CARTER v FC of T

Members:
CR Walsh SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2013] AATA 141

Decision date: 14 March 2013

CR Walsh (Senior Member)

INTRODUCTION

1. Mrs Carter seeks a review of the Commissioner's objection decision (dated 21 May 2012) which disallowed Mrs Carter's objection (dated 11 April 2011) to her amended assessment of income tax for the year ended 30 June 2008 (issued to her on 16 December 2010) and assessments of goods and services tax ( GST ) net amounts for the tax periods from 1 July 2007 to 30 June 2008 (issued to her on 10 December 2010) in relation to her florist retail business, "The Boulevard Florist", but which allowed a reduction in administrative penalty for the income tax and GST shortfalls (from 75% to 50%) and a partial remission of the general interest charge ( GIC ).

RELEVANT BACKGROUND FACTS

2. The facts relevant to this review application, which are not in dispute, are as follows.

3. At all material times, Mrs Carter carried on a business of florist retail trading as "The Boulevard Florist", at Shop 12 Beaumaris City Shopping Centre, Ocean Reef, Western Australia ( Florist Business ).

4. At all material times, the Florist Business was registered for GST and made taxable supplies in the course of carrying on the Florist Business.

5. In the period from 21 August 2007 to 21 July 2008, Mrs Carter, through her tax agent Mr Glenn Trinick, lodged business activity statements ( BASs ) with the Australian Taxation Office ( ATO ) for the monthly tax periods from 1 July 2007 to 30 June 2008.

6. On 28 April 2009, Mrs Carter, through her tax agent Mr Trinick, lodged her income tax return for the year ended 30 June 2008 ( 2008 Income Tax Return ). The 2008 Income Tax Return reported a "Cost of sales" for the Business of $259,982 and a "Total business income" for the Business of $313,971.


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Audit notification

7. By letter dated 1 September 2010, the Commissioner advised Mrs Carter that the ATO was conducting an audit of Mrs Carter's activity statements and income tax return for the Florist Business in respect of the period 1 July 2007 to 30 June 2008, for the reason that she had reported "cost of goods sold" ( COGS ) for the Florist Business for the 2008 year, which represented 83% of her reported business income and that this was outside the COGS industry benchmark percentage range of between 44% and 54%.

8. In that same letter, the Commissioner requested that Mrs Carter provide the ATO with evidence that she was correctly recording and reporting her business income for the Florist Business, particularly "in relation to receipts of cash income and where those cash receipts [were] used for either business or personal purposes". That letter further stated that Mrs Carter would "….need to demonstrate that [she had] kept records that explain all [her] sales transactions and that [she had] kept these records in such a manner as to enable [the Commissioner] to readily ascertain [her] tax liability." The letter specified that the records and information required by the ATO included:

  • an explanation of why your business is reporting outside the benchmarks for you industry segment including an explanation of how you calculate your sale prices.
  • for the period from 1 April to 30 June 2008
    • - all of your sales records such as invoices, receipts, cash register journal rolls, point of sales system print outs

      Note : You are required to keep detailed records of every sale unless you have completed and retained reconciliations of your daily sales to your banking.

    • - any reconciliations that you maintain of your sales records to the amount deposited in your business bank account and/or recorded in your cash book or similar record. The reconciliation should show amounts not deposited to business accounts and amounts used for drawings, wages and other cash expenses
    • - any reconciliations that you maintain between the cash book, bank statements and the amounts reported on your BAS at label G1
    • - copies of all bank statements
    • - any other relevant information.

9. Under cover of a letter dated 8 October 2010, Mrs Carter's tax agent, Mr Trinick, provided the Commissioner with the following documentation in relation to the Florist Business:

  • (i) Commonwealth Bank EFTPOS settlement totals receipts for the period 10 May 2008 to 16 May 2008;
  • (ii) a spread sheet summary of cash register rolls for the period 5 April 2008 to 30 June 2008;
  • (iii) cash register roll receipts for the period 9 May 2008 to 17 May 2008;
  • (iv) Bankwest Business Cheque Account statements for the period 27 March 2008 to 2 July 2008; and
  • (v) Bankwest deposit slips for the period 3 April 2008 to 1 July 2008.

10. In that letter, Mr Trinick also provided the Commissioner with the following information about Mrs Carter and the Florist Business:

  • Shortly after [Mrs Carter] purchased the business the supermarket in the shopping complex started selling flowers.
  • [Mrs Carter] had to reduce her prices to compete therefore her pricing has been on an ad hoc basis.
  • [Mrs Carter] was in a situation of either:-
    • 1) Walk away from the business and still continue to pay the Lease until a new tenant was found.
    • 2) Sell the business (she tried but was unsuccessful).
    • 3) Remain and deal with shopping centre issues and make the business profitable.
  • Please note that the husband of [Mrs Carter] has injected funds into the business.
  • [Mrs Carter] pays for her stock from legitimate sources and not backyard operators, as most florists do.
  • [Mrs Carter] does not have a cash business to purchase from backyard operators to reduce her gross profits as

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    other operators do. Majority of sales are EFTPOS.
  • Her till was never working properly and the roll would never follow through correctly and constantly jammed.

