SGARDELIS & ANOR v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2007] AATA 1499

Decision date: 4 July 2007

J Block (Deputy President)

Part A - Introduction and general

1. The decision under review is the decision by the Respondent to impose, and not to remit, an administrative penalty in respect of the business activity statement ("BAS") of the Applicants in respect of the period from 1 July 2004 to 30 September 2004 ("the Relevant Period").

2. The Applicants were represented by Mr Justin Lewis, solicitor, while the Respondent was represented by Ms KC Morgan of counsel instructed by Ms Wei-Li Su of the Respondent's Legal Services Branch.

3. For the purposes of these reasons for decision, the term "Applicant" when used in the singular, and unless the context expressly otherwise requires, refers to Mr Sgardelis.

4. The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with Exhibits as follows:

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Exhibit A1:		 A statement dated 21 August 2006 by the Applicant;
Exhibit A2: A statement dated 15 May 2007 by Gail Margaret Sgardelis;
Exhibit R1: A document entitled "BAS Summary" prepared by the Respondent for the period July 2003 to September 2004;
Exhibit R2: A facsimile from the Applicant sent on 25 October 2004 to the Wollongong office of the Australian Taxation Office;
Exhibit R3: An affidavit by Peter Cassidy sworn 19 December 2006;
Exhibit R4: An affidavit by Pierre Leon Flahaut sworn 19 December 2006; and
Exhibit R5: An affidavit by Brendan Hulley sworn 19 December 2006.

5. It may be noted that Exhibits A1 and A2 were admitted into evidence notwithstanding the fact that Ms Morgan had given notice that the Respondent objected to certain of the content of those exhibits. They were admitted on the basis that the objections would, if necessary, be dealt with at a later stage; in the result, it was not necessary to do so. Mrs Sgardelis was not required for cross-examination; Ms Morgan noted that her witness statement (Exhibit A2) was open to criticism in much the same way (to the extent relevant and bearing in mind that she was not involved in the business during the Relevant Period) as was the case with Exhibit A1.

6. The Applicants were in partnership and as such, carrying on the business of a retail furniture store under the style of Big Furniture Gallery in Wollongong prior to, during the Relevant Period, and thereafter.

7. The Applicants' BAS for the Relevant Period ("the Original BAS") appears at T28 p52. It provided that during the Relevant Period:

8. The Original BAS referred to in the preceding clause was, according to the Applicant, dispatched on 9 October 2004 (a Saturday).

9. Two days later (on 11 October 2004) the Applicants' premises were broken into. A filing cabinet containing a safe and business documents including those said to be capable of substantiating the figures in the Original BAS were stolen.

10. It is convenient at this point to include in its entirety Exhibit R1 as follows:

"JOHN & GAIL SGARDELIS

Tribunal Reference: NT2006/34

BAS SUMMARY

JULY 2003-SEPTEMBER 2004


BAS Entry July - Sep 03 Oct-Dec 03 Jan-Mar 04 Apr-Jun 04 Jul-Sep 04
G1 Sales 26,650 32,990 29,587 26,900 35,675
G10 capital purchases 56,213 133,325 11,670 149,390 825,700
G11 non-capital purchases 103,786 23,165 721,395 172,508 123,100
Refund claimed 12,941 11,227 63,953 26,818 83,011"

11. Exhibit R1 reflects the figures supplied in the Applicants' BAS statements for the Relevant Period and the preceding four quarters.

12. Following an audit, the Respondent prepared an amended BAS (referred to as the "Amended BAS" (T3 p13)) for the Applicants for the Relevant Period and reflecting total sales in box G1 of $43,435 and non-capital purchases in box G11 of $38,907, and in consequence of which there was a net amount of $411 due by the Applicants to the Respondent; (that amount has not been paid by the Applicants to the Respondent). A penalty was, in consequence

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imposed by the Respondent on the Applicants in respect of the shortfall.

13. It is important to note that the hearing related only to the penalty imposed on the Applicants. It did not relate to the Amended BAS notwithstanding the fact that there is a very large disparity between the figures contained in the Original BAS and the Amended BAS. Put in other words, the Applicants accepted the correctness of the Amended BAS, although contending that they did so because, and in consequence of a lack of records, they could not establish the correctness of the Original BAS.

