Voyka and Commissioner of Taxation
[2005] AATA 999
•11 October 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 999
ADMINISTRATIVE APPEALS TRIBUNAL )
)QT2003/365-371
TAXATION APPEALS DIVISION ) Re JOHN VOYKA Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Deputy President Don Muller Date11 October 2005
PlaceBrisbane
Decision The Tribunal sets aside the objection decisions under review and remits the matters for reconsideration in accordance with the following directions:
1. The gross income of John Voyka from ABC Construction and Engineering was:
For the tax year ending 30 June 1993, $ 81,001
For the tax year ending 30 June 1994, $ 441,980
For the tax year ending 30 June 1995, $1,125,985
For the tax year ending 30 June 1996, $ 955,746
For the tax year ending 30 June 1997, $2,140,020
For the tax year ending 30 June 1998, $1, 547,921
For the tax year ending 30 June 1999, $3,384,144
2. The allowable deductions in relation to ABC Construction and Engineering for the relevant years included:
(i) The equipment added in March 1993, in the manner treated by William Francis James Wight in exhibit 28.
(ii) Deductions for expenses in relation to various motor vehicles in the manner in which those expenses were treated by Mr. Wight in exhibit 28.
(iii) Travel expenses in the amounts identified by Mr. Wight in exhibit 28.
(iv) Other sundry expenses claimed in the manner in which those expenses were treated by Mr. Wight in exhibit 28.
3. Penalty Interest paid due to the late payment of rent on Crown Leases is not an allowable deduction.
4. At all times relevant to the tax years under review, John Voyka was in the business of primary production and the expenses identified by Mr. Wight in relation to that primary production are allowable deductions in exhibit 28.
5. The assessment of Capital Gains Tax to be paid by John Voyka is to take the following matters into account:
(i) A capital loss of $2,084 is available to Mr. Voyka in respect of the sale of the property at Vaughan Road, Ormeau.
(ii) The property at 233 Vulture Street was acquired prior to 20 September 1985 and is not an asset under section 160A of the Income Tax Assessment Act 1936.
(iii) For the purpose of calculating the capital gain in relation to 30 Voyka Street, Mr. Voyka’s principle residence included two hectares of adjacent land.
(iv) The cost base in relation to each of the properties sold is to include amounts for agents’ commissions, stamp duty and conveyancing expenses.
.................SIGNED.............................
D.W. MULLER
DEPUTY PRESIDENT
CATCHWORDS
TAXATION – assessment of income and allowable deductions for seven tax years from 1993 to 1999 inclusive – income accounted for on cash basis, not accruals – taxpayer involved in primary production – large deer farm not merely a hobby – penalty interest on late payment for Crown Leases not allowable deductions – capital gains tax calculated on share of profit relative to percentage of ownership, not the eventual division by Family Court – decisions set aside and remitted for reassessment
Income Tax Assessment Act 1936: s51, 160A, 167
Land Act 1994 (Qld) s.195
REASONS FOR DECISION
Deputy President Don Muller 1.This review relates to objection decisions covering seven income tax years.
QT2003/365 relates to the tax year ending 30 June 1993.
QT2003/366 relates to the tax year ending 30 June 1994.
QT2003/367 relates to the tax year ending 30 June 1995.
QT2003/368 relates to the tax year ending 30 June 1996.
QT2003/369 relates to the tax year ending 30 June 1997.
QT2003/370 relates to the tax year ending 30 June 1998.
QT2003/371 relates to the tax year ending 30 June 1999.
2.John Voyka, the applicant taxpayer, failed to lodge income tax returns for the above years and, following an investigation of Mr Voyka’s affairs, the Commissioner issued default assessments under section 167 of the Income Tax Assessment Act 1936 (the ITAA 1936).
3.The default assessments were created from documents including Mr Voyka’s profit and loss statements, hand written sales journals, bank statements and thousands of cheque butts, which were obtained from Mr Voyka’s business and residential premises.
4.Mr Voyka lodged notices of objection to the assessments, between 19 November 2001 and 11 December 2001. With a few exceptions the objection decisions affirmed the assessments raised under section 167.
