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The impact of this case on ATO policy is discussed in Decision Impact Statement: Badaoui & Konig and Commissioner of Taxation (2010/2378).
BADAOUI & ANOR v FC of T
Members:SE Frost SM
Tribunal:
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
[2011] AATA 672
Senior Member S E Frost
1. The applicants are husband and wife. They are registered for GST purposes as a partnership. They account for GST on a cash basis.
2. They claim to be entitled to input tax credits (ITCs) which the Commissioner has denied them. They base their claim on three "tax invoices" which were issued to them in August and September 2008 by companies associated with Michael and Norman Badaoui, brothers of the male applicant.
3. The tax invoices describe work undertaken in relation to the development of a service station site on Mulgoa Road, Regentville, in western Sydney. The applicants say:
- • the services described in the tax invoices were supplied to them;
- • they paid for those services; and
- • they are therefore entitled to the ITCs they have claimed.
4. Originally there were four tax invoices that attracted the Commissioner's interest (the fourth invoice was issued in December 2008). An assessment of the applicants' "net amount" for the tax periods that ended on 30 September 2008 and 31 December 2008 was made which had the effect of disallowing a total of $71,410 in ITCs. However, on objection, an ITC was allowed for $17,500 in respect of the services described in the fourth invoice. There remains an amount of $53,910 in dispute between the parties in relation to the September 2008 tax period, plus an administrative penalty of 50%, or $26,955, for behaviour that the Commissioner regards as "recklessness".
The issues
5. There are two broad questions before the Tribunal.
6. The first is whether the applicants made the acquisitions that they claim to have made and whether, if they did, they paid the suppliers for what they say was provided to them. If they made the acquisitions and paid for them, then the applicants will be entitled to the ITCs they claimed, since the Commissioner does not dispute that the acquisitions, if they were made, were for a creditable purpose.
7. The second broad question arises only if the applicants fail to establish their entitlement to the ITCs. It is whether, by claiming ITCs to which they were not entitled, they have a shortfall amount which resulted from recklessness as to the operation of a taxation law, and if so, whether the administrative penalty arising from that circumstance should be remitted to any extent.
The legislation - creditable acquisitions
8. The relevant legislation is the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 11-5 provides as follows:
" 11-5 What is a creditable acquisition?
You make a creditable acquisition if:
- (a) you acquire anything solely or partly for a *creditable purpose; and
- (b) the supply of the thing to you is a *taxable supply; and
- (c) you provide, or are liable to provide, *consideration for the supply; and
- (d) you are *registered, or *required to be registered."
9. You are entitled to the ITC for any creditable acquisition that you make[1]
10. For the applicants, the two critical elements to support the ITC claims are the fact of payment for the acquisitions, and the holding of a tax invoice at the time of lodging the GST return.
The tax invoices
11. The tax invoices that the applicants rely on to support their ITC claim are:
- (a) Invoice number 262 (the First Invoice) dated 22 September 2008, and issued by Kenmick Group Pty Ltd (Kenmick), for the amount of $143,000 (including GST of $13,000) for the following services:
"Professional services in relation to supervising, requesting the order and arranging for the soil contamination reports to be completed in accordance with the EPA guidelines, the National Australia Bank Environment Questionnaire and site audit, Council requirements and in satisfaction of the redevelopment."
- (b) Invoice number 263 (the Second Invoice) dated 28 September 2008, and issued by Kenmick, for the amount of $120,000 (including GST of $10,909.09) for the following services:
"Professional services in obtaining and documenting leases for the service station at 36-38 Mulgoa Road Regentville with 7 Eleven Stores Australia Pty Ltd. Fees inclusive of first years commission."
- (c) Invoice number 5092 (the Third Invoice) dated 27 August 2008, and issued by Buildwest Constructions Pty Ltd (Buildwest), for the amount of $330,000 (including GST of $30,000) for the following services:
"Professional Fees and charges for the preparation of all working drawings, survey, council requirements in relation to the development application and satisfaction of the deferred commencement."