Interim audit report

11. On 15 November 2010, the Commissioner advised Mrs Carter of his interim audit findings ( Interim Audit Report ). In the Interim Audit Report the Commissioner found that, for the following reasons, Mrs Carter did not keep the records of the Florist Business in such a manner as to enable the Commissioner to readily ascertain the her tax liability:

  • Your records do not readily reconcile to the reported amount and therefore fail the requirements of paragraphs 36 to 38 of the Taxation Ruling TR 96/7 Income Tax: record keeping - section 262A [of the ITAA 1936] - general principles.
  • You have forwarded partial z summaries only of your till tapes and you have failed to reconcile your cash takings as required by paragraph 38 of the Taxation Ruling TR 96/7 Income Tax: record keeping - section 262A [of the ITAA 1936] - general principles. Therefore we do not accept that all of your cash sales have been accurately reported.

12. As a consequence, in the Interim Audit Report the Commissioner exercised his discretion in s 167 of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ) and s 105-5 of Schedule 1 to the Tax Administration Act 1953 (Cth) ( TAA ) and found that the sales of the Florist Business for the 2008 year should be assessed by reference to the COGS small business industry benchmarks for the florist industry, resulting in a shortfall of income tax (of $57,389.85) and a shortfall of GST (of $16,745), respectively.

13. Further, in the Interim Audit Report the Commissioner found that an administrative penalty of 75% should be imposed in relation to the shortfall amount of income tax and the shortfall GST net amount, pursuant to ss 284-75 and 284-90 of Schedule 1 to the TAA and Miscellaneous Taxation Ruling MT 2008/1 - Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard ( MT 2008/1 ), on the basis that Mrs Carter "intentionally disregarded the law because the facts show that [she] knew what the correct tax treatment was and chose to ignore [her] obligations". According to the Interim Audit Report, the administrative penalty in respect of the shortfall income amount was $43,042.38 and the administrative penalty in respect of the shortfall GST net amount was $12,558.75.

14. In the Interim Audit Report the Commissioner also determined that there were no grounds for remission of administrative penalty under Practice Statement Law Administration PS LA 2006/2: Administration of shortfall penalty for false or misleading statement ( PS LA 2006/2 ) and the principles of the Australian Taxation Office's Compliance Model and the Taxpayers' Charter, based on Mrs Carter's particular circumstances, compliance history, other remission considerations and the intentional disregard by Mrs Carter of her taxation obligations.

15. In the Interim Audit Report the Commissioner advised Mrs Carter that he would provide his decision on GIC remission and Shortfall Interest Charge ( SIC ) remission in his final audit report.

Notice of assessments and liability to pay penalty - GST

16. On 8 December 2010, the Commissioner issued Mrs Carter with a "Notice of assessments and liability to pay penalty" for GST for the amount of $14,891.70. In calculating the administrative penalty payable, the Commissioner applied an increase of 20% to the base penalty amount for all periods except for the July 2007 period.

17. On 10 December 2010, the Commissioner issued Mrs Carter with a "Notice of assessments of net amount" of GST for the periods 1 July 2007 to 30 June 2008 for the amount of $16,745.

Final audit report

18. Also on 10 December 2010, the Commissioner advised Mrs Carter of his final decision on the audit of the Florist Business ( Final Audit Report ). In essence, the Commissioner adopted his findings in the Interim Audit Report, save for increasing the base penalty amount for additional GST net


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amounts attributable to the BASs for the August 2007 to July 2008 periods, based on Mrs Carter's conduct during the audit, her knowledge of the shortfall and her prior penalty history. The Commissioner assessed a partial remission of the interest charges to the base rate. According to the Final Audit Report, the total amount payable by Mrs Carter (excluding interest charges) was $132,068.90.

Notice of amended assessment and liability to pay penalty - income tax

19. On 16 December 2010 the Commissioner issued Mrs Carter with a "Notice of amended assessment" for the year ended 30 June 2008 for the amount of $57,389.85 and with a "Notice of assessment of penalty for failing to provide a document" for the amount of $43,042.35.

Objection

20. On 1 February 2011 Mr Trinick objected to those assessments on Mrs Carter's behalf.

21. On 15 March 2011, the Commissioner wrote to the Mrs Carter, advising her that the objection which had been lodged by her was invalid as it did not state fully and in detail the grounds for her objection.

