Al Ibrahim and Commissioner of Taxation [2009] AATA 239 (8 April 2009)

Last Updated: 9 April 2009

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 239

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2007/2845-6

TAXATION APPEALS DIVISION		)
	Re		SAMIR AL IBRAHIM

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Senior Member Bernard J McCabe

Date 8 April 2009

Place Brisbane

Decision

The Tribunal affirms the objection decisions under review.

......................[Sgd]........................
Senior Member

CATCHWORDS

TAXATION – Income Tax – Allowable deductions – Claim of deductions for overseas business expenses – Deductions disallowed – Objection to assessment – Whether assessment excessive – Applicant bears burden of proof – Insufficient evidence to discharge burden – Assessment not excessive – Objection decision affirmed

TAXATION – Income Tax – Administrative penalties – Shortfall amount as a result of statement – Claim of credits for PAYG – Credits disallowed – Whether liable to penalty – Applicant claimed PAYG withholding credits without citing PAYG statements – Applicant failed to take reasonable care – Liable to penalty – Objection decision affirmed

Taxation Administration Act 1953 (Cth) ss 14ZZ, 14ZZK, 284-75(1) of Schedule 1

Cullen v Corporate Affairs Commission (1989) 7 ACLC 121

Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946

Re Andrews and Australian Securities and Investments Commission [2006] AATA 25

REASONS FOR DECISION

8 April 2009

Senior Member Bernard J McCabe

1. The taxpayer, Mr Samir Al Ibrahim, claimed a number of deductions for overseas business and travel expenses in his 2001 and 2002 income tax returns. The Commissioner of Taxation, the respondent, disallowed those deductions. The Commissioner also imposed tax shortfall penalties. The taxpayer applied to the Tribunal, pursuant to s 14ZZ of the Tax Administration Act 1953 (“the TA Act”), to reconsider these matters.
2. At the hearing, the taxpayer told me he was content to focus on the claim of deductions for the overseas business expenses. The taxpayer’s Amended Statement of Facts and Contentions confirms he does not wish to pursue the claim of deductions relating to travel expenses. The hearing proceeded on that basis.
3. The taxpayer’s entitlement to claim deductions turned on a question of fact. I had to decide whether I accepted Mr Al Ibrahim’s explanation of what occurred and decide if it satisfied the requirements imposed by the law. I was also required to decide whether the tax shortfall penalties were excessive.
4. For the reasons I give below, I am not satisfied the taxpayer has demonstrated the Commissioner’s assessment is excessive. The objection decisions under review must therefore be affirmed.

