HOBART CENTRAL CHILD CARE PTY LTD v FC of TMembers:
SA Forgie DP
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 1027
SA Forgie (Deputy President) Hobart Central Child Care Pty Ltd (``HCCC'') applied for review of objection decisions made by a delegate of the Commissioner of Taxation (``Commissioner'') dated 3 June 1998 in respect of amended assessments issued for the financial years ended 30 June 1993, 1994 and 1996 and a Notice of Assessment issued for the financial year ended 30 June 1995. The assessments were issued after an audit had been carried out. As a result, the delegate had decided that HCCC had omitted to return income in those years and had claimed as deductions depreciation and other expenses in respect of which it was not entitled to claim a deduction under the Income Tax Assessment Act 1936 (``ITA Act''). The delegate increased HCCC's taxable income and this led to an increase in the primary tax payable by HCCC. I have decided to affirm the objection decisions.
HCCC and the centre
2. On the basis of the evidence of Mrs Bronwen Frances Watson, I find that the HCCC is a company of which she has been a director since 1991.
3. In late 1991, the Hobart City Council (``Council'') called for expressions of interest to run a child care centre then known as the Hobart City Créche (``Créche''). Mrs Dianne Mackey was its Assistant Director. The Créche was located in Bathurst Street in Hobart and, until then, had been owned by the Council.
4. HCCC expressed interest and, on 13 January 1992, began to operate the Créche, which was then named the Hobart Central Child Care Centre (``Centre''). Initially, Mrs Watson and Mrs Symmonds were both registered nurses and so approved as the licensees of the Centre. The Centre was initially licensed to care for a maximum of 45 children ranging in ages from birth to seven years provided it maintained a certain ratio of staff to children cared for.
5. Two of Mr and Mrs Watson's sons were employed at the Centre: Mr David Lachlan James Watson was employed as the administrative manager of the Centre from early to late 2003 and on and off before that from 2000; and Mr Richard Owen Llewellyn Watson was employed as the business manager at the Centre for some time.
6. HCCC receives two forms of payments. The first is in the form of payments made by the Commonwealth under the Child Care Act 1972 (``CC Act'') (``child care payments''). The
ATC 2354second is in the form of fees paid by the children's parents. Those fees may represent the full fee charged by HCCC for child care or may represent the balance between the full fee and the payment made by the Commonwealth under the CC Act in respect of a child.
7. On 4 April 2003, Mrs Watson was convicted of three counts of defrauding the Commonwealth contrary to the Crimes Act 1914 (``Crimes Act'').
``... Between 1 July 1993 and 30 June 1996, you, by not banking a substantial portion of the fees received by the Centre, kept a record of the fees earned, totalling about $390,000, out of documents provided to the Centre's accountant for the preparation of its accounts, including its taxation returns. The accountant was also provided with the details of depreciation claims in relation to items which were not used for the business of the Centre and were kept at your home for the personal use of you and your family. In consequence, the Centre's income tax returns for the financial years which ended in 1994, 1995 and 1996 substantially understated its taxable income. You, knowing that the information contained in the taxation returns was false, declared it to be true and correct.''
8. As to reparation orders sought by the Crown, Evans J was satisfied that the Commonwealth had suffered loss as detailed in Mr Gallen's affidavit. He was satisfied that he should exercise his discretion to make reparation orders in the amounts detailed and so ordered Mrs Watson to pay $44,734.47 in respect of count 1, $47,360.94 in respect of count 2 and $38,949.84 in respect of count 3.
9. His Honour sentenced Mrs Watson to seven months' imprisonment on each count to be served cumulatively. She was to be released after ten months on condition that she enter a recognizance of $3,000.00 to be of good behaviour for two years from the date of her release. He then noted that, in addition, she is to pay the Commissioner the amount that he specified for each count. They totalled $131,045.25 and mirrored the amounts that he had ordered to be paid by reparation to the Commonwealth.
10. On 4 April 2003, Evans J ordered that Mrs Watson pay $131,045.25 to the Commonwealth of Australia. A note attached to the certificate issued by the Registrar of the Supreme Court under s. 21B(3) of the Crimes Act reads:
``You have been convicted of a federal offence under the Crimes Act 1914 or, under section 19B of that Act, you have been discharged without conviction and the court has ordered you to make reparation to the Commonwealth or a public authority under the Commonwealth by payment of an amount of money or otherwise. This payment is in addition to any fine or other penalty imposed by the court. The above certificate when filed in a court of civil jurisdiction is enforceable as a final judgement of the court in which it is filed.''
The assessment and amended assessments in issue
11. The following table is taken from the outline of closing submissions made on behalf of the Commissioner by Mr McGovern SC with Mr Abbott of counsel. I have checked it against the material referred to in the footnotes and all figures are expressed in dollars:
|Year Ended||Date of Assessment||Omitted Income||Disallowed Expenses||Taxable Income||Assessment of Primary Tax Payable||Culpability Penalties||Interest||Total Amount Payable|
ATC 2355The disallowed expenses are further divided into expenses claimed by HCCC for deprecation and for expenses incurred in earning its income:
13. The assessment and the amended assessments included amounts imposed as penalties. The Commissioner imposed those penalties on the basis that HCCC's omission of income and all but one of its claims for expenses,
14. HCCC objected to the assessment and amended assessments on 11 February 1998 (``taxation objection'') and the Commissioner made a decision on 3 June 1998 disallowing the objection (``objection decision'').
Child care payments: legislative framework
15. The CC Act applied throughout the four financial years with which I am concerned. It was amended with effect from 1 January 1996.
16. The CC Act provides for:
``... assistance by the Commonwealth in respect of places where children of all or the majority of whom are under school age may
ATC 2356be cared for, in respect of the development of such places and in respect of research in connection with the care of children, and for related purposes.''
CC Act, Long Title
17. A ``child care centre'' is, among others, a place that provides child care for children all of whom are residing in their own homes, all or the majority of whom are of pre-school age and all, or the majority of whom, attend the place on a regular basis.
18. For most purposes in the CC Act,
19. The CC Act provides for two types of grants: capital grants and recurrent grants. Capital grants also come in two types. The first type is a grant made by the Minister to the operator of an eligible child care centre for the capital cost of an approved project.
20. Recurrent grants also come in five types: grants for recurrent expenditure, establishment of new eligible child care centres and fee relief as well as research grants and grants in respect of the development of child care centres. Only the first three have relevance in this case.
21. The first type are approved by the Minister and made to the operator of an eligible child care centre ``... to assist the operator to meet the operating expenses of the centre in respect of each quarter while the approval is in force.''
22. The grant is calculated by reference to the weekly rate
23. Should the Minister revoke an approval for either type of recurrent grant, the revocation takes effect on the last day of the quarter during which the revocation was made.
24. The second type of recurrent grant may be made where an operator employs a person to establish an eligible child care centre and does so during the six week period immediately before it begins to provide child care. If the
ATC 2357Minister approves a grant to be made to the operator of the eligible child care centre, the amount of the grant may not exceed the amount of the employee's salary or wages in that period.
25. The third type of recurrent grant takes the form of a grant to the operator to enable the operator to allow fee relief for a child in economic need in relation to a particular period.
26. A grant under the Act may be made upon any terms and conditions that the Minister considers fit provided that those terms and conditions are not inconsistent with the CC Act.
Child care payments: agreement between HCCC and the Commonwealth
27. An agreement was reached between HCCC and the Commonwealth on 13 January 1992 regarding a recurrent grant under s. 12A to enable HCCC to allow fee relief. The agreement specified the conditions on which the grant was made and provided that HCCC was required to use all moneys granted to it for the sole purpose of allowing fee relief in respect of children to whom it provided child care and who were identified in accordance with the guidelines as being in economic need. On termination of the agreement:
``... any grant moneys not used by the Operator[
HCCC] in providing fee relief, or used for purposes other than fee relief, must be repaid by the Operator to the Department within 21 days of the termination of this Agreement, and if not repaid, shall become a debt due and payable immediately to the Commonwealth and recoverable as such in a court of competent jurisdiction.''
Exhibit H, cl. 3(2)
28. HCCC was required to comply with the Child Care Centre Fee Relief Eligibility Guidelines (``CCCFRE Guidelines''), which were made under s. 4C of the CC Act and which were attached to the Agreement, and with the Child Care Fee Relief Guidelines (``CCFR Guidelines'') made under s. 12A of the CC Act.
``(i) the income of the family and the child as recorded in the income assessment notice[
An example was given in Exhibit Q, which is a letter dated 13 May 1999 from Centrelink to HCCC. Centrelink advised that the letter was a Childcare Assistance assessment for a named parent in respect of a named child. The percentage of Childcare Assistance was stated to be 82.48% for one child and 90.17% for two children. The assessment would remain unchanged for a year unless the parent's circumstances changed in that time.] issued by the Department of Social Security in respect of the child; and
(ii) the actual fees charged by the operator; and
(iii) the hours of child care booked and paid for.''
Exhibit H, Attachment, CCCFRE Guidelines, cl. 10(1)(g)
29. Every three months, HCCC was required to submit to the Department a claim for fee relief setting out the amount of the fee relief claimed, the amount of the special fee relief and the weeks in respect of which fee relief was claimed.
``a certificate... that the funds provided for fee relief during those months were used for fee relief in accordance with the Child Care Relief Guidelines.''
Exhibit H, Attachment, CCCFRE Guidelines, cl. 12(c)
HCCC was also required to lodge a statement by an accountant, who met the requirements of ss. 13(1)(a), (b) and (c) of the CC Act, that it
ATC 2358had kept the proper accounts and records and that:
``the funds provided for fee relief during the financial year were used for fee relief in accordance with the Child Care Fee Relief Guidelines.''
Exhibit H, Attachment, CCCFRE Guidelines, cl. 12(f)
30. The CCCFRE Guidelines were amended with effect from 1 January 1994 and were now called Guidelines for the Determination of Eligible Child Care Centres (Childcare Assistance) (``DECCC Guidelines''). There are similarities in substance between the two sets of Guidelines. Clause 15 of the DECCC Guidelines posed the question whether the operator of a child care centre lodged claims for Childcare Assistance and answered it:
``(1) The operator of an eligible child care centre must lodge with the Department, in the month following each quarter during which the centre is an eligible child care centre, a claim in the approved form setting out:
- (a) each amount of Childcare Assistance and Special Childcare Assistance claimed in respect of the quarter for the child care centre and
- (b) in resect of each amount - the weeks in which the child care occurred for which the claim is made.
(2) The operator must include with the claim:
- (a) a copy of any records of the child care centre that the Secretary or an authorised officer requires the operator to produce; and
- (b) if the Secretary or an authorised officer requires the operator to certify that the centre is being operated in accordance with these guidelines - a certificate by the operator for that purpose.
(3) In this clause, `quarter' means a period of 3 months for which the centre is required by the Secretary to maintain records for the purpose of lodging claims for Childcare Assistance.''
The Centre and its management
31. Mrs Watson said that she liaised with parents and was also concerned with the staff and the behaviour of the children. Primarily, her concerns were with the children's care but she also acted as a sounding board for parents who had problems affecting their children. Maintaining the Centre's accreditation was vital and she was concerned with it. She would open the Centre every morning but her duties were not confined to the time she spent there. She would write the Centre's practices, cook, sew and wash and dry linen as it needed to be done and did so at home as well as at the Centre. Mrs Watson said that she has no accounting qualifications but has completed an Advanced Diploma of Social Sciences in addition to her nursing qualifications.
32. Mrs Watson said that the child care business at the Centre was a seasonal business that had peaks and troughs. The Centre offered discounts and she recalled offering discounts to a family. Some parents did not pay their fees regularly. Others misplaced their receipts and she would issue a replacement receipt specifying that it was a duplicate. That happened frequently, she said. Mrs Watson named one family to whom she had issued a replacement receipt but said that no others came to mind. Some parents paid their fees in cash and they might do so during or after banking hours.
