XGYV and Commissioner of Taxation (Taxation)
[2015] AATA 478
•3 July 2015
XGYV and Commissioner of Taxation (Taxation) [2015] AATA 478 (3 July 2015)
Division TAXATION & COMMERCIAL DIVISION File Numbers
2014/6391, 6392
XGYV
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Dr James Popple, Senior Member
Date 3 July 2015 Place Canberra The objection decisions of the Commissioner of Taxation on 14 June 2013 and 9 October 2014 are affirmed.
..............................[sgd]..........................................
James Popple, Senior Member
CATCHWORDS
TAXATION — Deductions and penalties — whether taxpayer entitled to interest deductions for loan to company — whether taxpayer liable to administrative penalties due to recklessness or failure to take reasonable care — taxpayer bears onus of proof — taxpayer gave conflicting evidence — taxpayer estimated amounts of deductions — taxpayer was grossly indifferent as to entitlement for deductions — decisions under review affirmed.
LEGISLATION
Income Tax Assessment Act 1997, s 8-1
Taxation Administration Act 1953, s 14ZZK(b)(i); Schedule 1, ss 284-25, 284-75(1), 284-75(6), 284-80, 284-85, 284-90(1)
CASES
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347
Commissioner of Taxation v Marshall and Brougham Pty Ltd (1987) 17 FCR 541
Hart v Federal Commissioner of Taxation (2003) 131 FCR 203
REASONS FOR DECISION
James Popple, Senior Member
3 July 2015
Summary
I affirm the objection decisions of the Commissioner of Taxation (the Commissioner). “XGYV” (the applicant—the taxpayer) was not entitled to claim an interest deduction of $85,660.00 for the 2012 income year. The taxpayer has the burden of proving that the Commissioner’s objection decisions are excessive or otherwise incorrect. He has not proven that the Commissioner was incorrect in deciding that the taxpayer made false statements and was reckless in relation to the interest deduction and other deductions that he claimed for the 2012 income year. And, he has not proven that the Commissioner was incorrect in deciding that the taxpayer, or his agent, made false statements and did not take reasonable care in relation to various deductions that he claimed for the 2013 income year. As a result, the taxpayer is liable to administrative penalties in respect of the 2012 and 2013 income years.
Background
On 7 March 2013, the taxpayer objected against his amended income tax assessment for the 2012 income year. On 14 June 2013, the Commissioner disallowed his objection.
On 1 September 2014, the taxpayer objected against his amended assessment for the 2012 income year and his assessment for the 2013 income year. On 9 October 2014, the Commissioner disallowed his objection.
On 11 December 2014, the taxpayer applied to the Tribunal, under s 14ZZ of the Taxation Administration Act 1953 (the TA Act) and s 29(1) of the Administrative Appeals Tribunal Act 1975, for review of those decisions.
Decisions under review
The decisions under review are the Commissioner’s objection decisions on 14 June 2013 and 9 October 2014, disallowing several claims that the taxpayer had made. Before the hearing, the taxpayer advised that he no longer sought review of parts of those objection decisions, leaving three parts of those decisions in dispute.
Issues
The issues in this review are:
·whether the taxpayer was entitled to claim an interest deduction of $85,660.00 for the 2012 income year (the 2012 deduction); and
·whether the taxpayer is liable to:
oan administrative penalty of $18,543.35, being 50% of the shortfall amount for the 2012 income year (the 2012 penalty); and
oan administrative penalty of $605.00, being 25% of the shortfall amount for the 2013 income year (the 2013 penalty).
Because of s 14ZZK(b)(i) of the TA Act, the taxpayer has the burden of proving that the Commissioner’s objection decisions are excessive or otherwise incorrect.
The 2012 deduction
The taxpayer owned and managed a building company (the company), which was registered on 14 July 2004. He was a director of the company from its registration until 28 January 2009. He was its sole director from 5 July 2006. The company experienced financial difficulties. The taxpayer contributed a large amount of his own money to the company. On 29 January 2009, the taxpayer was made bankrupt. On 9 February 2009, a liquidator was appointed to the company. On 26 October 2012, the taxpayer was discharged from bankruptcy. On 18 March 2013, the company was deregistered.
The taxpayer says that he paid about $90,000 of his own money into the company. Most (maybe all) of this he paid to creditors of the company using his personal credit card. He says that he no longer has records of those payments because he gave them to the liquidator to prove the debt.