22. On 11 April 2011, Mr Trinick, lodged a further objection on Mrs Carter's behalf ( Objection ).

23. In the Objection Mrs Carter claimed, inter alia, that:

  • (i) Shortly after she had purchased the Florist Business the supermarket in the shopping complex containing her shop started selling flowers;
  • (ii) She had had to reduce her prices to compete;
  • (iii) Her pricing had been on an ad hoc basis;
  • (iv) The majority of her sales were EFTPOS;
  • (v) The cash register ("till") never worked properly and the roll would never follow through correctly and constantly jammed;
  • (vi) She could not afford a reliable cash register ("till") until about 8 months ago;
  • (vii) When added, the amounts shown on the cash register roll ("till tapes") matched her bank accounts, cash at bank, income tax returns and BASs;
  • (viii) The 2009 benchmarks have been withdrawn, indicating that the benchmarks are compiled incorrectly (which is a reflection on the 2008 benchmarks);
  • (ix) The cost of flowers and other items are considerably cheaper in the Eastern States;
  • (x) The benchmarks are inconsistent with s 99 of the Commonwealth Constitution as the WA economy is quite unique compared to the Eastern States.

Objection Decision

24. On 21 May 2012, the Commissioner determined the Objection by:

  • (i) Disallowing in full Mrs Carter's Objection to the amended assessment of income tax (for the 2008 income tax year, issued on 16 December 2010) and assessment of GST net amount (for the monthly tax periods from 1 July 2007 to 30 June 2008, issued on 10 December 2010);
  • (ii) Allowing in part Mrs Carter's Objection to the administrative penalty assessments for income tax shortfall (by reducing that penalty by $14,347.45) and GST shortfall (by reducing that penalty by $6,519.20). These reductions were as a consequence of a reduction in the penalty rate from 75% to 50% after the Commissioner determined that Mrs Carter had not intentionally disregarded the law but had been "reckless"; and
  • (iii) Granting a partial remission of GIC payable by Mrs Carter (Objection Decision).

Application to Tribunal

25. On 21 July 2012, Mrs Carter applied to the Tribunal for a review of the Commissioner's Objection Decision. Mrs Carter's "Reasons for Application" are as follows:

Incorrect assessment on Income and GST

Incorrect application of law

Inconsistency with Section 99 of the Commonwealth of Australia Constitution Act

Inconsistencies of correspondence

Inconsistencies with proper principles [of] accounting

Audit undertaken by unskilled auditors without proper qualifications


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The Commissioner has breached the APS Code of Conduct and Federal Criminal

Law by committing fraud, dishonesty and lack of care and diligence

26. The above issues are also raised in Mrs Carter's "Statement of Facts, Issues and Contentions", dated 12 November 2012, which was filed with the Tribunal and served on the Commissioner for the purposes of this review application ( Mrs Carter's SOFIC ). However, the Tribunal notes that not all of the issues raised in Mrs Carter's review application (and in Mrs Carter's SOFIC) were raised by her in her Objection to the Commissioner. In particular, Mrs Carter's Objection did not address the following issues, now raised:

  • (i) Inconsistencies of correspondence;
  • (ii) Inconsistencies with proper principles of accounting;
  • (iii) Audit undertaken by unskilled auditors without proper qualifications; and
  • (iv) The Commissioner breached the APS Code of Conduct and Federal Criminal Law by committing fraud, dishonesty and lack of care and diligence.

27. As such, Mrs Carter requires the leave of the Tribunal to have her grounds for objection amended by the addition of the above grounds: s 14ZZK(a) of the TAA. The Tribunal's discretion to allow a taxpayer's grounds of objection to be amended is very broad:
Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation 91 ATC 4942.

28. At the hearing of this review application, the Tribunal granted Mrs Carter leave to amend her grounds of objection to include additional grounds (i) to (iii) above, but refused to grant her leave in relation to additional ground (iv) above. The Tribunal notes that the Commissioner has been aware of these additional grounds since Mrs Carter's SOFIC was filed and served on 13 November 2012. Indeed, the Commissioner acknowledged and, to some extent, addressed these additional grounds in his Statement of facts, Issues and Contentions (dated 21 December 2012) as well as in his written "Submissions" (dated 31 January 2013) which were handed up at the hearing of this review application. As such, the Tribunal found it unnecessary to adjourn the hearing of this application to enable the Commissioner to prepare his response to the additional grounds.

29. Further, the reason the Tribunal did not grant Mrs Carter leave in relation to additional ground (iv) above is that the Tribunal does not have jurisdiction in relation to this review application to determine this issue. The more appropriate course would be for Mrs Carter to direct her complaints regarding the alleged conduct of the Commissioner to the Commonwealth Ombudsman: see also discussion in [57] and [60] below.

Decision sought by Mrs Carter

30. Mrs Carter's SOFIC states that the Tribunal should decide the following in relation to her review application:

  • a) An order setting aside the Respondent's decisions allowing the Applicant's objections
  • b) Orders be issued requesting the Federal Police charge the Commissioner for breach of the Public Service Act and other criminal activities.
  • c) Compensation is paid by the Respondent.
  • d) Other orders the [T]ribunal deem fit.

