The impact of this case on ATO policy is discussed in Decision Impact Statement: A & C Sliwa Pty Ltd and Commissioner of Taxation (2009/5232).

A & C SLIWA PTY LTD v FC of T

Members:
E Fice SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 390

Decision date: 6 June 2011

Mr Egon Fice, Senior Member

1. A & C Sliwa Pty Ltd (Sliwa) is a company involved in property development and construction works. Its sole director is Mr Andrew Sliwa. Mr Sliwa and his wife, Carolyn Sliwa, each own 50 per cent of the shares in Sliwa.

2. James East of James East and Associates Pty Ltd (James East) was the external accountant of Sliwa between 1993 and about 2008. James East prepared Sliwa's accounts, income tax returns and business activity statements (BASs). Other than providing the relevant information to James East, Mr Sliwa was not involved in the preparation of any of those documents.

3. Cadex Nominees Pty Ltd (Cadex) is the Trustee of the Sliwa Family Trust. Mrs Sliwa is the sole director and shareholder of Cadex. Both Mrs Sliwa and Mr Sliwa are potential beneficiaries of the Sliwa Family Trust.

4. The Commissioner of Taxation (Commissioner) conducted an audit of Sliwa's business activities between January 2004 and June 2007. On 7 May 2008 the Commissioner issued an interim decision summary report inviting Sliwa to comment on its findings. The Commissioner examined whether:

(a) all sales were correctly reported;
(b) input tax credits claimed were correct and only applicable to creditable acquisitions;
(c) an income tax return was required to be lodged for the 2006 financial year;
(d) the calculations on the BASs had been correctly calculated;
(e) the staff employed by Sliwa were required to make superannuation guarantee contributions;
(f) Sliwa should be registered for fringe benefits tax and whether fringe benefits tax was payable; and
(g) Sliwa was liable to an administrative penalty as a result of it making false or misleading statements on its income tax returns or BASs; and whether Sliwa was subject to a general interest charge on the additional amount of tax payable.

5. Following a response to the Commissioner's interim summary report made on behalf of Sliwa by Pitcher Partners, on 12 September 2008 the Commissioner issued a notice of assessment and liability to pay penalty in respect of the goods and services tax (GST) where the Commissioner identified Sliwa as having a tax shortfall. Subsequently, on 26 September 2008, the Commissioner issued a notice of amended assessment for the tax year 2004, and on 23 September 2008 issued notices of amended assessment for the tax years 2005 and 2006. The Commissioner also issued a notice of assessment and liability to pay penalty on 2 October 2008. Upon completing the audit, the Commissioner notified Sliwa that it had revised its BASs and amended its 2004, 2005 and 2006 income tax returns. Excluding interest charges, the Commissioner determined:

(a) additional liability for GST totalling $294,475.00;
(b) additional income tax liability amounting to $230,736.00;
(c) administrative penalties for GST shortfalls totalling $147,728.40; and
(d) administrative penalties for income tax shortfall amounting to $145,414.80.

6. Sliwa lodged an objection to the Commissioner's assessment on 12 December 2008. On 31 August 2009 the Commissioner issued a Notice of Decision on Objection (the objection decision) in which he allowed in part the objections to the GST assessments, the income tax assessment for the 2006 tax year and the penalty decisions; but disallowed the income tax objection for the 2005 tax year. On 30 October 2009 Sliwa lodged an application for review of the Commissioner's objection decision.

7. A number of relatively minor issues which arose out of the objection decision were not pursued on the hearing of this matter. The matters which I am required to determine are whether:

(a) the amendments to Sliwa's income tax liability for the 2005 tax year were properly made following the sale of lots 21 and 29 situated at Geelong Road, Mount Helen, Ballarat (the Geelong Road development);
(b) GST was correctly attributed in respect of the sale of lots 21 and 29 Geelong Road;
(c) GST was correctly attributed to construction services provided by Sliwa to Cadex in respect of:
- (i) lots 21 and 29 Geelong Road;
- (ii) 510A Talbot Street, Ballarat (the Talbot Street property); and
- (iii) the Francis Street property;
(d) the amendments to Sliwa's income tax liability for the 2006 tax year were properly made following completion of construction of a dwelling for Cadex on lot 1, 40 Francis Street, Echuca (the Francis Street property);
(e) a GST adjustment in respect of the sale of lot 3, 2 Comb Street, Ballarat (the Comb Street property) resulted in double taxation;
(f) the penalty assessments issued by the Commissioner in respect of income tax and GST shortfall were correct; and
(g) the penalty assessments should be remitted.

Sale Of Lots 21 And 29 Of The Geelong Road Development

8. There was no dispute between the parties that Sliwa was, at all relevant times, a property development and construction company.

9. On 8 November 2002 Mr Sliwa and or his nominee purchased land which was known as Geelong Road, Mount Helen for the price of $180,000. At the time of sale, the land was unimproved and no services were connected. The land, which was on Certificate of Title Volume 10169 Folio 893, was described as lot S2 on Plan of Sub-Division Number 326983M. Sliwa became the registered proprietor on 27 May 2003.

10. On 30 June 2003 the City of Ballarat Council (the Council) approved a planning permit application to sub-divide the land into 15 lots. There were a number of conditions attached to the permit including provision of a monetary contribution equal to 5 per cent of the site value to be paid to the Council pursuant to s 18 of the Subdivision Act 1988 (Vic) for public open space.

11. Lot 29 of the Geelong Road development was not part of S2 of the Plan of Subdivision. In fact, it is S3. The Contract of Sale of 8 November 2002 does not appear to deal with lot S3. Therefore, the $180,000 price paid by Sliwa does not appear to include the price for lot S3. There was no evidence before me regarding the purchase of that lot. It is substantially larger than all of the proposed lots (on sub-division) in S2, being 3202 square metres as opposed to approximately 800 square metres for the other lots.

12. By a contract made on 1 June 2003 Sliwa agreed to sell lot 21 to Cadex for $20,000. Lot 21 was created from the subdivision of lot S2. The contract provided for a deposit of $2,000.00 with the balance payable 14 days after the approval of the Plan of Subdivision. On 17 July 2003 Sliwa entered into another contract for the sale of the lot 29 Geelong Road land to Cadex. The purchase price was $60,000; the deposit being paid on the signing of the contract and the balance within 14 days after the approval of the Plan of Subdivision.

13. Prior to the sale of lots 21 and 29 Geelong Road, Sliwa obtained what was described as a market appraisal of both lots. This appraisal was provided by a Mr Ken Baker of Elders Real Estate in Ballarat. The appraisal relating to lot 21, which was provided in a letter dated 15 January 2003, states:

"It is in our opinion that the selling price of the abovementioned property would be in the region of $20,000.00 ."

As for lot 29, Mr Baker provided a market appraisal in a letter dated 17 July 2003 (on the same date as the Contract of Sale) in which he stated:

"It is in our opinion that the selling price of the abovementioned property would be in the region of $60,000.00 ."

14. Mr Sliwa testified it was intended that a childcare centre be built on lot 29 and the remaining land would be subdivided and sold. Furthermore, Mr Sliwa testified that he asked Mr Baker for a market appraisal of lot 29 on the basis that the subdivision would go ahead. He said that it was always Sliwa's intention to sell lots 21 and 29 to Cadex so that a childcare centre could be built on lot 29 and some units built on lot 21.

15. The question which arises for my determination in respect of this issue is whether the disposal of lots 21 and 29 by Sliwa to Cadex was outside the ordinary course of Sliwa's business. If that was the case, then Sliwa was required to include in its assessable income for the 2005 tax year, the market value of those lots. That is because, relevantly, s 70-90 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:

" 70-90 Assessable income on disposal of trading stock outside the ordinary course of business

(1) If you dispose of an item of your *trading stock outside the ordinary course of a *business:

(a) that you are carrying on; and

(b) of which the item is an asset;
your assessable income includes the *market value of the item on the day of the disposal.

…"

16. Although the expression market value used in s 70-90 of ITAA 1997 is a defined term, the definition does not assist in understanding the expression. As Ms M Baker, who appeared on behalf of the Commissioner, pointed out, market value should be determined in accordance with the principles established by the High Court in
Spencer v Commonwealth (1907) 5 CLR 418. Griffith CJ said at 432:

"… In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie whether there was in fact on that day a willing buyer, but by inquiring 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?'. …"

17. Isaacs J in Spencer's case said, at 441:

"… To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property."

18. Dr P Bender of counsel, who appeared on behalf of Sliwa, submitted that s 70-90 of the ITAA 1997 requires a two stage approach. One first needed to determine whether the disposal of trading stock was outside the ordinary course of business which the taxpayer carries on and, secondly, if there was a disposal outside the ordinary course of business, to determine the market value of that trading stock on the day of disposal.

19. Both parties relied on the High Court of Australia decision in
Pastoral and Development Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia 71 ATC 4177; (1971) 124 CLR 453 (Pastoral Development case), drawing different conclusions from the ratio of that case.

20. The Pastoral Development case involved the sale of cattle from Pastoral and Development Pty Ltd to a subsidiary company. Pastoral and Development had formed the intention of changing its operations and reducing its livestock by 50 per cent. It sold a number of cattle to the subsidiary company at £12.10.0d per head. At the time of sale to the subsidiary company, Pastoral and Development expected that the cattle would be resold by the subsidiary company for approximately £32 per head. The question before the court was whether the sale, in those circumstances, was one which took place in the ordinary course of carrying on the business of the taxpayer company and to which s 36(1) of the Income Tax Assessment Act 1936 (ITAA 1936) applied. Section 36 of the ITAA 1936 is not in dissimilar terms to s 70-90 of the ITAA 1997. It provided that where a taxpayer disposed of trading stock by sale being property which constitutes or constituted the whole or part of the assets of a business which was carried on by the taxpayer; and the disposal was not in the ordinary course of carrying on that business; then the value of the property sold was to be included in the assessable income of the taxpayer.

21. Both Dr Bender and Ms Baker relied on this passage from the judgment of Walsh J, which is found at 463-464:

"I do not assert as a general proposition that a sale by one company to an associated company upon terms that allow the latter to make a substantial profit and give the former less profit than otherwise it might be possible for it to make is never a sale in the ordinary course of the carrying on of the business of the former company. It is common enough that business is conducted in that fashion between associated companies, not by way of an exceptional and isolated transaction, but as a regular method of trading: cf.
Cecil Bros. Pty Ltd v Federal Commissioner of Taxation (1). My conclusion is concerned with the particular facts and circumstances of this case. The conclusion to which those facts and circumstances lead, in my opinion, is that the price was an arbitrary one and was so low as to take the transaction outside the category of an ordinary business transaction."

22. Dr Bender submitted that simply because a transaction is between associated entities does not mean it is outside the ordinary course of business. Quite plainly, that is what Walsh J said in the passage to which I have referred above. What in fact led Walsh J to conclude that the transaction in the Pastoral and Development case was outside the category of an ordinary business transaction was the fact that the price was arbitrary and very low. It was arbitrary because the person who fixed the sale price, a Mr Irving, said it had to do with the risks and expenses which were being incurred by the subsidiary company which purchased the cattle in connection with transporting the cattle to the meatworks. Walsh J found that explanation completely unconvincing. It was low because the subsequent sale by the subsidiary company was at a price which was almost three times higher than the sale to the subsidiary company.

23. Dr Bender submitted that the sale prices for lots 21 and 29 were not set in an arbitrary manner and were not so low as to take the sales outside the category of an ordinary business transaction. Those prices were based on market appraisals by an independent third party real estate business which took into account the subdivision of the Geelong Road Development in determining market values. Dr Bender also submitted that there was no requirement under ITAA 1997 for market value to be determined by a registered valuer. He submitted it was not unusual for reasonable estimates of market values of properties to be determined by market appraisal by real estate agents. In that respect, he relied on the evidence of Mr Christopher John Packer, an accountant and principal of Chris Packer and Associates, an accounting firm in Ballarat.