5.Mr Voyka seeks a review of the objection decisions.
6.At the hearing the applicant was represented by Mr L. Pollard, solicitor, while the Commissioner was represented by Mr S. Aftanas.
7.The following background matters are not in dispute and I find as follows:
I.In 1977, Mr Voyka operated a welding business, KJ Welders. He did subcontracting work which involved welding and steel fabrication on such projects as power stations, turbines, jetties and fuel farms. The initials “KJ” were those of his then wife.
II.In 1982, Mr Voyka registered ABC Construction and Engineering. His initial intention of registering this name was to have his business name placed at the front of the names in the Yellow Pages. However, his business was doing well enough and he continued to use the name KJ Welders.
III.In the mid 1980’s the welding business was operated from a property at Pinkenba, a suburb of Brisbane.
IV.Mr Voyka continued to operate the welding business but he also became interested in raising deer for commercial purposes. He installed the deer on two blocks of land at Pinkenba.
V.In December 1987, Mr Voyka bought approximately 347 acres of land at Pullenvale, a semi-rural western suburb of Brisbane. The property had a house on it into which Mr Voyka and his wife moved. The rest of the property was given over to deer farming, after appropriate fencing and accommodation for the deer had been completed.
VI.As at 1991, Mr Voyka had deer on both the Pinkenba and Pullenvale properties.
VII.In about 1991, Mr Voyka formed a relationship with his now second wife. She objected to his use of the business name K J Welders because of the association with his first wife. He then abandoned the name KJ Welders and resumed the name ABC Construction and Engineering (ABC).
VIII.Mr Voyka had a very acrimonious parting from his first wife. She obtained an injunction restraining him from entering the Pullenvale property. She eventually forced the sale of their jointly owned properties. She sold a large number of stud deer for $100 each, for which Voyka had paid $1000 each. Mr Voyka believes that she then opened the gates on the Pullenvale property and let the deer go. At any event a large number of them escaped.
IX.It is certainly well known in the Pullenvale area that there are now hundreds of deer roaming wild throughout Pullenvale and the surrounding suburbs. The main roads in the area have signs warning motorists of the danger of deer crossing the roads.
X.In 1991, Mr Voyka worked in Darwin for about 12 months.
XI.In late 1992, Mr Voyka shifted his operations to Cairns. He relocated his steel fabricating business to Cairns. He also bought a large property at Babinda to resume his interest in commercial deer farming. He transferred the remainder of his Brisbane deer herd to Babinda.
XII.Mr Voyka did not carry stock in relation to his welding or steel business. His customers supplied him with the materials, which he and his employees then manufactured and fabricated in accordance with the terms of the contracts he had with his customers.
8.There are four main issues in this review:
I.The calculation of Mr Voyka’s gross income for each year from his steel fabrication business ABC. Mr Voyka was assessed by the Commissioner as receiving the following income from ABC:
YEAR SALES INCOME
1993 $ 126,117
1994 $ 611,524
1995 $1,159,464
1996 $ 918,030
1997 $2,383,139
1998 $1,573,236
1999 $3,723,789
It emerged during the course of the hearing that Mr Voyka had a particular method of dealing with customers who failed to pay the full amount of an invoice, following a dispute about workmanship or price. He simply agreed to forgo the payment, the subject of dispute, and then he added the amount on to the next contract he had with that particular customer. Consequently, a number of the amounts attributed to his income have been counted twice.
II.The determination of his expenses in relation to the business of ABC, including the depreciation to be allowed for plant and motor vehicles
As of 8 November 1999 Mr Voyka owned the following vehicles:
¨1980 Rolls Royce Sedan 449DJL
¨1999 Mercedes Benz 471FBM
¨1986 Mercedes Benz 501FAY
¨1982 Mercedes Benz 540AFQ
¨1981 Mercedes Benz 995DNV
¨1987 Jaguar Sedan 986ELL
¨1992 Mitsubishi Pajero 218CHT
¨1998 Kia Ceres 731EMT
¨1985 Ford Trader Truck 769BOJ
¨1979 Volvo F86 Truck 096DKX
¨1974 P&H T300 Crane 175PWW
He also owned a 1994 Toyota Hi-Lux motor vehicle during the period under review.
