Zeqaj and Commissioner of Taxation (Taxation)
[2016] AATA 218
•06 April 2016
Zeqaj and Commissioner of Taxation (Taxation) [2016] AATA 218 (06 April 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2015/4353; 2015/4354; 2015/4355; 2015/4356; 2015/4357
Re
Visho Zeqaj
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Egon Fice, Senior Member
Date 06 April 2016 Place Melbourne The Tribunal affirms the objection decision made by the Commissioner on 26 June 2015, subject to the consequential amendment made by the Commissioner to Mr Zeqaj's Income Tax Return for the 2011 income year and the shortfall penalty imposed as a result of that amendment.
...................................[sgd].....................................
Egon Fice, Senior Member
TAXES AND DUTIES – Income tax and related legislation – Capital gains tax – Assessments – Objections, reviews and appeals – Penalties, offences and prosecutions – Particular penalties – Tax evasion – Shortfall interest charges – Evidence – Onus of proof that taxation decision excessive or incorrect – Taxpayer to prove assessment excessive – Failure to discharge onus – Decision under review affirmed
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)
Transfer of Land Act 1958 (Cth)
Cases
Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23
Denver Chemicals Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148
Trustee of the Balmain Trust v Federal Commissioner of Taxation (1998) 38 ATR 637
Secondary Materials
Australian Tax Office Practice Statement Law Administration 2006/2
Australian Tax Office Practice Statement Law Administration 2008/6
REASONS FOR DECISION
Egon Fice, Senior Member
06 April 2016
On 13 November 2013, the Commissioner of Taxation (the Commissioner) concluded an audit of the income tax affairs of Mr Visho Zeqaj for the 2006 income year and the 2008 to 2011 income years. As a result of the audit, the Commissioner determined that Mr Zeqaj had tax shortfalls for the income years in question which gave rise to outstanding liabilities in the amount of $1,515,657.86. Those liabilities included additional tax payable ($634,233.51); penalties ($493,051.90); and shortfall interest charge ($388,372.45).
During the audit, the Commissioner formed the opinion that Mr Zeqaj had avoided the imposition of tax by evasion during each income year, but that the avoidance of tax was not due to fraud.
In a letter dated 15 November 2013 the Commissioner notified Mr Zeqaj of the outcome of the audit. Mr Zeqaj had not been notified of the audit prior to receiving this notice. The Commissioner also issued to Mr Zeqaj amended assessments for the income years in question and a notice of assessment of shortfall penalty.
On 23 September 2014 Mr Peter Caluzzi, Mr Zeqaj’s tax agent, lodged an objection against the amended assessment for the 2006 income year. Mr Caluzzi also lodged objections against the amended assessments for the remaining income years in question and the penalty assessment on 24 September 2014. Those objections being lodged out of time, Mr Caluzzi applied for an extension of time to lodge objections in accordance with s. 14ZW(2) of the Taxation Administration Act 1953 (the Administration Act). The Commissioner agreed to treat Mr Zeqaj’s objections as if they had been lodged within time.
In summary, the Commissioner determined the following in his objection decision:
·Mr Zeqaj had evaded tax for the income years in question and therefore the Commissioner was correct to amend his assessments for the 2006 income year and the 2008 to 2011 income years in accordance with s. 170 of the Income Tax Assessment Act 1936 (ITAA 36).
·Mr Zeqaj had provided sufficient evidence to support the source of $830,653 used to purchase a property situated at 12 Browning Crescent, Avondale Heights, but had failed to provide sufficient evidence to identify the source of the remaining funds, $90,747.12, required for the purchase of that property.
·During the 2008 to 2010 income years Mr Zeqaj received rental income which had not been declared. The Commissioner determined the amounts of rental income to be $2,267 for the 2008 income year; $29,016 for the 2009 income year; and $26,945 for the 2010 income year.
·Mr Zeqaj had an undeclared capital gain from the disposal of real property situated at 98 Riviera Road, Avondale Heights in the amount of $100,210.
·In the 2011 income year Mr Zeqaj disposed of properties at 51 Vella Drive, Sunshine West and the Browning Crescent properties. The Commissioner initially allowed a capital loss of $13,400 on the disposal of the Browning Crescent property but, subsequently, Mr Zeqaj stated that the property was his private residence at the time that he owned it. That capital loss was therefore disallowed and Mr Zeqaj’s taxable income increased accordingly. The capital gain on the sale of the Vella Drive property was assessed by the Commissioner to be $246,250. This capital gain was also not declared by Mr Zeqaj.
