VPRX and Commissioner of Taxation (Taxation)
[2017] AATA 2156
•31 October 2017
VPRX and Commissioner of Taxation (Taxation) [2017] AATA 2156 (31 October 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2017/0354; 2017/0355
Re: VPRX
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:The Hon. Dennis Cowdroy OAM QC, Deputy President
Date:31 October 2017
Place:Sydney
The Tribunal affirms the decision under review.
.............................[sgd] ...........................................
The Hon. Dennis Cowdroy OAM QC, Deputy President
CATCHWORDS
TAXATION – default assessments issued against taxpayer – onus on Applicant to establish the assessment is excessive or incorrect – whether payments the Applicant received are capital gains or income – payments received were income - failure to discharge onus – Applicant is liable for administrative penalty – no grounds for remittal – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) s 6.5
Taxation Administration Act 1953 (Cth) ss 14ZZK, 14ZZ0, Sch 1 ss 284-75, 284-90, 298-20
Income Tax Assessment Act 1936 (Cth) ss 166, 167
CASES
Rowntree v Federal Commissioner of Taxation [2016] AATA 420
K.A. Hicks & Associates Pty Ltd and Ors and Commissioner of Taxation [2014] AATA 668
Confidential and Commissioner of Taxation [2012] AATA 178
Uratoriu v Federal Commissioner of Taxation (2010) ATC 20-219
Dixon as Trustee for Dixon Holdsworth Superannuation Fund v Federal Commissioner of Taxation [2008] FCAFC 54
Federal Commissioner of Taxation v Dalco [1990] HCA 3
George v Federal Commissioner of Taxation (1952) 86 CLR 183REASONS FOR DECISION
The Hon. Dennis Cowdroy OAM QC, Deputy President
31 October 2017
The Applicant seeks review of the decision of the Respondent (“the Commissioner”) in respect of default assessments issued to him for income years ended 30 June 2010 and 30 June 2012.
FACTS
The Applicant, who is a resident of Australia, created a domain name and website in 2006 (“the domain name”). The website generated revenue through Google Advertising. In the preparation of the website, independent contractors created certain portions of the content. Such contractors were based overseas.
The Applicant attempted to sell the domain name, with some difficulty. However, he ultimately found a buyer in the United States. In
April 2009 he travelled to the United States of America for the purpose of effecting a sale of the name to an organisation (“HGM”).
On 22 April 2009, having signed an agreement for the sale of the domain name to the organisation (“the sale agreement”), and completed the transaction, the Applicant returned to Australia. Payment for the sale was structured by an initial payment, followed by earn-out payments contingent upon the purchaser “monitoring” the asset. A final payment to be made contingent on a set revenue target being exceeded.
The Applicant received the initial payment in July 2009; earn-out payment in 2009, earn-out payment in 2010, and a final payment exceeding revenue of $250, 000 in 2011.
The Commissioner learned that payments were made from a foreign source to the Applicant and, relying upon Australian Transaction Reports and Analysis Centre (“AUSTRAC”), the Commissioner compiled a list of payments made to the Applicant paid from the United States by HGM or by another organisation, namely Federated Media Publishing Inc, between 9 July 2009 and 2 March 2010. A list of such payments is set out as follows:
| Financial year | Country | Transaction date | Payer Name | Assessable amount |
| 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 | USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA | 2/03/2010 1/02/2010 15/01/2010 6/01/2010 14/12/2009 2/12/2009 16/11/2009 2/11/2009 19/10/2009 1/10/2009 17/09/2009 15/09/2009 3/09/2009 19/08/2009 6/08/2009 20/07/2009 14/07/2009 9/07/2009 | HGM HGM HGM HGM HGM HGM HGM HGM HGM FMP HGM HGM HGM HGM FMP HGM FMP HGM | $2, 078 $3, 507 $3, 006 $3, 116 $3, 060 $3, 085 $2, 998 $3, 053 $3,315 $3, 224 $2, 963 $100 $3,327 $3, 362 $3, 450 $3, 594 $674 $10, 855 |
On 19 June 2014, in the absence of any income tax returns being lodged by the taxpayer for the financial year ended 30 June 2010, the Commissioner issued an assessment based upon the information received from AUSTRAC and assessed the income of the Applicant to be $59,859. The tax recorded as owing was $15,351.15.
