GRAHAM DOCKER AND ASSOCIATES PTY LTD v FC of T

Members:
G Hughes M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 1180

Decision date: 1 December 2005

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Dr Gordon Hughes (Member)

1. This matter was heard by the Tribunal on 26 September 2005. The applicant represented himself, assisted by his accountant, Mr Robert Liddle. The respondent was represented by Mr Richard Niall of counsel.

2. The application related to a decision by the respondent dated 8 September 2004 in respect of assessments of Goods and Services

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Tax ("GST") and penalties, which were issued by the respondent on 13 November 2003.

3. The applicant conducted a business in Dandenong, providing inspection and assessment services for rebuilt motor vehicles, certifying them as roadworthy and compliant with appropriate safety and registration requirements.

4. Graham Docker ( Docker ) was a director, the sole shareholder and company secretary of the applicant. Docker told the Tribunal he had been in the business for 25 years, was a mechanical engineer and a Fellow of the Institute of Engineers Australia.

5. Victoria Police conducted an investigation into the applicant as part of an ongoing investigation into the "re-birthing" of registered vehicles in Victoria. In the course of that investigation, Victoria Police executed search warrants and obtained large numbers of documents belonging to the applicant and to others. Docker was interviewed by Victoria Police on 2 and 3 April 2003 and again on 28 June 2005.

6. Pursuant to section 65 of the Taxation Administration Act 1953, the respondent obtained from Victoria Police various documents relevant to and emanating from the applicant. The assessments which were issued against the applicant on 13 November 2003 followed an audit by the respondent of these and other documents.

7. Initially there were nine tax periods, between 30 September 2000 and 31 December 2002, in dispute. Following an objection, only six quarters ultimately remained in dispute, being the quarters ending 30 September 2000, 31 December 2000, 30 June 2001, 30 September 2001, 31 December 2001 and 31 March 2002.

8. The applicant contended that its GST liability was incorrectly assessed on the basis of the material before the respondent. The respondent contended that the documentation of the applicant in relation to the consideration charged for the services was "abysmal"; and that the assessment was logical and appropriate in the circumstances.

9. Each service during the period in dispute was evidenced by a certificate prepared by the applicant for submission to VicRoads. It was unclear, however, what amount was charged in respect of each certificate. Central to the application, therefore, was the amount charged by the applicant for each certificate.

10. Victoria Police seized 11,082 certificates from the applicant, each certificate representing a service provided to the owner of a vehicle. These certificates were not invoices or receipts, however, and were not evidence of the amount charged for the service in question.

11. Victoria Police also seized invoice books, but these did not correspond with all the services provided. Docker explained that this was because the invoice books only recorded "spot clients", whereas regular clients were recorded on his computer, which the Victoria Police had seized.

12. Docker explained that, for "various reasons", some certificates had not been produced to Victoria Police and that, in any event, four to five per cent of certificates would not have been invoiced.

13. The respondent asserted that bank statements kept in the applicant's name were an inaccurate record of receipts because the applicant did not deposit all of its cash receipts, and that the applicant's own explanation of the deposits was inconsistent with the figures. It was therefore correct, in the respondent's contention, to reject the bank statements as a source of reliable information relevant to the matters in issue.

14. In relation to the audit conducted by the respondent, the applicant told the Tribunal that he did not have his records with him at the time and therefore may have provided the respondent with inaccurate information.

15. When executing its search warrants, the Victoria Police had seized approximately $20,000 in cash. The respondent contended that this approximated one and a half months' revenue. This contention was based on the following exchange between Docker and the Victoria Police on 2 April 2003, as recorded in the transcript of interview (at p33):

"Q. There was a large quantity of cash located - - -?

A. Yeah, yes.

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Q. I'm not privy to the amount but if you could just give me an estimation.

A. Some - something. It'd be - It'd be roughly around about a month and a half's worth of work, I suppose.

Q. Right. And how much cash are we talking?

A. It'd be about 20,000, I suppose."

The applicant told the Tribunal that he did not recall making this statement.

16. The respondent emphasised the inconsistencies in the applicant's estimation of the value of each certificate, namely:

• (a) at interview during the audit, Docker said the fees ranged from $275 to $440;
• (b) a letter from the applicant's solicitor dated 17 March 2004 asserted that as at March 2003 there were effectively three levels of charges: $125, $275 and $430, representing 5 per cent, 10 per cent and 85 per cent of the volume of certificates respectively. The letter further asserted that the maximum fee charged prior to June 2001 could have been $375 and between July 2001 and June 2002 it could have been $400;
• (c) at his interview with Victoria Police on 2 April 2004, Docker stated that 75 per cent of his work was charged at $480; and
• (d) the invoices revealed that in 2001 the applicant was regularly charging $450 per report.

