KDOUH v FC of TMembers:
PJ Lindsay SM
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 6
PJ Lindsay (Senior Member)
This is an application by Kalil Kdouh for review of a decision by the Commissioner of Taxation in relation to the penalty tax imposed on tax shortfalls in the 1996, 1997 and 1998 income years. The amounts of penalty tax are $4,953.84 (1996); $8,443.21 (1997) and $7,193.25 (1998). Penalty has been imposed under s. 226J of the Income Tax Assessment Act 1936 (the 1936 Act) for intentional disregard of the provisions of that Act or regulations. The rate of penalty is 75 per cent of the tax shortfall.
2. Briefly, the background is that in 1999 the respondent conducted an audit of Mr Kdouh's income tax returns for the years in question and found that he had not disclosed all of his assessable income as an owner/driver of a taxi cab and had claimed a deduction relating to a rental property to which he was not entitled. Mr Kdouh initially applied to the tribunal for review of the respondent's decisions on objections lodged against the primary tax raised in the amended assessments following the audit. He decided, however, not to continue with that application and consequently those applications were dismissed under s. 42A(1) of the Administrative Appeals Tribunal Act 1975. Instead he sought to extend the grounds of his objection to cover the imposition of penalty tax. The tribunal gave him leave to amend his objection to cover the imposition of penalty and the rate thereof (see s. 14ZZK(a) Taxation Administration Act 1953).
3. By letter dated 2 July 2004 Mr Kdouh's tax agent objected to the penalties imposed. The objection stated:
``The taxpayer believes that the penalty imposed on him was too harsh, because he did not show intentional disregard. Lack of knowledge and confusion for the extra income he earnt in the respective years mentioned above, was all it was.
There was no intention for fraud or avoidance. During Mr Kdouh's audit, information on day and weekend drivers was provided to the auditor.
We believe Mr Kalil Kdouh showed recklessness and hence during the audit voluntary disclosure was performed, thus the penalty rate should be 40%, based on recklessness, not 75%.''
(T39-167 in the documents lodged with the tribunal under s. 37 of the Administrative Appeals Tribunal Act 1975)
The reference to a penalty of 40 per cent for recklessness incorporates a reduction of 20 per cent for voluntary disclosure. The respondent disallowed the objection by decision made on 6 August 2004 (T40) and it is the subject of the tribunal's review.
4. At the hearing, the applicant was represented by Mr B Moussa, accountant, and the respondent by Ms A Lai, one of his officers. The applicant gave evidence at the hearing. The
ATC 2003tribunal had before it the T documents as well as the exhibits tendered during the hearing.
5. The applicant agreed that certain facts set out in the respondent's statement of facts, issues and contentions are not in dispute. Leaving aside the amounts of penalty for intentional disregard shown at par 2 thereof, I make the following findings of fact:
``2. On or about 14 January 1999 (see T20), the applicant was audited for the years of income ended 30 June 1996, 1997 and 1998 (`the relevant years'). At the conclusion of the audit, omissions of income were ascertained. The audit proceeded on the basis of an alternative income measurement basis being T-Accounts (see folios T33, 34 and 35). The audit results showed that during the relevant periods, substantial undeclared income had been omitted from the applicant's returned income. As a result of the audit, the taxable income of the applicant was amended upward based on the discrepancies identified in the T accounts and a tax shortfall penalty of 75% for intentional disregard was applied. See summary of amendments in the table below:+--------------------------------------------------------------+ | | 1996 | 1997 | 1998 | |--------------------------------------------------------------| | Taxable income on Notice | 15,441 | 18,869 | 10,388 | | of Assessment issued | (T4) | (T6) | (T8) | | based on Return lodged | | | | |--------------------------------------------------------------| | Understated Income | 29,510 | 54,667 | 59,258 | | based on T- account | (T33) | (T34) | (T35) | | methodology | | | | |--------------------------------------------------------------| | Amended Taxable Income | 44,951 | 73,536 | 69,646 | | as a result of the Audit | (T9) | (T10) | (T11) | |--------------------------------------------------------------| | Penalty for intentional | 8,022.17 | 17,902.67 | 18,277.73 | | disregard at 75% (section | | | | | 226J of the ITAA 36) | | | | +--------------------------------------------------------------+
3. During the course of the audit, the applicant was questioned in relation to whether he had understated the income and whether he rented out his taxi to other drivers. At the initial interview on 25 January 1999, the applicant told the auditor that:
- a) He signed all the tax returns (T21-104);
- b) He did not know of any income not included in his returns (T21-108);
- c) He only had one casual driver, Enrique Rodriguez (T21-109);
- d) He made no estimates when calculating his taxi income (T21-109).