In addition, an administrative penalty notice was issued for 75% of the income tax owing. The penalty was assessed at $11,513.25.
For the financial year ended 30 June 2012, AUSTRAC recorded the following payments to the Applicant:
| Financial year | Country | Transaction date | Payer Name | Assessable amount |
| 2012 2012 2012 | USA USA USA | 6/12/2011 15/11/2011 26/08/2011 | VPRX HGM HGM | $62, 009 $38, 963 $21, 610 |
The Applicant did not file any tax return for the financial year ended 30 June 2012. Accordingly, on 19 June 2014 the Commissioner issued an assessment of estimated income based upon information provided by AUSTRAC in the amount of $124,481. The tax owing in respect of such assessment was $46,698.25.
Further, because the assessment issued was a default assessment, a penalty notice in respect of the same financial year ending 30 June 2012 was issued showing a tax penalty of $35,023.50 was owing.
On 16 May 2016, the Commissioner received an objection to the Notices of Assessment for the financial years ended 30 June 2010 and 30 June 2012. As a result of the information provided, the Commissioner adjusted his calculations and then issued notices of amended assessments dated November 2016, to the Applicant for the financial years ended 30 June 2010 and 30 June 2012.
In respect of the financial year ended 30 June 2010 the taxable income was amended to $51,718 and for the financial year ended 30 June 2012, the taxable income was reduced to $63,189. The adjusted administrative penalties, levied at 75% of the new tax shortfall of $11,496.20 for the 2010 year, and shortfall of $15, 948.20 for the 2012 tax year, were $8,622.15 and $11,961.30, respectively.
No documentary evidence was submitted to the Commissioner, nor to this Tribunal, relating to the sale agreement for the domain name. However, the Applicant provided certain emails as detailed hereunder.
The notices of default assessment issued in 2014 were forwarded by the Commissioner to a firm of accountants, then known as Pink Diamond Financial Group and addressed to a post office box in Sydney
The objection made on 16 May 2016 was received from a firm of solicitors namely Latitude Legal Pty Ltd, who act for the Applicant in these proceedings.
The Applicants’ Statement of Facts, Issues and Contentions claims that:
(a)In respect of both the 2010 and 2012 years the payments were not income: rather they were attributable to capital gain which occurred at the end of the 2009 financial year;
(b)A deduction for expenses should be allowed for earning income;
(c)The Applicant should be entitled to claim rollover relief as some of the capital gain was used to purchase business assets for the Applicant’s next e-commerce business venture, namely Consultation Business Traveller.
APPLICANT’S SUBMISSIONS
The Applicant submitted that all of the documentation relating to the agreement for sale has been lost. Accordingly, the Applicant has no documentation with which to verify the arrangements for the sale. However, the Applicant contended that the amounts which were received and recorded through AUSTRAC comprised part-payment (which the Applicant described as “revenue payments”) and were capital. He maintains that such payments were not income. The Applicant explained that because of the Global Financial Crisis, it was difficult to sell his domain name. The purchaser, HGM, was not prepared to pay a fixed amount; rather the price would be determined on some basis, apparently calculated on profit.
The Applicant was unable to inform the Tribunal of the consideration agreed upon, nor the quantum of the purchase price.
The Applicant stated that he did not know the name of the lawyers who prepared the sale agreement and said that HGM had been taken over and all details of the purchase of his domain name were unavailable.
Instead of any written contract, the Applicant provided numerous emails to the Commissioner in support of his contention that the payments received by him from the USA between 9 July 2009 and 2 March 2010 were revenue payments.
The Applicant contended that all such payments were revenue and not income. Accordingly, no tax was payable for the 2010 year and the penalty was therefore without foundation.
With respect to the amended assessment issued for the financial year ended 30 June 2012, the Applicant stated at the hearing that he did not oppose such assessment. However he maintained that the penalty was unjust, in circumstances where he was unable to locate the sale agreement.
Tribunal Hearing
The Tribunal was concerned to ensure that the Applicant was given every opportunity to assist his case. He was provided the opportunity to give oral evidence and to call, by telephone, his accountant to verify his claims. The opportunities were not availed of.
