DELANDRO v FC of TMembers:
J Block DP
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 859
J Block (Deputy President)
Part A - Introduction and background
1. The objection decision under review is the disallowance by the Respondent of objections by the Applicant against amended assessments in respect of the years ending 30 June 2002 and 30 June 2003; those two years are collectively referred to as the "relevant years"; the relevant years in turn are referred to individually, as the case may be, as either the "2002 year" or the "2003 year".
2. The Applicant was represented by Mr Peter Zunker of Wearne & Company, accountants; the Respondent was represented by Ms Elizabeth Collins and Ms Kristen Deards of Counsel instructed by the ATO Legal Group.
3. The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. In tendering them, Ms Collins noted that the T documents included statements made by the Applicant or by Mr Zunker on his behalf which constitute evidence of a sort, but not evidence tested by cross-examination. The Tribunal had been informed by Mr. Zunker that the Applicant would not be giving oral evidence. In the light of that statement, evidence contained in the T documents falling under this head must of necessity be treated with reserve.
4. The Respondent furnished the Tribunal with a document entitled "Respondent's Chronology of Events", the content of which was prepared in accordance with information contained in or statements set out in the T documents. The chronology is a convenient starting point, and it is included in these reasons as follows: -
"Date Event Reference 1 May 2001 Commencement of sales promotion activity. T13-63  14 June 2001 Meeting between Delandro and Shelly Crocket (Draftworldwide) and Gordon Ford (Valley International). At around this time Delandro claims that a verbal agreement reached with Valley International and Draftworldwide (UK) to establish a sales promotional activity on behalf of those companies during the 2003 Rugby World Cup. T13-67; T13-70; 13-71 13 August 2001 Residential Tenancy Agreement signed by Delandro in respect of Camperdown premises and Delandro moves into premises. T13-67; T13-93 3 May 2002 Tax Invoice issued to Draftworldwide London for RWC 2003 project consultancy fees agreed as per 14 June 2001 meeting: Phase 1: Development of Scope of work and project plan inclusive of Pub-mate and Stadium-mate Trivia concept - $26,4000 due by 4 July 2002 ($24,000 plus GST of $2,400) T13-68 4 May 2002 Tax Invoice issued to Valley International for RWC 2003 Project consultancy fees agreed as per June 14 2001 meeting: Phase 1 - Development of Signage Rights and project plan inclusive of Pub-mate and Stadium-mate Trivia concept - $7,040 due by 4 July 2002 ($6,4000 plus $640 GST). T13-71 12 July 2002 Reminder letters sent to Valley International and Draftworldwide T13-75; T13-79 22 July 2002 Delandro issued an invoice to Shoreshot Event Management for $50,800. SFC; T13-66 Second reminder letters sent to Valley International and Draftworldwide. T13-76; T13-80 Tax Invoices issued to Draftworldwide ($16,000/$17,600) for Phase 2 and Valley International ($4,400/$4,840). T13-69; T13-72 August 2002 Delandro stops work after consortium advised that they were no longer competing for RWC business. Delandro moves out of Camperdown premises and determines to close down Sureshot. T13-67 9 August 2002 Third reminder letters sent to Valley International and Draftworldwide. T13-77; T13-81 19 November 2002 Legal advice provided by Bartier Perry to the effect that there were little prospects of recovering amounts owing under invoices issued by Sureshot. T13-73 26 November 2002 Tax Invoice (reminder) issued to Draftworldwide Australia Pty Limited ($40,000/$44,000). T13-70 Delandro determines that the invoices issued by Sureshot would not be collectable and claims that this in turn meant that the monies owed by Sureshot to him would not be collectable. T11-58 26 May 2003 Tax return for 2001/2002 income years lodged. T3-12 20 August 2003 Taxation return for 2002/2003 income year lodged. T5-23 7 October 2004 Amended assessments issued. 15 April 2005 Notice of objection to amended assessments lodged. T11-56 5 May 2005 ATO informs Delandro that further information is required to enable the Commissioner to make a decision in relation to the objections. T12-61 15 June 2005 Wearne & Co (Chartered Accountants) provide information in response to ATO's request dated 5 May 2005. T13-63 28 June 2005 Wearne provides further information to ATO. T14-96 6 July 2005 Wearne provides further information to ATO. T15-98 12 July 2005 ATO informs Delandro that objections in relation to 2001/2002 and 2002/2003 income years have been disallowed. T17-103 8 September 2005 Proceedings NT2005/346-247 commenced in the Administrative Appeals Tribunal." T1-1
5. The Respondent furnished the Tribunal with detailed written submissions dealing with both law and fact and in the latter respect, and in relation to factual matters only, again based on the T documents and thus, and for reasons set out previously, to be treated with reserve. However and subject to that reservation, the Tribunal was informed that the relevant facts are set out in the Respondent's submissions under the heading "Relevant facts" and in clauses 6 to 17, both inclusive, and reading as follows:
- 6. The applicant's representative has indicated that the applicant will not be called to give evidence in the proceedings. In those circumstances, the respondent submits that a number of issues which arise in the proceedings will not be the subject of evidence and a number of matters will remain unexplained. However it appears that the basic facts are as follows.
