• The impact of this case on ATO policy is discussed in Decision Impact Statement: Employee Investment Co Pty Ltd and Commissioner of Taxation (Published 23 October 2009).

EMPLOYEE INVESTMENT COMPANY PTY LTD v FC of T

Members:
GL McDonald DP

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2009] AATA 367

Decision date: 20 May 2009

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ATC 2921

GL McDonald (Deputy President)

1. The applicant company is appealing a decision by the Australian Tax Office (ATO) in regard to Goods and Services Tax (GST) assessments and a penalty assessment.

2. The applicant contends that most of the alleged payments (being loans, damages paid arising from litigation, rent received from commercial premises, reimbursements made to the applicant from sums incurred on its behalf by other entities, and consideration arising from the refinancing of a mortgage) it received from 1 July 2001 to 31 December 2003 (the relevant period) were not subject to GST. The applicant also claims that, in any event, it is entitled to input tax credits which would offset any GST that would be payable on those payments. The respondent claims the applicant received consideration for taxable supplies during the relevant period and failed to disclose those amounts in its Business Activity Statements (BAS) returns for the relevant period. Additionally, the respondent claims the applicant has acted in a reckless manner in preparing its BAS returns.

3. The applicant returned BAS returns displaying nil liability to pay GST for the 10 successive quarters commencing the quarter ending 30 September 2001. The respondent assessed a shortfall for each quarter as follows:

1 July 2001 - 30 September 2001	$1,441.00
1 October 2001 - 31 December 2001	$2,925.00
1 January 2002 - 31 March 2002	$11,379.00
1 April 2002 - 30 June 2002	$1,227.00
1 July 2002 - 30 September 2002	$5,371.00
1 October 2002 to 31 December 2002	$7,661.00
1 January 2003 - 31 March 2003	$5,207.00
1 April 2003 - 30 June 2003	$7,457.00
1 July 2003 - 30 September 2003	$21,976.00
1 October 2003 - 31 December 2003	$276,396.00
Total	$341,040.00

4. Additionally, a tax shortfall penalty of 60% was imposed, being an amount of $204,624.00.^[1] T documents, T26, page 184. In addition to the 50% penalty for recklessness, the respondent also imposed a further penalty, using the formula in s 284-85(2) of Schedule 1 to the Taxation Administration Act 1953 (TAA) whereby the base penalty amount of 50% imposed under item 2 in s 284-90 was increased by 20% under s 284-220. The 20% increase in penalty was abandoned by the respondent in the course of the hearing before the Tribunal.^[2] Transcript, page 8. The general interest charge, which is not reviewable by the Tribunal, is also applicable.

5. On 2 September 2005 the applicant lodged objections to the shortfall assessments and the imposition of a penalty. On 20 February 2007 the objections were allowed in part for the final quarter ending 31 December 2003 by reducing the liability by $228,573.00 but were otherwise disallowed. The penalty percentage rate was not reduced but the total penalty payable was reduced by $137,143.80^[3] T documents, T38, page 318. to $67,470.20 as the result of the reduction in the amount of GST payable in the final quarter.

6. The respondent now seeks to vary the decision under review to reduce the penalty to 50% of the tax shortfall.^[4] Respondent’s final outline of submissions, page 11. The applicant opposes the imposition of any penalty.

The hearing

7. At the hearing the applicant company was represented by its director, Mr Gary Fitton. The respondent was represented by Mr Albert Dinelli. The Tribunal had before it the documents filed for the purposes of satisfying s 37 of the Administrative Appeals Tribunal Act 1975 (T documents) and other documents tendered during the course of the hearing.

8. During the course of the hearing the Tribunal suggested, invited, requested, urged and cajoled Mr Fitton to attempt to find documentation to support some of the disputed transactions, most particularly to confirm amounts he is said to have loaned the applicant, amounts claimed to have been deposited with the applicant and said to be the payment of damages arising from a NSW Supreme Court judgment in favour of the applicant, copies of legal accounts paid by the applicant for the NSW Supreme Court case (said to amount to more than $1 million^[5] Transcript, page 38. ), and evidence of reimbursement to Mr Malcolm Martin or his interests who, it was claimed, loaned money to the applicant in order to bring the NSW case. The Tribunal adjourned this matter for two

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ATC 2922

months to allow Mr Fitton and his colleagues to gather this evidence.

