Bourne and Commissioner of Taxation

[2020] AATA 190

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(Decision by: Member D Mitchell)

Duncan Bourne
and Commissioner of Taxation

Tribunal:

Member:
Member D Mitchell

Legislative References:
Income Tax Assessment Act 1936 - The Act
Income Tax Assessment Act 1997 - The Act
Taxation Administration Act 1953 - The Act

Case References:
Federal Commissioner of Taxation v Dalco - (1990) 168 CLR 614
Federal Commissioner of Taxation v Rigoli - (2013) ATC 20-407; [2013] FCA 784
Gashi v Federal Commissioner of Taxation - (2013) 209 FCR 301; [2013] FCAFC 30
George v Federal Commissioner of Taxation - (1952) 86 CLR 183
Rigoli v Federal Commissioner of Taxation - (2014) ATC 20-446; [2014] FCAFC 29
Trautwein v Federal Commissioner of Taxation - (1936) 56 CLR 63

Other References:
Australian Taxation Office Practice Statement Law Administration PS LA 2014/4

Hearing date: 24 January 2020
Decision date: 17 February 2020

Brisbane
File Number: 2019/2083

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Decision by:
Member D Mitchell

REASONS FOR DECISION

INTRODUCTION

1. Mr Duncan Bourne (the Applicant) is seeking review of a deemed decision of the Commissioner of Taxation (the Respondent) dated 2 April 2019.^[1]

2. The reviewable decision disallowed the Applicant's objection to an income tax default assessment and administrative penalty assessment for the income year ended 30 June 2015 (the 2015 year).

BACKGROUND

3. During the 2015 year, the Applicant was the sole director of Promotional Directories Group Pty Ltd (PDG).^[2]

4. The Applicant did not lodge an income tax return for the 2015 year, by the due date of 2 November 2015.

5. On or about 21 March 2016, PDG issued to the Applicant a payment summary. The payment summary was authorised by the Applicant and reported gross payments of $390,000 and total tax withheld of $187,638.^[3]

6. On 22 June 2018, the Respondent issued a letter to the Applicant advising him that the Respondent was reviewing his income tax obligations for the 1 July 2012 to 30 June 2017 period. The Applicant was advised amongst other things, that: he was required by 25 July 2018 to lodge his overdue income tax returns for the 2015, 2016 and 2017 years; and if he did not lodge the overdue tax returns the Respondent may issue a default assessment; and if that occurred he may be liable for a penalty of 75% on any tax he may owe.^[4]

7. On 9 August 2018, the Applicant attended a formal interview with officers of the Respondent,^[5] at which he provided a written statement, regarding amongst other things his outstanding income tax returns.^[6]

8. On 8 October 2018, the Respondent issued a letter to the Applicant advising that the review of his income tax affairs had been finalised and that the Respondent had raised a default assessment of income tax for the 2015 year, together with an assessment of an administrative penalty.^[7]

9. On 22 October 2018, the Respondent issued the Applicant with a default assessment of income tax for the 2015 year under the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)^[8] and an assessment of administrative penalty imposed for failure to provide a document under section 284-75(3) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA 1953).^[9] As a result the Applicant incurred $165,590.60 tax payable together with a $120,785.00 administrative penalty for the 2015 year.^[10]

10. The default assessment of income tax was based on the contents of the payment summary issued by PDG, other than the tax withheld which was not paid by PDG and for which the Applicant was not afforded a PAYG credit.

11. On 13 November 2018, the Applicant lodged an objection to the assessments.^[11]

12. On 28 January 2019, the Applicant gave notice to the Respondent requiring that a decision be made regarding his objection.^[12]

13. On 2 April 2019, the Respondent was deemed to have decided and disallowed the objection pursuant to section 14ZYA(3) of the TAA 1953.^[13]

14. On 2 April 2019, the Applicant lodged an application for review of the objection decision with the Tribunal.^[14]

15. On 9 May 2019, the Respondent lodged with the Tribunal reasons for the objection decision.^[15]

16. Throughout the Tribunal process the Applicant provided a large volume of material, in particular in the week leading up to, and the day before the Hearing.

THE LAW

17. Section 166 of the ITAA 1936 requires the Respondent must, from the returns and any other information in his possession, make an assessment of: the taxable income of a person; the tax payable thereon; and any tax offset refunds. This section effectively deals with situations where a tax payer lodges an income tax return.

18. Where a person fails to lodge an income tax return and the Respondent has reason to believe that a person has derived taxable income, section 167 of the ITAA 1936 provides that the Respondent may make an assessment of the amount upon which income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166 of the ITAA 1936.

19. Section 4-15 of the ITAA 1997 provides that a taxpayer's taxable income comprises their assessable income less their deductions.

20. Section 8-1 of the ITAA 1997 relevantly provides:

General deductions

(1)You can deduct from your assessable income any loss or outgoing to the extent that:

(a)

it is incurred in gaining or producing your assessable income; or

(b)

it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2)However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)

it is a loss or outgoing of capital, or a capital nature; or

(b)

it is a loss or outgoing of a private or domestic nature; or

...

21. Where a taxpayer is dissatisfied with an assessment they may object against it in accordance with the requirements set out in Part IVC of the TAA 1953.