- 7. The applicant is and was, at all relevant times, a director and shareholder of Sureshot Marketing Pty Limited ( Sureshot ). Sureshot was at all relevant times the trustee of the Grip and Spin Unit Trust.
- 8. In May 2001 the applicant commenced a business providing "sales promotion services" [Letter from Mr Zunker to the respondent dated 15 June 2005 at T13-63 ]. At that time, and at all relevant times, the applicant was an employee of Creative Field Marketing, a company described by the applicant as a member of the "Images and Issues" group of companies [Facsimile from Mr Zunker to the respondent dated 6 July 2005 at T15-99] .
- 9. On or about 14 June 2001 the applicant met with Ms Shelley Crocket of Draftworldwide (UK) and Mr Gordon Ford of Valley International (UK), to whom he was introduced by a senior executive of Creative Field Marketing. After a "presentation and two day conference" the applicant made an "in principle" oral agreement to provide those companies with sales promotional services in relation to the 2003 Rugby World Cup [Timeline prepared by the applicant at T13-67 attached to letter of 15 June 2005]. The agreement was not then or ever reduced to writing, and there is no evidence as to the terms of that agreement, including the basis on which the applicant was to be remunerated.
- 10. In August 2001 the applicant leased premises at Building 1, 2/2 Cardigan Lane, Camperdown, apparently for a term of 12 months [Residential Tenancy Agreement at T13-93] . The rent paid in respect of those premises constitutes a significant part of the expenses he claims
ATC 2456to have incurred in relation to the business.
- 11. The sales promotional services the applicant claims he provided to Draftworldwide (UK) and Valley International (UK) pursuant to the agreement of 14 June 2001 were said to relate to a project known as "Pub-Mate" and "Stadium-Mate", which was a plan to conduct a trivia game during the 2003 Rugby World Cup for paying customers in pubs, entertainment venues and sporting stadiums. The applicant has described the tasks he performed for Draftworldwide (UK) and Valley International (UK) pursuant to this project as follows:
- 1. Producing a scope of work which outlined the multiple elements of the project and the stakeholders involved and their tasks,
- 2. Develop a project time line
- 3. Canvas support for the idea from strategic partners (Australian Rugby Union, advertisers, corporate sponsors etc) as well as seeing if the owners/licensees of the pubs etc and venues themselves were: (a) interested in the idea and (b) had the capability to support it technically, financially, from a marketing and promotional perspective as well as the potential to enlist community support (from local councils and businesses etc)" [Facsimile from Mr Zunker to the respondent dated 6 July 2005 at T15-99 ].
- 12. In addition to rent paid in respect of the Camperdown premises, the expenses claimed to have been incurred in connection with the business constituted depreciation expenses, motor vehicle expenses and other expenses.
- 13. Between May 2002 and July 2002 Sureshot issued tax invoices to Draftworldwide (UK) and Valley International (UK) as follows [Invoices at T13-68 to T13-72 ]:
Date Client Total Work description 3.5.02 Draftworldwide $26,400 "RWC 2003 Project Consultancy fees agreed as per June 14 2001 meeting: Phase 1: Development of Scope of Work and Project Plan inclusive of Pub-Mate and Stadium-Mate Trivia concept" 4.5.02 Valley International $7,040 "RWC 2003 Project Consultancy fees agreed as per June 14 2001 meeting: Phase 1: Development of Signage Rights and Project Plan inclusive of Pub-Mate and Stadium-Mate concept" 22.7.02 Draftworldwide $17,600 RWC 2003 Project Consultancy fees agreed as per June 14 2001 meeting: Phase 2: Scoping of Infrastructure and Strategic Partners for roll out of Pub-mate and Stadium-mate Trivia concept" 22.7.02 Valley International $4,880 "RWC 2003 Project Consultancy fees agreed as per June 14 2001 meeting: Phase 2: Scoping of Infrastructure and negotiation with production partners for roll out of POS for Pub-mate and Stadium-mate Trivia concept"
- 14. The total amount invoiced by Sureshot in the 2002 income year was $32,440 and the amount invoiced in the 2003 income year was $22,480.
- 15. On or about 22 July 2002 the applicant issued a document described as a tax invoice to Sureshot in the amount of $50,800, which is equal to the total amount invoiced by Sureshot to its clients in the 2002 and 2003 income years minus GST [Invoice at T13-66 ]. Other than this, there is no evidence of the arrangement (if any) in place between the applicant and Sureshot in the 2002 and 2003 income years.