24. In a witness statement made on 3 November 2010, which was admitted into evidence, Mr Packer said that he had numerous clients who relied on market value determined by a real estate agent as a reasonable estimate of market value for stamp duty purposes. He described this as a cost effective method of deriving a market value. In his view, real estate agents are the most appropriate people to give a reasonable estimate of market value given their experience in dealing with property sales. However, when Mr Packer was asked in cross-examination whether he had any valuation qualifications, he said he had none.

25. Dr Bender also submitted that the question regarding whether a transaction is outside the ordinary course of business depends on an assessment of the nature of the business and the transactions. He referred to
Case R85 84 ATC 569 at [5]. That case also involved the sale of cattle to a wholly owned subsidiary company which subsequently sold the cattle at a substantially increased price at market. Dr G W Beck (Member) said that whether one regards transactions as being in the ordinary course of business depends on one's assessment of:

"(a) the precise nature of the business that is being carried on;

(b) the character of transactions one could reasonably expect to be called for in the course of going about that business; and

(c) the character of the disputed transaction."

26. Ms Baker, while relying on what was said by Walsh J in the Pastoral and Development case, pointed to the final sentence in the paragraph quoted above. She said that although, as a general proposition, the sale by one company to an associated company was not necessarily a sale outside the ordinary course of business, that feature combined with the fact that the price was arbitrary and low could indicate such a sale. With respect to Dr Bender, Ms Baker's submission regarding Walsh J's reasons for decision is plainly correct. All that Walsh J was stating was that as a general proposition, a sale by one company to an associated company, by itself, does not take the transaction out of the ordinary course of carrying on a business. However, what might distinguish the transaction which was in the ordinary course of business from one which was not, was an arbitrary price so low as to take the transaction out of that category.

27. As Ms Baker submitted, there could be no argument about the fact that Sliwa and Cadex are associated entities. Sliwa is jointly owned by Mr Sliwa and his wife and Mr Sliwa was at all material times the sole director of Sliwa. Mr and Mrs Sliwa are discretionary beneficiaries under the Sliwa Family Trust. Cadex is the trustee of the Sliwa Family Trust and Mrs Sliwa owns all of the shares in Cadex and is its sole director.

28. There was no evidence before me that any negotiations took place between Sliwa and Cadex regarding the sale price of lots 21 and 29. In fact, in cross-examination Mr Sliwa agreed that there were no subsequent negotiations following the market appraisal provided by Mr Baker for both lots. Mr Sliwa also confirmed in cross-examination that no cash consideration was provided by Cadex to Sliwa in accordance with the sale of land contracts despite the terms requiring deposits in respect of both sales.

29. Although Dr Bender submitted that the prices for lots 21 and 29 were not set in an arbitrary manner and were not so low as to take the sales outside an ordinary business transaction, the evidence before me indicates otherwise. As I have set out above, Mr Baker's appraisals of both lots simply comprise a single sentence regarding the selling price of each lot. No reasons whatsoever were provided by Mr Baker as to how he arrived at those prices.

30. In the course of my time as a Member of this Tribunal I have dealt with many property valuation reports prepared by the Australian Valuation Office (AVO) and other registered valuers, as I mentioned during Dr Bender's closing submissions at the hearing of this matter. I have also had to deal with many valuations provided by real estate agents where the AVO valuation has been disputed. In providing their valuations, the valuers have always considered the particular circumstances of the property in question, noting whether it is a difficult building site or any other disadvantages that the property may pose. The reports commonly deal with the property market in that specific area at the relevant time. Comparisons are usually drawn with similar properties which have sold in recent times. Comparison of land size is frequently considered as is the condition of a dwelling on the site, if one in fact exists. Account is also taken of facilities, access and transport. Adjustments are made for variances in land size, condition of improvements, location and other pertinent value indicators. It is only after an assessment of all of those factors which influence the market that the valuer generally offers an opinion regarding market valuation. Consideration of these factors accords with the passage I have quoted from in Spencer's case.

31. The problem with Mr Baker's appraisals is that they provide none of these essential indicators of market value. Furthermore, Mr Baker was not called by Sliwa to give evidence to support the so called market appraisals which he provided.

32. There is a further important problem with Mr Baker's so called market appraisals. The selling price he has suggested for lot 21 is about one fifth of the price for which lots of a similar size in the Geelong Road Development sold in September 2003. Comparative sales prices of market sales at arms length are clearly valuable indicators of market price. The lots which sold, off the plan prior to completion of the development, fetched between $82,500 and $92,500. The variation in price in those lots seems to be related in part to the size of the lot and, possibly, some other advantages of particular lots over others. Overall, on a per hundred square metre basis, there was very little variation in price over the lots sold at arms length in September 2003, and one lot which sold in 2004. In fact the lot which sold in January 2004 is about 115 square metres larger than the other lots but on a per hundred square metre basis, fetched a lower price. That might indicate a softening of market values over the four month period although I have no evidence before me about that.

33. Regardless, the average price for which the lots sold to arms length buyers per hundred square metres was $10,771. By comparison, lot 21, which is 981 square metres, was sold by Sliwa to Cadex for $2,038 per hundred square metres. That is approximately one fifth of what the market was prepared to pay for land in the Geelong Road development approximately three months following the sale by Sliwa to Cadex. Lot 29 is a much larger block of land being some 3,202 square metres (although referred to as 3,187 square metres in the Commissioner's finalisation letter to Sliwa). That is the equivalent of approximately $1,873 per hundred square metres.

34. Although Dr Bender submitted that the Commissioner's market value was based on contracts which were signed some eight months before completion of the subdivision and development, and 11 months before the settlement of the sale of lots 21 and 29, in my opinion, nothing swings from that. That is because the price on the blocks of land sold at arms length was determined at the time of entering the contract, not at some later time.

35. Dr Bender also referred to the public open space contribution required by Council. According to Dr Bender, the Council obtained a valuation from an independent certified practicing valuer, Mr Vincent Braybrook, from V. Braybrook and Associates Pty Ltd. That valuation was in evidence and is dated 7 April 2004. Dr Bender submitted that Mr Braybrook's valuation determined market value for all 12 lots of the land in the Geelong Road Development to be $190,000.

36. However, while Mr Braybrook's letter containing the valuation does refer to lots 18-29 (12 lots) and Plan of Subdivision No PS326983M; Mr Braybrook refers only to lot S2 Geelong Road, Mount Helen. Quite plainly, the Plan of Subdivision shows lots S2 and S3 (which is lot 29), although only lot S2 has been subdivided. It is therefore unclear whether Mr Braybrook has in fact included S3 in his valuation.

37. The second point about Mr Braybrook's valuation is that it was conducted for the purposes of s 19 of the Subdivision Act. Section 19 deals with the valuation of land for public open space. However, in order to understand the basis of Mr Braybrook's valuation, one needs to look at s 18 of the Subdivision Act. It provides that a Council may require public open space. If a requirement for public open space is not specified in the Planning Scheme, then a Council may require the applicant who proposes to create any additional separately disposable parcel of land by a Plan of Subdivision, to either set aside on the plan a percentage of all the land for public open space; to pay or to agree to pay the Council a percentage of the site value of all the land in the subdivision; or do a combination of (a) and (b) above so that the total of the percentages required under (a) and (b) does not exceed 5 per cent of the site value of all the land in the subdivision.

38. As I have mentioned above, the Plan of Subdivision only deals with lot S2 on Plan of Subdivision PS326983M. Lot S3 was not subdivided. S2 was subdivided into 11 lots and S3 was simply acquired as a complete lot which appeared on the parent title Volume 10169 Folio 893. For that reason, it seems to me that Mr Braybrook only valued lot S2 because that was the only lot which fell under the Subdivision Act. Furthermore, because land was not set aside for the public open space, the valuation was conducted for the purpose of paying the Council a percentage, not exceeding 5 per cent, of the site value of the land in the subdivision intended to be used for residential purposes. The expression site value is defined in s 3 of the Subdivision Act as follows:

"site value means market value on the assumptions that there were no improvements and no leases, mortgages or charges affecting the land;"

39. Furthermore, the expression subdivision is also defined in s 3 of the Subdivision Act in the following way:

"subdivision means the division of land into two or more parts which can be disposed of separately;"

40. Therefore, rather than Mr Braybrook's valuation being indicative of the value of lots 18-29 as described in his letter, the only lots which form part of the subdivision are lots 18-28 which formed lot S2 on the parent plan. Furthermore, valuation is the value of the land in its unimproved state. Of course, following subdivision, the entire necessary infrastructure to support a residential development, including a road leading to the top of the court, was completed. The arm's length purchasers of those lots, while purchasing off the plan, undoubtedly purchased on the basis of the entire infrastructure being completed. That would explain the vast discrepancy between Mr Braybrook's valuation and the price which those lots in fact fetched in the open market in September 2003 and the one lot in January 2004.

41. For the reasons I have set above, I find that the sale of lots 21 and 29 by Sliwa to Cadex in June and July 2003 cannot be described as the disposition of trading stock in the ordinary course of Sliwa's business. Those transactions were plainly outside the ordinary course of Sliwa's business and therefore s 70-90 of ITAA 1997 applies.

42. Having found that there was a disposal of trading stock outside the ordinary course of business, I need to say something about the market value of those lots at the time of sale.

43. In my opinion, it is appropriate, for the purposes of estimating the market value of lots 21 and 29 in the absence of any further information about variations in those lots, to apply the average value per hundred square metres which the other lots fetched on the open market. That results in a value of $10,771 per hundred square metres. Applying that to lot 21 results in a value of $105,664. That method would value lot 29, assuming it is in fact 3202 square metres, at $344,887. The disparity between those values and the sale price achieved by Sliwa on its sale to Cadex simply highlights the valuation problem. As Ms Baker submitted, Sliwa bears the onus of proving that its assessments were excessive (s 14ZZK Taxation Administration Act (Cth) 1953 (the TAA)). Sliwa has not established that the assessments were excessive. Therefore, I find that the inclusion of $448,000 in the assessable income of Sliwa for the year ended 30 June 2005 was the correct decision.

GST Attribution On The Sale Of Lots 21 And 29 Of The Geelong Road Development

44. Mr Sliwa said, in his 30 March 2011 witness statement, that Sliwa was registered for GST and lodged BASs on a quarterly basis during the relevant periods in dispute with the Commissioner. Mr Packer's evidence was that Sliwa was registered for GST and that it accounted for GST on an accruals basis, lodging quarterly BASs.

45. There seemed to be no dispute about the fact that the sale of lots 21 and 29 of the Geelong Road development were taxable supplies in accordance with s 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The sales of those lots by Sliwa to Cadex were supplies of real property located in Australia and they were made for consideration. They attracted GST in accordance with s 9-40 of the GST Act. Applying the formula set out in s 9-75 of the GST Act, the amount of GST payable on the supply of lots 21 and 29, assuming the consideration to have been a total of $80,000, results in the GST sum of $7,272. There was no dispute about the fact that Sliwa had not made a choice to account for GST on a cash basis as is provided for in s 29-40 of the GST Act. In fact, there was no evidence that Sliwa had sought or been granted permission to account on a cash basis in accordance with s 29-45 of the GST Act.

46. The issue before me regarding the sale of lots 21 and 29 Geelong Road is the attribution of the GST payable on the taxable supply to a particular tax period. The GST attribution rules are set out in Subdivision 29-A. Section 29-5 of the GST Act relevantly provides:

"(1) The GST payable by you on a *taxable supply is attributable to:

(a) the tax period in which any of the *consideration is received for the supply; or

(b) if, before any of the consideration is received, an *invoice is issued relating to the supply - the tax period in which the invoice is issued."

47. Ms Baker also directed my attention to the provisions set out in s 99-5 of the GST Act. Division 99 of the GST Act deals with deposits as security. Section 99-5 provides:

"99-5 Giving a deposit as security does not constitute consideration

(1) A deposit held as security for the performance of an obligation is not treated as *consideration for a supply, unless the deposit:

(a) is forfeited because of a failure to perform the obligation; or

(b) is applied as all or part of the consideration for a supply."

