The Taxpayers and Commissioner of Taxation [2011] AATA 33 (21 January 2011)

Last Updated: 27 January 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 33

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2007/1955

TAXATION APPEALS DIVISION		) No 2007/1956-1961 No 2007/1964 No 2007/1966-1969 No 2007/2905-2910
	Re		THE TAXPAYERS

Applicants

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr A Sweidan, Senior Member

Date 21 January 2011

Place Perth

Decision

The Tribunal: 1. varies the objection decisions under review so that in relation to : 1.1 The applicant taxpayer, Mr P, the amended income tax assessments for the 1999, 2000 and 2001 income years be cancelled; and 1.2 The applicant taxpayer, ST, the Business Activity Statements (BAS) for the period ending September 2000 (in respect of both primary tax and penalty), and the BAS for the periods ending December 2000, March 2001, June 2001 , September 2001, December 2001, March 2002 and June 2002 (in respect of the imposition of penalty only) be cancelled; 2. Remits the matters referred to in 1.1 and 1.2 above to the respondent to issue appropriate fresh amended assessments, Business Activity Statements and/or penalty notices to the relevant taxpayers; and; 3. Otherwise affirms all of the objection decisions under review.

...(sgd) Mr A Sweidan...........
Senior Member

CATCHWORDS

Income Tax – GST – whether applicants have discharged onus of proof – whether penalties appropriately imposed – decisions under review varied in part and otherwise affirmed

LEGISLATION
Taxation Administration Act s14ZZK (a) and (b), s284-75(1)

CASES
FCT v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 621
Vadesz v Commissioner of Taxation [2006] AATA 682
Gauci & Ors v FCT [1975] HCA 54; (1975) 135 CLR 81
Docker v Commissioner of Taxation [2005] AATA 1180; [2005] ATC 2404
Eldridge v FC of T [1990] FCA 369; (1990) 90 ATC 4907
Gallo v Dawson [1990] HCA 30

REASONS FOR DECISION

21 January 2011	Mr A Sweidan, Senior Member
BACKGROUND

1. The applicants are two associated companies “ST” and “SM” and their director, Mr P who seek review by this Tribunal (AAT) of a number of objection decisions made by the Commissioner in respect of GST, income tax and penalties as more fully set out below. Mr P represented all of the applicants at the hearing.

ONUS OF PROOF

2. On review by the AAT, an applicant in taxation decisions is limited to the grounds stated in its taxation objection: s 14ZZK(a) Taxation Administration Act (TAA). Further, it bears the onus of establishing that the assessment is excessive: s 14ZZK(b) TAA. In effect this amounts to a rebuttable presumption that the assessment is not excessive.
3. The question for determination is whether the amount assessed is wrong. The burden on the applicant is two-fold: to prove that the assessment is excessive and to prove what the correct assessment ought to be.
4. The burden is not necessarily discharged, for example, by showing an error by the Commissioner in forming a judgement as to the amount of the assessment: FCT v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 621; Vadesz v Commissioner of Taxation [2006] AATA 682 at [31].
5. There is no onus on the respondent to show that the assessment is reasonable or supported by evidence: Gauci & Ors v FCT [1975] HCA 54; (1975) 135 CLR 81 @ 89 per Mason J:

The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.

6. It is not open to a taxpayer to complain in circumstances where the quantification of an assessment is complicated by the failure on its part to keep accurate records of account: Docker v Commissioner of Taxation [2005] AATA 1180; [2005] ATC 2404.
7. Whilst not a court, and hence not a forum where pleadings and the rules of evidence strictly apply, in considering the application the Tribunal is confined in its inquiries and deliberations by the taxpayer’s objections and must act upon the evidence placed before it: Eldridge v FC of T [1990] FCA 369; (1990) 90 ATC 4907 at 4921.

PENALTIES

8. In assessing penalty pursuant to s 284-75(1) TAA, and in determining whether any remission should be granted, the respondent and hence the Tribunal looks to those matters which are set out in PS LA 2006/2 and which are thereby provided as a general guide to all taxpayers and their advisors. In this way the respondent provides administrative guidance as to how penalty decisions will be made and the factors which may ameliorate a penalty decision. It is clearly of particular importance given the nature and role of the respondent that there is fairness, consistency and transparency of approach, this being reflected in both PS LA 2006/2, the Taxpayers’ Charter and the ATO Compliance Model.
9. The same onus rests on an applicant in respect to penalty as it does in respect to substantive issues.
10. For the reasons which follow the Tribunal finds that the applicants have comprehensively failed to discharge the onus which rests on them.

THE APPLICATIONS

11. Over fifty objections were filed in total by the applicants.
12. By letter dated 8 October 2007 addressed to the Tribunal, certain concessions were made by the Commissioner. The matters identified in that letter were not the subject of evidence. The Tribunal has accordingly varied the objection decisions as set out in its decision to reflect the concessions made in that letter.
13. The matters remaining before the Tribunal consist of:

(a) WT 2007/1955 – ST’s applications regarding assessments for GST liability and penalties for the periods;

(b) WT 2007/1956-1961 – ST’s applications regarding income tax assessments for the years ending 2000 to 2004;

(c) WT 2007/1966-1969 – SM’s applications regarding income tax assessments for the years ending 2000 to 2004;

(d) WT 2007/1964 – SM’s applications regarding assessments for GST liability and penalties for the periods between July 2000 to June 2004; and

(e) WT 2007/2905-2910 – Mr P’s applications regarding his personal income tax assessments and penalty assessments for the years ending 30 June 2002, 30 June 2003 and 30 June 2004.