The Commissioner disputes Mr Voyka’s claim that all of the motor vehicles were being used to the extent of 90% in the business of ABC.
III.Whether Mr Voyka was in the business of primary production. He claims his deer farming enterprise has been extremely expensive but it is yet to show a profit.
IV.The amount of capital gains tax that should be imposed on Mr Voyka as a result of the sale of properties jointly owned by him, his former wife and his former mother-in-law. The properties were sold as a result of a Family Court Order and Mr Voyka had to pay some of his profits to his wife as part of their settlement of financial affairs. Mr Voyka claims that he should not have to pay CGT on the amounts of his share which he had to pay to his wife. The Commissioner takes the view that his share of the profits was a part of his assets and that therefore he should pay the CGT on his share of his profit from the sales, irrespective of what eventually happened to his assets. There were also disputes about whether the cost base included amounts for agent’s commission, stamp duty and conveyancing.
9.The Tribunal had the following documentary evidence before it:
¨ The section 37 documents (the T-Documents).
¨ Supplementary T Documents.
¨ Five statements by Mr Voyka.
¨ Six statements from William Francis Wight, tax agent and accountant.
¨ Family Court judgment of Warnick J.
¨ Affidavit of Lance Pollard, Voyka’s solicitor.
¨ Affidavit of Mark Groben.
¨ Four volumes of Mr Voyka’s business records.
¨ The Respondents statement of facts and contentions as at 11 July 2005.
¨ A transcript of the evidence of Gary John Norman. ATO Officer, given to Cairns Magistrates Court on 26 May 2003.
¨ A bundle of source documents – additional business records of Mr Voyka.
¨ Valuation of house and land at Pullenvale by valuer, Paul Leonard Mitchell.
¨ Statement and CV of David Andrew Johnston relating to the viability of Mr Voyka’s deer farm, including reports on deer farming in Australia.
¨ Bank statements of Mr Voyka.
¨ Finance documents relating to leased equipment.
¨ A depreciation schedule produced by Mr Wight.
¨ Capital Gains Tax calculations by Mr Wight.
¨ Affidavit of Dion Ashwin, ATO Officer of Townsville, who inspected Mr Voyka’s deer farm at Babinda on 8 August 2005.
10.The Tribunal heard oral evidence form Mr Voyka, Mr Wight, Mr Mitchell and Mr Johnston.
GROSS INCOME
11.Mr. Voyka’s material was subjected to a thorough analysis by William Francis James Wight. Mr Wight has been a tax agent since 1986. He holds the qualification of Bachelor of Business (Accounting), Bachelor of Education and Certified Practicing Accountant. Mr. Wight produced a number of affidavits which he had prepared prior to the hearing. After the evidence at the hearing had concluded he prepared a final analysis of Mr. Voyka’s affairs. This final analysis became exhibit 28. I have come to the conclusion, for the reasons that follow, that exhibit 28 gives the most accurate portrayal of Mr. Voyka’s financial affairs.
12.Mr. Wight formed the opinion that the method of calculation of Mr Voyka’s gross income by the officers of the Australian Tax Office was inaccurate/inappropriate for the following reasons:
I.The method was to bring to account the total of all amounts paid into Mr. Voyka’s bank accounts and add debtors who had appeared to have not paid on their respective invoices. This was done without regard for deposits that would not be income in nature.
II.Non income items which have been included in the ATO assessment of gross income include items such as:
¨ Sale of assets.
¨ Transfers between the bank accounts.
¨ Funds introduced by the taxpayer.
¨ Lease back finance on equipment.
¨ Deposits from Credit Cards serving as a “quasi-overdraft”. In the 1999 year some $103,000 of the deposits were cash advances from the taxpayer’s credit card.
¨ The proceeds of loans.