(2) This section has effect despite section 9-15 (which is about consideration)."

48. The other side of the GST transaction should also be noted. The attribution of input tax credits for creditable acquisitions is matched against the tax period in which the entity provides consideration for the acquisition (s 29-10) of the GST Act).

49. Mr Sliwa testified that he signed contracts for the sale of lots 21 and 29 of the Geelong Development on 1 June 2003 and 17 July 2003 respectively. Those dates in fact record the date of acceptance of a contract note which, in accordance with the respective contracts of sale, were agreed to be the day of sale. Those contracts provided for the payment of a deposit on the signing of the contract in the amount of $2,000 and $6,000 respectively. Mr Sliwa testified that Sliwa did not receive the cash deposit and did not receive any cash at the time of settlement of those transactions. Both Contracts of Sale expressly state that the settlement date is to be the date upon which vacant possession of the property and chattels must be provided, that being, upon acceptance of title by the purchaser and receipt of the consideration then due to the vendor under the terms of the contracts.

50. The Transfer of Land instruments in respect of those two lots were lodged with the Office of Titles Victoria on 13 August 2004. The City of Ballarat Council had granted a planning permit in respect of the subdivision of lot S2 in accordance with Plan of Subdivision No PS326983M on 30 June 2003. Although the Contract of Sale of lot 29 refers to the balance of payment being due 14 days after the approval of the Plan of Subdivision, I have no evidence before me that lot S3 was part of the Plan of Subdivision PS326983M. The Plan of Subdivision refers only to lot S2. The sale of lot 21 also required payment of the balance of the purchase price within 14 days after the approval of the Plan of Subdivision. In that case, the balance was due and payable on 14 July 2003. As Ms Baker submitted, the reasonable inference to draw from the transaction documents is that the consideration for both lots 21 and 29 was received by Sliwa on or before the settlement date, 13 August 2004.

51. Mr Sliwa nevertheless testified that notwithstanding the express terms of both contracts for the sale of lots 21 and 29, no payments were made by Cadex to Sliwa the transfer of those lots. Nor did Sliwa issue any invoices to Cadex for the sale of those lots at that time. He said that invoices were issued for those sales in 2008. Mr Sliwa said that other than the invoices issued in 2008, Sliwa did not provide any other notice or document to Cadex requiring it to make payment to Sliwa for the sale of those lots.

52. However, in cross-examination, Mr Sliwa said that Sliwa and Cadex had agreed to Cadex making payment for lots 21 and 29 to Sliwa by way of set-offs in their respective loan accounts. He said that there would have been a verbal agreement between Sliwa and Cadex for payment via set-offs in the loan accounts. That of course is a reference to an agreement reached between the two entities by Mr Sliwa and his wife. I did not have the benefit of evidence from Mrs Sliwa. Nevertheless, given that the transfer of lots 21 and 29 from Sliwa to Cadex occurred on or about 13 August 2004, I accept that the agreement referred to by Mr Sliwa was in existence at that time.

53. Mr Packer attached to his witness statement extracts from Sliwa's and Cadex's general ledgers respectively. They record account entries and balances for the tax years ended 2004, 2005, 2006 and 2007. The general ledgers disclose that Sliwa maintained a loan account in respect of Cadex. Likewise, Cadex maintained a loan account relating to Sliwa. Corresponding entries in those loan accounts record loans and other credits and debits to and from each of the companies. The account entitled Loan - Cadex Nominees Pty Ltd in Sliwa's accounts between September 2003 and 30 June 2004 records both debit and credit entries in that account. The debit entries indicate an advance by Sliwa to Cadex, and credit entries an advance from Cadex to Sliwa.

54. Cadex's account entitled Loan - A & C Sliwa Pty Ltd also records credit and debit entries. The debit entries record payments made by Cadex to Sliwa and credit entries record payments from Sliwa to Cadex.

55. Sliwa's Cadex loan account records a debit balance of $464,500.00 as at 30 June 2004 while Cadex's Sliwa loan account records a credit balance in that amount. In other words, as at 30 June 2004, Cadex owed Sliwa the sum of $464,500.00. There are both credit and debit entries during the period recorded. The credit entry in Sliwa's accounts of $180,000.00 on 3 March 2004 records a set-off of that sum against the monies Cadex owed to Sliwa. It reduced Cadex's overall debt to Sliwa. There is of course a corresponding $180,000.00 debit entry on that date in Cadex's account. By itself, that transaction seems to indicate that the two entities already had an agreement to set-off monies owed from one entity to the other in their respective loan accounts.

56. The general ledger printout for the tax year end at 30 June 2005 records, in Silwa 's sales account, sales of $60,000.00 and $20,000.00 in respect of lots 29 and 21 Geelong Road. GST amounts of $5,454.55 and $1,818.18 are recorded. Also recorded on 30 June 2005 are the sales of lots 18 - 28 Geelong Road, which were the arms length sales. This is despite the fact that the settlement dates for those lots range between 20 August 2004 and 15 September 2004. In cross-examination, Mr Packer agreed that those simply appeared to be end of year entries. He agreed they did not reflect the dates on which the transactions in fact took place. It follows, according to Ms Baker, that the accounts prepared on behalf of Sliwa at the conclusion of the 2005 financial year could not be relied upon to reflect the true dates of the transactions recorded therein.

57. In my respectful opinion, Ms Baker is plainly correct. Furthermore, because GST payable must be attributed to the tax period in which consideration is received, the entries relating to the arm's length sales are positively misleading. The accounts of any entity should reflect the date on which those transactions settled as settlement necessarily requires the payment of the balance of the purchase price. The GST payable on those supplies should be attributed to the quarter in which they occurred. Failure to do so is contrary to s 29-5 of the GST Act.

58. As Mr Packer testified, Sliwa's general ledger accounts for the year ended 30 June 2005 disclose gross revenue of $60,000.00 and $20,000.00 being sales of lots 29 and 21 Geelong Road. The stock acquired by Sliwa referred to as the Mount Helen Stock, was taken into account as at 30 June 2005. The closing stock figure at the end of that financial year records the disposition of lot 21 but not lot 29. I am uncertain why that is the case. The loan accounts of both Sliwa and Cadex record the fact that on 30 June 2005, corresponding entries have been made in the loan accounts of Sliwa and Cadex to record the sales of lots 29 and 21. The amounts of $60,000.00 and $19,634.80 were debited to Sliwa's Cadex loan account and credited to Cadex's Sliwa loan account . In other words, the monies at that time owed by Sliwa to Cadex were reduced by the two sums I have just referred to. Exactly why the figure of $19,634.80 is recorded rather than $20,000.00 is not clear.

59. As Dr Bender submitted, no invoices were issued by Sliwa to Cadex in respect of the sale of lots 21 and 29 until at least 2008. Therefore there can be no doubt that s 29-5(1)(b) of the GST Act does not apply to the transaction in question. Furthermore, Dr Bender submitted that a standard contract for the sale of land is not an invoice. Because no payment was made by Cadex to Sliwa for the acquisition of lots 21 and 29 Geelong Road, there was no consideration as that word is defined in s 9-15 of the GST Act.

60. Dr Bender also submitted that loans provided by Cadex to Sliwa during the 2006 and 2007 tax years did not constitute consideration for the supply of lots 21 or 29. I did not understand Ms Baker to be disputing that submission.

61. Ms Baker submitted it is plain that the consideration received by Sliwa for the sale of lots 21 and 29 to Cadex was in form of a set-off recorded in the loan accounts of both entities. On 30 June 2005 Cadex's Sliwa loan account was credited with the proceeds of the sale of those two lots while Sliwa's Cadex loan account was debited with those amounts. Although the Cadex loan account has a discrepancy of some $365.20, no explanation was provided for that discrepancy. Furthermore, according to Mr Sliwa's evidence, there was a verbal agreement between the entities that the costs of those sales would be set-off in the loan accounts.

62. Both parties referred me to the Australian Taxation Office (ATO) Goods and Services Tax Determination No 2004/4 (GSTD 2004/4). Although GSTD 2004/4 is expressly stated be a ruling for the purposes of s 37 of the TAA, and the matter before me does not relate to a ruling, either private or public, nevertheless, the principles stated in GSTD 2004/4 have their genesis in decisions of the Court dealing with set-offs. In essence, GSTD 2004/4 provides that consideration can be provided or received by way of the settling of mutual liabilities in accordance with the doctrine of set-off. Significantly, the ruling provides that consideration is provided or received on the date that the set-off legally occurs. If the time of set-off is known to only one of the entities, consideration is provided and received by the other entity when it is informed of the date of the set-off, or when that information is first made available to it. The ruling also states that in many cases, the date of the set-off is the date on which the set-off is recorded in the books of the entities. The difference between the parties in this matter is that the Commissioner contends the set-off occurred when Sliwa transferred lots 21 and 29 Geelong Road to Cadex on or about 13 August 2004. On the other hand, Sliwa contends that consideration for the sale of those lots was received by Sliwa on 30 June 2005 when the book entries recognising the set-off were made.

63. The common law principle relating to the satisfaction of a liability by way of set-off is commonly traced to
Re Harmony and Montague Tin and Copper Mining Co (Spargo's Case) (1873) 8 Ch App 407. In the Australian Taxation context, perhaps the clearest exposition of the principle was made by Dixon J, as he then was, in
Federal Commission of Taxation v Steeves Agnew and Company (Victoria) Pty Ltd (1951) 82 CLR 408. In that case, his Honour said, at 420:

"… If cross-liabilities in sums certain of equal amounts immediately payable are mutually extinguished by an agreed set-off, that amounts to payment for most common-law and statutory purposes. …"

64. After referring to Spargo's case and to
Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co. Ltd. (1929) 43 CLR 247 and
Joseph v Campbell (1933) 50 CLR 317, Dixon J said at 421:

"… But for the application of these principles there must be cross-liabilities and agreement, express, tacit or implied, and the cross-liabilities must be equal. If they are not equal payment of the residue must be affected by other means. …"

65. GSTD 2004/4 also states that book entries made under an arrangement to set off debts are evidence of carrying into effect an agreement. The mere making of book entries cannot reflect payment in the absence of such an agreement. This was clearly stated by Barwick CJ in
Manzi and Ors v Smith and Another (1975) 132 CLR 671. In that case, there was no evidence that one party acknowledged any indebtedness to another party although entries had been made in the accounts. His Honour said, at 674:

"… We were referred to cases in which a payment of money was held to have been made by means of entries in books of account. But in those cases the entries represented the agreement of the appropriate parties e.g.,
Eyles v Ellis (9); In re Harmony and Montague Tin and Copper Mining Company (Spargo's Case) (10). These decisions, quite clearly, are not authority for the proposition for which they were advanced, namely, that a payment of money was made by the making by the company of a journal entry in the books of account without reference to, or without the agreement of, the persons said to be the recipients of the money. …"

66. The decision in Manzi's case was also referred to by Mason J (as he then was) in
Brookton Co-operative Society Limited v The Commissioner of Taxation of the Commonwealth of Australia 81 ATC 4346; (1981) 147 CLR 441, where he said, at 455:

"… Payment of a dividend may occur in a variety of ways not involving payment in cash or by bill of exchange, as, for example, by an agreed set-off, account stated or an agreement which acknowledges that the amount of the dividend is to be lent by the shareholder to the company and is to be repaid to the shareholder in accordance with the terms of that agreement. It is, however, well settled that the making of a mere entry in the books of a company without the assent of the shareholder does not establish a payment to the shareholder (
Manzi v. Smith (33)). …"

67. Dr Bender submitted that on 30 June 2004 the loan accounts between the two entities indicated the sum of $464,500 was owed by Cadex to Sliwa. That is in accordance with the accounts of the two entities. Dr Bender then noted that between 30 June 2004 and 30 September 2004 there were only two additional entries made to the loan accounts, those being in the sums of $4,000 and $3,500 respectively. Those entries are debit entries in Sliwa's Cadex loan account indicating further advances by Sliwa to Cadex. Therefore, according to Dr Bender, no consideration could have been paid to Sliwa during the 30 September 2004 quarter because no loans were made by Cadex to Sliwa during that quarter. That, again, seems to be in accordance with the accounts.