33. Mrs Janet Gail Moore, who is a qualified kindergarten teacher, said that she had been employed by HCCC to keep the books and to pay wages. She also assisted with child care as required. Her employment extended from 15 January 1996 to just before Christmas 1997.
34. Ms Moore reconciled the cheque book with the bank statements and completed a reconciliation of the cheque book. At the end of each year, she sent the documents to the accountant, Mr Denton. At times, she collected fees from the parents. If Mrs Watson were in the office, she would take the money and either she or Ms Moore would write the receipt. If Mrs Watson were not present, Ms Moore said, she would both take the money and write the receipt. If neither of them was present, Mrs Mackey would accept the money and issue a receipt. No differentiation was made in the records between fees paid in cash and those paid by cheque. In her evidence, Mrs Mackey confirmed that Ms Moore would give her the cash tin if Mrs Watson were not present. Ms Moore did so frequently. Ms Sarie Marguerite Clements was employed by HCCC from 18 April 1994 to 3 February 1995. Mrs Mackey
ATC 2359said that Ms Clements did not take the cash tin as she was at the Centre before Ms Clements arrived and still there when she left. Mrs Mackey could not recall what happened at lunch time. Mrs Mackey had a key to the office but could not recall whether she had it all the time or just when Mrs Watson was not present.
35. Ms Moore said that she would issue a receipt from the Medicare Childcare Cash Rebate Scheme Child Care Receipt Books supplied to the Centre. She would enter the details of the payments in the roll books. In addition, she would transfer details of payments made in her absence from the receipt books to the roll book. The roll book enabled parents to see what fees were outstanding. If a child was experiencing hardship, a separate claim was made to the Department.
36. Mrs Watson did not keep HCCC's books as she had no skills in that area. The bookkeeper paid income tax and super-annuation instalments as required.
37. Ms Clements is a qualified teacher and was employed from 9.00am to 5.00pm each weekday. Her duties included bookkeeping, paying the staff and, from time to time, helping in the kitchen, supervising child care and doing the laundry. In cross-examination, she said that she calculated and paid the group tax but that she did not make periodic payments in respect of Mrs Watson's salary.
38. Ms Clements said that her bookkeeping required her to write up the cash payments book. That required her to enter details from the cheque book butts. She allocated the payment to the appropriate payment column in the book. At the end of each month, she reconciled HCCC's cheque account bank statement.
39. Mrs Louise Phillipa Malone started part-time work at the Centre when Ms Symmonds sold her share in HCCC and left. By that time, Mrs Malone's child had been attending the Centre for various periods from January 1992. Her duties began as a general office worker but developed into a wide range of tasks maintaining the child care relief claims, interviewing parents, banking, preparing salaries and maintaining cash payments and receipt books. Several times, Mrs Malone said that she was left in charge when Mrs Watson was away.
40. In so far as bookkeeping is concerned, Mrs Malone said that she made records in the receipt books and the day books but she was not the only person who made records in them. Mrs Watson did not tell her what entries to make in them and did not interfere in the way in which they were set up. Mrs Malone said that she changed the bookkeeping system a little as she wanted to set up a cash received/cash paid book. Mrs Watson agreed that was a good idea. The only time that she reconciled the duplicate receipts with the cash occurred when Mrs Watson was away so that Mrs Malone could prove that they balanced. In doing that, Mrs Malone said, she had not acted on instructions from Mrs Watson.
41. In her statement, Mrs Mackey said that, to the best of her recollection, she could not recall ever signing any receipts or doing paperwork in the office. To the best of her memory, Ms Symmonds and Mrs Watson shared the office and paper work. She could recall Mrs Watson's working in the office on her own after Ms Symmonds left. Later, Mrs Watson engaged Mrs Malone on a part-time basis and both of them worked in the office. In cross-examination, Mrs Mackey explained that she was referring to the period 1992 and 1993.
42. Mrs Mackey's hours were from 8.00am to 5.30pm but she was frequently there until 6.00pm and, on one occasion, until 6.30pm. Mrs Watson was still there. She closed the Centre but Mrs Mackey thought that there were occasions when she would have closed the Centre and more so in later years. In the earlier years, Mrs Watson spent longer periods at the Centre than she did later.
43. Mrs Watson said that the Centre was broken into on a number of occasions between 1992 and 1996. Some damage was done and some money was stolen. She complained to the police about the break ins. She also took steps to stop the theft of money from the Centre. She coated some money in powder that blackened the hands of anybody who handled it. Mrs Watson said that she also kept the office locked but she and some senior staff, including the bookkeeper, had keys. Mrs Watson said that she took the cash home each night if it had not been banked.
44. Mrs Mackey recalled the Centre's being broken into as did Mrs Malone. She was not aware that there had been any theft from the Centre.
ATC 2360Mrs Watson agreed with Mr McGovern that she passed information relating to expenditure to the bookkeeper so that HCCC's accountant, Mr Denton, could claim it as expenses or depreciation. She thought it unlikely that claims for expenses or depreciation were a matter for discourse between her and her husband.
46. Mr Richard Watson said that, at the time he carried out the audit of HCCC's affairs, Mr Gallen was recorded in the minutes of the Association as the privately contracted auditor. The same minutes disclose that Mr Le Bis's wife, Mrs Alison Le Bis, was the President of the Association. She was the director of the Sandy Bay Child Care Centre. At that time, HCCC was a member of the Association and represented by his mother, Mrs Watson. Mr Gallen could not recall whether he ever carried out an audit of the Association's accounts. As far as he knew, the Association comprised several child care centres and provided them with a voice with which to lobby.
47. Mr Michael Dominic Gallen is a taxation officer employed by the ATO. Over his time in the ATO, he has worked in several sections but, at the time of the hearing, was an auditor in the ATO's Small Business Line. He was awarded a Bachelor of Commerce from the University of Tasmania in 1985 and has been a Certified Practising Accountant since 1991.
48. In his affirmation, Mr Gallen set out his procedures in detail. They included gathering documentary material, site inspections, analysis of records to trace income and expenditure, analysis of expenditure to determine whether supported by documents and, if so, whether a business or capital expenditure. Mr Gallen said that he identified two streams of income: one in the form of fees from parents and the other from the Department. He regarded the money from the Department as income on receipt. At that time, he was following a cash methodology. When he took up the debtors in June 1994, his methodology became an accruals methodology. It is permissible to use both if talking about a class of income and then total income. Different methods can be used for different classes of income. The accruals methodology requires the identification of the time at which the service was provided. That date would be the date the care was provided to a child. He did not prepare an assets betterment statement. Mr Gallen did not enquire whether there were any limits on the money paid to HCCC by the Department.
49. Mr Loader, who determined HCCC's objections, decided that that the correct methodology to use in the audit was the accruals methodology.
50. In cross-examination, Mr Gallen told Mr Watson that he had probably not audited the operator of a child care centre before the audit of HCCC. He had previously had association with the Private Child Care Association as its privately contracted auditor. He had taken that position as a result of the invitation of Mrs Le Bis, who is the wife of one of his colleagues. Mr Gallen was aware that Mrs Le Bis was also the Director of the Sandy Bay Child Care Centre.
51. Regarding the suggestion that HCCC had lost money through theft or fraud, Mr Gallen said that Mr and Mrs Watson had made the suggestion. They had not advised of the amount of money lost through those activities and had not given him a specific time frame within which they occurred. They told him that a staff member who had since left the Centre was suspected of theft.
52. Mr Roger Raymond Undy has been an auditor for over 17 years. He has had experience in several sections in the ATO. After the ATO selected HCCC for audit on 17 April 1997, Mr Undy was selected to assist Mr Gallen in conducting the audit. His duties included attending interviews with Mr Gallen, assisting in gathering information and, to a limited extent, was involved in the analysis of business records. Mr Undy could not recall whether he had matched receipts to the roll books.
53. On 4 October 1997, Mr Undy accompanied members of the Australian Federal Police (``AFP'') in searching Mrs Watson's residence. Both Mr and Mrs Watson were present during the search. Mr Undy said that he told them that he would photograph and video certain items: vertical blinds and furniture, Fisher & Paykel upside down refrigerator, Miele dishwasher and Corniche sink, Fisher & Paykel dryer, empty space for washing machine, leather chairs and furniture, Panasonic TV and stand, vertical blinds and canvas awnings. Mr Undy also videotaped a doll in the bathroom of the flat attached to the
ATC 2361residence. It was not relevant to the items being searched but, he said, he was so taken aback when he saw it that, to his regret, he photographed it.
54. Later on the same day, Mr Undy accompanied AFP officers to the Centre where he videotaped a Miele washing machine covered with a piece of material and unconnected to water or electricity supply, a Simpson washing machine connected to both supplies, several portable stereo-cassette players, refrigerator carrying a Council barcode and cloth covered chairs. In a file note, Mr Undy recorded that he had asked Mr Watson why the Miele washing machine was unconnected. Mr Watson had told him that it was broken.
Payments made to HCCC under the CC Act
55. Mr Robert Paul Whitehouse was appointed as the Trustee in Bankruptcy of Mrs Watson's estate on 4 March 2004. His understanding of the way in which child care payments were made to HCCC and handled by it was set out in a file note dated 30 July 2004:
- ``(i) The parent would apply to the Department for a subsidy for the subject child on a means tested basis. An amount per day or hour was determined.
- (ii) The parent would register the child with a particular child care centre and when paying their dues to the centre would receive a deduction in the fee in accordance with the granted subsidy.
- (iii) The parent would receive a receipt that entitled them to a further refund from Medicare.
- (iv) The principal book of original entry is the child roll book. This book is used as documentary evidence by the Common-wealth for audit purposes of the subsidy and control of the licence.
- (v) In quarter (1) a flat amount is received into a `trust account' by the centre. These funds are transferred to the operating account on what appears to be an ad hoc basis. In the quarter (2) the same base amount is received plus or minus any adjustments determined from the lodgement of a claim. In quarter (3) the standard amount is the original assessment plus or minus any adjustments that occurred in quarter (2) became the standard and so on.''
Exhibit AA, Annexure (a), cl. 1
56. The method of payment and adjustment is apparent from a letter dated 30 March 1998 written by Ms Yarja Rollinson of the Children's Services Program:
"This letter is to acknowledge receipt of your Childcare Assistance Claim for the October/December 1997 quarter and to advise you of payments for the April/June 1998 quarter.
CALCULATION OF OCT/DEC 97 CHILDCARE ASSISTANCE ADJUSTMENT (Note: figures in brackets are negative amounts) Oct/Dec 97 Childcare Assistance (CA) claimed $30713 Oct/Dec 97 Childcare Assistance (CA) advanced $21285 Oct/Dec 97 Childcare Assistance (CA) adjustment $9428 Oct/Dec 97 Special CA (SCA) claimed $1439 Oct/Dec 97 SCA advanced $0 Oct/Dec 97 SCA adjustment $1439 Apr/Jun 98 Childcare Assistance (CA) advance $30713 Apr/Jun 98 Special Childcare Assistance advance $1410
PAYMENTS APR/JUN 98 QUARTER Component Adjust 1 Apr 98 1 May 98 1 Jun 98 Total CA Advance $9428 $12285 $9214 $9214 $40141 SCA Advance $ $564 $423 $ 423 $1410 Total $ 9428 12849 9637 9637 41551" Exhibit N
57. In a letter dated 26 August 1998, Mr Tony Lawrie, Senior Payments Officer with the Families Support Team at Centrelink, explained to Mr Watson what was meant by a claim's having been processed:
``... The nature of the processing of the claim means the reconciled amount may be varied in the future.
We have received your records of attendances which provided details of number of hours of care, rebatable fee applied and CA percentage applied for each family over the quarter. We have used the figures supplied by you, checked for calculation errors and reconciled payments for the April-June quarter on that basis.
I cannot say that the reconciled amount is a final one however for the following reasons. It may be that you have been in error in the number of hours you have recorded for a family or you have applied an incorrect CA percentage for example. This may come to light in a Compliance visit at some future date. Alternatively, Centrelink may correct a family's CA percentage retrospectively, requiring you to adjust that family's record in the period and amend your claim.