III.The taxpayer had always accounted on a cash basis and made no election to account on an accruals basis. There is no valid argument on the basis of turnover that the taxpayer should have been accounting on an accruals basis.
IV.Therefore, debtors should not be brought to account at arriving at assessable income.
13.I accept the propositions put forward by Mr Wight. I accept his analysis of the documentation and his calculations of Mr Voyka’s gross income/turnover for the years in question. Consequently, I find that Mr Voyka’s gross income/turnover in respect of ABC for each year was:
1993$ 81,001
1994$ 441,980
1995$1,125,985
1996$ 955,746
1997$2,140,020
1998$1,547,921
1999$3,384,144
Business Expenses of ABC
14.Mr. Aftanas conceded the following matters on behalf of the Commissioner:
I.The methodology followed by Mr. Wight is correct.
II.The cheque butt summary produced by Mr. Wight is correct.
III.The ledger report accurately reflects the cheque payment information from the cheque butt summaries.
15.Mr. Aftanas did not concede the claimed deductions in relation to the following items:
(i)Equipment added in March 1993, which had been stored in containers at Pinkenba.
(ii)Depreciation on all motor vehicles, plus registration fees.
(iii)“Penalty Interest” on late payment of rent on Crown Leases.
(iv)Travel expenses including large payments to L.J. Hooker and to caravan parks.
(v)Freight and Cartage.
(vi)Advertising.
(vii)Other items such as bank charges, electricity, fuel, repairs, telephone, hire purchase expenses and purchases of plant.
Equipment added in March 1993
16.This equipment was acquired from funds from the NAB secured against property Mr. Voyka owned in Vulture Street, Brisbane. The items had been acquired earlier in 1992 as part of the taxpayer’s move out of Brisbane away from his estranged first wife. It was stored in a locked shipping container in Brisbane out of his first wife’s sight and outside of her knowledge. She had been seizing property and selling it at auction. The equipment was therefore not available for use and therefore not depreciated. It was depreciated from 1 April 1993 when it was in Cairns and available for use in producing assessable income.
17.I find that the claims made by Mr. Voyka in relation to this item are allowable deductions and that the manner in which they were dealt by Mr. Wight is appropriate.
Depreciation of motor vehicles
18.Mr. Voyka gave evidence about the motor vehicles in the following terms:
I.Some of the equipment for ABC would not fit into my usual work vehicle so I also had a ute. Examples of the type of equipment that would not fit into the Pajero were:
Diesel welder/generator;
Some large materials.
II.1980 Rolls Royce – this vehicle was used exclusively for marketing. It was used to impress and pick up large important clients from the airport and also to provide the vehicle to those clients for use while they were in and around the Cairns and Townsville area. The types of clients were Korean customers associated with the Sun Metal/Korean Zinc project, German customers for power stations and English customers for power stations.
III.The 1999 Mercedes was a 4WD Mercedes which was in effect a replacement of the Pajero because the Pajero was no longer reliable and had been worn out.
IV.The 1986 Mercedes was bought for Chang Kim, the Managing Director of New World Steel. It was registered in my name. It was transferred to him in about 1999 and I received payment for its market value by a piece of equipment, a crane which was the same market value.
V.1982 Mercedes – this was a spare vehicle that was used for long trips by me to any client meetings prior to purchasing the 1999 Mercedes.
VI.1981 Mercedes this was Cathy Voyka’s vehicle.
VII.1987 Jaguar used for same purpose as the 1980 Rolls Royce.
VIII.1992 Pajero – this has been commented on by me in my other statements and was worked into the ground.
IX.1998 Kia – this is a truck that was used for primary production business and also carrying of bananas and feed for livestock namely deer and also steel fabrication business for large items of materials.
X.1985 Ford Trader Truck – similarly it was used for the same purposes as the Kia but basically rusted away and was superseded by the Kia.
XI.1979 Volvo Truck – this was a 15 tonne truck that was used solely in the steel fabrication and subcontracting business of transporting materials.
XII.1974 Crane – this was used exclusively in the steel fabrication and subcontracting business.
19.I accept the evidence of Mr. Voyka concerning his use of the motor vehicles.