At the hearing, the Applicant sought to rely upon an affidavit, produced for the first time on the day of the hearing, referring to the penalties. Objection was taken to the reading of the affidavit, in circumstances where the Applicant had failed to adhere to directions on two occasions to provide any material to the Tribunal. Accordingly, the Tribunal indicated that it would grant leave for the Applicant to rely upon the affidavit but on terms of an adjournment, as sought by the respondent if the affidavit were allowed into evidence The Applicant did not avail himself of this opportunity and the affidavit was therefore not read.
The Applicant then sought to suggest that the failure to respond to the warnings of the Commissioner that no returns had been filed, which culminated in the default assessments, was the fault of his accountant. However, there is no evidence before the Tribunal to this effect; nor is there any evidence of any instructions provided by the Applicant to his accountant for the preparation of tax returns. The accountant did not provide any evidence.
ISSUES
The Respondent identifies the issues for determination as follows:
Ordinary Income
(a)Did the payments that the Applicant received via regular international transfers between 14 July 2009 and 2 March 2010 form part of the Applicant’s ordinary income for the income year ended 30 June 2010 pursuant to s 6-5 of the Income Tax Assessment Act 1997 (Cth) (‘ITA 1997’)?
(b)Was the Applicant entitled to claim deductions for expenses incurred in earning his ordinary income, as contended by the Applicant at paragraphs 6 and 8 of his Statement of Facts, Issues and Contentions dated 5 May 2017?
Capital Gain Tax
(c)Did the payments referred to above at subparagraphs 16 (a), (b) and (c) give rise to capital gains tax events?
(d)Was the Applicant entitled to claim a rollover relief, as contended in paragraph 5 of the Applicant’s Statement of Facts, Issues and Contentions dated 5 May 2017?
Administrative Penalties
(e)Whether administrative penalties were correctly impose at the rate of 75% of the tax shortfall amount for the years ended 30 June 2010 and 30 June 2012.
(f)Whether penalties should be remitted in full or in part pursuant to section 298-20 of Schedule 1 of the Taxation Administration Act 1953 (Cth)?
When the Applicant made his objection on 16 May 2016 to the Commissioner the Commissioner was provided, for the first time, with documentary evidence comprising the emails. As a result, the amended assessments were issued, reducing the amount of claimed income. The Commissioner accepted that one payment, made on 9 July 2009 for the amount of $10,855, constituted, or might have constituted, a capital payment and therefore was prepared to give credit for such amount. This is reflected in the amended assessment. However, the Commissioner maintained that the remaining payments were to be treated as income.
In respect of the financial year ended 30 June 2012, the Applicant accepts that the payments received by him for that year totalling $124,481.00 comprised taxable income. It appears from the email dated November 16, 2011 from HGM addressed to the Applicant that such payment comprised three amounts namely $40,000, a second payment of $40,000 and $24,125, all sent around 16 November 2011. The Applicant now acknowledges that such amount is comprised income. Such amounts, it is said by the Applicant, constituted 41.6% of the buyout price under the sale agreement.
Emails exist in the documentation provided to the Commissioner by the Applicant. One email dated 28 June 2011 was is from HGM and, relevantly, states:
Some good news for you!!
As you may remember, the Definitive Agreement addressing HGM’s acquisition of [the domain name] included a performance / revenue share provision. The details of this are in Section 2 of the REVENUE SHARE AGREEMENT you executed in July, 2009.
At a high level, during a “year” (12 months from Aug 1st to July 31st) if [the domain name’s] total revenue exceeds $250,000, a revenue share is paid on the incremental $ over $250,000. [The domain name’] revenue did not exceed $250,000 from August 1, 2009 through July 31, 2010. However, [The domain name] revenue did exceed $250,000 from August 1, 2010 through July 31, 2010. While we have 30+ days remaining before the Aug 1, 2009 – July 31, 2011 time period closes, our latest forecast is for ̴ $500,000 in total [The domain name] revenue during this 12 month period. Therefore, we will apply revenue share outlined in Section 2 of REVENUE SHARE AGREEMENT to this number (again, need to wait until after July 31st to know the exact number).
Based upon this email, it is obvious that since revenue in the period August 1, 2009 to July 31, 2010 did not exceed the target of $250,000, no revenue share was payable to the Applicant in that year.
