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Martinazzo and Commissioner of Taxation [2009] AATA 63; (2009) 72 ATR 184 (30 January 2009)

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Martinazzo and Commissioner of Taxation [2009] AATA 63 (30 January 2009); (2009) 72 ATR 184

Last Updated: 3 November 2010

2009_6300.png

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 63

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2007/2049-2051

TAXATION APPEALS DIVISION

) No 2007/2056-2057

Re
THOMAS MARTINAZZO
ANNA MARTINAZZO

Applicants
And
COMMISIONER OF TAXATION

Respondent

DECISION

Tribunal
Mr A Sweidan, Senior Member

Date 30 January 2009

Place Perth

Decision
The Tribunal affirms the decisions under review.

sgd. Andre Sweidan
Senior Member

CATCHWORDS

INCOME TAX - sale of cranes and associated equipment - whether proceeds correctly included in partnership income - whether applicants liable for administrative penalties - decision under review affirmed


LEGISLATION

Income Tax Assessment Act 1936, ss 90, 92, 284-75(1), 284-75(2), 298-20(1)


CASES
McCormack v Federal Commissioner of Taxation [1979] HCA 18; 79 ATC 4111
Macmine Pty Ltd v Federal Commissioner of Taxation 79 ATC 4133
Gauci & Ors v Federal Commissioner of Taxation [1975] HCA 54; 75 ATC 4257
Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614
Politis v Federal Commissioner of Taxation 88 ATC 5029
Forestwood Pty Ltd v FC of T (1944) 7 ATD 333
Trantwein v Federal Commissioner of Taxation (No 1) [1936] HCA 77; (1936) 56 CLR 63; (1936) 4 ATD 48
Hart v. FC of T (2003) 131 FCR 2003
BRK (Bris) Pty Ltd v. Federal Commissioner of Taxation [2001] FCA 164; 2001 ATC 4111; (2001) 46 ATR 347
Commissioner of Taxation v Archibold Dixon [2007] FCA 1079


REASONS FOR DECISION


30 January 2009
Mr A Sweidan, Senior Member

BACKGROUND

(SEE PARA. 15 BELOW FOR KEY TO ABBREVIATIONS)

  1. The individuals and legal entities relevant to these applications are as follows:
  2. At all relevant times the applicants Thomas Martinazzo and Anna Martinazzo were equal partners in a partnership known as TG & A Martinazzo (‘the partnership’). The partnership had carried on a crane and plant hire business since about 1974, trading as ‘Tom’s Crane & Plant Hire Company’.
  3. The partnership owned various cranes and associated plant and equipment, the details of which are apparently found in a depreciation schedule for the year ended 30 June 1994 (CD p208).
  4. During 1997 a relevant business commenced that was operated by Construction Plant Hire (WA) Pty Ltd (CPH) as trustee for the Martinazzo Family Trust.
  5. On 1 July 1997 Thomas and Anna Martinazzo executed a document described as an Offer, pursuant to which they offered to sell to CPH specified assets of the business carried on by the partnership (not including goodwill and plant and equipment) (Exhibit A5 attachment 1). The partnership retained ownership of plant and equipment (see the depreciation schedule for the year ended 30 June 2001 at CD p49).
  6. At all relevant times Thomas and Anna Martinazzo were the shareholders of CPH. The directors during the relevant period were Thomas Martinazzo, Giovanni Martinazzo (the son of Thomas and Anna Martinazzo) and Marisa Martinazzo (a daughter of Thomas and Anna Martinazzo). On 7 August 2002 administrators were appointed to CPH and on 5 October 2005 it executed a Deed of Company Arrangement (DOCA). (See ASIC search SCD p274 and DOCA at SCD p295).
  7. The crane hire business was said to be often in financial difficulty and was carried on successively during the relevant period by CPH, Man & Materials Hoist Pty Ltd (MMH) and then Crane Rental Pty Ltd as trustee for the Crane Rental Trust (CRT).
  8. At sometime prior to the appointment of administrators to CPH on 7 August 2002, the business commenced to be operated by MMH, trading as Tom’s Cranes (WA) (see Balance Sheet as of June 2002 at GMSD p153).
  9. At all relevant times Thomas and Anna Martinazzo were the shareholders of MMH. During the relevant period the Directors were, at various times, Thomas, Anna, Giovanni and Marisa Martinazzo. On 24 February 2004 administrators were appointed to MMH and on 5 October 2005 it executed a Deed of Company Arrangement (DOCA). (See ASIC search in SCD p286 and DOCA at SCD p303).
  10. It appears that the business commenced to be operated by CRT on or about 1 December 2003 (see General Ledger at GMSD p148).
  11. Cranes and associated plant and equipment of the partnership were used by the relevant operating entity and hired out in the course of the business. The operating entity was charged a fee by the partnership for the use of the cranes and associated plant and equipment. In the year ended 30 June 2002 this fee was $29,916 which was equal to the amount claimed by the partnership as a depreciation expense (see partnership return at GST p63).
  12. Commencing during the 1990s, Thomas and Anna Martinazzo also controlled companies incorporated in Malaysia, including Tom’s Crane (M) Sdn. Bhd. (Tom’s Cranes Malaysia). Cranes and associated equipment were shipped from Australia to Malaysia by the partnership to be used by the Malaysian entities in a crane hire business. As at 13 June 1996 the directors of Tom’s Cranes Malaysia were Thomas and Anna Martinazzo (Exhibit A5 attachment 3).
  13. Thomas Eric Armstrong (‘Mr Armstrong’) has been employed as the bookkeeper for the Martinazzo family since 1980. At all relevant times he was responsible for keeping the books, records and accounts and providing that information to the external accountant for the preparation of tax returns. (Transcript p66.)
  14. Bernard Hoey (‘Mr Hoey’) is a tax agent and a partner in the firm of accountants Burswood Partners which was formerly known as Roper Hoey. He first met and commenced acting on behalf of the Martinazzo family in around June/July 2002 (Witness Statement of Bernard Hoey – Exhibit A6).
  15. The following table is a list of the T documents relevant to both these submissions and those arising from the balance of the related Martinazzo applications heard on 1-2 December 2008 (in which the Tribunal’s decisions are being delivered concurrently), with the abbreviations used in the Tribunal’s decisions:
Volume of T documents
Abbreviation
Reasons for Decision and Relevant Documents for Thomas Martinazzo
TM
Reasons for Decision and Relevant Documents for Anna Martinazzo
AM
Common s.37 Documents for Thomas and Anna Martinazzo
CD
Supplementary Common s.37 Documents for Thomas and Anna Martinazzo
SCD
Statement of Findings on Material Questions of Fact, Evidence, Reasons for Decision and Relevant Documents for TG & A Martinazzo
GST
Reasons for Decision and Relevant Documents for Giovanni Martinazzo
GM
Supplementary s.37 Documents for Giovanni Martinazzo
GMSD
Supplementary s.37 Documents for Giovanni Martinazzo Volume 2
GMSD2

