Wing and Commissioner of Taxation (Taxation)

This matter concerned an appeal by the applicant, Mr Wing, against a decision of the Commissioner of Taxation regarding his assessable income and a shortfall penalty. The dispute arose from payments totalling $1.5 million made by the Wing Hotel Group, a private company, to the applicant via an interposed entity, Hammerfest Investments, in August 2014. The Commissioner had treated these payments as unfranked dividends assessable under Division 7A of the *Income Tax Assessment Act 1936* (Cth). The applicant contended that the payments were not assessable income, or alternatively, that certain concessions or exemptions should apply. The court was the Administrative Appeals Tribunal.

The primary legal issues before the Tribunal were whether the payments from the Wing Hotel Group to the applicant, channelled through Hammerfest Investments, constituted unfranked dividends assessable under Division 7A of the *Income Tax Assessment Act 1936*. Relatedly, the Tribunal had to determine if the small business CGT rollover concession under Division 152 of the *Income Tax Assessment Act 1997* (Cth) was available, if exemptions under sections 109J and 109M of the *Income Tax Assessment Act 1936* (Cth) were established, or if the payments could be converted into a loan complying with section 109N of the *Income Tax Assessment Act 1936* (Cth). The Tribunal also considered whether there were grounds to exercise a discretion under section 109RB of the *Income Tax Assessment Act 1936* (Cth) and whether the shortfall penalty imposed under section 284-75 of the *Taxation Administration Act 1953* (Cth) was correctly applied.

The Tribunal found that the payments were indeed unfranked dividends assessable under Division 7A. It reasoned that the small business CGT rollover concession was not available because the Wing Hotel Group had claimed other concessions that precluded its use. Furthermore, the exemptions under sections 109J and 109M were not established, and the payments did not meet the requirements to be treated as a loan under section 109N. The Tribunal also determined that there were no grounds to exercise its discretion under section 109RB. Crucially, the Tribunal noted that section 109Y of the *Income Tax Assessment Act 1936* (Cth) limits the deemed dividend to the "distributable surplus," which in this case was $499,999, reflecting the $500,000 payment less $1 in paid-up share value. The Tribunal concluded that the applicant failed to take reasonable care in preparing his tax return by not including this amount as assessable income, thus justifying the imposition of the shortfall penalty.

The Tribunal ordered that the reviewable decision with respect to the tax assessment be set aside and substituted with a finding that the applicant's assessable income be increased by $499,999. The reviewable decision concerning the penalty assessment was affirmed.