20.I accept that the treatment by Mr. Wight of the various expenses in relation to the motor vehicles has been appropriate.
Penalty Interest
21.Penalty interest on the late payment of rent on Crown Leases was claimed in various tax years, on the basis that the amount so paid should be categorised as “interest” paid as part of the expenses associated with the business.
22.Mr. Aftanas made the following submission in relation to this item:
“In Queensland, Crown Leases are governed by the Land Act 1994 and, previously, the Land Act 1962. Section 195 of the 1994 Act provides for the payment of “penalty interest” on late payment of rent and states:
(1)If a lessee, licensee or permittee does not pay the rent or instalment within the time prescribed under the regulations, the lessee, licensee or permittee must pay, as well as the rent or instalment, penalty interest on the rent or instalment outstanding at the rate prescribed under the regulations until the day the rent or instalment is paid.
(2) The Minister may extend the time for the payment of rent or instalment.
(3)However, penalty interest still runs from the time payment was owing under the regulations.
(4)Penalty interest is not payable on the rent or instalment outstanding if the lessee, licensee or permittee had a reasonable excuse for not paying the rent or instalment.
Section 249 of the 1962 Act similarly specifies the payment of a penalty for late payment.
Subsection 51(4) of the ITAA 1936 states:
A deduction is not allowable under subsection (1) in respect of:
(a)an amount, however described, payable, or expressed to be payable, by way of penalty under a law of the Commonwealth, a State, a Territory or a foreign country; or
(b)an amount ordered by a court, upon the conviction of a person for an offence against a law of the Commonwealth, a State, a Territory or a foreign country, to be paid by the person.
For years ended 30 June 1998 and onwards subsection 26(5)(1) of the ITAA 1997 applies to deny a deduction for penalties.
It is the Commissioner’s submission that penalty under section 195 of the Land Act 1994 or 249 of the Land Act 1962 is penalty under a law of a State and is accordingly not an allowable deduction under subsection 51(1) of the ITAA 1936.”
23.I accept the submission made on behalf of the Commissioner on this point and determine that the “penalty interest” is not an allowable deduction.
Travel Expenses
24.This matter was cleared up by evidence from Mr. Voyka that he made payments to L.J. Hooker and to caravan parks for the purpose of renting accommodation for his employees who were working for him in towns away from their normal place of residence.
25.These amounts are allowable deductions to the extent identified by Mr. Wight.
Other Deductions
26.I am satisfied that Mr. Wight has done a thorough analysis of the material in relation to the remainder of the claimed expenses and that his analysis is to be used.
Primary Production
27.During the course of the hearing I asked Mr. Aftanas if it would be possible to arrange for an officer of the ATO to visit Mr. Voyka’s property at Babinda, for the purpose of reporting on the matters of deer numbers, fencing, yards, sheds and anything else relevant to the question of deer farming. Mr. Aftanas reported back that an officer could visit Mr. Voyka’s farm. Mr. Voyka agreed to such a visit.
28.On 8 August 2005, Dion Ashwin of the Townsville office of the ATO visited Mr. Voyka’s property at Babinda. Mr. Ashwin’s affidavit, dated 12 August 2005 has exhibited to it 35 photographs of Mr. Voyka’s property. Mr. Ashwin’s affidavit contains the following:
“The property is divided (according to the taxpayer) into 11 paddocks; 6 on one side of the driveway and 5 of the other side. Each paddock is fenced with a square mesh wire; railway line has been employed on its end to act as fencing posts. (Refer to photographs 11 & 16). The end posts of each paddock are braced and support large steel framed gates which can be opened to allow the deer to pass from one paddock to the next. (Refer to photographs 20, 25, 27 & 28). The arrangement of the gates also allows the deer to be corralled so that they can be transferred to the handling area. The property boundaries are also fully fenced. The fencing and gates on the property appear to be in good condition and of a high standard. The fences and gates are approximately 2.5 meters in height so as to minimize escape of deer to other paddocks and from the property. The type of fencing on and around the property is consistent with industry standards. It was also noted that the fencing significantly deters dogs which the taxpayer indicated as being a threat to the deer and which have been a problem in the past. …..
