PALMER v FC of T
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
KL Beddoe (Senior Member)
There are three applications for review of objection decisions by the respondent Commissioner. The applications relate to the years of income ended 30 June 1993, 30 June 1994 and 30 June 1995.
2. Issues arise as to whether amended assessments notified in relation to each year of income were authorised, whether those amended assessments are correctly made, whether the additional tax provisions apply to the circumstances and whether there should be a further remission of additional tax said to be imposed by the Income Tax Assessment Act 1936 (``the Act'').
3. The dispute arises out of a raid on the home of an escort agency operator (the applicant) by Queensland Police. Although the applicant carries on business in New South Wales he resides in Queensland. In circumstances which are not clear to the Tribunal the respondent came into possession of information apparently obtained by the Queensland Police during the raid.
4. At the hearing Mr Harrison represented the applicant and Mr Farry represented the respondent Commissioner. The documents lodged in the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 were put before the Tribunal and further documents were tendered and marked as exhibits (A-H and 1-3). Oral evidence was given by the applicant, an employee of the applicant and an officer of the Australian Taxation Office. At the conclusion of the hearing the applicant was given leave to make further submissions in writing but no submission has been received by the Tribunal.
5. Having previously carried on an escort agency business in Queensland the applicant moved his operations to south of the Tweed River in December 1992 taking over premises previously used for similar purposes. Business was generated by advertising in the Yellow Pages telephone directory and in newspapers. The applicant also relied, to a significant extent, on business generated by referrals and spotters. Referrals came from tour guides, taxi drivers and hotel staff for which the applicant paid fees.
6. Female escorts worked in the business on a mutually agreed joint venture basis whereby the fee paid by each client to the applicant's receptionist was apportioned between the escort and the applicant. It was open to an escort to
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decline or refuse to entertain a client and arrangements between the escort and the client were mutually agreed between them.7. The applicant's responsibility in the arrangement with the escorts was to provide the premises, advertising, receptionist, credit card facilities and other infrastructure. The escort provided her services. The applicant, acting through his receptionists, collected the gross fees paid by the clients and paid the escorts their share in cash after the end of a shift. Payments in cash were also made to referrals, the drivers who took escorts to other locations and the receptionist. Any cash left over was banked the next day. Due to the use of credit cards by clients there was sometimes a shortage of cash and some payments were not effected until the next day when the applicant made cash available for the purpose.
8. It was a regular practice for clients to pay by use of credit cards. Vouchers charged to Bankcard, Visa and Mastercard accounts of clients could be deposited, during the relevant years of income, into the applicant's bank account for a bank charge of 3.5%. On the other hand, American Express paid 94% of the face value of the vouchers while Diners Club paid 90% of the face value of the vouchers completed by clients. Payments by American Express and Diners Club were effected by cheques payable to the applicant.
9. The applicant's evidence was equivocal about the division of the fee paid by a client but I am satisfied that it is more likely than not that each $100 in fees was paid as to $40 to the escort, $50 to the applicant from which he paid his expenses, bank charges, credit card commissions, receptionists tax instalments, referral fees etc and $10 remitted to the respondent as instalment tax payable in relation to the escorts. The applicant asserts that this is an arrangement with the Taxation Office whereby a flat 10% of the gross fee is remitted without admission as to whether the escorts are employees. The actual basis of the alleged agreement with the respondent is that the applicant remits to the respondent 20% of what the escorts earn. He rationalises this as 10% of the gross fee so that in effect the escort and the applicant each contribute 5% of the gross fee for payment of the group tax payment. I gained the impression during the hearing that the respondent was ``shy'' about conceding the existence of this arrangement. The evidence is however uncertain and equivocal and the more likely explanation is that the instalment payment is deducted from the escort's share of the gross. The daily sheets are silent on this.
10. The applicant's record keeping, while not unique, is somewhat peculiar to the applicant. He explained his system of record keeping to the Tribunal as a daily control system rather than an accounting system. Essentially the applicant's business maintains three distinct running records of the business. The basic record is exampled at folios 49-55 of the T documents and may be described as a daily takings sheet and such a sheet is completed by the receptionist on each shift.