14. The Applicants contended, in fact, that the Original BAS was correct as to the amounts reflected therein excepting only that the amounts in boxes G10 and G11 were erroneously transposed and so that it should, on this basis, have reflected non-capital purchases as $825,700 and capital purchases as $123,100. If this were in fact the case the Applicants would have had an entitlement to receive $83,011 and not an indebtedness of $411.

15. Quoted sentences or phrases contained in these reasons are taken from the notes made by me at the hearing which took place on 4 and 5 June 2007.

Part B - The evidence of the Applicant

16. The Applicant's evidence in chief consisted almost entirely of his attestation of the correctness of Exhibit A1. It is a long statement and some of it of little relevance; I include its content under the heading of "The Furniture Business" (clauses 32 to 58) and under the heading of "The GST Audit" (clauses 59 to 91) as follows:

"…

The furniture business

  • 32. Approximately 6 to 7 years ago my wife's employer decided to close down their furniture business because the owners were having family problems.
  • 33. My wife and I then decided to take over the furniture store in which she worked and we commenced trading under a different name.
  • 34. We named the business 'Big Furniture Warehouse' and we operate [sic] the business together from the premises at Orange Grove.
  • 35. Approximately 3.5 years ago our previous landlord decided to sell the Orange Grove property and the new owners did not continue our lease.
  • 36. We then decided to purchase new premises at 101a Auburn Street, Wollongong.
  • 37. We bought the property in March 2004 for approximately $625,000.00 and borrowed the full amount from Challenger Managed Investments to secure the purchase.
  • 38. We also sold both taxi plates for an overall amount of approximately $330,000.00 and for the purpose of injecting capital into the business and purchasing stock.
  • 39. We also sold the motor vehicles used to operate the taxis for approximately $15,000.00 each.
  • 40. The small bus service was sold with the vehicle for approximately $8,000.00 to $9,000.00 prior to commencing the furniture business.
  • 41. During the period of running the furniture business, we also borrowed against our family home at 3 Coogee Crescent, Mount Kembla. The family home is worth approximately $650,000.00 and we have borrowed approximately $450,000.00 against the property.
  • 42. Most of the borrowings against the family home were used for injecting capital into the furniture business and to purchase further stock.
  • 43. We did not employ any staff and my wife and myself ran the business, with my father in law occasionally providing assistance.
  • 44. The business operated 7 days a week for 8 to 9 hours each day and we predominantly sold household furniture.
  • 45. We had budgeted for the furniture business to trade at a loss for a number of years in hope that it would eventually become profitable.
  • 46. Funds were injected into the business from the business revenue, personal savings, sale of assets and borrowings against the properties we owned.

  • ATC 2339

    47. The level of stock on hand in the business gradually increased throughout the entire period of trading.
  • 48. The building at 101A Auburn Street was capable of holding more stock than the previous premises.
  • 49. We also made extensive capital improvements over time to the premises at 101A Auburn Street, such as a new mezzanine level so that we could carry more stock.
  • 50. The business traded continuously until the premises and its contents were destroyed by fire in May 2005.
  • 51. Investigations made by authorities indicate that the fire was deliberately lit and they are yet to identify the responsible party.
  • 52. We are yet to be indemnified by our insurer NRMA and await for the coroner to investigate the matter.
  • 53. We are also in the process of securing sufficient funds for the purpose of commencing action against the insurer should they continue fail to indemnify us under our policy of insurance.
  • 54. We have been forced to sell the Cordeaux Heights and Figtree investments and apply the balance available after repayment of the mortgages to ongoing liabilities.
  • 55. During the entire period in which the business was trading, we trading [sic] in the form of a partnership between my wife and myself.
  • 56. Notwithstanding that we were equal partners in the family business, I took sole responsibility for the administration of the business.
  • 57. We did not use the any electronic accounting systems, and simply used a cash book system for the purpose keeping records.
  • 58. I looked after the preparation and submission of all Business Activity Statements and used the service of Bosco Accounting Co (Australia) Pty Ltd for the purpose of preparing and lodging annual returns.