68. Dr Bender then submitted that the sales revenue resulting from the sale of lots 21 and 29 to Cadex was received by Cadex by way of set-off against the mutual obligations of Cadex and Sliwa. Following the sales transactions, Cadex owed Sliwa $80,000. The set-off was entered in the accounts on 30 June 2005. Therefore, according to Dr Bender, the date of entry of those set-offs in the accounts of both companies was the date on which consideration was received by Sliwa for the sale of lots 21 and 29. Dr Bender relied on s 1305 of the Corporations Act 2001 which deals with the admissibility of books of the company in evidence. It provides that a book kept by a body corporate under a requirement of the Corporations Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book. While I accept that to be the case, the prima facie position of course may be displaced by evidence to the contrary.

69. The first thing to note about the accounts of both companies is, as Ms Baker submitted, that they cannot be relied upon. That is evident because the sales of the remaining lots in the Geelong Road development are entered in Sliwa's sales account as if the settlement of those transactions took place on 30 June 2005. That clearly was not the case. I had in evidence the tax invoices relating to the sales of those lots setting out the settlement statements. Those sales were completed between August and September 2004 and therefore the entries in Sliwa's sale account are incorrect. On that basis alone it is reasonable to infer that the sales of lots 21 and 29 were also incorrectly recorded as having taken place on 30 June 2005.

70. Lending further weight to Ms Baker's argument are the two Transfer of Land instruments, which are registrable instruments under the Transfer of Land Act 1958 (Vic). They were executed on 13 August 2004 and lodged for registration with the Office of Titles Victoria. Those documents indicate registration taking place on 25 October 2004. It is inconceivable that those transfers were executed, with the consideration stated, without there being consideration in fact provided by the purchaser. That is because for Cadex to obtain the benefits of registration, it must have been a bona fide purchaser for value. The benefits of registration are conferred only on a person who has given valuable consideration. It cannot have been intended that Cadex lodged its Transfer of Land documents for registration while at the same time leaving its legal title exposed to displacement. This is particularly so as Cadex intended to construct a childcare centre on lot 29 and units on lot 21.

71. There is other evidence that also supports Ms Baker's contentions. Mr Sliwa, in cross-examination, said that there would have been a verbal agreement between both companies to set-off the price of lots 21 and 29 in the loan accounts held by both companies.

72. The fact that on 13 August 2004 the loan accounts indicated monies were owed by Cadex to Sliwa does not, in my opinion, alter the position. That is because it is clear that the loan accounts held by each company were credited and debited on a regular basis reflecting monies being transferred between those accounts, whether by advances or set-offs. For example, on 3 March 2004 the entry recording a $180,000.00 payment from Cadex to Sliwa refers to a transfer relating to South Street. It appears to be payment by Cadex to Sliwa for the transfer of that property. Irrespective, it had the effect of reducing the total of monies said to be owed by Cadex to Sliwa. Similarly, there were a range of large credit transactions in Sliwa's Cadex loan account between November 2004 and May 2005. Those transfers had the effect of reversing liabilities as at 30 June 2005 such that Sliwa then owed Cadex the sum of $635,365.20. The descriptions set out beside those transactions do not permit me to determine the nature of the funds or the reason why they were transferred except for the sale of lots 21 and 29. Quite plainly, those loan accounts were used to set-off liabilities by one company to the other and to record advances from one to the other.

73. In my opinion, the evidence discloses that the loan accounts were frequently used to set-off amounts owing from one company to the other by making either credit or debit entries in the accounts. By that means, cross-liabilities between the two entities were resolved although at any particular point in time, there remained a balance owing from one entity to the other. I find that the accounts of both entities, as stated in the evidence before me, cannot be relied upon to accurately record the dates on which transactions have taken place. It appears that entries were regularly made at the end of a financial year despite the fact that transactions took place at a much earlier date. I also find that the companies set-off the purchase price of lots 21 and 29 against their respective loan accounts by agreement which was in place certainly by 13 August 2004 when the Transfer of Land instruments were lodged for registration. Therefore, I find the GST payable on the supply of lots 21 and 29 to Cadex must be attributed to the 30 September 2004 tax quarter as the Commissioner has contended.

GST Attribution - Construction Services Provided By Sliwa To Cadex

74. In the conduct of its business as a construction company, Sliwa supplied construction services to Cadex in relation to a number of Cadex owned properties. The attribution of GST for the provision of those services is in issue regarding:

(a) the construction of three units on lot 21 of the Geelong Road development;
(b) the construction of a childcare centre on lot 29 of the Geelong Road development;
(c) the construction of a townhouse on lot 1, 40 Francis Street, Echuca; and
(d) the construction of a dwelling at 510A Talbot Street, Ballarat.

75. There was no dispute about the fact that the construction services provided by Sliwa to Cadex were taxable supplies as that expression is defined in the GST Act. The only issue is the correct tax period to which those services should be attributed.

76. Mr Sliwa testified that the construction services in respect of the above properties were provided for:

(a) the construction on lot 21, commencing in late 2004 and concluding in late 2005;
(b) the construction on lot 29, commencing in about late 2004 and concluding in about August 2005;
(c) the construction on lot 1 Francis Street, commencing in about June 2005 and finishing in about January 2006; and
(d) the construction at 510A Talbot Street, commencing in about 2005 and finishing in late 2005.

77. The Commissioner assessed the GST payable on the construction services to the following quarterly tax periods:

QUARTERLY TAX PERIOD	CONSTRUCTION SERVICES	GST AMOUNT
31 December 2004	Lot 21	$ 34,170
31 December 2005	Lot 29	$ 96,363
31 March 2006	Francis Street	$ 16,074
30 June 2007	510A Talbot Street	$ 17,400

Lots 21 And 29 Geelong Road

78. Sliwa contended that it issued no tax invoices in respect of the relevant periods for the construction services, nor did it receive any consideration by way of cash payment in those periods for construction services. Rather, payment for construction services supplied in respect of lots 21 and 29 were set-off in the loan accounts in the June 2007 quarter.

79. The construction of the three units on lot 21 was, according to Mr Sliwa, finished in about late 2005. However, Mr Sliwa testified that no invoice was issued by Sliwa to Cadex until 2008. He also testified that Cadex paid no cash to Sliwa for those construction services. The sales account for the 2007 financial year records the sale of Eilish Court (lot 21) for the gross sum of $375,870. That amount was debited to Sliwa's Cadex loan account and credited to Cadex's Sliwa loan account on 30 June 2007. Clearly, the cost of construction services has been set-off in the two entities loan accounts in that year by increasing the liabilities of Cadex to Sliwa by $375,870. This set-off accords with Mr Sliwa's evidence that there was an understanding or verbal agreement between the two entities regarding the set-off of liabilities owed by one entity to the other.

80. Mr Sliwa testified that Sliwa charged construction costs to Cadex on all of the construction projects which it completed, but not during the project. He said there were no written agreements between Sliwa and Cadex for the provision of those services. I should also refer to the letter provided by Pitcher Partners to the Commissioner dated 14 July 2008, objecting to the assessments. In that letter, Pitcher Partners said that Sliwa was prepared to accept an adjustment to the BAS for the quarter ended 31 December 2004 to reflect the transfer to Cadex of lot 21 for $375,870. This was subject to input tax credits relating to the construction of the units on lot 21 be allowed for that quarter. While that appears to be contrary to what Mr Sliwa now claims about the completion of the construction of those units in late 2005, because I have no better evidence of when that took place, I find that Sliwa has not met the onus of proving that the assessment in respect of these construction services was excessive in accordance with s 14ZZK of the TAA. I have, of course, also considered the fact that Sliwa and Cadex worked on an oral agreement to set-off the service construction costs in each entities loan accounts.

81. Mr Sliwa testified that the construction of the childcare centre on lot 29 was finished in about August 2005. The sale of lot 29, which is described as a sale of the childcare building, is recorded in the sales account by an entry on 30 June 2007 in the gross sum of $1,100,000. Entries were also made on 30 June 2007 in the Sliwa Cadex loan account and in Cadex Sliwa loan account for that sum. Assuming that the reference to sale of the childcare building is a reference to costs of materials and labour in constructing that building, then those costs were set-off in the respective loan accounts and recorded on the date I have stated. Again, for the reasons I have set out above regarding the oral agreement to record the costs to Cadex by setting off the sums owed in the loan accounts, and given that the agreement seems to have existed since at least 2004, I find that Sliwa has not discharged its onus in establishing that the assessment was attributed to an incorrect period and hence excessive.

82. Although Ms Baker made submissions regarding s 156-5 of the GST Act dealing with progressive or periodic supplies, the evidence of Mr Sliwa was that consideration was only to be provided on completion of the work projects and not on a progressive basis. Dr Bender submitted that s 156-5 had no application as the supplies were not made on a periodic or progressive basis. There was no evidence at all before me to indicate that supplies were made for a period or on a progressive basis.

40 Francis Street

83. Dr Bender submitted that no revenue was recognised for the construction services provided in respect of 40 Francis Street nor was any cash paid by Cadex to Sliwa for those services during the March 2006 quarter. Furthermore, Dr Bender submitted that the construction expenses continued to be recorded as an asset in Sliwa's balance sheet as closing stock at the end of the March 2006 quarter. Therefore, the costs of the construction services relating to the Francis Street property had not been recorded in the accounts of either entity as at the end of March 2006.

84. In his witness statement, Mr Packer observed that Sliwa recorded a decrease in stock on hand of $160,740 on 30 June 2007 which was described as 40 Francis Street stock. No set-offs were recorded in either loan accounts in respect of that property. Dr Bender submitted that because the $160,740 asset described as Francis Street stock remained in Sliwa's balance sheet as closing stock at the end of the March 2006 quarter, the GST attributable to the construction services provided in respect of the Francis Street property should be attributed to the June 2007 quarter.

85. Mr Sliwa testified that two townhouses were constructed on the Francis Street land. Cadex owned lot 1. Sliwa built a townhouse on lot 1 for Cadex and the costs of this project was funded using Sliwa's overdraft account with the National Australia Bank (NAB). Construction finished in about January 2006. Although Mr Sliwa testified that no invoices were issued by Sliwa to Cadex for construction services nor was any cash paid directly by Cadex in 2005 or 2006, he said that Sliwa on-charged construction costs to Cadex on all construction projects which it completed for Cadex. Mr Sliwa testified that although there were no written contracts between the two companies, the practice adopted by Sliwa and Cadex was to charge for construction services after the project was completed. Although Mr Sliwa did not say that this was commonly accomplished by entries in the respective loan accounts of the companies, that is clearly the evidence from past transactions. In cross-examination, Mr Sliwa said that Sliwa used job costing software referred to as Craftsman. He said that this information was provided to Mr East who determined when the entries should be made in the accounts regarding the provision of construction costs. Mr Sliwa agreed that it was his understanding that monies owed by Cadex to Sliwa would be set-off in the loan accounts and therefore he left that to the accountant, Mr East.

86. I have agreed with Ms Baker's submissions that the accounts prepared by James East are unreliable. In fact, they are positively misleading. To describe construction services provided for another party as closing stock is, in my opinion, misleading. Construction services comprise labour and materials; the materials used in the course of construction becoming part of another legal entity's property. The work having been completed and the materials supplied for the construction of another entity's property would seem to me to be more properly recorded in a current asset account, commonly described as accounts receivable. It is misleading to suggest that labour and materials provided in respect of completed construction work remains as stock on hand in the accounts of the entity providing the materials and labour.