On 9 February 2009 (the same day that a liquidator was appointed to the company), the taxpayer made a declaration as part of his bankruptcy. That declaration identified $113,709 that he owed to unsecured creditors, comprising personal guarantees of $101,709 to building supply companies and $12,000 of credit card debt “used to buy goods for the company”. He also noted, in the declaration, that he was owed $90,000 by the company. The implication is that that $90,000 was additional to the other $113,709 of debts which he claims to have incurred on behalf of the company. But, under cross-examination, the taxpayer said that the amount that he calculated he was owed by the company included the amounts in his bankruptcy declaration. The taxpayer says that he paid $20,000–$25,000 to his unsecured creditors, and that, when he was discharged from bankruptcy, he had no remaining debt to those unsecured creditors. So, if the $90,000 (the debt that the taxpayer says he incurred on behalf of the company) was included in the $113,709, then the $90,000 is no longer a debt owed by the taxpayer—and, therefore, no longer a debt owed by the company to the taxpayer. Unfortunately, it is not clear whether the $90,000 was part of the debt that the taxpayer no longer has to pay.
On 8 August 2011, the taxpayer lodged his tax return for the 2011 income year. He claimed an interest deduction of $55,600.00 (the 2011 deduction). His entitlement to the 2011 deduction is not a question in this review. On 30 July 2012, the taxpayer lodged his tax return for the 2012 income year. He claimed (amongst other deductions) the 2012 deduction: an interest deduction of $85,660.00. He says that the 2012 deduction related to the money he had paid into the company. Under cross-examination, he said that he had not previously made any claim for this loss, but later conceded that some of the 2011 deduction also related to that loss.
The taxpayer clearly treated the money that he paid into the company as a loan. He has not provided any evidence about the basis upon which that loan was made: its term, any interest payable, etc. The amount of any such loan is not clear. What is clear is that—as he said at the hearing—the taxpayer thinks that he is owed a lot of money by the company, and that claiming the 2012 deduction was an attempt to get back at least part of what he had lost.
Section 8-1 of the Income Tax Assessment Act 1997 (the ITAA 1997) relevantly provides:
8-1 General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature …
If the taxpayer did lend money to the company, he may have been entitled to claim a deduction for any interest he paid, during the 2012 income year, borrowing the money (using his personal credit card) to make payments on the company’s behalf. But he has provided no evidence that he made any such interest payments.
On the evidence before me, I cannot find that the taxpayer lent money to the company. Even if he did, that loan would have been a capital outgoing[1] and, because of s 8-1(2)(a) of the ITAA 1997, he would not have been entitled to claim it as a deduction.
[1] See Commissioner of Taxation v Marshall and Brougham Pty Ltd (1987) 17 FCR 541. In that case, the loss was not a capital outgoing (and was deductible) because: the loss was an integral part of the whole business carried on by the taxpayer, rather than the separate use of capital assets (at 548 per Bowen CJ, with whom Jenkinson J agreed); or the taxpayer was engaged in moneylending (at 553 per Burchett J). Neither of those circumstances applies to the taxpayer in this review.
The taxpayer was not entitled to claim the 2012 deduction.
The 2012 penalty
Section 284-75(1) of Schedule 1 to the TA Act[2] relevantly provides:
[2] The provisions in Schedule 1 to the TA Act have effect because of s 3AA. For the remainder of these reasons, I adopt the shorthand of referring to provisions in Schedule 1 as if they were provisions in the TA Act proper.
284-75 Liability to penalty
(1)You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner …; and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
The amount of the penalty is calculated according to s 284-85, which involves a base penalty amount worked out using a table in s 284-90(1). Item 2 of that table provides that, if a shortfall amount[3] results from a statement described in s 284-75(1) and the amount, or part of the amount, resulted from “recklessness by you or your agent as to the operation of a taxation law”, the base penalty is 50% of the shortfall amount or part.
[3] See TA Act, s 284-80.
As noted above, on 30 July 2012, the taxpayer lodged his tax return for the 2012 income year. On 1 March 2013, the Commissioner imposed the 2012 penalty on the taxpayer: an administrative penalty of $18,543.35, being 50% of the shortfall amount.
In BRK (Bris) Pty Ltd v Commissioner of Taxation, the Federal Court said:
… the recklessness of the taxpayer, or of a registered tax agent, must be with regard to the correct operation of the Act. … [I]t is necessary in my view that the conduct which gives rise to the tax shortfall must be reckless as to whether or not the Act or regulations will operate correctly so as to lead to an assessment of the proper tax payable by a taxpayer. Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.[4]
[4] (2001) 46 ATR 347 at [77] per Cooper J. This statement was quoted approvingly by the Full Federal Court in Hart v Federal Commissioner of Taxation (2003) 131 FCR 203 at [43] per Hill and Hely JJ; see also at [33] per Spender J.