The GST Audit

  • 59. I completed the relevant Business Activity Statement on 9 October 2004 and forwarded it to the ATO on that day.
  • 60. My business premises at 101A Auburn Street, Wollongong was broken into on 11 October 2004, and various business records together with other items were stolen by thieves.
  • 61. The thieves made way with an entire filing cabinet and [sic] probably as a result of a safe having been located and fixed to the bottom drawer.
  • 62. The stolen filing cabinet contained nearly all of the businesses records, including copies of all Tax invoices and proofs of payments made to various suppliers.
  • 63. The incident was reported to the police and was provided with Event Number E21623944.
  • 64. A few days thereafter, I advised the Australian Taxation Office of the break in by telephone that the business records had been stolen.
  • 65. During that telephone conversation I offered to amend the Business Activity Statement previously lodged and on the basis that I would not be in a position to immediately substantiate by way of documentation the amount claimed therein.
  • 66. I then forwarded a fax to the ATO 18 October 2004 stating the Business Activity Statement would need to be revised as a result of not being able to substantiate amounts claimed therein.
  • 67. A representative of the Australian Taxation Office then attended upon our premises shortly thereafter for the purpose of providing assistance in amending the Business Activity Statement.
  • 68. I remember Mr Pierre E L Flahaut together with another representative of the ATO attended on two further occasions for the purpose of obtaining information and to provide education in respect to record keeping and reporting etc.
  • 69. I simply did not make many of the statements that are alleged to have been made to the ATO representative in the 'Reasons' and 'Shortfall Penalty Decision'.

  • ATC 2340

    70. I never stated that we had ceased trading on 15 October 2004 and were waiting the appointment of receivers.
  • 71. Upon being questioned by the representative at to the financial viability of the business, I simply indicated that a receiver may well eventually have to be appointed if the business continued trading at a loss.
  • 72. Nor at any time did I decline to apply to the Credit Union for the issue of copies of the bank statements.
  • 73. I simply advised the ATO representative that the Credit Union were going to charge approximately $800.00 for the production of the material and queried as to whether there might be a more economically efficient means of sourcing the information.
  • 74. In any event, I ended up paying to the Credit Union the amount requested and it is my understanding that the information was released directly to the ATO.
  • 75. As a result of the break in and theft of the business cash book and Tax invoices, it was very difficult, if not impossible to locate each of the suppliers of stock purchased during the relevant period.
  • 76. More often than not, I was able to secure better deals from suppliers when purchasing in bulk and or paying in cash.
  • 77. We purchased stock from literally hundreds of suppliers and many times it would be a one off purchase where we may not see the particular supplier again.
  • 78. It was common practice in the industry for sales representative and importers to attend upon our premises without notice and offering to supply stock.
  • 79. During the period of 1 July 2004 to 30 September 2004, we decided to dramatically increase our stock levels in hope that we could make the business more profitable.
  • 80. That decision was based upon the fact that we had more space subsequent to renovations being performed and because we were able to obtain very good deals from a number of suppliers who had approached us.
  • 81. Most of the purchases were made with cash, and with the benefit of hindsight, this has raised my suspicions in relation to why we were broken into and had our safe stolen shortly thereafter.
  • 82. In regards to the nominated amount of $825,700 appearing in the Business Activity Statement prepared and lodged by me on or about 9 October 2004, for the 1 July 2004 to 30 September 2004, I simply made an error in regards to the particular box that the figure should have been entered.
  • 83. The amount of $825,700.00 should have rather appeared in the component of the form dealing with non-capital purchases as it mainly related to purchase of stock.
  • 84. Similarly, the specified amount of $123,100.00 appearing the [sic] component of the Business Activity Statement dealing with non-capital purchases should have rather been included in that concerning capital purchases.
  • 85. The $123,100.00 concerned renovations performed to the warehouse.
  • 86. This was simply a typographical error on my behalf and the respective figures were arrived at from tax invoices and other documents stolen during the said break-in of the business premises on 11 October 2004.
  • 87. In regards to the allegation that I told the ATO representative that the $825,700.00 related to a capital purchase of property, this is simply untrue.
  • 88. At the time when I was question [sic] about capital purchases in the order of $800,000.00 I was unaware that I had mixed up the capital and non-capital figures in the Business Activity Statement.
  • 89. I remember being asked about a purchase of a property and simply assumed that they must have somehow known that I was interested in raising funds to purchase the property next door as I believed it may have been a good investment.
  • 90. Upon becoming aware if [sic] the miscommunication between the ATO representative and myself, I immediately informed him that I knew one cannot claim for the capital purchase of property until it is actually purchased.
  • 91. In regards to the $825,700.00 worth of stock purchased during the relevant period, I pointed out to the ATO representatives when attending upon the premises that most of the items were still on the show room floor at the time."