87. Mr Sliwa's evidence was that the construction of the townhouses on lots 1 and 2 Francis Street were completed in about January 2006. As lot 2 was sold by Sliwa in March 2006 and that sale is recorded in its accounts, it is reasonable to infer that both townhouses were completed at about the same time. Ms Baker also submitted that in any event, because Mr Packer was not responsible for the preparation of the Sliwa accounts in question, he could not provide any evidence of their factual accuracy. Quite plainly, that must be correct. Accordingly, I am not satisfied on the balance of probabilities that the accounts prepared by James East which reflect the provision of construction services by Sliwa to Cadex for the lot 1 Francis Street construction work can be relied upon. As Ms Baker contended, Sliwa is therefore unable to establish that the GST assessment in respect of that transaction was excessive. It has not satisfied the onus placed on it by s 14ZZK of the TAA. Therefore, I find that GST in respect of these construction services should be attributed to the March 2006 quarter.

510A Talbot Street

88. Dr Bender submitted that Mr Packer's evidence was that the sales price, $191,400, remained owing to Sliwa by Cadex as at 30 June 2007. This was because Mr Packer said in his witness statement: The $191,400 debit on 30 June 2007 represented an amount that A & C Sliwa was owed as at 30 June 2007. However, as Ms Baker observed, at paragraph 21 of Mr Packer's witness statement, he testified that the amount of $191,400 gross of GST was recognised as sales revenue on 30 June 2007. Quite plainly, those two statements cannot stand together. Sliwa's sales account discloses a credit entry in the sum of $191,400 on 30 June 2007 which is consistent with Ms Baker's observation. The details of that entry state sale of 510 Talbot Street to Cadex. With respect to Mr Packer, his statement about the $191,400 debit, which was a reference to a debit in Sliwa's Cadex loan account, which has a corresponding credit entry in Cadex's Sliwa loan account, is plainly a set-off in relation to the sale of the Talbot Street property. While it is true to say that the entries represent an amount Sliwa was owed for the transfer of the Talbot Street property, that amount has been set-off in the loan accounts between the two companies. The balance of the loan accounts at that stage indicates monies owed by Cadex to Sliwa in the amount of $768,988.56. Accordingly, I find that the 30 June 2007 entry in the loan accounts of Sliwa and Cadex represents a set-off of the monies owed by Cadex to Sliwa in respect of the sale of the Talbot Street property. The Commissioner's attribution of GST to the June 2007 quarter was correct.

Construction Services Performed On Lot 1, 40 Francis Street - Amended Income Tax Assessment

89. The Francis Street property was purchased in the joint names of Sliwa and Cadex in about July 2004. The property was subdivided into two blocks, lot 1 being owned by Cadex and lot 2 owned by Sliwa. The two townhouses constructed on those lots were completed in about January 2006 according to Mr Sliwa. There seems to be no dispute about that, particularly as lot 2 is recorded as having been sold in March 2006. Despite completion of the works, Sliwa did not issue an invoice to Cadex for construction services and the only evidence in Sliwa's accounts that construction services had been paid for by Cadex was the fact that a figure of $160,740 is shown as a decrease in stock on hand as at 30 June 2007.

90. As I have already mentioned above, I have difficulty in describing construction services as stock on hand. That is because, as Harrison, Horrocks and Newman state in their text, Accounting a Direct Approach (3^rd ed, 1978), at 197-198, the purpose for which items are acquired is important in determining whether they are to be regarded as inventories (or stock). Usually, the method of accounting for the costs of construction of an individual building is the job-order costing system. The costs of each construction are individually assessed taking into account materials, common labour and other costs frequently referred to as overheads or indirect manufacturing costs. Indirect costs of course would include costs attributed to sub-contractors doing work on a building. None of this is evidenced in Sliwa's accounts. Furthermore, the accounts do not record any revenue in respect of the construction services provided for the Francis Street property. This is despite the entry indicating a reduction in closing stock.

91. From an accounting perspective, where an entity is accounting on an accruals (or earnings) basis, the accounts will usually record revenue on the completion of the services provided. It is at that stage that it is generally said the income profit has been realised. It is influenced by the fact that there is usually a legal obligation imposed on the recipient of the goods or services. That is of course not always the case as in building contracts which extend over more than one accounting period, revenue may be recognised on a proportional basis prior to completion. This is in fact reflected in s 156-5 of the GST Act. I have no doubt that if there were any concern about the ability of a party to perform the contract, or that there may be difficulties in receiving payment for work completed, recognition of that income should be deferred. However, that was not the case between Sliwa and Cadex. The account entries regarding this item again emphasise the fact that the accounts should not be relied upon.

92. Section 6-5 of the ITAA 1997 provides:

6-5 Income according to ordinary concepts (ordinary income)

"(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .

Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

(3) …

(4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

93. Although the word derived is a defined term, the definition simply refers the reader back to s 6-5(4) of the ITAA 1997.

94. As the authors Hoggett, Edwards and Medlin state in their text Financial Accounting in Australia, (5^th ed, 2003) at 124:

"Under the accrual basis of accounting, revenue is recognised in the period in which the anticipated inflow of economic benefits can be measured reliably, i.e. normally in the period in which a business sells goods or performs services under a contractual arrangement."

The authors also point out that where services have been provided in a particular period, but for which it is expected payment will be received in a later period, there should be an entry in accounts receivable for the period in which the work is completed.

The authors state at 530:

"… for accounting purposes, accounts receivable refer to those accounts which arise from the sale of goods and services on credit in the ordinary course of business."

95. Dr Bender referred to Taxation Ruling No. IT 2450 which deals with the recognition of income from long term construction contracts. The ruling states that long term construction contracts are contracts relating to construction work where the construction extends beyond a year of income. In this case, it is true to say that the construction of the Francis Street property commenced in about June 2005, being the 2005 income tax year, and was completed in about January 2006, or the 2006 income tax year. The only question which would arise if Sliwa's construction of the Francis Street properties can be described as a long term construction contract is whether income should have been logged in the 2005 or 2006 income tax year. As it transpired, it was not recognised, if at all, until the 2007 income tax year. The ruling expressly states that income from the sale of trading stock, even where the trading stock delivered may need to be assembled on delivery, is not included in a long term construction contract. However, that does not apply in this case in my opinion because the construction services provided cannot properly be described as trading stock.

96. In any event, Mr Sliwa testified that Sliwa on-charged construction costs to Cadex after the project was completed, but not during the project. Mr Sliwa's evidence was that the project finished in about January 2006. He said in cross-examination that he was uncertain as to whether all of the work had been invoiced by June 2006. He said it was possible that some of it may have been invoiced after the end of that financial year. There was no evidence of any complicating retention clauses in the agreement between Sliwa and Cadex.

97. While it may be possible to argue that some portion of the contract price should be attributed to the 2005 income year, the Commissioner has not made that argument, but rather, has assessed the income in respect of the construction works in the 2006 tax year. Therefore, in my opinion, the income tax ruling regarding income from long term construction contracts has no application to Sliwa's construction of the Francis Street unit. In fact, the ruling states that in respect of small businesses whose operations overlap two income years, they should continue to return income on their existing bases.

98. Dr Bender also drew my attention to
Grollo Nominees Pty Ltd and Ors v FCT (1997) 97 ATC 4585. While Grollo's case deals in some detail with the two methods referred to in the ruling, that is, the basic approach and the estimated profits basis, in my view, the case takes this matter no further. The Full Court of the Federal Court made it clear that the ruling was not binding on the parties or the Court. However, because the basic approach requires an entity to account for and include as assessable income all progress and final payments received in a year (allowing for deductions in that period), and the estimated profits basis permits the taxpayer to spread profit or loss over the years taken to complete the contract, the only issue in this case is the application of the basic approach. It is not a question of choosing between the basic and estimated profits basis of accounting.

99. In my opinion, the only issue in relation to the income from construction services provided for the Francis Street unit involves determination of when income from that project was derived. There are many cases which have dealt with this issue. As the Full Court said in Grollo's case:

"although the cases may be helpful, and they provide guidance as to the principles to be generally applied to the problem, they do not deal with the particular problem."

However, the Court also said that:

"[the cases] also say that it is relevant to take into account accountancy practices which are relevant to the problem and which may provide guidance… in reaching [a] conclusion."

100. In the case The
Commissioner of Taxes (South Australia) v the Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108 (Carden's case), Dixon J explained that the Court was concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining true income. After stating that the Courts have always regarded the ascertainment of income as governed by the principles recognised or followed in business and commerce, unless the legislature itself made a specific provision affecting a particular matter, his Honour said, at 154:

"… Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income."

His Honour then said at 155:

"Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. Thus, in Thorogood's Case(1), where the question was whether, in a business of buying land and selling it in subdivision on instalment contracts, future instalments of purchase money should be taken into the account of taxable income derived during the accounting period, the court pronounced decisively against the inclusion of the present value of these future payments. Isaacs J. said: ' "Derived" is not necessarily actually received, but ordinarily that is the mode of derivation.' Substantially the same thing is said in reference to the words 'arising or accruing' by Sir Houldsworth Shaw and Mr. Baker in their work on the Law of Income Tax , and they place the distinction upon the difference between trading and other sources of income. They say: - There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains."

101. Ms Baker submitted that for tax law purposes, actual receipt of monies was not necessarily required for derivation of income where the taxpayer used the accruals basis for tax accounting. She submitted that an amount is derived when it becomes due to the taxpayer. She referred to
Henderson v The Federal Commission of Taxation 70 ATC 4016; (1970) 119 CLR 612 where his Honour said, at 650:

"In ascertaining such earnings, only fees which have matured into recoverable debts should be included as earnings. In presenting figures before his Honour allowance was made for what was termed 'work in progress'. But this, in my opinion, is an entirely inappropriate concept in relation to the performance of such professional services as are accorded in an accountancy practice when ascertaining the income derived by the person or persons performing the work. When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned and it or they will be income derived in the period of time in which it or they have become recoverable."

102. Dr Bender referred to the High Court decision in
Brent v Federal Commissioner of Taxation 71 ATC 4195; (1971) 125 CLR 418 where Gibbs J referred to the ordinary meaning of the word derived. His Honour said, at 428, that as was set out in Carden's case, the amount of income derived is to be determined by the application of ordinary business and commercial principles.

103. Dr Bender also directed my attention to a number of other authorities which he submitted recognised that the expression derived when applied to income involved the general understanding among practical business people and the principles and practices of commercial accountancies. In fact, the High Court of Australia (Barwick CJ, Kitto and Taylor JJ), in
Arthur Murray (NSW) Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1965) 114 CLR 314 at 318 said:

"The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income. A conclusion as to what that understanding is may be assisted by considering standard accountancy methods, for they have been evolved in the business community for the very purpose of reflecting received opinions as to the sound view to take of particular kinds of items."

104. The Court in Arthur Murray's case cautioned that what ultimately matters is the concept, the book keeping methods being merely evidence of the concept. The Court referred to Carden's case and indicated that, in that case, uncertainty of receipt was determinative of that issue. In fact, that simply reflects basic accounting principles which I have referred to above. Where one accounts on an accruals basis, it is certainty of receipt which will dictate at which point of time income will be recorded in an entity's accounts. Dr Bender submitted that the only accounting evidence before me was that the financial of the accounts of Sliwa did not recognise sales income for the Francis Street construction services in the 2006 income year. Absent any accounting evidence produced by the Commissioner, no income should be recognised as derived in the 2006 income year. With respect to Dr Bender, I disagree.

105. It is arguable, as Ms Baker submitted, that because the construction works on the Francis Street property extended over two accounting periods, it should be treated as a long term arrangement and as such, profit for those services should have been apportioned between the income years in which the work was done. However, given that the construction works commenced in June 2005, and the agreement between Sliwa and Cadex was to pay for construction services as and when the project was completed, I do not accept that apportionment is appropriate in this case. That would not be in accordance with the parties' contract which must be considered when determining the appropriate period to which income should be allocated.

