• The impact of this case on ATO policy is discussed in Decision Impact Statement: Jones and Commissioner of Taxation (Published 14 October 2009).

JONES v FC of T

Members:
A Sweidan SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2008] AATA 542

Decision date: 25 June 2008

---

A Sweidan (Senior Member)

Background

1. The applicant seeks a review of the respondent Commissioner's decision of 17 September 2007 refusing applicant's request for an extension of time to lodge objections to the income tax assessments referred to below.

Facts

2. For the years ended 30 June 1996 30 June 1997 and 30 June 1998 the applicant prepared and lodged his income tax returns on the basis that he was in partnership with his spouse.

3. The applicant was an engineer and together with his spouse provided consulting engineering services. The applicant and his spouse said they were partners in the consulting business, which was conducted in Queensland.

4. The respondent conducted an audit of the applicant's income tax returns for the years ended 30 June 1996-98. The respondent determined that the income derived by the applicant was income from personal services and not partnership income as declared.

5. As a result of the audit the respondent issued amended assessments to the applicant for the 1996-98 income tax years based on the respondent's aforesaid determination.

6. By letter dated 28 November 2000 the applicant lodged objections against the amended assessments which were subsequently disallowed by the respondent.

7. The applicant sought a review by the Administrative Appeals Tribunal (AAT) of the respondent's decision that he was not carrying on a partnership business with his spouse during the 1996-98 income tax years.

8. The matter was listed for hearing in the AAT on 4 July 2002. Shortly prior to the hearing the respondent informed the applicant that one of the grounds that would be raised in opposing the application for review was that the relevant Queensland legislation prohibited engineers from entering into partnership agreements with persons who are not engineers.

9. The matter proceeded to hearing on 4 July 2002 before Senior Member McCabe and a decision was handed down on 31 January 2003. It appears that based on an agreement between the parties, the matter proceeded on the basis that the income was the personal service income of the applicant. The AAT decided that the applicant was entitled to a deduction for a reasonable wage paid to his spouse. Although it appears that it was agreed that the applicant and his spouse would lodge amended income tax returns this was not done. The applicant says that this was because he and his accountant were waiting to hear from the respondent as to the basis on which those returns should be prepared.

10. Amended assessments were however issued on 23 October 2003.

11. Although no amendment of the applicant's income tax returns was requested, the applicant has made requests in correspondence for deductions to be allowed for additional business expenses. The respondent says these were inconsistent with and outside of those originally claimed. The expenses being claimed were expenses that were not raised in the applicant's original review application before the AAT, that application having been made on the basis that a partnership existed.

12. The applicant lodged objections dated 2 December 2003 to the amended assessments claiming that the respondent had failed to comply with the AAT's instructions and that the amendments were incorrect. These objections were allowed on 14 October 2004.

13. Further amended assessments for the 1996-98 income tax years were then issued by the respondent on 10 February 2005.

14. The applicant objected to those assessments on 5 April 2005, The objection was disallowed and the applicant sought a review by the AAT.

15. The respondent advised the applicant by letter dated 26 July 2005 that the AAT did not have jurisdiction to deal with the objection request. The applicant was inter alia claiming a deduction in relation to a loan service fee to his spouse. The respondent advised the applicant that the proper procedure was to lodge applications for an extension of time to lodge objections against his original assessments.

16. On 2 February 2007 the AAT dismissed the application on the grounds that it did not have jurisdiction to hear the matter.

17. The AAT held that, as contended by the respondent, the proper course was for the applicant to seek from the respondent an extension of time to lodge objections to the original assessments.

18. By letter dated 30 June 2007 the applicant sought an extension of time to lodge an objection to the original assessments for the years ended 30 June 1996-98.

19. By letter dated 17 September 2007 the respondent advised the applicant that the request for an extension of time had been disallowed,

Issue

20. Should the applicant be granted an extension of time to lodge objections to the notices of assessment for the years ended 30 June 1996, 30 June 1997 and 30 June 1998?