SUMMARY OF ISSUES IN DISPUTE

Crane and frame - year ended 30 June 2002

  1. The issues in dispute in the year ended 30 June 2002 are:

16.1 Whether in calculating the net income of the partnership for the year ended 30 June 2002 pursuant to section 90 of the Income Tax Assessment Act 1936 (ITAA 1936) it is assessable on the amount of $345,000 received from the sale of a Favelle Favco 300D Tower Crane Unit 59 Serial 38 (‘the crane’) and a Wrap Around Climbing Frame for TC Serial 38 (‘the frame’) in the year ended 30 June 2002, and as a consequence the correct amount of the individual interest of each partner in the net income of the partnership assessable pursuant to section 92 of the ITAA 1936.

16.2 Whether the applicants are liable to administrative penalties pursuant to subsection 284-75(1) or alternatively subsection 284-75(2) of the Taxation Administration Act 1953 (TAA), and whether the administrative penalties assessed to the Applicant should be remitted pursuant to subsection 298-20(1) of the TAA.

  1. The income tax returns of Thomas and Anna Martinazzo for the year ended 30 June 2002 were each lodged on 2 January 2004 (SCD pp. 318,333) following the issue of final notices to lodge by the respondent (SCD p319 and pp.331-332). Each returned a partnership distribution from the partnership of $20,000 (TM p26, AM p23). This figure has been described by the tax agent in a letter to the Respondent dated 5 January 2007 as being based on a ‘guesstimate’ of the partnership income ‘based on information we had’ (see GST p167) in circumstances where prosecution action was being pursued for failure to lodge the individual income tax returns.
  2. The partnership return for the year ended 30 June 2002 was lodged on 17 December 2002 (SCD p350) following the issue of final notices to lodge by the Respondent (SCD pp.345-346). The partnership returned income of $29,916 and claimed deductions of an equal amount, giving a net income of nil (GST p64). The partnership return was lodged with a letter dated 9 December 2004 (CD p42) stating that the profit on sale of the crane and the frame was assessable income of MMH, not of the partnership.
  3. Following an audit, the respondent included an amount of $345,000, relating to the sale of the crane and the frame, in the net income of the partnership for the year ended 30 June 2002. The individual interest of each applicant in the net income of partnership pursuant to section 92 of the ITAA 36 was therefore $172,500. Each had returned a partnership distribution of $20,000 and therefore amended assessments were issued to each applicant increasing taxable income by $152,500.
  4. Thomas and Anna Martinazzo each lodged objections dated 4 August 2006 against the amended assessment for the year ended 30 June 2002 (TM p52, AM p49), now taking the position that the crane and frame were assets of Tom’s Crane’s Malaysia and that the partnership had transferred the asset to that entity in 1993. On 15 March 2007 the Respondent disallowed the applicants’ objections and the applicants now seek a review of those decisions by this Tribunal.

Year ended 30 June 2003

  1. As part of the audit the respondent made adjustments to the net income of the partnership for the year ended 30 June 2003, and as a consequence issued amended assessments to Thomas and Anna Martinazzo for that year (TM p50, AM p47). Objections were lodged to those amended assessments and were partially allowed (TM p66, AM p60). Applications were lodged in the Tribunal in respect of the objection decisions.
  2. In the Tribunal the applicants did not pursue the issues that were the subject of the adjustments to the net income of the partnership. However, they raised new issues (Exhibit A5) which were, on 26 November 2008, made the subject of a request to the Tribunal for an extension of grounds of their objections.
  3. In respect of two issues (bad debt and Kobelco crane) the respondent did not oppose the request to extend grounds and the Tribunal ordered that the grounds be extended. In the applicants’ Closing Submissions the bad debt issue has been abandoned.

Kobelco Crane

  1. The issue is whether, in calculating the net income of the partnership for the year ended 30 June 2003, it is assessable on the amount of $22,500 in respect of the sale of a Kobelco Mobile Haudralic Crane Unit 3 1BFI 848 (the Kobelco Crane). Alternatively, whether the partnership is assessable on only 80% of the $22,500.

