Vujevic and Commissioner of Taxation

[2004] AATA 1009

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 1009

ADMINISTRATIVE APPEALS TRIBUNAL

TAXATION APPEALS DIVISION            NT2003/294

Re: MARK VUJEVIC

Applicant

And: COMMISSIONER of TAXATION

Respondent

DECISION

Tribunal:       P.J. Lindsay, Senior Member

Date:             24 September 2004

Place:            Sydney

Decision:The Tribunal affirms the decision under review.

. . . . . . . . . . . . . . . . . . . . . . . .

P. J. Lindsay, Senior Member

©        Commonwealth of Australia          (2004)

CATCHWORDS

Income tax – prescribed payments made to applicant – audit of construction company making prescribed payments to applicant - cash payments made by company to applicant – quantum of cash payments made to applicant - no entitlement to credit for tax if no deductions made from cash payments – no remission of 10 per cent penalty tax - decision affirmed

Taxation Administration Act 1953 s.14ZZK

Income Tax Assessment Act 1936 s.221A, 221YHF, 226G

Income Tax Assessment Act 1997                        s.6-5

Commissioner of Taxation v Dalco (1989-90) 168 CLR 614

Coco v Commissioner of Taxation (1993) 42 FCR 219

REASONS FOR DECISION

P.J. Lindsay, Senior Member

1.      This is an application to review a decision by the Commissioner of Taxation dated 6 December 2000 to allow in part, an objection to an amended assessment of income tax for the year of income ended 30 June 1998. The objection was to the inclusion of $22,810 in the assessable income of Mark Vujevic, the applicant.  Due to adjustments made subsequently, the matter in dispute at the hearing was whether $21,465 should be excised from the applicant’s assessable income.

2.      The background is that the amended assessment arose from an audit of SJP Formwork (NSW) Pty Limited, a company for which the applicant performed work. 

3. In his oral evidence, the applicant said that payment for the work he did for SJP was subject to the prescribed payments system (PPS). He agreed to the company deducting from its payments, 25 per cent in tax under the PPS system. SJP prepared a PPS payment summary dated 7 July 1998 (exhibit A2). The applicant prepared his 1998 income tax return in conformity with that information, disclosing $59,315 as gross PPS income (T3-25 in the documents lodged with the tribunal under s.37 of the Administrative Appeals Tribunal Act 1975). The applicant said that these payments were made directly into his bank account. The assessment that issued on 6 October 1998 allowed credit in the sum of $14,828 for tax deducted under the PPS system. It can be seen that the amount of credit reflects deduction at the rate of 25 per cent.  

4.      The applicant said that he also worked some overtime on Sundays and at night.  SJP paid him cash for this work.  

5.      Ms Shelley Remati from the Australian Taxation Office was a field auditor who participated in the income tax audit of SJP in 1999.  Her affidavit sworn on 30 June 2004 (exhibit R2) states that she has been involved in the audit and investigation of companies and other entities in the building and construction industry, and that part of that work has been to examine the cash economy in the industry.  As part of the audit, in June 1999 she questioned Mr Steve Pejkovic, the sole director of SJP.  She went to SJP’s premises on 24 June 1999 and collected company records, including timesheets, from Mr Pejkovic. The timesheets relating to the 1998 income year were exhibited to her affidavit.   Her affidavit reads:

3.  I asked [Mr Pejkovic] questions to the effect of whether cash was being paid to workers.  He said words to the effect that cash was being paid.  I asked a question to the effect of whether tax was being deducted from this cash.  He said words to the effect that no tax was being deducted from the cash payments.  …

5.  On or about the time I obtained the documents from Mr Pejkovic, we discussed the content of the Exhibit.  To the best of my recollection, Mr Pejkovic indicated that the last column on the timesheets related to the cash payments.  I recall questioning Mr Pejkovic about the figures contained in that far right column.  I recall that his responses confirmed that all the figures were cash payments, but I cannot recall the details of his explanation of the individual amounts.