- 16. Between 12 July 2002 and 9 August 2002 Sureshot issued some account payment reminders addressed to Draftworldwide and Valley International in relation to the invoices described in paragraph 10 above [Letters at T13-75 to T13-82 ].
- 17. In a letter dated 19 November 2002 the applicant received legal advice from Bartier Perry that the prospects of recovery of the debts owing under the invoices issued by Sureshot were not favourable because "without a formalised agreement in writing the question of legal enforceability arises" [Letter from Peter Wilkinson, Bartier Perry to Mr Delandro dated 19 November 2002 at T13-73 ]. From that date the Sureshot took no further action to recover any amount owing under the invoices.
6. It is convenient also to note that the issues in this matter are well set out in clause 5 of the Respondent's written submissions, and which reads as follows:
- 5. There are two principal issues in these proceedings. First, whether the non-commercial loss rules in Division 35 of the ITAA operate to deny the availability of deductions claimed by the applicant in the 2002 and 2003 year in the years in which they were allegedly incurred, and if so, whether the respondent was correct in refusing to exercise his discretion under s 35-55(1)(a) of the ITAA 1997. Second, whether the applicant is entitled to contend that a deduction for a bad debt is available when such a claim is not raised as a ground in the objections the disallowance of which these proceedings are a review, and if so, whether such a deduction is available to the applicant. Each of these issues raises the question of whether the appropriate accounting method for the applicant in relation to his business activity in the years in question is the "receipts" method or the "earnings" method. This question will therefore be addressed separately in these submissions.
Part B - Aspects in respect of which there is little or no evidence or evidence which is contradictory
ATC 2458It is convenient at this juncture, and in this Part B to set out a number of matters which during the course of the hearing, emerged as matters about which it is either difficult or impossible to form any firm conclusion. I intend to refer as did the Respondent to the Income Tax Asssessment Act 1997 as the ITAA 1997; references to sections without references to a statute should be construed as references to sections in ITAA 1997. I note also that I found the Respondent's written submissions on aspects of the law so helpful that I drew on them to some considerable extent for the purposes of these reasons.
8. Sureshot Marketing Pty Limited ("Sureshot") is a company which is the trustee of the Grip and Spin Unit Trust ("the Unit Trust"). Tax invoices as referred to in clause 13 of the Respondent's written submissions and quoted above were issued by Sureshot to Draftworldwide (UK) and Valley International (UK) (collectively the "UK companies"). There were four such tax invoices; one was issued on 3 May 2002, one on 4 May 2002 and two on 22 July 2002.
9. The tax invoices were issued by Sureshot. A search by the Respondent indicated that although the Applicant is the only director of Sureshot there are two issued shares, one owned by the Applicant and the other by a Mr Blunt (who was previously a director of Sureshot). There was no evidence whatever as to the terms and conditions in respect of the Unit Trust and in particular no evidence as to who its unitholders are and what their unit-holdings are. Mr Zunker said that Sureshot rendered tax invoices to the UK companies on behalf of the Applicant and that the interposition of Sureshot and the Unit Trust was effected purely in order to give the Applicant legal protection against liability. Put in other words, that contention would suggest that Sureshot was the Applicant's agent and that it rendered invoices on behalf of the Applicant in such manner that when and if payment was received, any money so received would be held upon bare trust for the Applicant. If this is so, one might ask why it was necessary to have a unit trust at all since an interposed company as bare trustee would have been sufficient.
10. In a fax dated 28 June 2005 by Mr Zunker to the Respondent certain questions and responses were enumerated. I include the first of those questions and responses as set out at T pages 96 and 97 as follows:
1. ABN on Invoice is not the ABN for SureShot event Management and who has contracted with the Overseas organisation.
The entity invoicing is Grip and Spin Unit Trust, the client has incorrectly used the trustee name against the ABN for the trust. SureShot Event Management Pty Limited is the trustee of the trust and does not trade. It is the ABN for Grip and Spin Unit Trust on the invoice and the correct name should have been SureShot Event Management Pty Limited as trustee of the Grip and Spin Unit Trust. This client is not one that I usually deal with and I have added to the confusion by referring to the entity as Sureshot Event Management Pty Limited when it should have been SureShot Event Management Pty Limited as trustee of the Grip and Spin Unit Trust.
The information furnished in that response, confusing as it undoubtedly was, raises a number of questions and in respect of which there are no answers. A trust is not a juridical person in law; a trust is by contrast and in broad terms an obligation arising in equity pursuant to which a person who is the legal owner of assets is obliged to account for them to beneficiaries. As to why the Unit Trust would have an ABN is altogether unclear. So for that matter is the whole of the response quoted above.