I realise my response does not provide you with the unequivocal approved or not approved response you were seeking, but I do not agree I can give such a response ...''
58. Mr Whitehouse calculated the maximum income that HCCC could generate in any year (``business capacity'') as the number of its licensed places multiplied by the rate it charged per day and the number of operating days in that year.
59. Mr Whitehouse set out the income calculated by the ATO and included in its amended assessments. These are set out in the tables above but I will repeat them so that the table stands alone:
60. Mr Whitehouse considered it unsafe to base any estimate of HCCC's income on the basis of averages. That was because the rate charged for children under two years of age
ATC 2363differed from that charged for those over two years of age. He considered that the probable amount not included in HCCC's returned income was that shown in column 3 of the table above. That is the arithmetical difference between the figure shown between HCCC's business capacity and the amount shown as income in its taxation returns. Mr Whitehouse described that total as the ``probable total'' and then stated that the ``reality is something less''.
``(c) The amounts calculated in col. 4 by the A.T.O. exceed the licensed business capacity of the enterprise and as such can only be viewed as speculative. The issue of any assessment or charges based on this premise is in my opinion unsound.
- (i) In the 1993 year the A.T.O. has determined an amount for the first six months. The calculation of the annual amount was achieved by simply adding a like amount for the second six months. Noting the comments in para (a) and the fact that the second half of the year contains the majority of public holidays and the time the business was shut, logic dictates that the methodology used by the A.T.O. is flawed.
- (ii) In the 1994 and 1995 years the A.T.O. has used a combination of calculations that are not capable of reconciliation to any particular acceptable reference point. The total achieved by the A.T.O. exceeds the capacity of the income of the business and as such can only be classed as speculative or erroneous.
- (iii) Whilst in 1996 the result is close to my assessment I have no confidence in the A.T.O. methodology.
(d) At no time have the A.T.O. advised that they have confirmed their findings by use of the investigative methodology known as `the asset betterment concept' or `the personal expenditure review method' sometimes known in the trade as `the Al Capone method'.''
Exhibit AA, Annexure (a), Conclusion (c)
61. Mr Whitehouse wrote a further file note attaching Schedule B setting out the charge rate for those children under two years of age and those over that age. Mr Watson had given him the figures.
62. If an operating level of 95% of business capacity is assumed, the income generated by HCCC became $1,549,650.00 in the years 1993 to 1996. The difference between that figure and the income returned by HCCC in that period became $125,498.00.
63. Mr Whitehouse estimated a figure of 6.5% of ``down-time'' on the basis that it would be caused by the need to process parents and children at the beginning and end of the day. Based on the number of places HCCC was licensed for and operating at 93.5% of capacity, Mr Whitehouse assessed that HCCC's capacity would have been a total of $1,525,181.00 for the four years.
64. Mr Whitehouse divided the figure of $1,525,181.00 by 53 as the number of licensed
ATC 2364places and came to the figure of $28,779.00 per licensed placement. If the ATO's income is divided by $28,779.00, it suggests that 65.8 places produced the income. The schedule prepared by the ATO from the roll books, Mr Whitehouse said, suggests that there were ``over licence activities''
65. In giving evidence, Mr Whitehouse said that he had queried the ATO about matters arising under s. 108 of the ITA Act. In general terms, that section allows the Commissioner to treat an amount paid to a person by way of an advance or loan as a dividend paid to that person where he forms the opinion that it represents a distribution of profits.
66. Mr Whitehouse said that he had not considered whether any money paid by the Commonwealth from child care was held in trust by HCCC or whether some of it had to be repaid by HCCC. In considering the material provided by the ATO, he had not considered whether there had been double counting. No documents he had been given suggested that there had been double counting. Later, Mr Whitehouse said that he assumed that Mr Gallen had credited the payments from the Commonwealth straight to income.
67. Mr Watson questioned Mr Whitehouse about accruals methodology. In that methodology, Mr Whitehouse said, money accrues to the taxpayer on the provision or completion of the service. It could be apportioned if only partially provided. A cash methodology and an accruals methodology have both been accepted by the ATO. The ATO is not the arbiter of the methodology that either the company or he uses. In the case of HCCC, Mr Whitehouse said, the services it provided were not relevant in deciding the methodology employed. He used a methodology to determine the maximum income so that he could develop the parameters of what he was looking for. In doing that, he assumed that everybody paid HCCC what was owed. If a company mixed the cash and accruals methodology, there would only be a marginal difference at the end of the year. If the accruals methodology were used, there would be a need to pick up any debtors at the end of the year but there would be no need to do that if the cash methodology were used. He understood that HCCC adopted the cash methodology.
68. Mr Whitehouse said that he had seen Mr Gallen's very detailed analysis of HCCC's claims for expenditure and depreciation and had no quarrel with them. Mr Gallen, who had the Centre's roll books, had adopted an appropriate method. There were differences between the figures he had calculated and those calculated by Mr Gallen. The explanation of the difference was that his were arrived at after a theoretical exercise and Mr Gallen's after an exercise dealing with source documents and so with actual figures. Mr Whitehouse said in cross-examination that the marginal differences between the figures reached by the two different methods did not justify his examining the source documents. For all that, his methodology had a measure of reality as it was based on HCCC's business capacity. The difference between the ATO's figures and his own did not justify his spending money on undertaking further enquiries. In re-examination, he acknowledged that it could take more than 53 children to fill 53 places given that not all children attended the Centre for a full day or each day it was open. He had relied only on a head count.
69. Mr Whitehouse said that he had not ascertained Mrs Watson's wages by matching the amounts debited to her director's loan account offset against those wages. He was not required to do that. It was not relevant to him to see the cheques paid to her or the debits against her loan account. As he had the ATO's proof of debt and the Commissioner's assessment, he had no need to check what moneys Mrs Watson received and whether she received some as reimbursement of expenses she had incurred on behalf of HCCC.
70. Mrs Watson said that the Department frequently made adjustments at the end of a quarter. That might have arisen for a number of reasons including clerical error or a change in a parent's income and so a change in entitlement in child care benefit.
71. During the audit, there was various correspondence between JJ Denton Pty Ltd (``Denton'') and officers of the ATO. There is also reference in a letter dated 28 July 1997 to a letter dated 8 July 1997 from Mrs Watson to the ATO
72. Mrs Watson agreed that HCCC's roll books showed the name of each child and five days each week. When payment was required, that payment would, at times, be noted in the roll book.
73. Mrs Watson said that she did not keep the roll books in order to determine attendance but they could be used in that way. One of the letters ``S'', ``A'' and ``P'' was put next to each child's name for each day of the week to indicate whether that child was sick, absent or present. The roll books could also be used to determine whether fees had been paid or not as ``Pd'' was entered if they had been paid. The money that was paid might have included payments for such things as nappies and the kinder programme.
74. When asked whether the roll books were a reliable guide as to whether fees had been paid because they were audited by the government, Mrs Watson replied that that was not her initiative and were not required.
75. Ms Moore said that a roll book was kept detailing the names, birth dates and attendance of the children cared for by the Centre. The staff completed that roll book. Ms Moore also kept a computerised daily sheet of children present. The information on that list was taken from the entries made by parents on the daily sheet when delivering their children to the Centre. She would use the list to mark children as present or absent in the roll book. Mrs Moore agreed with Mr Watson that the roll book could not be regarded as a financial record as it did not include the fee relief payments.
76. Ms Clements said that she entered the payment of fees in the roll book next to the child's name and under the day of the week on which the fees were paid. If no fees remained to be paid for the child, she entered ``Pd'' in a column next to the child's name.
77. Mrs Malone said that the accounting and bookkeeping methods used at HCCC were those that had been used before she worked there. It was supervised by Mrs Watson. She described the system:
``The bookkeeping/accounting was recorded manually. The HCCC kept a daily Roll Book detailing the names, birth dates and attendance days of the children cared for by the centre. There was also a running total of the amount of money due, which was brought forward in the Roll Book each week. This allowed office staff to calculate part payments due when the account was not paid in full at the end of each week. When a parent paid their child care fees, the amount they paid was recorded in the Roll Book on the actual day when they paid the money. At the end of the week, the notation: 'pd' was put in the Roll Book under the 'Acct Due' column if an account was paid up to date at that stage.''
Exhibit 19 at 1
78. Mrs Mackey said that HCCC maintained a roll book from its inception. It recorded each child's name and the days that child attended the Centre. She said that the only time that she ever made entries in the roll book was during Mrs Watson's absence overseas. To the best of her recollection, she never noted the fees paid in the roll book.
79. Initially, Mrs Watson said, HCCC did not give parents receipts for the fees they paid but it did so when required. She could not recall whether that requirement came into force in 1993. Later, she said that receipts began to be issued towards the end of 1994. Later again, she agreed that receipts were issued from 1 July 1994 so that parents could use them in their claim for child care rebate from Medicare.
80. The receipts were not necessarily an accurate record even though the government audited them because, Mrs Watson said, a lot of people wrote them. Their audit was only required at a later date. When it was suggested to her that the 1996 receipts showed that a sum had been received that was substantially greater than that which had been banked, she replied that she ``wouldn't believe so''. When it was suggested to her that the receipts in the other years showed the same thing, Mrs Watson replied that the money would have been accounted for in what had been spent. It was not correct to say that the difference between the receipts and the bank records was explained by cash taken by her over four years.
81. Ms Clements said that she would receive payments of fees and write receipts. Only she, Mrs Watson and Mrs Mackey wrote receipts. Mrs Mackey only did so if she or Mrs Watson were not present. If only she and Mrs Watson
ATC 2366were present, Mrs Watson generally left it to her to write the receipt.
82. Mrs Malone said that parents were given a receipt when they paid fees on every occasion. The transaction was recorded in the ``big receipt book... which was an accurate record because it had to be reliable for inspection by the government who audited the child care assistance payment.''
83. Mrs Mackey agreed with Mr Watson that she wrote a significant number of receipts between 1994 and 1996. She had also written them in 1992 and 1993. If she made any errors they would be errors that arose from a parent's saying, for example, that he or she would pay on the way out and did not. In the meantime, she had written the receipt but, in that case, the receipt would remain in the book. It was a very rare occurrence.
84. While she was overseas from 4 October 1994 to 11 November 1994, Mrs Watson said, she gave her children access to her personal bank account. She left Mrs Mackey and the Centre's bookkeeper, Ms Clements in charge. Mrs Watson said that she expected those payments to continue while she was overseas. The accountant usually contacted the bookkeeper rather than her, Mrs Watson said. Mrs Watson made Ms Clements and Mrs Mackey co-signatories to the cheque account. She would have instructed Ms Clements to make sure that she inspected the drawings and did not overdraw HCCC's account.
85. Ms Clements said of the time Mrs Watson travelled overseas:
``... Before she left, Bronwen Watson instructed me on what was to be done in her absence with the parent paid fees. Those instructions were that I was to check the business account daily to make sure that we could cover the amount of cheques or payments that had to be made. Bronwen Watson specified that the business should not be overdrawn. I was to bank that amount of money each day and the balance was to go into her private account. Bronwen Watson supplied me with the number of the private Commonwealth Bank account into which the excess money was to be deposited. The passbook account was in the name of Bronwen F Watson; the account number was ...''
Exhibit 18 at 2
86. Daily for approximately six weeks, Ms Clements said, she banked some cash from the parent paid fees in HCCC's bank account at the NAB. On some of those days, she banked the rest of the cash in Mrs Watson's private account at the Commonwealth Bank of Australia (``CBA''). Ms Clements identified 16 payments totalling $12,455.00 that she paid to Mrs Watson's CBA account during Mrs Watson's holiday.
87. In cross-examination, Ms Clements denied that Mrs Watson had told her to pay her wages into her private account while she was overseas. Ms Clements repeated that Mrs Watson had told her to put the balance in her private account. She denied that, on her return, Mrs Watson had expressed any surprise about the amount of money paid into her private account. Ms Clements did not continue the practice after Mrs Watson's return from overseas.
