The impact of this case on ATO policy is discussed in Decision Impact Statement: Naidoo v Commissioner of Taxation (2012/0101, 0111 ).
NAIDOO & ANOR v FC of TMembers:
G Lazanas SM
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
 AATA 443
Ms G Lazanas (Senior Member)
1. Mrs Evanee Naidoo and Mr Ramsamy Naidoo are registered as a partnership for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). That entity is referred to in these reasons as the Naidoo Partnership.
2. Mr and Mrs Naidoo are in dispute with the Commissioner of Taxation (Commissioner) with respect to whether the Naidoo Partnership was carrying on an enterprise in the tax periods between 1 April 2007 and 31 March 2011 (the relevant period). The Commissioner cancelled the GST registration of the Naidoo Partnership with effect from 31 March 2011, but later reinstated it with effect from 24 February 2012.
3. The Commissioner formed the view that the Naidoo Partnership was not carrying on an enterprise during the relevant period and, therefore, that it was not entitled to claim input tax credits (ITCs) on the acquisitions made.
4. The Commissioner formed the view that the Naidoo Partnership was still liable to pay GST in the relevant period relying on s 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA). Peculiarly, even though the Commissioner formed the view that the Naidoo Partnership was not carrying on an enterprise, he assessed the Naidoo Partnership to positive net amounts for the relevant tax periods.
5. I have concluded that the Naidoo Partnership was not carrying on an enterprise in the relevant period. I have, therefore, decided that the Commissioner was required to cancel the GST registration of the Naidoo Partnership.
6. I have also concluded that the Naidoo Partnership was not entitled to claim ITCs during the relevant period and that this necessarily follows from the decision that the Naidoo Partnership was not carrying on an enterprise at that time.
7. With respect to the issue of the application of s 105-65 of Schedule 1 to the TAA, I have decided that it does not apply in the way that the Commissioner argued and that the net amount for each tax period in the relevant period is zero, not a positive net amount. As explained in the reasons below, this is because s 105-65 does not alter the net amount that is worked out under the GST Act.
8. In relation to the imposition of administrative penalties, the Commissioner determined that the behaviour of the Naidoo Partnership involved recklessness and that penalties of 50% should be imposed under the TAA. I concur with that decision. However, I
ATC 5777take a different view to the Commissioner as to the shortfall in respect of which the penalties are calculated. Accordingly, a lower amount of penalties applies. Further, the Commissioner decided that there were no circumstances warranting remission of penalties and I agree with that decision.
THE ISSUES BEFORE THE TRIBUNAL
9. The central issue in this case is whether or not the Naidoo Partnership was carrying on an enterprise and entitled to be registered for GST in the relevant period. The Commissioner argued that the activities engaged in by the Naidoo Partnership were not in the form of a business within the meaning of s 9-20(1)(a) of the GST Act.
10. In addition, the Commissioner argued that the activities of the Naidoo Partnership were conducted without reasonable expectation of profit, thereby enlivening the exclusion in s 9-20(2)(c) of the GST Act, so that even if the activities constituted an enterprise, they are excluded from being treated as such where the activities were conducted by partners who are individuals without reasonable expectation of profit or gain.
11. There are a number of other important issues which depend on the above issues. First, whether the Naidoo Partnership was entitled to claim ITCs in the relevant period. Secondly, whether, as the Commissioner argues, s 105-65 of Schedule 1 to the TAA applies to alter the net amount for each of the tax periods in the relevant period. Thirdly, there are issues with respect to penalties which raise both the imposition and remission aspects arising under the TAA and, in addition, the proper method of calculating the penalties having regard to the tax-related liability in issue.
12. It is necessary to set out some "central provisions" of the GST Act before addressing those legislative provisions specifically raised by the issues in this case. I should note at the outset that some of the legislative provisions have changed and it is sometimes necessary to make reference to these changes, as indicated below.
13. The "central provisions" (in their form during the relevant period) are as follows which, for simplicity, I have omitted the notes and examples:
7-1 GST and input tax credits
- (1) GST is payable on *taxable supplies and *taxable importations.
- (2) Entitlements to input tax credits arise on *creditable acquisitions and *creditable importations.
7-5 Net amounts
Amounts of GST and amounts of input tax credits are set off against each other to produce a *net amount for a tax period (which may be altered to take account of *adjustments).
7-10 Tax periods
Every entity that is *registered, or *required to be registered, has tax periods applying to it.
7-15 Payments and refunds
The *net amount for a tax period is the amount that the entity must pay to the Commonwealth, or the Commonwealth must refund to the entity, in respect of the period.
14. As will be noted, s 7-1 refers to "taxable supplies" and "creditable acquisitions", which are defined in s 9-5 and s 11-5, respectively. Most defined terms in the GST Act are identified by an asterisk at the start of the term: s 3(1) of the GST Act. As will also be noted, ss 7-5 and 7-15 invoke the concept of "net amount" which was defined during the relevant period in s 195-1 (the Dictionary of the GST Act) to have the meaning given by ss 17-5, 126-5 and 162-105. For present purposes, only the meaning given by s 17-5 is relevant. Section 17-5 contains the definition of net amount under the GST Act, except where other provisions expressly modify it, such as s 126-5 which applies in respect of taxpayers who make gambling supplies.
15. Subsection 17-5(1) relevantly stated (during the relevant period) as follows:
17-5 Net amounts
- (1) The net amount for a tax period applying to you is worked out using the following formula:
GST - Input tax credits
ATC 5778GST is the sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period.
input tax credits is the sum of all of the input tax credits to which you are entitled for the *creditable acquisitions and *creditable importations that are attributable to the tax period.
16. Section 3-10 of the GST Act provides that "[w]ithin a definition, the defined term is identified by bold italics ".
17. Section 9-5 of the GST Act sets out what are taxable supplies by stating that "[y]ou make a taxable supply if", among other criteria not presently relevant, "the supply is made in the course or furtherance of an *enterprise that you *carry on". Section 11-5 relevantly provides that "[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose".
18. The term "creditable purpose" is defined (to the extent presently relevant) in s 11-15 as follows:
11-15 Meaning of creditable purpose
- (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
19. The amount of ITC that is allowable in respect of a creditable acquisition is given by s 11-25 as follows (again, for simplicity without the note):
11-25 How much are the input tax credits for creditable acquisitions?
The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.
20. The other important definition which is key to the present case is that of "enterprise" which is contained in s 9-20. The relevant paragraph for present purposes states as follows:
- (1) An enterprise is an activity, or series of activities, done:
- (a) in the form of a *business; or
21. The word "business" is defined in s 195-1 of the GST Act as including "... any profession, trade, employment, vocation or calling, but does not include occupation as an employee."
22. The other important part of the definition of enterprise that is relevant is paragraph (c) of s 9-20(2) which provides an exclusion in the following terms:
- (2) However,
does not include an activity, or series of activities, done:
- (c) by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a *partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or
23. Further, "carrying on" is defined in s 195-1 to include "doing anything in the course of the commencement or termination of the enterprise".
24. Other relevant provisions of the GST Act and the TAA are set out below.
25. The facts are quite unusual and it is therefore necessary to set them out in some detail by reference to the entities that are involved, incuding the Naidoo Partnership and Kesons Pty Ltd (Kesons).
26. Broadly, Mr Ramsamy Naidoo claims that in the relevant period the Naidoo Partnership provided certain services to Kesons which owns and operates a hotel in Alpha, Queensland (Alpha Hotel). Mr Ramsamy Naidoo and Mrs Evanee Naidoo are the current directors and shareholders of Kesons. Kesons also employs Mr Ramsamy Naidoo on a full-time basis and Mrs Evanee Naidoo on a part-time basis.
