “almost certainly inaccurate in fact”: Trautwein at 87. It is therefore “no part of the duty of the commissioner to establish affirmatively what judgment he formed [under s 167 of the 1936 Act], much less the grounds of it, and even less still the truth of the facts affording the grounds”: George v Federal Commissioner of Taxation at 204.
The need, therefore, for a taxpayer to prove the “actual taxable income” in order to establish the excessiveness of an assessment made under s 167 was not so much that the assessment in Gashi was based upon the asset betterment basis of calculation as that it was made under s 167 where the “process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part)”. The figure arrived at by the Commissioner under s 167 may in any given case be based upon calculations similar to those where the taxpayer has furnished a return under s 166, but an assessment under s 167 is fundamentally different from one under s 166. A taxpayer seeking to establish that an assessment under s 167 is excessive needs to establish not that some element in the assessment is wrong but that “the amount upon which in [the Commissioner’s judgment] income tax ought to be levied” was the taxpayer’s actual taxable income. The primary obligation of a taxpayer is to furnish a return of income under s 166 and an assessment under s 167 does not provide a means by which taxpayers may be relieved of their obligation to establish their actual taxable income. It is, rather, a means by which the Commissioner may impose a liability where the taxpayer has failed to furnish a return.
…
[10] A taxpayer seeking to challenge an assessment under s 167 will not succeed merely by proving error by the Commissioner: George v Federal Commissioner of Taxation (1952) 86 CLR 183; Dalco. The task for the taxpayer on objection is not to prove that the Commissioner erred but to prove, albeit on the balance of probabilities (see Ma v Commissioner of Taxation (1992) 37 FCR 225), the correct amount upon which tax should be levied. The subject matter of challenge to an assessment under s 167 of the 1936 Act is “the amount” upon which the Commissioner has determined tax ought to be levied. The subject matter of challenge in such cases is not to the individual elements of assessable income and deductions which together would have made up taxable income to the assessment if it had been made under s 166.
The Full Court rejected the taxpayer’s appeal from that decision (Rigoli v Commissioner of Taxation (2014) 141 ALD 529; [2014] FCAFC 29), observing at [27] that “[t]he reasoning and conclusions of the primary judge were entirely correct”.
It follows that to prove the Commissioner’s assessments excessive, the applicant must prove what his actual taxable income was in each of the relevant years. He has comprehensively failed to do so.
The applicant’s approach to disputing the assessments
The applicant mounts a number of arguments in an attempt to undermine the assessments. He maintains that his only source of income was from his rental properties. In particular, he says that:
·Some of the deposits to his accounts are lottery winnings, and not income;
·Any cash deposited into his accounts, apart from the rental income, was “not from the applicants own source income. They were from other sources from other related entities”[15];
·He incurred deductible expenses in relation to his rental properties, and these expenses have not been taken into account in the Commissioner’s assessments[16];
·The “term deposits were organized on behalf of Caporale Designs Pty Ltd and any benefits such as interest is attributed to income to the company not to the applicant”[17];
·Shares in the National Australia Bank, which the applicant admits he had, were “not held for long, and the interest and or dividends would not have changed the fact that the applicant was still in loss after factoring the this income”[18];
·Although he concedes that he lent funds to “other entities”, he “did not receive any interest for the short term loans such as paying from his credit cards to cover the expenses of such project such as Gymea bay”[19];
·He “had not received yet any income from interest owed on the loans made to Caporale Designs Pty Ltd in 2003 of $770,000, as the agreement was that the company would pay the applicant the interest when it had funds available to do so”[20];
·He “did not have any gold, silver or platinum bullions that could be deemed as income to his own benefit”[21] (although it is not clear why the applicant thought that particular submission needed to be made).