22. The Respondent must decide whether to allow, wholly or in part; or disallow, the taxpayer's objection.^[16]

23. A taxpayer dissatisfied with the Respondent's objection decision may apply to the Tribunal for a review of the decision or appeal to the Federal Court against it.^[17]

24. Section 14ZZK(b)(i) of the TAA 1953 provides that on application for review of a reviewable objection decision, the Applicant has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been.

25. In relation to default assessments, of which the matter in these proceedings relate, case law authority has established that it is not sufficient for an Applicant to point to an error in the methodology applied by the Respondent in making the assessment, rather the Applicant must demonstrate what the actual amount should be. The applicable principles were explained by Pagone J in Federal Commissioner of Taxation v Rigoli (2013) ATC 20-407; [2013] FCA 784 as follows:^[18]

[8] ... In Gashi,^[19] the court had held that a taxpayer wanting to challenge an assessment made under s 167 upon the asset betterment method of calculation could only do so by establishing the actual taxable income for the period in dispute saying at [63]:

A taxpayer who seeks to establish that a s 167 assessment based on the asset betterment method of calculation is excessive must positively prove his or her "actual taxable income" and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer: Dalco^[20] at 623-5 and Trautwein^[21] at 88. The taxpayer must show that the unexplained accumulated wealth was from non-income sources. The manner in which a taxpayer discharges that burden is not defined or specified - it varies with the circumstances: Dalco at 624.

The reason for this conclusion lay in the difference between assessments made under s 166 and those made under s 167 which at [53]-[55] the court had explained:

The s 167 power is necessarily different to that in s 166. Under s 166, the power is to "make an assessment of the amount of the taxable income". The phrase "taxable income" is defined to mean "assessable income" minus "deductions": s 4-15 of the 1997 Act and s 6(1) of the 1936 Act. Under s 167, that process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part) because of one of the preconditions to the exercise of the power in sub-paras (a) to (c) of s 167 - a failure by a person to lodge a tax return, the tax return is deficient or the Commissioner has reason to believe that a person who has not lodged a return has derived taxable income. It is for those reasons that the balance of s 167 empowers the Commissioner to make an assessment of the amount upon which income tax ought to be levied and for that amount to be deemed to be the taxpayer's taxable income for the purposes of s 166.

The third part of the section - the deeming provision - would be futile if it was necessary for the Commissioner to undertake a process of the kind referred to in s 166. As the Commissioner submitted, the assessment of the "amount" in s 167 is not constrained by a process of subtracting "deductions" from "assessable income". Instead, in making his judgment of the "amount" that becomes taxable, the Commissioner may use what is known as the "asset betterment" method: Trautwein at 87, 99-100 and 105.

The asset betterment method, and the resulting assessment, is necessarily a guess to some extent and "almost certainly inaccurate in fact": Trautwein at 87. It is therefore "no part of the duty of the commissioner to establish affirmatively what judgment he formed [under s 167 of the 1936 Act], much less the grounds of it, and even less still the truth of the facts affording the grounds": George v Federal Commissioner of Taxation at 204.^[22]

The need, therefore, for a taxpayer to prove the "actual taxable income" in order to establish the excessiveness of an assessment made under s 167 was not so much that the assessment in Gashi was based upon the asset betterment basis of calculation as that it was made under s 167 where the "process of calculating taxable income as assessable income minus deductions is not possible (in whole or in part)". The figure arrived at by the Commissioner under s 167 may in any given case be based upon calculations similar to those where the taxpayer has furnished a return under s 166, but an assessment under s 167 is fundamentally different from one under s 166. A taxpayer seeking to establish that an assessment under s 167 is excessive needs to establish not that some element in the assessment is wrong but that "the amount upon which in [the Commissioner's judgment] income tax ought to be levied" was the taxpayer's actual taxable income. The primary obligation of a taxpayer is to furnish a return of income under s 166 and an assessment under s 167 does not provide a means by which taxpayers may be relieved of their obligation to establish their actual taxable income. It is, rather, a means by which the Commissioner may impose a liability where the taxpayer has failed to furnish a return.

26. As such, to be successful in this matter the onus falls on the Applicant to prove that the assessment was incorrect and what his taxable income actually was for the 2015 income year.

27. Section 284-75(3) of Schedule 1 to the TAA 1953 provides that administrative penalties may be imposed where:

284-75 Liability to Penalty

(3)You are liable to an administrative penalty if:

(a)

you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and

(b)

that document is necessary for the Commissioner to determine a tax-related liability (other than one arising under the Excise Acts) of yours accurately; and

(c)

the Commissioner determines the tax-related liability without the assistance of that document.

Note: You are also liable to an administrative penalty for failing to give the document on time: see Subdivision 286-C.

28. Section 284-85 of Schedule 1 to the TAA 1953 outlines how the amount of penalty is to be calculated.

29. For current purposes section 284-90 of Schedule 1 to the TAA 1953 provides that the base penalty is 75% of the relevant tax related liability.

30. Section 298-20 of Schedule 1 to the TAA 1953 provides that the Commissioner has the power to remit all or a part of the penalty.