THE FACTUAL BACKGROUND TO THE DISPUTE

5. Mr Al Ibrahim currently resides in Kuwait. He was unable to make arrangements to appear at the hearing to give evidence in person. That was unfortunate. As I explained to the taxpayer’s lawyers before the hearing, it is usually preferable for a witness to be available to give evidence in person if his or her evidence may raise issues of credit. I decided to proceed with the hearing and take evidence from Mr Al Ibrahim by telephone, given there had already been several adjournments and no clear indication that Mr Al Ibrahim would be returning to Australia in the near future.
6. The taxpayer explained in his oral evidence that he had engineering qualifications from an Iraqi university. In 1999, he worked for a company called Union Electrical Industries (“Union”) in Amman, Jordan. He said the company imported pumps from India. He supervised the assembly and installation of those pumps. His statement dated 19 November 2008 (at [4]) also suggested he was paid by Union to assemble electrical switchboards. That evidence suggested he was physically present in Jordan while he worked for Union, although other evidence suggested he came to reside in Australia at some point in 1999. I will refer to that evidence in due course.
7. Mr Al Ibrahim claimed in his statement dated 19 November 2008 (at [5]) that he wanted to go into business for himself. He said he started assembling electrical switchboards in his own right in 1999. He was not involved in any manufacturing at that point. He did not have a factory or machinery of his own. He assembled the switchboards using components provided to him from other sources. He explained in his oral evidence that he used Union staff in Union’s premises to complete the work. I infer from his statement (at [6]) that he effectively engaged Union as a subcontractor. In his oral evidence, he also said the switchboards were used in connection with pumps supplied by Union to its customers.
8. The taxpayer claimed the business began to grow in 2000. Whereas in the past he used Union’s staff to assemble products using Union’s equipment in Union’s factory that were sold to Union’s customers, he said he began to seek out his own customers in 2000. He said he was successful in securing two major customers during 2000 and 2001. He negotiated contracts to supply assembled devices to firms called Dana Commercial Centre (“Dana”) and Ayesh Electrical (“Ayesh”). The contract of supply to Dana is found in Exhibit 1 at folio 129. It is dated 12 July 2001. I note the contract, which is in English, refers to Mr Al Ibrahim’s plant being “co-located within Union Electrical Industries”. He entered into an agreement with Ayesh to supply switchboards on 20 August 2000. The letter recording the terms of that agreement is found in Exhibit 1 at folio 126. The letter is also in English. At the time he entered into the agreement with Ayesh, he said he acquired machinery of his own to use in the assembly process. There is a bill of sale dated 15 August 2000, noting the purchase in Exhibit 1 at folio 137. Mr Khalid Abdelhamid, the manager of Al-Emdad Marketing and Industrial Services (the firm which supplied the equipment referred to in the bill of sale), gave oral evidence which confirmed the equipment was sold to the taxpayer.
9. The taxpayer entered into an agreement with Union on 17 August 2000 with respect to this newly acquired equipment. The agreement is reproduced in Exhibit 1 at folios 121ff. The document is in English. The agreement said Union would house, operate and maintain the equipment in accordance with instructions from the taxpayer in return for a fee. The taxpayer referred me to several invoices in Exhibit 1 recording payments of the fees due under the agreement.
   Mr Abdelhamid explained in his oral evidence that his firm contracted with Union to provide the maintenance services. He also did some work on the equipment at the taxpayer’s request, for which his firm was paid a fee.
10. The equipment was housed at Union’s premises. It was operated under the supervision of Mr Amjad Bushnaq, who also gave evidence by telephone at the hearing. He said he undertook a variety of tasks on the taxpayer’s behalf. Mr Bushnaq managed the production process and employed the staff, although he acknowledged many of the staff were Union employees. He dealt with technical issues in connection with the design and assembly of the switchboards. Mr Bushnaq said he was employed by the taxpayer, but he accepted during the course of
    cross-examination that he also worked for Union. He described himself as the executive manager of Union’s factory. He said he was paid for his services by Mr Al Ibrahim but some of that money was handed to Union.
11. Mr Al Ibrahim conceded in his oral evidence that he resided in Australia throughout the life of his business (ie, from some time in 1999 to 2002). I have no reason to doubt that evidence, and I accept it. Thereafter, he only visited Jordan on occasion. During cross-examination, he admitted to spending a total of 38 days in Jordan between August 2000 and January 2003. It appears from the documents in Exhibit 1 that the taxpayer was only in Jordan when the business was supposedly launched in 2000 between 14 August and 28 August 2000, and then again between 7 December 2001 and 23 January 2002. He said Mr Bushnaq managed the business. The taxpayer rented office space in Jordan that was also used for storage, but Mr Bushnaq explained in his evidence that he was based at the Union factory and rarely visited the office.
12. The taxpayer’s evidence about the frequency and length of his visits to Jordan must be contrasted with the evidence given by Mr Bushnaq on the same topic.
    While Mr Al Ibrahim accepted that he made a few short visits over a three year period, Mr Bushnaq said the taxpayer visited “regularly” in the years 2001 and 2002. At one point in his evidence, Mr Bushnaq stated the taxpayer would be in Jordan for up to two months at a time during those visits. During cross-examination, however, Mr Bushnaq appeared to retreat from that estimate.
13. The taxpayer said he made modest profits from the business in 2000 and 2001. The contract with Ayesh was not renewed and the relationship with Dana collapsed when Dana failed to pay around $65,000 owed under the terms of the agreement. That created cash-flow problems for the business. The taxpayer was unable to identify new customers – a task made more difficult by the fact that he continued to reside in Australia. Mr Al Ibrahim was also experiencing significant health problems. In 2002, he decided to suspend trading operations. He observed during his evidence that he was hopeful he would be able to resume trading at some point, although he has no plans to do so in the immediate future. He also said Mr Bushnaq took over the machinery under a lease for US$8,000 per year. The taxpayer said those lease payments were made to him in cash. He did not deposit the money into a bank account, explaining that he used it to pay out-of-pocket expenses.
14. Mr Bushnaq said the lease arrangement for the machinery lasted for two years. The machinery has since been placed into storage in Jordan. Mr Bushnaq explained the machinery required repairs and maintenance that would cost around $20,000 before it can be used again.