·The Commissioner assessed Mr Zeqaj to an administrative penalty as a result of a tax shortfall amount which he claimed arose from an intentional disregard of taxation law. That assessment was at the base penalty rate of 75% for the 2006 and 2008 income years but increased by 20% for the 2009, 2010 and 2011 income years. The Commissioner declined to remit any of the administrative penalties.
·The Commissioner imposed a shortfall interest charge on Mr Zeqaj for all of the income years in question. Furthermore, the Commissioner declined to remit this shortfall interest charge for the 2006, 2008, 2009 and 2010 income years. The Commissioner maintained Mr Zeqaj was unable to object to the shortfall interest charge for the 2011 year as it was not greater than 20% of the additional income tax for that year.
Unfortunately, Mr Zeqaj did not have legal or accounting representation for the purposes of the hearing of this matter. Therefore, it is unremarkable that he had considerable difficulty in understanding both the hearing process and the basis upon which the Commissioner claimed he was entitled to make the assessments which he did.
Much of the hearing time was taken up by Mr Zeqaj’s complaints about the conduct of officers of the Australian Taxation Office (ATO). In fact, as best I could gather, Mr Zeqaj was particularly upset by the fact that the ATO conducted an audit of his financial affairs without first notifying him. He also expressed concern that the ATO’s methodology in coming to its conclusions was unexplained. That is despite the fact that the Commissioner’s objection decision, and in particular his reasons for decision, are comprehensive, comprising detailed calculations and a narrative of some 161 paragraphs.
Given these circumstances, I will state as simply as I can the way in which the Commissioner went about coming to his assessment. I will then analyse those conclusions in order to determine, as I must, whether Mr Zeqaj has discharged the onus of proof placed on him by s. 14ZZK of the Administration Act.
THE COMMISSIONER’S AUDIT AND ASSESSMENT POWERS
While there is no express provision in the taxation legislation referring to an audit by the Commissioner, the Commissioner has extensive powers to investigate the taxation affairs of a taxpayer and to make an amended assessment following the exercise of such powers. The most frequently used provision at the relevant time was s. 264 of ITAA 36 which provided:
264(1) The Commissioner may by notice in writing require any person, whether a taxpayer or not, including any officer employed in or in connection with any department of a Government or by any public authority:
(a)to furnish the Commissioner with such information as the Commissioner may require; and
(b)to attend and give evidence before the Commissioner or before any officer authorised by the Commissioner in that behalf concerning the person’s or any other person’s income or assessment, and may require the person to produce all books, documents and other papers whatever in the person’s custody or under the person’s control relating thereto.
264(2) The Commissioner may require the information or evidence to be given on oath or affirmation and either verbally or in writing, and for that purpose the Commissioner or the officers so authorised by the Commissioner made Minister an oath Reformation.…
In addition, the Commissioner also has extensive powers to access the books and records of a taxpayer wherever they may be kept. Section 263 of ITAA 36 relevantly provides:
263(1) The Commissioner, or any officer authorised by the Commissioner in that behalf, shall at all times have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act, and for that purpose may make extracts from or copies of any such books, documents or papers.…
There is no statutory requirement for the Commissioner to advise a taxpayer in advance that an enquiry is to be made of the tax affairs of a person or entity. Since the introduction of the self-assessment scheme which was adopted in 1990, the Commissioner may simply issue an assessment of taxable income on the basis of the income tax return furnished by the taxpayer. However, where the Commissioner is not satisfied with the income tax returns furnished by a taxpayer, he may make an assessment in accordance with s. 167 of ITAA 36. If he does so, then the amount on which the Commissioner determines tax should be levied becomes taxable income of the taxpayer. During the income years in question, s. 167 relevantly provided:
167 If:
(a)any person makes defaulting furnishing a return; or
(b)the Commissioner is not satisfied with the return furnished by any person; or
(c)the Commissioner has reason to believe that any person who has not finished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his judgement income tax or to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.
The Commissioner has a duty to make an assessment of a taxpayer’s taxable income. He may do this from the income tax returns furnished by a taxpayer or from any other information. Section 166 of ITAA 36 provided:
166 From the returns, and from any other information in the Commissioner’s possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable.
Section 170 of ITAA 36 sets out the limitations which apply to the Commissioner when amending an assessment. Item 5 in the table under s. 170(1) states that the Commissioner may amend an assessment at any time if he or she is of the opinion there has been fraud or evasion. There are no further qualifications to that power.