ONUS OF PROOF

  1. The applicants have the burden of proving that the amended assessments issued by the respondent were excessive: paragraph 14ZZK(b) of the Taxation Administration Act 1953 (TAA).
  2. Paragraph 14ZZK(b) effectively creates a rebuttable presumption that an assessment is not excessive: McCormack v Federal Commissioner of Taxation [1979] HCA 18; 79 ATC 4111, Jacobs J at 4128 and see Gibbs J at 4121.
  3. It is for the taxpayer to rebut the presumption; there is no onus on the Commissioner to show that the assessment is correct: McCormack, above; Macmine Pty Ltd v Federal Commissioner of Taxation 79 ATC 4133.
  4. There is no statutory requirement that an assessment should be sustained or supported by evidence: Gauci & Ors v Federal Commissioner of Taxation [1975] HCA 54; 75 ATC 4257, Mason J at 4261 – (originally in dissent but now accepted as correctly expressing the effect of ss 14ZZK and 14ZZ0 – see Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 624 – 25 and Politis v Federal Commissioner of Taxation 88 ATC 5029, Lockhart J at 5032).
  5. Consequently, the taxpayer does not discharge the onus by merely showing that the Commissioner made an error in the assessment. The taxpayer must positively establish on the balance of probabilities, that the amount is excessive: Dalco, above at 621.
  6. The onus rests on the taxpayer to establish the facts upon which he relies and if it is necessary for him to establish a particular fact in order to displace the assessment he must satisfy the court with respect to that fact: Danmark Pty Ltd v FC of T; Forestwood Pty Ltd v FC of T (1944) 7 ATD 333, Latham CJ at 337.
  7. Consequently, the taxpayer’s case must necessarily fail if the evidence relied upon by him to prove that an assessment is excessive is rejected: Gauci, above, Mason J at 4261.
  8. In assessing the quality (the weight) of the evidence adduced by the taxpayer it will often be important to bear in mind that facts concerning a taxpayer’s income are peculiarly within his or her knowledge. The taxpayer cannot take advantage of inadequate records or recollections: see, for example, the comment of Latham CJ in Trantwein v Federal Commissioner of Taxation (No 1) [1936] HCA 77; (1936) 56 CLR 63 at 87-88; [1936] HCA 77; (1936) 4 ATD 48 at 62-63.

OWNERSHIP OF CRANE AND FRAME

  1. In assessing the amount of $345,000 to the partnership, the respondent contends that the crane and frame were owned by the partnership at the time of the sales to Caelli Constructions Pty Ltd (Caelli).

Assessment

  1. The crane was shown in the partnership depreciation schedules as having been acquired on 1 February 1992, for an original cost of $1, with accumulated depreciation of $1, and a written down value of nil (see depreciation schedules for year ended 30 June 1994 at CD p208, and for year ended 30 June 2001 at CD p49).
  2. The crane was sold to Caelli on 20 May 2002 for an amount of $290,000, plus GST of $29,000. The invoice (number 00000419) was issued by MMH trading as Tom’s Cranes (WA) (CD p67 – see the foot of the invoice) and described the crane as ‘Favelle 300D Tower Crane’.
  3. The frame was sold to Caelli on 19 June 2002. The invoice (number 0000699) was issued by MMH trading as Tom’s Cranes (WA) and the frame is described as ‘Wrap Around Climbing Frame for TC Serial #38’ (CD p68). The invoice also included another frame described as ‘Wrap Around Climbing Frame for TC Serial #770’ (Frame 770). The two frames were sold for $55,000 each plus GST of $11,000.
  4. The accounts of the partnership recorded a profit on sale of the crane and frame of $345,000 (that is, the sum of $290,000 and $55,000). The General Journal for the year ended 30 June 2002 (CD p37) has an entry, under the heading ‘Sale of asset TC 59 Serial 38’, crediting $345,000 to an account called ‘Profit on sale of assets’ with the corresponding debit to ‘Loan TCWA’. There is also a debit to ‘accumulated depreciation’ of $1 and a corresponding credit to ‘plant at cost’.
  5. The entry ‘Loan TCWA’ refers to a loan from MMH to the partnership (see the balance sheet for MMH trading as Tom’s Cranes (WA) at CD p75).
  6. A letter lodged with the partnership return for the year ended 30 June 2002 referred to assets owned by the partnership and sold by MMH to a third party for $379,500 including GST (CD p42). It went on to include a rationale for non-assessability of the profit on sale of the assets to the partnership, advancing the proposition that the profit was assessable to MMH.
  7. A facsimile message from Roper Hoey to the Respondent dated 27 June 2005 attached copies of the invoices and stated ‘in relation to Tax Invoice 0000699, one of the climbing frames belongs to the Tom’s Cranes Malaysia, according to the client. So it is not taxable in the partnership.’ This is clearly a reference to Frame 770.
  8. The respondent did not accept that the crane and frame were owned by or assessable to MMH and included the $345,000 in the net income of the partnership.

Objection

  1. The grounds of the applicants’ objections are:

(a) That the crane and frame were assets of Tom’s Crane’s Malaysia and that the partnership had transferred the asset to that entity in 1993, or alternatively:

(b) A smaller amount may be assessable.

(c) A component of the amount should be treated as a capital gain.

(D) A deduction for a bad debt of $345,000 is allowable.

AAT application

  1. The applicants’ Closing Submissions (applicants’ submissions) contend that the issue of whether the profit on sale of the crane is assessable income of the partnership can be resolved by a determination of the owner of the crane at the time of the sale to Caelli. In support of the contention that the crane was owned by Tom’s Cranes Malaysia at the relevant time the applicants have referred (in the applicant’s submissions and its earlier contentions in Exhibit A5) to the following documents:

(a) Invoice dated 22 November 1993 from CPH to Tom’s Cranes Malaysia for the supply of one FavL 300D tower crane serial No. 59 complete with 16 ton winch and 30 HD tower sections for the lump sum of AU$270,000 (CD p202).

(b) Bill of Lading issued in Sydney on 10 August 1994 for the consignment to Malaysia of 2 cranes including one 300 Favelle Tower Crane Serial No. 59 (CD p203).

(c) Tom’s Cranes Malaysia (Exhibit A5 attachment 4) Shipping importation document issued in Malaysia on 28 September 1994 for 2 cranes including ‘1 Unit of Favelle 300 Tower Crane Serial No. 59’ (CD p205).

(d) Sale and purchase agreement dated 16 January 1996 between Toms Cranes Malaysia (the seller) and United Orix Leasing Berhad (the buyer) for goods/equipment including ‘1 Unit Favelle 300D Tower Crane c/w S/No: 38’, and ‘1 x External Climbing Frame’ for RM 1,261,083.47 (Exhibit A5 attachment 2).

(e) Guarantee and Indemnity dated 16 January 1996 between United Orix Leasing Berhad and Thomas Gaetano Martinazzo made in consideration of United Orix entering into a Lease Agreement with Toms Cranes Malaysia (Exhibit A5 attachment 2).