The background

9. The applicant company was incorporated on 22 April 1997.^[6] Exhibit A7, page 46. Mr Fitton has been a shareholder, the secretary and director of the applicant since its incorporation. Ms Sarah Turberville is also a director and shareholder in the applicant. Each of Mr Fitton and Ms Turberville hold one share in the applicant. The shares are described on the Australian Securities and Investment Commission (ASIC) company return apparently for the 2000 or 2001 year as being beneficially held. There is no indication on whose behalf the shares are beneficially held.^[7] Exhibit A7, page 47. According to Mr Fitton the applicant was established as an investment company to provide services including acquiring property, fitting it out and leasing it to another company of which Mr Fitton was, up until 2001, a shareholder and director, Remuneration Planning Corporation Pty Ltd (RPC). RPC was engaged in advising its clients on remuneration issues, including employee share participation arrangements. In 2001 an action was commenced in the NSW Supreme Court (No 2271 of 2001) by Mr Fitton, another shareholder in RPC (Mr Martin) and RPC against six defendants alleging breaches of fiduciary duty and/or oppressive conduct. No mention is made on the face of the originating process of the applicant as a party.^[8] Exhibit A7, page 60. According to a statutory declaration made by Mr Gary Riordan, the solicitor for the three abovementioned plaintiffs in the litigation, Mr Fitton, after his involvement with RPC ceased in 2000, conducted a remuneration advisory business through the applicant company.^[9] Exhibit A5(1). The services of the applicant company were thereafter marketed by two other companies associated with Mr Fitton, namely Remuneration Strategies Group Pty Ltd (RSG) and Trinity Management Group Pty Ltd (TMG).

10. What amounted to a counterclaim was commenced in the NSW Supreme Court against various defendants including Mr Fitton and TMG (No 1835 of 2001). It appears that initially the applicant was not part of this proceeding^[10] See Exhibit A7, page 70. but subsequently was joined.^[11] Exhibit A7, page 151, discloses the applicant as being the fifth defendant in that action. The actions were eventually settled after a mediation was arranged by the Court for 18 and 19 February 2002.^[12] Exhibit A7, page 37. As part of the settlement a valuation of Mr Fitton's and Mr Martin's share in RPC was to be undertaken by an independent expert, with those sums determined to be paid to Messrs Fitton and Martin. Mr Fitton's share was valued at $1,110,000.00.^[13] Exhibit A7, page 35. The cheque for that amount was to be sent to Mr Fitton's solicitor, Mr Riordan.^[14] Exhibit A7, page 36.

11. Mr Fitton told the Tribunal that the litigation costs were funded by Mr Martin, or interests associated or controlled by him, and that he (Mr Fitton) was required to repay the $1 million expended in prosecuting and defending the actions by way of reimbursement of the legal fees arising from the litigation. Mr Martin issued proceedings against Mr Fitton in the Victorian Supreme Court (No 8036 of 2002)^[15] Exhibit A7, page 93. to recover the amount claimed to be owing. A minute of consent orders dated 11 July 2003 shows an amount of $1 million to be paid to Mr Martin's solicitors and $290,424.53 to Mr Fitton's solicitors, with the balance to be paid to Mr Fitton, along with some interest. The amounts were paid from a sum which had previously been paid into Court.

12. The National Australia Bank (NAB) had provided various loans to the applicant. NAB held other securities, including over a property in the applicant's name at 51 Fitzgibbon Street Parkville, Victoria. The loans were guaranteed by Mr Fitton and Mrs J Fitton.^[16] Exhibit A7, page 101. The NAB commenced making demands for the repayment of the facilities and eventually legal proceedings were commenced by the bank.^[17] Exhibit A7, pages 37-38, 48-51, 108.

13. It is evident to the Tribunal, based on the material filed with it, that Mr Fitton, despite his claim to be an experienced businessman,^[18] Transcript, page 43. has not and does not adopt an ordered approach to his financial and other record keeping and that this extends to the companies of which he is a director, including the applicant. It is unnecessary to list the numerous issues which support such a finding. One example is to be found in the amount claimed by the applicant which relates to it paying reimbursement expenses to other entities for expenses incurred on its behalf. A receipt for expenses incurred in this way would ordinarily suffice to prove the expenditure and receipts or other documentation for this type of expenditure

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ATC 2923

(airfares, taxis, etc) could be expected to be annexed to a claim form. Yet no such evidence was produced and such evidence that was produced seemed totally unrelated to amount of reimbursement claimed. Some of the added difficulty facing the applicant in these proceedings, as Ms Turberville testified, arises because a computer, containing account and other details, was stolen.^[19] Exhibit A7, pages 18-23. While the Tribunal accepts that this may have caused some of the difficulties arising, it does not provide a complete explanation. During the course of evidence being given there was no claim that the information was unavailable because of the loss of the computer.