The Regentville property
12. By contract dated 7 August 2006, the previous owners agreed to sell the property to Mulgoa Service Station Pty Ltd (Mulgoa), a company of which Norman Badaoui was at the time the sole director. Michael Badaoui said that although the contract is dated 7 August 2006, the group had "secured" (perhaps by way of an option) the property "on favourable terms" somewhat earlier than that - in late 2004.
13. Michael Badaoui thought that his brother Zed might be interested in buying the property once development approval had been obtained. He said in his witness statement that he had made these types of arrangements with Zed before:
"...
As a director of the Badaoui Group I have on many occasions introduced to Zed prospective developments we were working on. The Badaoui Group would secure a site, and then take steps to add considerable value to a property by obtaining development approvals with an end use and purchaser in mind.
Each time we secured a site, we would introduce Zed to a development proposal. Where Zed was interested in a proposal, he would agree to buy the site, and would fund the cost of obtaining relevant approvals, consents and our cash flow requirements to get the development approvals on the understanding that he would purchase the site once the development concept and approvals had matured.
Our agreements were oral and we had an understanding that would result in Zed handing over cash as and when it was required. In most cases either Alan Kramer or myself would call Zed and ask for funds to be deposited into the account.
Sites would be offered to him at a discounted price, taking in to account the fact that he would fund the development costs during the development approval process.
…"
14. Later, and specifically in relation to the Regentville site, Michael explained:
"… I called Zed and said 'we have found another development site, it's a servo at Regentville on Mulgoa Road crying out to be redeveloped as a servo station or purpose built car wash'.
Zed said to me "I am happy to be involved in the service station development because I know you guys have got extensive knowledge in operating and developing service stations and highway developments. Can you lease it to a major?' I then said to him words to the effect of "Who knows, we will try.'
…
Prior to lodging the Development application I called Zed and said to him, 'I have already spoken to Council, the planner … has assured me we will have no issue as the development is permissible under the existing use rights, but we can always get an approval to redevelop the servo and use our industry contacts to arrange a good lease.'
Zed then said 'OK Michael, I trust you, get an approval for either a car wash or service station, but remember I want a good tenant, no flyby nighters'.
I said to Zed, 'we will let you know when we need any money. We will carry it for as long as we can as we will be doing the bulk of the work in house for the DA process. Norm, Sid, Alan and myself will all be involved.'
Zed then said to me words to the effect of 'my cash flow is excellent, let me know when you need some money'.
…"
15. Zed Badaoui said much the same thing in his witness statement at [12]-[16]:
"…
- 12. I cannot remember the precise dates of our discussions in 2005, however, I can remember being offered the Mulgoa Service Station Pty Ltd site at Mulgoa Road Regentville, and agreeing to buy it once my brothers Norman and Michael had obtained a development approval which would allow us to attract a blue chip tenant.
- 13. I agreed to fund the cost of the DA's the boys were applying for and told them to invoice me when they were ready.
- 14. When they needed money to meet the cost of work they were doing Alan Kramer or Michael would ring me to give me the details of the amount required and which account they required it to be banked in.
- 15. From the time Michael Badaoui my brother rang me with his proposal in 2005 to develop the site upon the basis that I would buy the site once the DA was approved, I agreed to buy the site, and to fund the cost of the DA process as and when my brothers required payment.
- 16. I advanced funds continually during 2008 at the request of Michael and Alan upon the basis that I would be invoiced when the boys were ready, much the same as any client does when his solicitor calls for a retainer.
…"
16. Zed said, and I accept, that the effect of these early discussions between him and Michael was that Zed (on behalf of the applicants) agreed to buy the property once it had development approval and it was in a condition to lease to a reliable tenant. As he described it in his written submissions, "In 2005 I had entered into an oral agreement with my brother Michael to meet all expenses associated with the development of this site, as it was my project. I was to buy out in full on completion." I also agree with both Zed and Michael that the proper characterisation of all the work that was done for the purpose of obtaining the development approval is that it was done for the applicants, as the prospective purchasers of the site.