The Naidoo Partnership
27. The Naidoo Partnership first registered for GST on 1 November 2000 and it had quarterly tax periods. The partners were at all relevant times Mrs Evanee Naidoo and Mr Ramsamy Naidoo. Mr and Mrs Naidoo, as partners of the Naidoo Partnership, owned and operated hotels and motels, including in Mackay, Dalby and Alpha in Queensland, from about 1999 until selling these assets in 2006.
28. Mr Ramsamy Naidoo claims that after the Naidoo Partnership sold the hotels that it owned and operated, it "has been providing management and support services for the hospitality industry and occasionally pest control services" since January 2006.
29. Mr Ramsamy Naidoo also stated that he was always searching for hotel acquisitions. However, a number of unforeseen circumstances meant that the Naidoo Partnership had to put its plans of buying hotels on hold. One of the reasons was that he had to take over the management of the Alpha Hotel in 2007 when his sons decided that they no longer wanted to operate the Alpha Hotel. Another reason was that in 2008 and again in 2010-2011, there were major Queensland floods which adversely affected the Alpha Hotel and Mr Ramsamy Naidoo had to spend considerable time and resources refurbishing it. The Naidoo Partnership also incurred substantial losses because of the floods and suffered from cash flow difficulties.
30. Mr Ramsamy Naidoo stated that a hotel in Jericho was on the market for sale originally in 2010 and again on the market in late 2011 and Mr Naidoo sought urgent reinstatement of the GST registration of the Naidoo Partnership with a view to purchasing that hotel with Mrs Naidoo. The hotel acquisition did not proceed even though the Commissioner reinstated the GST registration of the Naidoo Partnership with effect from 24 February 2012.
Kesons Pty Ltd
31. Kesons, the proprietor and operator of the Alpha Hotel, is a family company of which Mr Ramsamy Naidoo and Mrs Evanee Naidoo are the directors and shareholders. However, that was not always the case. At the time of acquisition of the Alpha Hotel on 31 January 2006, the sole director of Kesons was one of the sons of Mr and Mrs Naidoo and the main shareholders of Kesons were their four sons.
32. Mr Ramsamy Naidoo stated that the Alpha Hotel was acquired by Kesons and not by the Naidoo Partnership, as his four sons wanted to get involved in the business of operating hotels. However, those circumstances changed. According to Mr Ramsamy Naidoo, his sons decided that they no longer wanted to be involved in the hotel business.
33. Consequently, in or about mid 2007, Mr Ramsamy Naidoo and Mrs Evanee Naidoo acquired the shares in Kesons from their sons and they were also appointed directors of Kesons on 1 June 2007 and 29 June 2009, respectively. Mr and Mrs Naidoo thus assumed full control of Kesons.
34. One of the reasons why Mr Ramsamy Naidoo and Mrs Evanee Naidoo had such a keen interest in Kesons, even before they took over in mid 2007, was because they had provided a loan to Kesons in 2006 to acquire the Alpha Hotel. That loan ranged in value between $227,000 and $412,000 over the period from about mid 2006 to mid 2012.
Mr Ramsamy Naidoo
35. Mr Ramsamy Naidoo is a full-time employee of Kesons. In that role, he manages the Alpha Hotel on a full-time basis and receives salary and wages from Kesons.
36. Mr Ramsamy Naidoo claims that the services provided by the Naidoo Partnership to Kesons and the family members included "maintenance, like looking after all the lawns in the place, doing all the handyman work whether it be minor carpentry, minor electrical or any minor plumbing...".
37. In a written letter dated 12 March 2012 addressed to the Australian Taxation Office and signed by Mr Ramsamy Naidoo
In my capacity of a partner in the partnership firm of E Naidoo & R.K. Naidoo I provide the following contractor services:
- 1. All electrical works;
- 2. All plumbing works'
- 3. All Carpentry and handyman jobs;
- 4. Look after all the grounds keeping including mowing the grass of the 2.5 acres lawn of motel every week;
- 5. Maintenance of all the equipment for the hotel;
- 6. General maintenance of all the titles;
- 7. Pest Control services - Ramsamy Naidoo hold professional licence.
And in my capacity of an employee/director of Kesons Pty Ltd my job requirements include overseeing the general management, finance and marketing related activities such as:
- 1. Management of human resources including recruitment and training. There is high turnover of the staff due to the remoteness of the location.
- 2. Marketing and promotional activities including extensive networking with the businesses, especially mining companies and their senior staff - local and visiting in the vicinity of 100 kilometres from the hotel.
- 3. Financial management including day to day finances, cash flow management, organising finances from banks and other sources.
- 4. Procurement and Purchase management of all goods and services.
- 5. Expansion planning and management including refurbishing dilapidated rooms and plan for additional rooms and temporary hiring of accommodation to cater to large corporate group bookings.
- 6. At times, during high occupancy and shortage of staff, servicing the customers.
38. In terms of the division of his time for his different responsibilities, Mr Ramsamy Naidoo explained at the hearing that he did not keep any time records nor was there any document recording the work performed or the hours spent for either the Naidoo Partnership or Kesons. Mr Ramsamy Naidoo said "I am the man that runs the show" and "I look after all the people's hours at work there, I look after everything in the place and I sleep in the property".
39. He then explained that "in simple terms", he worked in the mornings from 7 am to 11 am for Kesons and again in the evenings from 5 pm to about 10 or 11 pm depending on whether guests arrived late at the hotel.
40. Mr Ramsamy Naidoo confirmed in cross-examination that there is no document which sets out what the Naidoo Partnership was to be paid by Kesons and the nature of the work that was to be performed. His explanation in relation to the payments was that all the paperwork goes to the accounting firm and
ATC 5781Kesons gets paid and then Kesons pays the Naidoo Partnership.
41. Some of the documents in evidence before the Tribunal were "GST Reports" that were prepared by the Naidoo Partnership's accountant. One of these reports, for example, for the quarterly tax period 1 October 2009 to 31 December 2009, showed "management fees" of approximately $2,350 being paid to it on a fortnightly basis which were referable to the services claimed to have been done by the Naidoo Partnership for Kesons. It was not clear why these receipts were referred to as "management fees" in circumstances where the services that were said to be provided by the Naidoo Partnership to Kesons were in the nature of handyman services and the general management tasks were said to be performed by Mr Ramsamy Naidoo as a director and employee of Kesons.
42. Counsel for the Commissioner put to Mr Ramsamy Naidoo that one of the reasons for the existence of the Naidoo Partnership in the relevant period was to ensure that Mr Ramsamy Naidoo got paid for the long hours spent working at the Alpha Hotel as an employee for Kesons. The following exchanges are relevant in this regard:
MR O'MAHONEY: Mr Naidoo, you said earlier that you just couldn't possibly charge for all the work you did to Kesons because that would involve, in your own words, and I quote, "40 to 80 hours overtime a week."?
MR RAMSAMY NAIDOO: Yes, that - because I'm the employee of Kesons. Now when I finish my 42 - anything between 30 and 50 hours a week, if you added another 20 or 25 hours to that, that will become overtime. It's not - and if you start charging overtime wages for anybody, irrespective it's me, it's just going to be beyond the business.
MR O'MAHONEY: So is the reason you set up the partnership - is the reason the partnership existed and that the work that it did during the relevant period to make sure that you got paid for the hours you spent on the property because you just couldn't possibly charge all those hours to Kesons as an employee?
MR RAMSAMY NAIDOO: -Yes. I - I would qualify - - -
MR O'MAHONEY: Because the - yes?
MR RAMSAMY NAIDOO: I will qualify what you are saying. Because, I mean, outback Australia, it is a place there is nothing else to do so, so you're either working or you're going to be sleeping and because of the nature of where I am, I would rather be working. So I will put the other hat on .... doing the work that somebody else could be doing because I have the hours on end...
MR O'MAHONEY: There's no suggestion in those comments of a very clear division of responsibility. What there is, is a suggestion, you put a lot of time into the property as an employee and you just need another way to charge for it?