14. Mr Fitton was named one of the plaintiffs in the NSW case. However, he claimed to the Tribunal that he was all along acting as the agent of the applicant in the proceedings in the NSW Supreme Court. The Tribunal is unable to accept this submission. Mr Fitton, in his personal capacity and unrelated to the applicant, was a director and shareholder in RPC. Part of the settlement was a payment to Mr Fitton for the value of his shareholding in RPC. The valuation was undertaken by an independent expert and a figure of $1,110,00.00 was determined.^[20] Exhibit A7, page 35. This figure does not appear in the financial reports for the applicant for the 2003 or 2004 year financials.^[21] Exhibit A7, pages 4-16. If, as Mr Fitton claimed, he was at all times acting as the undisclosed agent of the applicant and the sale of the shares was also conducted on that basis, then some report of this may be expected in the financial reports. The applicant was never a named plaintiff in the NSW Supreme Court proceedings. The applicant was a defendant in a related action commenced by the defendants against, among others, Mr Fitton, RSG and TMG. There is no documentary or other independent evidence which supports Mr Fitton's claim that he was at all times acting as an undisclosed principal for the applicant. This is an important issue and one where some independent evidence would serve to confirm the claim. The Tribunal would, on such an important matter, expect some confirmatory evidence. For reasons expressed later, the evidence of Mr Fitton's solicitor in the NSW Supreme Court proceedings was too unclear on this point to leave the Tribunal satisfied, even if he could be categorised as "independent", that it amounts to confirmation of Mr Fitton's claim. In the absence of satisfactory confirmatory evidence the Tribunal is unable to accept Mr Fitton's claim on this point.

The issues

15. There are several issues before the Tribunal relating to the relevant period. The first concerns the requirement for the applicant to file BAS statements for taxable supplies. The respondent has calculated this amount on deposits made into the applicant's bank account except for two deposits on which the GST totalled $228,573.00. The two deposits were made on 8 October 2003 and 26 November 2003, the first of $1 million and the second of $1,514,303.00. The respondent now accepts both deposits were repayments of loans and do not arise from a taxable supply. The applicant claims the remaining challenged deposits are explained as being loans, damages paid arising from the NSW litigation, rent received from commercial premises, reimbursements made to the applicant from sums incurred on its behalf by other entities, and consideration arising from the refinancing of a mortgage.

16. The second issue, which is connected to the first, is whether there are input credits, in particular whether legal expenses incurred with respect to the NSW litigation should be so characterised and whether payment of them was to be made by the applicant.

17. The third issue is the whether the imposition of a penalty of 50% on the applicant for recklessness in filing BAS statements showing a nil return should be made.

18. The fourth issue, which is connected to the third, is whether the penalty or a proportion of it should be waived. It is convenient to address each of the above in order.

First issue - did the applicant receive taxable supplies which it should disclose in BAS?

19. The applicant claims, save for the admission that $632,245.00 arose from taxable supplies and one other specific area, that deposits made into its account were from non taxable supplies. The specific area which the applicant concedes amounts to an undeclared taxable supply is the payment of rent totalling $54,318.82, being rent paid by TMG and RPC to the applicant for the rent of commercial

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ATC 2924

premises at Level 4, 302 Collins St, Melbourne, during the relevant period.^[22] See Respondent’s amended statement of facts issues and contentions, paragraph 9 and Transcript, pages 16-17.

20. The areas that remain in dispute and are:

• (i) loans said to be made to the applicant by Mr Fitton ($226,230.00^[23] Exhibit A2. ), Ms Turberville ($29,500.00^[24] Exhibit A1, paragraph 5. ), and Mrs Fitton ($60,000.00^[25] Exhibit A1, paragraph 12. ) said to total $315,730.58^[26] See Respondent’s amended statement of facts issues and contentions, paragraph 9(a). (this appears to be a miscalculation by the respondent. Loans said to be made by Mr Fitton actually equal $227,230.56 which would make the total $316,730.56);
• (ii) repayments of damages said to arise from NSW Supreme Court proceedings claimed to total $248,403.12;^[27] Exhibit A2 and Respondent’s amended statement of facts issues and contentions, paragraph 9(b).
• (iii) a deposit of $186,242.60 in to the applicant's account on 26 November 2003 was claimed to be for refinancing of the applicant's mortgage facilities;^[28] Exhibit A2 and Respondent’s amended statement of facts issues and contentions, paragraph 9(e).
• (iv) whether deposits totalling $3,789.36 related to reimbursement of expenses incurred by TMG and RSG on behalf of the applicant;^[29] Exhibit A2 and Respondent’s amended statement of facts issues and contentions, paragraph 9(d).
• (v) whether deposits totalling $2,466.52 were received by the applicant as consideration for taxable supplies.^[30] Exhibit A2 and Respondent’s amended statement of facts issues and contentions, paragraph 9(f).

The above matters are addressed below.

21. It was accepted by the applicant that an amount of $632,245.13 was received as consideration for taxable supplies and that gave rise to a GST liability of $57,476.83.^[31] Transcript, pages 16-17. The applicant accepted the respondent's figures in paragraph 20(i) above which were set out in the respondent's amended statement of facts issues and contentions filed with the Tribunal.

22. The applicant claims any amount owing as the result of consideration for taxable supply is cancelled by input tax credits arising. The applicant did not calculate the amount of any input tax credit claimed.