ISSUES

31. The central issue for determination by the Tribunal in this review application is whether the Commissioner's assessment of income tax for the year ended 30 June 2008 and assessments of GST net amounts for the monthly tax periods from 1 July 2007 to 30 June 2008 are excessive for the purposes of s 14ZZK(b)(i) of the TAA.

32. In deciding this issue it is necessary for the Tribunal to:

  • (i) consider whether it was appropriate in the circumstances for the Commissioner to apply the COGS small industry benchmark range (of 44% to 54%) for the florist industry to increase the income of the Florist Business in the year ended 30 June 2008; and
  • (ii) address Mrs Carter's claims that:
    • (a) the Commissioner acted inconsistently with s 99 of the Commonwealth Constitution by the use of benchmarks which she says are inappropriate for the Western Australian market where the costs of flowers and

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      other items are more expensive than in the eastern States of Australia.
    • (b) there were inconsistencies in the Commissioner's correspondence with her;
    • (c) the Commissioner's audit results are inconsistent with proper principles of accounting; and
    • (d) the Commissioner's audit of the Florist Business was undertaken by unskilled auditors, without proper qualifications.

33. The Tribunal must also determine whether:

  • (i) Mrs Carter is liable to pay an administrative penalty in respect of any income tax and GST shortfall amounts pursuant to ss 284-75(1) and 284-90(1) of Schedule 1 to the TAA; and
  • (ii) The administrative penalties imposed on Mrs Carter in respect of any income tax and GST shortfall amounts should be remitted in whole or part.

BURDEN OF PROOF

34. By virtue of s 14ZZK(b)(i) of the TAA, Mrs Carter bears the burden of proving that the Commissioner's income tax and GST assessments are excessive:
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 164 and
ANZ Saving Bank Ltd v Federal Commissioner of Taxation 94 ATC 4844. That is, the burden on Mrs Carter is two-fold, namely to prove that the assessments are excessive and to prove that the assessments are wrong and what the correct assessments should be.

35. The burden is not necessarily discharged, for example, by showing that an error by the Commissioner in forming a judgment as to the "amount" of the relevant assessment:
Dalco (1990) 168 CLR 614 at 621 and
Vadesz v Commissioner of Taxation [2006] AATA 682 at [31]. It is well-established that the Commissioner need not show that the relevant assessment was correctly made:
Gauci (1975) 135 CLR 81 at 89 per Mason J and
Vita Hot Bread Pty Ltd v Commissioner of Taxation [2012] AATA 570 at [9].

36. Further, there is no onus on the Commissioner to show that the relevant assessment is reasonable or supported by evidence:
Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89 per Mason J.

RELEVANT EVIDENCE

37. Mrs Carter did not provide any witness statements (including her own) in support of her application. Further, no witnesses were called to give evidence at the hearing in support of Mrs Carter's application, including Mrs Carter herself. Mrs Carter was not present at the hearing of her application which, according to her representative, was due to her ill health.

38. The only evidence provided by Mrs Carter in support of her application was a bundle of documents filed with the Tribunal and served on the Commissioner some four working days before the hearing of her application. This bundle of documents was tendered into evidence as Exhibit A1, but subject to a direction by the Tribunal:

  • (i) requiring Mrs Carter to, within an agreed period following the hearing, refile and serve the bundle of documents in an indexed and tagged form, with a clear description of each of the documents contained in the bundle and an explanation of the relevant of each of the documents. (That bundle was received by the Tribunal on 15 February 2013 and, for the most part, complied with the direction made by the Tribunal at the hearing); and
  • (ii) allowing the Commissioner an agreed period following the hearing to make submissions on, for example, the relevance of the various documents contained in that bundle. (Those submissions were received by the Tribunal on 1 March 2013).

39. The only other evidence before the Tribunal was the s 37(1AB) "Statement in Lieu" (or "T" documents) filed by the Commissioner on 21 August 2012 (which includes evidence, such as cash register tapes and Bankwest bank statements for the Florist Business, which largely comprises material which was provided by Mrs Carter to the Commissioner during the audit process).

RELEVANT LAW & ANALYSIS

Record keeping & application of COGS benchmark

40. Section 262A of the ITAA 1936 states:

262A Keeping of records [see Note 3]


  • ATC 5489

    (1) Subject to this section, a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act.

    Note: There is an administrative penalty if you do not keep or retain records as required by this section: see section 288-25 in Schedule 1 to the Taxation Administration Act 1953.

    ……….

  • (2) The records to be kept under subsection (1) include:
    • (a) any documents that are relevant for the purpose of ascertaining the person's income and expenditure; and
    • (b) documents containing particulars of any election, choice, estimate, determination or calculation made by the person under this Act and, in the case of an estimate, determination or calculation, particulars showing the basis on which and method by which the estimate, determination or calculation was made.