31. Guidance is provided to officers of the Respondent in relation to the circumstances in which an entity becomes liable to a subsection 284-75(3) penalty and how the penalty is assessed, including any remission, is explained in Practice Statement Law Administration PS LA 2014/4.

32. In relation to the exercising of the discretion to remit all or part of the penalty PS LA 2014/4 provides:

Determine any remission of the penalty

[26] The Commissioner has the discretion to remit all or part of the penalty under subsection 298-20(1). ATO staff must consider the question of remission in each case where a penalty has been imposed based on all of the relevant fact and the particular circumstances of the entity and having regard to the purpose of the provision.

[27] Relevant matters for the remission of penalty include that a major objective of the penalty regime is to promote consistent treatment by reference to specified rates of penalty. This objective would be compromised if the penalties imposed at the rates specified in the law were remitted without just cause, arbitrarily or as a matter of course.

[28] The discretion to remit penalties, in whole or in part should be approached in a fair and reasonable way. Remission, in full or in part, will generally occur when:

•

an entity has a genuine, yet mistaken, belief that lodgement was not required as opposed to an indifference to, or a rejection of, their obligations

•

an entity understood their obligation to lodge but circumstances beyond their control affected their ability to lodge

•

the amount of penalty imposed by law causes an unjust result

•

there were credits available to offset the amount of the tax-related liability payable, or

•

there was extraordinary cooperation during an examination.

ISSUES

33. The issues before the Tribunal are whether:

(a)

the default assessment for the 2015 year is excessive or otherwise incorrect and if so what is the correct amount of the Applicant's taxable income for the 2015 year;

(b)

the administrative penalty was correctly imposed under section 284-75(3) of Schedule 1 of the TAA 1953; and

(c)

the discretion to remit the penalty under section 298-20(1) of Schedule 1 of the TAA should be exercised.

APPLICANT'S CONTENTIONS

34. The Applicant contends that the payment summary issued by PDG, as authorised by him setting out that his income was $390,000 for the 2015 year is incorrect. The Applicant told the Tribunal that he generated the payment summary in response to ATO audits that were being undertaken in relation to a number of his companies at the time. He said, that advice he received after the audit was that he should not have classified the amount as income, rather it should have been considered to be repayment of director's loans.^[23] Consequently, the Applicant contends that the $390,000 upon which the default assessment was issued is not income and is therefore not assessable for taxation purposes.

35. The Applicant provided a number of spreadsheets setting out the cash transactions between himself and PDG, amounts he paid on behalf of PDG from his personal credit cards or other accounts, and an outline of the amounts he contends should be used to determine his correct taxable income.^[24] The spreadsheets and information evolved over time with the final spreadsheet being provided by the Applicant on 22 January 2019.^[25]

It was this spreadsheet upon which the Applicant sought to rely and was the spreadsheet discussed at Hearing. The Applicant also supplied a number of personal and business bank statements and invoices to support the contents of the spreadsheet.^[26]

36. The Applicant contends that his taxable income for the 2015 year is -$214,557.^[27]

37. The Applicant contends that he should not be liable to the administrative penalty on the basis that he says he does not have a tax-related liability for the 2015 year and a default assessment should not have been made as the Respondent was aware that he could not lodge his income tax return until the audit process for his companies was complete.^[28]

38. The Applicant further contends that if an administrative penalty should be applied that it should be remitted to nil or some lesser amount than that assessed by having regard to his personal circumstances and the matters set out in PS LA 2014/4 and in particular, the matters at paragraphs 28, 33-34, 35-38 and 41-45.^[29]

RESPONDENT'S CONTENTIONS

39. The Respondent contends that the Applicant has not discharged his onus to prove that the assessment for the 2015 year is excessive or otherwise incorrect; and the correct amount of his taxable income for the 2015 year.

40. The Respondent contends that the:^[30]

(a)

best evidence available to the Tribunal is the payment summary issued by PDG, and authorised by the Applicant, to the Applicant for the 2015 year;

(b)

Applicant's contentions that he was paid $390,000 in loan repayments by PDG is inconsistent with PDG's financial statements and his bank account statements;

(c)

Tribunal ought not be satisfied with the reconstruction of events proffered by the Applicant;

(d)

Applicant has not provided evidence to support his income amounts or substantiated all the deductions claimed; and

(e)

Applicant is not entitled to a deduction for funds transferred to PDG.

41. The Respondent contends that the administrative penalty for failing to provide a document was correctly imposed and that the discretion to remit all or part of the penalty should not be exercised as the Applicant has not provided evidence of:^[31]

(a)

any circumstances beyond his control which impacted his ability to lodge; or

(b)

any unjust result suffered by the non-remission of the administrative penalty; or

(c)

any other circumstances that would warrant remission of the administrative penalty.

EVIDENCE

Default assessment

42. It is not in contention that the Applicant caused PDG to issue him with a payment summary for the 2015 year which recorded the payment of salary and wages in the amount of $390,000^[32] or that the accounts of PDG provided that wages paid by PDG for the 2015 year was $410,000.^[33]

43. Consistently with his written evidence,^[34] the Applicant told the Tribunal that the payment summary was issued incorrectly as he had subsequent advice that he should seek to treat the money received from PDG in the 2015 year as repayment of a loan.