17. It is appropriate to focus in more detail upon the letter from the applicant's solicitor dated 17 March 2004. Key statements in the letter were as follows:

"1. Certification Fees

• 1.1 Mr Docker did not have access to any documentation at the interview with ATO officials on 16 September 2003. He had not had access to any related financial documents, since the Victoria Police executed a search warrant at his business premises on 2 April 2003.
• 1.2 Mr Docker instructs that he believes he correctly stated the upper fee of $430, including GST, and concludes that he has been misquoted.
• 1.3 Mr Docker further instructs that he made an oversight in not recalling the lowest fee applicable being $125, including GST. The sum of all $125 fees represents approximately 5% of all fees of GDA.
• 1.4 Reference is made in your letter dated 19 February 2004 to a statement by Mr Docker that GDA charges a range of rates for certifying a vehicle between $275 and $440. We advise that that ATO's finalisation letter dated 27 November 2003 calculates all compliance certificates at $440 each.

2. Work Performed by GDA

• 2.1 The fee structure as of March 2003 in relation to the type of jobs undertaken by GDA is as follows.
• 2.2 A fee of $125 including GST is levied for:
  • • additional seats
  • • child restraint anchorages
  • • missing identification plates
  • • reissue of a report (new report number issued)
  • • minor accident damage repairs
  • • engine/transmission changes (original in vehicles)
  • • imported vehicles (originally exported from Australia)
• 2.3 A fee of $275 including GST is levied for:
  • • personally imported vehicles
  • • imported 15 year old vehicles
  • • major repairable accident damage
  • • engine/transmission changes (limited performance)
  • • reshells (negotiated contract)
• 2.4 A fee of $430 including GST is levied for:
  • • reshells (non-negotiated contract)
  • • engine/transmission changes (substantial performance)
• 2.5 Past business performance analysis has indicated that the following fee matrix is applicable:

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  Group (a)	$125 fee including GST	5% of business
  Group (b)	$275 fee including GST	10% of business
  Group (c)	$430 fee including GST	85% of business

3. Average Price

• 3.1 Mr Docker instructs that it is not appropriate to estimate an average fee charged. However, the following table details the maximum fees charged since July 2000.
  

  (a)	July 2000 - September 2000	$375 including GST
  (b)	October 2000 - June 2001	$375 including GST
  (c)	July 2001 - April 2002	$400 including GST
  (d)	May 2002 - June 2002	$400 including GST (VASS certificates introduced)
  (e)	June 2002 - March 2003	$430 including GST ($30 VicRoads VASS fee introduced)."

Docker told the Tribunal that "the letter is not word perfect" and that it did not accurately reflect his understanding or his instructions.

18. In relation to the conflicting estimate given at the interview with the Victoria Police on 2 April 2004, Docker told the Tribunal that he could not recall stating that his top rate was $480, but the transcript records the following exchange:

"Q. What would you - what - what's your fee that you charge?

A. We charge $480.

Q. $480. Yeah. Okay. And that's obviously all maintained within your books.

A. Mm'm."

Docker told the Tribunal that the interview was conducted the day after his father's funeral and "I wasn't thinking straight".

19. Docker told the Tribunal that the amounts he charged customers varied because they were always open to negotiation. He said that accurate information would be available on his computer but that he did not have access to it. He provided the Tribunal with evidence of amounts which he had charged to three regular customers - SC Motors, PJ Auto Salvage and Aussie Compliance Pty Ltd - demonstrating that no charge exceeded $430, but he acknowledged that this was a small proportion of certificates for the relevant period.

20. The Tribunal formed the opinion, following lengthy evidence which included discussion and analysis of spreadsheets and other financial data, that Docker, while an apparently intelligent and articulate individual, was genuinely confused by his own figures. This was most likely as a consequence of inefficient and inadequate record-keeping practices.

21. The respondent initially issued assessments against the applicant based on an average of $440 per vehicle. This figure was calculated by reference to the information Docker had provided to the respondent on 16 September 2003. At that time he had stated that the rates for certifying a vehicle ranged from $275 to $440; but the respondent struck a flat rate based on the top figure in the range.

22. In the objection review which followed an objection made by the applicant on 8 September 2004, the respondent conceded that the services were generally charged at one of two rates. The first or higher rate was, according to the respondent, $450 and the lower rate was $250.