14. In application 2007/1956-61, leave was granted to enable ST to argue that the assessment as to income tax in 2002 was wrong in respect to the disallowing of an interest deduction of $401,072 because it was claimed that the approach adopted by the respondent was inconsistent with the approach adopted by him in assessing the 2001 and 2003 years. The relevant ground is set out in paragraphs (c) and (d) on the last page of the letter at the commencement of exhibit A6. The Tribunal rejects this assertion.

CONDUCT OF THE HEARING

15. The applications were initially listed for three days commencing on 3 May 2010. A further five days commencing 25 October 2010 were then listed and on 29 October 2010 a further two hearing days were allocated. The matter was then listed for oral submissions on 15 December 2010, on which date the hearing concluded.
16. The Tribunal notes that the proceedings were substantially delayed by the applicants’ conduct comprising in interalia numerous failures to comply with orders made as to the filing of documents and the provision of information to the respondent and the Tribunal, a failure to review the s 37 documents prior to October 2010, a failure to obtain transcripts to prepare for re-examination, arranging an alternative appointment for one of the hearing dates despite applicants’ agreement to the listing of these proceedings on that date, as well as other delays.
17. Given Mr P’s standing as a senior Perth businessman and his extensive experience as an accountant and business advisor, the Tribunal is of the view that the applicants’ approach to the Tribunal was in many respects unacceptable and came close to being contemptuous. Notwithstanding this the Tribunal granted the applicants considerable latitude due to their not having legal representation at the hearing.
18. The Tribunal is of the view that Mr P’s lack of legal knowledge and training does not excuse his conduct; lack of legal knowledge is a misfortune, not a privilege: Gallo v Dawson [1990] HCA 30 at [3].
19. The Tribunal comments further below on various other matters relating to Mr P’s conduct during the hearing.

WITNESSES

Mr P

20. The only witness for the applicants was Mr P, the sole director of SM and ST and an applicant in his own right. He gave evidence in chief by way of seven witness statements annexing numerous documents.
21. Mr P was cross-examined. During the course of cross-examination he was frequently aggressive and rude to both Counsel and the Tribunal. On numerous occasions he refused to answer questions on issues that he did not regard as relevant, he shouted at and attempted to engage in argument with Counsel, he failed to listen to questions and made various allegations and assertions of inappropriate behaviour by the respondent’s audit officer Mr Bei which were not supported by any other evidence before the Tribunal and were not put to Mr Bei when he gave evidence. Mr P’s behaviour demonstrated at best for him an immature attitude to the Tribunal and its processes. It is the view of the Tribunal that Mr P was in many respects deliberately obstructive.
22. Overall, Mr P’s attitude in the conduct of the proceedings appears to the Tribunal to be reflective of his general attitude to his taxation and financial affairs: his failure to comply with his taxation obligations, his failure to keep proper records, his use of ST and SM funds for private purposes, his reckless attitude to “bouncing” cheques meant to pay the respondent for his many obligations and his habit of promising to meet deadlines which promises were seldom kept.
23. It is clear to the Tribunal that Mr P lacks insight into the relevance of his truthfulness and honesty. He did not understand that his integrity was in many respects at the core of the proceedings in circumstances where, as shown by the evidence here, numerous amended BAS and Income Tax returns with different figures had been filed for each of the entities and numerous unfulfilled promises were made to provide documents and substantiation.
    
24. The Tribunal finds that overall Mr P was neither honest nor frank in his dealings with the respondent and in the course of these proceedings and was not a credible witness.
25. On 25 October 2010 the hearing resumed after an adjournment of some 4½ months. During that period the applicants had failed to obtain a copy of the transcript, (despite being advised by the Tribunal as to its availability) and also failed to retrieve the s 37 documents which Mr P had placed in storage some time previously. As a consequence of these failures, Mr P was not in a position to commence his re-examination on Monday 25 October 2010 and much of that hearing day was wasted so as to provide Mr P with a copy of the transcript and allow him the opportunity to review it to prepare his re-examination.
26. On resumption on 26 October 2010, Mr P declined the opportunity for re-examination, despite it being offered to him on several occasions. In doing so, the applicants effectively elected to not put on evidence in respect to the many unanswered issues which were dealt with in cross-examination.
27. No other witnesses were called by the applicants. In these circumstances the Tribunal can only act on the evidence before it.

Claude Bei

28. Mr Bei was the only witness called by the respondent. He was the auditor who undertook the audits of ST and SM, which resulted in the assessments issued against the applicants, which are the subject of these applications.
29. Mr Bei had filed five witness statements, being:

(a) exhibit R1 – witness statement in ST’s applications 2007/1956-1961, annexing audit report in respect to ST;

(b) exhibit R3 – witness statement in Mr P’s applications 2007/2905-2910, annexing audit report in respect to Mr P;

(c) exhibit R4 – witness statement in ST’s application 2007/1955;

(a) exhibit R5 – witness statement in SM’s application 2007/1964; and
(b) exhibit R6 – witness statement in SM’s applications 2007/1966 – 1969.