MR RAMSAMY NAIDOO: Is that wrong?
Transcript P-25, lines 15-32 and 40-43
43. Mr Ramsamy Naidoo further stated that he was the partner in the Naidoo Partnership providing all the services to Kesons and that there was no point in the Naidoo Partnership trying to expand and provide services to other clients. Mr Ramsamy Naidoo said that "there's only 24 hours in the day. How can I extend myself more than that because Kesons gave me enough work".
44. Counsel for the Commissioner also put to Mr Ramsamy Naidoo that another reason for the existence of the Naidoo Partnership was that the partners used the arrangement to reduce their personal taxable incomes. The tax returns of the Naidoo Partnership for the tax years ended 30 June 2007 to 30 June 2011 showed that it had incurred losses in each of those years, although I note that it made a $138 profit in the tax year ended 30 June 2012. Mr Ramsamy Naidoo also agreed with this
ATC 5782proposition, as evident from the following cross-examination:
MR O'MAHONEY:... It is also the case - I can take you to the documents - but for the sake of time it might be quicker if you're happy to agree with this, that the losses of the partnership that I've referred to, the substantial losses over four tax years were used to offset your personal income. Do you accept that? That your personal income liability was reduced? Your tax income liability was reduced or was offset by the losses of the partnership?
MR RAMSAMY NAIDOO: Yes, I agree with that but then is it a bad thing to show us when you can minimise your tax.
MR O'MAHONEY: Well, that's what I was going to ask you because that's an attractive thing about this arrangement, isn't it. That you've got the losses from the partnership which on their face so someone from the outside would think that's a business not going very well, I feel sorry for the person involved in it, but the reality is that there's an attractive thing about that for you, isn't there, where you can say well, actually it reduces my personal income tax liability?
MR RAMSAMY NAIDOO: Well, I can't see anything wrong with trying to minimise your tax. I mean, that's what the taxation has put there. It's all legal.
Transcript P29, lines 28-42
45. According to Mr Ramsamy Naidoo, it was clear to him that when he was dealing with customers, he was doing that in his capacity as an employee of Kesons and, on the other hand, when he was doing electrical and plumbing works and similar handyman tasks, he was doing this in his capacity as a partner of the Naidoo Partnership.
46. It was not at all clear to me that Mr Ramsamy Naidoo could maintain that his roles and capacities were able to be neatly compartmentalised such that the work he did was readily distinguishable for the various "hats" that he wore. I have difficulty in finding that Mr Ramsamy Naidoo was providing the handyman services in his capacity as a partner of the Naidoo Partnership to Kesons, the private company that owned and operated the Alpha Hotel and of which he and his wife were directors and shareholders (for most of the relevant period) and also employees. The fact is that Mr Ramsamy Naidoo was in charge of everything that happened at the Alpha Hotel and I find that this was because he was a director and a key, full-time employee of Kesons. I find that he performed all his work (including the handyman services) in those roles under his Kesons "hats".
Mrs Evanee Naidoo
47. Mrs Evanee Naidoo was employed on a full-time basis as a high school teacher in Sydney. She also received a small amount of salary and wages from Kesons in the income years ended 30 June 2008 and 30 June 2009. According to Mr Ramsamy Naidoo, who was the only person who provided evidence, his wife only worked as an employee at the Alpha Hotel during school holidays.
48. As noted above, Mrs Evanee Naidoo, like her husband, is also a director and shareholder of Kesons and is also a partner of the Naidoo Partnership. Mr Ramsamy Naidoo did not explain what role (if any) Mrs Evanee Naidoo played in the Naidoo Partnership.
ASSESSMENTS OF NET AMOUNTS AND PENALTIES
49. It is necessary to briefly set out the background of the Commissioner's GST audit of the Naidoo Partnership and the details of the assessments which ensued.
50. By letter dated 12 May 2011, the Commissioner advised the Naidoo Partnership that it was subject to an audit of its business activity statements (BASs).
51. Following the provision of some of the information that had been requested by the Commissioner and some further correspondence between the parties, on 11 August 2011 the Commissioner issued an audit finalisation letter. Relevantly, the Commissioner stated that:
We have completed the audit of your activity statements for the period 1 June 2007 to 31 March 2011.
Your activity statements have been revised. The GST net amount of credit is reduced by $35,373, resulting in a GST net amount to be paid.
ATC 5783The total GST net amount you need to pay is now $19,011. An administrative penalty of $17,686.50 has been applied. General interest charge (GIC) may also apply.
We have attached a Summary of revisions and administrative penalties showing the changes we made to the activity statement labels; Reasons for our decision and Reasons for our penalty decision.
52. On 11 August 2011, the Commissioner also issued a "Notice of Assessments of net amount" for the period 1 April 2007 (not 1 June 2007 as stated in the audit finalisation letter) to 31 March 2011. Accompanying that notice was a Schedule which included the following table and explanation:
Column A Column B Column C Column D Tax period Original net amount Assessed net amount Difference (Col C - Col B) Apr to Jun 07 -$2,580 $2,100 $4,680 Jul to Sep 07 -$915 $1,200 $2,115 Oct to Dec 07 -$1,075 $1,200 $2,275 Jan to Mar 08 -$1,250 $1,200 $2,450 Apr to Jun 08 -$2,345 $1,200 $3,545 Jul to Sep 08 -$1,934 $1,500 $3,434 Oct to Dec 08 -$1,841 $1,500 $3,341 Jan to Mar 09 -$563 $1,500 $2,063 Apr to Jun 09 $7 $600 $593 Jul to Sep 09 -$2,100 $1,500 $3,600 Oct to Dec 09 -$1,092 $1,500 $2,592 Jan to Mar 10 -$957 $1,500 $2,457 Apr to Jun 10 -$41 $1,334 $1,375 Jul to Sep 10 $407 $636 $229 Oct to Dec 10 -$183 $154 $337 Jan to Mar 11 $100 $387 $287 Totals -$16,362 $19,011 $35,373 The total amount applied to your running balance account is: $35,373
Explanation of schedule
This schedule details changes to your activity statement for GST. Your 'net amount' is the difference between labels 1A and 1B on your BAS.
The amounts in Column B are the amounts originally included in your activity statements for each tax period.
The net amount assessed for each of the relevant tax periods is set out in Column C. This is the amount that we have determined to be the correct net amount for the period.
The amounts in Column D represent the difference between the original net amount (Column B) and the new net amount assessed for that tax period.
53. On 16 August 2011, the Commissioner issued a "Notice of assessments and liability to pay penalty" for the amount of $17,686.50. It is noted that the administrative penalty of 50% was calculated by reference to the "difference" of $35,373.
54. In summary, the Commissioner decided as follows:
ATC 5784(a) the Naidoo Partnership was not carrying on an enterprise during the period 1 April 2007 to 31 March 2011;
- (b) the GST registration of the Naidoo Partnership was cancelled with effect from 31 March 2011;
- (c) the Naidoo Partnership was not entitled to claim input tax credits totalling $35,373 for the tax periods from 1 April 2007 to 31 March 2011;
- (d) the Naidoo Partnership was liable to pay the GST amounts totalling $19,011 for the tax periods from 1 April 2007 to 31 March 2011;
- (e) the Naidoo Partnership was liable to pay an administrative penalty of 50% of the shortfall amount of $35,373 due to its recklessness; and
- (f) the circumstances did not warrant any remission of the penalty amount.
55. On 26 September 2011, Mr and Mrs Naidoo's accountant objected to the cancellation of the GST registration and to the assessments of the net amount and the assessment of penalty. On 22 November 2011, the Commissioner disallowed the objection and issued the Naidoo Partnership an objection decision.
