• The impact of this case on ATO policy is discussed in Decision Impact Statement: Trustee for the Amabalad Family Trust and Commissioner of Taxation (Published 23 December 2009).

TRUSTEE OF THE AMABALAD FAMILY TRUST v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2008] AATA 809

Decision date: 11 September 2008

---

BH Pascoe (Senior Member)

1. This is an application to review the decision of the respondent on the objection lodged against an assessment of Goods and Services Tax (GST) for the periods from 1 October 2001 to 30 June 2004. The assessment increased the GST net amount payable by $727,739. A penalty of $436,643.40 had been imposed calculated at 50 per cent under s 284-90 of Schedule 1 of the Taxation Administration Act 1953 (the TAA) uplifted by 20 per cent under s 284-220 of that Act.

2. At the hearing the applicant, Amabalad Pty Ltd as trustee of the Amabalad Trust (Amabalad), was represented by Mr A. Maddams, a director of the applicant. The respondent was represented by Mr P. Nicholas of counsel. Evidence was given by Mr Maddams.

3. The relevant assessments were issued following an audit of Amabalad. As a result of the objection, subsequent discussions between the parties and the hearing, a number of claims for input credits were accepted by the respondent and a number of claims disallowed were conceded by Amabalad. The result was a balance of $443,891 as the GST shortfall. In addition the respondent remitted the penalties imposed for the quarterly periods from 1 October 2001 to 31 December 2003 to nil and the penalty for the two quarterly periods from 1 January 2004 to 30 June 2004 to 25 per cent of the shortfall.

4. Of the remaining shortfall there were five amounts which were in dispute. These were:

• (a) $55,016 said by the respondent to be the GST on invoices issued prior to December 2003 but unpaid when Amabalad accounted for GST on a cash basis but not included in the subsequent quarter when Amabalad changed to an accrual method of accounting;
• (b) $60,000 being GST on the purchase of intellectual property from Buck & Phollux;
• (c) $84,393 being a claimed input credit for GST on an invoice from The Oil Spot Pty Ltd for Amabalad accepting liability to a supplier of that company known as Fuchs;
• (d) $292 claimed by Amabalad for input credits on amounts paid to staff and other representatives on reimbursement of telephone accounts; and
• (e) $3,650 claimed by Amabalad for input credits on invoices made out to other entities.

In addition Amabalad contested the imposition of penalties.

5. The first amount in dispute relates to a change of accounting method by Amabalad from cash accounting to 31 December 2003 to accrual accounting from 1 January 2004. The relevant legislation requires that taxable supplies made in the periods prior to the change of accounting but for which payment had not been received are to be accounted for in the first period after the change the transition period. In the period prior to 1 January 2004, Amabalad had issued tax invoices to The Oil Spot Pty Ltd totalling $1,250,007. Of this total, $644,827 had been accounted for under the cash accounting method to 31 December 2003. The respondent included the balance of $605,180 with GST of $55,016 in the quarter ended 31 March 2004. Mr Maddams argued that the accounting software used in the accrual method required the entry of all unpaid sales invoices from a period prior to its commencement. In a statement filed with the Tribunal, Mr Maddams stated that invoices totalling $589,871 issued to The Oil Spot Pty Ltd including $189,786 noted as "Pre Jan" were listed in the detailed report produced. He said that the balance not so noted but listed as dates from 31 January 2004 to 31 March 2004 would have related to the period prior to January as Amabalad had acquired the business of The Oil Spot Pty Ltd from 1 January 2004. However, at the hearing he maintained that, under the earlier cash system of accounting, credit notes had been issued and not recorded. He believed that the excess over the $189,786 involving $17,253.28 of GST had been offset by credit notes. He argued that the only outstanding invoices to The Oil Spot Pty Ltd amounted to that total of $189,786 and these had been accounted for in the quarter ended 31 March 2004.