30. In the Tribunal’s view Mr Bei was a careful witness who attempted to answer to the best of his ability some confused and confusing questioning by Mr P. Mr P’s conduct throughout the cross-examination was at times inappropriate including involving shouting at Mr Bei, commenting unnecessarily on the evidence, repeatedly putting the same question to the witness and failing to allow Mr Bei the opportunity to answer the question.
31. Mr Bei’s concessions that his audit report for ST could have been clearer were in the Tribunal’s opinion appropriate and reasonable concessions. They do not detract in any way from the validity of the assessments and the amounts owed by the taxpayers pursuant to them, absent satisfactory evidence from the applicants.
32. It is noteworthy that in the course of his cross-examination of Mr Bei none of the allegations as to inappropriate behaviour, which allegations featured in Mr P’s cross-examination, were put to Mr Bei. Nor was Mr Bei cross-examined about his audit conclusions in respect to Mr P’s personal affairs, or the basis of the penalty decision, including the hindrance uplift.

S 37 DOCUMENTS

33. The applicants take issue with the content of the s 37 or T documents provided to the Tribunal by the respondent. That issue was first raised by Mr P on the morning of Wednesday 27 October 2010, being the sixth day of the hearing after he had been granted an adjournment on the morning of 26 October 2010 to enable him to uplift the Tribunal’s copies of the documents and obtain copies. The first the Tribunal was aware of this issue was when Mr P raised it that morning. No attempt was ever made by Mr P, or any of the applicants’ two prior firms of legal advisors to raise the issue with the Tribunal or the respondent prior to 27 October 2010.
34. In August 2007 15 volumes of these documents, each volume comprising approximately 250 pages, were provided to the applicants. A supplementary 16th volume of approximately 20 pages was provided pursuant to leave granted by the Tribunal, in May 2010.
35. Mr P’s witness statements annex numerous documents, many of which are in addition to the documents in the 16 volumes. Additionally, further opportunities were provided to applicants to provide any other documents they sought to rely on, and further documents were filed by them (late) in July 2010, pursuant to orders made in May 2010, being exhibit A6.
36. It is not disputed by the respondent that the s 37 documents do not contain every document inspected by the respondent. It is also not disputed that the respondent has an obligation under the Administrative Appeals Tribunal Act (AAT Act) to provide documents. However that obligation is substantially modified by s 14ZZF(1) TAA. The relevant provisions are:

s 37(1) AAT Act

Subject to this s, a person who has made a decision that is the subject of an application for review by the Tribunal must, within 28 days after receiving notice of the application (or within such further period as the Tribunal allows), lodge with the Tribunal 2 copies of:

(a) a statement setting out the findings on material questions of fact, referring to the evidence or other material on which those findings were based and giving the reasons for the decision; and

(b) every other document or part of a document that is in the person's possession or under the person's control and is relevant to the review of the decision by the Tribunal.

s 14ZZF(1) TAA

S 37 of the AAT Act applies in relation to an application for review of a reviewable objection decision as if:

(a) the requirement in subs (1) of that s to lodge with the Tribunal such numbers of copies as is prescribed of statements or other documents were instead a requirement to lodge with the Tribunal such numbers of copies as is prescribed of:

(i) a statement giving the reasons for the decision; and

(ii) the notice of the taxation decision concerned; and

(iii) the taxation objection concerned; and

(iv) the notice of the objection decision; and

(v) every other document that is in the Commissioner's possession or under the Commissioner's control and is considered by the Commissioner to be necessary to the review of the objection decision concerned; and

(vi) a list of the documents (if any) being lodged under subparagraph (v);