11. However and assuming that Sureshot did render the tax invoices for and on behalf of the Applicant as his agent (and as Mr Zunker contended) the tax invoice at T page 66 was entirely unnecessary. T page 66 indicates that on 22 July 2002 the Applicant invoiced Sureshot in an amount of $50,800; this latter invoice is referred to in these reasons as the "Applicant Invoice". It will be recalled that on 22 July 2002 Sureshot sent two tax invoices to the UK companies. T page 66 is headed "Tax Invoice" but the invoice does not include GST. It would seem that the Applicant Invoice is an invoice for the sum of the four tax invoices sent to the UK companies by Sureshot, but exclusively of their GST components. Mr
ATC 2459Zunker was unable to inform the Tribunal as to whether the Applicant is registered or required to be registered for GST purposes. Equally he did not know the GST registration position of either Sureshot or the Unit Trust.
12. The Applicant Invoice does not set out anything other than the amount charged; put in other words it does not set out any information whatever as to what the amount of $50,800 is for or any information as to how it was composed. It is simply an invoice from the Applicant to Sureshot dated 22 July 2002 reflecting an amount owing of $50,800. The date on which the Applicant Invoice was raised, i.e. 22 July 2002, is relevant for a number of reasons, and in particular because it related to the whole of the Applicant's entitlement against Sureshot and it was raised on the same day as the last two tax invoices sent by Sureshot to the UK companies. The Applicant was either employed by Sureshot or in the alternative and at least ex facie the Applicant Invoice, he was a consultant to Sureshot; the latter is more likely given that he was at all relevant times employed, as his tax returns show, by Creative Field Marketing ("Creative"), and as a manager. If he was a consultant to Sureshot (and in which case it would follow that Sureshot was not his agent) then GST would have been relevant if he was registered or required to be registered. In November 2002 the Applicant received legal advice from Bartier Perry; that legal advice (T page 73 and T page 74) reads as follows:
Recovery of Outstanding Debt
Further to our meeting on Friday, the 15th of last week, please find a summation as I understand it, of your position below:
- 1. After an introduction from a senior executive of your current employer, you were engaged by two (2) overseas companies (Draftworldwide and Valley International) for the purposes of being the local representative in a speculative tender for a significant project of the Rugby World Cup 2003.
- 2. You had several meetings, attended a workshop and verbally agreed to the terms and conditions of your consultancy work.
- 3. You used your resources, network of contacts, incurred costs, invested considerable time, effort and money in developing and delivering a strategic and operational plan pursuant to the success of the project.
- 4. You acted in good faith, fulfilled your obligations completely and invoiced the relevant third parties according to the pre-determined and agreed schedule of fees.
- 5. You have issued several letters of demand and communicated with the relevant stakeholders in an effort to obtain payment, all of which to date have been unsuccessful.
- 6. You identified this project as an opportunity to re-launch SureShot Event Marketing and used the anticipated revenue to set up premises for the purpose of engaging in further consultancy work.
After further review, consultation with colleagues as well as a discussion with an associate from Wolter Inkasso, one of Europe's foremost debt collection agencies, it is my determination that the recovery of monies owed to you is not a favourable one. In short, while you have legal grounds to pursue your claim, without a formalised agreement in writing the question of legal enforceability arises. The cost of pursuing this matter further and additional stress on yourself must also be taken into consideration.
One approach we did not discuss was to contact any local representatives of the companies involved and determine their willingness to take action on your behalf, although they are under no moral or legal obligation to do so.
If you require any further clarification please do not hesitate to contact me as required.
Pleases note that no statement of account has been enclosed nor will be issued in this instance.
13. As to whether the legal advice by Bartier Perry was intended for Sureshot or the
ATC 2460Applicant is altogether unclear. Clause 6 of the legal advice might suggest that it was intended for Sureshot even though it was addressed to the Applicant. However it records in clause 4 that "You... invoiced the relevant third parties"; there are moreover other aspects of the tax advice which would suggest that it was intended for the Applicant, in the sense that the person referred to as you is the Applicant himself.. It was in fact Sureshot who issued the tax invoices to the UK companies and not the Applicant. Although this is far from clear, the probabilities are that the advice was given in relation to the four tax invoices rendered by Sureshot to the UK companies, and in which event the legal advice was intended for Sureshot. It may be noted that the legal advice is in general terms somewhat imprecise, and as I have noted it is not at all clear whether it was intended for the Applicant or for Sureshot.
14. There was no evidence before the Tribunal as to the contractual terms between Sureshot (or the Applicant) and the UK companies. Equally there was no evidence as to the contractual terms applicable as between the Applicant and Sureshot or for that matter the Applicant and Creative. As to Creative, did the Applicant's managerial position with that firm permit him to become involved in the business activities which are relevant for the purposes of this decision?
