Zhu and Commissioner of Taxation

[2008] AATA 692

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 692

ADMINISTRATIVE APPEALS TRIBUNAL      )   

)    No: 2007/5284

TAXATION APPEALS DIVISION  )   

ReManqiang ZHU

Applicant

And    Commissioner of Taxation

Respondent

DECISION

TribunalProfessor GD Walker, Deputy President

Date7 August 2008

PlaceSydney

DecisionThe decision under review is affirmed.

..............[sgd]................................

Professor GD Walker
  Deputy President

CATCHWORDS – Taxation – whether amended assessment was excessive – whether penalty for failure to take reasonable care was correctly applied – applicant bears the burden of proving the facts on which he relies – applicant failed to discharge the burden of proof – assessment not excessive – penalty was appropriate – decision under review is affirmed.

…

RELEVANT ACT/S:

Taxation Administration Act 1953 (Cth) (the TAA): ss 14ZZK, Schedule 1 – 284-75, 284-80, 284-90

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REASONS FOR DECISION

7 August 2008	Professor GD Walker, Deputy President
Basic facts

1.      At all relevant times the applicant Mr Manqiang Zhu worked as a dim sim pastry cook at the Kam Fook Shark Fin (Jin Fu) seafood restaurant in Chatswood, New South Wales (the restaurant or the Kam Fook restaurant).  He began employment there on 25 March 2003.  It was his first employment in Australia after arriving as a new immigrant on 1 March 2003.

2.      In his income tax return for the year ending 30 June 2004 (T3 pp6-13), the applicant declared a gross income of $18,200 as wages from the restaurant.  An amount of $2,444 was recorded as tax withheld.  Those figures matched those on the PAYG payment summary by the restaurant to the applicant.

3.      On 21 October 2004, the respondent issued a notice of assessment to the applicant in accordance with the figures declared by the applicant on his income tax return (T4 p14).

4.      Subsequently, the respondent conducted an audit of the applicant’s employer, the Kam Fook restaurant.  On 28 April 2006, a recorded interview between officers of the respondent and Ms Rosetta Oi Ling Lee, principal of the restaurant (T5 pp15-30).  Ms Lee’s legal adviser was present.

5.      Approximately a month after that interview, the restaurant’s solicitor wrote to the respondent enclosing among other things a spreadsheet showing the total amount paid to the applicant for the 2003-2004 year as $38,925 (T6 p32).

6.      As the figure reported by the employer’s solicitor exceeded the amount declared by the applicant by $20,725, the respondent amended the applicant’s assessment to reflect an increase in the applicant’s assessable income by that amount.  The revised taxable income was $38,925, less allowable deductions of $330.  A notice of amended assessment was issued on 31 May 2007 (T11 p39).

7.      A spreadsheet prepared by the respondent at the time of the audit substantially confirmed the figures supplied by the employer (T7 pp33-34).

8.      In his income tax return the applicant also claimed the dependent spouse offset, on the ground that his wife disclosed that she had no separate net income for that year (T3 p8).

9.      Five bank statements for the relevant period provided by the applicant showed two significant deposits, one of $300 on 3 July 2003 (T13 p51), and one of $598 on 25 September 2003 (T13 p52).  There was only one withdrawal, $50 on 14 August 2003 (T13 p51).  The respondent took the position that those figures (together with some small deposits) showed that the applicant had saved $892.35 of the $21,905 total income that supported him and his wife.

10.     On 31 May 2007, the respondent amended the applicant’s assessment and imposed administrative penalties at the rate of 25 percent on the basis of the applicant’s failure to take reasonable care when lodging his income tax return.  In so doing, the respondent noted that the 25 percent penalty is the lowest rate available.  It stated that in normal circumstances, such behaviour might have been considered reckless, making 50 percent the appropriate penalty.  He acknowledged, however, that there might have been language problems and a lack of knowledge of income tax legislation involved, making a 25 percent penalty appropriate (T2 p4).

11.     On 31 October 2007, the applicant appealed to this tribunal from that decision.

12. At the hearing, the applicant was represented by Mr Patrick Chan, accountant of KB Chan & Co, while Ms Vicki Hammond appeared for the respondent. The documents before the tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act1975 (the T documents), taken into evidence as Exhibit R1, together with the other documents tendered by the parties at the hearing.  The applicant gave oral evidence in person with the assistance of a Cantonese language interpreter.