      …………….

  • (3) A person who is required by this section to keep records must:
    • (a) keep the records in the English language or so as to enable the records to be readily accessible and convertible into writing in the English language; and
    • (b) keep the records so as to enable the person's liability under this Act to be readily ascertained ; and…. [Emphasis added]

41. As outlined above, in Mrs Carter's case, the Commissioner was not satisfied that her records for the Florist Business for the relevant period had been kept "so as to enable the person's liability under the [ITAA 1936] to be readily ascertained" by him for the purposes of s 262A of the ITAA 1936. As a result, the Commissioner assessed Mrs Carter based on the small business industry COGS benchmarks for her industry segment, being florist retail.

42. These default assessments were issued by the Commissioner pursuant to his discretion in:

  • (i) s 167 of the ITAA 1936, with respect to Mrs Carter's income tax liability for the 2008 year; and
  • (ii) s 105-5 of Schedule 1 of the TAA, in relation to Mrs Carter's GST liability for the relevant periods in the 2008 year.

43. Section 167 of the ITAA 1936 provides:

Default assessment

If:

  • (a) any person makes a default in furnishing a return; or
  • (b) the Commissioner is not satisfied with the return furnished by any person; or
  • (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income'

    the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.

44. Section 105-5 of Schedule 1 to the TAA states:

Commissioner may make assessment of indirect tax

  • (1) The Commissioner may at any time make an assessment of:
    • (a) your net amount, or any part of your net amount, for a tax period; or
    • (b) your net fuel amount, or any part of your net fuel amount, for a tax period or fuel tax return period.
  • (2) The Commissioner may at any time make an assessment of the amount of indirect tax payable by you on an importation of goods.
  • (3) The Commissioner may make an assessment under this section even if he or she has already made an assessment for the tax period, fuel tax return period or importation concerned.

    Note: An assessment made under this section is a reviewable indirect tax decision: see Subdivision 105-B.

45. In relation to the issue of record keeping and the Commissioner's application of the COGS benchmark to the income of the Florist


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Business for the 2008 year, Mrs Carter's SOFIC states:

Record Keeping

  • 21. The Taxpayer provided records that complied with Section 262A of the Act and TR 96/7 (Paragraph 10) - Our view, generally, is that the minimum information required by ATO staff with accounting skills…
  • 22. A person with accounting skills is an accountant and not a bookkeeper. A bookkeeper records transactions and accountant interprets those transactions. A person who is an accountant has relevant qualifications, belongs to a professional body and complies with the rules and regulation of that professional body which includes APES205 Conformity with Accounting Standards, APES210 Conformity with Auditing Assurance Standards and APES 215 Forensic Accounting Services.
  • 23. The audit conducted by the Commissioner was not conducted by a person who is an accountant. Had the audit been conducted by an accountant the audit would have to have been done pursuant to the applicable standards had this not been done the accountant therefore would be in breach of his/her professional body and in particular APES 110. If in breach the accountant would have to resign from their current employment or resign from their professional body.
  • 24. Therefore, there was no audit conducted by the Commissioner or his subordinates who had accounting skills.
  • 25. Section 262A(2) states estimates can be kept. Estimates for June 2008 were submitted to the Commissioner for the month of June.
  • 26. Section 262A and TR 96/7 do not state that a business must use a cash register nor say that new cash register must be purchased at the detriment of the business.
  • 27. The examples stated in TR 96/7 are only examples and a guide. As the taxpayers sales are of high volume/low value sales transactions (paragraph 34) the taxpayer business fits example 2 of TR96/7.
  • 28. It's the taxpayer's choice whether to use a cash register or not. The defective cash register was only a convenience to store what little cash takings was received.
  • 29. The commissioner did not advise the taxpayer at any time that the taxpayer should use a cash register.
  • 30. The records provided match the bank statements. Therefore why would monthly reconciliation of sales need to be conducted?
  • 31. The Commissioner states on page 9 "Reason For Decision" "T2" that your business records were not kept in such a manner as to enable him to readily ascertain your tax liability:
    • a. Your records do not readily reconcile to the reported amount;
    • b. Your Z summaries of your till tapes were incomplete; and
    • c. You had failed to reconcile your cash takings.
  • 32. The Oxford Dictionary states "Readily" means willingly, easily. That's why TR 96/7 states that a person with "accounting skills" and not a novice needs to be used to inspect the records of a business.
  • 33. If till tapes were mandatory then estimates could have been calculated by a person with accounting skills, however there was no such person. Certainly not the Commissioner.
  • 34. If cash takings match bank account then there is no reason to perform reconciliation on cash takings.
  • 35. The Commissioner has failed to fabricate an unlawful case against the taxpayer and has no accounting skills or qualifications, practical business knowledge and fails to have the ability to use a calculator as some schedules do not add correctly. Further the Commissioner refers to incorrect periods of the audit.