(f) What appears to be part (Articles 11-31) of a Lease Agreement between Toms Cranes Malaysia (Lessee) and United Orix Leasing Berhad (Lessor) (Exhibit A5 attachment 2).

(g) Acceptance Receipt dated 17 January 1996 from Toms Cranes Malaysia to United Orix Leasing Berhad acknowledging receipt of leased equipment including ‘1 Unit Favelle 300D Tower Crane c/w S/No: 38’, and ‘1 x External Climbing Frame’ (Exhibit A5 attachment 2).

(h) Accounts for Tom’s Cranes Malaysia for the year ended 30 June 1996 (Exhibit A5 attachment 3).

(i) Schedule of plant and machinery of Tom’s Cranes Malaysia (Exhibit A5 attachment 4).

(j) Agreement for the sale of a Favelle Favco M310D Tower Crane Serial No. 770 (Favelle 770 crane) from Hazama Corporation to Tom’s Cranes Malaysia dated 3 April 1996 (CD p213-215).

Giovanni Martinazzo’s evidence

  1. Giovanni Martinazzo was cross-examined in relation to the crane and frame. He thought the partnership ‘bought [the crane] from new’, but did not know how much was paid or when it was bought. In relation to the fact that the crane was recorded in the depreciation schedule for $1, he suggested that it may have been ‘fully depreciated’ or bought for ‘some minimal sum’ at the end of a ‘lease or HP’ contract. (Transcript p19.) He did not know when the frame was purchased and said it ‘might have even been manufactured by Tom’ (Transcript p20).
  2. The crane and a lot of other assets were shipped to Malaysia and went to hire because there was no work in Perth (p21). He thought that the crane was probably owned by Tom’s Cranes Malaysia but he was not sure.
  3. He was aware that it was subject to a finance agreement with United Orix (p22) and later he said it was owned by Tom’s Cranes Malaysia at the time it was sold to Caelli (pp 30, 37-38).
  4. The witness testified that when an asset was sold it was invoiced through the operating company and it was not critically important to know which company owned the asset. The purpose of the sale was to raise money to get the struggling entity out of financial trouble, and the accountant could look at ownership issues when the relevant returns were completed and accounts prepared (pp 24,29-30). He considered that where the proceeds of sale went was not critical as that could be sorted out through loan accounts (p33). When questioned about what else could be looked at to determine ownership he referred to ‘registration papers’ (pp31,33).

Thomas Martinazzo’s evidence

  1. Thomas Martinazzo was cross-examined in relation to the crane and frame (Transcript pp.91-105). He agreed that the partnership initially owned the crane, as early as February 1992 (pp.93, 97). He could not remember who first owned the frame or whether it was purchased or manufactured (p93). The frame was shipped over to Malaysia in 1994 with the crane (p93), to be used by the Malaysian operating entity Tom’s Cranes Malaysia, because there was no work for it in WA (p104).
  2. The witness denied that the partnership still owned the crane because he stated that there was an understanding with Tom’s Cranes Malaysia that it would pay for the crane if it could afford it (p97). Such an understanding was not documented and given his primary role in both the partnership and Tom’s cranes Malaysia, he effectively claimed to have reached an agreement with himself, albeit in two different capacities.
  3. Importantly, the witness conceded that Tom’s Cranes Malaysia had not paid for the crane (p97). Later he conceded that ‘a deal is not a deal until you get paid’ (103). The witness also conceded that if there was a need to use the crane in WA again it would have simply been brought back, ie no-one would have had to buy it back (p97).
  4. In relation to the agreement between Tom’s Cranes Malaysia and United Orix the witness stated that it was security for a loan (p103). On re-examination (p117) he said it was a normal agreement made at the time in KL and after repayment of the loan over 24 months you had a freehold asset back on your books.
  5. It was conceded that an invoice issued by one of the various companies would not show who the owner of the asset was because the operating entity could be acting as a agent for the owner. The witness accepted that this was the case with the invoice for the crane issued by CPH when it was shipped to Malaysia (p100) and the invoices issued by MMH when the crane and frame were sold to Caelli (p102).
  6. The witness agreed that the money from the sale to Caelli was paid to MMH as an agent. When asked whether the partnership had the right to the proceeds of the sale he stated ‘That was not the purpose’, and then ‘Maybe did, I don’t know’ (p102).
  7. When asked what documents would assist in working out who owned an asset at a particular time, the witness responded that ‘the owner is shown on the depreciation schedule’ (p100) and ‘the depreciation schedule is the bible’ (p104). He said that ‘the depreciation schedule shows a dollar’ (p104).

Eric Armstrong’s evidence

  1. Mr Armstrong testified that his understanding was that the crane was owned by the partnership and disposed of by the partnership to Caelli (Transcript p75-76). As regards the frame, he said when the crane was put on the depreciation schedule it may not have shown “plus climbing frame” (p77).
  2. When the partnership wanted to sell an asset, the operating entity at the time would issue the invoice, such as the invoice for the sale of the crane to Caelli by MMH (p77). The purchase price went into the operating entity but was shown as a loan to the partnership (p79). He agreed that a number of assets were sold at that time, in circumstances where an operating entity was going under and a new one beginning to emerge, but rejected the proposition that there was a lack of precision in the records (p79-80).

Applicants’ submissions

  1. The applicants’ submit that the direct evidence of Thomas Martinazzo that the crane was owned by Tom’s Cranes Malaysia is supported by the crane’s transfer to Malaysia, the sale and lease back agreement with United Orix Leasing Berhad, and the schedule of assets of Tom’s Cranes Malaysia (Exhibit A5 attachment 4). The inconsistency with the partnership accounts and depreciation schedule is explained by a submission that the recording of financial transactions was not always complete due to a failure to provide Mr Armstrong with relevant information.