37. Thus, the obligation on the Commissioner in an appeal to the AAT is to provide each of the documents listed in paragraphs (i) – (vi) of s 14ZZF(1). Insofar as paragraph (v) is concerned, the question of what in addition to the limited documents listed in paragraphs (i)-(iii) and (vi) are to be provided, is clearly a question for the discretion of the Commissioner on the basis of what he considers is “necessary” to the review. The Commissioner submitted that to the extent that the Commissioner is aware of what additional documents the applicants sought to tender, he does not consider that any of those documents are necessary to the review of the objection decision. This position pertains in respect to those additional exhibits tendered by the applicants, being exhibits A8-A25, the documents identified in exR7 but which were not tendered, and other documents, the identity and content of which have not been made known to the respondent or the Tribunal.
38. It is always open to applicants to raise with the respondent perceived deficiencies in the content of s 37 documents. The Tribunal is accustomed to such matters being raised and resolved during the interlocutory stages of proceedings. Generally in the Tribunal’s experience the respondent’s approach is to seek to file supplementary documents so as to accommodate the applicants’ views. There is nothing in the view of the Tribunal inappropriate or against the model litigant status of the respondent in acting in this way. Indeed, in proceedings where, as here, there are potentially many thousands of pages of documents, merely filing all of them and not making any determination as to their necessity would be counter to the model litigant obligations of the respondent because it would place applicants and the Tribunal in a position of being asked to consider thousands of pages of materials that are not necessary.
39. Furthermore, it is clearly open to parties to take different views on what is necessary for review. This is particularly so when there is voluminous material and when, as here, many documents, including financial statements, BAS and income tax returns have been amended numerous times and many different versions of such materials provided to the respondent by the applicants at different stages.
40. It seems clear that between August 2007 and October 2010 the applicants failed to review the content of the s 37 documents and so failed to determine if any documents in addition to those filed and provided to the applicants were required by the applicants. Indeed it appears from Mr P’s comments from the bar table that the applicants’ copies of the s 37 documents had been placed into storage at some time in the past and not retrieved: ts247. Until the fourth day of the hearing it was not made clear that the applicants did not have their copies of the documents and no request was ever made of the respondent to supply a replacement set.
41. The applicants were legally represented by two different firms of solicitors until at least the end of 2008, and all their objections to the respondent, exhibits A1 – A5 and their Statements of Facts, Issues and Contentions were clearly produced with the benefit of legal assistance. The Tribunal draws the inference that those legal advisors had the opportunity to properly consider the s 37 documents and determined that no issue arose as to their completeness.
42. Alternatively, even if no such inference should be drawn, in light of the general history of the applicants in dealing with the audits, their affairs in general and the conduct of the proceedings, it appears to the Tribunal highly unlikely that even if the applicants themselves had considered the s 37 documents prior to October 2010 they would have raised any concerns at all with their content.
43. At the hearing on 25 October 2010 the respondent requested a list of any additional documents that the applicants sought to put in to evidence, so that it could identify where in the s 37 documents or other exhibits they appeared, and if they did not, to be able to otherwise deal with them. A list, ExR7, was provided in respect to ST’s documents. No objection was taken by the respondent to any of the documents on that list being tendered. Applicants then chose not to put all the documents identified in ExR7 into evidence. No further lists were provided and the Tribunal, having afforded the applicants numerous opportunities both at the interlocutory stage and throughout the hearing to identify what documents they sought to rely on and put into evidence, refused the applicants’ subsequent applications to put into evidence any further documents.
44. The further documents the applicants sought to adduce and which were said to total some 8,000 pages all appear to have been obtained from an application under the Freedom of Information Act made by the applicants to the respondent in 2006. Those documents had been in the applicants’ possession for some years. They could and should have been identified and disclosed in the usual way if the applicants wished to rely on them. Instead the applicants chose to ignore the orders of the Tribunal, both at the interlocutory stage and during the course of the hearing to identify the documents on which they intended to rely. As late as the last day of evidence on 5 November 2010, the applicants sought to rely on further unidentified documents. The applicants’ conduct in this regard appears to the Tribunal to have been based on a misconceived belief that they could use those documents to ambush the respondent.
45. The applicants’ assertions that they were denied natural justice are without substance. It is, if anything, demonstrative of the entire approach of the applicants to the audit, the proceedings and their taxation affairs in general: i.e. obfuscate, confuse and delay, then act aggressively and blame others for their own failures. The fact that over a third of the applicants’ submissions dealt with the issue of the documents, whilst effectively ignoring many of the substantive issues raised by the applications, is illustrative of this approach. The Tribunal finds that if the applicants did suffer any prejudice (which has not been shown) it is entirely as a result of their own failures.

ST – APPLICATION 2007/1955

46. This application involves GST payments for 24 periods from December 2000 to June 2004 and penalties. The initial applications relating to September 2000 and penalties for the periods September 2000 to June 2002 inclusive are no longer before the Tribunal.
47. The applicant is a company of which the sole director and shareholder is Mr P. It was an accounting firm that provided business advisory, audit, tax accounting services to clients. It had around 30 employees in October 2000, but at other times it appears to have been a higher figure. Its clients included private clients, Government agencies and other clients including the Medical Board. It also provided professional services, for example, the preparation of tax returns, BAS and the provision of other services like stress testing of the loan book, on a fee for service basis to Keystart, the sole client of SM.
48. An audit of ST commenced in May 2004 and concluded in June 2006. The respondent had determined that ST was habitually late in meeting its lodgement obligations and that there were frequent instances of BAS lodged prior to the commencement of the audit having no figures on the labels: ExR1: [4] @ 2, 3, 39.
49. Numerous amended BAS were lodged after the commencement of the audit. Mr P had declined the opportunity to make a voluntary disclosure at the commencement of the audit interview on 8 June 2004: T(1955)1:8. The BAS lodged after the commencement of the audit were disregarded by the respondent in making its assessments: T(1955)1:8. The audit determined that there was a shortfall of $2,949,231 in BAS, and penalties were imposed at the level of 75% for intentional disregard, plus an uplift for hindrance during the course of the audit totalling $1,746,429 in all.
50. ST’s Statement of Facts and Contentions in this application fails to disclose any matters relevant to the outcome of the audit of this entity and the assessments and penalties issued in respect to shortfalls of GST on BAS.
51. The sole issue appears to be the question of whether all the tax payable was paid by what the applicants call the “ST Group”. No attempt was made by the applicants to identify with any precision what they were referring to as the “ST Group”. Given the information contained in Ex R2, which shows that there were dozens of companies Mr P was associated with as a director in the relevant period, it is incumbent on the applicants to be precise and specific on this issue. Instead they have chosen to obfuscate.
52. In any event, regardless of the applicants’ assertions, ST was not a group for GST or income tax purposes: ExR1: [4] @ 39. Mr P admitted that he was aware of the respondent’s procedures in respect to grouping of taxpayers: ts 249: 3-33, and that no application was ever made by him or any entities associated with the applicants to be treated as a group: ts 249:25.
53. The agency argument put in the SM applications has no relevance to this matter. That argument was that SM received all its income as agent for ST. Even if that argument is correct, which the Tribunal finds it is not, that cannot assist ST in the present application because:

53.1 it fails to account for the non-SM portion of the ST income, being fees for accounting services rendered to clients other than SM;

53.2 it cannot apply to professional fees rendered directly by ST for the business consulting and other work performed, like stress testing, by ST in respect to the Keystart loans; and

53.3 the advice which the applicants rely on does not address the question of GST liability but only income tax liability.

ST – APPLICATIONS 2007/1956-1961

54. These applications involve income tax assessments of ST for the periods ending June 1999 – 2004.
55. Following the audit of ST conducted between May 2004 and June 2006, amended assessments were issued which increased the taxable income of ST for each of the years of review.
56. In each of the tax years 1999 to 2004, increases in taxable income arose from the incorrect claiming of superannuation deductions. The superannuation defaults by ST are set out in the ST audit report: Ex R1: [4] @ 9ff. These defaults comprised:

56.1 a failure to pay the statutory superannuation amounts by the relevant date;

56.2 a failure to pay the statutory superannuation amounst to a complying superannuation fund, as defined under the Superannuation Guarantee Charge Act 1992; or

56.3 a failure to make any payment on account of a statutory superannuation obligation.

57. The initial default identified following the commencement of the audit was that ST had failed to make contributions for Mr P and his wife who were employees of ST: Ex R1: [4] @ 10. This was accepted by ST in 2004 and was also accepted by Mr P in cross-examination: ts 188:5. On that basis alone the application must fail because this error on the part of ST led to adjustments to income tax payable, along with penalties. Despite this, on being pressed, Mr P persisted in asserting that the correct amount owing to the respondent was zero: ts 200: 42.
58. Mr P also accepted in cross-examination that the analysis of superannuation default, as set out in Mr Bei’s audit reports for ST and SM was correct: ts 187-197, but he then attempted to withdraw or qualify this acceptance: ts 198.
59. ST provided no evidence at all to dispute that analysis or to suggest that Mr Bei’s audit report was incorrect: ts 191: 30 – 192-19. No attempt was made to identify any additional relevant documents filed by the applicants in this matter. Rather, Mr P sought to cross-examine Mr Bei in a manner that appeared to seek to undermine the mathematical calculations in the audit report, a matter that Mr P accepted during his cross-examination was not in contention: ts 196:6-13.
60. In the 2002 year, an increase in taxable income arose from ST claiming a deduction for interest expense in that year that was not supported by appropriate source documentation: ts 435-437:20. As noted above leave was granted, without dissent from the respondent, to permit the applicants to contend that the treatment of the 2002 interest deduction was different from the treatment for the 2001 and 2003 interest deductions claimed.
61. The fact that one of the numerous versions of ST’s financial statements appeared to support the applicants’ assertions does not establish that the respondent’s notice of amended assessment issued 31 July 2006: T(1956-61)2:188, is wrong. The documents in T(1956-61)3 clearly explain the calculation and Mr Bei’s oral evidence explained why the deduction was disallowed in the 2002 year.
62. In the respondent’s Statement of Facts, Issues and Contentions filed in these applications, the respondent referred to this interest payment as a “General Interest Charge”. That is clearly incorrect. There is no other place that the incorrect reference to General Interest Charge is made, despite Mr P assertions to the contrary during evidence: ts256: 35.
63. During the course of his cross-examination of Mr Bei, Mr P sought to make an issue of what is clearly a typographical error. This was neither appropriate nor of any assistance to the Tribunal in the determination of the substantive issues in question.
64. ST lodged its income tax returns:

64.1 for the 1999 year, on 24 October 2002: T(1956-1961)1:25;

64.2 for the 2000 year, on 23 October 2001: T(1956-1961)1:13;

64.3 for the 2001 year, on 23 October 2002: T(1956-1961)1:17;

64.4 for the 2002 year, on 23 October 2002: T(1956-1961)1:21;

64.5 for the 2003 year, on 1 April 2004: T(1956-1961)1:43; and

64.6 for the 2004 year, on 25 February 2005: T(1956-1961)1:147.