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  • 36. The Commissioner has made statements that are not backed by evidence.
  • 37. The taxpayers 2008 Tax Return and relevant BAS statements are correct as lodged by the taxpayer.

46. Thus, in summary, Mrs Carter's contention is that she provided the Commissioner with records which complied with s 262A of the ITAA 1936 (and Taxation Ruling TR 96/7 , titled "Income Tax: record keeping - section 262A - general principles" ) for the reason that: (i) she provided the Commissioner with estimates for June 2008; (ii) she was not required to use a cash register; and (iii) the records she provided to the Commissioner matched the information (figures) contained in the bank statements she provided to the Commissioner.

47. In contrast, the Commissioner contends that based on the records and information provided to him by Mrs Carter during the audit, Mrs Carter failed to satisfy the obligations to keep business records as required by s 262A of the ITAA 1936.

48. Further, the Commissioner submits that based on the records and information provided to him by Mrs Carter during the audit of the Florist Business, he correctly applied Taxation Ruling TR 96/7 , which sets out the Commissioner's current views on what is expected of a person carrying on a business in respect of their obligation to keep records. In particular, the Commissioner noted that paragraphs 12 and 13 of TR 96/7 apply to businesses (like the Florist Business) that use a cash register to record their sales. Paragraph 13 of TR 96/7 states:

……we accept that a person may discard the rolls of tape after one month provided that the person has reconciled the "Z-totals" with actual cash sales and bankings for that period. The reconciliation must take into consideration any cash earned that the person used for other persons e.g., personal drawings, minor purchases, etc. The person must keep the reconciliation for the statutory period (5 years). We consider that it is necessary for the person to keep the one month representative sample so that the ATO staff can verify that the "Z-totals" are an accurate summary of every individual transaction that relates to the person's income and expenditure. The representative sample of the rolls of tape enables ATO staff to analyse more accurately whether a person has reconciled the bankings with the "Z-totals." If a person does not do a reconciliation, the person must keep the rolls of tape for the statutory period (5 years)".

49. The Commissioner contended that as he was unable to readily ascertain the applicant's tax liability, it was appropriate for him to issue default assessment which applied the COGS small industry benchmark range (of 44% to 54%) for the florist industry, in order to increase the income of the florist Business for the 2008 year, and accordingly increase Mrs Carter's income tax and GST liabilities in respect of that year.

50. Based on the evidence before it (including the bundle of documents comprising Exhibit A1), the Tribunal considers that Mrs Carter has failed to prove positively, on the balance of probabilities, that the relevant assessments are excessive. The evidence before the Tribunal (including the evidence in Exhibit A1) does not prove how Mrs Carter calculated the gross income of the Florist Business for the year ended 30 June 2008 and, in particular, the cash component. Mrs Carter's problems in this regards appear to arise as a result of the following:

  • • a defective cash register;
  • • missing till (cash register) tapes for June 2008,
  • • the fact that no reconciliations have ever been produced;
  • • the spread sheet summary of till (cash register) rolls for April and May 2008, which was provided on Mrs Carter's behalf by Mr Trinick, is unreliable in that:
    • (i) days are missing from the summary and yet other evidence before the Tribunal indicates that Mrs Carter did, in fact, trade on the those days; and
    • (ii) there is a difference between the total sales recorded on the spread sheet summary and the reported G1 "Total sales" amount in the BASs for the Florist Business for April and May 2008.

51.


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Further, there is no evidence before the Tribunal (including in Exhibit A1) to support Mrs Carter's contentions (as set out in paragraph 46 above). By way of example, there is no evidence of why Mrs Carter did not properly use a cash register in the months of April to June 2008 and whether she properly reconciled the "Z-totals" with the actual cash sales and bankings for those months.

52. The Tribunal considers that Mrs Carter has failed to discharge her burden of proof by producing to the Tribunal evidence establishing that the relevant assessments are, on the balance of probabilities, excessive. Accordingly, the Commissioner's assessments should prevail: Gauci and Dalco.

53. Consequently, the Tribunal considers that in the circumstances it was open to the Commissioner to exercise his discretion and apply the COGS small industry benchmark range (of 44% to 54%) for the florist industry and increase the income of the Florist Business for the 2008 year and, it follows, increase Mrs Carter's income tax and GST liabilities in respect of that year. The Tribunal notes that the use of such benchmarks have previously been accepted by the Tribunal: see
Baini v Commissioner of Taxation [2012] AATA 440 and Vita Hot Bread.