88. Mrs Mackey said that she recalled Mr and Mrs Watson's going on holidays in October and November 1994. Before Mrs Watson left, Mrs Malone said, she asked her to be responsible for the Centre in her absence. Mrs Malone understood that to mean that she was to be the Acting Director. At that time, Ms Clements worked in the office as Mrs Malone had left before Mr and Mrs Watson went on holidays. Mrs Watson had arranged for Ms Sandra Geeves to work extra hours in the nursery so that she could work in the office.
89. Mrs Mackey said that she banked some of the fees while Mr and Mrs Watson were overseas. Ms Clements and she were co-signatories for the cheques. Mrs Mackey said that she was concerned about accounting for the money during this period. She instructed Ms Clements to lock the money in the filing cabinet when she was not in the office. At the end of the day, she locked any cash and cheques in the filing cabinet and took the key home with her. She never took any money home. Mrs Mackey said that she asked Ms Clements to reconcile the books daily. She did not check whether Ms Clements did this as she was still busy running the Nursery. In cross-examination, she said that she recalled her instruction because, on the first day when she had reconciled the book, she had found $60.00 missing. She worried about it and
ATC 2367told Ms Clements that, if anything was wrong, it could only be one of them. Ms Clements was the bookkeeper and she instructed her to reconcile the books daily. She trusted Ms Clements to carry out the duties as the bookkeeper and she focused on the children. Mrs Mackey said that she knew that she had not taken the money and worried about the missing money until she discovered during the committal proceedings relating to Mrs Watson that there was another bank account and money had been going into that.
90. After Mrs Watson returned from her holiday, Mrs Mackey said that she returned to work in the Nursery full-time. Apart from writing an occasional receipt when no-one was in the office, she no longer did any office work. She might have done some banking. Later in her statement, Mrs Mackey said:
``31. When parents paid their childcare fees, I would take the money and issue a Medicare Childcare Cash Rebate Scheme Child Care Receipt from the books supplied to the Childcare Centre by Medicare. The details of these payments were then added to the Centre Roll Book. Parents often paid their fees either in arrears or advance, and the Roll Book allowed Centre staff to see what fees were outstanding.
32. I completed and signed some receipts in the Childcare Receipt Books. I signed the receipts I completed as D Mackey. Some of the other signatories that I recognise are Bronwen WATSON who signed her name `B WATSON'. I can also recognise Janet MOORE's writing and signature on some of the Childcare Receipts.
33. If Bronwen was not there and there was no one in the office, I took the Receipt Books and the Childcare Assistant Book for signature into the Nursery and completed the receipt there.''
91. Mrs Mackey recalled that Mrs Watson had been absent from the Centre on a number of occasions after November 1994 when she had travelled to Melbourne and New Zealand. Mrs Mackey recalled Mrs Watson's telling her not to bank any cash when she was away. She was to continue to bank the cheques. Before Mrs Watson left for one of her trips, Mrs Mackey recalled her saying that Mr Watson would collect the cash on Friday as there was a safe at home. Mr Watson did attend the Centre and take the cash. Mrs Mackey had been concerned about this. In cross- examination, Mrs Mackey said that she did not know whether Mr and Mrs Watson had a safe at home but believed what she was told by Mrs Watson.
Mrs Watson's salary
92. Mrs Watson said that she was paid approximately $400.00 a week as salary. That amount was debited to her director's loan account. When she went overseas, she said, that Ms Clements had credited far too much money to her personal account. Ms Clements banked approximately $12,000.00. Mrs Watson said that she had told Ms Clements to put her pay into her bank account. Ms Clements misunderstood her. Although this is not mentioned in her statement, Mrs Watson denied making it up.
93. Mrs Watson said that she notified the accountant of any cash she kept so that it would be included as her wages. She agreed that she kept cash from time to time but said that she did so only if it was wages. The cash she received from parents was put in a tin. She noted it in the roll book and issued a receipt. If she took cash from the tin, she would write a note and put it in the tin. She also kept a float for expenses but said that was also written up. Mrs Watson said that she usually wrote up the books and banked cash but there were times when Ms Clements banked the money. She kept back about $400.00 each week but did not agree that this amount was independent of her salary.
94. Cash was kept in a tin in an unlocked drawer. Mrs Watson did not agree that she used cash from fees to finance other services or that she treated the money in the tin as her own. Mrs Watson could recall taking money from the tin and giving it to her sons or her husband but she always replaced it later. She would often leave an ``IOU'' in the tin for the amount. Staff who gave change to parents from their own pocket would put an IOU note in the tin to record that they were owed money. Mrs Watson did not think that her husband would ever have gone to the Centre and taken cash though she then remembered one occasion. If she were at a late lecture, her husband would collect the money from the Centre and see that it was locked up adequately.
95. HCCC's general ledger as at 30 June 1995 showed a total debit of $37,060.00 and a credit of $37,114.00 leaving a credit of $53.05
ATC 2368in the directors' loan account.
96. Mrs Watson said that the cards marked ``Wages'' were maintained by Mrs Malone. Mrs Malone recorded that, for the year ended 30 June 1995, Mrs Watson had been paid $27,500.00. Mrs Watson said that she did not receive the money by cheque but then conceded that she might have done so. When Mr McGovern put it to her that she received drawings by way of cheque, she replied that she called it wages. She did not deny that she received payment by cheque but did not agree that she received $27,500.00 in that way.
97. Ms Moore said that all fees were placed in a tin whether they were paid in cash or by cheque. The tin was kept in the bottom drawer of a desk. At times, the cheques were placed with the National Australia Bank (``NAB'') Credit Listing Book. Ms Moore said that ``Bronwen Watson then determined how these moneys were distributed.''
98. Ms Moore said that money was taken from the tin to make purchases and a receipt for those purchases would be placed in the tin. If she was in the office, no-one took money from the tin. In her time at the Centre, Ms Moore herself only twice took money from the tin.
99. If Mrs Watson had not returned to the Centre by the time she was to leave, Mrs Moore said in proceedings in the Supreme Court on 27 March 2003 that... ``if Mrs Watson was not in the office I would take the `phone, the receipt books, the Child Care Assistance book and the money tin to Mrs Mackey in the nursery.''
100. Ms Clements said that the cash and cheques parents paid for fees were placed in a money box, which was placed in a bottom drawer of a desk. At the end of each day, Mrs Watson put the fees in a bag and took them home. The next morning, she would give her the amount to be banked, Ms Clements continued. Ms Clements did not check the amount to be banked against the fees paid by the parents.
101. The office was locked, Ms Clements agreed with Mr Watson, and Mrs Watson and she each had a key. She had been told that it was locked because money had gone missing from the drawer before she worked at the Centre. To her knowledge, the person had been caught when dye had been placed on the money. If she went out to lunch, she handed her key to Mrs Mackey. The cash tin was never taken out of the office, Ms Clements replied when asked whether Mrs Mackey was given the receipt book, cash tin and key when she, Ms Clements, went home at 5.00pm. She would give Mrs Mackey the receipt book and the key so that she could have access to the cash. It was her understanding that Mrs Watson locked up the Centre on most nights.
102. In cross-examination, Ms Clements said that she did not reconcile the cash box with the receipts daily or at all. She had not done so as Mrs Watson controlled the money. Mrs Watson told her what to do even though she was the bookkeeper and had the receipts. She told her, Ms Clements said, to run the books as they had been and she continued the same system as before. Mrs Watson did not want the cash against the receipts. She was following the system put in place by Ms Malone and did not need instruction from Mrs Watson on what to do. Ms Clements did not balance the cash and receipts while Mrs Watson was overseas as Mrs Mackey took over Mrs Watson's role and Ms Clements continued her own role.
103. Mrs Malone said that the cash and cheques were placed in a tin in a drawer and banked once or twice a week. The drawer was not locked but the office would be if no-one was there. She, Mrs Watson and Mrs Mackey had a key to the office. At the end of each day, Mrs Malone said, Mrs Watson would take the
ATC 2369cash and cheques home with her in her handbag. In cross-examination, Mrs Malone said that she had not always left the Centre before Mrs Watson. Whether she had or not, she did not count the money at the end of the day and did not know how much Mrs Watson took home. In her statement, Mrs Malone said that she did not know whether Mrs Watson returned all of the cash and cheques the next day. Mrs Malone continued:
``I would attend the bank on an irregular basis to deposit the takings of HCCC, probably once or twice a week as instructed by Bronwen Watson. Bronwen Watson would always hand me the cheques that needed banking and would count out some of the cash from the tin. It would always be Bronwen Watson's decision as to how much cash would be deposited and how much would be retained in the tin. After I deposited the takings in the bank account I would return to HCCC and enter the amount I deposited in a cash receipts record.''
Exhibit 19 at 2
104. Mrs Malone said that she did not do the banking daily but would do it when Mrs Watson told her to do it. Mrs Watson would hand her a cheque and tell her to bank it into the operating account. She, Mrs Watson, always made that decision. In some instances, Mrs Watson would have written out the deposit slip. In others, Mrs Malone did so.
105. Mrs Malone agreed with Mr Watson that, when she saw money being given to him and his children from the tin, she did not know on what it would be spent. She was not present when it was spent. All that she could say, as she had said, was that she ``believed'' it was spent on personal items as she never saw any dockets relating to the expenditure. She could not say that it was not reimbursed.
106. Mrs Mackey recalled that Mrs Watson had always told her not to bank the cash and that someone would collect it. By ``someone'', she had understood her husband or one of her sons. She thought that Mrs Watson had told her this as she had banked $1,000.00 early one week. Mrs Mackey could recall Mr Watson, Richard and, possibly, Stuart, collecting cash from the Centre and Mrs Watson's telling her that they were taking it to put it in the safe at home.
107. Mrs Mackey could recall Mrs Watson's taking money from the cash drawer in the office and placing it in her handbag on a large number of occasions at different times of the day. She never asked Mrs Watson what she was doing with the cash. It was her business. Mrs Mackey has also seen Mrs Watson removing cash from the cash drawer and give it to her sons.
108. HCCC kept a cash analysis book. Mrs Malone used the book as a cash payments and cash receipts journal for HCCC. She filled out the entries in the journal from the records contained in the NAB credit listings book referring to the money actually banked. She would then reconcile the cash payments journal with the bank statements sent by NAB. Mrs Malone said that she never reconciled the cash payments records with the roll books or receipt books. She balanced the cheque books and the journals to the statements. There was no general ledger or trial balance.
109. Mrs Watson said that the Centre maintained an expense/purchase journal. When told that Mrs Malone had said that it did not, Mrs Watson replied that it had been Mrs Malone's responsibility to do so as she was to set up the books as directed by Mr Denton.
110. Mrs Watson said that she would shop for the Centre three times a week. When she shopped at Coles supermarket, she would write a cheque written on HCCC's account at the NAB.
111. Ms Moore said that HCCC never had an Expenses/Purchases Journal while she worked there. Receipts for purchases were kept in the money box until the end of the month. She would then add up the receipts. Ms Moore added:
``Periodically, Bronwen Watson would staple together the receipts and write a cheque to herself for the total amount. This cheque usually exceeded $1,000.00.''
Exhibit 17 at 3
112. All cheque expenses were recorded in a green or red Collins cash book. Receipts were put in a drawer in the office for Mrs Watson to add up. Mrs Watson might have paid some expenses, such as the shopping at Coles, by cheque and others, such as those at Chicken Feed, with cash. To her knowledge, no record was kept of cash expenses. Ms Moore presumed that Mrs Watson used her own cash to purchase items and then put a receipt in the receptacle in the drawer. When asked whether the cash was
ATC 2370taken away each night by Mrs Watson, she replied that it must have been.
113. Ms Clements said that Mrs Watson purchased groceries and other supplies each week and paid for them by cheque. She also regularly purchased other items such as food, supplies and books with cash taken from the money paid as fees. She would put receipts for those purchases in the money box. At the end of each month, Mrs Watson added up the receipts and wrote a cheque payable to her for the total amount of the receipts. In cross-examination, Ms Clements agreed that she was not with Mrs Watson when she purchased the groceries and that it was possible that Mrs Watson paid for them from her own money.