Respondent's contentions

21. Subsection 14ZW (2) of Taxation Administration Act1953 (the TAA) provides that if the period in which an objection is required to be lodged has passed a person may still lodge the objection with the Commissioner together with a written request asking the Commissioner to deal with the objection as if it had been lodged within the required period.

22. Section 14ZX of the TAA provided that the Commissioner is to consider the application for an extension of time and give the person written notice of his decision.

23. Subsection 14 ZX (1) of the TAA provides the Commissioner with discretion as to whether to agree or refuse the extension of time request.

24. The onus is on the taxpayer to establish why the Commissioner should agree to his or her request for an extension of time. Subsection 14ZW (3) of the TAA requires the taxpayer to state fully and in detail the circumstances concerning, and the reasons for, the person's failure to lodge the objection with the Commissioner within the required period.

25. In making decisions on requests for an extension of time the Commissioner has regard to Tax Office Law Administration Practice Statement PS LA 2003/7 which provides guidance on the factors to be considered when deciding to agree to or refuse such a request. A balancing of the following factors is suggested:

• (a) The taxpayer's explanation for the failure to lodge the objection within the allowable time limits;
• (b) The circumstances of the delay;
• (c) Whether the taxpayer has an arguable case for the objection to be allowed in whole or in part; and
• (d) Other relevant matters that arise in the circumstances of a particular case.

26. The applicant is seeking to object to the notices of assessment for the years ended 30 June 1996, 1997 and 1998 on the basis that the assessments do "….not take into account important items such as the cost of establishing the business as a sole trader including any allowance for the loan from Helen Jones, its servicing costs or repayment of it, used in establishing the business in the beginning". (Loan Service Fees).

27. There was a delay of 5 months between the AAT decision of 2 February 2007 and the applicant's request for an extension of time. The respondent contends that the applicant has failed to provide an acceptable explanation for this delay.

28. Further the respondent contends that the applicant does not have an arguable case for the objection to be allowed in whole or in part.

29. The respondent contends that the applicant is not entitled to deductions under section 51 of the Income Tax Assessment Act 1936 (ITAA 1936) of section 8-1 of the Income Tax Assessment Act1997 (ITAA 1997) for loan service fees. Respondent says that costs of establishing a business and the repayment of any loan are matters of a capital nature and as such are specifically excluded as a deduction under section 51 of the ITAA 1936 and s 8-1 of the ITAA 1997 (The Tribunal notes that while this may be so the cost of servicing a loan is in a different category.).

Applicant's contentions

30. The applicant's explanation for the 5 month delay in requesting an extension of time to lodge objections to the original assessments is that this was due to the lengthy and complex history of the matter coupled with the fact that the applicant was under extreme pressure of work at the time.

31. Other than as set out above, the Tribunal does not consider it necessary to detail the history of the matter here. It is sufficient to say that the Tribunal is of the view that the applicant has provided an acceptable explanation for the delay.

32. In
Federal Commission of Taxation v Brown (1999) 99 ATC 4852 the Full Federal Court held that the strength or weakness of an applicant's case is a relevant factor in considering an application for an extension of time.

33. The applicant contends that the AAT decision of 31 January 2003 does not preclude him from claiming further deductions, including loan service fees.

34. The Tribunal has perused the decision of 31 January 2003 which is reported at [2003] AATA 84 and notes that the issue of other deductions was apparently not raised or considered. However it is clear that it was contemplated that amended returns would be submitted and on that basis it seems to the Tribunal that it was open to the applicant to claim other deductions, provided they can be justified.

35. The applicant in effect contends that due to the partnership structure having, by agreement with the respondent, been disallowed, he should be entitled to reconstitute the financial accounts of the business. He points to the deduction which the AAT allowed for "wages" to his wife, who was not in fact his employee, in support of his contentions.

36. The applicant's case, while not on the face of it strong, nevertheless appears to the Tribunal to be at least reasonably arguable due to the somewhat unusual circumstances of the matter.

Decision

37. In all the circumstances the Tribunal concludes that the applicant's application for an extension of time should be granted and the decision under review is accordingly set aside.