44. In a letter dated 14 March 2019, the Respondent wrote to the Applicant seeking more information about his objection.^[35] The letter relevantly provided:^[36]

In regards to the PAYG payment summary, you claim that "... the only reason the payment summary was sent to the ATO was that the ATO had requested I provide it ...."

On 31 March 2016, [Mr Officer] from the ATO, sent you an email (in your capacity as the director of PDG and regarding PDG's lodged 2015 income tax return) to confirm whether the reported R&D salary expenditure of $355,500 related to "... salaries of people employed by you ...." or "...not relate to people employed by you ...."

You responded on 1 April 2016 by voluntarily providing the payment summary and you added that you "... will be lodging with the ATO..."

This indicates that you (in your capacity as an employee) received salary and wages from PDG in the amount of $390,000.

If, as you say, you received the $390,000 between 1 July 2014 and 30 June 2015, as loan repayments, then why did you, on 1 April 2016, provide the ATO with a payment summary declaring the $390,000 as a salary that PDG paid you for the 2015 year?

45. The Applicant maintains that he caused the payment summary to be issued as a result of interactions he had with the ATO during an audit process of his companies.^[37]

46. It is not disputed that there is no loan agreement in place between the Applicant and PDG and that during the 2015 year the Applicant was the sole director of PDG. The Applicant accepts that he was fully responsible for the running of PDG during the 2015 year.

47. The Applicant sought to rely upon information outlined the final spreadsheet he provided on 22 January 2020^[38] and associated substantiating documents to show that he loaned PDG more money that what he took out during the 2015 year.^[39]

48. The Applicant told the Tribunal that he had been running his own businesses since he was in high school. He told the Tribunal that he had not consulted with a lawyer when he set up PDG rather he consulted with his accountant. He confirmed his written statement that the PDG financial statements, which are in evidence before the Tribunal, were prepared by his accountants; however as they [the financial statements] were unaudited and not signed that they cannot be totally relied upon.^[40] He said he formed that view because of legal advice he had received. The Applicant confirmed that he assumed that these financial statements were the documents that he relied on when his accountant submitted the tax returns for PDG.

49. The Applicant was asked to explain why the 2013 Balance Sheet of PDG showed the balance of the Directors Loan account at 30 June 2013 as being $369,520.18 however at 30 June 2012 it was nil^[41] - did this mean that the money going backwards and forwards between him and PDG only started after 1 July 2012? The Applicant said "no", this had been going on since 2004, he said: "This is the nature of small business, it's literally ongoing for cash flow. You are putting money in and taking money out when you don't have the cash flow to do that." He then said that the accounts were incorrect, he said he has discovered that financial statements are unreliable and incorrect, but they are a good indicator, so not completely useless.^[42]

50. In relation to the absence of any loan documents or anything in writing setting out his arrangements the Applicant said it worked:^[43]

"Like every other small business on the planet you put money in when it's needed and take money out when it's not. And these are regular occurrences, there are not - you know one year I just decided I want to put all this money in and take it back out again, this is a regular ongoing process. So, we need money in it and I've got the money from a loan account or wherever else I'm drawing it from, I'll put it into the bank account on the proviso that I know it's going to help the business to continue to trade and I'll be able to draw it out when the money comes back in. So, I'm not investing in the business, I'm literally just making sure the business can continue its operations."

51. When asked about the bookkeeping entries for payments of cash in and out of PDG and the payment of expenses, in particular that the bank account and the loan account should be appropriately debited and credited or that the relevant expense account should be debited, the Applicant told the Tribunal that small business is more casual than that and that is why there is no loan agreements.

52. The financial statements for PDG for the years ended 30 June 2013,^[44] 30 June 2014,^[45] 30 June 2015,^[46] and 30 June 2016^[47] appear to have been prepared on 19 September 2018. The Respondent said these statements were provided to him by the liquidators of PDG.^[48] An exert of PDG's financial statements for the year ended 30 June 2015 provided by the Applicant as an attachment to a statement dated 10 June 2019, is not complete and therefore cannot be confirmed whether they were signed or audited, however provided consistent figures within the accounts.^[49] It is likely that these accounts were used in lodging PDG's income tax return for the 2015 year.

53. The Applicant submitted that the money that has gone backwards and forwards between his bank account and that of PDG and the invoices he has paid on behalf of PDG have been considered as loans. That was how he was keeping the business running and that he had the expectation that he would get the money back as soon as it was available.

54. The Applicant acknowledged that his record keeping has been his "kryptonite".^[50]

55. On the Applicant's final spreadsheet, he provides the following details:^[51]

56. The Applicant told the Tribunal that he considered the $386,500 paid to him by PDG to be a repayment of a loan not wages. He said the fact that: no pay-as-you-go withholding or superannuation guarantee charge was submitted; and there have been no director's penalty notices issued to him, support his contention that the payment summary was a mistake.^[55]

57. The Respondent acknowledged that there is evidence of the Applicant paying items of expenditure on behalf of PDG and paying funds to PDG.^[56] However, the Respondent submitted that the evidence provided by the Applicant is unsatisfactory to establish that the payments received by him from PDG were loan repayments, particularly as there was no written loan agreement or other document which adequately establishes an obligation upon PDG to repay amounts to the Applicant, or provides for the timing or manner in which amounts are to be repaid.^[57]