In this case, Mr Zeqaj was considered by the Commissioner to have evaded tax. A Practice Statement Law Administration (PS LA 2008/6) published by the ATO sets out the procedures to be followed by tax officers for collecting information on fraud or evasion. That document states that the Taxation Authorisations Guidelines provide information about the laws which apply to the exercise of authorised powers conferred by delegates on officers and provide guidance about how to exercise those powers. The document then states, at [26]:
Unless otherwise specified the general area of the Taxation Authorisations Guidelines apply. Paragraph 1.6.1 of the Taxation Authorisations Guidelines authorise an Executive Level 2 (EL 2) officer to make a determination or form an opinion in the name of a Deputy Commissioner that the taxpayer or entity has been involved in fraud or evasion or has intentionally disregarded the tax law.
I had in evidence a Fraud or Evasion Opinion made by an authorised tax officer in the name of Deputy Commissioner Greg Williams. The basis for the opinion that there had been an evasion of tax in the income years in question was that there appear to be undeclared business income and an undeclared source of asset purchases. It briefly stated that the taxpayer had large amounts deposited into his bank accounts and that he had purchased real property assets from unidentified funds.
The authorised tax officer did not form an opinion that Mr Zeqaj had avoided tax by fraud in relation to the income years in question.
There are two High Court decisions dealing with tax evasion, both of which have stood the test of time and remain as valid today as they were when the decisions were first made.
The first decision, in Denver Chemicals Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296 (Denver Chemical) dealt with the concept of evasion in the context of state income tax legislation which existed at that time. Denver Chemical, a foreign company registered in New South Wales, manufactured a medicinal compound which it sold, not only New South Wales, but in other states as well. In the income tax returns in question, the company, unknown to the Commissioner of Taxation, only disclosed its gross sales in New South Wales and not in other States. Having become aware of the undisclosed sales in other States, the Commissioner formed the opinion that there had been an avoidance of tax by evasion. Dixon J said this about evasion, at 313:
I think it is unwise to attempt to define the word “evasion.” The context of s. 210(2) shows that it means more than avoid and more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.
The second High Court decision, which followed Denver Chemical, is in Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23 (Australasian Jam). The issue in that case was the undervaluation of stock where Australasian Jam had adopted the practice of accounting for its stocks at original cost, those cost remaining unchanged between 1914 and 1947. This was despite the fact that the evidence disclosed wide cost fluctuations, both up and down, from year to year. Furthermore, it used this methodology regardless of the fact that there was a statutory provision which required the reporting entity at the end of every accounting period to value the cost of its stocks actually on hand where reference to cost meant actual cost. Clearly, Australasian Jam had ignored that statutory requirement and instead, deliberately chose to value its stock at historical cost.
The High Court (Fullagar J) found there was no deliberate attempt to deceive and therefore the case was not one of fraud (at 39). His Honour went on to say:
On the other hand, it would be unreasonable to suppose, and it has not really been suggested, that those responsible for the company’s income tax returns were ignorant of the requirements of s. 31. They continued to use in their accounts a figure which had once represented cost but which no longer represented cost. They returned, for income tax purposes, the accounts of the company as quite correctly and properly kept by it for its own purposes, but not adjusted so as to comply with s. 31. They would have supplied further true information, if they had been asked for it, but they hoped, says the Commissioner, that they would not be asked for it, and they allowed, if they did not actually invite, my assessors to make an assumption which they must have known was unfounded. I think, says the Commissioner, that there has been here more than a mere withholding of information which might or might not be relevant: I think that there has been an intentional withholding of information lest I should hold the company liable to tax to a greater extent than it was prepared to concede, and I regard this as “evasion”.
Fullagar J said that the view expressed by the Commissioner was not arrived at capriciously or fancifully or upon irrelevant or inadmissible grounds. He therefore found that the amended assessments made by the Commissioner were authorised by the relevant legislation.
FUNDS UNABLE TO BE ACCOUNTED FOR
Returning to the case at hand, the Commissioner’s concern was directed to the acquisition by Mr Zeqaj of three properties in particular. They are conveniently described as the Browning Crescent, Avondale Heights property; the Riviera Road, Avondale Heights property; and the Vella Drive, Sunshine West property. In the income years in question, Mr Zeqaj returned the following income amounts (gross payments, less withheld tax):
·2006 income year – $17,042
·2008 income year – $25,257
·2009 income year – $31,584
·2010 income year – $30,025
·2011 income year – $33,150
His occupation in the 2010 and 2011 income years is described as: kitchen hand.
Browning Crescent, Avondale Heights property
On 28 October 2005 Mr Zeqaj became registered as the sole proprietor of the Browning Crescent property. Evidence obtained from RP Data Search discloses that the property was sold to Mr Zeqaj on 9 April 2005 for $880,000. The settlement date was 9 August 2005. In a letter dated 18 March 2015 PC Accounting Services Pty Ltd, who appear to have acted for Mr Zeqaj in the acquisition of that property, noted that although stamp duty was $48,400, it was reduced to $41,400 because Mr Zeqaj was entitled to a first home owner’s grant of $7,000.