11. Evidence given by one of the applicant's receptionists and by the applicant establishes to my satisfaction that the daily takings sheets are, generally, an accurate summary of business transacted on the shift. Certainly those sheets are the applicant's means of maintaining management control of the business. In that regard he relies on the receptionists maintaining accurate daily takings sheets. I gained the impression that the applicant maintains a firm control through the receptionists and it is therefore more likely than not that these day sheets are accurate. The difficulty is that the daily takings sheets are not available for the relevant years of income. In effect the Tribunal is being asked to draw inferences on the basis of documents relevant to a period after the relevant years of income.
12. The day sheets do not show commissions charged by the various banks and credit card providers - I accept that the costs of these commissions were borne by the applicant and the escorts did not receive less than half of the fee charged because the customer used a charge card or Bankcard.
13. Nor do the day sheets reflect bad debts. It is the applicant's evidence that bad debts were entirely his cost because the escort was paid on the night for the service and the subsequent non payment by the customer was not recovered from the escort.
14. It is the applicant's evidence that the subject income tax returns were not prepared on the basis of the daily takings sheets but rather on the basis of his banking records. It will be immediately apparent that the substantial amount of cash transactions on each shift would not be reflected in the banking records. Tax payments made to the Australian Taxation
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Office on behalf of the escorts were recorded as ``wages''. However the applicant insisted in his oral evidence that he banks all receipts. He also said that where there is a cash shortfall on a shift, because most customers paid by charge card or Bankcard, he provides cash to the receptionist who then paid the cash shortfall to the referrals drivers and escorts. It seems the receptionists paid themselves for the shift first and then paid the escorts and referrals from available cash. Referrals are often paid the following night and drivers are paid on their next shift. All payments are made in cash except for payments to organisations such as the Taxation Office.15. In the context of bad debts a particular problem arose in relation to one client who I will call ``A''. That person was apparently a regular customer of the applicant staying on the premises for extended periods of time by comparison with most customers. Eventually difficulties arose with A because of repudiation of his charge-card vouchers by the providers and non-acceptance of his cheques by his bank. I was told that a substantial debt arose because of the non-payments but the escorts who provided services to A continued to be paid. On the basis of the evidence before me I have considerable difficulty in understanding why the applicant allowed A on the premises when it was clear he had not paid for previous visits. The applicant sought to explain this by saying that he thought A's presence in the premises would attract custom. It will be apparent that the bad debts incurred by the applicant in relation to A had not previously been brought to account as assessable income if the applicant's returns for the relevant years were prepared on the basis of his banking records. It would be reasonable to infer that dishonoured cheques and factored Bankcard vouchers would be taken into account in calculating gross proceeds of the business. Dishonoured charge card vouchers would not appear in the bank account if they had not been factored to the bank.
16. It is clear from Exhibits 2, C and D that the applicant was providing services to A until October 1996 and he accepted cheques in payment of those services until at least 9 October 1996. A cheque for $9,000 was dishonoured upon being deposited at the applicant's bank in December 1996. The applicant explained that he had taken this cheque from A on a defer presentation basis as an arrangement to overcome the non-payments by A. What this does establish is that services provided to A were not paid for at the time or were paid by cheques or charge card vouchers which were dishonoured at the bank. It further establishes that whatever A's payment problems were he was still being provided with escort services after 30 June 1996.
17. The applicant's evidence is that because the Taxation Office had previously audited him in 1986 and relied on his bank records that was the appropriate basis for preparation of his income tax returns in the relevant years.
18. Both the applicant and his receptionist state in their affidavits (Exhibits A and B) that document T16 is a reasonable representation of what the average cash expenses of the business were during the relevant years of income. Document T16 is several of the daily takings sheets within the period 1 July 1995 to 8 August 1995 - a period of 39 days which period is summarised in document T17. Comparison of those documents reveals that T17 is a summary of the applicant's interest in the gross taking, ie, excluding the payments to and on behalf of the escorts.
19. Given the evidence about the expenses it follows, in my view, that document T17 should be accepted as a reasonable representation of the applicant's interest in the gross income when considered vis-a-vis the escorts' interest in the gross income. Document T 17 indicates an average gross income of $997 per day.