114. Ms Clements said that Mrs Watson also regularly used cash from parent paid fees for her own private purposes. When Mrs Watson travelled overseas in October 1994, for example, Mrs Watson bought clothes for herself from the cash in the money box. Regularly, Ms Clements said, Mrs Watson gave her children money from the money box. At times, she might give her children $20.00 for food or $200.00 for clothes, for example.
115. In cross-examination, Ms Clements said that Mrs Watson would take money from the tin at lunch time and a small amount would be left in case anything was needed. Mrs Watson would return and put receipts in the tin. Ms Clements would not see her spend the money. As to the clothes, Ms Clements said that Mrs Watson had told her that she had used the money to purchase clothes. She did so a couple of weeks before the trip. When asked whether the money spent on the children was returned to the tin, Ms Clements replied that it had not been returned while she was there. She agreed that she was not there all the time and that the Centre was open from 8.30am until 6.30pm each day.
116. During her time at the Centre, Ms Clements said, a carpet and two computers and a printer were the only major items of plant and equipment that HCCC purchased for use at the Centre. Ms Clements used one of the computers and the printer at the Centre but the other computer was not used at the Centre. She understood that it was installed at Mrs Watson's residence. She also seemed to remember that HCCC purchased a microwave oven and cassette recorder to replace similar items damaged when the Centre had been broken in. The only audio equipment used at the Centre while she was there were a little cassette in the toddlers' room, a smaller one in the kindergarten room and a radio cassette in the babies' room.
117. Ms Clements said that the only television set was the old one in the staff room. That was watched by the staff in their lunch hours as Mrs Watson did not approve of children watching television. No video cassette recorder (``VCR'') was installed or used at the Centre. Ms Clements said that she entered a cheque drawn on HCCC's business account in favour of Loughrans on 31 May 1994. It was a cheque for the sum of $969.00. The VCR was identified as such and entered in the cash payments book under ``Equipment''.
118. Mrs Malone said that HCCC never kept an expenses/purchases journal while she was there. Receipts for cheques were kept in a file she maintained but she did not recall any receipts for cash purchases' being kept. Of cash receipts, Mrs Malone said that there might have been such receipts ``... and Bronwen Watson would write herself a cheque for these receipts. There was no check as to whether these purchases were for HCCC.''
Washing machines and tumble dryer
119. Mr David Watson said in his statement that:
``... at all relevant times a Bendix washing machine was installed at 1 Willowdene Avenue and used for family washing.
... the Miele washing machine was used for washing soiled linen belonging to the Centre during the relevant period.
... the tumble dryer was used to dry washed Centre linen.''
Exhibit C at -
120. Mr Richard Watson said that he had lived in the family home during the years 1992, 1993, 1994 and 1996. In his statement, Mr Richard Watson repeated the passage set out above in Mr David Watson's statement.
ATC 2371``certainly not'' composed it for him. When he spoke about the Miele washing machine, he had said exactly what is in the statement. That is to say, he made his point and his father then put it into the correct language.
121. In giving evidence, Mr David Watson said that the Bendix was installed in the old laundry and, to his knowledge, was in full working order. He recalled emptying it. As to the expression ``at all relevant times'' used in his statement in relation to the Bendix washing machine, Mr David Watson said that it was a ``figure of speech'' and meant for the ``purposes of these proceedings'' and so the years in dispute. Those years were 1992/1993, 1993/1994, 1994/1995 and 1995/1996. He ``suspected'' that he meant the same thing when he used the expression ``during the relevant period'' in relation to the Miele washing machine. In response to Mr McGovern's suggestion that this would be completely false, Mr David Watson replied that he did not know what to say. When told that the Miele washing machine had been acquired on 14 April 1996, he said that, if that is the case, a thirteen year old gets things a bit fuzzy. As a thirteen year old, he would be first home and would be asked to hang out the washing. He might have forgotten the washing machine. The ``relevant period'' includes the period when the Miele washing machine was used.
122. When the Centre needed clean linen for Monday, his mother would bring it home in her car. It happened very regularly and he knew that because he had to peg it out.
123. Mr David Watson said that he was present at 1 Willowdene Avenue during a raid by the Australian Federal Police (``AFP''). When shown a photograph said to have been taken on that day, he recognised it as a photograph of the laundry at the house.
124. Mr Richard Watson said that his father had sent him a draft of the statement he signed. He had asked his father to make a few amendments such as changing the description of his position from administrative manager to business manager. Having said that, he rejected the suggestion that his father had composed his statement. They had met, he said, and prepared points. His father had typed the statement. Mr Richard Watson said that his brother, Mr David Watson, had not been present at the meeting.
125. He and his father had spoken about the Miele washing machine. Mr Richard Watson believed that it had been acquired in the early 1990s but could not recall precisely. He did not believe that there had been more than one Miele washing machine at the house but they also had a Bendix washing machine. That had been acquired in the early 1990s and before the Miele. When told that the Miele had been acquired on 4 April 1996, Mr Richard Watson said that he believed that it was the washing machine to which he had referred. He had only given an approximate date as to its acquisition. As to what he meant by ``relevant period'' when talking about the Miele washing machine, he said that he meant the early 1990s onwards or the early to mid 1990s. It was certainly used from 1996 onwards to wash soiled linen for the Centre.
126. Mr Richard Watson said that he was present during the AFP's search on 4 October 1997. Both the Bendix and the Miele were at 1 Willowdene Avenue at the time. He could not recall if there was an empty space in the laundry at the time. When told that the Miele was found at the Centre on that day in an unconnected state, he replied that it was not uncommon for the washing machines to be swapped while being repaired. At times, he has assisted in swapping machines but could not recall assisting in taking the Miele to the Centre on that occasion. Mr Richard Watson denied that the Miele washing machine had been acquired for private domestic use. He could not recall a Simpson washing machine at the Centre and said that he could not say that he ventured into the laundry often. Although he agreed there was a machine in the laundry, Mr Richard Watson did not recall seeing its being used. He did not really remember a tumble dryer at the Centre. The washing was dried at home, he said and he could not recall the circumstances at the Centre. Mr Richard Watson did not agree that the linen was washed and dried exclusively at
ATC 2372the Centre and not at home. At home, he would go to the machine at times and find the Centre's washing in there. His own clothes were dried in the dryer at home but he could not comment on whether his brothers' or parents' clothes were dried there.
127. When it was suggested to him that his mother did not trundle home with a pile of soiled nappies, Mr Richard Watson replied that it did occur. In order to get nappies washed and dried, they had to be washed on Fridays; he specifically recalled Fridays. Whether washing took place on other days of the week depended on the weather. In winter, it did occur on other days but it occurred especially on weekends.
128. Mrs Watson said that the Miele washing machine moved between 1 Willowdene Avenue and the Centre. When asked why she did that when there was a Simpson washing machine at the Centre, she replied that she washed at home. Mrs Watson said that HCCC had arranged for the repair of the Simpson washing machine as HCCC was expected to return it to the Council in working order. She acknowledged that the Miele was not connected at the Centre but said that it was ready to be connected. The Bendix washing machine was at 1 Willowdene Avenue. When asked why there was any need to move the Miele to the Centre if it was legitimately used at 1 Willowdene Avenue, Mrs Watson replied that it had not been a huge effort to move it.
129. Ms Moore said that there was a daily routine at the Centre for the washing. The washing was put into the Simpson washing machine in the laundry to be washed and then transferred to the dryer. It would be done at some time during the day between the hours of 9.00am and 3.30pm. They were her hours of work and the washing was done while she was there. In cross-examination, Mrs Moore acknowledged that Mrs Watson was generally at the Centre before she arrived and that she had often left before she left at 3.30pm. She agreed that she would not know if Mrs Watson returned to the Centre later in the day.
130. Ms Moore said that she saw a Miele washing machine at the Centre in approximately October or ``lateish 1997''. It was never actually installed and the top loader continued to be used. Ms Moore did not see it arrive but it remained for the rest of the time she was employed at the Centre. She never saw it operate and, to her knowledge, was never connected. When asked if there were only one set of taps, she replied that she would ``have to presume so''.
131. Ms Moore said that she never saw any evidence that Mrs Watson took the washing from the Centre to her home to be washed. The washing that was done at the Centre included bibs, bottom washers, sheets, towels, some clothes, tea towels, cushion covers, face washers and smocks. Ms Moore did not recall any blankets' being washed and could not recall any sheepskins being washed. The towels that were washed were generally in the nature of hand towels.
132. Ms Clements said that she used the washing machine at the Centre as her job included doing the laundry. She used the same machine throughout her time at the Centre and it was not replaced.
133. Mr Gallen saw the Miele washing machine in the laundry at the Centre but noted that it was not connected. The Simpson washing machine had been connected. Mr Gallen never visited 1 Willowdene Avenue.
134. Mr Gallen agreed with Mr Watson that the issue regarding the Jaguar was whether the fault was inherent at the time of purchase. He took the view that its fault was inherent at the time of purchase.
135. Using the same language in their statements, Mr David Watson and Mr Richard Watson said in their statements that food used by the Centre, both fresh and preserved, was stored at 1 Willowdene Avenue during the relevant period. Food for the Centre was also prepared and cooked at that address. Mr David Watson said that the ``relevant period'' was the period from 1992/1993 to 1995/1996 but extended beyond that period.
136. Mr David Watson said that the preserved food included cans of baked beans, spaghetti and tins of fruit and ``that sort of thing''. The fresh food included cheeses, fresh vegetables and some meat products. His mother would cook it as time permitted. Sometimes she would cook in the morning and sometimes at night. He could not recall if the words in his statement were his precise words but he had made a point about the food. It did not surprise him that he had used precisely the same words as his brother in describing the food as they had
ATC 2373the same education at the same school and used the same words. He did not adopt the suggestion that he had simply signed what was put in front of him by his parents, or one of them.
137. Mr Watson confirmed that HCCC had claimed a deduction for the expense of a Corniche sink that was installed at 1 Willowdene Avenue in 1993. He denied that it was a false or completely untenable claim. Mr Richard Watson could not recall a Corniche sink but said that food was prepared for the Centre at home. He occupied the downstairs flat and had not committed a new sink in the house to memory. Mr Richard Watson said that there were several refrigerators at the Centre.
138. Mrs Watson said that there were two sinks at 1 Willowdene Avenue. At home, she did a lot of work and a lot of food preparation for the Centre. She said that she believed she could claim the sink as a deduction and that the ATO could refuse it if it wanted. Mrs Watson repeated her statement when it was suggested to her that she knew that her claim for the Corniche sink was false. For a time, HCCC had employed a full time cook at the Centre and there were cooking facilities at the Centre. Despite that, she still prepared food at home.
139. Ms Moore said that there were cooking facilities at the Centre. For several months in the first half of 1996, a person was engaged to cook at the Centre. She said that she never saw any evidence of Mrs Watson's cooking meals away from the Centre or taking cooked food to the Centre. In cross-examination, she said that she occasionally saw Mrs Watson cooking meals at the Centre. She did observe that Mrs Watson did a weekly shop and took food to the Centre. Her shopping included perishable food.
140. Mrs Malone also recalled a cook at the Centre when she was there. The cook would leave after lunch and leave the afternoon tea ready to be served.
