Vitali Roesch and Commissioner of Taxation
[2014] AATA 595
•22 August 2014
[2014] AATA 595
Division TAXATION APPEALS DIVISION File Number
2013/1839
Re
Vitali Roesch
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President I R Molloy
Date 22 August 2014
Place Brisbane 1. The penalty decision in relation to the 2004 income year is to be varied so as to substitute a penalty of 50% on the shortfall amount based on recklessness in substitution for the 75% penalty based on intentional disregard of a taxation law.
2. The objection decision in respect of the 2004 income year is otherwise affirmed.
.............................[Sgd]........................................
Deputy President I R Molloy
CATCHWORDS
TAXATION – Assessment of income – Asset betterment assessment – Shortfall penalty – Whether asset betterment error constitutes excessive assessment – Unaccounted expenditure – Excessive assessment not demonstrated – Whether intentional disregard of taxation law or recklessness
LEGISLATION
Income Tax Assessment Act 1936 (Cth) ss 167, 171A
Taxation Administration Act 1953 (Cth) Sch 1 Div 284
CASES
Gashi v Federal Commissioner of Taxation (2013) 209 FCR 315
Rigoli v Commissioner of Taxation [2014] FCAFC 26
REASONS FOR DECISION
Deputy President I R Molloy
22 August 2014
This application concerns an assessment for income tax made on an asset betterment basis and an assessment of the penalty for failing to disclose income.
Assessments
On 30 March 2005 Mr Roesch lodged an income tax return for the income year 2004 reporting a taxable income of $7,382. On 8 April 2005 the Commissioner of Taxation issued a nil assessment on the return.
The Commissioner subsequently conducted an audit of Mr Roesch’s financial affairs which considered his assets, liabilities and credit card expenditure. The audit included succeeding years but the issues in respect of those other years have been resolved leaving only 2004 in dispute.
On 21 July 2011, the Commissioner of Taxation issued an amended assessment for the 2004 income year pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) (“ITAA”) using the asset betterment method. The amended assessment included an amount upon which in the Commissioner’s judgment income tax ought to be levied of $451,154.
The Commissioner was outside time to issue the amended assessment unless, relevantly, he formed the opinion there had been evasion: s 171A(2)(a) of the ITAA. The Commissioner claimed to have formed that opinion on the basis that Mr Roesch had withheld information that if disclosed would have resulted in an assessment based on a greater amount of income than was declared. For reasons that will become apparent I accept that that opinion was and remains correct.
On 22 July 2011, a notice of assessment was issued for shortfall penalty of $154,212.50 pursuant to Division 284 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (“TAA”). The penalty was 75% of the shortfall amount on the basis of a failure to disclose taxable income due to intentional disregard of a taxation law pursuant to
ss 284-75(1) and 284-90(1) and item 1 of the schedule to s 284-90(1) of the TAA.
An objection succeeded in part in that the assessable income for 2004 was reduced by $32,148 with a consequential reduction in the shortfall penalty. The reduction was due to the exclusion of certain credit card expenses from the asset betterment calculation. Dissatisfied with the objection decision, Mr Roesch applied for review.
Since the objection decision the Commissioner has amended his asset betterment calculation in consequence of further material provided by Mr Roesch. According to the amended calculation, Mr Roesch’s taxable income in the 2004 income year was $290,360.06. This of course is still significantly more than the taxable income which was declared, but less than in the default assessment or the objection decision.
Mr Roesch’s evidence
Before the Tribunal, Mr Roesch relied on an amended statement of facts and contentions dated 31 January 2014. He also gave brief oral evidence. He was not cross-examined.
Mr Roesch’s evidence was that he lived in Germany before coming to Australia on
27 May 1998. He transferred over $2 million to Australia. He used his personal funds to set up or buy businesses. He supported himself and his family with these same funds.
He also lent money to associated entities.
He said he suffered financial losses due to debtors becoming bankrupt or going into liquidation. Further funds were borrowed from the Bank of Western Australia Ltd secured against Mr Roesch’s principal place of residence.
Mr Roesch said that the amended asset betterment calculation “has serious errors and omissions”. He attached to his statement “a corrected asset betterment calculation”. In his calculation Mr Roesch appeared to agree with the Commissioner’s calculation of changes of assets and liabilities for 2004 including the acquisition of two properties.
Mr Roesch disputed the Commissioner’s inclusion of $269,089.03 in personal credit card expenses in his calculation. He said he does not have documents he expected to receive from the Commissioner and therefore could not identify exact amounts that are business expenses.