20. I am satisfied that Document T16 can also be accepted as a reasonable reflection of the direct expenses incurred by the applicant for payment of receptionists, drivers and referrals. The document does not evidence overheads incurred nor does it support the applicant's claim that he pays the tax instalments for the escorts. In regard to these instalments I am satisfied on the evidence of the receptionist that the tax instalments are deducted from the 50% gross income derived by the escorts and not from the applicant's 50% share. However I am satisfied that the applicant would pay escorts in bad debt cases such as where cheques and charge card vouchers are dishonoured. The evidence does not allow me to quantify the bad debts.
21. On the basis of the evidence I have calculated the following direct expenses to reduce the average income of $997 per day ($363,000):
22. I am satisfied that the applicant incurred substantial fees for factored Bankcard vouchers and commissions for other charge card vouchers. The material before me does not allow me to quantify these amounts but I take into account the fact that on Friday 4 August 1995 the following amounts were derived out of a gross of $1,200.00 taken by the applicant (his 50% share of the house gross):
$
Bankcard 30
Visa 735
Amex 65
------
830
+Cash 370
------
$1,200
======
I have calculated the relevant factor charge at 3.5% of the gross amount for Bankcard and Visa and 6% of the gross amount for Amex. That calculates to a charge of $61.35 which on an annual basis is $22,331.00.
23. I have also calculated the tax instalment paid by the applicant on the receptionists' wages at $8,736.00.
24. The total direct expenses are calculated by me as follows:
$
Receptionists' wages 43,680
Tax Instalment thereon 8,736
Drivers' fees 50,960
Referrals etc 43,680
Card charges 22,331
--------
$169,387
========
Of these amounts the receptionists' wages, drivers' fees and referrals were generally paid in cash. Sometimes the applicant provided cash for this purpose but on most occasions cash taken on the shift was used to pay these outgoings. The tax instalments and card charges would be reflected in the bank account as either a debit or a reduced credit in the case of Amex and Diners Club. The respondent concedes that these charges and receptionists' wages were not taken into account in the objection decisions under review.
25. The applicant's income tax return for the years under review disclosed the following gross incomes and taxable income amounts:
Year ended 30 June Gross Income Amount Taxable Income
$ $
1993 148,468 961 (L)
1994 226,030 901 (L)
1995 313,498 8,189 (L)
The amended taxable incomes adopted and assessed by the respondent and which are now conceded to be excessive are set out in the adjustment sheets (Exhibit F) as follows:
Year ended 30 June 1993 $
Taxable Income as returned 961 (L)
Omitted Income 188,940
--------
Adjusted Taxable Income $187,979
========
Year Ended 30 June 1994
Taxable Income as returned 901 (L)
Omitted Income 218,099
--------
Adjusted Taxable Income $217,198
========
Year Ended 30 June 1995
Taxable Income as returned 8,189 (L)
Omitted Income 159,330
--------
Adjusted Taxable Income $151,141
========
26. The respondent having conceded that the assessments are excessive, does the onus placed on the applicant by s 14ZZK(b) of the Taxation Administration Act 1953 still apply? In this case the applicant has failed to show that the arbitrary assessments made by the respondent are incorrect. Neither has the respondent explained to the Tribunal the detail as to how the assessments of taxable income were calculated by the respondent's auditor.
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27. In
Trautwein v FC of T (1936) 4 ATD 48 at 79 Dixon and Evatt JJ were dealing with statutory provisions, quite different to s 14ZZK(b) in the Income Tax Assessment Act 1922 - an Act which did not have a provision similar to s 14ZZK. Their Honours said that the right of the taxpayer to relief against assessments of income tax was not merely to show that the assessment was erroneous but is a burden to show that the assessment should be reduced by some figure. That is the taxpayer must show that the Commissioner has sought to impose a liability in excess of the liability imposed by the legislation.
28. In my view it is not sufficient to show that some error has occurred if that error has not been quantified as to amount. This Tribunal should not speculate in the absence of evidence as to what the correct assessable income might be. To merely say that an assessment is excessive, as the respondent Commissioner has done in this case, is not to meet the burden imposed on the applicant by s 14ZZK. The Commissioner having conceded that the assessments are excessive, but having failed to quantify the excessive amounts, the burden remains on the applicant as to the quantum of the amount by which the assessments are excessive.
