Brown and Commissioner of Taxation [2010] AATA 829 (26 October 2010)

Last Updated: 27 October 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 829

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2009/4778

TAXATION APPEALS DIVISION		)
	Re		ALLAN BROWN

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Senior Member Bernard J McCabe

Date 26 October 2010

Place Brisbane (heard in Toowoomba)

Decision

The Tribunal affirms the decision under review.

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

CATCHWORDS

TAXATION – income tax assessment and penalty decision – husband employed wife to assist with rental property – deduction claimed for wages and superannuation contribution – whether outgoings were of a domestic nature – whether a genuine employment relationship existed – penalty imposed – inclusion of claims for deductions occurred as a result of a want of reasonable care.

Income Tax Assessment Act 1997 (Cth), s 8-1

Income Tax Assessment Act 1936 (Cth), ss 82AAA, 82AAB, 82AAC

Superannuation Guarantee (Administration) Act 1992 (Cth)

Taxation Administration Act 1953 (Cth), s 14ZZK

REASONS FOR DECISION

26 October 2010

Senior Member Bernard J McCabe

1. Allan Brown (“the taxpayer”) was the owner of a rental property. He says he employed his wife to assist with the paperwork and other issues associated with the property during the 2006-2007 year of income. He claimed a deduction in respect of the wages he paid her and in respect of a large contribution to her superannuation. The Commissioner disallowed the deductions in the objection decision. The matter has now come before the Tribunal.
2. I am not satisfied Mr Brown and his wife have discharged their obligation under s 14ZZK of the Taxation Administration Act 1953 (“the TAA”) to demonstrate that the Commissioner’s objection decision was excessive. The decision is therefore affirmed. I explain my reasons below.

THE FACTS

3. Mr Brown and his wife Lucie have been married for nearly 39 years. Mr Brown was employed as a truck driver for a local business. In his evidence, he said he worked long hours during the year of income in question. He said he was on the road each weekday and on many weekends. Mrs Brown worked for a local egg producer until 2005. Since then, she has worked 3-4 days a week in the family’s fish and chip shop in Nerang. (That business was sold a few weeks before the hearing.) Her son runs the business and she said in her evidence that the taxpayer would often come down to assist in the shop on weekends. Curiously, Mr Brown did not mention in the course of his evidence anything about the business, his wife’s extensive involvement in its operation or any role that he played.
4. Mr Brown purchased a rental property in Pittsworth in 2002 in his own name. It was sold in February 2007. The property was available for rent throughout the time it was in Mr Brown’s hands although there were periods when it was untenanted, including a period of several months in the year of income in question. During that year, the property was managed by a local real estate agent who collected the rent and dealt with the tenants. If there were maintenance requests or any other issues, Mr and Mrs Brown both said the agent would call the Brown residence where Mrs Brown would typically deal with the matter. When it became apparent that Mrs Brown was often in Nerang rather than waiting by the phone at home, she volunteered – almost as an afterthought - that she was also contactable on her mobile phone.
5. The taxpayer and his wife said in oral evidence that Mrs Brown attended the property on a number of occasions during the relevant year to undertake maintenance and cleaning. She also did some gardening and she supervised the work of tradesmen. Most of those visits were during the period in 2006 when the property was untenanted although there may have been other visits during the year of income for other purposes.
6. In addition to undertaking the physical tasks, Mr Brown said his wife also collected the mail from the post office box in town. (The couple lived on a property outside Pittsworth.) It was her job to do that, he explained. Mrs Brown offered a different view. She said either she or her husband collected the mail. She agreed it was her practice to keep records in relation to all of the household administration including those matters relating to the rental property. These records were kept in a filing cabinet in a spare room in their home. Mrs Brown was able to sign cheques drawn on the joint account to pay all of the family bills, including expenses incurred in relation to the rental property. She said her husband dealt with some bills and she dealt with others. Mrs Brown’s evidence left me with the impression that her “job” was not clearly defined. It was certainly not onerous. It was obvious that the few tasks connected to the property were accomplished along with her many other jobs at home and in the course of providing unpaid assistance at the family business in Nerang.
7. Mr Brown said he decided his wife should be paid for the excellent work she was doing in the year of income in question. He said he formed that view without reference to anyone else. He said he believed it was only fair to his wife. He also claimed he had a vague concern that his wife might otherwise have some sort of claim against him in the event that the marriage broke down after nearly four decades as a couple. He insisted that he reached this view before he spoke with Mr O’Brien, the tax agent. It was difficult to determine from his evidence whether the risk of marriage breakdown was of genuine concern to Mr Brown, or if it was merely an explanation that he thought might lend credit to the arrangement he had supposedly entered into with his wife. I note Mr Brown did not appear to have the same concerns about his wife working for many years without pay in the fish and chips shop in which he had an interest. Not that Mr Brown said anything about the fish and chips shop or its ownership or his role or that of his wife in the course of his evidence: that detail was elicited from his wife who was absent from the hearing room during his testimony.
8. The evidence in relation to the fish and chips business was unclear. Mrs Brown said it was run by her son but owned by her husband, and she merely helped out on the basis that it was a family business, and that is what one did. Mr O’Brien, who represented Mr Brown, suggested from the bar table that the business was conducted through a company but he did not tell me the name of the company or identify what role Mr Brown played in its management.
9. The evidence that Mr Brown made an independent decision to employ his wife without speaking to anyone else is inconsistent with the evidence of Mrs Brown, who suggested the employment idea came up in the course of a discussion with their tax agent, Mr O’Brien. I note the statement of Mr O’Brien in the s 37 documents appears to be more consistent with Mrs Brown’s account.
10. I am not persuaded that Mr Brown was genuinely motivated to enter into an employment agreement with his wife because he felt it was fair to her or because he was worried about the consequences if their marriage should fail. That testimony was not consistent with his conduct in relation to the fish and chips business. The discrepancies between his evidence and that given by his wife left me with the clear impression that Mr Brown tailored his evidence to fit what he thought he needed to establish in order to succeed before the Tribunal.
11. Mr O’Brien pointed to a number of steps that had been taken that he said were consistent with the existence of an employment relationship. He noted that money had changed hands in the form of wages (although it was in the form of back-pay, and it was not entirely clear where the money ended up) and that amounts in respect of tax had been withheld and subsequently remitted to the Commissioner. He also pointed to a large employer contribution to Mrs Brown’s superannuation. He added that the taxpayer had been registered as a PAYG employer. I was not told of any payment in respect of workers’ compensation. There was no written contract of employment, although I accept that is not necessary.

