WGMH and and and and Commissioner of Taxation
[2014] AATA 244
[2014] AATA 244
Division TAXATION APPEALS DIVISION File Numbers
2013/0464, 2013/0465 & 2013/0466
Re
WGMH
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Numbers
2013/0467, 2013/0468 & 2013/0469
Re
CYDW
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Numbers
2013/0470 & 2013/0471
Re
QPTS
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Numbers
2013/0472 & 2013/0473
Re
KXBF
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 28 April 2014 Place Brisbane The objection decisions under review are affirmed in respect of the 2005-2006 years of income. The taxpayers do not have leave to amend assessments in respect of the 2002-2004 years of income.
.........................SGD...........................
Senior Member Bernard J McCabe
Catchwords
INCOME TAX – Reassessment of tax liability for 2002-2004 years of income – Objections lodged out of time – Principles governing extension of time – No extension of time granted – No leave to amend assessments.
INCOME TAX – Reassessment of tax liability for 2005-2006 years of income – Characterisation of income – Alleged mistake – Taxpayers’ evidence contradictory and incomplete – Failure of taxpayers to prove that assessments are incorrect – Objection decisions under review affirmed.
Legislation
Taxation Administration Act 1953 (Cth) ss 14ZW; 14ZX; 14ZZK
Income Tax Assessment Act 1936 (Cth) ss 166A; 171A; 175A
Income Tax Assessment Act 1997 (Cth) ss 6.5; 8.1
Cases
Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243
BCD Technologies Pty Ltd and Commissioner of Taxation [2004] AATA 496
Brown v Federal Commissioner of Taxation (1999) 42 ATR 118
Commissioner of Taxation v BCD Technologies Pty Ltd (2005) 144 FCR 457
Commissioner of Taxation v Ryan (2000) 201 CLR 109
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344
Kajewski v Commissioner of Taxation (2003) 52 ATR 455
Metlife Insurance Limited v Commissioner of Taxation (2008) 70 ATR 125
REASONS FOR DECISION
Senior Member Bernard J McCabe
28 April 2014
The individual taxpayer in this case is a medical practitioner. I shall call him Dr Smith for the purposes of these reasons. Dr Smith used a service company which I shall refer to as Serviceco (the corporate taxpayer) to run his medical practice. Dr Smith was an employee and director of Serviceco. Serviceco’s records over a number of years suggest Dr Smith was paid remuneration and amounts in respect of director’s fees. Dr Smith now says he should not have been taxed on the director’s fees because they were actually loans. He puts the confusion down to mistakes made by his former accountant. If
Dr Smith is right, that would have consequences for his own tax affairs and those of Serviceco in the years ended 30 June 2002 through 30 June 2006.
A preliminary issue has arisen, however. The accountant’s mistakes – if that is what they were – did not come to light for some time. The objections were lodged on
14 November 2010. The objections in respect of the 2002, 2003, 2004 and 2005 years were therefore lodged out of time: s 14ZW(1) of the Taxation Administration Act 1953 (Cth) (“the Administration Act”). The Commissioner exercised his discretion to accept the objection in respect of the 2005 year of income but he refused to accept the objections in respect of the earlier years pursuant to s 14ZX(1) of the Administration Act. It will therefore be necessary for me to consider whether to exercise the discretion to accept the objections in respect of those earlier years of income.
SHOULD THE TAXPAYERS HAVE LEAVE TO OBJECT AGAINST ASSESSMENTS IN RESPECT OF THE 2002, 2003 AND 2004 YEARS OF INCOME?
Serviceco lodged tax returns that recorded nil income in the relevant years of income. The Commissioner relied on the Federal Court’s decision in Commissioner of Taxation v BCD Technologies Pty Ltd (2005) 144 FCR 457 to argue a formal assessment does not occur for present purposes when a taxpayer lodges a nil return – which means there is no decision against which a taxpayer may object. If that is so, the argument runs, the Commissioner cannot now go back and issue original assessments in respect of those years of income because of the passage of time: s 171A of the Income Tax Assessment Act 1936 (Cth) (“ITAA 36”). I cannot grant an extension of time to Serviceco to lodge objections against non-existent assessments.