17. Soon after "securing" the property in 2004, Mulgoa lodged with the local council, with the owners' permission, a development application for a car wash/café on the site. Although early indications were that the application would likely be approved, this did not eventuate. The application was withdrawn in March 2006. A second application, lodged in June 2006, was not viewed favourably by Council, and so a further set of plans was prepared for the site, but this did not happen until late 2007, because the group was by now focusing on other developments.
18. Throughout this time, a great deal of work was done towards obtaining development approval. For example, the Badaoui group commissioned a contamination assessment which was undertaken in April 2005. A supplementary report was commissioned in September 2005. By December 2005 the group was attempting to address with the Council certain engineering concerns that had been raised in relation to stormwater collection.
19. According to Alan Kramer, who was involved in some of the accounting functions for companies in the Badaoui group said in his witness statement:
- "[5] … from 2005 to the end of 2008 a huge amount of work was undertaken by Sid Dahdah, Norman Badaoui, Michael Badaoui and to a lesser extent myself as we worked on a number of Development Applications, and Variations for the Service Station site at 34-38 Mulgoa Road Regentville.
- [6] I know that during that time Sid, Norman and Michael together spent a huge number of hours on development applications. As a group of people we tried to maximize work being done in house. I liaised with the consultants and assisted Michael and Norman Badaoui as and when requested in any way they asked me to.
…
- [12] As a team Michael, Norman, Sid and I were involved in a number of development applications for projects at [four separate locations] as well as 34-38 Mulgoa Road, Regentville. It would be fair to say that as a group, the cost of obtaining development approval on a major project in either Penrith or the Blue Mountains would take no less than two to three months and often quite a deal longer to prepare and complete the application and to respond to the detailed requirements of either the Council or the proposed tenant and that the total value in terms of our time per development project would usually be worth between $300,000.00 to $400,000.00. We did our best to limit the involvement of consultants to minimize the expenditure of cash to parties outside the Badaoui Group. The amounts charged per invoice by Buildwest Constructions Pty Ltd and Kenmick Group Pty Ltd to Zed and Elisabeth Badaoui were fair and reasonable. We worked hard and spent a large amount of time on each project. When we needed funds to keep each job going, I would ring Zed and tell him how much was required and where to transfer the money. I would say words to the effect 'Zed, I need $20,000 tomorrow for Kenmick or Buildwest Constructions, can you please electronically transfer the money in to Buildwest Holdings No 1 Pty Ltd account'. The group would usually use Buildwest Holdings No 1 Pty Ltd as the working account for the whole Group. Zed would always make the payment without fail."
20. Michael Badaoui said, in answer to some questions that I put to him, that he initially expected that the companies in the group would "carry" the project "to the end". However, it became clear that from about March 2008 the companies were short of funds and needed to start getting paid:
"In March, 2008 my brother Norm came to me and said words to the effect 'We've been carrying this development for Zed for too long and we haven't billed him up to now. We have now run out of money ourselves. Ring him and get him to start funding all the work done and the work that's going to be done.'
I then said to Norm, 'alright mate I'll call Zed and speak to him'. I rang Zed in March, 2008 and said words to the effect 'I know we were going to bill the DA and CC costs once we got the final approval, but the delays and other problems we've had have killed us. As you know the bank has called in the Receivers [for Mulgoa], Norm's [backside] is on the line and he [is not happy]. I hate to ask you but we need some dough to repay us for the work we've done on the site'. He then said to me words to the effect 'I know you guys have already done a lot of work, I will bank roll the work and buy the site from the Receiver. Get Alan to call me when you need money. Just get on with it and invoice me when you are ready. I want the site with a DA and a blue chip tenant Michael.'"
Payments from Zed Badaoui to the Badaoui Group
21. The applicants claim that various payments made by Zed Badaoui to the Badaoui group of companies during 2008 represent payment for the services referred to in the three tax invoices in question.
22. First, in respect of the First and Second Invoices, there is a letter dated 5 December 2008 on "Kenmick Group" letterhead, addressed to both the applicants, and signed by Michael Badaoui, that says[3]
"In response to your queries relating to the above mentioned invoice payments, as at the 30/9/08 these invoice (sic) have been paid in full.