    ATC 2341

17. The Applicant said that he was separated from his wife and that he had lost significant assets. He said in particular that the Original BAS was sent to the Respondent before the break-in to the Applicants' business premises referred to more fully later in these reasons.

18. The remainder of this Part relates in the main to the cross-examination of the Applicant.

19. It was put to the Applicant that according to banking records and having regard to deposits (excluding rent received), sales for the Relevant Period amounted to $43,435. The Applicant agreed that "this was what the ATO came up with but that it was not necessarily correct".

20. The Applicant said that while he accepted the Amended BAS (T3 p13), he did not "necessarily agree with it".

21. The Applicant said that the Original BAS was sent on 9 October 2004. When asked whether there was a reason why it was sent prior to its due date, he said that there was no particular reason. In addition, he could see nothing odd in the fact that 9 October 2004 was a Saturday.

22. A number of questions were then asked of the Applicant as to Exhibit R1 and the fact that there were large variations in the figures. He agreed that there were significant changes in respect of capital purchases and also that sales as a percentage of expenses were low.

23. The Applicant said that he had been in business for some 20 years and agreed that he knew that it was necessary to be accurate as to the amounts inserted in a BAS. He said that he did not agree that the Original BAS was inaccurate.

24. It was put to the Applicant that according to Exhibit R1, sales for the year to June 2004 amounted to approximately $100,000 in contrast with non-capital purchases of just over $1 million. The Applicant agreed that this was so and agreed also that capital purchases in the same period amounted to approximately $350,000. He agreed therefore that during that year total expenditure amounted to approximately $1,350,000 against sales of $100,000.

25. Referred again to the Original BAS, the Applicant agreed that it reflected sales of approximately $35,000 against expenditure of almost $1 million. When it was put to him that the Original BAS could not be accurate, he denied that this was so.

26. Cross-examined as to his error in relation to the Original BAS, the Applicant again contended that except for the transposition of the figures in boxes G10 and G11, the Original BAS was correct. (At this point, Mr Lewis interjected to refer to clause 82 of Exhibit A1 quoted earlier in these reasons.)

27. The Applicant's attention was drawn to Exhibit R1 and in particular, the quarter ending June 2004 in which an amount of $149,390 was reflected as capital expenditure. He said at first that he could not remember what it was for but thereafter said that this amount was spent on renovations and in particular in respect of the installation of a mezzanine floor so as to have storage area above the showroom. When asked who the builder was, the Applicant said that he could not remember, having found the builder in the Yellow Pages.

28. It was put to the Applicant that he had made no attempt, after the tax audit commenced, to substantiate the Original BAS by obtaining the necessary documents. He said that he did obtain some invoices but agreed that he did not provide any to the Respondent. He also said that he often made purchases for cash.

29. The Applicant denied in relation to the Amended BAS that in respect of capital purchases, zero was the correct amount. He agreed though that he had no proof because he had no documentation.

30. As to box G11 (non-capital purchases), it was put to the Applicant that the amount reflected should have been a much lower figure. He said that he agreed that there had been a gross inaccuracy in relation to what could be established.

31. It was next put to the Applicant that the Respondent had made a note dated 18 November 2004 to the effect that he (the Applicant) had told the Respondent during the course of the tax audit, that $800,000 related to a real property acquisition. He said that he did not remember.

32. 

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It was then put to the Applicant that the Respondent had been told in the course of an interview that $800,000 related to a real property acquisition and that he understood that this was so. He answered "No". He also agreed that notes taken by the Respondent were likely to be accurate; he said moreover that he had himself made no notes. He contended that the Respondent may have made notes but this did not have the result that they were necessarily accurate.

33. Pressed as to the real property acquisition, the Applicant said that he might have told the Respondent that he was thinking of buying the real property next door. (Mr Lewis here interjected to refer to clause 88 of Exhibit A1 quoted earlier in these reasons.)