15. Yet another mystery arises from the fact that in claiming deductions the Applicant reflected substantial amounts in respect of rental on a residential unit in Camperdown. Indeed the Applicant Invoice was rendered to Sureshot by the Applicant at 2/2 Cardigan Lane, Camperdown. Mr Zunker informed the Tribunal that the Camperdown unit permitted both residential and business use. Mr Zunker said also that the Applicant's tax returns for the relevant years showed him as resident at 53 Ivy Street, Darlington. The tax returns in question are the only documents which would suggest that the Applicant was not resident in the Camperdown unit and the tax returns are themselves, as will be demonstrated, incorrect in a number of important respects. This is a convenient point at which to note that a number of statements, usually somewhat hesitantly, were made by Mr Zunker as to matters of fact concerning the Applicant. It is clear of course that Mr Zunker was hardly in a position to be giving evidence of so completely a hearsay nature.
16. In his tax return for the 2002 year (T3) the Applicant specified that his main salary and occupation was $83,484 as a manager (T page 12). That tax return reflects a non-primary production loss of $40,547 but reflects nothing at all by way of income from the enterprise referable to the UK companies. Excepting only that the figures are different, the Applicant's tax return for the 2003 year is similarly incorrect. It will be remembered that the Applicant Invoice was rendered in July 2002 and thus within the 2003 year. The Applicant in fact, it would seem, claims that the Applicant Invoice reflects the gross amounts exclusive of GST charged by Sureshot to the UK companies. On this basis part of the amount claimed in the Applicant Invoice against Sureshot fell within the 2002 year and part within the 2003 year. Yet no income amounts were reflected in either return from this source. Legal advice as to the fact that recovery would be difficult was obtained only in November 2002. Leaving aside the fact that the legal advice was as I have said, in some respects imprecise, it was not until November 2002 that it was obtained. The Chronology (and see T page 67) indicates that the enterprise ended in August 2002 and at which time the Camperdown unit was vacated. There was no evidence before the Tribunal as to the basis upon which the Camperdown unit was vacated more particularly having regard to the residential lease which is included in the T documents; nor was there any evidence other than statements in the tax returns for the relevant years, as to the basis upon which the Applicant was said to reside in Darlington. The residential tenancy agreement in respect of the Camperdown unit which was included in the T documents indicated that the tenancy was granted for a year ending in August 2002 and so that it might have been vacated because the tenancy ended. As I have noted the tax returns contained information which was incorrect and so that there must be doubt as to the statements contained in them as to the place of residence of the Applicant.
17. In all of this veritable sea of uncertainty there are two certainties; no amounts of any kind were ever recovered from the UK
ATC 2461companies; of even more relevance is the fact that the sales production activity commenced in May 2001. See clauses 1 to 4 of a letter by Wearne & Company to the Respondent dated 15 June 2005 at T page 63 reading as follows:
- 1. Date of Commencement of the sales promotion activity was 1st May 2001.
- 2. Copy of invoice to Sureshot Event Marketing Pty Limited - this is an internally raised document as Sureshot Event Marketing Pty Limited is owned by Blake Delandro. Please refer to attachment 2.
- 3. Please refer to the timeline of events undertaken for Sureshot Event Marketing Pty Limited as attachment 3.
- 4. The evidence to support the amount of $20,400 relates to the 2002/2003 and $30,400 to the 2000/2001 years is the attached invoices from Sureshot Event Marketing Pty Limited respectively. These have been raised to be sent to the client by Sureshot Event Marketing Pty Limited. We have attached copies of these invoices as attachment 4. On the basis that Sureshot Event Marketing Pty Limited was used as a billing vehicle to protect Mr Delandro from and actions against him personally from clients, the end of billing of Sureshot Event Marketing Pty Limited represents the frequency of billing by Mr Delandro to the end client. With the introduction of the Personal Services Regime this would be an effective way of complying with those rules while still maintaining a level of asset protection.
18. Mr Zunker in his submissions contended that the sales promotion activities involving the UK companies commenced early in the 2002 year. That statement was contradicted by T page 63. In his closing submissions Mr Zunker sought to suggest that clause 1 of the letter dated 15 June 2005 was not intended as a statement that the business commenced in May 2001. The difficulty of course is that it says categorically that it did.
19. It is relevant to note that despite all of the uncertainty to which I have referred, the Respondent accepts, so I was informed, that the Applicant engaged in a business activity and being the sales promotion activity referred to in the Chronology as from May 2001. Given the content of the various invoices and in particular the Applicant Invoice, the Respondent might have contended that it was Sureshot and not the Applicant who conducted the business activity; the terms of the Applicant Invoice would suggest that this was more likely. The Respondent might also in all the circumstances have contended in the absence of evidence that there was no business at all and whether by the Applicant or Sureshot and that the only activities were those of a preliminary nature and before the business commenced. The Respondent having made this concession, which was in all the circumstances generous, I accept it, but at the same time note that in accordance with T page 63 it must also be accepted that the relevant business activity commenced in May 2001 and thus prior to the commencement of the 2002 year.