The law in relation to nil assessments and returns has a long pedigree. The High Court decided in Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 (and confirmed in Commissioner of Taxation v Ryan (2000) 201 CLR 109) there was no assessment within the meaning of the relevant provisions in force at the time unless there was a notice of a dollar amount specified as being due and payable as tax: Batagol at 252-253 per Kitto J and 256-257 per Owen J; see also BCD at 460 per Heerey J. But as the Federal Court observed in BCD, the decisions of the High Court in Batagol and Ryan predated the self-assessment regime. When that regime was introduced, an assessment was deemed to occur on the date the return was furnished to the Commissioner:
s 166A(1) of the ITAA 36.
The Tribunal had earlier concluded the introduction of the self-assessment system necessitated a re-think of the applicability of the decisions in Batagol and Ryan:
see BCD Technologies Pty Ltd and Commissioner of Taxation [2004] AATA 496. The Federal Court disagreed on appeal. Heerey J explained ((2005) 144 FCR 457 at 460):
…the concept of a deemed assessment introduced by s 166A was not intended to alter the fundamental nature of an assessment under the Act, as established by Batagol.
The artificial state of affairs created by the lodging of a return only extended to bringing into existence at that time of a notional assessment without the Commissioner having to actually issue and serve one. But both kinds of assessments must qualify as assessments within the meaning of the Act. It would be an irrational and asymmetrical intention to impute to Parliament that "ordinary" assessments must specify an actual amount of tax payable but with "deemed" assessments a nil or negative amount will suffice.
The Commissioner says that disposes of the question: there was no original assessment, so there can be no amendment, and it is now too late to issue an original assessment.
The taxpayers disagree. In written submissions, they referred to the decision in
Kajewski v Commissioner of Taxation (2003) 52 ATR 455, but that case dealt with an allegation of fraud or evasion. They also referred to the decision of Emmett J in
Metlife Insurance Limited v Commissioner of Taxation (2008) 70 ATR 125 – however that case dealt with the application of s 170(10AA). I do not see how either case assists in the interpretation of the provisions in question here.The taxpayer also argued the Commissioner failed to grapple with ss 171A(2)(b) and 175A of the ITAA 36. Section 175A(1) provides a dissatisfied taxpayer may object to an assessment. That is common ground, although it rather begs the question of whether there is an assessment for the purposes of the legislation. I note s 175A(2) expressly provides a taxpayer may not object under s 175A(1) against an assessment determining the taxpayer either had no taxable income, or (even if there is taxable income) no tax is payable.
But there are exceptions to the general rule limiting the time within which original assessments must be made. These exceptions are set out in s 171A(2), a curiously worded provision that reads as follows:Subsection (1) does not apply in relation to a nil year if:
(a) the Commissioner is of the opinion there has been fraud or evasion; or
(b) had the Commissioner made an assessment, in accordance with the taxpayer's return of income, that the taxpayer had no taxable income or that no tax was payable by the taxpayer (assuming that such an assessment could have been made)--this Act would not have prevented the Commissioner amending the assessment at any time.
There is no suggestion of fraud or evasion in this case, so s 171A(2)(a) does not apply. But the taxpayers say 171A(2)(b) is relevant. In their written submissions, they explained the provision means the Commissioner is entitled to issue an original assessment “where the evidence of the taxpayers demonstrate[s] that the taxpayers’ returns contain a statement that is erroneous or incorrect”.
That is wrong. Section 171A(2)(b) refers to the Commissioner’s power to amend an assessment under other provisions of the income tax laws without a time limit.