The taxpayer claims to have between 400 and 500 deer. It is impossible to count the deer with any certainty because they are easily scared and are unwilling to co-operate in any counting exercise. However I photographed as many deer as I could see. It is apparent that the taxpayer’s claim as to the number of deer held is probably accurate; my sense of it is that he certainly has more than 200 deer.
The paddocks are very heavily grazed and it can be observed from the photographs that the grass cover is minimal despite the ideal conditions that exist for the replenishment of pasture. (Refer to photographs 29, 31, 32, 33, etc). To the extent that the paddocks were heavily grazed I would have thought that the property was overstocked, however I have no authority for making that claim. This is merely an observation. …..
The taxpayer’s claim for depreciation refers to the boundary and internal fencing. The taxpayer maintains he did not make the claim originally because he had overlooked it. I am unable to comment on this aspect of the claim, although clearly if the taxpayer’s account is accepted I would have thought the cost would not be unreasonable. There is a substantial amount of fencing of a high standard.
Summary
Mr Voyka is clearly very knowledgeable with respect to the deer he holds on the property and the industry generally. He spoke at length on the subject and impressed me with the passion he holds for the industry. He clearly has devoted a considerable amount of effort, money and time to the activity. I am of the view that his claim to have 400 deer on the property is more than likely accurate.”
29.I find that Mr. Voyka did not build up a large herd of deer merely to satisfy a hobby. Nor did he spend tens of thousands of dollars in building fences, yards and stalls for the purpose of pursuing a hobby. He hopes to make money out of the venture.
30.I accept that Mr. Voyka suffered a significant set back in his quest to build a herd and to make the venture economically viable when he had the unfortunate dispute with his first wife.
31.However, I am satisfied that at all times relevant to the tax years being reviewed, Mr. Voyka was a primary producer and that the expenses identified by Mr. Wight are allowable deductions.
Capital Gains Tax
32.During the years in question, Mr. Voyka disposed of the following properties:
·30 Voyka Street
·115 Main Beach Road
·Mt. Flinders Road
·Colwell Street
·Vaughan Drive, Ormeau
·233 Vulture Street
33.The Commissioner has conceded the following:
I.A capital loss of $2,084 is available to Mr. Voyka in respect of the sale of the property at Vaughan Road, Ormeau.
II.The property at 233 Vulture Street was acquired prior to 20 September 1985 and is not an asset under section 160A of the ITAA 1936.
III.For the purpose of calculating the capital gain in relation to 30 Voyka Street, Mr. Voyka’s principle residence included two hectares of adjacent land.
IV.The cost base in relation to each of the properties sold is to include amounts for agents’ commissions, stamp duty and conveyancing expenses.
Family Court Proceedings
34.On 3 November 1995, Warnick J. made an order which covered the sale of the jointly owned properties, the payment of expenses and debts, the disposal of motor vehicles, machinery, plant and equipment, and the division of proceeds and assets. The parties to the proceedings were John Voyka, Katrina Voyka and Helen Jakovljenic (Mrs. Voyka’s mother). There is nothing in the order which indicates that the interests of the parties in the various properties were to be altered in any way, other than to have them sold.
35.I do not accept that John Voyka’s legal and beneficial interests in the jointly owned properties were altered by the Family Court. There is no doubt that the proceeds of the sales, which then constituted part of his assets, were the subject of the order for redistribution between him and his first wife. However, that final distribution of his assets does not affect his liability to pay Capital Gains Tax on his capital gain.
36.The Tribunal sets aside the objection decisions under review and remits them for re-consideration in the light of the above findings.
I certify that the 36 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President Don Muller.
Signed: .....................................................................................
B. Hitchcock, Personal AsstDate/s of Hearing 18, 19, 20, 21.7.05, 24.8.05 and 1.9.05
Date of Decision 11 October 2005
Solicitor for the Applicant Mr. Pollard, Bennett and Philp
Respondent Mr. S. Aftanas, departmental advocate
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