6.  Based on the documents obtained and the information from Mr Pejkovic, the details for each employee were collated for the income years 1997, 1998 and 1999.  Where two or three figures were written for a worker for a given week, a ‘PC’ next to a figure was taken to mean a petty cash reimbursement.  The first figure was taken to be a ‘bonus’ which was a reasonably consistent amount paid each week regardless of extra hours worked.  The final figure was taken to be an amount paid according to the number of ‘overtime’ hours worked. This is consistent with my experience in examining other companies which were making cash payments.  …

6.      In cross examination Ms Remati agreed that Mr Pejkovic was not the author of the information in the workers’ timesheets relating to weekly cash payments and he did not make the actual payments of cash to the workers. Ms Remati also accepted that the timesheets were not signed by the worker or anyone on behalf of SJP. She maintained, however, that Mr Pejkovic explained to her what the numbers in the timesheets represented and she had no reason to doubt his explanation.  She said the information therein formed the company’s wages book. The column for the cash payments showed the number of hours of overtime, the amount of bonus paid and any petty cash reimbursement due to the individual worker for a particular week.  Ms Remati added that the timesheets were the only records of wages that she obtained from the company and she thought they correctly recorded cash payments to workers.   

7.      From the company’s records and in particular the time sheets showing a column with figures that Mr Pejkovic had informed her represented cash payments,  Ms Remati said she prepared a list of people and the amounts those records showed them as having been paid (exhibit R4). In aggregate she found that $1,275,774 was paid out in cash by the company to its workers, including the applicant.

8.      Based on the SJP records (exhibit R1), the respondent calculated (T5-28) that the applicant was paid the following amounts of cash during the 1998 income year:

– bonus   $  6,690

– petty cash             $  2,420

- overtime                 $14,775

An amended assessment was issued on 14 April 2000 (T6-29) including the sum of $22,810 in assessable income (it appears that the respondent accepted that the applicant spent a portion of the petty cash on deductible purchases and that amount was excluded from the amended assessment).  The amended assessment stated that the adjustment was the result of an audit or investigation.

9.      There was an interview on 19 October 2000 between Ms Remati, the applicant and his tax agent Keith Davies, who represented him at the hearing. In the record of interview (T7-30) the applicant maintained that tax was properly taken out of the cash he received for overtime. The applicant accepted that he worked at least eight nights, for which he was paid $25 an hour for four hours, regardless of how few hours he actually worked ($800). He stated that he also worked perhaps ten Sundays, for $200 net each time. He explained that the petty cash payments were in reimbursement for his expenditure on diesel, tolls, hardware items and the like, and averaged about $140 to $150 per week. Following the interview, the applicant’s agent wrote to the ATO on 24 November 2000 in these terms (T8-32):

Our client is prepared to accept an amendment to his original 1998 return as follows:

Gross income for overtime calculated 10 [Sundays] x $348  $3,480   

Other overtime   800

$4,280

Tax credit for tax instructed to be deducted 10 x $148 =   $1,480.

The tax agent signed the letter, which he asked the ATO to treat as an objection.  By decision dated 6 December 2000, the respondent disallowed the objection.  However, there was a problem with service of the objection decision and considerable delays ensued before an application to have the decision reviewed was lodged at the tribunal on 18 December 2003. The tribunal granted the applicant an extension of time to lodge his application for review.

10.     The upshot of the interview on 19 October 2000 was that a further amended assessment for the 1998 income year issued on 12 February 2001.  The purpose of the amendment was to recognise that the total amount received by way of petty cash reimbursements, $2,420, was not income in character. The net effect of the amended assessments is that the respondent has increased the applicant’s assessable income, as initially disclosed in his 1998 return, by $21,465 i.e. the bonus of $6,690 added to the overtime of $14,775. 

11.     In his oral evidence, the applicant denied receiving or being entitled to receive a bonus, which he said was paid only to workers on construction sites, not those like him who worked in the yard.  Regarding Sunday work, his evidence in chief was that he asked for tax to be taken out of his payments, and that left him with $200 net. When cross-examined, however, he said he requested that 25 per cent tax be taken out of his Sunday overtime pay. In re-examination he said there was no arrangement between him and the company for tax to be deducted. Rather, he thought that under the relevant award, the minimum payment for Sundays was $348 and it was company policy that he be paid only $200, the rest he assumed was paid by SJP to the ATO. 