As I noted above, the taxpayer thinks that he is owed money by the company. He said that his claim of the 2012 deduction was an attempt to get back some of what he is owed. I have already decided that the taxpayer was not entitled to claim the 2012 deduction. His claim was a false statement for the purposes of s 284-75(1) of the TA Act. At the hearing, the taxpayer said that it was only recently that he learnt that he would not be able to recover the $90,000 from the company. This suggests that, at the time that he lodged his tax return for the 2012 income year, he must have thought that the money that he had lent the company (or some of it) might be repaid to him. And, as noted above,[5] it is possible that, when he was discharged from bankruptcy (13 weeks later), he no longer had to pay the $90,000 to his creditors.
[5] See [10] above.
In these circumstances, the taxpayer was (at least) grossly indifferent as to whether or not his claim for the 2012 deduction was correct. A reasonable person in the taxpayer’s position would see there was a real risk that a taxation law (the ITAA 1997) would not operate correctly to lead to the assessment of the proper tax payable because of his claim for the 2012 deduction. Accordingly, I find that, in claiming the 2012 deduction, the taxpayer was reckless as to the operation of a taxation law.
The Commissioner says that the taxpayer made false statements and was reckless, also, in relation to several other deductions that he claimed for the 2012 income year: work-related car expenses; work-related travel expenses; work-related self-education expenses; and other work-related expenses. These other deductions totalled $15,000. The Commissioner disallowed deduction claims by the taxpayer totalling $100,660 (including the 2012 deduction of $85,660), against a gross income of $128,660 for the 2012 income year.
There is not enough evidence before me to find that the taxpayer was also reckless in relation to these other deductions. However, because of s 14ZZK(b)(i) of the TA Act, the taxpayer has the burden of proving that the Commissioner was wrong in imposing the 2012 penalty. The taxpayer has provided no evidence to support his assertion that he was entitled to claim those other deductions, or even that he was not reckless in claiming them.
I find that all of the shortfall amount for the 2012 income year resulted from false statements by the taxpayer, and recklessness by the taxpayer as to the operation of a taxation law. It follows from item 2 of the table in s 284-90(1) that the base penalty amount is 50% of the shortfall amount. The Commissioner was right to impose the 2012 penalty.
The 2013 penalty
Item 3 of the table in s 284-90(1) provides that, if a shortfall amount results from a statement described in s 284-75(1) and the amount, or part of the amount, resulted from “a failure by you or your agent to take reasonable care to comply with a taxation law”, the base penalty is 25% of the shortfall amount or part.
On 11 August 2013, the taxpayer lodged his tax return for the 2013 income year, using a tax agent. He claimed deductions for work-related car expenses; work-related clothing, laundry and dry-cleaning expenses; and other work-related expenses. These deductions totalled $6138. The Commissioner says that the taxpayer, or his agent, made false statements and failed to take reasonable care in claiming these deductions. On 23 December 2013, the Commissioner imposed the 2013 penalty on the taxpayer: an administrative penalty of $605.00, being 25% of the shortfall amount.
There is not enough evidence before me to find that the taxpayer, or his agent, failed to take reasonable care in claiming these deductions. However, again, because of s 14ZZK(b)(i) of the TA Act, the taxpayer has the burden of proving that the Commissioner was wrong in imposing the 2013 penalty. The taxpayer has provided no evidence to support his assertion that he was entitled to claim those other deductions, or even that he took reasonable care in claiming them.
Section 284-75(6) of the TA Act provides that a taxpayer is not liable to an administrative penalty if they engage a registered tax agent; give that tax agent “all relevant taxation information”; and meet other specified requirements. At the hearing, the taxpayer conceded that he had not given his tax agent any documents supporting these deductions, but had merely estimated the amounts. So, s 284-75(6) does not apply in this review.
I find that all of the shortfall amount for the 2013 income year resulted from false statements by the taxpayer, or his agent,[6] and a failure by the taxpayer, or his agent, to take reasonable care to comply with a taxation law (the ITAA 1997). It follows from item 3 of the table in s 284-90(1) that the base penalty amount is 25% of the shortfall amount. The Commissioner was right to impose the 2013 penalty.
[6] Section 284-25 of the TA Act provides that “[t]his Division [which includes s 284-75] applies to a statement made by your agent as if it had been made by you”.
Conclusion
The taxpayer was not entitled to claim the 2012 deduction. He is liable to both the 2012 penalty and the 2013 penalty.
I certify that the preceding 31 (thirty-one) paragraphs are a true copy of the reasons for the decision herein of Senior Member Popple ...........................[sgd].............................................
Associate
Dated 3 July 2015
Date of hearing 19 June 2015 Applicant In person Counsel for the Respondent Ms Victoria Hammond and Mr Jordan Mundell
Solicitors for the Respondent Legal Services Branch,
Australian Taxation Office
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Tax Assessment
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Deductions
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Administrative Penalties
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Compliance
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False Statements
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