58. The Respondent submitted that the evidence clearly shows that the Applicant was aware of the transactions between himself and PDG by virtue of being a signatory to his own bank accounts and that the payment summary is the earliest record of the characterisation of those moneys. The payment summary predates the preparation of the financial statements, and naturally predates the reconstruction that has occurred.^[58]

59. The Respondent submitted it was apparent from the evidence before the Tribunal that after the payment summary was tendered to the Respondent, and after the moneys were paid to the Applicant, some advice was received that those amounts could have been treated as loan repayments. The Respondent submitted that it is not appropriate for the character of payments to be re-categorised after the fact. At the time the payments were made they were wages or Directors fees or ordinary income, reimbursement for the Applicant's services as a sole director or the managing direction of PDG in much the same fashion as he was paid in both the 2013 and 2014 income years.^[59]

60. The Respondent outlined in his Statement of Issues, Facts and Contentions, that the Applicant's reconstruction of events is inconsistent with PDG's financial statements and his bank account statements as follows:^[60]

[34] PDG's financial statements show that at 30 June 2014, it owed the sum of $512,337.27 to the Applicant.^[61] This figure is also reflected in the statement signed by the Applicant on 1 July 2014.^[62] Whereas the financial statements describe the liability as a loan, the statement describes it as a debt.

[35] PDG's financial statements show that at 30 June 2015, the Director's loan had increased by $342,791.91 to $855,129.18.^[63] The Applicant's letter of 10 June 2019 states that this increase accounts for the $390,000 purportedly repaid.^[64]

[36] Considered together, the above points require that the Applicant loaned PDG $732,791.91 during the 2015 year, being the sum of the $342,791.91 increase in the Director's loan and the $390,000 allegedly repaid to the Applicant.

[37] The Commissioner has identified payment from the Applicant to PDG totalling only $206,800. The transactions comprising this sum are set out at Table 1 in Appendix 1 to this Statement.^[65]

[38] Accordingly, the Applicant's reconstruction of events requires him to have paid $525,991.91 of business expenses for PDG during the 2015 year.^[66] The Commissioner contends that the Applicant has failed to identify business expenditure of this magnitude incurred on behalf of PDG.

[39] The Commissioner also considers it relevant that:

39.1. there is a paucity of evidence regarding the terms of the alleged loan;

39.2. the Applicant has been paid salary and wages by PDG in earlier income years despite the existence of the alleged loan;^[67]

39.3. PDG recorded wages of $410,000 in its financial statements for the 2015 year;^[68] and

39.4. the Commissioner has identified $538,500^[69] paid to the Applicant's Westpac Classic Plus account from PDG's Westpac business account in the 2015 year. The transactions comprising this sum are set out in Table 2 in Appendix 1 to this Statement.

Applicant's taxable income for the 2015 year

61. The Applicant's evidence at Hearing was consistent with his written statements^[70] that he did not lodge his 2015 year income tax return as he was waiting for his company's audit process to be completed. He says that officers of the Respondent were aware of this. It is noted however, that the evidence submitted by the Applicant has not included any income or deductions in relation to any other entity outside of PDG.

62. On the Applicant's final spreadsheet, he provides the following details in relation to his taxable income for the 2015 year:^[71]

64. The Applicant told the Tribunal that he has estimated the bank interest, income work and share dividend amounts. He does not have any supporting documents to substantiate these amounts.

65. The Respondent acknowledges the "rent Penshurst" income amount as it is substantiated by the Applicant's bank statements.^[76]

66. In relation to the property related expenses the Applicant has provided invoices in support to some of the expenses (mainly the repair costs) and the depreciation reports, the other amounts he told the Tribunal he has estimated based on later year statements.^[77] Further, the Applicant was unable to explain the loan interest amount in relation to what portion of the loan related to the investment property in question.^[78]

67. The Applicant told the Tribunal that the other deductible interest deduction related to his share portfolio. The Respondent put to the Applicant that the loan accounts in relation to this debt was in his parents' names and as such they are responsible for the loan. The Applicant said he paid the loan and was responsible for it, however provided no evidence to support this contention.

68. The Applicant told the Tribunal that he was claiming a deduction of $183,699 for unreimbursed business deductions, being the difference between the amounts he says he lent PDG and the amount he says he was repaid by PDG during the 2015 year. The Applicant said that this amount was deductible as it relates to invoices he paid in the process of trying to earn income.