ISSUES

12. The taxpayer claimed to have paid his wife $25,000 in wages, reportable fringe benefits and allowances. I do not need to explain how that amount was calculated for present purposes. The question of whether that amount is deductible is determined with reference to s 8-1(1) of the Income Tax Assessment Act 1997 (“ITAA97”). Mr Brown also paid $35,000 into his wife’s superannuation and claimed it was an employer contribution. Deductions in respect of employer superannuation contributions are dealt with under ss 82AAA-82AAC of the Income Tax Assessment Act 1936 (“ITAA36”).
13. Section 8-1(1) of ITAA97 permits a taxpayer to claim deductions in respect of losses or outgoings incurred in gaining or producing assessable income. Section 8-1(2) specifically rules out deductions in respect of losses or outgoings of a private or domestic nature. The Commissioner says the taxpayer’s payments to his wife were of a private or domestic nature.
14. Husbands, wives and other family members may contract with each other but the proximity of the relationship always raises a question over the nature of the relationship. First year law students are familiar with the cases that distinguish between relationships between family members that were intended to be legally enforceable and those that were never intended to be legally binding. A similar inquiry is required in a case like this.
15. Mr Brown’s claim that he was motivated to formally employ his wife because he was worried about the prospect of a marriage breakdown would certainly be strong evidence in favour of the conclusion that this was a genuine relationship that was intended to be legally enforceable – if I believed him. But I am not persuaded that was his motivation, for reasons I have already explained.
16. I was left with the clear impression that the taxpayer was prepared to do what Mr O’Brien recommended in order to secure a tax deduction. I am not persuaded he was attempting to enter into a genuine employment relationship with his wife, nor that the money was paid out to meet a business expense, as opposed to a domestic or private expense. It is not clear to me that he did anything other than shuffle some money between accounts, commission some paperwork and talk about employing his wife in order to achieve a tax advantage that was not in truth available to him. At any rate, I am not satisfied the Commissioner’s assessment was excessive.
17. I would reach a similar view in relation to the claim for a deduction in respect of an employer superannuation contribution. In order to claim a deduction under the relevant provisions of ITAA36 and the Superannuation Guarantee (Administration) Act 1992, the contribution must be made in respect of an employee. It will be apparent I am not persuaded the taxpayer and his wife were engaged in a contract of any kind, much less a contract of employment.
18. In those circumstances, the taxpayer must fail because he has not persuaded me that the Commissioner’s assessment is excessive: s 14ZZK of the TAA.

PENALTIES

19. The Commissioner imposed a penalty at the rate of 25% on the shortfall amount pursuant to Division 284 of Schedule 1 to the TAA. In essence, the Commissioner says the inclusion of claims for deductions that were not allowable occurred as a result of a want of reasonable care.
20. I learned nothing during the course of the hearing that would enable me to conclude the Commissioner was wrong. The claim for deductions should not have been made.
21. I was not provided with any evidence to suggest the imposition of the penalty would be a harsh outcome for the taxpayer. I note the taxpayer has recently been unable to work because of an injury, but I was told nothing else. I therefore see no reason to remit the penalty wholly or in part. I am also unaware of any cogent reasons why the shortfall interest charge should be remitted. Mr O’Brien suggested there may have been some delay in the conduct of the audit and the Commissioner’s other processes, but I am not persuaded that is so.

CONCLUSION

22. I have not made reference to the additional submissions that were filed by the taxpayer’s representative without leave after the hearing had concluded. While the Tribunal could re-open the hearing to consider the additional evidence, I am not satisfied it is appropriate to do so. The taxpayer had ample opportunity to present a case and be heard. The obligation to act fairly has been satisfied. The obligation to deal with the matter quickly and efficiently would be compromised if I were to examine the late material and necessarily provide the Commissioner with the opportunity to respond.
23. The objection decision is affirmed.
    

I certify that the 23 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

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

Patrick MacDonald

Date of Hearing 5 October 2010

Date of Decision 26 October 2010

Advocate for the Applicant Mr D O’Brien, David O’Brien Accountants

Advocate for the Respondent Ms J Kot, ATO Legal Services Branch