TRIBUNALS’ FINDINGS

  1. In the Tribunal’s opinion the evidence of Thomas Martinazzo in relation to ownership of the crane and frame was vague, inconsistent and unsatisfactory. He was not sure whether there had been a sale from the partnership to Tom’s Cranes Malaysia, particularly given that there had been no payment.
  2. If, as the applicants assert in paragraph 26 of their submissions, that ‘the specific owner of any specific asset within the Martinazzo entities was known only to Thomas Martinazzo and to a lesser extent, Giovanni Martinazzo”, then his understanding of the ownership here is crucial.
  3. The evidence of Thomas Martinazzo that the crane could simply be brought back to WA if work was available without the need to buy it back strongly indicated that there was no sale, but perhaps a loan of the items.
  4. Importantly, Thomas Martinazzo himself testified that the depreciation schedule would show who the owner of an asset was. Further, he was not sure himself whether the partnership was entitled to the proceeds of the sale to Caelli. His evidence was more consistent with the crane and frame having been shipped to Malaysia by the partnership to be hired out by the Malaysian operating entity in accordance with the usual practice where the partnership remained the owner.
  5. The evidence of Giovanni Martinazzo was equally vague and unsatisfactory in displacing the onus of proof in this regard. He was uncertain who bought the crane when it arrived in Malaysia but said Tom’s Cranes Malaysia owned it at the time of the sale to Caelli. This assertion came in the context of a view by him that the ownership issues were not particularly important. He referred to registration papers as being relevant to ownership: however no registration papers have ever been provided in respect of the crane and frame.
  6. The fact that the crane and frame were shipped to Malaysia is clearly not of itself relevant to ownership. The bill of lading (and other shipping documents) is also clearly not a document that of itself can prove ownership of an asset.
  7. It cannot be assumed that simply because Tom’s Crane Malaysia purported to sell the assets to Orix Leasing that it was necessarily the true owner. Given the lack of precision and significance the key players in the Martinazzo group and their advisers at that time gave to documenting issues of ownership, it is reasonably open to draw the conclusion that such an agreement may have been entered into with little or no regard to the issue of ownership of the relevant items.
  8. In relation to the schedule of assets (Exhibit A5 attachment 4) the Applicant contends that item 10 is the crane and frame, and item 12 is the Favelle 770 crane and the Frame 770, noting that there is direct documentary evidence of the purchase of the Favelle 770 crane by Tom’s Cranes Malaysia.
  9. The Tribunal is of the view that the schedule should be afforded little or no weight in relation to ownership of the crane and frame for the following reasons:

66.1 There is no evidence of the status of the document, who it was prepared by or for what purpose. It is not part of the accounts for the year ended 30 June 1996 (Exhibit A5 attachment 4) as it was clearly prepared at a much later date given that it includes assets apparently acquired as late as 2006.

66.2 The crane and frame are included in the document notwithstanding the fact that they were sold a considerable time earlier to Caelli in 2002.

66.3 The fact that the Favelle 770 crane and the Frame 770 were included in the schedule of assets has no relevance to the ownership of the crane and frame. It is not disputed that the former were purchased in Malaysia from Hazama Corporation. The respondent did not assess any profit on sale of the Frame 770 following the accountant’s indication during the audit that it was owned by Tom’s Cranes Malaysia.

  1. Further, in relation to the accounts of the partnership and the applicants’ submission that they were incorrect:

67.1 Mr Armstrong rejected the proposition that there was a lack of precision in the records.

67.2 The crane was included in the partnership depreciation schedule.

67.3 The profit on sale of the crane and frame was recorded in the partnership accounts, as was the corresponding loan to MMH for $345,000, which is also recorded in the MMH balance sheet. In the following year amounts paid to Giovanni Martinazzo and other family members by MMH were offset against this loan account (see GMSD p151 and the Tribunal’s findings in 2007/1166-1167). This was a substantial transaction and profit in the year ended 30 June 2002 that would have further come to notice in the following year.

67.4 when the partnership return was lodged in December 2004 it was stated that the owner of the crane and frame was MMH. This was a further opportunity for the applicants to consider the ownership issue.

67.5 During the audit the respondent was informed that Frame 770 was owned by Tom’s Cranes Malaysia ‘according to the client’. It represented yet another opportunity for the applicants to assert that the other frame on the same invoice was also owned by Tom’s Cranes Malaysia.

67.6 If the crane and frame were disposed of to Tom’s Cranes Malaysia, no evidence has been provided that any balancing charge was brought to account in any income tax return of the partnership.

  1. In summary, the Tribunal finds that the applicants have failed to present a complete, consistent and cogent or any acceptable basis for asserting that the partnership was not the owner of the crane and frame at the relevant time of sale to Caelli in the year ended 30 June 2002. This is clearly a matter within the applicants’ knowledge and they cannot take advantage of their own inadequate records and recollections to discharge the burden of proving that the amended assessments were excessive.
  2. The applicants have also failed to adduce any evidence relating to the calculation of the amount of $345,000 shown as a profit in the accounts and included in the partnership’s net income by the respondent. There is no evidence of the original cost of the crane, the amount of the depreciation claimed as a deduction or of other expenses incurred in respect of the crane or frame (all of which could be relevant in calculating the amount to be included in assessable income as a balancing charge, profit or gain on disposal).
  3. The only evidence of these matters is the depreciation schedule and the accounts of the partnership.
  4. As regards the frame, the evidence is even less satisfactory and goes no further than showing that it was originally owned by the partnership (having been either purchased or manufactured) before being shipped to Malaysia and ultimately sold to Caelli. There is no evidence of its original cost, or of the amount claimed as deductions for depreciation by the partnership.

OWNERSHIP OF KOBELCO CRANE

  1. In the year ended 30 June 2003 a profit of $22,500 on sale of the Kobelco Crane was included by the partnership in its assessable income.
  2. The partnership’s depreciation schedule (GST p50), reveals that the crane was acquired on 31 July 2002 for $40,000 and sold on 19 June 2003 for $62,500 (it is described as ‘Tom Thumb’).
  3. The relevant invoice for the sale to Seacrest Homes dated 19 June 2003, for an amount of $68,750 (including GST of $6,250), was issued by MMH trading as Tom’s Cranes (WA) (GST p48).