69. When asked to explain why previously he was regarding this amount as a loan and now he is saying it is a deduction and which one was it, he said: "The equitable amount that I claimed on the loan repayments/other loan, whatever it is, and the excess is unreimbursed business expenses. Am I allowed to do that?"^[79]

70. When asked why the amount does not remain as a loan that gets carried over and is recouped - is he suggesting he is writing it off - the Applicant said: "I want to write it off myself, 100 per cent, as I've done previously, it's not a new thing that I've done, as you can see in the T documents that the ATO submitted. If I can't run it through the business, I'll run stuff through myself personally, that way I can hopefully generate profit from other entities and keep my tax down." ^[80]

71. The Applicant told the Tribunal that he takes this approach as a tax planning method. He said that he does not claim a deduction for an expense he has paid for PDG in both his income tax return and PDG's income tax return.^[81]

72. The Respondent submitted that a sum of money loaned to another entity is fundamentally capital in nature and similarly, an item of expenditure incurred on behalf of another entity which gives rise to a debt payable by that entity is capital in nature. On that basis, the sums paid to PDG by the Applicant would be capital in nature and are not deductible.^[82]

73. The Applicant told the Tribunal that whether something is capital in nature is subjective and referred to a document on the Respondent's website titled 'Claiming a tax deduction for depreciating assets and other capital expenses'^[83] and a CCH exert titled '[31-920] First negative limb: capital losses and outgoings'.^[84]

74. In particular, the Applicant quoted:^[85]

A capital expense is either:

•

the expense of a depreciating asset - this includes both the amount you paid for the asset and the expenses from transporting and installing it

•

an expense associated with establishing, replacing, enlarging or improving your business.^[86]

There is no statutory criterion for determining whether a loss or outgoing is capital or of a capital nature in ITAA 1997.^[87]

The words used by the taxpayer to describe the expenditure in question, for example in any relevant agreement or document, or the way the taxpayer deals with the expenditure in its accounts, is not a decisive factor in determining the true nature of the expenditure.^[88]

75. When it was pointed out to the Applicant that these statements refer to 'you' (which in this instance would be PDG), however he was seeking to claim expenses he paid on behalf of PDG in his personal income tax return, he said: "Well, [incurred] on behalf of the business in the prospect of carrying on the business."^[89]

76. The Applicant said:^[90]

"Yes, so I'm relating to the point that they're not actually capital expenses, irrespective of whether they're in the business or in my name, they're not actually capital expenses. That's my contention here, based upon, you know, information here that's been provided by the ATO, which would be really interesting to see what the basis for that is, actually, contending they're capital expenses. "Enlarging, improving your business", I mean, I'm not getting consultants in to come and help me to streamline my business here. I'm not putting money in as a shareholder, hoping that I'm going to get a return, as I've aforementioned stated. You know, I'm not using money - putting money in the business to acquire another business and trying to claim it. These are regular ongoing expense costs. Ongoing revenue expenses, so not incurred as a - in my positon as a shareholder, but incurred as my positon as an operating officer of the business, trying to run the business. ..."

77. The Respondent submitted that if the sums of money the Applicant paid to PDG were loans with an intent of being repaid, then they are capital in nature. The Respondent submitted that the Applicant is not a lender by trade, he is not a bank and his business is not in lending money. As such when the Applicant transfers a significant sum of money to PDG, it is not conducted in the course of his business. It is an amount of capital that he is injecting into PDG so that it can keep operating.^[91]

78. The Respondent submitted that the Applicant's view that because his money was used by PDG for revenue items the loan made to PDG would be revenue in nature, fails to account for the fact that the nature of the money in the Applicant's hands is different to the nature of the money is in the company's hands. If it is a loan, it goes on the company's balance sheet and what the company then chooses to do with it is a matter for the company.^[92]

79. The Respondent submitted that the expenses that the Applicant has paid on behalf of PDG were not paid by him for work done for him; rather the work was done for PDG and therefore was not incurred in gaining or producing the Applicant's assessable income. The business is PDG and the invoices were issued in PDG's name and for work done for PDG.^[93]

80. The Respondent said that:^[94]

"Between the shortcomings of the calculation in [the Applicant's] assessable income, and of the shortcomings of the property expenses claimed, and the interest expense claimed as against his shares, and the fact that [the Applicant] cannot claim the amounts loaded which he expected to be reimbursed for from PDG, it is the Commissioner's contention that [the Applicant] has failed to establish his taxable income for the 2015 year. .... [I]t is the Commissioner's view this is a reconstruction that has occurred after the fact. After [the Applicant] received some advice. It is not possible to recharacterise the initial payment from PDG to [the Applicant]. The best record available to the Tribunal is the payment summary. [The Applicant] was the director of PDG, he was the signatory to the accounts, he was aware of the affairs of himself, he was aware of the work that he did, he was aware of how much money he was being paid by PDG."

Administrative Penalty

81. The Applicant lodged his income tax return for the year ended 30 June 2014 on 5 November 2015.^[95]

82. In a letter dated 22 June 2018, the Respondent advised the Applicant that his personal income tax obligations for 1 July 2012 to 30 June 2017 were being reviewed and requested to meet with him to talk about the result.^[96] The letter also provided:^[97]

Lodgement

...

If you don't lodge your overdue documents, we will make default assessments of the tax you owe using:

-

the tax returns you have lodged in the past

-

other information we have.

The Penalties and charges you may face

If we make a default assessment, we may charge you a penalty of 75% or more on any tax you owe.

We may also charge you a penalty for each document you haven't lodged by the due date. You can find more information on penalties for not lodging at .....

You may also need to pay interest on any tax you owe.

83. In an attachment to an email from an officer of the Respondent dated 16 August 2018, the Applicant was asked to provide the listed information and documents in relation to his businesses that were under review or audit.^[98] In a page headed with the Applicant's name he was asked to provide a number of documents in relation to his personal taxation affairs in relation to the 2013 to 2018 financial years. In particular, point 8 provided:^[99]

You have provided a payment summary from Promotional Directories Group Pty Ltd for the 2015 financial year. This payment summary reflects you were paid wages of $390,000.