Issues

13.     This application raises two issues:

(a)Is the amended assessment issued by the respondent to the applicant excessive?

(b)Was the penalty correctly applied under s 284-90(1) of the Taxation Administration Act 1953 (Cth) (the TAA) at the rate of 25 percent on the basis of the applicant’s failure to take reasonable care?

14. The respondent relied on s 14ZZK of the TAA and put the applicant to proof of all the facts on which he relied.

Applicable law

15. In proceedings such as these, s 14ZZK of the TAA places on the applicant the burden of proving that the decision under review should not have been made or should have been made differently.

16.     Section 284-75(1) of Schedule 1 (TAA) states that a taxpayer is liable to an administrative penalty if he or she, directly or through an agent, makes a statement to the Commissioner that is false or misleading in a material particular and that a shortfall results.  The relevant shortfall amount ‘is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been’ (Section 284-80 of Schedule 1).  

17.     The amount of the penalty is calculated as a percentage of the shortfall amount.  Pursuant to s 284-90 of Schedule 1 (TAA), the percentage is determined by the nature of the taxpayer’s conduct when the false or misleading statement was made.  In this instance, the respondent applied Item 3, which operates where ‘Your shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a taxation law’.   

Applicant’s evidence

18.     At the hearing the applicant adopted his statutory declaration dated 3 April 2008 (Exhibit A2) in which he said inter alia that as his position at the Kam Fook was his first job in Australia, he worked without much concern about the conditions of remuneration, only hoping to be able to stand on his own feet as soon as possible.

19.     He worked six days a week, six hours a day (10 am – 3 pm) [sic] and his net weekly wages after tax were $303, and his gross being $350.  He worked for 49 weeks during the relevant period, with three weeks paid leave.

20.     He lived, as he does now, at the house of his younger brother and pays no rent.  He paid for his own daily living expenses, such as meals, transport and personal items but owned no furniture and had little in the way of savings.

21.     He considered that he had been able to work hard and earn his living without any inappropriate conduct.  In cross-examination he conceded that he was actually working five hours per day and said he had never worked any extra hours or been paid any extra wages.  His wife worked part-time in 2004, earning about $100 per week, but not every week.  He then said she had been earning between $100 and $200 per week.  His wife had also received some $3,000 by way of Centrelink payments.

22.     His brother’s house has three bedrooms.  He is not sure if it is paid off.  He  still lives in the house, as do his brother and sister-in-law.  He pays no rent because of his low income, nor does he contribute to household bills.  He is not sure how much his brother earns in his work of internal building and repairs, but said he worked 10 to 20 hours per week, or more than that when he was busy.  At the relevant time he earned more than the applicant, because the applicant was a new arrival.  His sister-in-law also works, but he did not know how many hours a week.

23.     The restaurant had supplied him with two meals per day, and he took dinner at home.  He spent about $100 a week for food, plus an amount for daily necessities.  His wife also worked at the restaurant and received lunch there free of charge.  He and his wife travelled to work by train, and weekly tickets cost him $30 to $40 per week.  He owned no car then or now and in 2004 took no holidays away from home.  They spent very little on clothing and the restaurant provided some work clothes.  He did not smoke, drink, gamble or make any charitable gifts and had no specialist tools of trade.  He had received no formal training as a pastry cook but had learned from experience and had obtained his position at the restaurant via a friend’s introduction.

24.     The applicant was aware that the respondent had investigated the restaurant.  He had ceased working for the restaurant in about February 2006 because they had not adapted and he wanted a change.  He explained the doubling of his wages in 2005 to 2006 on the basis that his hours were longer.  When it was pointed out to him that he had said he had worked the same hours the whole of his time at the restaurant, he said the hours were the same but perhaps his salary had increased because he had gained experience.  Asked why he had left the restaurant when his salary had been doubled, he said that after a long period there he saw no chance of promotion and there had been some changes made.  He had moved to Canberra for a period before returning.

25.     At his new employment in Canberra he had worked only half days at half his previous wages.

26.     When it was put to him that he had left the restaurant because he was no longer being paid undeclared cash wages, he replied that he had resigned because of the lack of promotion.  When it was then put to him that the doubling of his wage constituted a promotion, he replied that there had been a wage rise, but the position was just a little higher than before.  His wage had doubled because the workload was heavier and he was under more pressure.