Deposits arising from damages action in the NSW Supreme Court case

23. It appears that the damages paid as the result of the settlement reached in the NSW Supreme Court were not paid in a lump sum but by instalments of irregular amounts. Deposits dated 26 August 2002 for $22,623.12,^[32] Transcript, page 34 and Exhibit A2. 11 September 2002 for $50,000.00, 13 November 2002 for $21,780.00 and 12 September 2003 for $154,000.00 were identified as damages by Mr Fitton.^[33] Exhibit A2. Mr Fitton said that these amounts likely came from lawyers' trust accounts. No documentation including, for instance, reconciliation statements provided by the legal advisers, were produced to substantiate the deposits, despite Mr Fitton saying at one point that these could probably be obtained^[34] Transcript, page 33. and at another that they had been sent (to him or the applicant)^[35] Transcript, page 34. and at another that they were "probably" in the records kept at home.^[36] Transcript, page 35. Despite the time given between the adjournment of the case on 17 December 2008 and its resumption on 17 February 2009 no documentation was produced which substantiated the deposits as coming from damages paid from the settlement of the NSW Supreme Court action. In the absence of any other explanation, therefore, the applicant has not discharged its onus and the sums are taxable.

Loans

24. It was the evidence of Ms Turberville that during the relevant period she was employed as a lecturer at Monash University.^[37] Transcript, page 83. Ms Turberville said that she deposited $500.00 into the applicant's account every fortnight from her salary by way of an interest free loan that was repayable on demand.^[38] Exhibit A3, paragraph 2. Bank statements for the applicant's account with the Commonwealth Bank of Australia (CBA) reveal deposits of that sum commencing 19 October 2001 on a regular fortnightly basis, totalling $29,500.00, were made.^[39] Exhibit A2. The bank statements also record that the deposits are from Ms Turberville and are made as "savings for co acc." Mr Fitton, in his oral evidence to the Tribunal, confirmed the deposits were by way of a loan from Ms Turberville to the applicant.^[40] Transcript, page 21 and Exhibit A1, paragraphs 2-5.

25. On behalf of the applicant a backdated document evidencing the loan was produced.^[41] Annexed to Exhibit A3. The document is dated 16 January 2004 and states that Ms Turberville commenced making the loans on 21 November 2003. Initially Ms Turberville stated that the loan document was signed on 16 January 2004 but subsequently was uncertain and conceded that she may have signed it in 2008.^[42] Transcript, page 87. It was Mr Fitton's evidence that the loan document was prepared in May or June 2008 at the same time as he prepared the affidavit of his evidence to the Tribunal.^[43] Transcript, page 21. It was submitted on behalf of the respondent that Ms Turberville's evidence in respect of the

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ATC 2925

purported loans she made was unreliable and should not be accepted by the Tribunal. The Tribunal accepts that the lately produced written document said to evidence what was initially an oral agreement is clearly unreliable and does not accord with the date of the commencement of the deposits which are shown on the bank statements as commencing in October 2001.

26. The Tribunal finds it difficult to accept Ms Turberville's recollection that the loan document was signed in 2004 when in fact it was signed in 2008, a short time before she gave oral evidence. This calls into question her reliability as a witness. Without some independent confirmatory evidence it would be difficult for the Tribunal to accept that the deposits she made were in fact loans. However, independent confirmatory evidence is available in the form of the regularity of the fortnightly payments as well as the CBA statements identifying the source of the payments as being from Ms Turberville. Despite Ms Turberville's unreliability as a witness, the evidence satisfies the Tribunal that, on the balance of probabilities, the applicant has established the amounts, totalling $29,500, were deposited by Ms Turberville as loans to the applicant repayable on demand. That amount is therefore exempt from GST.

27. Mr Fitton, along with his final written submissions, filed a new copy of the bank statements previously filed. In the new copy, an amount of $500.00 deposited on 20 September 2001 is annotated as coming from Ms Turberville. The Tribunal has accepted other amounts of $500.00 as being loans from Ms Turberville. Those amounts are recorded on the bank statements as "Sarah Turberville savings for co acc". The amount deposited on 20 September 2001 and now claimed as a loan from Ms Turberville is simply recorded as "deposit" on the bank statement. The Tribunal therefore does not accept this amount as being a loan from Ms Turberville as it is unclear where the money came from.

28. It was the evidence of Mrs Fitton that she loaned $60,000.00 to the applicant. The money was deposited in three amounts on 21 and 24 November 2003 - one of $25,000.00, one of $30,000.00, and one of $5,000.00. The deposits are confirmed in the CBA bank statements which record "JM Fitton" as the drawer of the cheque deposited.^[44] Exhibit A2, page 137. Mr Fitton confirmed the loans being made by his wife from whom he is now separated. An acknowledgement of the loan, prepared by Mrs Fitton, was signed on 20 November 2003 by both Mr Fitton and (somewhat curiously) Mrs Fitton.^[45] Exhibit A6. Mrs Fitton said that she remembered the document existed when Mr Fitton requested she prepare an affidavit for these proceedings.^[46] Transcript. page 135. Mrs Fitton confirmed that the document had remained with her since it had been signed. While the document provides that the money be repaid by December 2007 it was Mrs Fitton's evidence that she had not asked for or received any of it to date.^[47] Transcript, page 136.