23. In order to apportion these two rates, the respondent relied upon the assertion by the applicant, contained in its solicitor's letter dated 17 March 2004, that 85 per cent of its business was carried out at the higher fee rate. Although the letter further asserted that there was in fact a third level of $125, this was rejected by the respondent in the absence of evidence establishing that the lowest rate had been charged. Accordingly, the respondent concluded that 85 per cent of the business was conducted at the higher rate (which the respondent determined to be $450 including GST) and 15 per cent was conducted at the lower rate of $250. Although the lowest rate cleared by the applicant was rejected, the respondent's assessment of the second level

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($250) was lower than the second level asserted on behalf of the applicant ($275), this providing some acknowledgment of the existence of lower charges.

24. In the audit assessments, 75 per cent penalties had been imposed on the basis of an intentional disregard of a taxation law. At the objection stage a decision based on recklessness was substituted, and 50 per cent penalties were imposed.

25. The challenge facing the applicant in this application is twofold - the respondent has adopted a plausible methodology in its calculations, and the applicant lacks documentary evidence to demonstrate that the respondent's calculations had produced a distorted result. Under section 14ZZK of the Taxation Administration Act 1983 (Cth), the applicant is limited on this application to the grounds stated in the objection (subject to any contrary order of the Tribunal) and, importantly, has the burden of proving that the assessment is excessive. It is not for the respondent to prove that the assessment was correctly made. Pursuant to section 59, a Notice of Assessment is "conclusive evidence" that the assessment was properly made and, except in proceedings under Part IVC, that the amounts and particulars in the assessment are correct. By virtue of section 14ZZK, the applicant carries and must discharge the onus to show that the assessment is excessive.

26. As stated by Latham CJ in
Trautwein v The Commissioner of Taxation (1936) 56 CLR 63 at 87, in reference to section 39 of the then Income Tax Assessment Act 1922 (which is similar to section 59 of the Taxation Administration Act 1953):

"The application of sec. 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right-and remains right until the appellant shows that it is wrong."

27. Similarly, as stated by Kenny J in
Australia and New Zealand Banking Group Ltd v Federal Commissioner of Taxation (2003) 137 FCR 1 at 11:

"The Commissioner has a statutory duty to make an assessment of a taxpayer's taxable income and the tax payable thereon "[f]rom the returns, and from any other information in his possession, or from any one or more of these sources": see s 166 of the Act and Commissioner of Taxation (Cth) v Ryan (2000) 201 CLR 109 at 119 per Gleeson CJ, Gummow and Hayne JJ. Part IVC of the TAA provides, amongst other things, for appeals to this Court by persons dissatisfied with objection decisions of the Commissioner on the ground, relevantly, that an assessment is excessive: see TAA, Pt IVC, ss 14ZZ and 14ZZO. The task of a taxpayer, upon an appeal to the Court, is to show that the amount of money for which tax is levied by a notice of assessment exceeds the taxpayer's actual substantive liability: see Commissioner of Taxation (Cth) v Dalco (1990) 168 CLR 614 at 623, 625-626 per Brennan J and 631 per Toohey J."

28. Accordingly, the burden is on the applicant to show that the assessments were excessive. The Income Tax Assessment Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is it necessary for the Commissioner to adduce evidence to sustain or support the assessments:
Gauci v The Commissioner of Taxation (1975) 135 CLR at 89 per Mason J;
McCormack v The Commissioner of Taxation (1979) 143 CLR 284 at 301, 306;
The Commissioner of Taxation v Dalco (1990) 168 CLR 614. The taxpayer also needs to establish the amount which should be substituted for the amount assessed:
Martin v Federal Commissioner of Taxation (1993) 93 ATC 5200.

29. The applicant has been unable to satisfy the Tribunal that the respondent erred in the two most essential elements of the assessment - the calculation of two levels of consideration at $450 and $250 respectively for certificates, and the apportioning of 85 per cent of business to the higher rate.

30. With regard to the levels of consideration, evidence was provided by Andrew Raymond Allsop, an employee of the respondent, that while there was clearly a broad range of fees charged by the applicant, the sample which he examined suggested that "quite a few" were at $450. Similarly, in relation to the lower range, "quite a few"

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invoices were for the sum of $250. Given that the respondent was confronted with incomplete records, it was unavoidable that an element of guesswork would be involved in the ultimate assessment. The original determination by the respondent's auditors determined that an average figure of $440 should be applied in respect of each service. The objection review conducted by Mr Allsop produced the divided range of $450 at the upper level and $250 at the lower level.