Applicants’ submissions

  1. The applicants’ submit that the direct evidence of Thomas Martinazzo that the Kobelco Crane was owned by MMH is supported by the following:

75.1 The Proforma Invoice dated 30 May 2002 issued by CCM Co Ltd to Tom’s Crane & Plant Hire Co, a business registered under the name of MMH (Exhibit A5 attachment 6).

75.2 The Motor Vehicle Licence and Third Party Insurance policy for the Kobelco Crane, which shows it was registered in the name of MMH (Exhibit A5 attachment 7).

75.3 The Kobelco Crane was incorrectly recorded as a partnership asset in the depreciation schedule.

  1. Alternatively the applicants submit that the partnership is only assessable on 80% of the $22,500, relying on a purported agreement that the partnership was entitled to only 80% of the proceeds and the selling entity (MMH) was entitled to retain the balance (see ‘Minutes of Discussion between Tom and John Martinazzo sorting out issues, challenges and resolutions going forward 10 July 2002’ at CD p271).

TRIBUNAL’S FINDINGS

  1. Thomas Martinazzo’s evidence about the ownership of the Kobelco crane was again extremely vague and unsatisfactory. He was uncertain whether MMH was the owner or acting as an agent, and whether or not the partnership owned the asset. When asked whether he could assist with working out who owned the asset he said ‘I can’t remember’. (Transcript pp.114-115.)
  2. Giovanni Martinazzo stated that the Kobelco crane was not purchased by the partnership and that the partnership had not purchased assets since around 1997 (Transcript pp 55, 63). He claimed that it was purchased by the trading entity that imported and registered it (Transcript pp 54).
  3. In relation to the invoice issued by CCM (which says the Kobelco Crane was sold to ‘Mr John Martinazzo Tom’s Crane & Plant Hire Co’), he stated that the business name Tom’s Crane & Plant Hire Co was not owned by the same company that owned Tom’s Cranes (WA) and he didn’t know who owned it. This contradicts the applicants’ submission that the business name was owned by MMH as they claim that various invoices indicate that MMH trades as Toms Cranes (WA) (eg. CD pp. 67-68, GST pp. 43-44, 48-49).
  4. There is evidence indicating that Tom’s Crane & Plant Hire Co is a trading name used by CPH (see Exhibit A5 attachment 1, GST p45).
  5. Mr Armstrong said MMH trading as Tom’s Cranes (WA) issued the invoice because it was the operating entity at the time. The asset was owned by the partnership. (Transcript pp 81-83).
  6. However the mere registration of the Kobelco Crane in the name of MMH does not determine the issue of ownership. Registration in the name of MMH is consistent with MMH being the operating entity that bears all expenses associated with carrying on the crane hire business.
  7. The evidence reveals that the applicants do not know with any certainty which entity owns the Kobelco Crane. Evidence adduced suggesting that it was owned by MMH is contradicted by the partnership’s depreciation schedule in particular and no satisfactory explanation has been provided.
  8. The Tribunal finds therefore that the applicants have not discharged the burden of proof (section 14ZZK(b) of the TAA), in particular they have not established that the Kobelco Crane was not owned by the partnership and disposed of by MMH on its behalf in accordance with the common practice of the group.
  9. The Tribunal also finds that there was no agreement entered into on or about 10 July 2002 that the selling entity was entitled to 20% of the proceeds of the sale of assets owned by the partnership.
  10. In cross-examination Mr Hoey agreed that the only written reference to this alleged agreement (CD p271) were what appeared to be minutes from a meeting that was ‘probably’ on 10 July 2002. He conceded that these recorded ‘fairly informal discussions’, and that there was nothing else to reflect the fact that the agreement was actually put into place by anyone at any time (Transcript pp126-128).

BASIS FOR ASSESSMENT – CRANE AND FRAME, KOBELCO CRANE

  1. The Tribunal finds that the amounts of $345,000 in respect of the crane and frame, and $22,500 in respect of the Kobelco crane, are both assessable income to the partnership as a balancing adjustment pursuant to subsection 40-285(1) of the ITAA 97.
  2. The Tribunal notes that the respondent does not contend that the amounts are assessable as ordinary income pursuant to section 6-5 of the ITAA 97.

DIVISION 40 – CAPITAL ALLOWANCES

CRANE AND FRAME

  1. Division 40 of the Income Tax Assessment Act 1997 (ITAA 97) provides for a uniform capital allowance system. It was introduced into the ITAA 97 with effect from 1 July 2001 by the New Business System (Capital Allowances) Act 2001. Formerly provisions dealing with deductions for the decline in value of a depreciating asset were contained in Division 42 of the ITAA 97, and prior to 1 July 1997 in the Income Tax Assessment Act 1936 (ITAA 36).
  2. The Income Tax (Transitional Provisions) Act 1997 (ITTPA 97) contained in Division 42 contains provisions dealing with the transition from the ITAA 36 to Division 42 of the ITAA 97. Section 42-6 of the ITTPA 97 is the general transition provision. The effect of section 42-9 of the ITTPA 97 is to treat amounts that you have deducted or can deduct under the depreciation provisions in ITAA 36 as being depreciation deductions under Division 42.
  3. The New Business System (Capital Allowances – Transitional and Consequential) Act 2001 relevantly amended the ITTPA 97 to facilitate the transition to Division 40. (The ‘former Act’ is defined in subsection 40-10(1) of the ITTPA 97 as ‘Division 42 of the Income Tax Assessment Act 1997’. The ‘new Act’ is defined in subsection 40-10(2) as ‘Division 40 of the Income Tax Assessment Act 1997 as amended by the New Business System (Capital Allowances) Act 2001 and the New Business System (Capital Allowances – Transitional and Consequential) Act 2001’.)
  4. Balancing adjustments are the subject of Subdivision 40-D of the ITAA 97. Subsection 40-285(1) provides as follows:

40-285(1) An amount is included in your assessable income if:

(a) a * balancing adjustment event occurs for a * depreciating asset you * held and:

(i) whose decline in value you worked out under Subdivision 40-B; or

(ii) whose decline in value you would have worked out under that Subdivision if you had used the asset; and

(b) the asset's * termination value is more than its * adjustable value just before the event occurred.