12.     A statutory declaration made by Mijo Vrdoljak on 16 July 2004 was tendered in the applicant’s case (exhibit A1). The declaration reads in part:

I was employed by SJP Formwork (NSW) Pty Ltd, for a period of three years, in the position of supply yard foreman.

The tax audit was conducted covering the period I was employed by the above company.

Part of my duties included rostering employees shifts and in that capacity I had regular contact with Mark Vujevic and regularly assisted him in loading material from the yard to take to the job site.

Every Tuesday I would collect Marks overtime hours for the previous week, check his claim to my roster and hand the claim to the pay clerk.  In addition I would also regularly collect from Mark his petty cash reimbursement dockets and hand them to the pay clerk.  On some occasions Mark would hand the petty cash dockets directly to the pay clerk.

I would pick up Mark’s envelopes containing his overtime and petty cash reimbursement from the pay clerk on the following Thursday. …

The overtime hours allocated by me to Mark Vujevic during the period in question amounted to an average of five hours a week at time and a half and 3 hours on the occasional Sunday at double time.

The people on production were the only ones paid a production bonus.  The workers in the yard like Mark and I did not receive any bonuses.

13.     In oral evidence Mr Vrdoljak said he was in charge of recording the number of overtime hours that were worked and he prepared time sheets for the paymaster.  He said that for Sunday overtime, cash payment was made for a minimum of four hours.  There was additional payment for any extra hours worked. He said he would collect and distribute the pay envelopes. As they were sealed and nothing was written on the them regarding number of hours worked or pay rate, he was unable to check whether the amounts enclosed were correct. In relation to his own cash payment for Sunday work, Mr Vrdoljak said that a greater amount of tax would be taken out depending on the number of extra hours he worked.  Mr Vrdoljak said he was an employee and not subject to the PPS rules. He agreed that he also received an amended assessment in April 2000 and $20,740 was included in assessable income (exhibit R3). Ms Remati confirmed in evidence that the amount of the adjustment was consistent with the amount of cash she recorded as having been paid by SJP to Mr Vrdoljak.

14.     The applicant submitted that the amounts of taxable income and tax payable in the amended assessment dated 12 February 2001 are excessive because he worked overtime on only twenty or so occasions during the 1998 income year. He claimed to be entitled to a credit for tax withheld by SJP, being $148 from the payments of $348 due for Sunday overtime. At the hearing he was unsure of the precise number of Sundays worked, but estimated that it was not many more that ten.  It was submitted that, as Mr Pejkovic did not make the cash payments himself, Ms Remati’s belief that the information in the timesheets, particularly that the numbers in the last column represented amounts of cash paid to the particular worker (exhibit R1), was not conclusive. Further, Mr Davies pointed out that if the number of hours shown as a record of additional cash payments was to be believed, the applicant was shown on some occasions to have worked seventy hours a week, on other occasions seven days a week and often 14 or 15 hours a day.  It was contended that Mr Vrdoljak’s evidence supported the argument that the applicant did not work for such extended hours. 

15. Under s.14ZZK of the Taxation Administration Act 1953, the applicant bears the onus of proof in establishing that the assessment is excessive. The nature of the onus was explained by the High Court in Commissioner of Taxation v Dalco (1989-90) 168 CLR 614, in the context of another statutory provision that is not materially dissimilar to s.14ZZK:

For this taxpayer to demonstrate that in some respects, indeed it may be in a number of respects, the Commissioner erred in the way in which he attributed income to the taxpayer or otherwise dealt with the material available to him does not prove that an assessment was excessive. It does not prove that the taxable income of the taxpayer was less than the amount of taxable income shown in any of the assessments. It was necessary for the taxpayer to make good the proposition that his income was less; this he failed to do in respect of any of the assessments. (at 634 per Toohey J)

16.     I accept the evidence of Ms Remati as to the authenticity of the timesheets and the explanation of their content given to her by Mr Pejkovic. I am satisfied that the company’s timesheets that comprise exhibit R1, recorded various items of information such as the particular worker’s job classification, in the applicant’s case noted as “truck” (exhibit R5), and others such as foreman and carpenter. I infer that an entry such as “WC” on particular days, records absence on workers compensation, and entries such as “unpaid leave”, “holidays” and “sick” are equally self-explanatory.  Other columns record the number of hours worked on given days of the week.  I find that the timesheets were intended to present an accurate record of information relevant to workers’ entitlements, and in particular, the final column sets out the amounts of cash to be paid for overtime, bonuses and reimbursements for work related expenditure. I accept that the amounts in that column bear no relation to the PPS income that the applicant disclosed in his 1998 income tax return.