106. It is unlikely that Sliwa could have legally pursued any fees at the end of the 2005 income tax year. However, Sliwa did not record any income from those construction works until 2008. It did record a reduction in stock in the 2007 financial year. In my opinion, that does not correctly reflect the rights of Sliwa to claim payment for those works in or about January 2006. According to Mr Sliwa, that was when the construction works were completed and therefore Sliwa most probably had a legal right to claim payment for those works. Furthermore, because Cadex was a related entity and Mr Sliwa was well aware of Cadex's capacity to pay for the construction services, which in any event it had been agreed would be set-off in the loan accounts, make it certain that payment by Cadex would be received by way of set-off. In those circumstances, I find that applying the principles and practices of commercial accountancy, the amount of $160,740.00 should have been recorded as receivable in the accounts of Sliwa as at 30 June 2006. In fact, that sum should have been set-off in the loan accounts at that time or probably at the end of January 2006 as agreed between the parties. It necessarily follows that I find the Commissioner's assessment that Sliwa derived assessable income of $160,740.00 in the 2006 tax year was correct. Sliwa has failed to prove that the assessment for that tax year was excessive. The sum of $160,740.00 was ordinary income derived by Sliwa during the 2006 tax year.

Double Taxation Issue

107. Division 75 of the GST Act deals with the sale of freehold interests in land. It permits a taxpayer to use what is described as a margin scheme to bring taxable supplies of freehold interests in land within the GST system. In essence, the margin scheme permits the calculation of the GST liability which attaches to certain taxable supplies of real property to be based not on the amount of the consideration for the supply, but on the difference between the consideration for the supply and the costs of its acquisition. As far as sales of freehold land which occurred prior to 29 June 2005 are concerned, the vendor could simply choose to apply the margin scheme to calculate the amount of GST on the supply. However, for sales after 29 June 2005, s 75-5(1) of the GST Act was amended such that the margin scheme could only be applied by the vendor where the vendor and the recipient of the supply have agreed in writing to the margin scheme being applied. In the course of the audit of Sliwa, the Commissioner determined that there were no records to indicate Sliwa had made a choice to use the margin scheme at or before the time of supply of the real property and therefore disallowed Sliwa its use for calculating GST payable. Included amongst the real property was land described as lot 3, 2 Comb Street, Ballarat (the Comb Street property).

108. In particular, for the March 2006 BAS quarter, the Commissioner increased the amount of GST payable by $2,272 and made a corresponding decrease in Sliwa's assessable income for the 2006 income tax year of $11,102. Although not specifically identified in the Commissioner's assessment, the property to which the margin scheme was disallowed in the March 2006 quarter was the Comb Street property. In his decision, the Commissioner said:

"Because we are not allowing the margin scheme to be applied to a number of your property sales, we consider it fair and reasonable to reduce your assessable income in these cases by the amount of GST not being allowed to you. Details of the reductions to be made to your assessable income for these sales are set out in the following table. Further details are set out in the attached spread sheet showing all GST revisions being made."

The spreadsheet did not specifically identify the property in question. The decrease in assessable income arises as a result of Division 17 of the ITAA 1997 which provides that for income tax purposes, an amount is not assessable income to the extent that includes an amount relating to GST payable on a taxable supply.

109. Pitcher Partners lodged an objection on behalf of Sliwa to the Commissioner's amended assessment on 12 December 2008. In a table which is set out in the schedule to the objection, under the heading The Disputed Assessments, is set out the quarterly tax period March 2006. The objection related to the Notice of Assessment of net amounts for quarterly tax periods. In the following table set out in the objection lodged by Pitcher Partners is the disputed net amount - Columns C, D & E. The expression disputed net amount is defined in the schedule to the objection and it means that part of the increase in net amounts as set out in Columns C, D and E of Table 2 in section two of this schedule. Under the date Mar 06 in Column C, is the figure $2,272.

110. The column also contains the description Margin Scheme. Although Ms Baker submitted that the Commissioner formed the view that Sliwa had not objected to the GST assessment made for the quarter ended March 2006 insofar as it disallowed Sliwa's use of the margin scheme in relation to the supply of the Comb Street property, with respect, that cannot be correct. The schedule to Sliwa's objection plainly sets that out under Table 2. While it is correct to say, as apparently does the Commissioner, that in the text of the objection decision under the heading Application of the Margin Scheme - Column C Table 2, in the post 29 June 2005 adjustment, while there is a reference to March 2006, the adjustment figure beside that date simply picks up Column D of Table 2 which sets out reporting attribution figures.

111. In any event, the objection decision in fact purports to deal with the margin scheme items and sets out Table E which includes the GST for the March 2006 quarter. The objection decision states, immediately above Table E:

"As stated at point 1.1 above, it is now accepted that the margin scheme is applicable to these sales and as such the adjustments to assessable income that were made during the audit will be reversed as follows: …"

While the Commissioner had adjusted the assessable income, increasing it by $11,102 in respect of the 2006 tax year, no adjustment was made to the GST figure.

112. However, Ms Baker submitted that insofar as Table E of the objection decision purports to state that Sliwa's use of the margin scheme in relation to the Comb Street property for the March 2006 quarter was acceptable, it is incorrect. In fact, Ms Baker submitted that the Commissioner has maintained his position that Sliwa was not entitled to apply the margin scheme in respect of the sale of the Comb Street property and therefore, by increasing Sliwa's assessable income by $11,102, the Commissioner had erred by not reducing that figure by the amount of the GST which was disallowed under the margin scheme. Ms Baker submitted that an examination of the objection decision under the heading The Post 29 June 2005 Adjustment discloses that the only supply which is disputed is in respect of the December 2005 quarter on the grounds that Sliwa was unable to obtain written confirmation of an agreement with the purchaser to apply the margin scheme to the sale.

113. With respect to Dr Bender's submissions, what Ms Baker has said about the sale of the Comb Street property has significant force. Because the sale of the Comb Street property occurred after s 75-5 of the GST Act was amended requiring an agreement between vendor and purchaser in writing to the application of the margin scheme, I would have expected Sliwa's objection to the Commissioner's amended assessment to have dealt with the provision of an agreement in writing. In fact, the objection does so in respect of the December 2005 quarter. An explanation is provided in respect of that quarter about why Sliwa required further time to obtain confirmation of that agreement. The objection was that the Commissioner should allow further time under s 75-5(1A)(b) of the GST Act for the agreement to be made. It does not address the sale of the Comb Street property at all, despite what is set out in Table 2 of the objection.

114. On the other hand, Table E of the Commissioner's objection decision refers to the GST based on the margin scheme being allowed in respect of the sale of the Comb Street property. Furthermore, under the paragraph headed 1.1 Margin Scheme, particularly the section dealing with sales after June 2005, the Commissioner referred to the application for a further extension of time to obtain an agreement in writing in respect of the property sold in the December 2005 quarter. That extension of time was granted and the Commissioner accepted that the sale of that property could be accounted for as if the margin scheme applied. This was essentially because Sliwa's then tax accountant had simply incorrectly entered GST on sales at Label 1A and GST on the purchases at Label 1B. The net outcome, subtracting one from the other, arithmetically, is equal to the GST payable in accordance with the margin scheme. In any event, the purchaser provided a signed agreement stating that the margin scheme was to apply and therefore the Commissioner accepted Sliwa's objection to the December 2005 quarterly BAS return.

115. However, while it is likely that the March 2006 quarter GST return in relation to the Comb Street property probably produced the same arithmetic outcome, although I did not have evidence of that before me, there is no mention of any signed agreement between the purchaser and the vendor in respect of that property. That is likely why the Commissioner would appear not to have intended to deal with the GST for that quarter on the objection. Therefore, I accept Ms Baker's submission that what is set out in Table E of the Commissioner's objection decision is, unfortunately, incorrect. On the hearing of this matter, the Commissioner maintained his position that Sliwa was not entitled to apply the margin scheme in respect of the Comb Street property. Because there was no evidence before me of a written agreement between purchaser and vendor in respect of that property, I find that Ms Baker's submission regarding Table E must be accepted. It follows that the Commissioner's decision on the objection decision to increase the assessable income in respect of the 2006 income tax year should be reduced by the amount of $2,272.

Penalties

116. The Commissioner issued Notices of assessments and liability to pay penalty on 12 September 2008 in the amount of $147,728.40, and 2 October 2008 in the amount of $145,414.80. However, following the objection decision, because a number of objections were allowed, the Commissioner revised his decision on penalties. This revision resulted in reduction in the GST administrative penalty by $53,445.40 and a reduction in income tax administrative penalty of $59,823.15. To give effect to the reduction in income tax penalty, the Commissioner issued a Notice of Remission for that penalty on 8 September 2009. It resulted in total income tax penalties amounting to $85,591.70.

117. In addition to penalties relating to the matters to which I have referred above, there are also penalty issues arising out of Sliwa's incorrect use of the margin scheme for the quarter ended 30 June 2004.

118. A taxpayer's liability to pay penalties for making false or misleading statements about a tax related matter or in taking a position which was not reasonably arguable about a tax related matter are dealt with under Subdivision 284-B of the TAA. Section 284-75(1) provides:

"(1) You are liable to an administrative penalty if:

(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and

(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and

(c) you have a *shortfall amount as a result of the statement.

Note 1: Subsection 2(2) specifies laws that are not taxation laws for the purposes of this Subdivision."

119. Subdivision 284-A provides that Division 284 applies to statements made by agents. Section 284-25, as it was at the relevant time, provided:

"This Division applies to a statement made in an *approved form by your agent as if it had been made by you."

120. Ms Baker submitted that statements were made to the Commissioner regarding Sliwa's income tax returns for the 2005 and 2006 years and in each of the BASs for each of the relevant tax periods. That was not disputed. Mr Sliwa testified that James East prepared all of Sliwa's income tax returns and BASs.

121. The expression, approved form is defined in s 995-1(1) of the ITAA 1997 where it is stated it has the meaning given by s 388-50 in Schedule 1 of the TAA. Section 388-50 of the TAA provides:

"388-50 Approved forms

(1) A return, notice, statement, application or other document under a *taxation law is in the approved form if, and only if:

(a) it is in the form approved in writing by the Commissioner for that kind of return, notice, statement, application or other document; and

(b) it contains a declaration signed by a person or persons as the form requires (see section 388-75); and

(c) it contains the information that the form requires, and any further information, statement or document as the Commissioner requires, whether in the form or otherwise; and

(d) for a return, notice, statement, application or document that is required to be given to the Commissioner - it is given in the manner that the Commissioner requires (which may include electronically).

(1A)Despite subsection (1), a document that satisfies paragraphs (1)(a), (b) and (d) but not paragraph (1)(c) is also in the approved form if it contains the information required by the Commissioner. The Commissioner must specify the requirement in writing.

(2) The Commissioner may combine in the same *approved form more than one return, notice, statement, application or other document.

(3) The Commissioner may approve a different *approved form for different entities.
Example
The Commissioner may require high wealth individuals to lodge a different income tax return to that required to be lodged by an individual whose only income is a salary."

122. There was no dispute about the fact that the income tax returns and BASs lodged by James East were in the approved form. Having seen the documents in evidence which were lodged by James East, I find that to be the case. Therefore, in accordance with s 284-25 of the TAA, statements made by James East when acting as Sliwa's tax agent must be treated as if they were made by Sliwa.

Income Tax Shortfall - Sale Of Lots 21 And 29 Geelong Road

123. In his objection decision, the Commissioner determined that Sliwa's income tax shortfall for the 2005 year was $122,961.30. The Commissioner determined that Sliwa should be liable for a base penalty amount of 50 per cent due to recklessness by Sliwa or its agent. Although the Commissioner had also initially ruled that there should be an increase in the base penalty amount by 20 per cent pursuant to s 284-220(1), in his objection decision, the Commissioner considered that the 20 per cent increase in the base penalty amount was not appropriate and therefore allowed the objection to that extent. This resulted in a base penalty amount of $61,480.65 being imposed on Sliwa.

124. Sliwa contended that the assessment was excessive and there was no tax shortfall in relation to the sale of lots 21 and 29. However, as I have found that there was a tax shortfall in respect of the sale of lots 21 and 29, this contention cannot be sustained.