Mr Peter Caluzzi lodged a notice of objection against the amended assessment of the Commissioner on behalf of Mr Zeqaj. As far as it concerned the 2006 income year, Mr Caluzzi said that the entire purchase price of the Browning Crescent property was provided by Mr Zeqaj’s father. The ATO then requested details of the payments made by Mr Zeqaj’s father in respect of the purchase of that property. In a letter dated 18 March 2015 PC Accounting Services provided the details of 5 bank cheques which were paid for with monies drawn from the accounts of Mr Hodo Zeqaj, Mr Zeqaj’s father. The sum total of those cheques amounted to $791,728.09. That was in fact the sum required to be paid over at settlement.
There was an additional sum of $88,000 paid as a deposit prior to settlement. The evidence before me discloses that $80,000 was paid by cheque drawn on an account in the name of Shaban Zeqaj and Hiriji Zeqaj. The remaining $8,000 was paid in cash. According to the Commissioner, that left the source of the remaining $90,747.12 unexplained. This amount, according to the Commissioner, was significant when compared with Mr Zeqaj’s returned income.
Mr Zeqaj was highly critical of the statutory requirement for him to bear the onus of proving that the assessment made by the Commissioner was excessive. In his written submissions, he suggested that it indicated he was guilty unless proven innocent. With respect to Mr Zeqaj, that is a gross misunderstanding of the law of taxation. Guilt and innocence play no part. This is not a criminal matter. Contrary to Mr Zeqaj’s statement that the Commissioner is required to prove his arguments, there is no such requirement placed on the Commissioner. As the High Court of Australia (Barwick CJ, Mason and Jacobs JJ) in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 explained, at 89:
The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessment should be sustained or supported by the evidence. The implication of such a requirement would be inconsistent with s. 190(b) [where the onus provision was then situated] for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.…
[T]here is nothing inherently unfair in a provision which places the onus on the taxpayer to prove his case when the purpose for which an asset was acquired depends so much on his intentions and on circumstances of which he, rather than the Commissioner, has comprehensive knowledge.
Mr Zeqaj also complained about my explanation to him about the weight which would be given to his statements, even if made under oath, in the absence of objective evidence. That explanation was derived from what Hill J said in the Federal Court of Australia decision of Imperial Bottleshops Pty Ltd & Egerton v Federal Commissioner of Taxation (1991) 22 ATR 148 where his Honour said, at 155:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be “tested most closely, and received with the greatest caution”: Pascoe v FCT (1956) 6 AITR 315; 11 ATD 108 at 111. It would of necessity, be rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required that makes it more probable than not that his sworn testimony is to be believed.
There was nothing in the written submissions provided by Mr Zeqaj, or in any documents which he lodged with the Commissioner or the Tribunal, which provided an explanation for the source of the $90,477.12. His returned assessable income for the 2006 income year certainly does not provide that explanation. There being no reasonable explanation offered by Mr Zeqaj as to the source of those funds, I find it is reasonable for the Commissioner, in making an amended assessment pursuant to ss. 166 and 167 of ITAA 36, to treat those monies as Mr Zeqaj’s assessable income.
Disposal of Browning Crescent, Avondale Heights property
Mr Zeqaj disposed of the Browning Crescent property by transferring it to Kabil Zeqaj on 31 August 2010. Consideration was said to be: NATURAL LOVE AND AFFECTION. The Transfer of Land lodged with Land Victoria pursuant to s. 45 of the Transfer of Land Act 1958 records the transfer as being stamped with stamp duty of $49,970 on an assessed value of the property of $915,000. The auditor then determined that Mr Zeqaj had incurred a capital loss of $13,400 ($915,000 - $880,000 - $48,400 (being stamp duty on the acquisition of the property)) on the transfer of that property.