4. In a letter dated 6 February 1999, the applicant indicated that amounts of $2970 and $5220 (driver pay-in) were included in his income tax returns for the 1997 and 1998 income years. (see folio T23)
5. On 21 April 1999, the respondent asked the applicant further questions in relation to the other drivers. (see folio T26)
6. On or about 16 May 1999, the applicant replied to the respondent's request and declared amounts of $8,125, $13,590 and $16,560 undeclared income for Enrique Rodriguez, for the 1996, 1997 and 1998 income years respectively. (see T28)
7. On 19 May 1999, the respondent conducted a second interview with the applicant (see T29). At that interview, the auditors pointed out to the applicant the discrepancies:
- a) The kilometres driven and the number of shifts reported did not correspond; and
- b) The number of shifts the applicant declared and the number of shifts Enrique Rodriguez declared were different.
8. On or about 6 June 1999, the applicant wrote to the respondent to explain the kilometres discrepancies. In that document, the applicant disclosed that he received shift pay-ins from three other weekend drivers, Sam and Sunny and Fadi, in the relevant years. Further amounts of undeclared income were declared in that document,
ATC 2004being $5,810, $4,700 and $3,800 for the 1996, 1997 and 1998 income years respectively (see T30)
9. On or about 22 June 1999, the respondent requested shift details and shift work sheets in relation to all of the shifts done by the applicant and by other drivers.
10. No daily work sheets were provided by the applicant in relation to the shifts by other drivers.
11. On 28 June 1999, a final audit interview was conducted at the respondent's premises in Hurstville. The auditors explained the proposed adjustments to the applicant and asked if the applicant was able to provide details regarding the other drivers. The applicant said that:
- a) He did not have the details of the other drivers and they would not co-operate;
- b) The other drivers did not keep any records of shifts driven.
6. The reasons for the respondent's decision to disallow in part the original objection to primary tax may be summarised as follows:
Year of income ended 30 June 1996
The additional amount of $29,510 included in assessable income comprised $8,900 in undisclosed earnings from a full-time early shift driver, $10,705 from part-time and weekend drivers and $9,905 of T account (funds available less funds expended) shortage. The last item was allowed on objection, making the adjustment $19,605.
Year of income ended 30 June 1997
The additional amount of $54,667 included in assessable income comprised $18,360 of undisclosed earnings from a full-time early shift driver, $3,000 for a relief driver, $8,580 from part-time and weekend drivers, $1,617 adjustment to depreciation claimed on the taxi and $23,110 T account shortage. Again, the last item was allowed on objection, making the adjustment $31,557.
Year of income ended 30 June 1998
The additional amount of $59,258 included in assessable income comprised $16,560 of undisclosed earnings from a full-time early shift driver, $10,840 from part-time and weekend drivers, $8,532 adjustment to deductions claimed for a rental property and $23,326 T account shortage. In addition to allowing the last item, the objection regarding the part-time and weekend drivers was conceded to the extent of reducing the adjustment by $3,800, making the total reduction $27,126.
7. The relevant provisions from Part VII - Penalty Tax in the 1936 Act are set out below:
``226J Penalty tax where shortfall caused by intentional disregard of law
Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part.
226Y Reduction of penalty tax - disclosure after tax audit notified
- (a) under a shortfall section a taxpayer is liable to pay additional tax in respect of a year of income because of a tax shortfall or part of a tax shortfall; and
- (b) after the Commissioner had informed the taxpayer that a tax audit relating to the taxpayer in respect of the year was to be carried out, the taxpayer voluntarily told the Commissioner, in writing, about the shortfall or part; and
- (c) telling the Commissioner could reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit;
the amount of the additional tax is reduced by 20%.
226H Penalty tax where shortfall caused by recklessness
Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.
227 Assessment of additional tax
(3) The Commissioner may, in the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under a provision of this Part, but, for the purposes of the application of subsection 33(1) of the Acts Interpretation Act 1901 to the power of remission conferred by this subsection, nothing in this Act shall be taken to preclude the exercise of the power at a time before an assessment is made under subsection (1) of the additional tax.
Note: Section 204 sets out when the additional tax is payable and the consequences of not paying it on time.''
8. The issues for determination are:
- • whether the tax shortfall penalty under s. 226J for intentional disregard should be maintained.