29. Mrs Fitton is an officer of the taxation department and is not, and never has been, a shareholder or director of the applicant and otherwise has no association with the applicant. She and Mr Fitton are separated and there is no reason to assume that she would support him (in the sense that he is a 50% owner in the applicant) by committing perjury in the giving of her evidence. There is no reason for the Tribunal to disbelieve Mrs Fitton and the Tribunal accepts that she loaned $60,000.00 to the applicant, interest free and payable on demand. Therefore, that loan is not subject to GST.

30. Mr Fitton also claims to have made loans to the applicant as well as the applicant making loans to him.^[48] Exhibit A1, paragraph 11 and Exhibit A4 (affidavit of Mr Marotta), paragraph 3. The loans said to be made by Mr Fitton were represented in the deposits into the applicant's account dated 17 September 2003 ($6,000.00), 8 October 2003 ($1 million), 15 October 2003 ($32,491.00), and 26 November 2003 ($188,739.56). The respondent accepted the deposit of $1 million was not from a taxable supply leaving an unexplained total of $227,230.56. The Tribunal has addressed the issue concerning the claimed loan of $188,739.56 below.

31. The Tribunal does not find Mr Fitton to be a dishonest witness. However, his memory of transactions was at times unclear and at times he was confused. In the absence of some supporting evidence the Tribunal experienced difficulty in accepting what he said at face value in relation to the making of the loans. In

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ATC 2926

respect of the transactions involving loans said to be made by Mr Fitton to the applicant there was no supporting documentation, including no receipt or acknowledgement, issued by the applicant confirming the deposits as loans. Mr Fitton, in his final written submissions, contended it was clear he had loaned EIC the amounts because the bank statements showed the amounts coming from an account bearing his account number. Although the amounts may have come from Mr Fitton's account, there is no supporting evidence that show these amounts are in fact loans to EIC. Mr Fitton claimed he had also signed a loan agreement with EIC.^[49] Applicant’s final written submissions, paragraph 6. This loan agreement has never been produced to the Tribunal. The onus rests with the applicant to satisfy the Tribunal that the deposits were from a non taxable supply. The Tribunal is satisfied that that onus has not been discharged with respect to the $38,491.00 and that that sum should be characterised as being subject to GST.

32. There is also the further deposit of $50,000.00 into the applicant's bank account. It was claimed that the payment was part of damages awarded to the applicant from the NSW Supreme Court proceedings. Exhibit A7, page 147, evidences a bank cheque dated 9 September 2002 payable to Mr Fitton - even though the supporting letter refers to RSG. An accompanying email from Mr Fitton requests that the cheque be paid to the applicant. On 11 September 2002 a $50,000.00 payment into the applicant's account appears on its bank statement. It is unclear to the Tribunal, if the cheque and deposit arise from the same transaction, whether the payment is a loan from Mr Fitton to the applicant or whether, as it is claimed, it is the payment of damages on behalf of the applicant. In the end the distinction is probably immaterial as the Tribunal is satisfied, as the result of the close timing of the events, that the cheque was paid into the applicant's account and whichever of the two characterisations is correct it is immaterial as neither forms part of a taxable supply to the applicant.

Reimbursement deposits

33. A relatively small sum of $3,789.36 was claimed by Mr Fitton for reimbursement of costs met by the applicant on behalf of expenses incurred by TMG and RSG. He said these were for airfares, taxis, hotel and other like expenses.^[50] Transcript, pages 24-5. No receipts for the expenses incurred and no claim forms or other evidence concerning the reimbursements were available, despite it being Mr Fitton's evidence that claims were made at the end of each fortnight or month and that records of the transactions were kept.^[51] Transcript, page 26. Exhibit A7, pages 28 to 31, are entitled "account transactions [accrual]." These pages show several debits each for the same amount of $966.67 with one exception of one transaction for $5,800.02. Sometimes the amounts of $966.67 are described as "rent", sometimes as "telephone lease and office", sometimes as "purchase" and sometimes no description appears. The Tribunal is unable to relate the amounts set out in the document as constituting reimbursement for any expenses incurred on behalf of the applicant of the sort mentioned by Mr Fitton in his evidence. Given, with the one exception mentioned, the entries relate to the same amount ($966.67) and having regard to the descriptions where they are mentioned, it would appear highly unlikely that they represented reimbursements of the type of expenditure identified by Mr Fitton in his oral evidence. In any event there is no correlation between the sum claimed on behalf of the applicant as relating to reimbursements to the sums appearing on the documents, including for the $5800.02. The Tribunal is unable to accept Mr Fitton's explanation as satisfying it that the amounts are as claimed. The applicant has not discharged the onus of proof which rests with it. The decision of the respondent in as far as it relates to the sum claimed should therefore be affirmed.