141. Mrs Malone recalled:
``... that Bronwen Watson wrote a cheque every Tuesday for groceries for HCCC. Bronwen Watson always went to Coles at New Town. These cheques would be drawn on the `general' account. I recall that Bronwen Watson would often take some of the groceries home for what I believe was for her personal use. Often bags were left in the car and not taken into the Centre. I believe the cheques would also cover these groceries. Cheques would also be drawn on this account for wages for HCCC employees. If the balance of the `general' account was insufficient, an amount would be transferred from the `investment' account to the `general' account. The general account would be kept at a minimum. Cheques from the government would be paid to the investment account. I do not know why this was done,''
Exhibit 19 at 3
142. Mrs Malone said in cross-examination that she saw groceries that were in the back of Mrs Watson's car and that were covered by the cheque. She said that she knew because Mrs Watson always put the shopping docket in the tin and she helped Mrs Watson to unload and put away the groceries. There were often groceries on the docket that she did not help put away. Mrs Watson was ``perfectly open'' in what she did and ``not at all secretive''. Mrs Malone tried to arrive at the Centre by 7.50am and normally arrived at the same time as Mrs Watson. She did not see Mrs Watson take food to the Centre at that time.
143. Mrs Mackey recalled Mrs Watson bringing food to the Centre after she had done the weekly shopping but did not recall her bringing prepared food in the period 1993 to 1996. At that time, she said, the Centre had a cook. When told that she had agreed in the Supreme Court that Mrs Watson had taken both prepared and unprepared food to the Centre, Mrs Mackey replied that she might have been mistaken and that might have happened later. She could not recall Mrs Watson's doing so in the period 1993 to 1996 as the Centre had a cook for most of that time. As to the answer she gave in the Supreme Court, she would have thought it correct at the time. She recalled thinking about her answer after she had walked out of the court after giving evidence. Mrs Mackey queried whether Mrs Watson took prepared food from home in the period 1993 to 1996 or later. She has trouble with time frames. Although she had concerns whether her evidence was correct, Mrs Mackey agreed that she did nothing with it. She explained that she felt it have very little relevance to the whole situation and did not know what she was expected to do.
144. Mr Richard Watson said that he kept HCCC's books while he was employed as its business manager. In giving evidence, he said that he was HCCC's bookkeeper from 1997 to 1999 and prepared the wages and used the system employed by the previous bookkeeper. He said that he found and corrected the bookkeeper's mistakes and did not direct any payment or benefit to his parents or to himself except for their salaries. Each fortnight, he prepared and recorded the fortnightly wages, payments of income tax instalments and superannuation levies for each of the staff.
145. Mr Richard Watson said that his mother drove a 1979 Lotus car and used it for business purposes. It had an unusually low clearance meaning that it could not negotiate the crossing and the driveway at 1 Willowdene Avenue. As a consequence, his mother had to park in the street and that often happened at night. In Mr Richard Watson's view:
``Alighting in the street, often in the dark, with the residue of the cash takings did not accord with my training in Occupational Health and Safety to be a safe system of work and did not meet the employer's statutory duties.''
Exhibit D at 
Following discussions with his parents, a decision was made to alter the crossing and the driveway to allow his mother's car to have access to the garage. This enabled her to park her car in the garage and to leave it only after the garage door had locked.
146. Mr Watson said that landscaping was done at the house. It included paving the driveway. He was aware that HCCC had claimed the sum of $3,100.00 as a deduction being part of the cost of that landscaping that included the driveway. That sum represented about a third of the total cost of the landscaping but he could not recall the proportion precisely ten years after the event. Mr Watson denied that HCCC's expenditure on the landscaping was purely domestic expenditure and stated that the claim was properly made as part of his wife's duties included taking cash home. She was unable to get her car up and down the driveway as it did not comply with Council regulations. When he approached Work Safe Tasmania and explained the problem with the cash, he was told that his wife's driving home with the cash is a safer system of work. Mr Watson thought that, as a good employer, HCCC should be concerned about workplace health and safety issues. HCCC made the contribution so that the garage door would go up and his wife could alight in the garage. His wife's car was broken into and damaged in the street.
147. When asked whether he had provided information honestly during the audit process, Mr Watson said that he had done so to the best of his ability. When asked whether he had done so in relation to the landscaping issue, Mr Watson replied that it was probably a cost benefit decision at that stage. He denied that he was suggesting that he had been dishonest during the audit process; just that, in relation to a few depreciation issues at the time, he told the accountant that ``we put our hands up''. When he was told that he had never previously given an explanation for HCCC's claim for the landscaping expenses, Mr Watson replied that he had not been asked. When told that he had been asked, he replied that he could not remember.
148. Mr David Watson said that he wrote the Centre's occupational health and safety policy as part of HCCC's preparation for accreditation. He said that, in the course of obtaining a commission in the Royal Australian Army, he had undertaken an Advanced Diploma in Personnel Management and had received formal training in occupational health and safety. As part of his Science Degree, he said that he had received similar training in occupational health and safety. In Mr David Watson's view, alighting from a car in a dark street with money did not represent a safe system of work.
149. In giving evidence, he said that his training had occurred in various sessions spread over 16 days. The training was part of his training as a potential officer to manage potential and real risks. Although his being injured in an accident meant that he never completed his officer training, Mr David Watson said that he had been in the Army from 1997 to 2003. He had completed year 12 and finished school in 1997. Safety was an important part of his training. In cross-examination, Mr David Watson said that he had served in the Reserve while he was studying for his Science Degree at University. He had received a probationary commission. He saw no
ATC 2375distinction between his saying that he had served in the Royal Australian Army and in the Reserves and none between saying that he had been in the course of obtaining a commission and a probationary commission.
150. Mr Richard Watson said that he was present at the Centre from time to time when parents paid their fees. He could recall his mother writing a receipt for the fees and taking the cash home. Her vehicle could not pass over the driveway because it did not have sufficient clearance. The driveway was changed in the early to mid 1990s to accommodate her vehicle. He had qualifications in occupational health and safety through his employment with the ATO since 2000 and had done some training in the early 1990s at University while he was studying sociology. Mr Richard Watson could not recall when his mother's car caught fire but thought that it was the mid 1990s but it could have been 1996. In re-examination, he said that it had caught fire on three occasions because the carburettor was directly above the distributor.
151. Mrs Watson said that the floor of the garage had been lowered so that she could drive her car into the garage. She believed that the cost of doing that had been claimed as a deduction because she used a room in her home as an office. She would carry things from the car in the garage to that room. Mrs Watson said that she disagreed with the proposition that the cost should never have been claimed. She disagreed with what her husband had written in his letter of 8 July 1997.
152. Mr Richard Watson said that parents often paid the fees in the evening when the banks had closed. By that time, the banks had closed. As part of her official duties, his mother would take the unbanked cash home each evening. This was done on the advice of the police to small businesses and in accord with sound security measures given that the Centre did not have a safe or a strong room. Mr Richard Walsh continued:
``As part of the passive security measures to protect the cash takings mesh exterior blinds were installed on the North facing bedroom bay window at the extreme rear of the house where the takings were stored, thus preventing the windows from being opened sufficiently to allow access. These are the only external blinds at 1 Willowdene Avenue.''
Exhibit D at 
153. In cross-examination, Mr Richard Watson was shown photographs of the blinds.
154. Mr Richard Watson disagreed with the proposition that there was no way the blinds would stop a person from entering the window. He thought that the purpose of the blind was to stop people looking in the window and seeing things as well as stopping them from entering. He had no formal qualifications in blind security.
155. Mr Richard Watson could not recall whether there had been a depreciation claim for interior blinds for the lounge and dining rooms of 1 Willowdene Avenue. When it was suggested that the claim might have been an error in the bookkeeping, he replied that there were so many that he could not say.
156. In a letter to HCCC's accountant dated 8 July 1997, Mr Watson set out HCCC's response to a number of matters raised during the tax audit.
``Clearly the supply of the blinds to Willowdene Avenue and the only one of a series of payments to Macgregors Landscaping would appear to be errors committed by the bookkeeper at that time. However, to be fair the former expense might have been considered by that employee to be a `home office' expense. Nonetheless, the errors are regretted. It should be noted that the Centre has employed a number of bookkeepers with varying success.''
Exhibit 1 at 356
157. When reminded of this passage from his letter, Mr Watson said that it had been quoted out of context. In writing that passage, he had made a cost benefit decision not to argue about the matter. He put his hand up; ``It's a
ATC 2376trifle.'' Mr Watson insisted that the claim had always been tenable and denied that he had made recent inventions to deal with the problems of the case. When asked the nature of the bookkeeper's error, Mr Watson said that he could not; the letter just referred to the bookkeeper's error. The decision was made that they should move on and just pay the amount. He denied that there had been no bookkeeper's error and that the error had been made up to tell the ATO. He had simply not wanted an argument over such a trivial matter. Mr Watson said that he had always claimed that the expenditure was necessary for reasons of safety. That was the case when he had responded to the ATO.
158. Mrs Watson said that the internal blinds installed at 1 Willowdene Avenue were nothing to do with the Centre. She acknowledged that external awnings installed at the Centre and claimed as a deduction had nothing to do with the Centre as the Council was responsible for the maintenance of the exterior of the building. Both were the bookkeeper's errors but she did not agree with Mr McGovern's description of them as a ``big error''. Mrs Watson said she found out about the error at about the same time as the ATO.
159. Mrs Mackey said that two leather chairs appeared in Mrs Watson's office on the day two officers of the ATO visited the Centre. They remained for a day or two and then disappeared.
160. Mr Albert John Wilkinson is the Building Services Manager for the Council. He said that he is responsible for the maintenance of all buildings owned or leased by the Council and has been concerned with maintenance in one position or another for 25 years. He has known Mrs Watson since she became the lessee of the Centre and he is responsible for the maintenance of the building in which that Centre is located. Every year at Christmas time, the Council would undertake any necessary painting or repairs of the building. It was in fair operating condition for a crèche.
161. Mr Wilkinson said that he compiled an inventory of the chattels and equipment at the Centre and that were owned by the Council. They included a Simpson washing machine and dryer. They were in good operating condition. He was not aware that the Council had purchased any new equipment. The Council inspected the premises every month or two. It generally did that because there were complaints of vandalism and broken glass in the area in which the Centre is located. During his visits to the Centre, he had not taken the inventory of chattels and equipment with him as he was there to inspect the building and site and not the chattels and equipment. Mrs Watson did not advise him that she had disposed of any of the Council's chattels or equipment or put them into storage. He has never noticed a range of equipment in addition to the Council's on the premises. For example, he has never noticed a Miele washing machine or a Panasonic video cassette recorder.
162. After his mother's car caught fire and became inoperable, his parents bought a 1978 Jaguar, Mr Richard Watson said. It was chosen because it was cheap and had a larger load carrying capacity. He drove the car immediately after it had been purchased and also spoke with Mr Saunders who serviced it at that time. Mr Richard Watson said that he was satisfied that it was operable, in a condition commensurate with its age and serviceable. Later, the Jaguar's head gasket failed. Mr Saunders removed the head and Mr Richard Watson saw that there was pre- existing damage to the head. Mr Richard Watson reported that, in Mr Saunder's opinion, it was cheaper to replace the head rather than to carry out preventative maintenance. Consequently, a reconditioned head was installed in the Jaguar.
163. Mr Watson agreed that the cost of the Jaguar was in the order of approximately $7,000.00. HCCC paid for it and debited the amount in the directors' loan accounts with HCCC. It was used for business, Mr Watson said. Before he purchased the Jaguar, he asked McGanns Auto Services (``McGanns'') for a report on it. He wrote to McGanns on 7 April 1995 advising that the vehicle had certain faults, which were patent at the time it reported on the vehicle.
164. Mr Richard Watson said that he recalled the purchase of the Jaguar but did not
ATC 2377recall later discussing with his father the ``patent faults'' that had been found in it. Had his father known of the pre-existing damage, he would not have purchased it. Mr Richard Watson had attended a mechanical course at Elizabeth College as part of his HSC.
165. Mr Byron Saunders wrote to the ATO on 16 March 1998 regarding the Jaguar. He recalled a Mr Watson's telephoning him shortly after he purchased the Jaguar. Mr McGann had checked the Jaguar before Mr Watson had purchased it, Mr Saunders wrote, and given it a ``clean bill of health apart from a few problems that I attended to in its first service and tune up.''
``A little time after, the Jag was returned to me after they had experienced overheating problems on a couple of long trips up north. On investigation, I found that the head gasket had blown and the cylinder head had to come off. The head was replaced with a `reco' head as a cheaper alternative to having the old one repaired.