Furthermore, the auditor was of the opinion that Mr Visho Zeqaj was not at any time the beneficial owner of the Browning Crescent property. He formed the opinion that the property was purchased under Mr Zeqaj’s name to avoid the disclosure of income properly derived or under the control of another taxpayer and to avoid declaring this income in their personal income tax returns. There is authority for the proposition that the Commissioner may issue two or more assessments to different taxpayers in relation to the same income, in respect of the same income year, provided he can form the view that each assessment is correct. Davies J in Trustee of the Balmain Trust v Federal Commissioner of Taxation (1998) 38 ATR 637 said this, at 644:
The principle to be applied is that stated by Brennan J in DFC of T v Richard Walter Pty Ltd 95 ATC 4067; (1995) 183 CLR 168 were his Honour said at ATC 4083; CLR 201 – 202:
“The fact that a tax liability remains outstanding against two taxpayers pending the ascertainment of the tax paid truly liable is no bar to the exercise of the power to assess both to tax in respect of the same income. As Dixon J. observed in Richardson v FC of T (1932) 2 ATD 19 at 24; (1931-1932) 48 CLR 192 at 207 when upholding the validity of an assessment to tax against a second person while the first person’s assessment remained on foot and unamended:
‘it was not unnatural that [the Commissioner] should delay relieving one of two persons whom he considered culpable until the liability of the other was established.’
In the alternative, the auditor held that if Mr Visho Zeqaj was the true beneficial owner of the Browning Crescent property, the capital loss on transfer would be included in his assessable income. However, after Mr Zeqaj provided the Commissioner with further information which indicated that this property was Mr Zeqaj’s main or principal residence from soon after settlement until the time he transferred the property, the claimed loss should be disregarded in accordance with s. 118-110 of the Income Tax Assessment Act 1997 (ITAA 97).
Part 3-1 of ITAA 97 deals with capital gains and losses. Section 100-10(1) provides:
CGT affects your income tax liability because your assessable income includes your net capital gain for the income year. Your net capital gain is a total of your capital gains for the income year, reduced by certain capital losses you have made.
A CGT event described as A1 occurs on the disposal of a CGT asset. The time of that event is when the contract for disposal is entered into or, if there is no contract, when the entity stops being the asset’s owner (s. 104-5). Division 116 explains how to work out what the capital proceeds from a GST event are. The general rule regarding capital proceeds are described in s. 116-20(1) which provides:
The capital proceeds from a *CGT event are the total of:
(a)the money you have received, or are entitled to receive, in respect that the event happening; and
(b)*market value of any other property you have received, or are entitled to receive, in respect of the event happening (work out as at the time of the event).
Subdivision 104-A deals with disposals. Section 104-10(2) provides:
You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
Section 104-10(4) provides:
You make a capital gain if the*capital proceeds from the disposal are more than the asset’s *cost base. You make a capital loss if those capital proceeds are less than the asset’s *reduced cost base.
Subdivision 110-A deals with the cost base of a CGT asset. Section 110-25 sets out the general rules about the cost base and points out that it consists of five elements. Broadly, those elements relate to how much was paid or is required to be paid for the asset and its market value; incidental costs incurred; the cost of borrowings; capital expenditure on preserving or moving the asset; and capital expenditure incurred to establish, preserve or defend title to the asset or right over the asset.
Also relevant for the purposes of assessment is s. 116-30 which is described as the market value substitution rule. It is a modification of the general rules regarding consideration received where a taxpayer received no capital proceeds from the disposition of the property. It provides:
116-30(1) If you receive no *capital proceeds from a *CGT event, you are taken to have received the *market value of the *CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)
Section 118-110 exempts a dwelling which was the taxpayer’s main residence throughout the ownership period from CGT. The ownership period is defined in s. 118-125. It is the period on or after 20 September 1985 when the taxpayer had an ownership interest. For a dwelling that is not a flat or home unit, an ownership interest is defined in s. 118-130 which provides:
(b)for a dwelling that is not a flat or home unit – you have a legal or equitable interest in the land on which it is erected, or licence or right to occupy it; or…
The Commissioner subsequently sought further information from Mr Zeqaj which revealed that the property became his residence soon after settlement, remaining so until the time it was transferred. Mr Zeqaj also provided to the Commissioner water accounts in respect of that property which were addressed to him. Relying on this information, the Commissioner determined that the capital loss of $13,400 should be disregarded when calculating Mr Zeqaj’s assessable income for the 2011 income year and his taxable income increased by that amount.
Because Mr Zeqaj provided no evidence to the contrary either prior to or in the course of hearing this matter, I find that the decision made by the Commissioner to exclude the claimed capital loss of $13,400 was correct and in accordance with the law dealing with CGT. Therefore, the Commissioner’s decision to increase Mr Zeqaj’s taxable income in the 2011 income year was correct.
Disposal of Vella Drive, Sunshine West property
The evidence before me (Transfer of Land lodged with the Victorian Land Titles Office) indicates that on 31 May 1995, Mr Zeqaj together with Skender Zecevic (later changed to Zeqaj) and Kabil Zecevic (also later changed to Zeqaj), became the registered proprietors as joint tenants of land in Sunshine West identified on the Certificate of Title as Volume 9951 Folio 516. The purchase price of the land was stated as $67,500.