27.     He explained his saving performance and lack of withdrawals from his bank account as resulting from frugality and his ability to save over a period.  His wife’s Centrelink payments had been paid into their joint account, before she opened another account.  When asked why he had said his wife did not have an account, he replied that in 2004 she did not and her Centrelink entitlements had gone into the same account.  Asked to explain the lack of details about the other account, he said he had a safe deposit box with the Bank of China for valuable documents, for which he paid $450 per year.  His bank statements (T13 pp50-55) did not show his wife’s Centrelink payments because she took them herself and did not lodge them into the account, not into this account.  Reminded that Centrelink makes payments only into bank accounts, he explained that another account had been opened at the Bank of China recently in connection with the safe deposit box but they had no other account in 2004.

28.     The applicant said his sister-in-law had prepared his 2004 tax return by filling in his personal details, but the figures had been entered by his employer, and he paid him $50 to do it at the restaurant.  His employer had lodged the return.  It was then pointed out to him that the return was lodged electronically, which conflicted with his assertion that his sister-in-law had completed a printed form.  He answered that she had asked a friend to transfer it to a computer and lodge it.  His sister-in-law had helped with the first return, but his employer had done the later one.  She had prepared the 2004 return together with her friend.

29.     His attention was then drawn to the claim of a $50 gift to charity (T3 p7).  He said he did not recall the payment and had no receipt for it.  Even if he had previously had a receipt, he would not have it now because it did not relate to a large sum.

30.     It was then pointed out to him that his wife’s earnings were not shown on the return.  He replied that initially she did not work.  Reminded that he had said that she did, and had earned $100 to $200 per week, he replied that he was not too familiar with the matter.  Her income was low and for that reason he did not write it down.  Perhaps she had not reached the threshold.  He persisted in that response after it was pointed out to him that he had claimed she had not earned any wages at all.

31.     He said he did not understand that he had claimed $1,535 by way of spouse offset, saying that “basically” she had no income.  She took her meals at the restaurant, where she worked, and had only worked occasionally.  Asked whether he had thus claimed a $1,200 offset wrongly, he replied that he did not know about those things.  Nor did he know anything about the figure of $38,925 on the spreadsheet.

32.     In re-examination he said that he had divorced his wife in 2005 and that relations had not been harmonious.  For that reason she did not necessarily tell him all about her expenditures or other financial matters.  He was not sure that she had her own bank account, or why she was receiving payments from Centrelink, but thought it might be because of her low income.

33.     Asked whether he had worked longer hours in 2006 than in 2004, he replied that the “workload was a bit longer”.  It was then put to him that he had been paid more that year because he had worked longer hours; he replied that after a time he had become more familiar with the work.  He had simply accepted the figures shown in the statement of earnings his employer had given him, but had not fully understood it.

Respondent’s evidence

34.     In addition to the T documents (Exhibit R1) and copies of the applicant’s assessments (Exhibit R4), the respondent also relied on the evidence of Mr Shi Qui Li, who had also worked at the Kam Fook restaurant in 2004.

35.     In his statement (Exhibit R3) and in his oral evidence, he said that he worked 10 hours a day at the restaurant.  He was told that all the money he received was after tax money, all his taxation being handled by the company.  He was paid about $900 per week and was told to sign the company payroll record, but during the relevant period there was no figure entered on the record.

36.     The company reported his annual income at about $23,000 per year, which was less than the wages he received.  He understood that the purpose was to enable the company to pay less tax and less superannuation and workers’ compensation.

37.     He was unwilling to co-operate in this scheme, but the company said it was company policy, and as a new immigrant he felt he had no choice.  But the restaurant was investigated by the ATO in March 2005, after which the company prepared some false documents and asked employees to pay the tax that they owed.  The company retained the employees’ tax instalments.  His real income had been $40,000, but only $23,000 had been declared.  The employer should have paid the difference in the tax payable.

Applicant’s submissions

38.     On behalf of the applicant Mr Chan submitted that the evidence was insufficient to establish what the applicant had actually earned.  A solicitor’s letter written two years later enclosing a spreadsheet was not a reliable basis.  The respondent should have produced a proper wages record but had not done so.  All the other documents in existence, such as superannuation records, pointed to the correct income figure being as stated by the applicant.