[15] Applicant’s Submissions [76]
[16] Applicant’s Submissions [122]
[17] Applicant’s Submissions [78]
[18] Applicant’s Submissions [83]
[19] Applicant’s Submissions [84]
[20] Applicant’s Submissions [85]
[21] Applicant’s Submissions [87]
None of those submissions assist him. They really do nothing more than chip away at the Commissioner’s methodology, but even then, not in any convincing way.
The critical question – what was the applicant’s income in each of the relevant income years – remains unanswered. Indeed, the reality is that the applicant has no idea what his taxable income was for any of the relevant years, and neither do I.
What emerged at the hearing was an almost unintelligible account of the financial arrangements within the Caporale family. That account included an assertion that any money coming in for one of the family companies would be transferred to one of the applicant’s accounts. Apparently he would use his credit cards to pay for expenses, even if he, personally, had not incurred the expenses.
I was told that an amount of $20,000, earmarked in a settlement sheet at page 12848 of Volume 55 as payable to Capital Holdings Pty Ltd (a company of which the applicant’s parents were the directors), was transferred to the applicant. I was not told why.
I was told that an amount of $42,000, referred to at page 12849 and evidently paid to Catarina Gardens Pty Ltd (a company of which Ms Caporale was the director) on settlement of the sale of a property in Gymea, was available for the applicant’s use because Rosa “authorised” him to use it. She did not tell me why she authorised him to use that company’s money, or the circumstances in which the authority might be exercised.
I was told that the family had a “pot” of money, and that all the money coming into the pot was available for use by any family member.
I was told that various deposits into bank accounts that were not in the applicant’s name should not have been included in the applicant’s assessments because the money belonged to the account holder, not to the applicant. There were many examples of these categories of deposits, including into accounts in the name of Elite Project Management Pty Ltd, Caporale Designs Pty Ltd, Castlepeake Pty Ltd and Bayconnection Property Developments Pty Ltd.
It also became clear that the applicant had access to all of these accounts and he certainly availed himself of that access to transfer money to his own accounts, including his credit card accounts. It is possible that this has led to some duplication in the Commissioner’s assessments, by including the original deposit to the third party account as well as the deposit by way of transfer into an account in the applicant’s name. That in itself will not undermine the assessment; at most it would show that the assessment is wrong. But, as the authorities show, establishing that an assessment is wrong is not enough. The applicant must also show how it can be made right.
I have already discussed the applicant’s unsuccessful deduction claim for car expenses in the 2009 year. Over the years there were other cars on the scene apart from the Porsches. In June 2004, for example, the applicant received an insurance renewal advice for a 2002 Mercedes C180 Coupé, a 2002 Mercedes C200 Kompressor Coupé, a 2003 Mercedes ML500 4x4 Station Wagon, and a 2003 Holden Rodeo LT Pickup[22]. They were all said to be used for “business” purposes, even though no records to support such a claim, such as log books or travel diaries, have been provided to the Tribunal. The claim is ridiculous. Ms Caporale told me that the lease payments, as well as the insurance payments, for these vehicles were paid by the applicant “on behalf of Caporale Designs Pty Ltd”. That is a convenient way to deflect attention from the obvious point that the applicant could not possibly afford the payments from his own income, which he still maintains is less than $5,000 per year. But apart from making the assertion, she did not provide any proof that the cars were owned by the company and not by the applicant.
[22] Applicant’s Materials, Volume 10, p2227
By 2008 the applicant owned at least eight rental properties. How he could have afforded to buy them is anyone’s guess. On his version he had almost no income. He certainly borrowed extensively, but he still had to pay back the loans. Where was the money coming from? Most of it seems to have come from within the family group. Indeed, Ms Caporale told me that the applicant had authority to transfer money around the family entities, including to himself. Apparently he relied on that authority to “reimburse” himself when he made payments on behalf of any of the family companies. This arrangement was put forward as one of the cornerstones of his case that the money that went to his accounts was not his income. However, there is no evidence that “reimbursements” were only made when the applicant could demonstrate that he had actually made a payment on behalf of one of the family companies, and there are no reconciliations to show the extent to which the payments to him represent reimbursements.