6. The figure calculated by the respondent was arrived at by a combination of the records of The Oil Spot Pty Ltd and Amabalad. The Tribunal is prepared to accept that the amount of $17,253.28 was included and accounted for in the quarter to 31 March 2004 on the basis of Mr Maddams' evidence and the records he produced. It is difficult to be satisfied that the balance had either been accounted for or had ceased to exist as a result of credit notes. The provenance of the detailed report is unclear as it does not appear to reconcile with the actual quarterly statements lodged by Amabalad. Mr Maddams could only assume the offset by credit notes but was unable to produce specific evidence to support his argument. He maintained that the records of credit notes issued at the relevant time were no longer in the possession of Amabalad. The Oil Spot Pty Ltd had since gone into liquidation and Mr Maddams had no access to its records and the only records produced by the respondent were only to September 2005. Mr Maddams maintained that the auditor of the respondent had conceded that supplies prior to 31 December 2003 and not accounted for under each basis had been appropriately dealt with by Amabalad in the transition period and, consequently, it would be reasonable to accept that those relating to The Oil Spot Pty Ltd had been dealt with similarly. On balance and accepting Mr Maddams as a truthful witness, the Tribunal is prepared to accept that the only outstanding invoices were those totalling $189,786 accounted for in the transition period. It is relevant to note that the business of The Oil Spot Pty Ltd was acquired by Amabalad from 1 January 2004 and it is unlikely that any greater amount of previously made supplies had not been recognised in that transition period. Consequently, the decision as it relates to this issue involving $55,016 should be set aside.

7. The next issue involved the acquisitions of intellectual property from Buck & Phollux Pty Ltd for a total of $660,000 including GST of $60,000. Tax invoices were produced by the vendor for cash of the items of intellectual property. Mr Maddams said that the sender was a supplier of specialised oils to retailers. In addition it had developed a number of promotional items. The rights to these items were said to have been purchased by Amabalad for development and sale. One of the products was "Easy-Steer", a five-wheel trolley to move goods up to 500kg. Mr Maddams said that a prototype was manufactured and exhibited at shows. Another product was "Enterprise Furniture" described as high end stainless steel executive furniture. Mr Maddams said that it was intended to contract out the manufacture of this furniture. A further product was a novelty product in the shape of a hand providing shade from the sun and called "Handi Shade." Another product was "Ishwatch", a novelty watch for which Mr Maddams had a working model. Finally there were "SKROTE" products. The exact nature of these was unclear.

8. It was submitted for the respondent that there was no evidence other than the oral evidence of Mr Maddams that there was an acquisition, nor evidence of the items being acquired in carrying on an enterprise. It is clear that Amabalad was carrying on a business at the date of the relevant invoices, 1 December 2001. Here, the Tribunal is prepared to accept the evidence of Mr Maddams that the intellectual property in the various products were acquired for the purpose of carrying on an enterprise. His evidence was clear that at the date of acquisition, there was a clear intention to further develop the products for manufacture and sale as an extension of the existing business of Amabalad. It is appropriate therefore to set aside the decision as it relates to this issue.

9. In relation to the third issue, Mr Maddams said that this arose as a consequence of acquiring the business formerly carried on by The Oil Spot Pty Ltd under an agreement dated 1 January 2004. Mr Maddams had been a director of that company and a joint guarantor of debts due to its major supplier, Fuchs Australia Pty Ltd (Fuchs). He said that Fuchs was concerned at the acquisition and the result of negotiations was for Amabalad to accept liability for the total Fuchs debt. As at 31 December 2003, the debt amounted to $928,325.93. By invoices dated 31 December 2003, The Oil Spot Pty Ltd billed Amabalad with the total amount of the debt showing it as including GST of $84,393.27. It is noted that the agreement for purchase of the assets of The Oil Spot Pty Ltd made no mention of this liability, showing the assets being acquired as a total of $314,307 and the consideration being the assumption of various liabilities totalling $397,667 including $111,419.31 described as "Balance of FUCHS outstanding loan 2".