At the time of the first service, there were no signs that there were problems in this area.
Cylinderheads and head gaskets can give trouble at any time without prior warning."
Fraud and theft
166. Mrs Watson spoke of the Centre's having a $90,000.00 deficit when HCCC took over its operation from the Council. That deficit was not carried over to the new business but Mrs Watson understood that an employee at the Centre had been charged with theft.
The process of review
167. A person who is dissatisfied with an objection decision that is a reviewable objection decision
168. Another of the modifications relates to the burden of proof. Generally, neither party carries a burden of proof in proceedings in the Tribunal. When the Tribunal reviews an objection decision, however, the person applying for review:
``... has the burden of proving that:
- (i) if the taxation decision concerned is an assessment (other than franking assessment) - the assessment is excessive."
TA Act, s. 14ZZK(b)(i)
169. There have been no modifications to the Tribunal's essential task:
``It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the court than of the office desk.
It is clearly not case in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer's objections. Although it is not bound by the rules of evidence (sec. 33(1)(c)) in reaching its decision it must act upon the evidence which is placed before it ...''
per Foster J Eldridgev FC of T 90 ATC 4907at 4921
170. The Tribunal's task was explained more fully in FC of T v Dalco.
``... It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed... unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the
ATC 2378Commissioner in forming a judgment as to the amount of the assessment.''
at 4091; (1990) 168 CLR 614 at 621 90 ATC 4088
171. It is open to the taxpayer to attack the Commissioner's power to make an assessment
``... mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment..., the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous ...''
per Brennan J FC of Tv Dalco 90 ATC 4088at 4092; (1990) 168 CLR 614at 623
As Toohey J
``... A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.''
at 4097; (1990) 168 CLR 614 at 631 per Toohey J 90 ATC 4088
172. It may be a case in which not all of the material facts are known. If they are not:
``... A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed ...''
per Brennan J FC of Tv Dalco 90 ATC 4088at 4094; (1990) 168 CLR 614at 625
If all of the material facts were known and the amount of a taxpayer's taxation liability turned on the application of the law to those facts, the taxpayer would discharge the burden of proof by establishing that the Commissioner had erroneously included in the assessed taxable income an amount that should not have been included.
The grounds of HCCC's objections at the hearing
173. At the hearing, Mr Watson put forward a number of grounds on which he submitted on behalf of HCCC that the assessments should be set aside. In essence, they were:
- (1) The Commissioner is bound to make a genuine estimate of HCCC's taxable income. In doing so, he must pay proper regard to statutory concepts of income and to the contractual relationship between HCCC and the Commonwealth.
- (a) The Commissioner is bound to apply accepted accounting practices and philosophy in making that estimate and failure to do so indicates a failure to make a genuine estimate. Mr Watson submitted that the Commissioner's failure was shown by his:
- (i) failure to categorise inflows of monies as, for example, income, capital or trust monies and to establish the point at which they were, if at all, assessable income;
- (ii) employment conflicting account-ing methodologies within the same assessment;
- (iii) selection of incorrect method-ology; and
- (iv) replication of flawed method-ology.
- (b) Payment of monies by the Department of Health and Family Services (``Department'') under the CC Act were made in advance to HCCC. The monies, Mr Watson submitted, were held on trust and HCCC could only spend them on certain conditions. HCCC had yet to be advised of those conditions. To the extent that HCCC has spent any of the monies, they were loans from the Department to HCCC and so do not constitute income in the hands of HCCC.
- (a) The Commissioner is bound to apply accepted accounting practices and philosophy in making that estimate and failure to do so indicates a failure to make a genuine estimate. Mr Watson submitted that the Commissioner's failure was shown by his:
- (2) Officers of the Australian Taxation Office (``ATO'') had shown bad faith, bias and malice towards HCCC. Mr Watson submitted that:
- (a) one officer had acted in matters relating to requests under the Freedom of Information Act 1982 (``FOI Act'') when he had a clear conflict of interest and had tried to circumvent the FOI Act.
- (b) that officer had failed to correct what he had himself identified as errors in the assessments and so acted contrary to the Taxpayers' Charter;
- (c) that officer had failed to inform himself of the applicable law and the factual circumstances;
- (d) that officer had misled another officer;
- (e) another officer had access to HCCC's taxation files although he was the auditor for the Private Child Care Association (``Association'') and so had a conflict of interest; and
- (f) the Commissioner had required HCCC to lodge its taxation return for 1997 despite his being in possession of the financial records it needed to complete that return.
- (3) In criminal proceedings against Mrs Bronwen Watson, a director of HCCC, Evans J ordered that an amount to be paid. Mr Watson submitted that the amount had been ordered by way of reparation and the Commissioner was precluded from seeking to recover the amount of taxation assessed from HCCC or from any other person.
- (4) Given the criminal proceedings, penalties should not be imposed on HCCC.
- (5) The amended assessments are excessive because:
- (a) the amended assessments for 1994, 1995 and 1996 failed to allow for General Interest Charges (``GIC'') in preceding amended assessments;
- (b) the amended assessments did not allow for money that had been lost through fraud; and
- (c) the income had never been exacted and money had been included in the amended assessments as income and it should never have been included.
174. A number of submissions made by Mr Watson may be grouped together and considered as a submission to the effect that the Commissioner's had adopted an incorrect methodology in making the assessments. Underpinning his submission were further submissions either expressly stated or inherent in his submissions. They were to the effect that the information on which the Commissioner and his officers had relied was unreliable and their calculations defying logic. The Commissioner should be a model litigant and should make a firm calculation. It had not done the work properly. The information it used was unreliable because, for example, the bookkeepers' evidence as to what occurred was unreliable and a matter of conjecture. The payments by the Department should not have been taken into account as income on their receipt as they were payments in advance paid into a discrete bank account.
175. With regard to the payments by the Commonwealth, Mr Watson referred to the agreement between the Commonwealth and HCCC, the amounts paid were properly loans to HCCC and remained loans until the Department processed the claims lodged on behalf of parents. Those claims could only be lodged after the parents had paid the proportion of fees based on their estimate of income in the forthcoming years. The payments should not be regarded as coming home to the applicant until they could not be recouped. In support of his submission, Mr Watson relied on Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd
176. As to the methodology adopted by the Commissioner in relation to other payments received by HCCC, I have had regard to the principles discussed by Dixon J when faced with rival methods of accounting. His Honour said in Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd that they were:
``... directed to the same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income.... Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form....''
(1938) 5 ATD 98 at 131-132; (1938) 63 CLR 108 at 154-155
177. The issue decided by the High Court in that case and the decision reached were summarised by the High Court in Arthur Murray (NSW) Pty Ltd v FC of T:
``... The question there was whether fees earned by a doctor in his medical practice might be treated as assessable income of the year in which they were earned even though not received in that year; and it was held, as regards each year which had ended before
ATC 2380the doctor's death, that earning without receipt did not make income."
(1965) 14 ATD 98 at 99; (1965) 114 CLR 314 at 317
178. In Arthur Murray (NSW) Pty Ltd v FC of T, the High Court considered whether receipt of fees paid for dancing lessons to be given in the future could be regarded as income at the time of their receipt. They decided that they could not.
179. Based on the agreement and the statutory framework, it would seem that the payments made by the Department are received in advance of the service offered by HCCC. The service is progressively given during each quarter as the children are given child care. If that is the case, the advance payments progressively become HCCC's income as that term is ordinarily understood.
180. The Commissioner has not adopted that approach. Instead, he has treated the payments by the Department as income on receipt. I do not intend to consider whether that was appropriate or inappropriate for I do not consider that it would alter the conclusion that I would come to regarding the income. Mr Watson did not take his submissions a step further and specify what result they should have reached had they used another method that he considers preferable. In omitting to do that, a question immediately presents it. That question is whether another method would have led to a different assessment from that method used in making the assessment. Unless HCCC is able to show that the assessment is excessive, it has not discharged its burden of proof. The payments made to HCCC under the Act illustrate this. Supposing for the moment that Mr Watson is correct and that the payments should be regarded as income when the service is provided and not at the earlier time on their receipt in the hands of HCCC, would it mean that the assessments are excessive? Having regard to the way in which the payments are calculated by the Department from quarter to quarter and the adjustments are made, it may well be as a matter of logic that, over the course of a financial year, the adjustments cancel each other out to a large degree so that the amounts paid by the Department to HCCC are about the same as those identified by the Commissioner. Mr Watson has not analysed the payments by the Department and the adjustments. He has not shown that there would be any difference between treating the payments as income at the time of their receipt and at the time the children were cared for and so the time at which HCCC delivered the service.
181. As to the approach adopted on the audit generally, Mr Gallen has taken a methodical approach based on receipts and roll books. Based on the evidence of all of those who undertook bookkeeping duties for HCCC as well as Mrs Mackey, I find that the roll books were kept as a record of those children who attended the Centre. Mrs Watson acknowledged that was so. I also find that the roll books were used as a tool to record the payment of fees. That in itself underlines that they are more likely than not to be an accurate record of the children's attendance. Mrs Watson again acknowledged that they could be used in that way even though they were not required.
182. On the basis of the evidence of all of the employees of HCCC, I find that the receipts that were written were an accurate record of the fees paid by parents to HCCC on those occasions. Mrs Watson would have me not make that finding because she said that a lot of different people wrote the receipts. Having heard the evidence, I am satisfied that each of the staff members who wrote receipts would have done so to the best of her ability and with honest intent. They might have made mistakes or, in the case of Mrs Mackey, written a receipt for which the fees had not yet been received but that was a very rare occurrence and she did not suggest that the parents did not ultimately pay the fees for which she had written the receipt.
183. Mr Gallen's calculations of HCCC's income lead to a different conclusion from that reached by Mr Whitehouse. That, though, does not undermine Mr Gallen's approach. Mr Whitehouse acknowledged that his approach was theoretical whereas Mr Gallen's had its foundation in what had actually happened in the conduct of HCCC's business. Mr Gallen's approach, Mr Whitehouse acknowledged, was a more appropriate method. I have come to the same conclusion although Mr Whitehouse's calculations are valuable in that, given the relatively small differences between them and Mr Gallen's, they lend added weight to my finding that Mr Gallen's approach is appropriate. The outcomes of the two calculations lead me to conclude that there is a substantial shortfall between the income shown in the receipts written on behalf of HCCC and
ATC 2381the income returned by HCCC in its income tax returns for the years in question. On the evidence that I have, I am not satisfied that the discrepancy between the two methods is of any great significance.
184. Mrs Watson said that the difference between the fees paid by parents and recorded in the receipt books and the amount banked and representing those fees was explicable by HCCC's expenses. She did not specify the nature or amount of those expenses and, in the absence of records supporting them,
185. On the balance of probabilities, I am not satisfied that the claim for expenditure should be accepted as an expense incurred by HCCC in producing its assessable income or incurred in carrying on its business. The evidence regarding the paving of the driveway and associated work in the garage at 1 Willowdene Avenue was contradictory. On the one hand, the Watson family defended the expenditure at the hearing on the basis that it was required to provide Mrs Watson with a safe place of work. That requirement translated to enabling her to drive straight into her garage so that she could take the cash from the Centre to the safe and office at her home. On the other hand, Mr Watson had earlier said during the audit process that he had not continued with the claim for expenses in relation to the landscaping because he had made a cost benefit decision. Given that the audit was clearly a serious process and given that HCCC was being given an opportunity to support HCCC's claims for expenses and deductions, I have discounted the evidence given at the hearing and prefer the evidence given by Mr Watson at a time closer to the landscaping's being carried out and, on balance, at a time at which his memory of events is likely to be clearer than it is now. That leads me to conclude that the expenditure on the landscaping was not for any purpose connected with HCCC's conducting its business.