17.     The applicant has admitted that he received some cash payments for overtime and by way of reimbursement (the latter treated by the respondent as not being assessable). He asserts that he did not receive bonuses and certainly not the amount of $6,690. He initially claimed at interview in October 2000 that he received only $3,480 for overtime, but this conflicted to a degree with his oral evidence as to the number of Sundays worked. He was unable to explain how he arrived at his estimate of the overtime he worked, which he also described as “regular”. 

18.     There is no reason for concluding that only some of the amounts identified in the last column of the timesheets as being cash payments were paid to the workers, but other amounts, such as bonuses, were not.  I note that both the applicant and Mr Vrdoljak said that yard workers such as the applicant and himself were not entitled to a bonus.  From her examination of the records, Ms Remati concluded that certain cash payments were made each week regardless of the number of hours actually worked in a given week. This appears to be an acceptable explanation for the figures recorded. Based on the company’s records being the weekly timesheets and the evidence of Ms Remati, I find on the balance of probabilities that the applicant received the amounts of cash shown in the company’s records against his name. The payments of overtime and bonus were made to the applicant in connection with the work he performed for SJP and they have the character of income according to ordinary concepts. They were correctly included in assessable income for the 1998 income year (s.6-5 Income Tax Assessment Act 1997).

19. On the evidence before me, there is no basis for accepting the applicant’s submission that he worked the overtime, or any other periods, in the capacity as an employee, as defined in s.221A of the Income Tax Assessment Act 1936.  I find that that all the work he performed for SJP was as a contractor. Payments he received for that work, whether for overtime or the amounts of bonus, were subject to the PPS rules.

20.     The applicant’s evidence regarding the arrangement with the company for tax to be deducted from Sunday overtime payments was confused and contradictory.  He argued that he did not declare his cash overtime payments because he thought enough tax had been taken out. But that explanation is inconsistent with his evidence that he did not know why he did not include the cash payments in his 1998 income tax return. It is also contrary to Ms Remati’s evidence that Mr Pejkovic admitted that the company did not deduct tax from the cash payments, whether for overtime or bonus. I prefer Ms Remati’s evidence to the applicant’s. I find on balance that there was no arrangement with the company for tax to be deducted from his overtime. This finding leads me to reject his submission that s.221YHF(1) of the 1936 Act entitled him to a credit for PPS deducted from the cash prescribed payments received from SJP. There is no entitlement to credit unless deductions have been made.  Accordingly, the respondent’s submission regarding jurisdiction does not arise. Had it been necessary to consider the point, I would have accepted the submission that the tribunal does not have jurisdiction to review a claim that credits have been wrongly denied, as such a calculation is not part of the process of assessment and thus not subject to review under the objection, reviews and appeals provisions of the Taxation Administration Act 1953 (Coco v Commissioner of Taxation (1993) 42 FCR 219).

21.     The respondent imposed a penalty equal to 10 per cent of the tax shortfall arising from the applicant’s failure to take reasonable care by not declaring all cash income by way of bonus and overtime. This represents a remission of the maximum penalty of 25 per cent of the tax shortfall that is allowed under s.226G of the 1936 Act. The applicant did not make any submissions seeking a remission of the penalty. The circumstances of this case, non-disclosure of cash income, lead me to conclude that there is little justification for further remitting the level of penalty. 

22.     The decision under review is affirmed.

I certify that the preceding 22 paragraphs are a true copy of the reasons for decision of P.J. Lindsay, Senior Member:

Signed:         
          ..................................................................................……………………………….

Associate

Hearing  1 September 2004

Applicant’s written submissions     8 September 2004

Respondent’s written submissions 20 September 2004

Decision   24 September 2004

Applicant’s Representative            Mr K. Davies, tax agent

Respondent’s Representative       Australian Taxation Office