THE TAXPAYER’S BURDEN OF PROOF

15. Section 14ZZK of the TA Act creates an evidentiary hurdle for the taxpayer. Mr Al Ibrahim must establish that the Commissioner’s assessment is excessive. The reason for the rule is clear enough: it is the taxpayer’s affairs which are in issue, and the taxpayer is usually in the best position to adduce evidence of what went on.
16. I should make a few general remarks at the outset about the evidentiary difficulties that confronted the taxpayer. All of the witnesses gave evidence by telephone. As I have already indicated, telephone evidence presents difficulties when the Tribunal is required to make assessments of credit. Mr Bushnaq and Mr Abdelhamid both required the assistance of interpreters. The taxpayer did not require the assistance of an interpreter and appeared to understand questions he was asked, but I acknowledge English was not his first language. It was also necessary for me to keep in mind that the events in question occurred in Jordan, where the business culture, environment and practices might be significantly different to those which prevail in Australia. Mr Gordon, counsel for the taxpayer, gave one example: he said dealing in large amounts of cash – especially in American currency – was more common in Jordan than in Australia. Mr Gordon also encouraged me to allow for the fact that the events in question happened seven or eight years ago, pointing out that the witnesses’ recollections might be affected.
17. I have kept these matters in mind when considering the evidence, but I am ultimately unable to accept he taxpayer has discharged the onus of proof he bears under s 14ZZK of the TA Act. I acknowledge the taxpayer offered an explanation of what occurred and provided some corroboration in the form of documents recording payments and agreements. I also note the evidence of Messrs Abdelhamid and Bushnaq. But I am still required to critically evaluate the evidence. I must be persuaded that (a) the evidence should be accepted, and (b) that it establishes the Commissioner’s assessment is excessive. I am not persuaded on either point in this case.
18. I begin with my concerns over the amount of time the taxpayer spent in Jordan during the period when he claimed he was running a business. The taxpayer acknowledged he resided in Australia and visited Jordan for a total of 14 days in 2001 and 24 days in 2002. While I accept it is possible to run a business of this nature from a remote location, one would expect to see evidence of arrangements for remote supervision. For example, I would expect to see a chain of emails or other correspondence, recording instructions and exchanging information. There is limited evidence of this nature. This paucity of evidence leads me to question whether or not the taxpayer was conducting his own (or any) business. I would also expect to see more detailed evidence describing the purpose of the rented office space in Amman in the operation of the business. Mr Bushnaq said he rarely went to the office. All of the operations appear to have been conducted out of Union’s premises. The taxpayer himself was rarely present. The taxpayer referred vaguely to the space being used for storage, but it is difficult to see what storage was required. The evidence does not enable me to be satisfied there is a connection between the expenditure on the office space in Amman and the business.
19. Mr Gordon argued that I should not hold the absence of a “paper trail” against the taxpayer. He said that a paper trail might be less common for cultural reasons: businessmen in these circumstances might prefer face-to-face contact (although that could not have occurred here to any great extent given the taxpayer rarely visited Jordan) or at least telephone contact (in which case I would expect evidence in the form of phone records). Mr Gordon added the taxpayer had not been asked for records of many of these contacts or of many other transactions. In those circumstances, he submitted it would be unfair to be critical of their absence. I disagree. Section 14ZZK of the TA Act puts the onus of proof onto the taxpayer. It is up to the taxpayer to provide the evidence required to support his story.
20. I accept there is evidence in the form of written agreements with two customers of orders that were being taken and filled. I also note there is an agreement with Union that suggests the taxpayer was subcontracting work to that company. But the relationship with Union is unclear, as is the relationship with Mr Bushnaq. The fact that the taxpayer’s business appeared to be carried on using Union facilities and staff, was overseen by someone who remained an employee of Union, and catered to Union’s customers – albeit with two exceptions – calls into question whether there was a genuine subcontracting relationship. It also calls into question whether Mr Bushnaq was an employee of the taxpayer whose wages could be claimed as an expense, or whether his services were supplied as part of some other arrangement with Union. Even after the taxpayer acquired his own machinery, the production process continued at Union’s premises and used Union staff. Apart from a few documents in Exhibit 1, the accounts of the taxpayer and the testimonies of the two witnesses, there is limited evidence that the taxpayer was actually conducting a business that could actually be distinguished from Union’s business. I do not deny that the taxpayer may have had some sort of dealings with Union and the witnesses. I also accept that those dealings, however they are described, might have yielded profits. But I am not satisfied that the dealings are as he alleged.
21. Mr Gordon said I should rely on the corroborating evidence of Messrs Bushnaq and Abdelhamid, but I do think I can give their evidence any weight. I was troubled by discrepancies between the stories told by the three witnesses. Mr Bushnaq and the taxpayer had different accounts of the number of customers who placed orders with the taxpayer’s business. Mr Bushnaq thought there were three or four customers, while Mr Al Ibrahim referred to two. That discrepancy might be explained by the passage of time, but it might also be explained by the fact that Mr Bushnaq was unclear about which (if any) customers were customers of the taxpayer’s business as opposed to Union. I also note Mr Bushnaq was unclear about how often Mr Al Ibrahim was physically present in Jordan during the period. In addition, Mr Bushnaq suggested he was reimbursed for regular payments he supposedly made on behalf of the taxpayer. He said the taxpayer reimbursed him in cash in person. But if the taxpayer was only rarely in Jordan, that either did not occur or did not occur often. Mr Abdelhamid’s evidence raised similar questions. He claimed the taxpayer made payments to him in cash at times when the evidence suggests Mr Al Ibrahim was not physically present in Jordan.
22. If more documentation had been provided, and if the taxpayer and his witnesses had been available for cross-examination in person, it is possible that my doubts about the taxpayer’s explanation would be assuaged. I would certainly be in a better position to assess what weight should be given to what the witnesses said. But that did not occur.
23. That leaves me with the Commissioner’s assessment. While I am unsure in the circumstances whether it is right, given the state of the evidence, I am not persuaded it is excessive. It follows that aspect of the objection decision must be affirmed. The deductions claimed in respect of the expenses incurred in connection with the alleged business (including a deduction in respect of the unpaid debt from Dana, the rental expenses and Mr Bushnaq’s wages) should not be allowed.