I also had in evidence an application to register a plan of subdivision relating to the above-mentioned Title by the three joint tenants, which was lodged with Land Victoria on 10 May 2006. Following subdivision, Lot 3 from the Parent Title (Volume 9951 Folio 516) which became Certificate of Title Volume 10942 Folio 907 (51 Vella Drive) was transferred from the three joint tenants to Mr Zeqaj on 27 July 2006. The consideration said to have been provided by Mr Zeqaj is simply stated as Partition Agreement. The auditor noted that three industrial/commercial units were constructed on each of the subdivided lots.
A Transfer of Land lodged with Land Victoria on 17 September 2010 under s. 45 of the Transfer of Land Act 1958 discloses that Mr Zeqaj transferred the property to Zecarija Zeqaj. The consideration was said to be Natural Love and Affection. The Transfer of Land document indicates that for the purposes of stamp duty, the value of the property was assessed as $515,000.
The Commissioner, in attempting to estimate the cost base which should be attributed to this property, allocated one third of the land purchase price to Mr Zeqaj. That amounted to some $22,500. However Mr Zeqaj had difficulty establishing, by evidence, the cost of construction of the dwelling on that land. In response to a request from the Commissioner for further information, Mr Zeqaj provided a schedule from an entity called BMT Tax Depreciation which related to his brother’s property at 53 Vella Drive. That schedule disclosed an amount of $285,633 for capital works plus $16,388 for plant and equipment.
Upon the Commissioner requesting further information to substantiate his claim, Mr Zeqaj informed the ATO that all of the properties were owner built with family assistance. The Commissioner referred to Taxation Determination 60 which deals with capital gains and whether the value of a taxpayer’s labour may be included in the cost base of an asset constructed by the taxpayer. The Commissioner determined that no value could be attributed to that labour.
The Commissioner then issued a notice under s. 264 of ITAA 36 to a third party seeking further information to substantiate the valuation amounts set out in the depreciation schedule for his brother’s property at 53 Vella Drive. Unfortunately for Mr Zeqaj, that information did not provide verification of the costs incurred in the construction of that property. The Commissioner, while accepting some expenses were incurred in the construction of the property, was not able to reach a figure to include in the calculation of the cost base because of lack of evidence. The Commissioner pointed out to Mr Zeqaj that he had the onus of establishing a figure. Mr Zeqaj had not done so.
Because Mr Zeqaj received no capital proceeds on the transfer of that property, the Commissioner applied the market value substitution rule in s. 116-30 of ITAA 97. He valued the property at time of transfer at $515,000 and deemed Mr Zeqaj to have received that sum on transfer. The Commissioner, allowing for the purchase price of the land, deemed Mr Zeqaj to have made a capital gain of $492,500. However, because Mr Zeqaj owned the property for a period in excess of 12 months, it allowed him the 50% discount on the capital gain in accordance with s. 102-3 of ITAA 97. The Commissioner therefore increased Mr Zeqaj’s assessable income in the 2011 income year by $246,250.
I had no further evidence from Mr Zeqaj on the hearing of this matter and therefore find he has not discharged the onus he bears to prove the assessment made by the Commissioner in relation to the capital gains tax payable on the transfer of the Vella Drive property was excessive.
Disposal of Riviera Road, Avondale Heights property
Mr Zeqaj became registered as the proprietor of the Riviera Road property on 11 July 1997. Information from RP Data discloses that the property was sold on 6 December 1996 for $173,000. The settlement date is also stated to be 6 December 1996 but it is likely that, given the transfer was registered on 11 July 1997, settlement occurred significantly later. However, nothing turns on that.
Mr Zeqaj disposed of that property and the Transfer of Land document lodged with Land Victoria records the transferee as Skender Zeqaj. The consideration is stated to be Gift of natural love and affection. For the purposes of stamp duty, the property was valued at $380,000. According to the Commissioner, Mr Zeqaj claimed that he did not officially hold this property as it was purchased with funds gifted by his family. He then gifted the property back to his family.
While the Commissioner accepted that Mr Zeqaj may have used funds provided by his family for the purchase of the property, he said this did not exclude Mr Zeqaj from the application of the CGT rules on its disposal. The Commissioner said that in accordance with s. 104-10(2) of ITAA 97, change of ownership occurred 5 May 2008 and that change of ownership triggered CGT event A1. Because Mr Zeqaj received no consideration on the transfer of the property, the Commissioner applied the market value substitution rule under s. 116-30. He deemed Mr Zeqaj to have received $380,000 on transfer.