The funds used to pay against these invoices were those advanced during the months of August and September being:
$100,000.00 on the 12/8/08
$150,000.00 on the 5/9/08
$20,000.00 on the 29/9/08
A credit balance of $7,000.00 is owed to you."
23. The documents lodged with the Tribunal under s 37 of the AAT Act confirm that $100,000 was deposited to an ANZ bank account in the name of "Buildwest Holdings No. 1 Pty Ltd" on 12 August 2008[4]
24. The Buildwest Holdings No. 1 account is the account that Mr Kramer referred to as "the working account for the whole Group". Michael Badaoui described Kenmick as the group's "admin company" and Buildwest as the group's "building arm". Michael also said that the money that had been paid to the Buildwest Holdings No. 1 account had been transferred by journal entry to Kenmick, but even if that did not occur, I see nothing unusual in a practice by which a creditor satisfies a debt to a subsidiary company in a group, by depositing money, by consent, to the account of the parent. It is proper to regard the deposits to the bank account of the parent as payment for the services supplied by the subsidiary, and that is how I regard these particular deposits.
25. The Commissioner raised some doubts about the $100,000 and $150,000 deposits on the basis that Zed had made handwritten notations on his hard copy bank statement, labelling those transfers "High Street". Zed acknowledged that he was an investor in a Badaoui group development project centred on High Street, Penrith, and the Commissioner suggested that these payments were made in relation to that investment. Zed rejected that suggestion, and so do I. As became clear through Michael's evidence[8]
26. That brings me to the Third Invoice. There is a letter dated 8 December 2008 on Buildwest letterhead, addressed to Zed Badaoui and signed by Mr Kramer, that says[9]
"This letter is to verify that the above mentioned invoice from Buildwest Constructions Pty Ltd being invoice #5092 has been paid in full as at the 30/9/08.
The funds paid against this invoices (sic) were those advanced during the first three months of this year being inline with the discussed expected/quoted costs and request for payment ($350,000.00). Once the works were completed an invoice was issued and the payments booked against it leaving a credit balance of $20,000.00 owed to you.
…"
27. In a document that Zed Badaoui identified as "a copy of my spreadsheet, I think, which I have on my computer just allocating different sums to different entities, different places", there are 14 entries of $25,000 each, and dated from 29 January 2008 through to 17 March 2008. They total the same amount - $350,000 - as is referred to in the Buildwest letter dated 8 December 2008, and they cover the same period. They are each labelled "Short term Loan".
28. He was asked why they were identified that way. There followed this exchange:
"MR MILLER: If I was to take you to 34 and you will see in the High Street column, really, going from the bottom up, of 14 entries there are $25,000 short-term loans, they're described as? - Short - well, yes, like I said, how do I describe these things? I will leave that to the accountants to allocate what it actually is. It might have been a short-term loan. It might have been an investment. It might have been ice cream money - I don't know. It's me with my spreadsheets. How I word it - I am not an accountant to word it correctly so if we're going on the words -
MR FROST: But it wouldn't be the label that your accountant puts on it, would it? Wouldn't it be the label that you put on it? Right or wrong, it's your label? - It's my label, yes, but that's -
Right or wrong? - But I could change that at any time before tax year.
But the words - well, I don't quite know what that means but - ? - It's just a label. Well - okay.
But the words 'short-term loan' are your words. Is that right? - Yes. But I can show you -
MR FROST: Are they your words? - Yes, they are my entries."
29. If the payments "might have been" a short term loan, or "might have been" an investment, or "might have been" ice cream money, then I cannot comfortably conclude that they represent payment for the services described in the Third Invoice, no matter what Mr Kramer's letter says. They must have been for something other than the services described in the Third Invoice - most likely one of the many other Badaoui group projects that Zed was involved in.