The refinancing of the mortgage

34. It is clear that the applicant had extensive finance facilities provided by the NAB. That finance was secured over assets owned at least in part by Mr Fitton, for example, a property in NSW. Clearly by 2002 the NAB was becoming anxious about the loans being repaid. This ultimately resulted in NAB issuing proceedings in the Victorian Supreme Court against Mr Fitton for recovery of the amounts loaned. The loans made to the applicant from Mrs Fitton and Ms Turberville and those claimed to be made by Mr Fitton were all made in order to permit the applicant to continue trading in

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ATC 2927

circumstances where it was experiencing, what the Tribunal accepts as being, a period of financial hardship for the applicant. The respondent accepted that on 26 November 2003 a deposit of $1,514,303.36 from a CBA bank account numbered 124966 was made into the applicant's current bank account as part of the refinancing arrangement with NAB.^[52] Exhibit A2, page 137. It did so on the basis that the deposit was confirmed in correspondence from the applicant's accountant and because timing on the bank statement indicated that a sum in excess of the deposited amount was paid to the NAB on the same day.^[53] T documents, T1, page 17.

35. However, the respondent did not accept an amount deposited into the same account on the same day of $186,242.60 was made for the same purpose. Mr Fitton confirmed, as the bank statement demonstrates, the latter amount was paid into the applicant's account.^[54] Exhibit A7, page 1. Mr Fitton maintained since the $186,242.60 came from the same bill as the $1,515,303.36 that it was clear that it fulfilled the same purpose. Exhibit A7, pages 2 to 3, contain copies of two letters dated 9 February 2005 and 18 May 2005. The latter letter is from the applicant's bank (the CBA) and the other from a subsidiary of the bank which deals in securities. The letters signed by the same person notify Mr Fitton, apparently in his capacity as a director of the applicant, that two bills bearing the same number as the bill giving rise to the two deposits into the applicant's account on 26 November 2003 had been discounted, the interest and costs, in each cases being debited to the applicant's current account. While the letters are dated well after the deposits were made they confirm the existence of an ongoing facility which is clearly related to the two deposits made from the CBA and its subsidiary.

36. The applicant's CBA account for 26 November 2003 also records establishment fees and other costs being debited to the applicant's account, as well as a payment to the NAB of $1,932,982.65.^[55] Exhibit A2, page 137. Mr Marotta told the Tribunal that the difference between the deposits made into the account as loans and the sum paid to the NAB was met by Mr Fitton.

37. An amount of $188,739.56 also deposited into the applicant's account on 26 November 2003 is claimed as being a loan to the applicant from Mr Fitton. No source is nominated by Mr Fitton for that sum but Mr Marotta gave evidence the money came from Mr Fitton's own funds.^[56] Transcript, page 118. The timing suggests confirmation that the deposit of the $188,739.56 is connected with the repayment of the debt owed to the NAB. The Tribunal notes that the deposits of the $60,000.00 by Mrs Fitton, the deposits by CBA and its subsidiary, along with the $188,739.56, provided a sufficient total amount to repay the totality of NAB debt and leave, after payment of fees relating to the securing the CBA loan, a modest credit in the applicant's account of $16,440.82.

38. The totality of the evidence leaves the Tribunal satisfied that the amount of $186,242.60 was, consistently with the amount of $1,514,303.36, a loan made to the applicant in order to repay the amount outstanding to the NAB and that the $188,739.56 was a deposit by way of loan made to the applicant for the same purpose. The Tribunal is satisfied that these amounts do not therefore represent a taxable supply.

Second issue - should tax input credits be allowed?

39. Mr Fitton claimed that the cost of litigation undertaken in the Supreme Court of NSW was incurred on behalf of the applicant and that he was acting as the undisclosed agent for the applicant in those proceedings. The Tribunal is unable to accept this claim. As stated earlier, a part of the resolution of the proceedings related to the agreed purchase by the defendants, or some of them, of the shares held in RPC by Mr Fitton. These were held in his personal capacity. The costs associated with at least that part of the proceedings are costs solely attributable to Mr Fitton and are entirely independent of the applicant. The only evidence which supports Mr Fitton's claim that he was acting as the applicant's agent is to be found in his and Mr Riordan's oral evidence to the Tribunal. It was Mr Riordan's evidence that he led the litigation against RPC and others on behalf of Messrs Fitton and Martin and the applicant.^[57] Transcript, page 121. Mr Riordan was unable to state the source of the funding for the action as that, he maintained, remained in Mr Fitton's power.^[58] Transcript, page 121. Mr Riordan said it was his understanding that:

• (i) the agreed amount paid by way of the settlement was held by the Court on behalf of the applicant as the beneficial owner.^[59] Transcript, page 122. Later he said that he caused the money to be paid into the Victorian Supreme Court while Mr Fitton and Mr Martin litigated who had the greater entitlement to it;^[60] Transcript, page 122.

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  ATC 2928

  (ii) that all three of Mr Fitton, Mr Martin and the applicant were involved from the commencement of the proceedings;^[61] Transcript, page 122. and
• (iii) that the applicant was a shareholder in RPC.^[62] Transcript, page 123.