65. Following the audit, amended assessments and penalty assessments were issued in August 2006 for tax of $807,109.24 and penalties totalling $221,179.96.
66. The total unpaid income tax and penalties owed by ST for the 1999, 2000, 2001, 2002, 2003 and 2004 years is $1,028,289.20.
67. The Tribunal does not intend to comment on all the assertions made in the applicants’ submissions on this matter other than to say:

67.1 the premise upon which much of the applicants’ case is based is clearly wrong: the respondent bears no onus at all to prove the assessments correct or to lead evidence to support its assessments, consequently any attempt to draw inferences on Mr Bei’s hazy memory of events and documents he saw some 6 years ago is misguided, as are the repeated attempts to suggest that the respondent failed to prove something;

67.2 the submissions contain numerous assertions as to the effect of the evidence which are simply wrong. For example, the statements reported as being made by Mr Bei in pars 46.1.7 and 46.1.9, even if they are accurate reflections of what Mr Bei said, are not inconsistent; they are entirely consistent statements; and

67.3 there is no substance in any relevant assertion in light of the evidence and the Tribunal’s findings.

SM – APPLICATION 2007/1964

68. This application relates to sixteen quarters of GST in the period September 2000 – June 2004. The audit report is annexure 12 to Mr P’s witness statement ExA3.
69. The audit of SM commenced in May 2004 and concluded in June 2006. Numerous amended BAS were lodged after the commencement of the audit and are set out in a table at page 52-53 of the audit report at tab 12 Ex A3. Information obtained during the audit indicated that the original BAS as lodged and the amended BAS were incorrect: T(1964)1:4, which was explained in cross-examination by Mr Bei, being that he obtained information from the Department of Housing and Works which identified payments made to SM and this formed the basis of the decisions made in the audit report: ts 450: 45, 452:30, 454:30, T(1966-1969)2:314-1317.
70. SM was a special purpose vehicle established by Mr P to provide services to the Department of Housing and Works in the management of the Department’s Keystart Home Loans scheme. The funds received by SM were funds supplied to it by the State Government of Western Australia and SM effectively operated as an agency of the State in its administration of the Keystart Home Loans scheme.
71. SM had a very poor lodgement history with the respondent, being a late lodger or non-lodger of BAS: ExA3 annexure 12 @48. During the course of the audit numerous amended BAS with different figures were lodged by the applicants: ExA3 annexure 12 @3-4.
72. The audit determined that there was a shortfall in BAS, and penalties were imposed at the level of 75% for intentional disregard, plus uplift for hindrance during the course of the audit. The shortfall amounted to $1,869,637.38 and penalties totalled $1,682,637.38.
73. The applicants’ sole written submission in respect to this application is that there was “no shortfall on a global basis”. This is the same argument dealt with above in respect to the “grouping” of ST. For the reasons set out above it is an argument without substance and is rejected by the Tribunal.
74. During the course of the audit and in these proceedings the applicants have sought to argue that SM received all payments as agent for ST. The payments made by the Department to both SM, in respect to Keystart, and ST, in respect to certain specialist accounting and consulting work undertaken by it for Keystart, do not support this characterisation.
75. The annexures at tabs 1-9 and 16 of ExA3 also do not support the agency argument in the period under review. The contentions of the applicants in respect to arrangements prior to the period under review in the audit are in the Tribunal’s opinion irrelevant.
76. Annexure 16 to Ex A3 is the advice of one of applicants’ previous firms of solicitors Norton Smailes dated 10 December 2004. This advice relies on the following:

(a) Response to tender (tab 6 Ex A3);

(b) the SM contract apparently dated 1999 (tab 7 Ex A3);

(c) the SM contract dated 3 June 2003 (tab 9 Ex A3); and

(d) Mr P’s explanations: pages 1 – 2 letter dated 10 December 2004: ts 146:37-43.

77. It appears that the first time any legal advice as to this alleged agency arrangement was sought was in December 2004: ts 143:22, there is no evidence that any prior advice was sought. Furthermore, Norton Smailes advised Mr P that if the respondent did not accept his explanation of the position (as in fact happened), he should provide certain additional evidence. That step was never undertaken by the applicants: ts 149-150. The Tribunal infers that there was no such evidence.
78. The advice of Norton Smailes clearly hinges on what they were told by Mr P. In light of the Tribunal’s findings as to the general unreliability of his evidence and in light of what the audit found was the actual position in respect to payments made by the Department of Housing and Works to both SM and ST, along with the total failure of the applicants to follow the advice provided to them as to what evidence would be necessary to support their position, the very basis of the Norton Smailes advice is not proved. The agency contention is rejected by the Tribunal.

SM – APPLICATIONS 2007/1966-1969

79. These applications involve income tax assessments of SM for the periods ending June 2001 – 2004.
80. Following the audit of SM conducted between May 2004 and June 2006, amended assessments were issued which increased the taxable income of SM for each of the years of review.
81. In each of the tax years 2001 to 2004, increases in taxable income arose from the incorrect claiming of superannuation deductions. The superannuation defaults by SM are set out in the SM audit report: tab 12 Ex A3, pages 13 – 30.

81.1 a failure to pay the statutory superannuation amount by the relevant date;

81.2 a failure to pay the statutory superannuation amount to a complying superannuation fund, as defined under the Superannuation Guarantee Charge Act 1992; or

81.3 a failure to make any payment on account of a statutory superannuation obligation.

