Sobczuk and Commissioner of Taxation [2003] AATA 1079; (2003) 54 ATR 1043; 2003 ATC 2235 (29 October 2003)

Last Updated: 2 October 2009

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2003] AATA 1079

ADMINISTRATIVE APPEALS TRIBUNAL )
) Nos QT00/13, QT00/97, QT00/117-118

TAXATION APPEALS DIVISION		)
	Re		PEDRO SOBCZUK

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr BJ McCabe, Member

Date 29 October 2003

Place Brisbane

Decision

The Tribunal affirms the objection decisions under review.

(Sgd) BJ McCabe
Member

CATCHWORDS

TAXATION – income tax – deductions – whether legal fees incurred in defending criminal charges are deductible – whether stolen monies repaid to employer should be included in the assessment of the applicant’s taxable income – whether the applicant has a HECS debt – whether TFN credit adjustment properly calculated

Taxation Administration Act 1953 ss 14AAK(b)(i), 226J
Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation [1980] FCA 150; (1980) 11 ATR 276
AAT Case 11,608 [1997] AATA 35; (1997) 34 ATR 1230
Sobczuk v Carnarvon Medical Services Corporation (No 1888 of 1998 and No 165 of 1999)

REASONS FOR DECISION

29 October 2003

Mr BJ McCabe, Member

INTRODUCTION

1. The applicant in these proceedings is Mr Pedro Sobczuk. Mr Sobczuk has objected to the Commissioner’s assessments in respect of each of the years of income ending on 30 June 1995 through 30 June 1998.
2. Mr Sobczuk has several applications before the Tribunal. Some of the older applications have already been dealt with. He has made applications under the Freedom of Information Act 1982 and he has engaged in extensive correspondence with the Ombudsman. He is also making at least one application to the Federal Court. Most of this is irrelevant to the proceedings before the Tribunal with which this decision is concerned, but it may be useful to understand the background. The applicant was employed by the Carnarvon Medical Services Corporation (the Corporation) as an accountant-administrator. He was convicted of stealing money from the Corporation and sentenced on 14 November 1997 to serve a term of imprisonment. (I note the applicant strenuously objected to being characterised as an accountant in the course of his written submissions, but that is how he was characterised by the trial judge).
3. Mr Sobczuk believes he was wrongly convicted. He hinted at the existence of a conspiracy between a cast of individuals – he seems to think he was framed. He suspects the Commissioner possesses information that might tend to exonerate him. He sought access to documents held by the Commissioner and wanted to cross-examine officers who were involved in his case, or whom he suspected of involvement. He thinks the Commissioner and the Ombudsman and perhaps others are involved in a cover-up. Mr Sobczuk also accused the Commissioner of taking advantage of Mr Sobczuk’s psychiatric disorder.
4. Given the applicant’s aims and the multiplicity of claims, there was some difficulty in divining the issues before the Tribunal. They appeared to be as follows:

(a) Were the costs of defending the criminal proceedings properly deductible?

(b) Mr Sobczuk was ordered to repay the Corporation $96,383.96 (which included an interest charge of $6,303.85) that was stolen. He says that amount included an amount in respect of salary, on which he had paid tax. He says those amounts should not be assessable in the circumstances. He also claims he received overtime meal allowances that were repaid pursuant to the judge’s orders, and were not assessable income.

(c) Does the applicant have a HECS debt in the amount of $5,641?

(d) The applicant disputes the amount of a TFN credit adjustment.

(e) Were the tax shortfall penalties properly imposed?

THE MATERIAL BEFORE THE TRIBUNAL

5. The Tribunal was provided with the documents required under section 37 of the Administrative Appeals Tribunal Act 1975. A set of supplementary documents was also filed. The sentencing remarks of the trial judge in Mr Sobczuk’s criminal prosecution were also tendered as an exhibit, as were copies of correspondence between the applicant and the Corporation. Mr Sobczuk and Ms Dany Johnson gave oral evidence.
6. Mr Sobczuk wanted to examine several other officers from the tax office. Although I was initially sympathetic to his requests, it became apparent the officers did not possess information that was relevant to these proceedings. The witnesses were not called.
7. The applicant appeared on his own behalf at the hearing, and in the numerous directions hearings. Mr Aftanas appeared on behalf of the Commissioner. Both of the parties provided extensive written submissions. In the applicant’s case, the submissions ran to some 24 pages.

THE APPLICANT’S BURDEN IN RELATION TO THE APPLICATION

8. Section 14ZZK(b)(i) of the Taxation Administration Act 1953 says the taxpayer objecting to an assessment must prove the assessment is excessive or wrong before it can be set aside. There is good reason for this rule: the taxpayer presumably has access to the information that will enable him to prove his case, whereas the Commissioner is at an informational disadvantage.
9. The Commissioner has issued assessments in this case and stands by them in the face of the applicant’s objections. The applicant must prove the Commissioner is wrong, which means he must adduce evidence or point to provisions of the statute establishing an error has been made.

THE MATTERS IN DISPUTE

(a) Can the applicant claim a deduction in respect of costs incurred in defending the criminal proceedings?