Part C - Receipts or accruals
20. The Applicant contends that he did derive income (although the source of that income is less than clear) and in both of the relevant years but that he wrote off the Applicant Invoice and thus all of the amounts due. The concept of write off is relevant only of course if the appropriate accounting method was the accruals method.
21. The Respondent contended correctly in my view, that the Applicant did not earn or derive any income from the business activity during the relevant years because:
- (a) The Applicant did not actually receive any amount in relation to his business activity in the 2002 or 2003 income years;
- (b) The appropriate method of accounting for the Applicant in each of the years of income was the "receipts" method, with the result that only amounts that are actually received are derived for the purposes of s 6-5(2) of the ITAA 1997;
- (c) In the 2002 year no amount was even invoiced by the Applicant. No recoverable debt was therefore created in the 2002 year, with the result that even if it was appropriate for the Applicant to adopt the "earnings" method of accounting, no amount could
ATC 2462have been derived by the Applicant from his business activity in that year; and
- (d) The Applicant did not return any income from the business activity; the returns for both the 2002 and the 2003 years of income stated that the income derived by the business was "NIL".
22. The two commonly used methods of accounting for items of income are the receipts method under which a taxpayer derives income when it is actually received and the earnings or accruals method under which income is derived when it is earned and at the point at which a recoverable debt is created.
23. In determining the income derived by a taxpayer for the purpose of section 6-5(2) of the ITAA 1997 the taxpayer must adopt the method of accounting which is the most appropriate to the taxpayer's circumstances. As Dixon J stated in
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 154, ("Carden's case") the appropriate method of accounting will be the one that is calculated to give a substantially correct reflex of the taxpayer's true income. To ascertain which method should be adopted it is appropriate to weigh all of the relevant circumstances in relation to the taxpayer and the income in question in order to determine which method produces the correct reflex of that income. The taxpayer's occupation and the manner in which it was carried on is relevant, as is the basis on which the taxpayer's accounting records were kept [
Federal Commissioner of Taxation v Dunn 89 ATC 4141; (1989) 85 ALR 244 at 246-247], although neither of these matters are determinative of the question.
24. The authorities on the receipts and earnings methods of accounting draw a clear distinction between trading income, in relation to which the earnings method is usually appropriate [
J Rowe & Son Pty Ltd v Federal Commissioner of Taxation 1971 ATC 4001; (1971) 124 CLR 421 at 448], and income derived from a personal services business carried on by a taxpayer, in relation to which the receipts method will ordinarily be appropriate. The Respondent contends that the comments made by Dixon J in Carden's case are particularly apposite to the present circumstances:
"Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts present in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income."
Federal Commissioner of Taxation v Firstenberg 76 ATC 4141; (1976) 27 FLR 34 the Court found that the earnings (or "accruals") basis was "artificial" and "unreal" [at 58 per McInerney J] in the case of a legal practitioner with a small practice. The conclusion reached by the Court in that case was that "in the case of a one man professional practitioner the essential feature of income "derived" is receipt" [Ibid]. Even where a professional practitioner employs a number of people to undertake work on his behalf it will still usually be the case that the receipts method of accounting will be the most appropriate, although it is true that it is not a principle of law that a sole practitioner must be assessed on a receipts basis [
Federal Commissioner of Taxation v Dunn 89 ATC 4141; (1989) 85 ALR 244 at 255].
26. In contrast, in the case of a very large partnership carrying on a professional services business the earnings method of accounting is likely to be the appropriate one. In
Henderson v Commissioner of Taxation 70 ATC 4016; (1970) 119 CLR 612 the taxpayer was a partner in an accounting firm said to be one of the largest in Australia; it employed 295 people. A considerable amount of the work done by and in the name of the partnership was done by those employees. The partnership accounts were prepared on an earnings basis. It could not be said that that taxpayer's partnership drawings were akin to the reward for personal services received by the taxpayers in the cases cited
ATC 2463above. The High Court in Henderson distinguished the matter from Carden's case on that basis [Henderson at 646-647 per Barwick CJ].
27. The Respondent drew the Tribunal's attention to TR98/1 but I do not think it necessary for me to consider it in any detail.
28. The clear inference to be drawn from the description of the tasks the Applicant performed is that the Applicant was carrying on a business that relied solely or principally on his own personal exertion. If he had actually received any amount from the UK companies or either of them it would have been a reward for the professional skill and work of the Applicant; indeed, the Applicant stated at paragraph 7 of his Statement of Facts and Contentions that he "was considered ideally suited to bring this project to success given his background of event management, marketing, and most importantly the experience in the hospitality industry". The Applicant's business did not operate on a "fund of circulating capital", nor did it generate income from the sale of trading stock. The outgoings incurred by the Applicant in carrying on the business bore no relationship to the amount he invoiced his clients.