82. The analysis undertaken by Mr Bei in respect of SM superannuation is identical to that undertaken in respect to ST, which analysis was ultimately accepted by Mr P, as set out above.
83. A second issue arose by reason of SM showing in its financial statements for the relevant years, as current assets, loans from SM to ST. Mr P was the sole director and shareholder of both entities at all relevant times.
84. Division 7A, s 109D ITAA provides that when a private company makes a loan to an entity which is a shareholder in it, and the loan is not repaid in the year in which it is made, the private company is deemed to have paid a dividend to the shareholder entity.
85. S 44 ITAA provides that the assessable income of a shareholder in a company includes all dividends paid to the shareholder. This includes deemed dividends.
86. To avoid the effect of Division 7A a taxpayer needs to have a valid loan agreement in place. The only loan agreements claimed to have been in place between SM and ST were those provided to the respondent on 28 June 2005 T(1966-1969)2: 318, 375ff, were undated and otherwise did not comply with the requirements of Division 7A.
87. Despite request from the respondent, the applicants failed to provide information as to when the loan agreements were signed: Ex A3, tab 12 @ 66; and the applicants dealt with this failure, despite repeated requests from the respondent, at the hearing by Mr P saying he did not recall whether he had provided the additional information requested: ts 210-213: 15. The Tribunal finds that his purported lack of memory is disingenuous.
88. SM lodged its first income tax return:

88.1 for the 2001 year, on 14 January 2003: T(1966-1969)1: 69 ;

88.2 for the 2002 year, on 14 January 2003: T(1966-1969)1: 73;

88.3 for the 2003 year, on 26 August 2004: T(1966-1969)1: 212 & 214; and

88.4 for the 2004 year, on 11 March 2005: T(1966-1969)2: 308.

89. Amended assessments and penalty assessments were issued in August 2006, for tax of $2,946,123 and penalties of $2,651,512.84.
90. The total unpaid income tax and penalties owed by SM for the 2001, 2002, 2003 and 2004 years is $5,597,635.84.
91. The applicants have made no substantive written submissions in this application.

MR P – APPLICATIONS 2007/2905-2910

92. These applications involve income tax assessments for the periods ending June 2002 to 2004, and specifically concern the application of Division 7A ITAA to deemed dividends in respect to SM and another entity associated with the applicant, “CH” (CH).
93. S 109D ITAA provides that when a private company makes a loan to an entity which is a shareholder in it, and the loan is not repaid in the year in which it is made, the private company is deemed to have paid a dividend to the shareholder entity.
94. S 44 ITAA provides that the assessable income of a shareholder in a company includes all dividends paid to the shareholder. This includes deemed dividends.
95. Mr P relies on his evidence in Ex A5 in support of this application. Ex A5 @ [4] refers to his witness statement which is Ex A3 as containing the evidence in support of these applications. There is in fact no evidence at all in Ex A3 that deals with the issues arising in these applications.
96. Mr P was at all relevant times a director and shareholder of SM: Ex R2, and CH: Ex A5 @ [6]. The sole shareholder of CH at all material times was TH, an entity associated with Mr P, who was himself a shareholder of TH: Ex A5 @ [7]; Ex R2.
97. Mr P lodged his first income tax return:

97.1 for the 2002 year, on 25 March 2004: T(2905-2910)1:34-41;

97.2 for the 2003 year, on 1 April 2004: T(2905-2910)1: 43-50; and

97.3 for the 2004 year, on 24 March 2005: T(2905-2910)1: 52-59.

98. In the present case, for each of the years 2002 – 2004, dividends were deemed received in Mr P’s hands, as shareholder of TH, being loans from SM or CH, which deemed dividends were not declared in the relevant income tax returns. The following table sets out the position:

Year	SM	CH	Total
2002	$1,369,259.00		$1,369,259.00
2003	$985,516.00		$985,516.00
2004	$230,063.00	$551,087.00	$781,150.00
			$3,135,925.00

99. The deemed dividends for each of these years were brought to account in the audit and amended assessments were issued. The amended income for each of the years is assessed as follows:

Year	Declared income	less dividends returned	add dividends not returned	Assessed income
2002	$148,000		$1,369,259.00	$1,517,259
2003	$148,000		$985,516.00	$1,133,516.00
2004	$456,978	$307,594	$781,150.00	$930,534
	$752,978.00	$307,594.00	$3,135,925.00	$3,581,309.00

100. Amended assessments and penalty assessments were issued in August 2006, for the tax of $1,653,782.23 and penalties of $1,234,869.20.
101. The total unpaid tax and penalties now owed to the respondent by Mr P for the 2002, 2003 and 2004 years is $2,888,651.40, excluding interest.
102. PS LA 2005/3 provides that for the 2004 tax year only, a loan agreement will be valid for Division 7A purposes if entered into prior to the lodgement of the relevant income tax return.
103. Mr P relies on two loan agreements, each dated purportedly 1 March 2005 for the 2004 year: ExA5 @[12] and tab 5 & ExA5 @[14] and tab 7. These loan agreements were not provided to the respondent during the course of its audit or the objection phase: T(2905-2910) 1:7. There were undated loan agreements between SM & ST provided during the course of the audit, being relevantly, at T(1966-69) 2:375, which was first provided by facsimile to the respondent on 28 June 2005 T(1966-69) 2:318 and despite request, no further information was ever provided as to when the loan agreements were signed: T(1966-69) 2:320-324.
104. The evidence of Mr P in respect to the loan agreement purportedly dated 1 March 2005 between CH and TH is in ExA5 @[12]:

The remainder of the funds distributed to me during the year ended 30 June 2004 were advanced by CH to TH as its sole shareholder in accordance with a loan agreement entered into between the parties. Exhibited at tab 5 of the bundle of documents annexed to this witness statement is a copy of the loan agreement entered into between CH and TH dated 1 March 2005.