When this was put to the Applicant, he raised for the first time that there was a second agreement dealing with such payments. However, as the terms of the second agreement are also not before the Tribunal.
In the emails provided to the Tribunal by the Applicant, there is an email from HGM dated 27 August 2011, the relevant portions read:
Hi guys – we wide said [the Applicant] and Vik’s payments this morning and for text Nelson’s payment yesterday and I wanted to give you the breakout of the payment. See attached.
Please note that you should check with a tax advisor as to how you should treat these payments for tax purposes. I expect there will be treated as additional proceeds from the sale of [the domain name], but please do not take any tax advice from me on how you should personally treat this.
An email which is dated 9 November 2011 from HGM to the Applicant is entitled: Re-: [the domain name]Revenue Share Payment. It relevantly states:
As you may recall from the acquisition agreement between HGM and [the domain name], there was a revenue share component – which (as outlined in the thread below) kicked in for the first time for the “year” of Aug 2010 – July 2011. At the time, you were each given your respective % of this revenue revenue [sic].
Well, the acquisition agreement also provided HGM the option to make a one-time payment to “buy out” this ongoing revenue share obligation. The amount of this one-time payment was $250, 000. In light of the growth of [the domain name] as well as the notion that it’s nice to get money sooner rather than later (particularly to great founders/employees) :-), I have recommended to the board that HGM “buy out” this revenue share obligation. The board has agreed this will work!!
In other words, per each of your % interest for the revenue share in the definitive agreement, HGM be sending you each a check in/ around early December for your % of this $250, 000.
Note, thereafter, HGM will no longer be paying a revenue share based on [the domain name] revenue. However, again, this decision makes sense both from a financial perspective for HGM and, I would think, from your perspectives.
As with the revenue share payments earlier this year, David O will work on ensuring you get the specific $ amounts due (math should be pretty straightforward – your rev share % applied $250, 000). As with the prior rev share, we will need you to consult/investigate outside of HGM regarding tax obligations.
PRINCIPLES
The assessments relied upon by the Respondent were issued under s 166 and s 167 of the Income Tax Assessment Act 1936 (Cth) (‘ITA 1936’). The power to issue such assessments has been considered in George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 204; Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614.
Pursuant to s 14ZZO(b)(i) of the Taxation Administration Act 1953 (Cth) (‘Administration Act’), the onus is upon the Applicant to establish that the assessments are excessive, and therefore, erroneous.
In Uratoriu v Federal Commissioner of Taxation (2010) ATC 20-219; [2010] FCA 1157 at [27] McKerracher J said:
On a challenge under 14ZZO(b)(i) of the TAA Act, the onus lies with the applicants: Danmark Pty Ltd v Commissioner of Taxation (Cth) (1944) 7 ATD 333 at 337 per Latham CJ. Mr Uratoriu must show not only negatively that the assessments are wrong but also positively what correction should be made in order to make the assessments correct FCT v Dalco (1990) 168 CLR 614 at 623-625; 20ATR 1370 at 1374-1376; 64 ALJR 166 at 169-170; 90 ATC 4088 at 4092-4094; 90 ALR 341 at 346-347 per Brennan J and (at CLR 632-634; ATR 1380-1381; ALJR 173-174; ATC 4097-4098; ALR 352-353) per Toohey J). In assessing the weight of the evidence adduced it is relevant that some facts concerning a taxpayer’s income are or should be peculiarly within the taxpayer’s knowledge and a taxpayer cannot take advantage of inadequate records or recollections: see, for example Trautwein v FCT (1936) 56 CLR 63 at 87-88; [1936] ALR 425 at 428 per Latham CJ. ; R v
The Act does not place any onus on the Commissioner to show that the assessments were correctly made: see K.A. Hicks & Associates Pty Ltd and Ors and Commissioner of Taxation [2014] AATA 668 at [12].
Pursuant to s 167 of the ITA 1936, the Commissioner may issue a default assessment in circumstances where, inter alia, a person makes default in furnishing a return or the Commissioner has reason to believe that the person who has not furnished a return has derived taxable income. Such section authorises the Commissioner to:
…make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of section166.