56. On 10 January 2012, Mr and Mrs Naidoo applied to the Tribunal for a review of the objection decision.
57. By letter dated 23 February 2012, the representative for the Naidoo Partnership requested that the ABN and GST registration be activated forthwith as the Naidoo Partnership was looking to acquire a hotel and without the ABN and GST registration, the purchase would be delayed and the "firm might suffer substantial losses". On 24 February 2012, the GST registration of the Naidoo Partnership was reinstated by the Commissioner commencing from the date of 24 February 2012.
WAS THE NAIDOO PARTNERSHIP CARRYING ON AN ENTERPRISE?
58. The GST Act defines enterprise broadly. However, it is clear that an enterprise must necessarily be carried on by an entity (s 9-5(b) and s 11-15(1) of the GST Act). It is also clear that that entity is required to be registered under the GST Act if, amongst other criteria, it is carrying on an enterprise (s 23-5 of the GST Act).
59. I was not convinced that the Naidoo Partnership was the entity providing the services to Kesons. Mr Ramsamy Naidoo failed to establish that he was performing any services as a partner or in any other capacity on behalf of the Naidoo Partnership, which is a separate entity for GST purposes.
60. I do not doubt Mr Ramsamy Naidoo's evidence that handyman services and the like were provided and it is also clear that it was Mr Ramsamy Naidoo who was doing that work, but this only reinforced my finding that Mr Ramsamy Naidoo was doing so in his capacity as a director and employee of Kesons. Mr Ramsamy Naidoo was doing no more than what would be expected of a person who was one of the owners, directors and employees of Kesons especially having regard to the fact that he had been the running the show the whole time.
61. I also find that the Naidoo Partnership had no employees, no business plan nor strategy to expand the provision of "management and support services for the hospitality industry" and thereby improve profitability. Furthermore, Mr Ramsamy Naidoo was not interested in doing so because I find that he was already fully occupied with work for Kesons. Apart from looking at the possibility of purchasing another hotel in outback Queensland (which I find was only seriously considered in early 2012), I find that the Naidoo Partnership did not undertake an activity or series of activities in the form of a business, in the relevant period.
62. The Naidoo Partnership was, therefore, not carrying on an enterprise for the purposes of the GST Act in the relevant period as the activities engaged in by Mr Ramsamy Naidoo were not done by him in his capacity as a partner of the Naidoo Partnership or otherwise on behalf of the Partnership.
63. As candidly acknowledged by Mr Ramsamy Naidoo in cross-examination, he was alive to the tax advantages provided to him and his wife by the Naidoo Partnership running at a loss and the perverse incentive for keeping things that way. Accordingly, I find that the reasons for the existence of the Naidoo Partnership included to provide income tax
ATC 5785benefits to Mr Ramsamy Naidoo and Mrs Evanee Naidoo.
64. It follows that, even if there were any activities done by the Naidoo Partnership and they did constitute an enterprise, as defined, taking into account also the meaning of "carrying on", I am of the view that that the exclusion in paragraph (c) of s 9-20(2) of the definition also applies because such activities (if any) were undertaken by a partnership comprised of individuals and there was no reasonable expectation of profit or gain. There was no evidence of how the Naidoo Partnership proposed to generate income to a level where it would cover expenses, let alone produce a consistent profit. In this regard, I find that the loan that the Naidoo Partnership provided to Kesons had no terms for repayment or even for the payment of any interest. That demonstrates that Mr Ramsamy Naidoo and Mrs Evanee Naidoo were intent on looking after the interests of Kesons, not improving the profitability of the Naidoo Partnership.
WAS THE COMMISSIONER CORRECT IN CANCELLING THE GST REGISTRATION OF THE NAIDOO PARTNERSHIP?
65. As the Naidoo Partnership was not carrying on an enterprise in the relevant period, the Commissioner was correct in cancelling its GST registration. This is because the GST Act requires that the Commissioner must do so if he is satisfied that the taxpayer was not carrying on an enterprise and he believes on reasonable grounds that the taxpayer is not likely to carry on an enterprise for at least 12 months (s 25-55(2) of the GST Act).
66. The provisions specific to the issue of when an entity's GST registration must be cancelled are set out in s 25-55 which states:
25-55 When the Commissioner must cancel registration
- (1) The Commissioner must cancel your *registration if:
- (a) you have applied for cancellation of registration in the *approved form; and
- (b) at the time you applied for cancellation of registration, you had been registered for at least 12 months; and
- (c) the Commissioner is satisfied that you are not *required to be registered.
Note: Refusing to cancel your registration under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).
- (2) The Commissioner must cancel your *registration (even if you have not applied for cancellation of your registration) if:
- (a) the Commissioner is satisfied that you are not *carrying on an *enterprise; and
- (b) the Commissioner believes on reasonable grounds that you are not likely to carry on an enterprise for at least 12 months.
Note: Cancelling your registration under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).
- (3) The Commissioner must notify you of any decision he or she makes in relation to you under this section. If the Commissioner decides to cancel your registration, the notice must specify the date of effect of the cancellation.
67. The date of effect of cancellation of GST registration is provided for in s 25-60 which relevantly states:
25-60 The date of effect of your cancellation
- (1) The Commissioner must decide the date on which the cancellation of your *registration under subsection 25-55(1) or (2) or section 25-57 takes effect. That date may be any day occurring before, on or after the day on which the Commissioner makes the decision.
Note: Deciding the date of effect of the cancellation of your registration is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).
68. I am mindful of the fact that the Naidoo Partnership became registered again for GST with effect from 24 February 2012 and that, in registering the entity, the Commissioner must have been satisfied at that time that the Naidoo Partnership was carrying on an enterprise or
ATC 5786intended to carry on an enterprise from a particular date pursuant to s 25-5(1) of the GST Act. I note that this aspect is not before the Tribunal for review; however, I refer to it only to point out the fact that the Naidoo Partnership became registered again within 12 months of the Commissioner having cancelled the GST registration of the Naidoo Partnership. As noted above, under s 25-55(2)(b) of the GST Act, the Commissioner must believe on reasonable grounds that the taxpayer is not likely to carry on an enterprise for at least 12 months. There was no evidence that the Commissioner did not form such a belief at the relevant time of deciding to cancel the Naidoo Partnership's GST registration with effect from 31 March 2011, notwithstanding that the GST registration was reinstated less than 12 months later.
69. As noted above, the Commissioner cancelled the GST registration of the Naidoo Partnership with effect from 31 March 2011 (the last day of the relevant period). Whether or not that was the correct date of effect was not the subject of the Commissioner's objection decision for review by the Tribunal nor were any submissions made about it at the hearing. It is, therefore, not a matter that I must separately address because I have decided that the Commissioner was correct in cancelling the GST registration of the Naidoo Partnership. Nevertheless, I consider it appropriate to set out some observations below as to whether that was the correct date of effect of cancellation, particularly as I think it is odd that the Commissioner decided that it was not carrying on an enterprise at any stage during the relevant period but then decided to cancel the GST registration with effect from the last day of the relevant period.
70. The only document which shed some light on this issue of the date of effect of cancellation was the "Reasons for our decision" that accompanied the audit completion letter dated 11 August 2011 in which the Commissioner relevantly stated, as follows:
Paragraph 25-55 (2)(a)(b) [sic] of A New Tax System (Goods and Services Tax) Act 1999 provides that the Commissioner must cancel the GST registration of the entity if the Commissioner is satisfied that the entity is not carrying on an enterprise and not likely to be carrying on an enterprise for at least 12 months.
The date of effect is when the entity ceases to hold itself out as being registered for GST. This day will be the last day of the concluding tax period for this entity.
71. The Commissioner's stated reason that the date of effect is "when the entity ceases to hold itself out as being registered for GST" and that this was the last day of the quarterly tax period ended 31 March 2011 is confusing, particularly as it was the Commissioner that decided to cancel the entity's GST registration and he notified this decision by letter dated 11 August 2011, not on or about 31 March 2011. It must also be remembered that the Commissioner only notified the Naidoo Partnership that a review of its BASs was to be undertaken by letter dated 12 May 2011.