Constitutional issue

54. At the hearing of this application Mrs Carter's representative contended that the Commissioner breached s 99 of the Constitution in his application of the COGS small industry benchmark for florist retail to the Florist Business of Mrs Carter. In relation to this issue, Mrs Carter's SOFIC states:

Constitution

  • 38. The Commission[er] withdrew benchmarks for 2009. The reason the Commissioner gave was that he only withdraw the cash sales benchmarks but not the cost of goods sold to annual turnover benchmark.
  • 39. Annual turn includes cash sales? So how could the cost of goods sold ratio be relevant if cash sales are withdrawn and not left in the cost of goods sold ratio?
  • 40. This is another "not applying proper accounting principles and practices by the Commissioner".
  • 41. The benchmark should be based on Qualitative, Quantitative - Discrete and Continuous Numerical Data. There is no evidence the Commissioner has applied these principles of statistics and has not released and printed the discrete numerical data, permutations, probability and sampling to the public to confirm his position. Therefore the Commissioner has provided false data to the public and refuses to verify the data.
  • 42. The Commissioner was given an explanation as to why the Cost of Goods Sold ratio was high, however he chose without providing any sound accounting theory or practices to continue to wrongly assess the taxpayer.
  • 43. How can average Cost of Goods Sold be used to determine average percentages as florist's financial statements may vary. Different costs may or may not be included in the Cost of Goods Sold. For example I included delivery costs and non floral materials in the taxpayers Cost of Goods Sold. Did The other florists include these costs in the trading statement? Did the other florists In Australia prepare a trading statement?
  • 44. The Commissioner alleges that the only explanation for a high Cost of Goods Sold was removing monies from the till or not recording sales.
  • 45. The taxpayer's financial statements show debt by way of overdraft and credit card. If the taxpayers business was profitable then there would be no reason to hold such debt in the business and this explains the high Cost of Goods Sold ratio.
  • 46. The Commissioner has provided no evidence that the benchmarks are weighted correctly from state to state.
  • 47. Therefore the Commissioner has breached Section 99 of the Constitution by levy a tax greater than what would be levied to a taxpayer say in New South Wales.

55. The Commonwealth Parliament derives its power to enact income tax legislation from the Constitution. The empowering provision is s


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51(ii) of the Constitution which provides Parliament, subject to certain restrictions in the Constitution, with the "power to make laws for the peace, order and good government of the Commonwealth with respect to…….[T]axation; but not so as to discriminate between the States or parts of States." Also of relevance is s 99 of the Constitution which states:

99. Commonwealth not to give preference

The Commonwealth shall not, by any law, or regulation of trade, commerce or revenue, give preference to one State or any part thereof over another State or any part thereof.

56. Since the first enactment with respect to income tax by the Commonwealth in 1915, many taxpayers have sought to argue that they are not required to fulfil their taxation obligations because the Commonwealth's tax legislation, or some aspect of it, is invalid under the Constitution. Such arguments have generally not been entertained by the courts, being dismissed as frivolous and disclosing no cause of action. Mrs Carter's claim with respect to s 99 is no different. That is, there is no factual basis for Mrs Carter's contention that the Commissioner acted inconsistently with s 99 of the Constitution.

57. In any event, the Tribunal's broad power to stand in the shoes of the decision-maker (here, the Commissioner), is exercisable only in relation to the decision under review (in this case, the Commissioner's objection decision dated 21 May 2012): see s 43(1) of the Administrative Appeals Tribunal Act 1975 (Cth) ( AAT Act ) which states that "For the purpose of reviewing a decision, the Tribunal may exercise all the powers" of the decision-maker. However, the Tribunal has no general review power, nor does it have any general decision-making power. Its obligation is to conduct a merits review of the decision-maker's decision and to reach a decision that it objectively considers to be the correct and preferable decision:
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 78;
24 ALR 577 per Smithers J. That is, the Tribunal has no greater powers than those which may be exercised by the decision-maker. As President Brennan J said in
Re Brian Lawlor Automotive Pty Ltd and Collector of Customs (NSW) (1978) 1 ALD 167 at 175:

"The AAT is not a primary administrator. It is not the original repository of powers and discretions under an enactment."

58. As such, in exercising its powers under s 43 of the AAT Act the Tribunal is not in a position to determine whether the Commissioner acted inconsistently with s 99 (or s 51 (ii)) of the Constitution in his dealings with Mrs Carter.

Other issues raised by Mrs Carter

59. As stated above, in her review application and in Mrs Carter's SOFIC (and at the hearing of this application), Mrs Carter, through her representative, raised the following additional grounds for seeking a review of the Objection Decision:

  • (a) Inconsistencies of correspondence;
  • (b) Inconsistencies with proper principles of accounting;
  • (c) Audit undertaken by unskilled auditors without proper qualifications;

60. For the same reasons as provided above (in paragraph 59), consideration of these issues are irrelevant to the Tribunal carrying out its merits review function in s 43 of the AAT Act. That is, the Tribunal is limited to a review of the Objection Decision. If Mrs Carter is dissatisfied with the Commissioner's conduct in relation to her, and seeks compensation in respect of that conduct, the more appropriate and best course of action would be for her to make a complaint to the Commonwealth Ombudsman. Alternatively, she could consider making an application under the Compensation for Detriment caused by defective administration (the CDDA scheme), which is administered by the ATO in accordance with a "Financial Charter", or the act of grace scheme, which is administered by the Department of Finance and Administration in accordance with the Financial Management and Accountability Act 1997 (Cth)).