40. Later in cross examination Mr Riordan agreed that the applicant was not a party in the early stages of the proceeding and he was unable to state when it became so.^[63] Transcript, page 128. However, while he did not specify any proportion, Mr Riordan did say that at least in part the settlement related to Mr Fitton in his personal capacity.^[64] Transcript, page 128. There is no evidence before the Tribunal that the applicant was a shareholder in RPC and Mr Fitton did not claim that to be the case.^[65] Transcript, page 177.

41. It would be fair to treat Mr Riordan's evidence as being qualified, and, it is clear that at the time he gave his evidence, both oral and written, his memory of the parts played by those he represented in the NSW Supreme Court had faded to a point where it could not be safely relied upon.

42. Mr Riordan agreed that an account from his then law firm disclosed an amount of $43,707.40^[66] Mistakenly recorded as $430,707.40 in the Transcript at page 125. outstanding with respect to costs incurred in undertaking the NSW Supreme Court action. The account was addressed to Messrs Fitton and Martin and not to the applicant.^[67] T documents, T32, page 259. There is no documentation which relates to the existence of any agency agreement and no other documentary evidence which supports the claim made by Mr Fitton that at all times he was acting as the undisclosed agent of the applicant. While, because of this claim, it may be explicable that there is no mention made in the Court or publicly available documentation of any relationship existing, an experienced businessman, as Mr Fitton claimed to be, could ordinarily be expected to be able to point to a document evidencing the existence of such an arrangement between him and the applicant. No such document was produced.

43. Nowhere in the extensive material relating to legal costs incurred with respect to the NSW Supreme Court action is there a cost breakdown showing who or which party was to bear the costs associated with which part of the proceedings. Additionally, there is no information before the Tribunal as to what, if any, sum arising from the litigation was determined to be payable to the applicant. Nor is there any identification of how much of the damages agreed were attributable as being paid to the applicant and how much to Mr Fitton, in his personal capacity. Mr Riordan told the Tribunal Messrs Fitton and Martin were each claiming a proportion of the damages.

44. In an affidavit sworn by Mr Riordan^[68] Exhibit A5(1). and a subsequently made statutory declaration^[69] Exhibit A5(2). he states that he was engaged by Messrs Fitton and Martin and the applicant in proceeding No 2271 of 2001 in the NSW Supreme Court. Mr Riordan set out the payments to be made by the defendants in settlement of the NSW Supreme Court proceedings as follows:

• (i) an amount of $250,000 to Mr Fitton as a contribution to the legal costs of Mr Fitton and the applicant;
• (ii) the payment of $50,000 for the transfer of any interest on level 6 of, 'The Chelsea',110 Sussex St Sydney to a Mr Costello; and
• (iii) the sum of $1,368,000.00 to Mr Fitton and Mr Martin for moneys taken wrongly by Mr Costello and Mr Chikasovski.

45. Mr Riordan stated that he arranged for the last stated amount to be paid into the Supreme Court of Victoria on behalf of Mr Fitton and Mr Martin because they disagreed as to which of them was to receive which portion of the agreed damages. Mr Riordan, however, maintained that of the total the sum of $1,179,985.00 was held by Mr Fitton on behalf of the applicant. Mr Riordan's explanation for this was "This was evident from the nature and conduct of the proceedings."^[70] Exhibit A5(2), paragraph 7. According to Mr Riordan a further sum was paid to Mr Fitton from the sale of his shares in RPC. There is no evidence to suggest that this sum was ever paid into the applicant's account or formed part of a loan made by the applicant to Mr Fitton.

46. In respect of the Victorian Supreme Court proceedings Mr Riordan states that $1,179,985.00 was paid to Mr Martin as reimbursement of legal fees. He continues:

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"Once again, EIC was a party to this settlement and the reimbursement of legal fees to Martin was made by EIC. EIC agreed to this payment to Martin, instead of being paid into EIC's account at the Commonwealth Bank of Australia. Those moneys were required by EIC to prevent foreclosure on its assets by the National Australia Bank.^[71] Exhibit A5(2), paragraph 9. "

47. Not any of the documentation or evidence demonstrates that the applicant was involved as a party or otherwise in the litigation undertaken in the Victorian Supreme Court. The actions there were first between Mr Martin as plaintiff and Mr Fitton as defendant and second between the NAB as plaintiff and Mr Fitton as defendant. Although considerable documentation was filed relating to both sets of proceedings there is nothing which substantiates Mr Fitton's claim that he was acting as the applicant's agent in defending those proceedings. It would appear, or at least it is conceivable, that the NAB action related to Mr Fitton in some other capacity (for example, in his capacity as guarantor to the bank of the loan to the applicant). In the absence of any sufficiently supported explanation the account remains properly the responsibility of the applicant.