186. If I am incorrect in that conclusion, I find that the essential character of the expense is not that of an expense incurred in carrying on a business. As Wilson J said in FC of T v Forsyth,
187. I am not satisfied that the Miele washing machine was purchased for the purpose of HCCC's producing its assessable income or carrying on its business. All agreed that it was not connected to either the water or electricity supply at the Centre at any time. On the basis of the evidence of Ms Moore, who worked at the Centre for most of 1996 and 1997, I find that it did not arrive at the Centre until approximately October 1997. By that time, the Miele washing machine was approximately 18 months old. I find that it was neither used nor installed ready for use at the Centre.
188. That the Miele washing machine was not used at the Centre does not of itself put an end to HCCC's claim for its cost. If its expense is properly characterised as a revenue expenditure and not as capital expenditure, it may be allowable as an expense if it was used at the Watson home to wash the Centre's linen and associated items. I am not satisfied that it was so used. That is despite the evidence of Mrs Watson and two of her sons to the contrary.
189. Ms Moore saw the washing being done in the laundry at the Centre. Certainly, she was not present at the Centre when Mrs Watson arrived or later when Mrs Watson went home. It is feasible, perhaps, that Mrs Watson could have taken washed linen but I do not think it likely. I do not think it likely because, if Mrs Watson were doing the washing at home, there would have been no need for Ms Moore to see the amount and variety of washing that was put through the laundry at the Centre. I do not think it likely because Mrs Watson's washing the linen at home would have been contrary to the practice at the Centre that had prevailed before Ms Moore arrived. Ms Clements was at the Centre then and she did do the washing as it was part of her duties. There is no suggestion in her evidence that she only did some of the washing.
ATC 2382I discount the evidence of Mr David Watson and Mr Richard Watson. One's evidence mirrored the other's. The mirroring of substance does not call its reliability into question but the mirroring of wording does. Mirroring does not of itself answer the question of reliability in the negative but it is a factor. In this case, another factor is the lack of understanding shown by Mr David Watson as to the time at which the Miele washing machine was bought. Mr Richard Watson's understanding was not much better and it was clear that neither of them had any clear idea as to what washing machine was used in the house and when. Apart from a statement that she did the Centre's washing at home, Mrs Watson did not take the matter any further. Taking these factors into account together with the matters in the preceding paragraph, I have not placed any weight on their evidence and am not satisfied that the Miele washing machine was used to wash the Centre's linen at 1 Willowdene Avenue.
191. That brings me to the exterior blinds. I am not satisfied that their purchase can be regarded as an expense incurred in HCCC's earning income. In reaching that conclusion, I rely on the principles set out in FC of T v Forsyth
192. Based on the photographic evidence and Mr Richard Watson's acknowledgement that they were made of a woven PVC, it is difficult to see how they could prevent the windows from being opened. Even if they were woven PVC and fibreglass, which is a possibility, that difficulty remains. They were not security blinds as commonly understood. On the basis of the evidence that I have, I am satisfied that they might stop a person from looking into the room where the money was kept but would not otherwise provide any great hindrance to a person intent on entering the house. The blinds no doubt served a purpose for the house. In so far as they prevented anybody seeing HCCC's takings, the blinds served some purpose for the business. It was such a small role when compared with the role that they played for the house that I do not regard the expense of installing them as an expense incurred in the course of HCCC's earning its income.
193. Turning to the Jaguar, Mr Watson agreed that HCCC paid for it but that the amount of its cost was debited in his director's loan accounts with HCCC. That meant that it was treated as a private purchase by Mr Watson as HCCC effectively lent him the purchase moneys and that amount was then offset against his wage or salary at the end of the year. Mr Watson claimed that the Jaguar was used for business but gave no evidence of the manner in which it was used in the business. Given that he owned the motor vehicle, it is difficult to see how HCCC could claim the expenses incurred in relation to its repairs and maintenance as a deduction. The claim would be that of its owner, Mr Watson.
194. The claim for the cost of the Corniche sink as a deduction depends upon whether Mrs Watson prepared food for the Centre at her home. I do not accept that she did or, if she did, it was only a very small amount. Ms Moore, Mrs Malone and Mrs Mackey all spoke of the Centre's having a cook most of the time in the years in which they worked at the Centre. Taken together, their employment or knowledge of the Centre extended from 1992 to just before Christmas 1997. I accept their evidence that a cook was engaged at the Centre for most of the time that they were there. Certainly, on the basis of Ms Moore's evidence, I find that Mrs Watson cooked at the Centre occasionally. None of them ever saw Mrs Watson take food that she had prepared elsewhere. Although Ms Moore and Mrs Mackey were not at the Centre at opening and closing times, Mrs Malone was generally there before opening time and when Mrs Watson arrived. This evidence is contrary to that of Mrs Watson and two of her sons. Each of her son's evidence again mirrored the other's and their oral evidence was again very general although Mr David Watson added that his mother would cook as time permitted. Even if she did cook as time permitted, having regard to the evidence overall, I am satisfied that it would have been only very occasionally if at all. Given that it is a question of fact and degree whether the cost of the Cornich sink is necessary in relation to gaining assessable income, I have decided that it was so little used for the preparation of food for the Centre, if at
ATC 2383all, that the expense of its acquisition is not an allowable deduction.
195. The refrigerator received very little attention in the course of the evidence. On the evidence that there was, I am not satisfied that it was an expense incurred in the course of HCCC's gaining its assessable income.
196. Mr Watson alleged that HCCC had lost money through theft or fraud. As I understand his position, money was lost through the Centre's being broken into or through a staff member committing fraud. Neither possibility is supported by documentary evidence that HCCC reported the loss to the police or the outcome of any investigation they might have conducted. Mr Watson pointed to a past conviction of a staff member when involved in another centre. That may be relevant but there is no evidence that there was any shortfall of cash during times at which that staff member had any control of HCCC's cash. Instead, the evidence of all of HCCC's employees who were called is that Mrs Watson took charge of the cash. It was she who took told the bookkeepers what to bank. Having regard to all of the evidence, I am not satisfied that money was lost by HCCC through fraud or theft. If I am incorrect in that, I have no evidence as to the amount that was lost. Given Mrs Watson's practice in relation to cash, I cannot assume that all of the shortfall between the receipts issued for parents' fees and the amount banked was stolen.
The effect of the reparation order
197. Mr Watson submitted that the Commissioner had lost the opportunity to impose penalties under the ITA Act. That was so because the Director of Public Prosecutions (``DPP'') had, in laying charges against Mrs Watson under the Crimes Act, effectively compromised the debt to a fixed amount. The DPP had done so relying on his power under s. 6(1)(a) of the Director of Public Prosecutions Act 1983 (``DPP Act'') ``to institute prosecutions on indictment for indictable offences against the laws of the Commonwealth.'' The Commonwealth, on whose behalf the Commissioner collects taxation, had decided to exercise the Commonwealth's rights through the DPP and not through the Commissioner.
198. I will begin with the legislative provisions. Section 19B of the Crimes Act 1914 (``Crimes Act'') permits a court to order that a charge be dismissed or that a person be discharged without proceeding to a conviction in respect of a charge if the court is satisfied of two things. The first is that the person has been charged before it with a federal offence. The second is that it is of the opinion that, for one or more of certain reasons specified in s. 19b(1)(b) that it is inexpedient to inflict punishment or any punishment other than nominal punishment or that it is expedient to release the offender on probation. Where it decides to discharge the person, the court may, in so far as its powers are relevant in this case, do so:
``... without proceeding to a conviction in respect of any charge..., upon his giving security, with or without sureties, by recognizance or otherwise, to the satisfaction of the court, that he will comply with the following conditions:
- (i) ...
- (ii) The he will make such reparation or restitution, or pay such compensation, in respect of the offence or offences concerned (if any), or pay such costs in respect of his prosecution for the offence or offences concerned (if any), as the court specifies in the order (being reparation, restitution, compensation or costs that the court is empowered to require the person to make or pay:
- (iii) ..."
Crimes Act, s. 19B(1)(d)
A ``federal offence'' means ``an offence against the law of the Commonwealth.''
199. The effect of Mrs Watson's being convicted of three counts of defrauding the Commonwealth has its foundation in her actions and not in those of HCCC. That is apparent from the sentencing remarks of Evans J. His Honour saw fit to make a reparation order but it is clear from s. 19b(1)(b) that he did not need to make it in terms covering the full amount of the taxation owed to the Commonwealth as a result of her actions. Taxation would have been owed by both HCCC and Mrs Watson as a result of them. It is apparent from Mr Gallen's affidavit that the amounts assessed to Mrs Watson as dividends from the profits of HCCC and so the amount of taxation payable were substantial as were the amounts assessed to HCCC. The debts owed by each are distinct.
ATC 2384I am concerned with the objection decisions regarding HCCC's assessments and not with those relating to Mrs Watson. The fact that a reparation order was made against Mrs Watson does not mean that the Commissioner cannot recover taxation owed by HCCC. Income tax and any other liabilities such as interest and penalties arising as a result of its imposition are due and payable as a debt due to the Commonwealth.
201. Except in relation to the claim for a deduction related to a skylight in the year ended 30 June 1993, the Commissioner imposed penalties unde s. 226J of the ITA Act which provides:
``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.''
202. Mr Watson submitted that the directors had been pleasant to the officers of the ATO and AFP during their search of the premises. Section 226J, though, is not directed to such matters at the time of the audit. It is directed in the first instance to an earlier time i.e. the time at which HCCC lodged its returns and to events before that time leading it to understate its income and overstate its deductions in those returns. Events after that time may also be relevant in determining whether omission of income or overstatement of deductions was an intentional disregard of the Act and any regulations or something else. So, for example, full explanations of how omissions or overstatements came to be made or proffering assistance in identifying and quantifying them may be relevant in demonstrating that they were not a result of intentionally disregarding the law.
203. In this case, Mr and Mrs Watson's politeness during the audit process stopped far short of indicating their state of mind as directors of HCCC at earlier times. Mr Watson has tried to lay the blame at the door of the bookkeepers but I prefer their evidence on the basis that it is consistent and there is no hint that they have concocted the evidence. On the basis of the evidence of the bookkeepers and bearing in mind the shortfall in income that I have already found, I am satisfied that Mrs Watson intentionally failed to bank or account for all of HCCC's cash income. She treated it as her own by, for example, using it to purchase groceries that were not for use in the Centre or directing that cash payments be made to her own private account without any instruction that they were to be accounted for against her salary or drawings as a director.
204. The claims for deductions are typified in part by Mrs Watson's statement that she believed she could claim the sink as a deduction and that the ATO could refuse it if it wanted. They are also typified in part by Mr Watson's views of the claims for deduction during the audit process i.e. he tried to blame the bookkeepers for making errors and then saw decisions to give up claims for deductions as simply cost benefit decisions. Taken on their own, such statements could be thought merely to indicate lack of reasonable care
ATC 2385were not used for the purpose of HCCC's gaining its assessable income. The reasons that were advanced in support of the various items were spurious. The attitude that was taken in making the claims for deductions was effectively this: If the Commissioner did not challenge the claim well and good and if he did, so be it.
205 Section 298-20 of Schedule 1 to the TA Act provides that the Commissioner may remit all or part of a penalty. It does not set out any guidelines as governing the exercise of the discretion. Given the provisions relating to the imposition of penalties, there would clearly need to be circumstances that could be regarded as mitigating the taxpayer's behaviour in some way while bearing in mind the purpose for which income tax is imposed and paid and the role of the ITA Act and TA Act in supporting that purpose. I am satisfied that there are no circumstances that mitigate those in which HCCC finds itself. Mr Watson has made allegations about the behaviour of certain ATO officers in relation to the audit and in relation to a request that was made under the Freedom of Information Act 1982. On the evidence that I have, I am satisfied that the behaviour of the ATO's officers has not impinged on their functions in carrying out the audit. I am also satisfied that their actions do not justify the actions of HCCC and its directors in pursuing their claims for deductions or failing to disclose the full amount of its income. There are no grounds for remitting the penalties under s. 298-20 of Schedule 1 of the TA Act.
206. For the reasons I have given, I affirm the objections decisions of the respondent dated 3 June 1998.