In calculating the capital gain which should be assessed, the Commissioner allowed the stamp duty expenses of $6,580 on the acquisition of the property to be included in the cost base. That is in accordance with s. 110-25(3) of ITAA 97. It is properly described as an incidental cost. The Commissioner therefore determined that the capital gain on disposition amounted to $200,420 ($380,000 - $173,000 - $6,580). Because Mr Zeqaj held the property for a period longer than 12 months, the Commissioner determined he was entitled to the 50% discount on the capital gain in accordance with s. 102-3. The net capital gain therefore was $100,210 and the Commissioner assessed this amount to be included in Mr Zeqaj’s assessable income or the 2008 income year.
Given that Mr Zeqaj provided no additional evidence in relation to the disposition of this property, I find the Commissioner properly applied the CGT provisions in arriving at his assessment. Mr Zeqaj has not discharged the onus he bears of proving, on the balance of probabilities, that this assessment was excessive.
UNDISCLOSED RENTAL INCOME
In the course of the audit, the Commissioner identified that Mr Zeqaj had received rental income from the Vella Drive property between 2008 and 2010 which he had not included in his income tax returns. The Commissioner obtained copies of a National Australia Bank (NAB) account in Mr Zeqaj’s name. I had copies of these bank statements in evidence. They disclose regular payments between the years in question made by a corporate entity called Parissis Pty Ltd. There was no dispute about the fact that Parissis was the real estate agency which managed the rental property. The rental amounts received by Mr Zeqaj were $2,267 in 2008; $29,016 in 2009; and $26,945 in 2010. Those amounts accord with the bank statements in evidence.
In the objection lodged on behalf of Mr Zeqaj for the 2009 income year, Mr Caluzzi said Mr Zeqaj believed the rental for that year ($29,016) was given to his mother and that she would be assessed on that amount. However, when responding to the Commissioner’s request for further information in March 2015, Mr Zeqaj said he thought the real estate agent was collecting the rent and paying the tax. He also gave this as the reason in the course of the hearing.
I do not accept either reason given by Mr Zeqaj. The NAB bank account into which the rental was paid is solely in his name and I have no doubt whatsoever that Mr Zeqaj was aware that the rents from the Vella Drive property were being paid into his account. He did not disclose those monies as income when, plainly, he ought to have. This of course is another ground for the Commissioner’s finding that Mr Zeqaj evaded the payment of income tax. I find that the Commissioner correctly included those amounts in Mr Zeqaj’s assessable income during the years in question in accordance with s. 6-5 of ITAA 97.
SUMMARY OF AMENDED ASSESSMENTS
This summary sets out the position as at the time of hearing this matter.
·2006 income year – amended taxable income $108,338 (21 July 2015)
·2008 income year – amended taxable income $128,195 (15 November 2013)
·2009 income year – amended taxable income $63,319 (15 November 2013)
·2010 income year – amended taxable income $58,395 (15 November 2013)
·2011 income year – amended taxable income $279,224 (21 July 2015)
TAX SHORTFALL ADMINISTRATIVE PENALTY
A taxpayer is liable to an administrative penalty if the taxpayer or their agent makes a false or misleading statement to the Commissioner. As amended in 2010, s. 284-25 of the Administration Act provides that a statement made by a taxpayer’s agent is treated as having been made by the taxpayer. Section 284-75(1) provides:
284-75(1) You are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a*taxation Law; and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Section 284-90(1) the sets out the base penalty amounts applicable to a taxation shortfall depending upon the accepted reason for that shortfall. In this case, the Commissioner applied the base penalty amount of 75% of the tax shortfall for intentional disregard of the law in all of the income years in question. In addition, in the income years 2009 – 2011 inclusive, the Commissioner has increased the base penalty amount by 20% in accordance with s. 284-220(1) of the Administration Act. In so far as it is relevant to Mr Zeqaj it provides:
284-220(1) The *base penalty amount is increased by 20% if:
…
(c)the base penalty amount was worked out using item 1, 2 or 3 of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items previously;…
The Commissioner worked out the base penalty amount in the 2006 and 2008 income years using Item 1. The Commissioner accepts that knowledge or awareness of the shortfall amount in a previous accounting period is a prerequisite to increasing the base penalty amount under s. 284-220(1)(c). However, relying on PS LA 2006/2, the Commissioner formed the view that Mr Zeqaj was aware of a previous shortfall amount due to intentional disregard of the taxation law. Therefore, written notice need not have been given. In my opinion, that is correct for the reason that there has been a finding of evasion of tax in this case. Accordingly, I find that the Commissioner properly and lawfully increased the penalty amount by 20% for the 2009 – 2011 income years. That is, the penalty rate for those years must be 95%.