29. In this particular instance the receipts method is in the Tribunal's opinion clearly the correct method; it is moreover the method which the Applicant himself (inferentially) chose having regard to the fact that he did not reflect any amounts whatever in respect of the business in question in his tax returns. If the Applicant intended to use the earnings or accrual method then in the view of the Tribunal, his tax returns would have been framed differently. It must be born in mind in this context that ex facie his tax returns for the relevant years, losses were claimed but no income was reflected.
Part D - Bad debts
30. Having come to the conclusion that the correct method of accounting was receipts and not accruals, it is not strictly necessary for me to deal with this aspect and I do so in the interests of completeness only, and in case it can be suggested that my conclusions as set out in the preceding part were in any way erroneous.
31. The Applicant now seeks to claim a deduction in his Statement of Facts and Contentions of an unspecified amount under either section 25-35 or section 8-1(1) of the ITAA 1997. This claim was not made in the Applicant's objections lodged on 15 April 2005. By operation of section 14ZZK(a) of the Tax Administration Act 1953 the Applicant is limited to the grounds raised in his objections and is therefore not entitled to claim the deduction in this proceeding, unless the Tribunal orders otherwise. The Respondent contends that the Tribunal should not make an order to allow the Applicant to make a further claim not raised in his objections.
32. Each of the Applicant's objections make the following statement:
"The taxpayer determined that the invoices would not be collectable on the 26 November 2002. This was on the basis of legal advice that the outstanding monies owed to Sureshot Event Management Pty Limited by it's [sic] clients would not be collectable. This in turn meant that the monies owed by Sureshot Event Management Pty Limited to myself, would not be collectable."
It may be noted that this statement would suggest that despite the Respondent's concession the business in question was conducted by Sureshot and not the Applicant at all. This is so having regard to the fact that the Applicant claimed that he wrote off the Applicant Invoice because Sureshot could not recover the tax invoices from the UK companies.
33. No claim was made in either objection for a deduction pursuant to section 25-35 or section 8-1(1) in respect of any amount. While reference was made to section 8-1(1), all of the grounds set out in the objections are expressed to be in support of the contention in the first paragraph of each objection, namely, that the taxable income in each year should be reduced by the amount the Respondent has deferred under Division 35. It would seem that the inclusion of the paragraph in the objections set out above was inserted by way of explanation as to why the total amount of $50,800 was not returned in the Applicant's assessable income in the 2002 and 2003 income years in the first place; it is to be noted that it follows immediately after a paragraph which deals with
ATC 2464the amounts the Applicant contended should be included in assessable income.
34. The Respondent in his written submissions noted that the Tribunal has a broad discretion as to whether a taxpayer should be allowed to raise an objection not raised in his objections. The Respondent contends that the Tribunal should not do so in this matter because to do so would be futile more particularly because of the material before the Tribunal does not disclose a prima facie case.
35. Assuming that the Applicant is permitted to claim that he is entitled to claim a deduction under section 25-35 of the Act, and it is not necessary for the Tribunal to determine whether he should be allowed to do so, the Respondent correctly contended that the Applicant is not entitled to any such deduction because:
- (a) the Applicant has not established that a debt owed to him existed in either the 2002 year or the 2003 year;
- (b) the Applicant has not established that the debt was bad and that he wrote off the debt as bad in either the 2002 year or the 2003 year; and
- (c) no amount was included in the Applicant's assessable income in respect of a debt written off as bad in the 2003 or 2003 income year.
36. Even more to the point is the fact that there is no evidence of any kind that the Applicant in fact wrote off the bad debt during the only possible relevant year and which is the 2003 year. It will be remembered that the whole of the Applicant's claim as against Sureshot arises from the Applicant Invoice which was rendered, Applicant, in July 2002. There was no evidence before the Tribunal which would suggest that there was any derivation even on this hypothetical basis in respect of the 2002 year.
Part E - Non-commercial losses
37. The Respondent contended, correctly in the view of the Tribunal, that the assessable income derived by the Applicant from the sales promotion business in the 2002 and 2003 income years was nil, as the Applicant accounted, or should have accounted, for income on a receipts basis and no amount was actually received by the Applicant in those years.
38. Division 35 operates to defer deductions claimed by individuals in relation to certain non-commercial business losses. The relevant parts of the operative provision, section 35-10, read as follows:
- "(1) The rule in subsection (2) applies for an income year to each * business activity you carried on in that year if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), unless:
- (a) One of the tests set out in section 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) is satisfied for the business activity for that year; or
- (b) The Commissioner has exercised the discretion set out in section 35-55 for the business activity for that year; or
- (c) The exception in subsection (4) applies for that year.
- (2) If the amounts attributable to the *business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess:
- (a) Were not incurred in that income year; and
- (b) Were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on."