72. If the issue was before the Tribunal, I would have canvassed whether the GST registration of the Naidoo Partnership should have been cancelled with effect from 1 April 2007 (the beginning of the relevant period). I think that is the date which conforms to the conclusion that the Naidoo Partnership was not carrying on an enterprise at any stage during the relevant period and is also in accordance with the requirements of ss 25-55(2) and 25-60(1) of the GST Act. However, the determination of the correct or preferable decision as to the date of effect of cancellation of the GST registration of an entity not carrying on an enterprise should await a case where the issue is squarely raised.
WAS THE NAIDOO PARTNERSHIP ENTITLED TO CLAIM INPUT TAX CREDITS?
73. The Naidoo Partnership was not entitled to claim ITCs as it did not make creditable acquisitions during the relevant period. This follows from s 11-5 which states that "[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose". The meaning of "creditable purpose" in s 11-15(1) of the GST Act is "[y]ou acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise". As I have determined that the Naidoo Partnership was not carrying on an
ATC 5787enterprise at any stage during the relevant period, it follows that the Naidoo Partnership did not have a creditable purpose in making the acquisitions and, therefore, did not make creditable acquisitions in the relevant period.
74. The Commissioner made further submissions that many of the acquisitions were, in any event, not for a creditable purpose because they were of a private or domestic nature or not taxable supplies made to the Naidoo Partnership, but were instead made to Kesons (ss 11-15(2)(b) and 11-5(b)). The Commissioner further added that the evidence fell well short of establishing that the Naidoo Partnership made many of the acquisitions that it claimed to have made.
75. Based on a review of the documents before the Tribunal, which included some bank statements, a handful of tax invoices and the "GST Reports" for the Naidoo Partnership prepared by the accountant, I agree that there are difficulties with both the technical issues for the ITC claims under the GST Act and the evidentiary burden regarding the substantiation of the ITCs, although it is unnecessary to analyse these claims because of the conclusions above. Nevertheless, I note that the expenses of the Naidoo Partnership were not separate from the personal expenses of Mr and Mrs Naidoo as on the face of the bank statements and the "GST Reports", there were many expenses that were charged to the Naidoo Partnership that were clearly private or domestic in nature including purchases of groceries and clothing and cash withdrawals for gambling. The overall impression gained was that the Naidoo Partnership's accounts were in a disorderly state.
HOW HAS THE COMMISSIONER ASSESSED THE NET AMOUNT?
76. The Commissioner assessed the Naidoo Partnership to a positive net amount for each tax period, even though the Commissioner contended that the taxpayer was not carrying on an enterprise. The precise details of the Commissioner's notice of assessments of net amount for each of the tax periods are set out in the table above at paragraph  of these reasons and it is appropriate to make some preliminary comments.
77. First, it is noteworthy that the Naidoo Partnership's "original net amounts" as shown in Column B were mostly negative net amounts (therefore, manifesting in GST refunds by the Commissioner to the Naidoo Partnership) with the exception of three positive net amounts for the quarterly tax periods ended June 2009 ($7), September 2010 ($407) and March 2011 ($100). Secondly, the amounts appearing under Column C with the heading "Assessed net amount" (representing the Commissioner's assessment of the net amounts pursuant to s 105-5 of Schedule 1 to the TAA) were in fact the GST amounts on taxable supplies that were reported by the Naidoo Partnership in each of the tax periods (namely, "the incorrectly reported GST amounts"). So much is clear from the BASs which are in the T-Documents before the Tribunal. The Commissioner claimed that those GST amounts are payable because of s 105-65 of Schedule 1 to the TAA (discussed below). Thirdly, to arrive at the amounts in Column D with the heading "Difference", the Commissioner subtracted from the amounts shown under the heading "Assessed net amount", the amounts shown under the "Original net amount" heading. The Commissioner then applied the total of the "Difference" column, namely, the amount of $35,373 to the running balance account of the Naidoo Partnership claiming that that was the debt payable by the Naidoo Partnership to the Commissioner.
78. It suffices to say that what the Commissioner was trying to do by issuing an assessment of net amounts based only on the incorrectly reported GST amounts, was to require the taxpayer to repay the entirety of the refunds paid while at the same time requiring the taxpayer to pay the incorrectly reported GST amounts, notwithstanding that, on the Commissioner's view, the Naidoo Partnership never made any taxable supplies in the relevant period. The Commissioner claims that his decision under s 105-65 of Schedule 1 to the TAA not to pay a refund of the incorrectly reported GST amounts is properly reflected by inclusion of those amounts in the taxpayer's net amounts.
79. For the reasons set out below, I disagree with the Commissioner's approach. As I have decided that the Commissioner is right about
ATC 5788the Naidoo Partnership not carrying on an enterprise during the relevant period, the Naidoo Partnership's net amount can only be zero for each of the tax periods in the relevant period.
80. It follows that I also disagree with the Commissioner's approach in arriving at the amounts shown in the column under the heading "Difference" referred to in paragraphs  and  above. I find that the amount owed by the Naidoo Partnership to the Commissioner, based on the assessment of the net amount for each of the tax periods, is the total of the amounts shown in Column B titled "Original net amount" that were overpaid by the Commissioner to the Naidoo Partnership in each of the tax periods, that is, the total of the negative net amounts expressed as a positive amount (this conclusion is important for the penalties discussed below).
81. My reasons are substantially the same as those recently given by Deputy President Frost in
Re The Private Tutor and Commissioner of Taxation  AATA 136 at - (The Private Tutor Case), discussed further below. The Private Tutor Case was decided by the Tribunal after I had reserved my decision in this case. Accordingly, I invited the parties to make further submissions with reference to the calculation of the net amount and the application of s 105-65 and, specifically, with respect to how and to what extent s 105-65 applies to the net amount. Both parties accepted the invitation and provided the Tribunal with helpful submissions for which I am grateful. I address these submissions in my reasoning below.
THE OPERATION OF SECTION 105-65 OF SCHEDULE 1 OF THE TAA
82. The Applicant's supplementary submissions adopted the reasons set out in The Private Tutor Case and submitted that the net amount for each of the relevant tax periods should be zero (if it was held that the Naidoo Partnership was not carrying on an enterprise). On the other hand, the Commissioner's supplementary submissions canvassed a number of issues with respect to s 105-65, and I propose to broadly adopt a similar outline. The issues are as follows:
- (a) whether s 105-65 of Schedule 1 to the TAA is properly taken into account in an assessment of a net amount and, consequentially, whether the Tribunal has jurisdiction to review a decision made by the Commissioner under s 105-65 pursuant to Part IVC of the TAA ("The jurisdiction issue");
- (b) whether the conditions necessary to enliven s 105-65 are met in the circumstances of this case ("Are the conditions set out in s 105-65 satisfied?"); and
- (c) if the conditions of s 105-65 are satisfied, whether the residual discretion provided for in s 105-65 should be exercised ("Was this an appropriate case for the exercise of the Commissioner's discretion?').
83. I will deal first with the application of s 105-65 of Schedule 1 to the TAA.
Was the Commissioner correct in assessing the net amount for each relevant tax period by reference to section 105-65?
84. The Commissioner contends that s 105-65 of Schedule 1 to the TAA is a necessary step in finally determining a taxpayer's liability in respect of GST and that it is, therefore, properly to be taken into account in an assessment of the taxpayer's net amount for each of the relevant tax periods. It is on the basis of s 105-65 that the Commissioner assessed the Naidoo Partnership to positive net amounts for each of the relevant tax periods.
85. The Commissioner acknowledged that the question of whether s 105-65 is taken into account in assessing a taxpayer's net amount for a tax period is also determinative of whether the Tribunal has jurisdiction to review a decision made under that section. The Commissioner submitted that "a question may arise as to whether [s 105-65] is properly taken into account in an assessment of a net amount, and thus whether it is relevant to the function of the Tribunal in proceedings under Part IVC of the TAA".