The amount included is the difference between those amounts, and it is included for the income year in which the balancing adjustment event occurred.

  1. Although the crane and frame were acquired before 1 July 2001, subsection 40-285(1) can apply to include an amount in assessable income, as the effect of either of the following provisions is that Division 40 applies:

93.1 Subsection 40-285(4) of the ITTPA 97 provides that Division 40 applies to a balancing adjustment event that occurs on or after 1 July 2001 for a depreciating asset you hold if you held the asset on that day. The crane and the frame were partnership assets held on 1 July 2001. Therefore Division 40 of the ITAA 97 applies to a balancing adjustment event that occurs on or after that date.

93.2 Pursuant to subsection 40-10(1) of the ITTPA 97, Division 40 will apply if you have deducted or can deduct an amount under the former Division 42 and you hold the plant at 1 July 2001. The crane and the frame were partnership assets held on 1 July 2001 and the partnership deducted or can deduct an amount under the former Division 42. As noted above, the effect of section 42-9 of the ITTPA 97 is to treat amounts that you have deducted or can deduct under the depreciation provisions in ITAA 36 as being depreciation deductions under Division 42. The partnership’s depreciation schedule indicates that $1 was deducted under the depreciation provisions in ITAA 36 in respect of the crane. While there is no evidence of the original cost of the frame or the amount of depreciation deducted, the reference is to amounts you ‘can deduct’ and it is clear that the partnership could have deducted amounts in respect of the frame under ITAA 36 and the former Division 42.

  1. Section 40-295 deals with the meaning of a balancing adjustment event. Paragraph 40-295(1)(a) provides that a balancing adjustment event occurs for a depreciating asset if you stop holding the asset. The crane and frame were partnership assets at the time of the sales to Caelli, and at that time the partnership stopped holding the assets.
  2. Subsection 40-30(1) provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. The crane and frame are clearly depreciating assets.
  3. Section 40-40 deals with the meaning of ‘hold a depreciating asset’. Item 7 provides that a depreciating asset that is a partnership asset is held by the partnership and not any particular partner. The crane and frame were partnership assets.
  4. An amount is only included in assessable income under subsection 40-285(1) if the decline in value has been worked out under Subdivision 40-B (or would have been worked out under this Subdivision had the taxpayer used the asset). Subsection 40-285(1) of the ITTPA 97 provides as follows:

Paragraphs 40-285(1)(a) and (2)(a) of the new Act have effect in relation to a depreciating asset that you held at 1 July 2001 as if amounts you have deducted or can deduct for the asset under the former Act or the Income Tax Assessment Act 1936 were part of the asset's decline in value under Division 40.

  1. The partnership held the crane and frame at 1 July 2001. The amounts it deducted or can deduct for these assets under the ITAA 36 or the former Act (Division 42 of the ITAA 97) are part of the decline in value under Division 40 for the purposes of paragraph 40-285(1)(a) of the ITAA 97.
  2. An amount is only included in assessable income under subsection 40-285(1) if the asset’s termination value is more than its adjustable value just before the event occurred. Section 40-300 deals with the meaning of termination value. The termination value of a depreciating asset is worked out as at the time the balancing adjustment event occurs and is the amount specified in the relevant item in the table in subsection 40-300(2) if such an item applies, or otherwise the amount taken to have been received under section 40-305. The table in paragraph 40-305(1)(b) includes: in item 1, where you receive an amount, the amount; and in item 3, where you are granted a right to receive an amount, the amount of the right.
  3. The termination value of the crane and frame were the amounts of $290,000 and $55,000 respectively, received by MMH from Caelli on behalf of the partnership (paragraph 40-305(1)(b) - item 1). Alternatively paragraph 40-305(1)(b) - item 3 applies. As a consequence of the sale of the assets by MMH on its behalf the partnership was ‘granted a right to receive an amount’, the amount of that right being a total of $345,000.
  4. Section 40-85 deals with the meaning of adjustable value (and opening adjustable value) of a depreciating asset. The adjustable value of a depreciating asset broadly represents so much of the cost of the asset at a particular time as is not yet declined, and so provides the starting point for further decline calculations and for balancing adjustments. The adjustable value of the crane is nil according to the partnership depreciation schedules. The assessments are based on the adjustable value of the frame being nil and no evidence has been adduced to show this is incorrect.
  5. The amount included is the difference between the termination value and adjustable value. In the case of the crane and frame, the difference is $290,000 and $55,000 respectively. The total of $345,000 is included in the net income of the partnership in the year ended 30 June 2002 when the balancing adjustment events occurred.
  6. Accordingly the Tribunal finds that each applicant was correctly assessed on his/her individual interest in the net income of the partnership pursuant to section 92 of the ITAA 1936 and the respondent’s objection decisions in respect of the year ended 30 June 2002 are affirmed.

Kobelco Crane

  1. The amount included by the partnership in assessable income in respect of the sale of the Kobelco Crane was $22,500. The Tribunal finds that this amount was properly included as a balancing adjustment pursuant to subsection 40-285(1) of the ITAA 97. (The transitional provisions are not relevant as the Kobelco Crane was acquired after 1 July 2001 when Division 40 of the ITAA 97 came into effect.) Accordingly the amount assessed as the individual interest of each applicant in the net income of the partnership pursuant to section 92 of the ITAA 1936 was correct and the Respondent’s objection decisions in respect of the year ended 30 June 2003 are affirmed.

CAPITAL GAINS TAX

  1. In the grounds of their objections the applicants have an alternative ground that a component of the $345,000 should be treated as a capital gain. The Tribunal finds that the capital gains that arose on the disposal of the crane and frame are to be disregarded pursuant to subsection 118-24(1) of the ITAA 97 because the decline in value of the assets was worked out under Division 40.