That unlimited power to amend arises in a few specific cases. ATO Interpretative Decision 2012/44 offers the example of the old s 136AD which dealt with transfer pricing. If that section was found to apply to a taxpayer, the Commissioner was entitled to issue an amended assessment regardless of the time limits – much as he could if he were satisfied there was fraud or evasion. Section 171A(2)(b) merely says if the Commissioner would have the power to amend an assessment because of a provision like s 136AD, he can overlook the fact a nil return is not regarded as an assessment and proceed to lodge an original assessment without regard to the usual time limit.I am satisfied there was a nil return and assessment in respect of Serviceco in the
2002-2004 years of income, and it is now too late to issue original assessments. There are no other provisions of the legislation engaged on the facts that would authorise the issue of amended assessments out of time, so Serviceco cannot rely on s 171A(2)(b) – which means the time limits in the legislation that apply to original assessments continue to apply.That conclusion has implications for Dr Smith. If Dr Smith were successful in his application – if he were relieved of the liability to pay tax in respect of the income in question in the 2002-2004 years of income – the Commissioner would be prevented from recovering the revenue from Serviceco. I shall return to this issue below.
The principles governing applications for extension of time are well known. They are set out in cases like Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344
(at 348-350 per Wilcox J) and Brown v Federal Commissioner of Taxation
(1999) 42 ATR 118 (at 126-132 per Hill J). In a case like the present, I must consider:·The applicant’s explanation for the delay. In this case, both applicants point the finger at their former accountant. They say her failures to account and to keep them informed explain the delay. The Commissioner pointed out the applicants did not act promptly even after they changed accountants: the new accountants took over in 2007 and the objections were not lodged until 2010. It follows the applicants have been slow to exercise their rights, and they do not have a compelling explanation for the entirety of that delay.
·The merits of the case. I have already pointed out there is no merit in Serviceco’s application in the relevant years of income. Dr Smith’s application is unlikely to fare much better for the same reasons I explain below in relation to the 2005 and 2006 years of income.
·Prejudice to either party
. Dr Smith will not have the opportunity to challenge what he now says are incorrect assessments if he is denied an extension of time. But the Commissioner will be denied the opportunity to recover revenue to which he is entitled if Dr Smith is ultimately successful. On balance, the prejudice to the Commissioner is of greater concern because any mistakes were made by
Dr Smith’s agent.
On balance, I do not think it is appropriate to allow the extension of time sought by the applicants. I will therefore confine my analysis to the issues arising in relation to the objections to the 2005 and 2006 years of income for both Dr Smith and Serviceco.
THE BASIS OF THE ORIGINAL ASSESSMENTS IN 2005 AND 2006
The taxpayers both lodged tax returns in respect of the 2005 and 2006 years of income on the basis that amounts recorded as director’s fees were paid by Serviceco to Dr Smith. Serviceco claimed a deduction in respect of the amounts, and Dr Smith reported the amounts as assessable income. Dr Smith now says that was a mistake: he says the amounts paid out by Serviceco were actually loans from Serviceco to finance his other business operations.
Directors fees would ordinarily qualify as income according to ordinary concepts in the hands of the director: s 6.5, Income Tax Assessment Act 1997 (Cth) (“ITAA 97”). The company paying the fees would be able to claim a deduction in respect of those amounts provided the fees were incurred in gaining or producing the company’s assessable income, or incurred in carrying on a business for the purpose of gaining or producing assessable income: s 8.1(1), ITAA 97.
In this case, the taxpayers now claim the amounts that were shown as being paid to
Dr Smith should not have been characterised as director’s fees. Dr Smith does not dispute the amounts in question were paid either to him or to entities he controlled: he acknowledged as much during cross examination. The problem, according to the taxpayers, was the way the monies were characterised and treated for taxation purposes. The taxpayers said their former accountant took it upon herself to describe – and
misdescribe, at that – amounts which were in reality loans from the company to Dr Smith and other companies he controlled. She acted without instruction, I was told, when she prepared returns in the years under review (and in the earlier years that I have declined to review) on the basis that the amounts were director’s fees.In order for the taxpayers to succeed, they need me to put to one side the fact they were represented by a professional tax agent who acted on their behalf over a long period. They also need me to ignore the fact the agent consistently filed returns adopting the same general approach to these payments (i.e., treating them as directors’ fees), resulting in significantly higher tax bills for Dr Smith in particular. Importantly, Dr Smith’s evidence at the hearing confirms that approach was explained to him at the time, and that he accepted it. In the course of his examination in chief, he said:
“I did question [the accountant] about the extent of tax that I was paying and [the accountant] told me that I needed to pay that tax because they were director’s fees and that – I believed [the accountant] because I’d been with [the accountant] for such a long time….I’m not a tax expert, and I did ask the question, I read all the forms she gave me, I actually signed them in her office in front of her and I read them all but – and I did ask the question, ‘why am I paying so much tax’ and the answer was ‘they’re director’s fees and you have to pay them.’”