86. The Commissioner's arguments can be summarised as follows:
- (a) Section 105-65 is not merely a procedural provision; it is a necessary step in establishing a taxpayer's substantive
ATC 5789liability in respect of GST. A taxpayer's liability is determined for a tax period under Div 17, in terms of the net amount and it includes an amount refundable by the Commonwealth to the taxpayer (s 7-15) so that, where an amount is refundable, the taxpayer's net amount and, therefore, substantive liability is not finally determined without consideration of s 105-65. The taxpayer's burden of proving an assessment is excessive involves showing the taxpayer's substantive liability is excessive:
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 271.
- (b) Section 7-15 of the GST Act states that "the *net amount for a tax period is the amount that the entity must pay to the Commonwealth, or the Commonwealth must refund to the entity, in respect of the period". In determining the net amount, the Commissioner considers that all relevant provisions that may bear on that legal obligation or legal entitlement must be taken into consideration.
- (c) The decisions in
Re Wynnum Holdings No. 1 Pty Ltd and Commissioner of Taxation  AATA 296 at -,
Re Australian Leisure Marine Pty Ltd and Commissioner of Taxation (2010) 76 ATR 390;  AATA 620 at - and
Re Cyonara Snowfox Pty Ltd and Commissioner of Taxation  AATA 124 which concerned other provisions in Subdivision 105-C of Schedule 1 to the TAA were treated as substantive provisions forming part of the assessment process. These other provisions, for example, s 105-50 of Schedule 1 to the TAA, affect the net amount in that they modify or override the formula in s 17-5 by providing for the net amount to cease to be payable in certain cases. It would be wrong for the Commissioner to disregard the effect of those other provisions in making an assessment of the net amount.
- (d) Section 105-65 was considered by the Federal Court in
International All Sports Ltd & Anor v Commissioner of Taxation (2011) 81 ATR 607;  FCA 824 and by the Tribunal in
Re Luxottica Retail Australia Pty Ltd and Commissioner of Taxation (2010) 75 ATR 169;  AATA 22 (Luxottica),
Re MTAA Superannuation Fund (R G Casey Building) Property Pty Ltd and Commissioner of Taxation  AATA 769 and
Re National Jet Systems Pty Ltd and Commissioner of Taxation (2011) 82 ATR 740;  AATA 766 and the Tribunal proceeded on the basis that it had jurisdiction in relation to s 105-65 and exercised the discretion in Luxottica at  and .
- (e) The formula in s 17-5 as to the working out of the net amount is not comprehensive and self-contained and the net amount is expressly adjusted by several provisions outside s 17-5, for example, ss 51-45, 54-40, 54-45 of the GST Act and s 13-5 of the A New Tax System (Luxury Car Tax) Act 1999 and s 21-5 of the A New Tax System (Wine Equalisation Tax) Act 1999.
- (f) Section 105-65 and other provisions in Subdivision 105-C of Schedule 1 to the TAA that affect liabilities and entitlements need to be appreciated in the context of former s 105-100 (repealed from 1 July 2012) which made the production of a notice of assessment conclusive evidence of the amounts therein, subject to an appeal or review under Part IVC of the TAA. The decision of Logan J in
Deputy Commissioner of Taxation v PM Developments Pty Ltd (2008) 173 FCR 247;  FCA 1886 at  supports the policy for the conclusive effect given to the correctness of an assessment and also for Commonwealth revenue law controversies to be resolved in the Federal Court or the Tribunal in the context of Part IVC proceedings.
- (g) The decision of the Full Court of the Federal Court in
Commissioner of Taxation v Multiflex Pty Ltd (2011) 197 FCR 580;  FCAFC 142 at  supports the consideration of s 105-65 in the determination of the net amount on the basis that s 17-5 is not self contained and should be construed with the more generic provisions of the TAA.
87. The Commissioner also urged me to refer to Miscellaneous Taxation Ruling MT 2010/1: Restrictions on GST refunds under
ATC 5790section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1), in particular paragraphs -. I have extracted paragraph  of MT 2010/1 below:
GST is defined in section 195-1 of the GST Act as including 'tax that is payable under the GST law'. GST law is defined in section 195-1 of the GST Act in paragraph (d) as including the Taxation Administration Act 1953, so far as it relates to any Act covered by paragraphs (a) to (c)', which includes the GST Act, any Act that imposes GST and the GST Transition Act. Section 2-30 of the GST Act also indicates that the provisions of the TAA contain provisions dealing with administration, collection and recovery of amounts of GST. This evidences that these Acts are to be read together.
88. Whether the Commissioner's approach is correct requires an analysis of how s 105-65 interacts with the GST Act and, specifically, whether any amounts that can be retained by the Commissioner pursuant to the exercise of his discretion under s 105-65 not to give the refund (being a refund which the Commissioner must otherwise give to the taxpayer under s 8AAZLF of the TAA) form part of the net amount.
89. Before dealing with the Commissioner's arguments, it is necessary to set out s 105-65, in its form at the time of the Commissioner's assessment as at 11 August 2011. This is the form that it took after changes were made with effect from 1 July 2008 and prior to further changes which took effect from 1 July 2012. I note that the relevant period in issue spans 1 April 2007 to 31 March 2011, but nothing turns on the amendments made to s 105-65 with effect from 1 July 2008 in this case, so it is unnecessary to additionally set out the form of s 105-65 prior to 1 July 2008.
105-65 Restriction on GST refunds
- (1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:
- (a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply, to any extent; and
- (b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is *GST-free); and
- (c) one of the following applies:
- (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;
- (ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.
Note: Divisions 3 and 3A of Part IIB deal with payments, credits and RBA surpluses.
- (2) This section applies to the following amounts:
- (a) in the case of a *supply:
- (i) so much of any *net amount or amount of *GST as you have overpaid (as mentioned in paragraph (1)(a)); or
- (ii) so much of any net amount that is payable to you under section 35-5 of the *GST Act as the Commissioner has not refunded to you (as mentioned in paragraph (1)(a)), either by paying it to you or by applying it under Division 3 of Part IIB of this Act;
- (b) in the case of an *arrangement:
- (i) so much of any net amount or amount of GST to which subparagraph (a)(i) would apply if the arrangement were a supply; or
- (ii) so much of any net amount to which subparagraph (a)(ii) would apply if the arrangement were a supply.
Note: Division 3 of Part IIB deals with payments, credits and RBA surpluses.
ATC 5791The Commissioner's arguments summarised above in paragraph  should not be accepted for the following reasons.
91. The GST Act expressly provides for the working out of the net amount, a defined term, in a precise manner using clear and unambiguous language in s 17-5(1) of the GST Act. There are adjustments and special rules which affect the net amount, including those set out in s 17-5(2) and those listed in s 17-99, as well as in other Acts, such as the A New Tax System (Wine Equalisation Tax) Act 1999, but their implications for the calculation of the net amount are expressly indicated.
92. The net amount in s 17-5(1) is worked out using the formula "GST - input tax credits" where, relevantly, GST is in turn defined as "the sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period". It does not factor into the net amount calculation, amounts of overpaid GST (that is, GST not on taxable supplies).
93. Section 7-15 stands for the straightforward proposition that the net amount is the amount that the entity must pay to the Commonwealth or the Commonwealth must refund to the entity, once the calculation in s 17-5 is performed. In other words, it is the net amount that is payable or refundable, as appropriate. The Commissioner's interpretation of s 7-15 to the effect that net amount means the amount that is arrived at after considering all the relevant provisions that bear on the taxpayer's legal obligation or entitlement are taken into account (and that s 105-65 is one such provision) has no basis in the statutory framework and leaves the issue at large creating uncertainty. Section 7-15, read in isolation, without reference to the definition of net amount in s 17-5 encompasses all amounts payable to or refundable by the Commonwealth, without limitation. Section 7-15 is only coherent when it is read in light of the definition of net amount in s 17-5. The reference to net amount in s 7-15 does not supersede the definition of net amount in s 17-5.