- • whether the penalty should be reduced under s. 226Y of the 1936 Act as a result of the taxpayer's disclosures after the tax audit had been notified.
- • whether the facts and circumstances of the case warrant an exercise of the discretion to remit the whole or part of the penalty under s. 227(3) of the 1936 Act.
The applicant's taxi business
9. Mr Kdouh admitted he signed his record of initial interview with the auditor on 25 January 1999 (T21) and that he stated therein that he was unaware of any income not disclosed in his tax returns or of any expenses that were overstated. But he also admitted he told the auditor that he had only one casual driver of his taxi, Enrique Rodriguez, when in fact he had three other drivers, who mainly worked on weekends. Later, the auditor wrote to him on 21 April 1999 (T26-123) requesting full details of all drivers who earned income from driving his taxi. Mr Kdouh's response dated 9 May 1999 (T28) again was to refer only to Enrique Rodriguez. But he also disclosed a total of $38,275 in pay-ins per shift received from Mr Rodriguez in the three income years. He claimed that he did not omit this amount intentionally and apologised for doing so.
10. It was put to Mr Kdouh that had the auditor not followed up at their next interview on 19 May 1999 with more questions about the driving of the cab, he would not have mentioned the three weekend drivers. His answer was that he did not believe he had to refer to them unless he was asked about them. It was not until 5 June 1999 (T30) that the applicant gave the auditor information about the weekend drivers, the kilometres they had driven and the amounts they paid him for those shifts. Mr Kdouh's evidence was that his weekend drivers refused to complete their daily worksheets showing kilometres driven and other details. He was certain that if he compelled them to do so, they would not drive for him. He explained that he compiled the information from the figures in his own worksheet that showed the kilometre figures on Friday afternoon when he finished work and on his resumption on Monday morning. However, the auditor was not satisfied with the accuracy of that information he had provided in June 1999.
11. Mr Kdouh asserted that his 1996, 1997 and 1998 tax returns did not disclose amounts received from weekend drivers because he thought these payments were not income. In cross-examination he was referred to documents (T23) he wrote in February 1999 and sent to the auditor regarding his taxi income and expenses for the years in question. He was asked why he treated some payments from weekend drivers as income and included those amounts in his tax returns, but he left out the remainder of those payments. The applicant's answer was that the driver concerned had recorded the pay-ins on the applicant's own work sheet thus enabling him to find the information, but when that did not happen and there were no work sheets to refer to, he did not have a record of the amounts of cash or cab charge dockets the driver had given him.
12. Since Mr Kdouh admitted that he did not receive worksheets from the weekend drivers with details of cash and cab charge dockets, he had to concede that the record of interview on 25 January 1999 was incorrect in that he stated his tax returns did not include any amounts of taxi income or related expenditure that was based on an estimate.
13. There was cross-examination about his ability during 1997 and 1998 to repay a bank loan at the rate of $1,750 a month, at a time when he disclosed merely $18,869 as his taxable income for the 1997 income year and $10,338 for the following year. Mr Kdouh was asked how he could reconcile the statement in the loan application (exhibit R2) that he had gross income of $40,704 per annum with the amount in his 1997 tax return. His response was to suggest the bank manager would do anything to ensure the loan was approved. When asked how he managed to make the monthly repayments without any default, he said he borrowed some money from his brother in law and from his wife, who was receiving instalments of the sale proceeds of a butchery in which she had had an interest.
14. During the course of the hearing there was reference to an earlier audit in 1993 concerning Mr Kdouh's income tax returns for the 1991 and 1992 income years. Mr Kdouh recalled an interview with the ATO's auditor and amended assessments being issued. According to the audit report dated 15 September 1993 (exhibit R3), Mr Kdouh was audited because a cash transaction report disclosed his repayment in 18 months of a loan of $29,000 for a taxi cab, despite having a taxable income of only $5,371. Adjustments were made due to overstated expenses and also for cash repayments off the loan that had not been included in his assessable income. Penalties were imposed for deliberate evasion because the applicant had not produced any records and had not provided any information to assist in determining the correct income derived from use of his taxi. Mr Kdouh's taxation representative at the time lodged objections to the amended assessments. Further amended assessments were issued to allow Mr Kdouh certain expenses for the two years but he was still considered to have omitted income of $5,200 in both years. Penalty was imposed at the rate of 45 per cent (exhibit R3).