31. Mr Allsop gave evidence that he did not accept Docker's claim that the upper fee charged was $430 because this was inconsistent with the sample invoices provided. Similarly, Mr Allsop did not consider there was evidence to justify the applicant's assertion that there was a third and consistent lower charge of $125. In reaching his conclusion, Mr Allsop told the Tribunal that he was not influenced by any figures provided by Docker to Victoria Police.

32. Mr Allsop acknowledged that the level of documentation, upon which he was able to base his calculations, was "not good" because of the small sample of invoices. He was, nevertheless, prepared to accept that the auditor had been unreasonable in proposing an average fee of $440 for all certificates; and that, on the basis of the evidence which he examined, he concluded that a two-tier approach was more appropriate. The Tribunal accepts that, based on the information available, Mr Allsop's approach was sound in the circumstances.

33. With regard to the apportionment of 85 per cent of the business to the higher rate, Mr Allsop stated that this figure was derived from the letter from the applicant's solicitors dated 17 March 2004. The applicant disputed that this was an accurate or rational percentage, but it would in fact appear to be a quite logical determination by the respondent based on the material available. No information provided by the applicant during the hearing would suggest that a different percentage would have been more accurate or that an alternative means of calculating an appropriate percentage could have been adopted with any greater reliability.

34. In his evidence to the Tribunal Docker was critical of the respondent's audit process, which he considered, amongst other things, did not comply with the respondent's own charter for the conduct of enquiries or audits. Specifically, Docker considered the relevant tax officer failed to provide adequate assistance or explanations, and failed to provide him with reasonable time to collect relevant records. These complaints related to a Mr DePetro, who was not called to give evidence. However, Monique Scanlon, an employee of the respondent and part of Mr DePetro's team, did give evidence; and nothing in Ms Scanlon's evidence would support the assertion that the audit process was not fair or correct, or that the conduct of Mr DePetro was inappropriate.

35. In summary, the applicant has not established that the assessments are excessive. There was a rational, defensible basis for the decision under review. The number of services were correctly ascertained by the number of certificates issued the applicant. There was a cogent and probative basis for the assessment. There was a sound basis for rejecting the bank statements as an accurate record of the receipts by the business. There was no evidence of an injustice to the applicant. It is not open to a taxpayer to complain in circumstances where the quantification of an assessment is complicated by the failure on its part to keep accurate records of account.

36. On the applicant's own account, the services could be separated into categories. The applicant asserted that 85 per cent of the business consisted of services for which it charged $430 plus GST. The respondent accepted that this was a fair allocation of the workload, but concluded, on the basis of all of the evidence, that a proper figure for the upper range was $450. The figure of $450 was arrived at having regard to invoices issued by the applicant.

37. In short, the onus is on the applicant to establish that the respondent's assessment is incorrect. This applicant has failed to discharge that onus.

38. Given that the Tribunal considers that the assessment was reasonable in the circumstances, this leaves the question of the penalty.

39. Division 284 of the Taxation Administration Act 1953 sets out the circumstances in which administrative penalties apply for making false or misleading statements: section 284-5. Section 284-75 provides that a taxpayer is liable to an

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administrative penalty if the taxpayer or its agent makes a statement to the Commissioner that is false or misleading in a material particular and there is a "shortfall amount" as a result of the statement. A "shortfall amount" is an amount by which the relevant liability is less than would otherwise have been: section 284-80. Section 294-854 provides for the amount of the penalty by reference to a "base penalty amount" under section 284-90. By section 298-30 the Commissioner must make an assessment of the amount of an administrative penalty under Division 284.

40. Mr Allsop gave evidence that the GST net amount shortfall was $15,391. He considered it appropriate to impose a penalty based on reckless behaviour, taking into account the applicant's poor record-keeping, failure to deposit income in a bank and the lack of awareness of reporting obligations. The respondent described the applicant's conduct as "reckless" because its documentation was "abysmal".

41. On this basis, a penalty of 50 per cent on the shortfall was imposed, being $7695.50. If the applicant's conduct could be categorised as "lack of reasonable care", the penalty would be 25 per cent. The respondent submitted, however, that the applicant's conduct went beyond a "lack of reasonable care", demonstrating instead a complete indifference to the identification and recording of income over a sustained period of time. The respondent asserted that the applicant should not be entitled to seek comfort from its lack of proper and diligent process. Under a self-assessment regime, a rigorous adherence to rules was important and a failure to identify income must necessarily attract a strict penalty. The Tribunal sees no basis for disturbing this assessment.

42. For the above reasons, the Tribunal affirms the decision under review.