94. The Commissioner's reference in paragraph  of MT 2010/1, to the definition of "GST" in s 195-1 of GST Act as including "tax that is payable under the GST law" and his subsequent reference to the definition of "GST law" in s 195-1 as "including the Taxation Administration Act 1953, so far as it relates to ... the GST Act, [and] any Act that imposes GST, ..." to support his argument that s 105-65 must be taken into consideration in determining an entity's net amount, does not advance his position. There is no disputing that the GST Act and the TAA are to be construed together, as was pointed out by Stone, Edmonds and Logan JJ in
Commissioner of Taxation v Multiflex Pty Ltd (2011) 197 FCR 580;  FCAFC 142 at , but it is difficult to see how s 105-65 can be worked into the statutory definition of net amount in circumstances where "GST" is also specifically defined in s 17-5(1) of the GST Act.
95. Section 105-65 can only operate after the net amount has been calculated. So much is clear from the fact that the Commissioner can only exercise the discretion in s 105-65 after the net amount for the tax period has been worked out and it has been determined that the net amount or an amount of GST has been mistakenly overpaid to the Commissioner. Paradoxically, if an amount of overpaid GST is included in the net amount, it is no longer overpaid GST to which s 105-65 can apply. The amount would be payable under s 7-15.
96. I conclude that, contrary to the Commissioner's approach, s 105-65 of Schedule 1 to the TAA is not a provision which allows the Commissioner to alter the net amount calculated under s 17-5(1) of the GST Act. There is nothing in the statutory provisions of either the GST Act or the TAA which produces the result that the Commissioner contends for, nor do any of the authorities to which he referred compel such a conclusion. Indeed, none of the cases expressly canvass the operation of s 105-65 with respect to the net amount. Accordingly, in the face of the statutory provisions, s 105-65 cannot be taken into account in the determination of the net amount for a tax period. I prefer the view that s 105-65 operates after the net amount for a tax period is calculated under the GST Act.
97. As noted above, my reasons are substantially the same as those recently given by Deputy President Frost in The Private Tutor
ATC 5792Case and, accordingly, I have summarised and adapted those reasons for the parties in this case. This is because, relevantly, as also explained by Deputy President Frost:
- (a) "net amount" is expressly stated to be the difference between the GST liability on taxable supplies and the ITC entitlements with respect to creditable acquisitions and creditable importations for a tax period (s 17-5 of the GST Act);
- (b) one of the requirements of a "taxable supply" is that "the supply is made in the course or furtherance of an enterprise that you carry on" (s 9-5(b));
- (c) one of the requirements for an entity to be entitled to claim ITCs is to acquire a thing for a "creditable purpose", namely, to acquire a thing in "carrying on your enterprise" (s 11-15(1));
- (d) if an entity does not carry on an enterprise, then it cannot make "taxable supplies" nor "creditable acquisitions" even though it may still be registered for GST and have tax periods applying to it. Its GST liability must be zero and its ITC entitlement must also be zero;
- (e) therefore, its net amount must be zero.
98. I note that in The Private Tutor Case, Deputy President Frost decided that the taxpayer was carrying on an enterprise and so he did not have to ultimately decide this issue. Nevertheless, Deputy President Frost indicated at  that if he had agreed with the Commissioner's position that the taxpayer was not carrying on an enterprise, he would have reduced the net amount for each tax period to zero. This is what I have decided in this case, namely, that the net amount of the Naidoo Partnership for each of the tax periods from 1 April 2007 to 31 March 2011 is zero.
99. I now discuss the three issues earlier identified as having been canvassed in the Commissioner's supplementary submissions.
The jurisdiction issue
100. Section 25(1) of the Administrative Appeals Tribunal Act 1975 relevantly states that the Tribunal has jurisdiction to review decisions where an enactment authorises it to do so. Section 14ZZ of the TAA provides that the Tribunal only has jurisdiction to review a "reviewable objection decision" being a decision made by the Commissioner with respect to a taxpayer's objection. Relevantly, s 105-40 of Schedule 1 to the TAA provided at the relevant time that a person who is dissatisfied with a decision under former s 105-5 (with respect to an assessment of a net amount, at the relevant time) may object against it in the manner set out in Part IVC of the TAA. Section 105-65 of Schedule 1 to the TAA, however, contains no such provision for a taxpayer to object against it.
101. In the absence of such a provision, a taxpayer is not entitled to pursue review under Part IVC of the TAA if a taxpayer is dissatisfied with the Commissioner's decision. The taxpayer's review rights are limited to judicial review in proceedings brought in the Federal Court under s 39B of the Judiciary Act 1903 or the Administrative Decisions (Judicial Review) Act 1977. In this regard, the present case has many similarities with
Commissioner of Taxation v Administrative Appeals Tribunal (2011) 191 FCR 400;  FCAFC 37 where Keane CJ and Gordon J of the Full Court held that the Tribunal did not have jurisdiction to review the Commissioner's refusal to make a determination under s 292-465 of the Income Tax Assessment Act 1997 with respect to disregarding excess non-concessional contributions.
102. Finally, I note that some of the authorities to which the Commissioner referred, in particular, Luxottica, were also cited as supporting the Tribunal's jurisdiction, because the Tribunal had there proceeded on the basis that it had jurisdiction in relation to s 105-65. But it appears to me that the jurisdiction issue with respect to s 105-65 has not previously been the subject of any deliberations by the Tribunal or Federal Court.
103. As I have concluded that s 105-65 does not alter the determination of a taxpayer's net amount under the GST Act, and s 105-65 does not have any provision for a taxpayer to object against it, the Tribunal does not have jurisdiction to review the Commissioner's decision under s 105-65 of Schedule 1 to the TAA. Whether or not this was intended to be the case when the legislation was drafted is unclear. The Commissioner may be correct in
ATC 5793his view (at paragraph  of MT 2010/1) that it would be desirable for taxpayers to be able to challenge such a decision under Part IVC of the TAA and also able to obtain merits review in the Tribunal. However, this is of no assistance in circumstances where the statutory framework does not provide for this outcome.
Are the conditions set out in s 105-65(1) satisfied?
104. Having regard to my conclusion on the jurisdiction issue, it is unnecessary for me to deal with the other issues raised regarding s 105-65. Nevertheless, it is appropriate to do so, particularly as the parties addressed these aspects at length.
105. The Commissioner says the s 105-65(1) conditions are satisfied. First, in respect of paragraph (a) of s 105-65(1) and s 105-65(2)(a), the Commissioner says the Naidoo partnership "overpaid" GST by remitting an amount that was in excess of what was legally payable on the particular supply in the relevant tax period. The Commissioner states that there is no question that supplies made by the Naidoo Partnership during the relevant period were treated as being "taxable supplies" and, therefore, subject to GST. Secondly, in respect of paragraph (b) of s 105-65(1), the relevant supplies were not taxable because they were not made in the course of an enterprise that the Naidoo Partnership was carrying on. Thirdly, in respect of paragraph (c) of s 105-65(1), there are two alternative conditions. In the present case, the Commissioner says he was not satisfied that the Naidoo Partnership had reimbursed a corresponding amount to Kesons. In addition, he says that the second condition was also met as Kesons was registered for GST.