THE TAX SHORTFALL PENALTIES

24. The Commissioner imposed tax shortfall penalties on the taxpayer because he claimed PAYG withholding credits that had been disallowed. The penalty has been levied at the rate of 25% of the shortfall amount on the basis that the taxpayer failed to take reasonable care.
25. The parties did not adduce much evidence in relation to this issue at the hearing, although the matter is addressed briefly in the taxpayer’s Amended Statement of Facts and Contentions and in the course of the parties’ submissions. I gleaned the following facts from the documents. The taxpayer was a director of three associated companies while being employed by another company which acted as a consultant to the three companies. GlobalTel Pty Ltd, one of the associated companies, and Zaro Consulting Pty Ltd, the consultant, paid the taxpayer a salary or wage. He said he was under the impression that the companies withheld amounts in respect of PAYG as required, and he had sought credits on that basis in his tax return.
26. The taxpayer’s Amended Statement of Facts and Contentions acknowledges that he did not ask to see the PAYG summaries at any point before lodging his return. The Amended Statement of Facts and Contentions also says the taxpayer was not intimately involved with the operation of the companies. He provided operational advice and was not aware of whether the company was meeting its tax obligations. Mr Gordon argued the taxpayer discharged his duties by satisfying himself that a competent financial controller was in place. Mr Gordon claimed the taxpayer should not be held responsible for the failure to meet PAYG obligations given that he had no reason to suspect anything was wrong.
27. The courts have made it clear over a long period of time that directors must, at a minimum, be familiar with the financial position of the company: see, for example, Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 at 956 per
    Tadgell J. The authorities exhibit a particularly stern view of directors who fail to ensure that a company complies with its obligations under the taxation laws: see, for example, Cullen v Corporate Affairs Commission (1989) 7 ACLC 121; see also
    Re Andrews and Australian Securities and Investments Commission [2006] AATA 25. Difficult questions can arise about a director’s responsibility where a company is the victim of fraud or internal mismanagement that was not readily apparent. There are some limits to what directors can be expected to know, especially in larger companies or more complex organisations.
28. As it happens, I do not think it is necessary for me to delve into these larger questions over the taxpayer’s responsibility as a director. The penalty was imposed in respect of the statement in his income tax return that he was entitled to the credits. Given he accepts he did not sight a PAYG statement from either of the companies involved, I do not see how he can escape a finding that he failed to take reasonable care in the preparation of his tax return. Any reasonable person would have required those documents before completing the return, even if the task of completing the return was delegated to an accountant or agent. It follows I agree the Commissioner was right to impose a penalty under s 284-75(1) of Schedule 1 of the TA Act at the rate of 25% of the shortfall amount.

CONCLUSION

29. The objection decisions under review are affirmed.

I certify that the 29 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed:...............................[Sgd]...............................................

Michael Buckingham, Associate

Date of Hearing 12 December 2008

Date of Decision 8 April 2009

Counsel for the applicant Mr S Gordon

Solicitor for the applicant Mallesons Stephen Jaques

Advocate for the respondent Jacqueline McGrath, Australian Tax Office