39.     One could have no confidence in the word of the employer concerning the amended figures, and more evidence was needed.  The respondent’s conclusions based on estimates of the cost of maintaining the applicant’s living standard was subjective and overlooked the applicant’s lack of any assets.

40.     The assertions in the record of interview that the payment of undeclared cash wages was an industry practice could not be accepted.  While in reality the employers might not have been able to gain any benefit from claiming after the audit had begun that it had paid a greater sum in wages, they might not have realised that at the time.  They had tried to explain the understatement of their receipts through the medium of wages.  They had attempted to manipulate wages figures to avoid declaring the restaurant’s full income.

41.     The applicant's savings of $800 in a year out of an income of $21,000 was not particularly large considering that the applicant paid no rent, which normally constitutes a large proportion of a person’s income.

42.     The applicant had no particular objection to the penalty as assessed, but repeated that he had relied on the employer’s PAYG summary.

Consideration

43. Evaluation of the evidence must start from the proposition that under s 14ZZK of the TAA, the applicant bears the burden of proving the facts on which he relies in order to prove that the assessments are incorrect.

44.     In any event, the most cogent evidence before the tribunal favours the respondent.  The spreadsheet (T6 p32) showing the applicant’s true gross income at $38,925 was supplied through the restaurant’s legal representatives.  At that stage of the ATO investigation, the employer restaurant had nothing to gain by overstating that amount.

45.     At the interview on 28 April 2006, the principal of the restaurant, Rosetta Lee, admitted that a substantial amount of money was paid in cash wages, in this context meaning undeclared, unrecorded cash wages (T5 pp20, 21, 23, 25).  Her understanding was that this was an industry practice (T p26).  Her evidence supports the accuracy of the spreadsheet (T6 p32).

46.     Less persuasive in my view is the argument based on the improbability that the applicant and his wife could have lived on $21,000 for a year and still managed to save $800 during that time.  It does not seem inconceivable that a person schooled in China in frugal habits, who paid no rent, had no assets, neither smoked, drank nor gambled, took no holidays away and had most of his meals supplied for him at the restaurant, could have managed on such an income and saved the amount indicated.

47.     On the other hand, the manner in which the applicant continually altered his evidence weakened his case substantially.  For example, he said that he had worked five hours per day, six days a week for his entire time at the restaurant and had never worked any additional hours.  Later he explained the doubling of his wages as the result of working longer hours, then said that he had been working the same hours but was paid more because he had acquired more experience, or because the workload and pressure were greater.

48.     As regards his wife’s income, he said that basically she had no income, or that she had earned $100 per week, or that she had earned $100 to $200 per week.  In his tax return, he had claimed that she had no income at all (T3 p8), which he explained by saying her income was very low, so he did not declare it.  He said her Centrelink entitlements were paid into their joint account, and that subsequently she had opened another account, then said she took it herself and had not paid it into any account.  He said he made no gifts to charity but when confronted with his claim for a $50 deduction on that basis in his return (T3 p7), he claimed not to recall the matter.  His explanation for leaving the restaurant to take employment in Canberra at half the wages he had previously received, was implausible.

49.     I find that the applicant has failed to discharge the burden of proof, proving the assessment excessive.

50.     The applicant did not submit that the penalty as assessed on the basis of 25 percent of the tax shortfall was excessive, but pointed out that he had relied on the employer’s earnings statement.  On the preponderance of probabilities, I find that the applicant was aware that the figures set out in the statement of earnings were substantially less than his real wages.  I accept the respondent’s contention that such conduct would normally qualify for a penalty at the 50 percent rate for recklessness, but that for the reasons given the 25 percent rate, being for lack of reasonable care, was appropriate.

51.     The decision under review is affirmed.

I certify that the 51 preceding paragraphs are a true copy of the reasons for the decision herein of Professor GD Walker, Deputy President

Signed:   .........................[sgd].................................................
               Renee Wallace, Associate

Date/s of Hearing:  22 July 2008
Date of Decision:  7 August 2008
Solicitor for the Applicant:                  Mr P Chan, KB Chan & Co
Solicitor for the Respondent:             Ms V Hammond