48. A lack of clarity also surrounds other legal bills. For example, the bill accompanying the cheque for $50,000.00 discussed above herein is stated to relate to the damages claim (and the Tribunal accepts this as relating to the Supreme Court of NSW proceedings). It is addressed to Messrs Fitton and Martin. The Tribunal does not know whether this account is for work done on behalf of Mr Fitton in his private capacity or in on behalf of the applicant. Nor does the Tribunal know whether half the bill, or some other proportion of it, is payable or was paid by Mr Martin. In such circumstances the Tribunal is satisfied that the applicant has not discharged the onus of proof resting with it. That amount cannot be claimed as an input tax credit.

Third and fourth issues - penalty

49. It was claimed that the applicant's BAS statements had been recklessly prepared in that assumptions were made that the amount of taxable supplies would be outweighed by input tax credits available. Mr Fitton prepared the statements filed on behalf of the applicant. For each quarter the statements showed nil activity when clearly this was not so. Mr Fitton, in his final written submissions, explained the reason for filing statements recording nil activity was because EIC knew the GST liability was nil and was simply returning a self assessed nil GST liability.

50. If every taxpayer made self assessments which could not be checked by proper accepted accounting methods when called upon to do so the system of tax collection would fail. Mr Fitton and Ms Turberville, as directors of the applicant company, had a duty to ensure proper records and books of account were kept. They are, according to their evidence, experienced in business and management. Mr Fitton is a former tax officer, and while he was engaged in the policy development area, he must be taken to be aware of the responsibilities associated with running a company. Ms Turberville is a university lecturer in business management and must also be taken to be aware of the basic requirements.

51. Recklessness is an objective test and may be defined as follows:

"Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there is a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more then mere negligence and must amount to gross negligence.^[72] BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) ATC 4111 at 4129 per Cooper J. "

52. So that the directors of the applicant and those members of the public reading this decision are clear in their understanding of what constitutes recklessness, it may be helpful for the Tribunal to quote the following passages:

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"… 'recklessness' connotes conduct that is more culpable than a failure to take reasonable care to comply with a taxation law but less culpable than an intentional disregard of a taxation law.

…

There must be the presence of conduct that falls short of the standard of a reasonable person in the position of the entity. Similar to the position with a failure to take reasonable care, dishonesty is not an element of establishing recklessness. The actual intention of the entity is of no relevance.

Behaviour will indicate reckless where it falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity.^[73] Miscellaneous Taxation Ruling MT 2008/1 at paragraphs 99-101. "

53. The Tribunal has found that Mr Fitton is not a dishonest witness. Similarly, the Tribunal does not find that Mr Fitton was acting dishonestly when he prepared the applicant's BAS statements. However, it is clear the applicant's financial documents are not organised and incoming and outgoing payments are not recorded in an orderly manner. Had they been so, Mr Fitton may have been able to point to documentation that discharged the applicant's onus. The Tribunal has decided some payments are non taxable supplies only because the Tribunal engaged in its own investigation into the mass of documents filed with the Tribunal. In the main Mr Fitton was not able to help the applicant by pointing to documentation that could be used to prove the payments were not subject to GST.

54. Mr Fitton, in his final written submissions, argued that the applicant's conduct could not be viewed as reckless, that any reasonable person in the applicant's position would return a nil GST amount over the relevant period. Mr Fitton, in an apparent attempt to explain the directors' behaviour, stated that at the relevant time EIC, Mr Fitton and Ms Turberville were involved in a number of litigations and that they "simply did not have in their possession the information to enable [them] to provide accurate calculations of EIC's GST inputs and credits."^[74] Applicant’s final written submissions, paragraph 11. Mr Fitton contended that there is no "unjustifiable risk" in his actions.^[75] Applicant’s final written submissions, paragraph 1(b). The Tribunal does not agree.

55. The applicant was reckless in declaring nil taxable supplies during the relevant period when in fact that was not the case. It was not reasonable for the applicant to engage in its own estimation of calculation and coming to the conclusion that input tax credits would cancel the amount owing as the result of consideration for taxable supply and therefore declaring nil taxable supplies. The Tribunal does not understand how EIC could engage in its own calculation and claim it was accurate when, in Mr Fitton's own words, it did not have in its possession the information to enable it to provide accurate calculations. A reasonable person, in the applicant's position, would consider that taxation law may not have been complied with.

56. It follows that the penalty of 50% imposed by the respondent should be affirmed. The Tribunal does not remit any part of the penalty but the amount will be reduced by the findings of the Tribunal relating to the non taxable supply.

Decision

57. The Tribunal:

• (a) sets aside the decision under review; and
• (b) substitutes a decision that the following amounts are not taxable supplies:
  • (i) loans provided by Mrs Jacinta Fitton (totalling $60,000.00) and Ms Sarah Turberville (totalling $29,500.00);
  • (ii) payment made on 11 September 2002 ($50,000.00);
  • (iii) mortgage refinance on 26 November 2003 ($186,242.60); and
  • (iv) loan provided by Mr Gary Fitton on 26 November 2003 ($188,739.56).
• (c) remits the matter to the respondent with a direction that the other payments claimed by the respondent to be taxable supplies are subject to GST; and
• (d) affirms the decision to impose a 50% penalty.

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