10. It was submitted for the respondent that there was no evidence of any supply to Amabalad in relation to this invoice and that it could not be said to be consideration for the purchase of assets for The Oil Spot Pty Ltd as the formal purchase agreement entered into set out the full purchase price, not including the $928,325.93. It is difficult to see how this transaction can provide an input credit to Amabalad. The relevant debt was in relation to supplies made to The Oil Spot Pty Ltd. For reasons which were not fully explained Amabalad agreed to assume the liability. Perhaps it was to ensure the continuing good will of a major supplier who would be supplying goods to Amabalad as the future operator of the newly acquired business. While Mr Maddams may have seen this transaction as part of the costs of the acquisition of the business, the invoice from The Oil Spot Pty Ltd was dated 31 December 2003 prior to the date of the purchase agreement which was specific as to the consideration payable. It is such that the Tribunal is unable to find a basis for claiming an input tax credit and the decision under review should be affirmed in relation to this issue. It is not clear from the evidence which quarterly period included a claim for the input credit. It was implied by Mr Maddams that claims were made or payments were made to Fuchs in reduction of the debt. It would appear that some $290,000 was paid between 1 January and 31 December 2004 with further payments in the 2005 calendar year. However, Amabalad changed to the accrual method from 1 January 2004, so it would appear more likely that the full claim was made in the quarter ended 31 March 2004.

11. The act of issue was the reimbursement of telephone accounts of staff and other representatives. There is simply no basis for claiming an input tax credit for this expenditure. The telephone carrier made a supply to the individual. There is no evidence and it is unlikely that any of the individuals were registered for GST and provided a tax invoice to Amabalad. It was simply a payment made to the individual under an arrangement with Amabalad as a reimbursement for an outgoing of that individual. Consequently, the decision under review in relation to this issue should be affirmed.

12. The remaining issues related to claims by Amabalad for input credit on invoices in the names of related parties. Again, the respondent submitted that no supply was made to Amabalad so that no input credit was available. Mr Maddams submitted that in all cases Amabalad acted as agent for the related parties and having paid the relevant invoices on their behalf, then reviewed the accounts to the relevant related party. As GST was included in that reinvoice, he maintained that there would be an improper gain to the revenue if the offsetting input credit was not allowed. It would appear more likely that both parties are right. The answer appears to be that no input credit is available to Amabalad but, equally, no supply was made by Amabalad so that no GST should have been charged and accounted for by Amabalad on the reinvoicing. As a consequence rather than accepting the claim for the input credits, the amount of $3,650 should be deducted from the amount returned as GST on sales. The end result is that the GST shortfall should be reduced by this amount of $3,650.

13. The final issue is that of penalty. As noted, prior to the hearing the respondent had determined to reduce the original penalty of 60 per cent of the total alleged shortfall to 25 per cent of the shortfall of the last two quarterly periods ended 30 June 2004. This level of penalty is provided for in s 284-90 of Schedule 1 to the TAA where the shortfall resulted from a failure to take reasonable care to comply with a taxation law. It would seem that the bulk of the shortfall in the quarter ended 30 June 2004 related to a claim for input credits on the purchase of assets from the Munni Laundry. It was conceded by Mr Maddams that the contract for such purchase did not proceed and that it was appropriate that the claim be excluded. However, this was not conceded until the incorrect claim was noted as the audit. While Mr Maddams argued that he could have lodged an amended Business Activity Statement (BAS) in October 2004 if, in the Tribunal's view, does not overcome the problem that the claim was made at a time when the cancellation had taken place and indicates a lack of reasonable care. Given the difficulties encountered by both the respondent and the Tribunal in reconciling and dealing with the large variety of questions in relation to the issues in this matter and the acceptance by Amabalad that some errors occurred, it is not appropriate to remit the percentage of penalty finally sought to be imposed at 25 per cent on the last two quarters' shortfall after giving effect to the decision of this Tribunal.

14. The effect of the foregoing is that the decision under review should be varied by reducing the tax shortfall to a total of $325,225 by those amounts conceded by the respondent prior to and at the hearing together with the amounts of $55,016, $60,000, and $3,650 now allowed by the Tribunal as set out in the forgoing reasons. The matter should be remitted to the respondent to issue amended assessments in accordance with these reasons including a recalculation of the penalty of 25 per cent of the remaining shortfall in the quarters ended 31 March and 30 June 2004.