Sinclair and Commissioner of Taxation [2000] AATA 1168; (2000) 47 ATR 1001; 2001 ATC 2092 (4 December 2000)

Last Updated: 7 October 2009

DECISION AND REASONS FOR DECISION [2000] AATA 1168

ADMINISTRATIVE APPEALS TRIBUNAL )

) QS2000/30,31
sitting as the SMALL TAXATION CLAIMS TRIBUNAL )
Re GRAHAM SINCLAIR
Applicant
And COMMISSIONER OF TAXATION
Respondent

REASONS FOR DECISION

Tribunal Mr K L Beddoe, Senior Member

Date 4 December 2000

Place Brisbane
Decision No. 1168

CATCHWORDS
INCOME TAX: Allowable deductions – whether carrying on business – whether use of boat essential to efficient conduct of business
Taxation Administration Act 1953: s 14ZZK
Income Tax Assessment Act 1936: s 51AB, 53, 54
Ferguson v The Federal Commissioner of Taxation [1979] FCA 29; 79 ATC 4261

REQUEST FOR WRITTEN REASONS FOR DECISION

Mr K L Beddoe, Senior Member

1. On 4 December 2000, the Tribunal decided to affirm objection decisions by the respondent following a hearing at which the applicant conducted his own case and an officer of the Taxation Office represented the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the T documents and further documents were tendered and marked as exhibits. Oral evidence was given by the applicant.
2. The essence of the applicant's case was that a boat owned by him was used in the course of carrying on a business so as to make some proportion of expenses relating to the boat allowable deductions within the terms of the Income Tax Assessment Act 1936. The respondent contended:

(a) The applicant was not carrying on a business; and

(b) If there was a business the respondent was not satisfied that the use of the boat is essential for the efficient conduct of the business and the boat was not held for use principally for that purpose (s.51AB).
3. At the conclusion of the hearing, the Tribunal gave oral reasons for its decisions to affirm the objection decisions and those decisions were made in writing.
4. By letter, dated 11 December 2000, the applicant requested that the Tribunal's reasons be given in writing. Due to a delay in obtaining the transcript of the Tribunal's oral reasons, the Tribunal has not complied with the obligation to provide written reasons within 28 days after the request.
5. The Tribunal's reasons given on the day are as follows.
6. In this matter, the applicant seeks to have allowed certain claims for reductions relating to a boat which is, for all intents and purposes, permanently moored in the Brisbane River. In the years of income which are before the Tribunal – that is, the years of income ended 30 June 1994 and 30 June 1995 – the boat was located at two different locations in the Brisbane River, most of that time located in a marina, but for some of the time located at the piles in the Brisbane River as a matter of economy. The claim relates to expenses relating to the boat.
7. The quantification of those expenses is a real problem for the Tribunal and it is not clear, notwithstanding the schedules of expenses and the revised schedules of expenses that appear in the T documents, as to how the claims that are before the Tribunal have been calculated. The applicant is unable to assist the Tribunal in relation to that, making it clear in his evidence that he relied entirely on his accountant for the preparation of the tax returns. He merely adopted what the accountant put into those returns. There is no evidence before the Tribunal from the accountant as to how the tax returns were prepared and the Tribunal is then left in a situation where, to some extent at least, it must speculate as to exactly how those claims were prepared.
8. In that regard, I cannot get past the problem that arises in relation to section 14ZZK of the Taxation Administration Act 1953, firstly in relation to the grounds of objection and there it is made quite clear that the Tribunal is limited to the grounds of objection that are before the Tribunal. In this case the grounds of objection as set out in the T documents are very general in nature. In my view they should be interpreted as meaning that the applicant objects to the adjustments made by the Commissioner to the assessed taxable income of the taxpayer after the taxpayer failed to answer requisitions – or initially failed to answer and then eventually answered requisitions – for information from the Taxation Office.
9. In that regard, I note that the problem with the answering of the requisitions for information seemed to be a matter involving the tax agent personally, rather than the taxpayer in these proceedings who, I accept, seemed to be unaware of the fact that the Taxation Office was conducting inquiries into the returns lodged by the applicant. The second part of section 14ZZK of the Taxation Administration Act 1953, insofar as it is relevant, provides that on an application for review of a reviewable objection decision the applicant, that being the taxpayer, has the burden of proving that the assessment is excessive.
10. That is certainly the situation in these proceedings, that the applicant has to satisfy me that the amended assessments as made by the Tax Commissioner are excessive on the material. There are a number of issues that arise and have clearly been raised in these proceedings and the Tribunal has had the benefit of the documents lodged in the Tribunal, pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. The Tribunal has also had the benefit of certain other documents which were tendered and marked as exhibits and the Tribunal has had the benefit of the evidence of the applicant in these proceedings. There was no evidence called for the respondent.
11. The first issue which arises in the light of that evidence is the situation of the claimed business that was being carried on. Now, the evidence establishes to my satisfaction that the applicant, being of a nautical mind and having lived on a boat in the Brisbane River for a number of years which he purchased in an unfinished state and which he proceeded to work on for a number of years to bring the boat up to a proper standard and in particular to a standard to his satisfaction, became aware of the developments in relation to navigational aids and in particular computerised navigational aids. He became particularly aware of a program that had been developed in the United States and for which he thought there would be a market in Australia.
12. I think that it is reasonable to find, and I do find, that the applicant was acting in good faith and that he came to the conclusion that he would be able to retail these programs in Australia for use in Australian conditions and that he would be able to do so at a profit, and that profit, in his calculations, would be a substantial profit per transaction. I am not satisfied that his motivation in relation to a decision to import and sell the computer programs was in any way motivated by factors other than desire to sell the programs at a profit to himself and that was the purpose for which he entered into the venture.
13. Whether he was carrying on a business is put in dispute and there is a lot then said about what are the criteria for determining whether a person is carrying on a business. However, I think the authority in that regard is the dicta of Bowen CJ and Franki J in Ferguson v The Federal Commissioner of Taxation [1979] FCA 29; 79 ATC 4261, and in particular at 4264 and 4265, where their Honours set out the criteria that they considered relevant in determining whether or not the activities carried on can be correctly characterised as carrying on a business.
14. Their Honours refer to a purpose of profit making. In this case, I have no doubt, and I find, that the applicant entered into the venture for the purpose of profit making. As their Honours point out, whether or not a profit was achieved in the particular year is not the issue, but rather the purpose. The purpose was in this case to make a profit. The question of repetition and regularity of the activities is also important, according to their Honours, and that is a difficult issue in this case.
15. I am satisfied, however, in the light of the applicant's evidence, that he did intend to maintain the venture on the basis that there would be a continuing business in purchase and sale of the programs. There was also the sideline in relation to the charts, although, as the applicant said, the charts were not really the issue as far as he was concerned; he wanted to make the profit on the programs, but he would supply charts in situations where it was expedient or reasonable for him to do so and he would supply them at a profit where he could.
16. As their Honours also point out, the business has to begin somewhere and it may begin on a small scale. The problem with the applicant's case is the lack of organisation of his activities and in particular the proper keeping of books of account and records. There were some books kept, but as he said himself, it was minimal because the business was minimal. As it transpired, some of those vital documents are no longer available because of the problems associated with the tax agent engaged by the applicant at the time.
17. Something was made of the fact that the applicant's primary concern was in relation to the boat and the work that he was doing on the boat and that whatever else he did, including the purchase and sale of programs, was something that was so secondary it might be construed as a hobby or some other activity which was something less than the carrying on of a business. However, I am satisfied on the material before me that the applicant was carrying on a business. He set out to do so. That was his intention and that intention was frustrated by the fact that the computer program was incompatible with the charts that were available in Australia.
18. The applicant has his reasons as to why that was so. He suggests that the technology company and the Navy are responsible for that. Whether that is the case, I am unable to say. I make no findings in relation to the cause of the computer programs being incompatible, but I find as a fact that it transpired that the computer programs were incompatible with the Australian charts at the time, although, as the applicant said in his evidence, that has since been rectified.
19. So I am satisfied and find that in the years ended 30 June 1994 and 30 June 1995, the applicant was carrying on a business. The business was minimal; it probably could not be any smaller than it was, but his purpose was clear: that was his intention. He sought to trade at a profit and he failed because of factors that he had not taken into account and I would think he would say were beyond his control so as to make the business venture unsuccessful.
20. The difficulty that arises then, having found that the applicant was carrying on a business, is to quantify the expenses that may be allowable within the terms of section 51, 53 and 54 of the Income Tax Assessment Act 1936. To some extent, it may be said that the accountant has already done so in relation to the direct expenses, because the tax returns appear to have been prepared on a basis which I would have thought is technically incorrect, in that there has been a failure to disclose in the relevant parts of the returns the total business income which, in my understanding, is the gross income. In the year ended 30 June 1994, the total business income is disclosed as $660, and in the following year, the year ended 30 June 1995, the total business income is disclosed as $310.
21. I think it is reasonable to infer, in the light of the evidence and in the light of the other material that appears below those figures on the tax returns, that those total business income figures are not in fact total business income figures, but are in fact net business income figures which take into account the cost of trading stock. There is no other entry that I can see in relation to the material that is before me that suggests that the trading stock has been other than taken into account in calculating total business income. I therefore accept that the figures of $660 and $310 respectively are in fact the gross profit figures, rather than the total income figures.
22. On that basis, I am satisfied that the direct outgoings in relation to the purchase and sale of programs and charts have probably been taken into account in the calculation of those figures. That, to some extent, is a speculation on the part of the Tribunal, but I think it is a reasonable inference in the circumstances, given the material before the Tribunal. As to whether any other expenses are allowable, it is something which I simply cannot determine, because there is no information before me that will allow me to determine whether there are any other expenses allowable within the terms of sections 51, 53 and 54 of the Income Tax Assessment Act 1936.
23. There are schedules of expenses in relation to the boat and that is the main issue that arises in these proceedings and that is where the Tribunal must consider the operation of section 51AB of the Income Tax Assessment Act 1936. Section 51AB contains a number of provisions, but it is necessary in this case to consider the defined terms and section 51AB defines a boat as including any vessel. I find that the vessel in question is clearly a boat as defined.
24. A leisure facility is defined as meaning a boat, but other than a boat that is an excepted facility in relation to the year of income. An excepted facility is defined in various paragraphs, but the relevant paragraph is paragraph (b)(iii) which reads:

"Excepted facility, in relation to a year of income, means a boat that at all times during the year of income is used or held for use by the taxpayer principally for any one or more of the following purposes."

25. There has been no suggestion that subparagraphs (i) and (ii) are relevant, and the suggested relevant paragraph is subsection (iii) and that reads:

"For any other purpose in the ordinary course of a business carried on by the taxpayer if the taxpayer satisfies the Commissioner that the use of such a boat for that purpose is essential to the efficient conduct of that business."

26. Unless the applicant's boat can be brought within (b)(iii) of the definition of accepted facility, it will be a leisure facility, and therefore the deductions are not allowable within the terms of section 51, etcetera, of the Income Tax Assessment Act 1936. Because of (b)(iii), the applicant's case fails for two reasons. The first is that I am not satisfied that it is used "principally for any one or more of the following purposes".
27. I am satisfied, as a question of fact, that the applicant's boat is used principally as his place of residence. His evidence was very clear that it is the place where he resides; that is his first priority in life. I accept that in relation to the proposed business, the boat would be of use and used in the course of that business for the purpose of demonstrating the operation of the computer program, but I am not satisfied that it was ever the principal use of the boat.
28. Further, I am not satisfied that ever was the principal use of the boat during the years of income ended 30 June 1994 and 30 June 1995. Therefore, in my view, the boat fails at the outset because it is not used "principally for any one or more of the following purposes". However, I have also come to the conclusion that the boat would not be used in such a way that it would be essential to the efficient conduct of the business of selling the computer programs. I am satisfied that it would be an aid to that business and have no doubt that it would be an advantage to the business in being able to provide a facility where the use of the program could be demonstrated and the taxpayer – the applicant in these proceedings – gave evidence about that and I accept that evidence; but I am not satisfied that the business could not have equally be carried on efficiently at another location other than a boat on the Brisbane River.
29. There is no evidence about how such a business would normally be carried on, but there was evidence about how another company carries on a business and that was carried on from premises in the city. Whether that meant that the business was less efficient, I am unable to say, but I am not satisfied that the boat would be essential to the efficient conduct of a business of buying and selling computer programs designed to be used for navigational purposes.
30. It follows, for these reasons, that the Tribunal cannot be satisfied that the assessments that are for review before the Tribunal are excessive and therefore the Tribunal has no option but to affirm the decisions under review.

I certify that the 30 preceding paragraphs are a true copy of the reasons for the decision herein of Mr K L Beddoe, Senior Member

Signed: .....................................................................................

R. Hayes, Associate

Date/s of Hearing 4 December 2000

Date of Decision 4 December 2000

Date of Written Reasons 24 January 2001

Applicant Mr. Sinclair, himself

Respondent Mr. Westerink and Mr. Aftanas,

departmental advocates