29. That the taxpayer has the burden of proving that the amount by which taxable incomes assessed is excessive is made clear by the decision of the High Court in
FC of T v Dalco 90 ATC 4088. As the Court recognised the mere fact of error in making an assessment under s 167 of the Act by the Commission does not prove that the assessment is excessive.
30. In Dalco Brennan J quoted with approval a dissenting judgment of Mason J in
Gauci & Ors v FC of T 75 ATC 4257 at 4261 as the correct view of then s 190(b) of the Act, which is in terms similar to s 14ZZK, as follows:
``The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with sec. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.''
31. In
FC of T v Munro 97 ATC 5041 the Federal Court (Lockhart J) held that the taxpayer in that case had not discharged the onus of proof in terms of s 14ZZK. That finding resulted in the appeal from a decision of the Tribunal being allowed and the Tribunal's decision set aside. The Tribunal had rejected the taxpayer's evidence preferring the only slightly more probable evidence of a third party. Lockhart J referred to the evidence relied upon by a Tribunal as ``a shaky foundation''. His Honour summarised the principles relating to onus of proof at pages 5049-5050.
32. The applicant's evidence in this matter is deficient because his records for the relevant years of income are deficient and not because I formed an adverse impression of his evidence. I did however form an adverse impression because I am satisfied that the applicant was seeking to create a particular impression and dissembled when questions likely to lead to a contrary impression were put to him. However my lack of satisfaction with the applicant's evidence does not by itself constitute a failure to discharge the onus. I am still required to consider the material before me.
33. As Burchett J explained in
Ma v FC of T 92 ATC 4373 I have to consider whether the applicant has proved sufficient to entitle him to have the assessments set aside. Section 43 of the Administrative Appeals Tribunal Act 1975 will then apply to empower the Tribunal to make a decision within the terms of the section. At page 4379 his Honour made comment on cases such as the one before him and the present case as follows:
``Furthermore, the making of estimates upon inexact evidence, which is so much a feature of both judicial and administrative decision- making, cannot be uniquely excluded from appeals against betterment assessments. To refuse to consider the credit, not only of the applicant, but also of his independent and unchallenged witnesses, simply because the effect of the evidence was to support his accountant's generalizations about double- counting rather than to hit upon a precise figure, was to fall into an error of law. If authority be needed for this proposition, it may be found in the decision of Walsh J, in
Krew v. FC of T 71 ATC 4213, to which Mr Gibb, with his usual frankness, referred me. That was a betterment case, bearing some similarity to the present, in which Walsh J.,
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in various parts of his judgment, acted on evidence that `substantial' portions of sums of money represented the proceeds of gambling; expressly eschewed (at 4223) any attempt to reach a `precise result' and acknowledged (at 4224) that his decision as to certain `large payments' lacked `satisfactory evidence of a specific kind', concluding nevertheless that it was `probable that a large part of the money was derived from gambling', with the result that `a somewhat arbitrary decision' was required, to some extent in favour of the taxpayer.''
34. It follows, in my view, that I must accept that the applicant incurred factor charges and commissions in relation to business transacted with charge cards. Although neither party quantified these charges it is now the task of the Tribunal to do so. I am supported in that conclusion by dicta of Davies J in
Saffron v FC of T 94 ATC 4049 at 4051 where his Honour referred to the judgment of Burchett J in Ma and went on to say:
``If, despite the general untruthfulness of a witness and the lack of records, the Court or the Tribunal nevertheless feels satisfied, as a matter of probability, as to the existence of a relevant fact or factor, effect must be given to that conclusion.''
35. The applicant puts in issue the validity of the assessments which are the subject of the decisions under review. The issue, as I understand it, is whether the assessments were authorised by s 167 of the Act.
36. On the material before the Tribunal the respondent had reason to be not satisfied with the returns lodged by the applicant and was well justified, in my view, in making assessments of the amounts on which in his judgment income tax ought to be levied. It is well established that s 167 extends the power of the Commissioner under s 166 of the Act upon being satisfied in terms of s 167. I am satisfied that the Commissioner was correct, in the circumstances of this case, in so exercising the power. I am satisfied that the assessments, the subject of this review, were authorised by s 167.