Your 2015 income tax return remains outstanding.

You are required to lodge this return immediately.

84. In a statement dated 10 June 2019, the Applicant provided that:^[100]

"Furthermore as for the penalty for failure to lodge I was in the midst of a full scale audit by the ATO regarding my companies and it was acknowledged and accepted at the time by the ATO Officer [name removed] ... that I could not complete my personal tax returns until the business returns and financials had been completed. This information for my personal tax returns to be lodged has been with my accountant, BTACS East Brisbane since the 29th September, 2018, over 3 weeks before the amended assessment was issued. The only reason it was delayed is that the accountant who prepares my returns was away on holidays and therefore could not prepare and lodge the returns before the amended assessment was done and since then the system will not allow the correct tax return for 2015 to be lodged."

85. The Applicant told the Tribunal that he did not lodge his 2015 year income tax return as he understood that he could wait until all of his other audits were resolved. However, when asked whether he had this in writing from the Respondent, he said he could not specifically find it.

86. When it was put to him that in his spreadsheet where he provides what he says his 2015 year taxable income is, he had not included any income or expenses related to any of his other businesses, only in relation to PDG, the Applicant said that they were all related.

87. The Applicant told the Tribunal that his circumstances at the relevant time were not normal circumstances. He said that in 2015 he had: two lots of litigation on foot, one in relation to what was to be the sale of PDG; he was affected by the breakdown of his business partnership; his father passed away suddenly; he got engaged and then married; then subsequently he had a son, who needed higher care than normal; and as the eldest son, his family all rely on him.

88. The Applicant told the Tribunal that he believed he had cooperated with the Respondent during the audit processes. He said he has been compliant his whole life with the Respondent.

89. The Respondent told the Tribunal in his view that the Applicant had not identified any particular circumstances that would amount to an unjust result or any other circumstances that might warrant remission of all, or part of the penalty assessed. Further, while the Respondent said it appreciates that the Applicant was experiencing a difficult time, he was able to instruct an agent to lodge an income tax return around the time that his 2015 return was required to be lodged, which plainly shows however he was still attending to his affairs.^[101]

CONSIDERATION

90. The Tribunal notes that the Applicant has put a lot of effort into providing evidence for this matter. At Hearing, the Applicant gave evidence under oath and the Tribunal considers that he openly and honestly answered questions asked from both the Tribunal and the Respondent. Other than the progressive spreadsheets that provide the Applicant's submissions in relation to his 2015 year taxable income which changed over time,^[102] the Applicant's evidence at Hearing was consistent with the written statements he provided throughout the audit, objection and Tribunal processes that are before the Tribunal.

91. Section 167 of the ITAA 1936 allows the Respondent to make a default assessment where he has reason to believe that a taxpayer has derived taxable income but has not lodged their return by the due date. The amount assessed is then considered to be the taxpayer's taxable income for the purposes of section 166 of the ITAA 1936.

92. In this matter, it is not in dispute that PDG issued a payment summary to the Applicant for wages/salary relating to the 2015 year and that the Applicant did not lodge his 2015 year income tax return. Consequently, the Respondent had the power to issue the default assessment.

93. In seeking review of the Respondent's decision to issue the default assessment, the Applicant has the burden of proving that the assessment is excessive or otherwise incorrect, as well as proving what the assessment should have been.

94. The Applicant acknowledged early in the Hearing when discussing record keeping and provision of documents by a taxpayer that he understood that it was his "onus to prove"^[103] his position in relation to his tax affairs.

95. The Applicant provided background information in relation to his setting up and running of PDG and insights into how, from his, experience small businesses are run. The Applicant was very open in relation to his business practices and acknowledged that in this matter the "buck" stops with him. It was clear that the Applicant's strengths lie in the running of the business, rather than maintaining accounts and financial records which was seen by the progressive reconstruction of his financial position for the 2015 year which continued up until one day before the Hearing.

96. The Tribunal notes that the Applicant gave the impression that his intention is to comply with taxation laws and tax plan as appropriate. However, on occasions the Applicant did not appear to fully understand his obligations or what he should do to ensure he could meet them. An attitude that there is not a requirement to have particular documents or have records kept in a particular manner fails in circumstances like those at present where the Applicant has been unable to provide evidence that supports his contentions.

97. The problem with the Applicant's evidence is that he was unable to satisfactorily explain or provide supporting evidence that the amounts of money he received from PDG during the 2015 year, which are reflected on the payment summary, were not in fact payments relating to salary and wages at the time.

98. The Applicant stated that it was not until sometime after the issuing of the payment summary that he received advice that he should not have classified the amount as salary and wages, rather he should have considered the payments to be loan repayments. The Applicant confirmed that he did not keep records that would show the amounts being processed through PDG's bank and Director's Loan accounts that would support his contentions. Further on the evidence before the Tribunal as set out above at paragraph [60], the Applicant's reconstruction of his financial position does not accord with the financial statements of PDG and his bank accounts.