Dr Smith agreed his bookkeeper confirmed this approach was correct. In the course of the same answer, Dr Smith added he did not seek advice from another accountant until some time later – and even that inquiry was motivated by concern at the amount of professional fees he was being charged rather than any specific disagreement over the basis on which returns were being prepared. It was only once he obtained different advice from new accountants that he formed the view that the amounts should not have been characterised as director’s fees.
The old tax agent’s approach was reflected in the financial statements of Serviceco, which are set out in Exhibit One at pp 47 and 62. They record amounts paid in respect of director’s fees. Those statements (or at least those relating to the year ending
30 June 2006) were adopted by the directors according to minutes of a meeting held on
17 April 2007: see Exhibit One at p 39. The taxpayers now claim those financial records should not be taken at face value, and point to different figures in the MYOB records. Confusingly, the same minutes also record a resolution that the company would not pay directors’ fees.
The financial affairs of Serviceco and its relationship with Dr Smith become more confusing as one delves deeper into the evidence. There are amounts in the 2006 financial statements that suggest director’s fees were paid, but there are further amounts apparently paid to or on behalf of Dr Smith that do not appear to be accounted for as director’s fees. There are two loan accounts, but Mr Cadman, the taxpayers’ new accountant, acknowledged there were inconsistencies between the various financial records in their possession. Evidence elicited from Dr Smith at the hearing confirms there were many transactions in which Dr Smith obtained money from Serviceco’s accounts. Indeed, he agreed in cross-examination that all of the monies that would otherwise be recorded as profit in the company’s accounts went to him. Some of that money went directly into the pocket of Dr Smith, who is also recorded as drawing a salary. Some of the money was paid on to other companies. Mr Birch, a forensic accountant retained by the applicant, was able to trace some of the money flows into the associated companies. But even if I accept the monies paid by Serviceco ultimately made their way into
Dr Smith’s other business ventures, that fact alone sheds little light on how the payments should be characterised in relation to Dr Smith.
The taxpayers’ current position appears to rely heavily on the resolution recorded in the minutes of the directors’ meeting held on 17 April 2007 not to pay director’s fees.
The records of Serviceco are incomplete and contradictory. It is possible to rationalise the financial transactions that occurred in a variety of ways, although each explanation requires that I dismiss contradictory evidence. The taxpayers prefer to explain what went on as if there were a series of loans. The Commissioner notes the returns proceeded on the basis that payments made to Dr Smith were director’s fees because that is how they were represented in the financial records and tax returns – even though the company’s own minutes suggest director’s fees should not be paid.
I am not persuaded the Commissioner’s assessments are incorrect, which means the taxpayers have not discharged their burden under s 14ZZK(b) of the Administration Act. While there is much in this confusing state of affairs that is difficult to reconcile, I think the best explanation of what occurred is to be found in the oral evidence of Dr Smith when he agreed he was told he was being paid directors fees, and that tax would have to be paid on those amounts. That was the approach adopted by his tax agent, and Dr Smith allowed that approach to continue for some time before his new accountants suggested a different and better approach was open to him, and which probably should have been adopted from the outset. I am not persuaded in any event that the taxpayers have made out their alternative explanations which would suggest a different assessment should have been made.
CONCLUSION
The objection decisions under review are affirmed in respect of the 2005-2006 years of income. The taxpayers do not have leave to amend assessments in respect of the earlier years of income.
I certify that the preceding 24 (twenty -four) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe .........................SGD................................
Associate
Dated 28 April 2014
Date of hearing 14 November 2013 Date final submissions received 3 February 2014 Advocate for the Applicant Mr J Cadman Counsel for the Respondent Ms L Allen
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