The picture painted by these arrangements, and the shortcomings in them, is a most unfavourable one for the applicant. It is a picture that does not exclude the possibility, but instead invites the inference, that at least some (and perhaps most) of the money coming into the applicant’s accounts was ordinary income in his hands, provided to him to enable him to meet his day-to-day living expenses. I draw that inference, and find accordingly. Additionally, as a shareholder of some of the companies, and as an associate of shareholders of the others, the applicant has not demonstrated that the money deposited into his accounts does not represent deemed dividends under Division 7A of the ITAA 1936. Since none of the companies’ financial statements have been provided to the Tribunal, it is also the case that the applicant has failed to prove that the companies did not have a distributable surplus in any of the relevant years: see s 109Y of the ITAA 1936.
The applicant’s case is full of inconsistencies, contradictions, inadequate explanations and unsupported and implausible assertions. All the objection decisions relating to the income tax assessments for the 2003 to 2008 income years will be affirmed.
ADMINISTRATIVE PENALTY
In respect of the GST shortfall of $54,389, administrative penalty was assessed at 75 per cent of the shortfall for the first monthly period, June 2001, and at 90 per cent for each subsequent monthly period.
In respect of the income tax shortfalls, administrative penalty was assessed at 90 per cent for each of the 2003 to 2008 income years, 50 per cent for the 2009 year and 78.5 per cent for the 2011 year. On objection, the penalty for 2011 was acknowledged to be wrong, and was reduced to 50 per cent[23].
[23] ST4-135 in matters 2013/3536; 3537; 3553; 3554
The penalty rate of 75 per cent applies where a shortfall results from intentional disregard of the law by the taxpayer or the taxpayer’s agent: table item 1 in s 284-90(1) in Schedule 1 to the TAA. That rate will be uplifted to 90 per cent if an aggravating factor in s 284-220(1) is present, such as a failure to tell the Commissioner about a shortfall after becoming aware of it (paragraph (b)) or a previous imposition of penalty under table item 1, 2 or 3 in s 284-90(1) (paragraph (c)).
The penalty rate of 50 per cent applies where a shortfall results from recklessness on the part of the taxpayer or the taxpayer’s agent: table item 2 in s 284-90(1) in Schedule 1 to the TAA.
For the 2011 year I have found that there is no shortfall amount because the assessment was precisely in accordance with the return as lodged (see [46] of these reasons). I will set aside the objection decision relating to the administrative penalty for the 2011 year and substitute a decision that the objection is allowed in full.
For the 2009 year I am not satisfied that the shortfall was not caused by recklessness. There are no grounds for remission. The objection decision relating to penalty for the 2009 year will be affirmed.
As for the remaining penalty amounts, I am completely uninformed as to the applicant’s state of mind at the time of lodgement of his returns and so I cannot possibly be satisfied that he did not intentionally disregard the law. The uplift in penalty to 90 per cent, where it has been applied, is certainly justified on the basis of paragraph (c) of s 284-220(1). There are no grounds for remission. All the objection decisions in relation to penalty for the GST shortfalls, and for the income tax shortfalls for 2003 to 2008 inclusive, will be affirmed.
DECISION
The objection decision relating to administrative penalty for the 2011 income year is set aside. Instead the objection is allowed in full.
All other objection decisions under review are affirmed.
I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost .................................[sgd].......................................
Associate
Dated 30 January 2015
Dates of hearing 3 - 5 March 2014 Date final submissions received 4 June 2014 Advocate for the Applicant Ms R Caporale Counsel for the Respondent Mr A O'Brien Solicitors for the Respondent ATO Review And Dispute Resolution Group
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Taxation and Revenue – GST
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Taxation and Revenue – Income Tax
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Administrative Penalty
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Intentional Disregard of the Law
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Default Assessments
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