15. It was put to the applicant that as a result of the audit in 1993 he had become aware of how important it was to keep proper records. Mr Kdouh replied by pointing out that the ATO's record keeping audit conducted in February 1996, considered that he prepared and maintained his business records to an adequate standard (T47).
16. Mr Kdouh disclosed $5,200 rental income in his 1998 income tax return that he said he received from his brother-in-law, Mr Jomaa, the tenant of his property at 4 Edward Street, Arncliffe. He claimed the following deductions: interest of $6,271, special building write off amounting to $1,542 and other rental deductions of $1,599. In connection with the audit, he informed the respondent by letter dated 18 February 1999 (T25) that four people began living in that property from 16 August 1997 until 15 August 1998 when the applicant and his family moved into the home. In cross- examination he conceded that, as the tenant had not occupied the property for the entire income year, the deductions required adjustment. He also admitted that the amount of special building write-off was wrong and should be $750. Remarkably, in relation to that deduction he admitted that he created a figure of $3,084, his share being $1,542 (the balance being his wife's), so that he could obtain a refund of his provisional tax.
17. Mr Kdouh was asked questions in cross- examination about the electricity supplied to 4 Edward St and to 31 Knoll Ave Arncliffe, another property he owned. Pursuant to a request under s. 264 of the 1936 Act, Energy Australia informed the respondent (exhibit R1) that the account for 4 Edward St has been in the applicant's name from 4 September 1997, when the electricity meter was installed. The account for 31 Knoll Ave was also in the applicant's name from 12 March 1987 until 29 January 1998 and thereafter it was in the name of Mr A and Mrs F Jomaa. The applicant did not dispute the accuracy of the information from Energy Australia. It was put to him that, contrary to his tax return and his earlier evidence, his brother in law did not live at 4 Edward Street in the period that he had claimed. Mr Kdouh said he could not remember. He was then asked about the application to the National Australia Bank that he made in December 1996 to finance the purchase of 4 Edward Street (exhibit R2). He agreed that the application stated that he and his family were going to occupy the property. He agreed that he had the property renovated to suit his family's needs. Finally he conceded that he had allowed the Jomaas to stay in the Knoll Avenue home and that he and his family moved into the Edward Street property.
Findings and consideration
18. Mr Moussa submitted that Mr Kdouh did not realise his full responsibility for returning cash dealings from his drivers and he did not receive expert advice about that matter from the ATO during earlier audits. It was submitted that he was co-operative with the auditor and that the respondent's adjustment to the 1998 assessment should be reduced by $4,321 and such an adjustment should be taken into account in determining penalty for that year. The appropriate penalty was for recklessness because the applicant did not try to hide income and he provided the auditor with all relevant information even though he could have withheld the information about the cash payments. In his submission the penalty should be reduced by 20 per cent for co-operation.
19. For the respondent, it was submitted that Mr Kdouh's leaving out pay-ins from drivers of his taxi, being amounts of income, constituted intentional disregard of the taxation law. He had been audited in the past and penalised for omitting taxi earnings and not retaining related documentation. It was submitted that the applicant made a statement to the auditor at the initial interview that he had not understated his income, a statement that he knew was untrue. Further, it was submitted that when the applicant was challenged by the auditor, he made admissions of further amounts of understated income that contradicted the statements he had made earlier. If anything, the applicant's conduct increased the auditor's work rather than reducing it. In relation to the rental property, the respondent submitted that Mr Kdouh claimed the deduction for a property he occupied, knowing that he was not entitled to deductions in respect of his home.
20. It is not disputed that Mr Kdouh has a tax shortfall in each of the income years in question. In proceedings before the tribunal, he carries the burden of proving that the assessment of income tax is excessive (s. 14ZZK(b)(i) of the Taxation Administration Act). Consequently, where the applicant contends that penalty should not have been imposed under s. 226J of the 1936 Act, he must prove that he did not intentionally disregard the 1936 Act or the regulations, rather than the respondent having to defend the decision to impose that rate of penalty (
Nozzi Pty Limited v FC of T (2003) 52 ATR 521).
21. Hill and Hely JJ in
Hart v FC of T 2003 ATC 4665; (2003) 131 FCR 203 discussed various penalties imposed under the 1936 Act and in the course of that analysis, differentiated intentional disregard from recklessness in the following passage:
``There is a line between recklessness and dishonesty, and as the Explanatory Memorandum for the Taxation Laws Amendment (Self Assessment) Bill 1992 (Cth) (at p 89) confirms, a finding of dishonesty is not necessary for a taxpayer to be subject to a s 226H penalty. Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self assessment. But, in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established although there are some sections (eg s 226K) which impose a liability in particular circumstances even if the taxpayer has not been negligent. The context makes it clear that recklessness means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J).