125. Alternatively, Sliwa submitted that it was not reckless and the position it adopted was reasonably arguable. Dr Bender submitted that to be reckless conduct, it must involve gross carelessness. The Full Court of the Federal Court in
Hart v Commissioner of Taxation 2003 ATC 4665; (2003) 131 FCR 203 (Spender, Hill & Hely JJ), at 214, explained the concept of recklessness in the following way:

" [43] Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) ATC 4111 at 4129 Cooper J made the following observations in relation to recklessness in the context of s 226H;

'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 was 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 than mere negligence and must amount to gross carelessness.'

[44] There is a line between recklessness and dishonesty, and as the Explanatory Memorandum for the Taxation Laws Amendment (Self Assessment) Bill 1992 (at p 89) confirms, a finding of dishonesty is not necessary for a taxpayer to be subject to a s 226H penalty. Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self assessment. But, in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established although there are some sections (eg s 226K) which impose a liability in particular circumstances even if the taxpayer has not been negligent. The context makes it clear that recklessness means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J)."

126. Sliwa was a property development and construction company. It had appointed an accountant for the purpose of keeping its accounts and lodging tax returns and BASs. I have found that the disposal of lots 21 and 29 Geelong Road was a disposal of trading stock outside the ordinary course of business. That is because price charged to Cadex was arbitrary and so low as to take the transaction outside the category of an ordinary business transaction. Those lots were sold at about ⅕^th of their market value to Cadex. Although Sliwa obtained what were described as market appraisals regarding those two lots, it should have been apparent to both Mr Sliwa and to James East that those so called appraisals were far below market value. The appraisals offered no explanation whatsoever as to how the selling price was arrived at. Although Dr Bender submitted that market appraisals by real estate agents are a reasonable method of determining market value, and I have no doubt that is the case, what was provided by Mr Baker in this case was so far from the market price that it could not, in any circumstances, be described as a reasonable assessment of market price.

127. I cannot accept that either Mr Sliwa or James East considered Mr Baker's appraisals to have been reasonable. Mr Sliwa was experienced in the property development and construction business and I have no doubt that prior to commencing this project, quite likely in conjunction with his accountant, he had made some estimate of the true market value of those lots for the purposes of ensuring that the project would be profitable. Had all of the remaining lots sold at the indicative selling prices offered by Mr Baker, Sliwa would undoubtedly have suffered a loss on the project. Therefore, I cannot accept Dr Bender's submission that Sliwa was unaware of what the selling price of the remaining lots might be.

128. In my opinion, Sliwa and James East were aware that the market appraisals prepared by Mr Baker may be incorrect and were indifferent to that fact. Their conduct shows a disregard or indifference to the consequences foreseeable by a reasonable person. The same of course can be said of the fact that Sliwa and James East were indifferent to the fact that the amount of $448,000 should have been included in the assessable income of Sliwa for the 2005 tax year. Accordingly, I find that the Commissioner's objection decision, which upheld a 50 per cent base penalty for the income tax shortfall for the 2005 tax year, was correct.

Income Tax 2006 - Francis Street Property

129. The Commissioner determined that Sliwa had an income tax shortfall of $119,396.70 in the 2006 tax year as a result of the unrecorded sale of the Francis Street property. In fact, the Commissioner initially incorrectly assessed Sliwa in respect of the sale of the Francis Street property in the amount of $409,091.00. Following the objection, the Commissioner reduced that income to $160,740.00 which was the amount attributed to construction services provided by Sliwa to Cadex. That resulted in a reduction in the income tax shortfall for the 2006 tax year from $119,396.70 to $48,222.00. The Commissioner upheld Sliwa's objection to the 20 per cent uplift and determined that the revised penalty for the 2006 tax year, calculated at 50 per cent, was $24,111.00.

130. As I have already said above, the accounting in respect of the construction services provided to Cadex for the construction of the Francis Street unit was unsatisfactory. Construction was completed in about January 2006 and although the accounts recorded a decrease in stock on hand, that was recorded in the 2007 tax year. No revenue was recorded in respect of those construction services until 2008 tax year. Given that the construction was completed in 2006, and Mr Sliwas evidence was that the agreement between Sliwa and Cadex was that construction services would be paid for when they were completed, there is no logical reason why the revenue in respect of those construction services was not brought to account in the 2006 tax year. There was no uncertainty regarding payment from Cadex as the amounts owed were simply set off against liabilities which Sliwa had to Cadex at that time. The failure to record the revenue in the 2006 year was, in my opinion, reckless. I have no doubt that a reasonable person in the position of either Sliwa or James East would have been aware that there was a risk that the Act would not operate correctly and to lead to the assessment of the proper tax payable because of what was stated in the accounts. For that reason, I find that the Commissioner's assessment of a penalty at 50 per cent in respect of the 2006 income tax year on the shortfall of $48,222 was correct.

GST Shortfall - Sale Of Lots 21 And 29

131. I have found that the GST payable in respect of the sale of lots 21 and 29 should be attributed to the quarter ended 30 September 2004. Sliwa's failure to attribute GST to that quarter resulted in a tax shortfall of $7,272. In his objection decision, the Commissioner allowed the objection in respect of the 20 per cent uplift thereby reducing the penalty by $727.20. The Commissioner maintained the 50 per cent penalty in due to recklessness.

132. I have accepted Ms Baker's submission that Sliwa's accounts cannot be relied upon. There are many problems with those accounts which I have described above. The Contracts of Sale for those lots were executed in June and July 2003. Transfer of Land instruments were lodged with the Office of Titles Victoria in August 2004. Construction works for Cadex commenced on those lots in late 2004. Despite that and despite verbal agreement between Sliwa and Cadex that payments for the sale of those lots by Sliwa to Cadex would be made via set-offs in their respective loan accounts, no invoices were issued in respect of those sales until 2008. They were set-off in the loan accounts on 30 June 2005. In my opinion, simply recording those transactions as having taken place on 30 June 2005 was known to both Sliwa and James East to be incorrect. Accordingly, I find that Sliwa and James East, by their conduct, disclosed a disregard of, or indifference to, consequences foreseeable by a reasonable person in recording sales of those lots on 30 June 2005. There was indifference as to whether those entries were true and correct and a reasonable person in the position of Sliwa or James East would see there was a real risk that the Act would not operate correctly to lead to the assessment of the proper tax payable.

GST Shortfall - Construction Services Provided By Sliwa

133. The quarters in question in respect of construction services are 31 December 2004, 31 December 2005, 31 March 2006 and 30 June 2007. They relate to the construction services provided in respect of the units constructed on lot 21 Geelong Road, the childcare centre constructed on lot 29 Geelong Road, the dwellings constructed on the Francis Street property, the Echuca property and the Talbot Street property.

134. Although Mr Sliwa's evidence was that construction work on lot 21 Geelong Road concluded in 2005, as I have already indicated above, Mr Packer lodged a revised BAS for the December quarter 2004. In that revised BAS, Mr Packer identified $372,119 of capital purchases for which he claimed input tax credits of $33,829. According to Mr Packer, that related to construction services provided in respect of that property. The amended BAS was lodged on 19 March 2010. When asked whether he held tax invoices at the time of amending the BAS statement, Mr Packer replied that the tax invoices were available for that quarter. He did not specifically say that he held the tax record as is required under s 29-10(3) of the GST Act. Mr Packer agreed that those credits probably related to the construction work on lot 21 Geelong Road.

135. As Ms Baker submitted, the attribution of creditable acquisitions in relation to lot 21 in the December 2004 quarter is inconsistent with Sliwa's claim that the works were not completed until a much later date. As I have already indicated, I am of the view that the accounts prepared by James East cannot be relied upon to reflect the true position of Sliwa during the quarters in contention. Furthermore, I find that a reasonable person in the position of Sliwa would have seen there to be a real risk that the material reflected in the accounts was incorrect and that the maker of those statements was grossly indifferent to whether or not the material was true and correct. Accordingly, I find that Sliwa was reckless in making the statements it did to the Commissioner regarding the GST attributable to construction services and therefore the base penalty amount of 50 per cent is appropriate.

136. The construction services provided in respect of lot 29 Geelong Road also appeared in Sliwa's accounts on 30 June 2007. According to Mr Sliwa, construction of the childcare centre on that lot was completed in about August 2005. Given the set-off arrangements between Sliwa and Cadex, there appears to be no sound reason why the costs of constructing the childcare centre for Cadex should not have been attributed to the December 2005 quarter. Although Mr Sliwa testified that he had access to a software program called Craftsman, which undoubtedly prepared job costing reports for particular construction projects, there was no evidence before me of job costing in respect of lot 29 Geelong Road. Mr Sliwa did attach to his amended witness statement of 30 March 2011 a job costing report for the Francis Street property. Assuming he was able to produce similar reports in respect of the construction of the childcare centre on lot 29 Geelong Road, there seems to be no good reason why such a report would not have indicated the costs incurred to completion including a summary of GST payable in respect of the work and materials provided. In my opinion, Sliwa and or James East were reckless in attributing the costs of the construction of the childcare centre to the June 2007 quarter. As the evidence discloses a disregard or indifference to foreseeable consequences in not doing so, I find that the base penalty amount which should be attributed to the shortfall arising in the December 2005 quarter was correctly assessed at 50 per cent of the shortfall amount.

137. Mr Sliwa testified that the construction of a townhouse on lot 1 Francis Street was completed in about January 2006. There were no entries in Sliwa's accounts regarding the provision of those construction costs in the 2006 tax year. Although Mr Sliwa attached to his amended witness statement extracts from the job costing report for the construction of the townhouse at 40 Francis Street, those extracts were not dated. They disclose the job start date to be 30 June 2005 and at the date of the extracts, costs amounted to $23,257.35. The report indicates that no income had been recorded on that particular job. Although this construction work extended beyond one income year, as I have indicated above, there was no good reason why those construction costs should not have been set-off in the loan accounts between the two entities in the 2006 tax year. The evidence before me indicates that Sliwa and James East either disregarded or were indifferent to foreseeable consequences of not attributing GST to either the March 2006 or June 2006 quarters. I find that a reasonable person in the position of Sliwa or James East knew there was a real risk that the material presented in the accounts may be incorrect and that the Act may not operate correctly to lead to the assessment of the proper tax payable. Accordingly, I find that the appropriate base penalty amount for the shortfall of GST in the June 2006 quarter was 50 per cent of the shortfall amount.

138. Mr Sliwa testified that the construction works conducted on the Talbot Street property were completed in about late 2005. Furthermore, Sliwa's sales account records the sale of 510 Talbot Street to Cadex (materials) on 30 June 2007. The GST recorded in that sales entry is $17,400. Despite that, Mr Sliwa testified that he believed some invoices for materials came in after the job was completed. He agreed that those invoices would have been provided to Sliwa by June 2006. However, even by June 2007, when the supply of labour and materials appears to be recorded in the sales account, no GST was recorded for the June 2007 quarter. While it is arguable that the GST should have been recorded in an earlier quarter, I do not have sufficient evidence before me to determine precisely which quarter that should be. I therefore accept the Commissioners assessment that the GST component of construction costs for the Talbot Street property should be attributed to the June 2007 quarter. Again, I am satisfied that Sliwa's failure to do so amounted to recklessness. The evidence discloses that Sliwa and James East showed disregard of or indifference to consequences foreseeable by a reasonable person as a result of not recording GST by the June 2007 quarter. I find that the base penalty amount was correctly assessed by the Commissioner at 50 per cent of the shortfall amount.

Margin Schemes

139. The Commissioner submitted that a base penalty amount of 25 per cent of the shortfall should be applied in respect of the BAS quarters ending 30 June 2004 and 31 March 2006 relating to GST shortfall amounts caused by the incorrect use of the Margin Scheme. Section 284-90(1) of Schedule 1 to the TAA provides that a base penalty amount of 25 per cent of the shortfall amount should apply if the shortfall resulted from a failure by the taxpayer or its agent to take reasonable care to comply with the taxation law.