He said that his own asset betterment calculation, including his inclusion of $580,160.20 as a loan repayment from V Roesch Family Trust, proves that the estimate of taxable income by the Commissioner is excessive.
He made it clear that he thought both the original asset betterment calculation and the amended calculation were incorrect.
In his statement he said:
The Applicant wishes that his objection be upheld in full. The Applicant believes that for the 2004 year the error shown to exist in the Asset Betterment calculation proves that Respondents (sic) contentions have failed. The Applicant believes that he has proven that the taxation return lodged by him for the 2004 years (sic) is a full and true disclosure of his taxable income. The taxable income of the Applicant based on the error in the Amended Betterment Spreadsheet proves that the amount is excessive.
Asset Betterment Assessments
In Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301 (“Gashi”), the
Full Court of the Federal Court observed, at [55], that an assessment resulting from the asset betterment method is necessarily a guess to some extent and almost certainly inaccurate. At [63] the Court said:
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 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.
Even if a taxpayer is able to prove that an item in the asset betterment statement is wrong, or should not have been included, but does not adequately explain the source or sources for the otherwise unexplained increase in wealth, the taxpayer does not discharge the onus: Gashi, [66]-[67]; Rigoli v Commissioner of Taxation [2014] FCAFC 29, [26].
Mr Roesch’s approach has been to challenge the Commissioner’s calculations. He has not adequately explained how he acquired assets from non-income sources.
Furthermore, as the Court said in Gashi, at [65], an increase in assets cannot be viewed in isolation – it must also take into account expenditure during that period. I appreciate that Mr Roesch may not have retained records from ten years ago. However, even allowing for this, he has not given anything approaching a satisfactory explanation of how he was able to fund his credit card expenditure.
Mr Roesch has failed to discharge the onus of showing that the assessment was excessive including what the assessment should have been.
Penalty
Mr Roesch was assessed for an administrative penalty for a shortfall amount based on intentional disregard of a taxation law. The Commissioner now contends that the appropriate penalty should be based on recklessness by Mr Roesch or his agent as to the operation of a taxation law.
The Commissioner submits that Mr Roesch’s inability to articulate how he was able to fund his lifestyle (reflected in his credit card expenditure), and increase his loans to related entities, “is indicative of a taxpayer indifferent to whether his declared taxable income is true and correct. Had such an explanation been readily apparent, it would have been expected to have been made.”
The Commissioner further submits that a reasonable person in Mr Roesch’s position should have realised that a declaration of taxable income of $7,382, whether prepared by himself or his agent, was likely to be incorrect. But for the Commissioner’s submissions I would have been minded to uphold the objection decision on penalty based on intentional disregard of a taxation law.
I am however persuaded by the Commissioner’s argument that the penalty should be based on recklessness. I see no basis for remitting the penalty.
Directions
The Commissioner submits that the matter should be remitted to amend Mr Roesch’s taxable income for the 2004 income year to $292,046.05 in accordance with the Commissioner’s amended betterment asset calculation, and for the penalty assessment to be assessed on the basis of recklessness.
As I have said I accept the variation to the penalty. However the amended betterment calculation is another matter. I have the Commissioner’s amended calculation. However I am not able to determine independently whether that calculation is accurate or appropriate.
Essentially the amended calculation is a concession made on behalf of the Commissioner. However Mr Roesch does not agree with the calculation. He does not support the Commissioner in seeking the direction in respect of it.
In the circumstances I am not willing to give the direction the Commissioner seeks. It is open to the Commissioner, if he chooses, to determine the amount of revenue to collect. I am not satisfied that Mr Roesch, even with the benefit of the Commissioner’s concession, has discharged the onus of showing the assessment to be excessive.
Conclusion
The result is that the penalty decision in relation to the 2004 income year is to be varied so as to substitute a penalty of 50% on the shortfall amount based on recklessness in substitution for the 75% penalty based on intentional disregard of a taxation law.
Otherwise the objection decision in respect of the 2004 income year is affirmed.
I certify that the preceding 31 (thirty-one) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy ..........................[Sgd]..........................................
Associate
Dated 22 August 2014
Date of hearing 7 July 2014 Advocate for the Applicant Mr Lous Puggioni, L G Puggioni & Co Counsel for the Respondent Mr Michael Ballans Solicitors for the Respondent Ms Suzannah Auld, Australian Government Solicitor
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Assessment of Income
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Excessive Assessment
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Shortfall Penalty
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Recklessness
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