37. For the above reasons I am satisfied that the objection decisions under review should be set aside and each of the objections remitted to the respondent with directions that the assessments are to be amended in each year to reduce each taxable income by $43,680.00 per year of income for receptionists' wages (in accordance with the respondent's concession), $22,331.00 per year of income for charge card commissions and factoring charges (the respondent conceded in principle).
38. In relation to additional tax I am not satisfied that the Commissioner was wrong in concluding that the Act imposed additional tax in the circumstances of this case.
39. Additional tax as tax shortfall interest imposed by s 170AA of the Act has been imposed for the years in dispute. Penalty tax imposed by s 226J of the Act was also assessed. It is not clear to the Tribunal how all the assessed amounts were determined. They are as follows:
Year ended 30 June Shortfall Interest Shortfall Penalty
$ $
1993 19,487.74 81,373.13
1994 14,639.45 72,135.24
1995 2,648.18 47,815.68
In relation to the shortfall penalty the respondent did not exercise the remission discretion in s 227(3) of the Act. Nor does it appear that the discretion contained in s 170AA(11) of the Act was exercised.
40. In essence s 226J operates to impose the shortfall penalty where the shortfall, or part of it, was caused by the intentional disregard by the taxpayer or the tax agent of the Act or the regulations.
41. Section 226J is, in my view, coloured by s 226H which imposes shortfall penalty caused by recklessness of the taxpayer or the tax agent with regard to the correct operation of the Act or the regulations. An intentional disregard must be something more than disregard for the consequences. In my view it suggests that the person must have acted with an actual intent to disregard the operation of the Act and
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regulations, ie, there must be an intent which transcends a reckless disregard.42. In the light of the evidence I find it difficult to understand why s 226J is thought to be applicable. There is nothing in the evidence to indicate an intentional disregard for the Act by either the applicant or his tax agent. The evidence does however indicate a recklessness in the way the applicant dealt with his obligations under the Act. In Case 74/96,
96 ATC 662 I discussed the operation of s 22H and concluded that it applied where there was gross carelessness without regard for the consequences. That is the situation in this case. I will therefore change the decisions under review so as to impose the shortfall penalty in accordance with s 22H and not s 226J as assessed by the respondent.
43. There is nothing in the material before me suggesting that the discretion in s 227(3) should be exercised in the applicant's favour and I so decide not to exercise the discretion.
44. I do not see any basis for exercising the discretion in s 170AA(11) and I so decide not to exercise the discretion.
45. The respondent has proceeded on the basis that the assessments which are the subjects of the objection decisions are amended assessments. I am not satisfied that any of those assessments are in fact amended assessments. However If I be wrong on that point I have come to the conclusion that s 170(2)(b)(ii) would be satisfied because there has been an avoidance of tax and the time limitation of making the amended assessment within four years of the original assessment could not be an issue given that the assessments in dispute were made in October 1996.
46. The respondent has submitted that the Tribunal increase the assessments for the years ended 30 June 1994 and 30 June 1995. While I accept that the Tribunal may have the power to do so in appropriate cases I am not satisfied that it would be appropriate to do so in the light of the respondent's concession that the assessments are excessive.
47. If the respondent is of the view that amended assessments are authorised then the respondent may take action to give effect to his submission. I do not propose to do so because I am not satisfied that the amended assessments would be authorised by s 170 of the Act.
48. The objection decisions under review will be set aside and each matter remitted to the respondent with directions as follows:
- (a) as an arbitrary adjustment a deduction is to be allowed in each year of income under review for charge card factoring and commission charges amounting to $22,000.00 ($22,331.00 rounded down);
- (b) as an arbitrary adjustment receptionists' wages paid in cash should be allowed to a total amount of $43,680.00 in each year of income under review;
- (c) penalty tax for the tax shortfall is imposed by s 226H of the Act so as to impose additional tax equal to 50% of the amount of the shortfall after giving effect to paragraphs (a) and (b) of this decision; and
- (d) I will certify that these proceedings have terminated in a manner favourable to the applicant.
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