140. The adjustment in respect of the Margin Scheme for the quarter ended 30 June 2004 relates to Sliwa's failure to remit $31,819 GST resulting from the sale of a property referred to as Clayton Street, Ballarat. Although Sliwa did not dispute the primary tax liability in respect of the sale of this property, Dr Bender submitted that no penalty should apply because the sale resulted from unintended mistakes made by Sliwa's accountant after all relevant information was provided to him. He said it was Sliwa's accountant, James East, which made the decision to apply the Margin Scheme. Dr Bender referred to s 284-75(6) of the TAA, which deals with liabilities to an administrative penalty where a registered tax agent or BAS agent makes the statement. Section 284-75(6) is a slightly altered form of s 284-75(1A) which was only introduced into the TAA in 2009, and it applied to statements which were given or made after 1 March 2010. It cannot assist Sliwa in this case.

141. The BAS shortfall for the quarter ended June 2004 in respect of the Clayton Street property resulted from an incorrect application of the Margin Scheme, as it operated prior to 29 June 2005. Sliwa had applied the Margin Scheme where no choice had been made to apply the Margin Scheme under s 75-5(1) of the GST Act as it then stood. No explanation other than the fact that James East made a mistake was offered. Mr East was not called to give evidence and I am not able to find, as submitted by Dr Bender, that it resulted from an unintended mistake. Ms Baker submitted that the application of the margin scheme to the Clayton Street property resulted from a failure to take reasonable care on behalf of Sliwa and/or James East. The expression reasonable care is not defined in the TAA and must therefore be accorded its ordinary meaning in the context in which it appears in the Act. In other words, the expression should be given a construction which promotes the purpose or object underlying the Act. In determining what the purpose or object of the underlying Act might be, I may have regard to extrinsic materials. Section 15AA of the Acts Interpretation Act 1901 (the Interpretation Act) provides:

"15AA Regard to be had to purpose or object of Act

(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object."

142. Section 15AB of the Interpretation Act deals with the use of extrinsic material in the interpretation of an Act. Section 15AB(1)(a)provides:

"15AB Use of extrinsic material in the interpretation of an Act

(1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:

(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or …"

143. The Revised Explanatory Memorandum to the A New Tax System (Taxation Administration) Bill No. 2 2000 states, at paragraph 1.69:

"Reasonable care requires the taxpayer to make a reasonable attempt to comply with the provisions of a taxation law. The effort required is one commensurate with all taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill. …"

144. The Explanatory Memorandum indicates an objective standard of care must be exercised taking into account all of the relevant circumstances of the taxpayer.

145. Mr Sliwa testified in his amended witness statement that James East was responsible for making the decision whether or not to use the Margin Scheme for all property sales made by Sliwa. According to Mr Sliwa, Mr East told him that the Margin Scheme could be used for property sales to which he applied the Margin Scheme. It is unclear whether the advice Mr Sliwa received from James East was oral or in writing. Nevertheless, there was no other evidence that he had been so advised other than the statement in his amended witness statement.

146. Ms Baker submitted that, despite references in the documents provided to James East, Mr Sliwa's evidence clearly indicated that both he and James East ignored express terms of contracts (for example the sale of lots 21 and 29 to Cadex), failed to issue invoices and deferred charging for services Sliwa had performed. I accept Ms Baker's submission that the overall conduct of the accounting for Sliwa's property development and construction business failed to properly deal with the matters relating to its tax affairs. I also accept Ms Baker's submission that I should infer, by the failure to call Mr East to give evidence in this matter, that Mr East was not given adequate records to properly prepare the accounts. Accordingly, I find that the shortfall amount which resulted from the failure to attribute GST in respect of the sale of the Clayton Street property in the June 2004 quarter demonstrated a failure by Sliwa or James East to take reasonable care to comply with the GST Act. The Commissioner's assessment of a base penalty amount being 25 per cent of the shortfall amount was correct.

147. The sale of the Comb Street property occurred after 29 June 2005, following the amendment to s 75-5(1) of the GST Act. The amendment provided that the Margin Scheme could only be applied where there was an agreement in writing between the vendor and the recipient to apply the Margin Scheme. There was no dispute about the fact that there was no such written agreement in respect of the Comb Street property. There was no explanation or evidence before me for the failure to account for compliance with the amended s 75-5(1) of the GST Act. In my opinion, a reasonably diligent tax accountant would have been aware of the amendment and would have advised his or her client accordingly. Therefore, I find that Sliwa and/or Mr East failed to take reasonable care to comply with s 75-5(1) of the GST Act following its amendment requiring an agreement in writing between vendor and purchaser. I find that the base penalty amount assessed at 25 per cent of the shortfall amount was the correct base penalty in respect of the shortfall resulting from the sale of the Ballarat property.

Remission Of Penalty

148. Section 298-20 of Schedule 1 of the TAA deals with remission of penalty. Section 298-20(1) simply provides that the Commissioner may remit all or part of the penalty. In exercising his discretion, the Commissioner has set out what matters should be regarded when exercising that discretion in Practice Statement LA 2006/2. There can be no doubt that reference to that set of guidelines is permissible particularly where discretionary decisions are required to be made under an enactment. As Bowen CJ and Deane J said in
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, at 69:

"Ordinarily, however, an administrative officer charged with the exercise of discretionary power will be entitled, in the absence of specifically defined criteria or considerations, to take into account government policy. … Indeed, the consistent exercise of discretionary administrative power in the absence of legislative guidelines will, in itself, almost inevitably lead to the formulation of some general policy or rules relating to the exercise of the relevant power."

149. The Practice Statement, at paragraph 137, sets out the objectives including:

a) the larger the item, the greater the level of care required;
b) the objective of the penalty regime is to promote consistent treatment regarding the rates of penalty imposed and the Commissioner must insure that the decision to remit in part or full or not to remit is made in good faith and is reasonable taking into account all relevant matters;
c) entities with a good compliance history should be encouraged to remain compliant by treating them more leniently than those entities which do not have a good compliance history;
d) an entity without a good compliance history bears a heavier burden of proof justifying why remission is warranted; and
e) the discretion to remit should be administered such that it meets the objectives of the penalty regime without causing unintended or unjust results.

150. I accept Ms Baker's submission that there was no evidence before me which would warrant considering remission of any penalty. There was no evidence of a good compliance history and no evidence to show that the penalty was harsh in these particular circumstances. Therefore, in my opinion, the discretion to remit penalties should not be exercised in this case.

Conclusion

151. Sliwa sought review of seven broad issues arising from the Commissioners objection decision dated 31 August 2009. Those are set out in paragraph 7 above.

152. The first issue was whether the Commissioner had correctly amended Sliwa's income tax assessment for the 2005 tax year. It arose out of the sale of two vacant lots to Cadex, an associated entity of Sliwa. Although Sliwa contended that the sales were made in the ordinary course of Sliwa's business as a property developer, because I found that the sales were made at arbitrary prices which were one fifth of the market price for those lots, I have concluded that the sales could not properly be described as ordinary business transactions. It necessarily follows that Sliwa's assessable income for the 2005 tax year must include the market value of those lots. I have also found that the Commissioner's assessment of the market value of the two lots was correct.

153. The second issue was whether GST had been correctly attributed to the tax periods (quarters) in which consideration was received for the supply of lots 21 and 29. Sliwa contended that the correct tax periods were those which were recorded in Sliwa's sales account and that consideration was provided by way of a set-off in the loan accounts of Sliwa and Cadex. Those entries were recorded in the accounts on 30 June 2005. However, I have found that Sliwa's accounts cannot be relied upon to prove an accurate statement of when consideration was received by Sliwa. That is because Sliwa and Cadex had a verbal agreement regarding setting off liabilities in their respective loan accounts. Furthermore, Transfer of Land instruments were lodged with the Titles Office in August 2004 indicating that consideration had been received by Sliwa prior to lodgement. I have therefore come to the conclusion that the GST payable on the supply of those two lots to Cadex should be attributed to the September 2004 quarter as the Commissioner determined in his objection decision.

154. The third issue in contention was the attribution of GST arising from the costs of construction services which Sliwa provided to Cadex. Those services were provided in respect of the dwellings I have referred to at paragraph 74 above. The Commissioner contended that the correct quarters for attribution were those set out at paragraph 77. Because I have found that Sliwa's accounts cannot be relied upon, in order to properly assess the correct attribution periods, I needed other objective evidence of when those services had been provided and when consideration was received by Sliwa. This was not forthcoming. I have found that Sliwa has not satisfied the onus it bears to prove that the assessments of GST were excessive due to the Commissioners attribution I have referred to above. I have therefore concluded that the Commissioner's attribution of GST for the provision of construction services was correct.

155. The fourth issue was whether the Commissioner had correctly amended Sliwa's income tax assessment for the 2006 tax year. It arose from the completion of construction of the dwelling on the Francis Street property. I have found that the way in which the costs of construction of this dwelling were recorded in Sliwa's accounts was not in accordance with ordinary and commercial principles. The accounts of Sliwa do not correctly reflect Sliwa's income resulting from the provision of these services. Because of the agreement between Sliwa and Cadex regarding setting off liabilities in the respective accounts of each entity, and the agreement to pay for construction services upon completion, I have found that Sliwa was legally entitled to be paid when the dwelling was completed in January 2006. It derived income from that work in the 2006 tax year. I have therefore concluded that the Commissioner was correct in amending Sliwa's income tax assessment for that year.

156. The fifth issue was referred to by Dr Bender as the double taxation issue. It arose out of the way in which Sliwa's objection was drafted regarding application of the GST Margin Scheme. The Commissioner apparently understood that Sliwa had not objected to the GST assessment for the March 2006 quarter for which he had disallowed the Margin Scheme. This was incorrect. Nevertheless, in his objection decision, the Commissioner appeared to have allowed the Margin Scheme in respect of the Comb Street property and by way of adjustment, increased Sliwa's assessable income for that tax year. He did not alter the GST payable for the March 2006 quarter which gave rise to the double taxation claim. However, I have accepted that the Commissioner erred in stating in his objection decision that the Margin Scheme was applicable to the Comb Street property. There was no evidence of a written agreement to apply the Scheme to this property. I have therefore found that the Commissioner should reduce the amended assessable income for that tax year by $2,272.00.

157. The sixth issue was about the penalty assessments issued by the Commissioner. The penalties related to shortfalls in income tax and GST, including use of the Margin Scheme. I have found that the shortfall in income tax for the 2005 2006 tax years; the GST shortfall in respect of the sale of lots 21 and 29 Geelong Road; and the GST shortfall in respect of the construction services provided by Sliwa to Cadex all resulted from the recklessness of Sliwa or James East. Their conduct in accounting for these aspects of Sliwa's business disclosed a disregard or indifference to consequences foreseeable by a reasonable person. I have concluded that the Commissioner's assessment of penalty at 50 per cent of the shortfall amount was the correct decision. The Commissioner assessed Sliwa at 25 per cent of the shortfall amount in respect of the incorrect application of the Margin Scheme. I have also found this to be correct as I have concluded that the application of the Margin Scheme to the Clayton Street and Comb Street properties disclosed a failure to take reasonable care.

158. Finally, the Commissioner submitted that there should be no remission of any of the penalty assessments because none of the objectives set out in the Commissioner's Practice Statement dealing with penalty remission applied to Sliwa. I have agreed with the Commissioner and determined that there are no grounds for exercising the discretion to remit penalties.

159. The outcome of my determination of the aspects of the objection decision brought before me for review is that I find the Commissioner's objection decision made on 31 August 2009 was correct save for Sliwa's assessable income for the 2006 tax year which must be reduced by $2,272.00.

160. I affirm those parts of the Commissioner's objection decision which I have reviewed except for the decision to increase Sliwa's assessable income by $11,102.00 in the 2006 tax year. I remit to the Commissioner the decision to increase Sliwa's assessable income for the 2006 tax year by $11,102.00 and direct that Sliwa's assessable income for that year be reduced by $2,272.00.

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