106. I consider the Commissioner's argument that the Naidoo Partnership "overpaid GST" in all of the relevant tax periods to be flawed. This is because the Naidoo Partnership cannot have overpaid GST in circumstances where the GST liability was entirely offset by a claim for ITCs that was also incorrectly reported. In those periods, where the GST liability was entirely offset and the Naidoo Partnership reported a negative net amount, the taxpayer did not receive fewer ITCs than it would otherwise have been entitled to (as it was not entitled to any ITCs), nor did it overpay GST in respect of any supply. I find, therefore, that there was no overpayment for the purposes of s 105-65 in respect of those tax periods. Indeed, if the Naidoo Partnership had overpaid GST in those tax periods, the Commissioner would not need to recover the GST amounts from the taxpayer (in addition to the refunds paid), as he is now seeking to do.
107. Consequently, I find that the Naidoo Partnership only overpaid GST in the periods in which it reported positive net amounts but, again, only to the extent that it actually paid more GST than it was liable to pay or received fewer ITCs than it was otherwise entitled to receive. As it did not receive fewer ITCs than it was otherwise entitled to receive (because it was not entitled to any ITCs) and only paid $7, $407 and $100 in GST in June 2009, September 2010 and March 2011 respectively, those are the only overpaid amounts for the purposes of s 105-65(1)(a) and s 105-65(2).
108. My finding is not based on a conclusion that s 105-65 applies only to positive net amounts. Indeed, I accept the Commissioner's view that s 105-65 can apply to overpaid GST on individual supplies and, therefore, can apply in circumstances where a taxpayer reports a negative net amount for a tax period. However, an amount of GST must have been "overpaid" in order for s 105-65 to apply. In that respect, the present case is to be distinguished from a case where a taxpayer has a negative net amount that involves the correct reporting of ITCs but incorrect GST liability. In that situation, the taxpayer would have overpaid GST because the refunds it received based on the correct ITCs it claimed would have been less than the taxpayer would have otherwise been entitled to receive. In this respect, I agree with the Commissioner that a reduction in the ITCs to which a taxpayer was entitled would constitute an overpayment for the purposes of s 105-65. However, a reduction in the ITCs to which a taxpayer was never entitled (such as in the present case because it was not carrying on an enterprise in the relevant period) is not sufficient to constitute an overpayment.
109. If the Tribunal had jurisdiction, I would have decided that s 105-65 applies only to the positive net amounts overpaid by the Naidoo Partnership with respect to the three quarterly
ATC 5794tax periods referred to above. This is because the criteria in paragraphs (a) to (c) of s 105-65(1) are satisfied with respect to those amounts only and not with respect to all of the incorrectly reported GST amounts as contended by the Commissioner. The amounts have been overpaid in those three tax periods because, even disregarding the incorrectly claimed ITCs, the Naidoo Partnership overpaid those positive net amounts to the Commissioner.
Was this an appropriate case for the exercise of the Commissioner's discretion?
110. The Commissioner contends that once the conditions set out in paragraphs (a)-(c) of s 105-65(1) are satisfied, the question is whether "the residual discretion to pay the refund" to the Naidoo Partnership should be exercised. The Commissioner submits that the residual discretion should not be exercised to refund the GST overpaid as the circumstances of this case would give rise to a "windfall gain" to the Naidoo Partnership if a refund was to be made.
111. Starting with "the windfall gain" point that the Commissioner raises, it is clear that this is not a case where the taxpayer is seeking a GST refund from the Commissioner as the Commissioner overpaid GST refunds to the Naidoo Partnership for virtually all of the tax periods in issue. The Naidoo Partnership overpaid amounts to the Commissioner only in respect of three quarterly tax periods where it had positive net amounts - June 2009 ($7), September 2010 ($407) and March 2011 ($100).
112. If the Tribunal had jurisdiction to review the Commissioner's decision made under s 105-65, I would have decided to refuse to refund only the positive net amounts totalling $514 to the Naidoo Partnership. They are the amounts that were in fact overpaid to the Commissioner.
113. The Commissioner formed the view that the Naidoo Partnership was liable to pay penalties at the rate of 50% on the basis that there had been recklessness as to the operation of the tax laws. I was not satisfied that the penalties imposed at that rate were excessive nor that they should be remitted to any extent.
114. The key issue is whether the partners of the Naidoo Partnership discharged the onus of proving that the assessment of penalty on the basis of recklessness as to the operation of the taxation laws was excessive. In
Hart v Federal Commissioner of Taxation (2003) 131 FCR 203;  FCAFC 105 (Hart), the majority of the Full Federal Court at  referred to the concept of recklessness being established "if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person". The majority of the Full Federal Court in Hart also approved the observations of Cooper J in
BRK (Bris) Pty Ltd v Commissioner of Taxation  FCA 164 at  as follows:
... Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there 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.
115. In this case, the factors that I consider to be relevant to the question of penalty were as follows:
- (a) The Naidoo Partnership owned and operated a number of hotels in the past and Mr Ramsamy Naidoo, one of the partners, is an experienced businessman in the hospitality industry. He should have known that after the sale of the hotels, the Naidoo Partnership was not carrying on an enterprise or that there was a real risk that it was not doing so.
- (b) There were very unusual arrangements especially regarding the capacities in which Mr Ramsamy Naidoo claimed to have performed various services. Mr Ramsamy Naidoo ought to have foreseen a risk that the services that he claimed to provide to Kesons as a partner of the Naidoo Partnership, when he was also a director and full-time employee of Kesons, would not
ATC 5795withstand scrutiny, particularly, in circumstances where there were no precise terms as to the nature of those arrangements.
- (c) Mr Ramsamy Naidoo caused the Naidoo Partnership to claim ITCs which he knew, or at least ought to have known, the Naidoo Partnership was not entitled to claim as it was not carrying on an enterprise or there was a real risk that it was not doing so. Furthermore, there was a paucity of records and such records as there were, painted a disorderly picture of numerous private and domestic expenses being incurred by the Naidoo Partnership. Even if the Naidoo Partnership was carrying on an enterprise and entitled to claim ITCs, the substantiation of ITCs would have likely been a very difficult exercise.
116. Having regard to those factors, Mr Ramsamy Naidoo and Mrs Evanee Naidoo failed to discharge the onus that they bore pursuant to s 14ZZK of the TAA of establishing that the assessment by the Commissioner of a 50% administrative penalty was excessive. Accordingly, I find that the administrative penalty of 50% for recklessness is the correct or preferable one.
117. However, I disagree with the Commissioner's view that the penalties should be calculated in respect of the "Difference" amount referred to in paragraphs  and  above. In my view, the provisions of the TAA require the 50% penalties to be calculated in respect of the shortfall amount, that is, taking into account the ITCs claimed less the GST liability, in this case it is the amounts that were overpaid by the Commissioner to the Naidoo Partnership as GST refunds. It follows, that the penalties are $8,438 (50% of $16,876) not $17,686.50 (50% of $35,373), as the Commissioner assessed. This calculation of penalties is based on 50% of the negative net amounts for the tax periods as that is the tax shortfall, namely, the tax-related liability that is due and payable by the Naidoo Partnership to the Commissioner: s 250-10(2), Item 12 - "excess refund of GST" and Item 90, "administrative overpayment made by Commissioner" and s 255-5(1) of Schedule 1 to the TAA.
118. The final issue to be considered is whether the penalty should be remitted. Taking into account all of the circumstances of the case, I am not satisfied that the penalty should be remitted in whole or part, as there is nothing unjust or harsh about the imposition of penalties in this situation.
119. For the reasons set out above, the Tribunal decides that:
- (a) the objection decision made by the Commissioner in relation to the cancellation of the GST registration of the Naidoo Partnership is affirmed;
- (b) the objection decision made by the Commissioner in relation to the net amount for each of the tax periods in the relevant period 1 April 2011 to 31 March 2011 is set aside and substituted with the decision that the net amounts are zero;
- (c) the objection decision made by the Commissioner in relation to the administrative penalty is affirmed as to the rate of 50% but is to be applied only to the tax shortfall in accordance with the Tribunal's reasons;
- (d) the objection decision made by the Commissioner in relation to the decision to not remit the penalty is affirmed.