39. The Applicant was an individual carrying on a business activity and the amounts otherwise deductible were in excess of his business income. This is so because in each relevant year his business income was nil. This being so the Applicant cannot in either year deduct his losses unless either of the tests in section 35-10(1)(a) applies or the Respondent exercises his discretion under section 35-10.
40. The Applicant seeks to rely on the assessable income test set out in section 35-30 which provides as follows:
"The rule in section 35-10 does not apply to a *business activity for an income year if:
ATC 2465(a) The amount of assessable income from the business activity for the year; or
- (b) You started to carry on the business activity, or stopped carrying it on, during the year - a reasonable estimate of what would have been the amount of that assessable income if you had carried on that activity throughout the year; is at least $20,000."
41. The assessable income in each relevant year was nil. Accordingly section 35-10(1)(a) cannot assist the Applicant. Section 35-10(1)(b) cannot assist him for the 2002 year because he did not start the business in that year; as set out previously he started it in the preceding tax year. As to the 2003 year (the year in which the business was closed) the Applicant did indeed abandon the business in August 2002; on any basis and having regard to all the circumstances a reasonable estimate of the business income for the 2003 year would be nil. During the 2003 year the business was conducted for at most two months before it was abandoned and in circumstances where nothing was ever received. As to why the Applicant sought legal advice only in November 2002 after closing the business in August 2002 is entirely unclear.
42. In TR2001/14 the Respondent has set out the factors which in his view should be taken into account for the purposes of that ruling in clause 62 of the ruling as follows:
- 62. To make a 'reasonable estimate' under paragraph 35-30(b) of assessable income that would have been derived from the business activity if it had been carried on throughout the income year in question (i.e., an estimate of a notional annual amount) an individual can consider all relevant factors, including, but not limited to:
- (a) the cyclical nature of the particular business activity which may result in variations in the pattern of receipts;
- (b) any orders received and/or forward contracts entered into;
- (c) the amount that could have been derived for a full income year based on a pro rata calculation of the assessable income already derived for the part of the year. The amount derived for the part of the year must be typical of the income derived in a full year;
- (d) the type of business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry; and
current size and investment in the activity.
43. To the extent that the evidence deals with those matters it appears that the Applicant's business activity was a small, one-man professional service business in which the Applicant had invested minimal capital. He described the work performed in the invoices issued by Sureshot as 'Development of Scope of Work' and 'Scoping'. The Applicant did not have established relationships with his clients, Draftworldwide (UK) and Valley International (UK), and did not enter into a written contract for the provision of services to these clients, or seek to formalise his relationship with them in any other way, for example through a letter of engagement. There is no suggestion or evidence that the Applicant's business was cyclical, or that there was any other feature of the business or the industry in which it operated that made it reasonable to estimate the receipt of assessable income in the 2002 or 2003 income years.
44. The only remaining possibility is the discretion contained in section 35-55 of the Act which provides as follows:
- (1) The Commissioner may decide that the rule in subsection 35-10(2) does not apply to a * business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because:
- (a) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or
- Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.
ATC 2466(b) the business activity has started to be carried on and, for that or those income years:
- (i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and
- (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).
- Note: This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.
45. There was no evidence that any special circumstances existed in relation to the Applicant's business activity that would justify the exercise of the Respondent's discretion on the basis of section 35-55(1)(a). As the examples provided in the section (drought, flood, bushfire or some other natural disaster) suggest, a special circumstance is something unusual, an occurrence that is out of the ordinary course of events [
Minister for Community Health v Chee Keong Thoo (1988) 78 ALR 307]. The non-payment of amounts owing by clients of the business is not a special circumstance; it not an uncommon or extraordinary event in the normal course of business. The first limb of section 35-55(1) is therefore not satisfied.
46. Further, there is no evidence that the nature of the business activity of the Applicant caused it to fail the assessable income test, nor is there an objective explanation, based on evidence from independent sources, that the business would have met the assessable income test within a period that is commercially viable in the industry of sales promotion services. As the note to subsection 35-55(1)(b)(ii) indicates, the second limb is intended to cover business activities with a lead time between commencement and the production of any assessable income. The second limb of the section 35-55(1) is therefore not satisfied.
47. Apart from any other considerations a discretionary power should not be exercised where to do so would defeat the policy of the relevant statute, and the Tribunal considers that do so in this case would indeed have that effect. See in this regards Federal Commissioner of Taxation v G.M. Swift & Ors and in particular French J at page 5118.
Part F - Conclusion
48. The Respondent noted in his statement of facts and contentions as amended that he relied on section 14ZZK of the Taxation Administration Act 1953. The Applicant's failure to give any evidence must give rise to an inference that it would not have assisted him. The Applicant has failed to discharge the onus and indeed it cannot be said that he has made any real attempt to do so.
49. I have not dealt with the quantum of the losses claimed in respect of the relevant years because I do not consider it necessary for me to do so.
50. In the circumstances the objection decision under review is affirmed.