Although I had in evidence a notice of assessment of shortfall penalty which was issued on 15 November 2013, that is prior to the Commissioner making his objection decision which was delivered on 26 June 2015, the only amended penalty assessment which I had in evidence was for the 2011 income year. However, I have noted that in his objection decision, the Commissioner said that any administrative penalty, general interest charge and shortfall interest charge which applied to Mr Zeqaj’s tax shortfall would be reduced for amounts allowed in his objection decision. In particular, the objection decision allowed a significant sum in the 2006 income year, resulting in an amended taxable income reduction from $945,991 to $108,338.
I did not have evidence before me indicating that the penalty assessment for the 2006 income year had been also amended as it should, although Mr Tavolaro, who appeared on behalf of the Commissioner, submitted otherwise. The Commissioner did issue an additional penalty notice for the 2011 income year which resulted from the disallowance of the capital loss of $13,400 on the disposal of the Browning Crescent property. The amount of the additional penalty, $5,728.50, was added to the initial penalty assessment figure of $86,991.05 resulting in a total tax shortfall penalty assessment for the 2011 income year of $92,719.55. There was no change to any of the penalty amounts assessed for the 2008 – 2010 income years.
I did not have in evidence any material which would support a reduction in the penalty amount under s. 284-224 or 284-225 of the Administration Act.
SHORTFALL INTEREST CHARGE
Section 280-100 of the Administration Act provides that the taxpayer is liable to pay a shortfall interest charge on an additional amount of income tax that the taxpayer is liable to pay because the Commissioner amended his or her assessment for an income year.
If the Commissioner imposes a shortfall interest charge on a taxpayer as a consequence of an amendment to their taxable income, the taxpayer may lodge an objection under Part IVC of the Administration Act to the imposition of that charge provided that the interest charge payable on an additional amount of income tax is more than 20% of the additional amount (s. 280-170). Mr Zeqaj lodged an objection to the imposition of the shortfall interest charge for all of the income years in question. In his objection decision, the commission noted that while the shortfall interest charge imposed was greater than 20% for the income years 2006 and 2008 – 2010, it was not greater than 20% of the additional income in the 2011 income year. Therefore, the objection lodged for the 2011 income year was invalid.
As for the remaining income years, the Commissioner submitted that because there was income tax evasion in Mr Zeqaj’s circumstances, he would have been aware of his potential shortfall and could have taken steps to mitigate the interest charges but did not do so. Respectfully, I agree with that submission. There seems to me to be no basis for, nor was any such basis put forward by Mr Zeqaj, remission of the shortfall interest charge in circumstances where evasion had been found to have occurred. There can be no question that a taxpayer in those circumstances would have foreseen the imposition of such a charge and could have avoided it by making proper disclosure of assessable income. I find there is no basis for remission of the shortfall interest charge for the 2006 income year and the 2008 – 2010 income years.
CONCLUSION
Because Mr Zeqaj did not put on any evidence other than that provided by the Commissioner under s. 37 of the Administrative Appeals Tribunal Act 1975, I have gone carefully through all of those documents in order to determine whether the Commissioner’s assessment following objection was correct. I have found that the Commissioner’s amendments made to Mr Zeqaj’s assessable income for the 2006 income year were correct. I have also found that the Commissioner’s amendment made to Mr Zeqaj’s assessable income in the 2011 income year was correct.
Although the Commissioner amended the tax shortfall penalty assessed for the 2011 income year, despite a significant amendment to Mr Zeqaj’s assessable income in the 2006 income year, I did not have in evidence an amended tax shortfall penalty notice. This may still need to be addressed by the Commissioner.
Other than the issue I have raised in the preceding paragraph, I find that Mr Zeqaj has not discharged the onus of proving that the assessments made by the Commissioner in his objection decision were excessive. Nor has Mr Zeqaj discharge the onus of proving that the tax shortfall penalty and the shortfall interest charge assessments are excessive or that they should not have been made or made differently. Accordingly, I find that the Commissioner’s objection decision made on 26 June 2015 was correct, subject to the consequential amendment to Mr Zeqaj’s taxable income for the 2011 income year and the shortfall penalty imposed as a consequence of that amendment. With that qualification, I affirm the Commissioner’s objection decision.
I certify that the preceding 70 (seventy) paragraphs are a true copy of the reasons for the decision herein of Mr Egon Fice, Senior Member ....................................[sgd]...................................
Associate
Dated 06 April 2016
Date of hearing 15 February 2016 Applicant In Person Solicitor for the Respondent Mr. Vincent Tavolaro Solicitors for the Respondent Australian Government Solicitor