10. The costs of defending criminal charges are not ordinarily deductible: see Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation [1980] FCA 150; (1980) 11 ATR 276. Although there are some exceptions to the rule, as in AAT Case 11,608 [1997] AATA 35; (1997) 34 ATR 1230, those exceptions arise where the criminal proceedings are so closely connected with the taxpayer’s work that it could be said the risk of proceedings was part of the taxpayer’s work. In AAT Case 11,608 (supra), the applicant worked in a bar and was charged with manslaughter following an altercation with a drunken patron who was attempting to re-enter the premises after being ejected. Since the control and removal of drunkards was part of the applicant’s job, the Tribunal concluded there was a necessary connection between the costs and the job. That is not the case here.
11. The Tribunal is satisfied there is not such a close connection between the applicant’s work and the criminal proceedings. The costs of defending the charges are not deductible.

(b) Did the money repaid to the Corporation include money that was paid to the applicant in respect of salary? What about overtime meal allowances?

12. Mr Aftanas directed me to the remarks of the sentencing judge. Viol DCJ said the applicant should repay an amount of $90,055.11 (the amount the jury concluded the applicant had stolen) and interest. The judge said:

“The sums stolen in each count were banked by you in various accounts in your name. Not all the monies were used by you and there is sufficient money in your accounts for the repayment of the money found to have been stolen to the complainant.”

13. In other words, the applicant received a large quantity of money from the Corporation, of which $90,055.11 was stolen. The balance of the money in the accounts may have been received in the form of salary and other benefits to which the applicant was entitled. The applicant’s obligation to repay the amount stolen was satisfied out of the pool of funds available to him. That may be the source of the applicant’s contention he was required to refund money that had in fact been paid to him as salary and benefits, upon which he had paid income tax.
14. The applicant was effectively required to pay an amount equivalent to that which had been stolen. That much is clear from the sentencing judge’s remarks. His Honour was bound by the jury’s conclusion; so, in effect, is the Tribunal. The Tribunal cannot go behind the convictions and second-guess the jury’s verdict. It follows I am not satisfied the respondent’s assessment is wrong. The applicant must fail on this point.
15. There was also no evidence that money paid in respect of overtime meal allowances had been wrongly repaid to the Corporation. I did not see anything in the material that would enable me to be satisfied the applicant was paid those allowances. I note the Australian Industrial Relations Commission concluded in Sobczuk v Carnarvon Medical Services Corporation (No 1888 of 1998 and No 165 of 1999) that the applicant had no entitlement under his contract of employment to overtime and overtime meal allowances. It follows I cannot be satisfied the respondent’s assessment was wrong.
16. I would reach the same conclusion in relation to claims for travel allowances: I have not seen enough evidence to satisfy me that the Commissioner is in error in his treatment of the applicant’s affairs in this respect.

(c) Does the applicant have a HECS debt?

17. The respondent says the applicant initially paid his HECS debt using money stolen from the Corporation. That money was refunded to the Corporation by the respondent and the debt was reinstated.
18. The respondent argued the Tribunal could not review his decision to refund the money to the Corporation. The Commissioner says the applicant can dispute a HECS assessment, but that is not what is occurring here. The Commissioner says there is no real dispute that the amount of the debt was calculated correctly. He says the decision to refund the money to the Corporation and reinstate the debt is an internal administrative matter, albeit one that impacts on the applicant. But that does not of itself bring it within the jurisdiction of the Tribunal. The respondent is right, and the applicant’s claim on this point fails.

(d) Has the amount of the TFN credit adjustment been properly calculated?

19. The respondent’s submissions on this point were short. He said the tax file number credit was not properly before the Tribunal. In any event, the Commissioner said the applicant did not provide enough information or explanation that would enable the Tribunal to conclude the respondent’s assessment was wrong. In his written submissions, the applicant said:

“Page 14, paragraph 39 regarding refund of TFN Credit.
The TFN credit is before AAT. For long time ATO has been taking advantage of my disability and refusing to rectify it. The amount of $654.75 is included in my objection QT00/115, page 26, as the actual amount is the 48.5 per cent of $6303.85, which is $3058.33, kept by ATO on the interest repayment, where Mr AFTANAS was trying to covered up ATO by presenting at the hearing an irrelevant case, and the member advised me to respond following his submission with the irrelevant case, but in his submission the irrelevant case is not included.”

20. I have some difficulty making sense of the applicant’s point. After having read his submissions and perusing the material on the file, I accept the Commissioner’s contention. I am unable to be satisfied his decision on this point is wrong.

(e) Were the tax shortfall penalties properly imposed?

21. The Commissioner also imposed tax shortfall penalties on Mr Sobczuk, which the applicant disputes. The respondent has assessed Mr Sobczuk as being liable to pay a 75% penalty under section 226J on the basis that he intentionally disregarded the law. The penalty related in particular to his failure to declare an amount that was in fact received as salary/wages, but which the applicant claimed had been repaid to the Corporation.
22. The respondent says the applicant knew the money should have been included in his assessable income. He was a professional accountant, so he cannot plead ignorance, and he was present at the sentencing hearing to hear the trial judge direct that he repay the stolen money – which obviously did not include any amount that he was entitled to receive for his work as an accountant-administrator. In essence, the Commissioner says the applicant has maintained his position in the face of clear evidence that it was untenable. I agree.

CONCLUSION

23. The objection decisions under review are affirmed.
    

I certify that the 23 preceding paragraphs are a true copy of the reasons for the decision herein of Mr BJ McCabe, Member

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

Associate

Dates of Hearing 20 and 21 January 2003

Date of Decision 29 October 2003

The Applicant appeared in person

Solicitor for the Respondent Mr S Aftanas, ATO Legal Practice