ADMINISTRATIVE PENALTY

  1. Division 284 of Schedule 1 to the TAA deals with administrative penalties for false or misleading statements, unarguable positions and schemes. It applies from 1 July 2000, and in respect of income tax matters for the 2000-01 and later income years.
  2. Relevantly, Division 284 imposes penalties where an entity makes a statement which is false or misleading in a material particular (subsection 284-75(1)) or takes a position under an income tax law that is not reasonably arguable (subsection 284-75(2)).

False or misleading statement - recklessness

  1. Subsection 284-75(1) applies where an entity or its agent makes a statement to the Commissioner, the statement is false or misleading in a material particular whether because of things in it or omitted from it, and there is a shortfall amount as a result of the statement. In this case it is clear that each of the applicants, or their agent, made a false or misleading statement in the return for the year ended 30 June 2002 by understating their share in the net income of the partnership assessable pursuant to section 92 of the ITAA 36. As a result there was (for each applicant) a shortfall amount pursuant to item 1 of the table in subsection 284-80(1).
  2. The amount of the penalty is determined pursuant to section 284-85. The base penalty amount is worked out using the table in subsection 284-90(1). Where the shortfall amount results from ‘recklessness by you or your agent as to the operation of a taxation law’, the base penalty under item 2 of the table is 50% of the shortfall amount. The applicants’ penalties were worked out under item 2 to be $35,549.25 (Thomas Martinazzo documents p35) and $13,874.55 (Anna Martinazzo documents p32).
  3. The respondent’s view on the meaning of ‘recklessness as to the operation of a taxation law’ is set out in Miscellaneous Tax Ruling MT2008/1 and the Tribunal agrees with that view. Recklessness connotes conduct that goes beyond mere carelessness or inadvertence by displaying a high degree of carelessness. Dishonesty is not an element of establishing recklessness. It is essentially an objective test and the actual intention of the entity is of no relevance.
  4. Behaviour will indicate recklessness where it falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity. Although the test for determining whether recklessness is shown is the same as that applied for testing a want of reasonable care (see paragraphs 124 - 125 below), it is the extent or degree to which the conduct of the entity falls below that required of a reasonable person that underscores a finding of recklessness.
  5. The Full Federal Court in Hart v. FC of T (2003) 131 FCR 2003; [2003] FCAFC 105 (Hart) at paragraphs 33 and 43 endorsed the following comments of Cooper J in BRK (Bris) Pty Ltd v. Federal Commissioner of Taxation [2001] FCA 164; 2001 ATC 4111; (2001) 46 ATR 347 (BRK) at paragraph 77:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, and a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.

  1. In Hart the Full Federal Court held that a claim for a tax deduction was so tenuous that it was only explicable on the basis of gross negligence in propounding the claim. A reasonable tax agent would have foreseen the significant risk that the claim for the deduction was highly likely to involve an incorrect application of the law. In the circumstances, disregarding this risk equalled recklessness.
  2. BRK essentially concerned a false claim that certain beneficiaries had a present entitlement to trust income. Cooper J inferred from the evidence that there was no attempt by the agent to ascertain the correct position and concluded at paragraph 80 that when the income tax returns were prepared, the agents:

‘...were indifferent as to whether or not the statements as to the distribution of income contained in the returns were correct.’

  1. In this case the applicants’ income tax returns for the year ended 30 June 2002 were not lodged until 2 January 2004 following final notices from the Respondent. The amount included as the partnership distribution was $20,000, described by the tax agent as a ‘guesstimate’. The partnership return was not lodged until 17 December 2004 (again following a final notice) and had a net income of nil, with a ‘rationale’ of why no amount relating to the profit on sale of the crane and frame was assessable (although the profit was recognised as such in the accounts of the partnership). That rationale involved the proposition that there had been a ‘deemed disposal’ of the crane and frame from the partnership to MMH and concluded that MMH was assessable on the profit on sale of the crane and frame. This proposition is no longer advanced on behalf of the applicants.
  2. In these circumstances the Tribunal finds that the behaviour of the tax agent was more than merely careless. A reasonable tax agent in the Tribunal’s opinion would have foreseen the significant risk that: when the individual tax returns were lodged, the amount returned as the partnership distribution was incorrect; and further when the partnership return was lodged that the rationale for not including the profit on sale of the crane and frame in the net income was highly likely to involve an incorrect application of the law. In the Tribunal’s view this behaviour fell significantly short of the standard of care expected of a reasonable tax agent and amounts to recklessness.
  3. The Tribunal accordingly finds that the applicants are each liable to the administrative penalty (of 50% for recklessness) imposed in the respective notices of assessment and liability to pay penalty pursuant to subsection 284-75(1).

Remission pursuant to subsection 298-20(1) of the TAA

  1. Subsection 298-20(1) of the TAA provides that ‘the Commissioner may remit all or a part of the penalty’.
  2. The TAA imposes the penalty and the respondent (and therefore the Tribunal) then has a discretion to remit conferred by subsection 298-20(1) (see Commissioner of Taxation v Archibold Dixon [2007] FCA 1079).
  3. The Tribunal is of the view that there is no basis for any remission of the penalties. On the contrary, the following factors in the Tribunals’ opinion point to remission being inappropriate:

120.1 The amount involved was large in comparison with the other assessable income derived by the partnership in the year ended 30 June 2002.

120.2 The evidence before the Tribunal showed that the applicants have a poor compliance record: income tax returns for the year ended 30 June 2002 and subsequent years were lodged late following demands for lodgement made by the respondent; and both were successfully prosecuted for failure to lodge the return for the year ended 30 June 2003. There is also a poor compliance record for lodging partnership returns.


DECISION

  1. The Tribunal affirms the decisions under review.

I certify that the 121 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member


Signed: sgd. June Rainey

Associate


Date/s of Hearing 1 and 2 December 2008

Date of Final Submissions 19 December 2008

Date of Decision 30 January 2009

Counsel for the Applicant Mr P Bevilacqua

Solicitor for the Applicant Butcher Paull and Calder

Counsel for the Respondent Ms L Black

Solicitor for the Respondent Mr M Vincent

ATO Legal Services Branch


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