105. This evidence fails to descend to particulars regarding the circumstances of the execution of the loan agreement. Critically there is no evidence from Mr P that the parties signed the document prior to lodgement of his 2004 taxation return, nor is there any corroborative evidence from Mr P’s brother or the witnesses to their signatures, nor is there evidence of the company records of either party supporting the date of execution of the agreement. The Tribunal infers from these failures that this loan agreement was not signed on 1 March 2005, but on some later date and merely dated 1 March 2005.
106. The evidence of Mr P in respect to the loan agreement dated 1 March 2005 between TH and himself is in ExA5 @[14]:

The remainder of the funds distributed to me during the year ended 30 June 2004 were advanced by TH to my brother and I in accordance with a loan agreement entered into between the parties. Exhibited at tab 7 of the bundle of documents annexed to this witness statement is a copy of the loan agreement entered into between TH and me dated 1 March 2005.

107. This evidence is subject to the same deficiencies as set out above and is rejected for the same reasons.
108. During the course of his cross-examination on this issue, Mr P said he would ascertain certain information that he could not then recall and would then deal with it in re-examination: ts215:6. He chose not to do so. The only inference that can be drawn is that Mr P could not have led any evidence in support of his position on this point.
109. Furthermore, in light of Mr P’s history of the provision of multiple revisions of company accounts: T(2905-2910) 1:7, and his filing of multiple BAS and income tax returns for each of the entities, as well as the matters set out above, the Tribunal gives no weight at all to Mr P’s explanations as to his income tax affairs. Specifically, the Tribunal gives no weight at all to the construction of TH’s financial statements which show payments in reduction of principal and interest because they are unaudited and there are no underlying records or source documents which evidence what is claimed in these financial statements.
110. No relevant loan agreements were provided in respect to the 2002 and 2003 years.
111. It is noted that the applicants have made no submissions in respect to this application.

PENALTY

112. In assessing penalty, the following factual matters are relevant:

(a) Mr P was at all times the sole shareholder and director of both corporate applicants;

(b) he is a businessman of considerable experience and a long-standing trained accountant;

(c) he is, and was at the relevant times, a director, secretary and / or shareholder in a vast number of closely held entities: Ex R2, and, in light of the other matters set out in this paragraph, must be taken to have been aware of and understood his responsibilities;

(d) he was a member of relevant professional tax and accounting associations until 2009;

(e) the firm of accountants he was the director of at all times held themselves out as being tax experts;

(f) in respect to SM the conduct was particularly concerning given that that entity was charged with administering a government scheme utilising taxpayer funds on behalf of the State; and

(g) the applicants’ record keeping both on a personal level and in respect to each of the entities was admitted by Mr P to be extremely poor.

113. In the Tribunal’s opinion in light of these factors the penalty imposed, being at the intentional disregard level of 75% was entirely appropriate.
114. Each of the penalties was the subject of an additional uplift of 20% by reason of the applicants’ behaviour in hindering the audit. No attempt was made by the applicants to challenge that in cross-examination of Mr Bei. Those matters were put to Mr P in cross-examination, being the many unfulfilled promises to provide documents and proper substantiation and the multiple unfulfilled promises to assist, as well as the many amendments to BAS and Income Tax Returns.
115. Additionally, Mr P’s behaviour in these proceedings was entirely consistent with his obstructionist behaviour in the audit which led to the hindrance up-lift. In the circumstances the Tribunal is of the view that the uplift was entirely justified.

DECISION

116. The Tribunal:

116.1 varies the objection decisions under review so that in relation to :
116.1.1 The applicant taxpayer, Mr P, the amended income tax assessments for the 1999, 2000 and 2001 income years be cancelled; and

116.1.2 The applicant taxpayer, ST, the Business Activity Statements (BAS) for the period ending September 2000 (in respect of both primary tax and penalty), and the BAS for the periods ending December 2000, March 2001, June 2001 , September 2001, December 2001, March 2002 and June 2002 (in respect of the imposition of penalty only) be cancelled;

116.2 Remits the matters referred to in 1.1 and 1.2 above to the respondent to issue appropriate fresh amended assessments, Business Activity Statements and/or penalty notices to the relevant taxpayers; and;
116.3 Otherwise affirms all of the objection decisions under review.

I certify that the 116 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member

Signed:...(sgd) T Freeman......

Associate

Date/s of Hearing 3, 4 and 5 May, 25, 26, 27 and 29 October 2010, 5 November 2010 and 15 December 2010

Date of Decision 21 January 2011

Representative for the Applicants Self Represented

Counsel for the Respondent Ms C Thompson

Solicitor for the Respondent Mr M McCoy

Australian Taxation Office