The primary judge did not explain, in terms, why the circumstances of this case fell within s 226H, rather than, eg s 226G. However, it is implicit in his Honour's judgment that the claim to the tax deduction was so tenuous, that if not due to an intentional disregard of the Act, it was only explicable on the basis of gross negligence in propounding the claim. A finding of gross negligence may be made in appropriate circumstances without the need for any subjective enquiry.''
(at ATC 4674; FCR 214)
22. In relation to the undisclosed earnings, Mr Kdouh says that he did not realise that he had to include cash and other payments (pay- ins) received from drivers who did not complete worksheets. He maintained this assertion even though he admitted that the justification or reason for his receiving pay-ins was that they were provided in return for allowing casual drivers to have the use of his taxi for their own reward. Having regard to the number of years that he has been conducting a successful taxi
ATC 2008business and his previous experience from the 1993 audit which found that he had not disclosed all of his earnings, it is difficult to accept his contention. It is unrealistic, and also very convenient for him, to attempt to defend his position by blaming others for not providing him with information in the form of worksheets. Mr Kdouh himself should have kept his own record of pay-ins, including at least the amount involved, the identity of the payer and the date (s. 262A of the 1936 Act). Whatever may have been the scope of the record keeping audit in 1996, it is plain that he had been subjected to a substantial rate of penalty in 1993 in respect of his nondisclosure of earnings.
23. There is nothing in the applicant's evidence that persuades me to accept that he did not appreciate that pay-ins were part of his income or earnings from the use of his main business asset, the taxi. He knew from his experience in the business and the earlier audit, that the amounts received from his drivers for their use of his taxi were income and to be declared as such in his returns. I am satisfied that he made a choice not to disclose in his 1996, 1997 and 1998 returns the earnings from casual drivers who did not give him worksheets and he deliberately understated his income by nondisclosure. Moreover, he did not co-operate fully with the auditor and gave him minimal assistance. Indeed he misled the auditor with the limited information he provided at the initial interview. This pattern of withholding information continued over the next five months in 1999. I find that he did not disclose the information about other drivers because he wished to keep it from the auditor. This continued until he had no alternative but to do so when confronted with discrepancies in the number of kilometres travelled, and he admitted as much in cross-examination. I do not accept his evidence that it was only through borrowing from his brother in law and assistance from his wife that he managed to repay the bank loan. It is inconsistent with his capacity to afford the improvements to 4 Edward Street that cost $50,800 (T25). I infer that his undisclosed, cash earnings allowed him to repay the loan and to pay for the construction contractor.
24. The applicant's actions during the audit interviews in 1999 demonstrate an intentional disregard for his responsibilities under the 1936 Act and regulations. I accept the respondent's submission that the applicant's actions in disclosing amounts in the tax returns in question that were significantly less than the income amounts he disclosed to the bank, is consistent with behaviour that constitutes intentional disregard. It goes without saying that he has not discharged the onus of proving that he did not have an intentional disregard for those responsibilities.
25. As for the 1998 return and the deductions claimed in respect of a rental property, suffice to say that his evidence at the hearing was unconvincing and ultimately unreliable. He candidly admitted that he inflated the amount of a deduction claimed for the special building write off, simply to allow him to obtain a refund of provisional tax. This is also consistent with intentional disregard for the income tax legislation and not mere recklessness. But his evidence went further than that. At first he allowed that his tenants were not in occupation of the property throughout the year, thus leading to his having overstated deductions, given that they were claimed on a full year basis. Further on in cross-examination, he agreed that his brother in law had not at any time occupied the property for which the deductions were claimed. By his own admission (T30-148), he knew from courses he attended with ITP and H&R Block what was required to claim rental property deductions such as water and council rates, depreciation, insurance and gardening. He frankly stated in cross- examination that he claimed deductions regardless of whether he lived in the property. My conclusion is that he deliberately intended to claim the deductions in the 1998 return for a property that was not occupied or to be occupied by a tenant. It is difficult to give any credence to his evidence on this aspect of the case as well, and again I find that he has not discharged the onus of proving there was no intentional disregard on his part.
26. On the evidence before me, there is no basis for exercising the discretion in s. 227(3) of the 1936 Act to remit any of the penalty. For these reasons the respondent's decision of 6 August 2004 should be affirmed.