Section 14ZZK of the Taxation Administration Act1953 (Cth) (‘the Administration Act’) relevantly provides that on an application for review of a reviewable objection decision, the Applicant has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been, or that the decision should have been made or made differently.
FINDINGS
The Tribunal makes the following findings:
(g)The Tribunal accepts that a sale agreement existed with HGM.
(h)The Tribunal also accepts that there was another agreement entered into between the Applicant and HGM namely the Revenue Share Agreement signed in July 2009.
(i)As evidenced by the email of 9 November 2011, HGM elected to buyout the interest of the Applicant in the domain name and to do so a payment of $250,000 was made to buy out the “ongoing revenue share obligation”.
(j)There is no evidence before the Tribunal concerning receipt by the Applicant of that sum.
(k)Payments made up to 9 November 2011 to the Applicant from HGM comprised revenue or income payments calculated on the basis which, in the absence of the sale agreement and the Revenue Share Agreement, especially Section 2 thereof (referred to in the email of HGM to the Applicant dated 9 November 2011) is not explained.
(l)It follows that all payments received by the Applicant from HGM, now under review, in the 2010 tax year comprised revenue or income payments, and not payments of capital.
With respect to the financial year ended 30 June 2012, the Applicant now accepts such assessment but challenges the penalty. The challenge is based upon the fact that not only is tax payable by the taxpayer, but there will be the Applicant compound interest payable to the Commissioner and also penalties. The Applicant submitted that such would constitute a harsh result.
CONSIDERATION OF PENALTY
Sections 298-20(1) of the Administration Act authorises the Commissioner to remit all or part of a penalty.
However, the administrative penalty applies, as stated in s 284-75(3), if, inter alia, the taxpayer fails to give a return. The amount of the penalty is set out in Schedule 1 to s 284-90 of the Administration Act in item 7, as follows: “You are liable to an administrative penalty under subsection 284-75(3)”. The amount of the penalty is 75% of the tax-related to the liability concerned.
The principles are well established that, whether a penalty is to be considered as harsh depends upon the particular circumstances: see Dixon as Trustee for Dixon Holdsworth Superannuation Fund v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287; Rowntree v Federal Commissioner of Taxation [2016] AATA 420 (‘Rowntree’).
The taxpayer has been unable to prove that the amended assessments are erroneous and indeed, at the hearing it became apparent that only the amended assessment for the financial year ended 30 June 2010 was challenged, together with the penalty for both 2010 and 2012. Essentially, the Applicant’s claim that the penalties are excessive or harsh result from the fact that he is unable to produce the documentation to support his claims; but such a reason has been found not to be justification for concession.
The Tribunal is satisfied that the applicant is not entitled to be recorded as merely grossly careless or grossly indifferent towards his income tax obligations, as was considered in Confidential and Commissioner of Taxation [2012] AATA 178; (2012) 88 ATR 222 [202]; see also Rowntree at [82]. In the circumstances there is no justification for reducing the penalties.
The Applicant claimed an entitlement to claim business expenses. Since this issue was not raised in the Applicant’s taxation objection, it is now too late to raise it in the application: See s 14ZZK(a) of the Administration Act. Further, no detail has been provided of any business expenses incurred in the earning of the income for the 2010 tax year.
CAPITAL GAINS TAX
No submissions were made in respect of this issue.
ORDERS
It follows that the Applicant’s challenge to the assessment of income for the 2010 year fails because the Applicant has not discharged the onus under s 14ZZK(b) of the Administration Act. Further, the administrative penalties for the 2010 year and 2012 year were correctly imposed s 284-90 of Schedule 1 of the Administration Act. No grounds have been established warranting the remission of penalties pursuant to s 298-20 of Schedule 1 of the Administration Act.
In all of the circumstances, the Tribunal finds that the decision of the Commissioner under review is the correct and preferable decision and therefore, affirms the decision under review.
I certify that the preceding 51 paragraphs are a true copy of the reasons for the decision herein of The Hon. Dennis Cowdroy OAM QC, Deputy President
............................[sgd]............................................
Associate
Dated: 25 October 2017
Date(s) of hearing: 17 August 2017 Solicitors for the Applicant: Mr S Gupta, Latitude Legal Pty Ltd Solicitors for the Respondent: Mr E Chiaw, Commissioner of Taxation
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