99. While noting the Applicant's contention that the financial statements of PDG cannot be fully relied upon, the Tribunal notes that the versions of these documents before the Tribunal are consistent and the Applicant gave evidence that while they are unlikely to be fully correct they are "still a good guide".

100. Further in providing details of his earnings for the 2015 year, the Applicant provided an estimated amount as salary or wages received from PDG of $1,000. He was unable to substantiate how he reached this figure and was open about the fact he was estimating it so as to put "something" in.

101. Based on the Applicant's evidence there is no certainty in relation to what his actual taxable income should have been for the 2015 year. The Applicant has largely estimated income and expenses, and sought to claim deductions for expenses that relate to other taxpayers (for example the loan account held in his parents' names or expenses paid on behalf of PDG).

102. The Tribunal does not accept the Applicant's contention that he should be allowed a deduction of $183,699 in relation to unreimbursed expenses he personally paid on behalf of PDG. The requirements of section 8-1 of the ITAA 1997 is clear in that for an expenditure to be deductible it must relate to the earning of the person's (being in this case the Applicant not PDG) assessable income and must not be of capital, private or domestic in nature. The payment of the invoices outlined by the Applicant on behalf of PDG is not attributable to the earning of his personal income rather it is attributable to earning PDG's income. In the Applicant's hands these transactions are capital at best and depending on the arrangements in place with PDG form part of the Applicant's Director's Loan balance. There is a clear delineation between the revenue expenses of PDG and the capital expenditure (by way of investment or provision of a loan to PDG) by the Applicant.

103. In part the Applicant has provided evidence that would show that the assessment was incorrect^[104] however where default assessments are made by the Respondent there is no onus on the Respondent to prove that the assessment was fully correct. The Respondent has not had the benefit of being provided with all relevant information regarding the taxpayer's income and expenses at the time of making the default assessment. The onus is on the Applicant to establish the amount upon which his income tax ought to be levied.^[105]

104. Based on the evidence before the Tribunal, the Tribunal is not satisfied that the Applicant has discharged his onus to prove that the assessment was excessive or otherwise incorrect as he has not established what the correct amount of his taxable income actually was for the 2015 year.

105. As the Applicant failed to lodge his income tax return by the due date the Respondent may impose an administrative penalty for failure to lodge a return, notice or document required for the Respondent to determine his tax-related liability for the 2015 year. Where the Respondent imposes an administrative penalty in this circumstance the rate of penalty as set out in the TAA 1953 is 75% of the tax related liability.

106. The Tribunal is satisfied that the administrative penalty was correctly applied.

107. In considering whether or not the discretion to remit the administrative penalty in full or in part, should be exercised, the Tribunal notes that while PS LA 2014/4 is not binding on the Tribunal, it is an appropriate tool to assist in assessing the parties contentions.

108. In relation to the factor considered in PS LA 2014/4 when assessing whether an administrative penalty will be remitted the following circumstances are considered:

-

Did the Applicant have a genuine, yet mistaken, belief that lodgement was not required as opposed to an indifference to, or a rejection of, their obligations?

-

Did the Applicant understand his obligations to lodge but circumstances beyond his control affected his ability to lodge?

-

Does the amount of penalty imposed by law cause an unjust result?

-

Did the Applicant have credits available to offset the amount of the tax-related liability payable?

-

Was the Applicant extraordinarily cooperative during an examination?

109. The Tribunal notes that the Applicant submitted that the administrative penalty should be remitted in full as he says the Respondent knew he was not going to lodge his 2015 year income tax return until the audit process in relation to all of his entities was complete (implying in some way that the Respondent agreed to this approach) and that his personal circumstances at the time prevented him from lodging his return and this should be taken into consideration.

110. The Applicant did lodge his 2014 year income tax return at the end of 2015 and continued to operate PDG up until mid-2017. Further, the Applicant was put on notice by the Respondent that he was required to lodge his 2015 year income tax return immediately in 2018 and that failure to do so could lead to a default assessment being made and a penalty imposed. This indicates that the Applicant was aware of his requirements to lodge and he has provided no evidence to support that the Respondent agreed to any further delays in the lodgement of his 2015 year income tax return.

111. The Applicant provided evidence in relation to his personal circumstances and the Tribunal notes that 2015 and 2016 were particularly difficult for the Applicant. The Applicant did not provide any evidence that indicated that the conducting of his business or personal affairs outside of his taxation affairs were impacted upon by his circumstances.

112. The Applicant did not provide any evidence in relation to the amount of the penalty causing an unjust result.

113. There is no evidence before the Tribunal that the Applicant had credits available to offset the amount of the tax-related liability.

114. Based on the information before the Tribunal, the Tribunal is not satisfied that the discretion to remit the administrative penalty in part or in full should be exercised.

CONCLUSION

115. The Applicant has not discharged his onus to prove that the assessment for the 2015 year is excessive or otherwise incorrect and what his correct taxable income was for the 2015 year.

116. The administrative penalty imposed pursuant to sections 284-75(3) and 284-90 of Schedule 1 to the TAA 1953 was correctly imposed. The Applicant has not persuaded the Tribunal that the discretion in section 298-20 of Schedule 1 to the TAA 1953 in relation to the remission of the administrative penalty should be exercised.

117. Accordingly, the decision under review is affirmed.