30. In fact, to accept that they represent payment for those services would be to disregard, or reject, the much more plausible evidence of Michael, who said that it was in March 2008 - not January - that the companies needed to receive some money from Zed. According to Michael, it was in March that Norm told Michael that "we have now run out of money ourselves", and Michael then approached Zed: "I hate to ask you but we need some dough to repay us for the work we've done on the site". The only reasonable way to read that comment is that, up to that point, Zed had not made any payment at all for the services that had been provided in relation to the Regentville property. The Buildwest letter dated 8 December 2008, on which the applicants rely, is entirely inconsistent with Michael's evidence, which I accept.
31. Zed tried to downplay the "ice cream money" comment by explaining in his written submissions that Mr Miller had been trying to suggest that Zed "had spent large amounts of money on nothing, that I had received no services for my money …", but that was not Mr Miller's point at all. Instead it was that, with all the different projects that Zed was involved in with his brothers, it was possible, even probable, that these injections of funds were not in payment of the services provided in respect of the Regentville site. That is a plausible scenario which, once raised, needed to be negated by the applicants. They failed to do so.
32. The result is that the applicants have satisfied me that the services described in the First and Second Invoices were supplied to them, that they paid for them during the September 2008 tax period, and that at the time they lodged the BAS for that tax period, they held valid tax invoices for the acquisitions. I am also satisfied that the services described in the Third Invoice were supplied to the applicants, but the applicants have not satisfied me that the 14 amounts of $25,000 paid in January to March 2008 were in payment of those services. Holding the tax invoice at the time of lodging the BAS for December 2008 did not justify claiming the corresponding ITC because they have not satisfied me that payment for the acquisition had been made.
33. I should add that, when the applicants filed their final written submissions on 13 June 2011, they provided some new material, claimed to be the work of Mr Robert Brooks, described as the "external accountant" of the Badaoui group of companies during 2007 to 2009. Among other things, there is now a suggestion in that material that some of the payments which Michael Badaoui said related to the First and Second Invoices actually related to the Third Invoice. There is no reason to suppose that the statements to that effect from Mr Brooks are more likely to be accurate than statements made (at or around the time the invoices were issued) by the owner and one of the employees of the business. Moreover, the earlier letters had been provided to the Commissioner in December 2008, at a stage when the Commissioner was still considering whether to allow or disallow the previously claimed ITCs. The applicants plainly intended the Commissioner to act upon the representations in those letters and they should not now be permitted to resile from those representations. For those reasons, and also given the fact that the applicants were directed by the Tribunal to file "all reports, records and any other documents on which [they intend] to rely at the hearing" by 14 March 2011, I decline to have regard to this material.
Administrative penalty
34. Because, on my findings, the tax shortfall is $30,000 rather than $53,910, the penalty for which the Commissioner contends must be reduced in proportion. The question now is whether that $30,000 shortfall resulted from recklessness on the part of the applicants or their agent.
35. In
BRK (Bris) Pty Ltd v Commissioner of Taxation 2001 ATC 4111[2001] FCA 164, Cooper J, discussing earlier but relevantly identical legislative provisions, said at [77]:
"… 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."
36. This language, in my view, is entirely inapt to describe Zed's behaviour in claiming the $30,000 as an ITC. He knew that he had paid large amounts of money to the Badaoui group; his brothers had been asking him since March 2008 for money to cover the work at Regentville; he had tax invoices relating to work which he either knew or could reasonably assume had been undertaken; and he was not being asked to make payment on those invoices, a fact which would entitle him to assume that he had paid for the work described.
37. In circumstances such as those, it is not careless, much less grossly careless, to include ITC claims in a BAS. That I have found, on the evidence, that the $30,000 ITC claim should not have been made does not impact on the reasonableness of the position taken by the applicants in lodging a BAS including an ITC claim of that magnitude.
38. I am satisfied that the inclusion of the $30,000 ITC claim did not result from recklessness on the part of the applicants or their agent. For completeness, and while I do not understand the Commissioner to have submitted in the alternative that the applicants are liable to a 25% penalty on the basis of failure to take reasonable care to comply with a taxation law, I am satisfied that the applicants' behaviour does not fall within this description either.
Conclusion
39. The objection decision will be varied so as to allow ITC claims to the extent of $23,910, reduce the tax shortfall to $30,000, and remove the administrative penalty.
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