Administrative penalties

61. Penalties apply if a statement that is false or misleading in a material particular is made by a taxpayer to the Commissioner: s 284-75(1) of Schedule 1 to the TAA. Such statements include statements made about a tax-related matter, for example by a tax agent preparing an


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income tax return or a BAS: section 284-25 of Schedule 1 to the TAA.

62. Section 284-90 of Schedule 1 to the TAA contains a scale of penalties which are to apply for false or misleading statements or statements whose positions as to income tax law are not reasonably arguable. Where a statement results in a "shortfall amount" above the applicable threshold, the penalty is calculated as a fixed percentage of the "shortfall amount". A "shortfall amount" is the difference between the amount of tax, credit, or payment entitlements, calculated on the basis of the taxpayer's statement, and the amount of tax, credit or payment entitlement according to the law: s 284-80 of Schedule 1 to the TAA.

63. Where there is a "shortfall amount" and part or all of it is caused by the "recklessness" of the taxpayer or of a registered tax agent with regard to the correct operation of a taxation law (excluding excise laws), the taxpayer is liable to a penalty of 50% of the amount of the shortfall, or part of the shortfall, as appropriate: s 284-90(1) of Schedule 1 to the TAA, item 2.

64. In
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] FCA 164 the Federal Court (Cooper J) stated (at [77]) made the following comments regarding what constitutes "recklessness":

Recklessness…. 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 fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and 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.

See also: the Full Federal Court's decision in
Hart v Federal Commissioner of Taxation 2003 ATC 4665 which endorsed the above comments of Cooper J at [33] and [44].

65. In relation to the administrative penalties applied to Mrs Carter in respect of the Florist Business in the 2008 year, Mrs Carter's SOFIC states:

Penalty

  • 1 The determination of the administrative penalty for the 2007 and 2008 financial years was subject to Section 284-215(2) of schedule 1 of the TAA which was repealed with effect from 4 June 2010 pursuant to Act 56 2010.
    Aurora developments Pty Ltd v Commissioner No 2 [2011] FCA 1090 at [19]-[22] per Greenwood J.
  • 2 Pursuant to Miscellaneous Taxation Ruling MT 2008/1 at paragraph 102, 'recklessness' assumes that the behaviour in question shows disregard of or indifference to risk that is foreseeable by a reasonable person. There has been no such behaviour by the taxpayer. The taxpayer has correctly lodged their tax return and BAS. Such behaviour is evident by the Commissioner to extort money from the taxpayer.
  • 3 Further, Sub-section 284-75, 284-80(1) and 284-90(1) of TAA and MT 2008/01 are not applicable.

66. The Commissioner contends it was appropriate in the circumstances for him to apply a base penalty amount of 50% on the income tax and GST shortfalls of the Florist Business as a result of Mrs Carter being "reckless" for the purposes of item 2 of Schedule 1 in s 284-90(1) of the TAA.

67. Further, in assessing the alleged "recklessness" of Mrs Carter, the Respondent contends that it correctly applied paragraph 102 of Miscellaneous Taxation Ruling MT 2008/1 (titled "Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard"), which states:

Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.

68. Based on the evidence before it, the Tribunal considers that in the circumstances of Mrs Carter's particular case it was appropriate for the Commissioner to apply a base penalty amount of 50% on the income tax and GST


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shortfall amounts of Mrs Carter on the basis that those shortfall amounts were caused by her "recklessness" and that no part of those penalties should be remitted: BRK (Bris) and Hart. See also: the decision of Megaw J in
Shawinigan Ltd v Vokins & Co Ltd [1961] 2 Lloyds Rep 153 at 162;
[1961] 1 WLR 1206 at 1214;
[1961] 3 All ER 396 at 403.

69. More particularly, the Tribunal considers that a reasonable person in Mrs Carter's position would have foreseen that there was a real, as opposed to fanciful, risk that by not reconciling the Z-tapes (i.e. cash register tapes) with the BASs and bank accounts with the Florist Business for the relevant period and, instead, by relying solely on the deposited cash in bank to identify the sales of the Florist Business for the relevant period, her income tax returns and BASs may well be incorrect. Further, a reasonable person in Mrs Carter's shoes would have foreseen the risks of operating a business with a faulty cash register which is unlikely to record all sales and/or damage the Z-tapes such that the true sales for a particular day may be unascertainable.

DECISION

70. For the above reasons, the Tribunal affirms the Objection Decision.



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