34. The Applicant said that although he had a computer, he did not use it because he was not computer-literate. He said that he alone ran the business during the Relevant Period. When customers came in and if a sale was made, payment would be taken but only in cash or through EFTPOS. Questioned as to whether credit cards were accepted, he said they were and that he viewed them as being the same as EFTPOS.

35. Questioned as to the amount of sales recorded in the Original BAS of approximately $35,000 and as to the number of transactions, he answered, "How many drops are there in a glass of water?". The Applicant said that sales were always made on the basis that payment preceded delivery and so that credit (and including hire purchase credit) was never allowed.

36. The Applicant said that each sale was recorded in an invoice book in which the Applicants retained a carbon copy. Purchases of stock were made for cash, being cash taken in the business and also from the sale of taxi licenses. Large amounts of cash were kept for this purpose in a safe. He did not remember when he sold the taxi licenses. He referred in this context to clauses 38 and 39 of Exhibit A1 quoted earlier in these reasons.

37. The Applicant said that in the past four to five years real properties had been bought and sold amounting to millions of dollars. When it was put to him that as a businessman of 20 years standing he must have known that he had to keep records, he answered, "We are here because I have no records. Phone and ask the tax authorities".

38. Questioned further as to Exhibit R1, the Applicant said that he thought that the taxi plates were sold prior to July 2003.

39. Taken back to the Relevant Period, the Applicant was asked how he could expend almost $1 million, bearing in mind that sales amounted to approximately $35,000, and more particularly where some sales were paid for through EFTPOS or credit cards. He answered that he sold a property in Neebo Drive, Figtree but could not remember when this occurred.

40. Reverting to the Relevant Period, the Applicant said that he had $800,000 in cash available. It was put to him that that statement was untruthful and he answered, "Why should it be a lie?"

41. The Applicant was referred to clause 28 of Exhibit A1 in which he said that Neebo Drive, Figtree was sold in late 2004 for $410,000. He said that he did not remember. He also repeated that he did not remember that he had told the Respondent that an amount of approximately $800,000 related to the acquisition of real property. (It may be noted in general terms that numerous questions were answered by words to the effect that he (the Applicant) did not remember.)

42. The Applicant said that the Original BAS was completed on 9 October 2004 and at a time when he had the necessary documents, but that two days later (on 11 October 2004) after he posted the Original BAS, there was a break-in; see clause 60 of Exhibit A1 quoted earlier in these reasons. He said that he contacted the police and a report to the police was duly made. He said that the thieves took only his filing cabinet and some bits and pieces. The thieves did not take the computer and he did not know whether any furniture was taken but thought that it was possible that a few pieces could have been stolen without his being aware at the time. He said that the cabinet contained a safe, which in turn contained official documents (and in particular certificates of courses taken). Although the break-in resulted in the safe being lost, he did not lose any cash.

43. 

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The Applicant said that he had contents insurance but that his insurance cover did not relate to the items taken.

44. The business premises subsequently burned down. T23 p39 contains a note reading as follows:


"16/05/2005 Business premises burned down on 14/5/05 @ 1915, Forensic Police investigating"

45. The Applicant said that the Respondent contacted him about one week after he sent in the Original BAS. The Respondent asked him about the Original BAS and said that the Respondent was seeking clarification of certain aspects. He said that he told the Respondent that he no longer had the necessary documentation because it had been taken in the break-in which had occurred on 11 October 2004. He said that he would amend the BAS and that pending his submission of a corrected BAS, no action need be taken in respect of the Original BAS. It was at this stage and following that conversation that he sent a handwritten fax addressed to Peter Cassidy (fax receipt date 18 October 2004) which appears at T6 p16 reading as follows:

"BASS STATMENT NEEDS TO

REVIZED PLEASE BE ADVISED

IT DUE TO BRAKE IN AT

BUSINESS I HAVE NO RECORDS

WE HAVE DISCUSSED OVER THE PHONE

[signed/initialled]

PS PETER

THE BAS STATEMENT

WAS SENT ON THE 9-10-04

BRAKE IN TOOK PLACE 11-10-04.

FOR YOUR REF [sic]"

46. In respect of the fax set out in the preceding clause, the Applicant accepted that the date at the top of it indicated that it was sent on 18 October 2004. When the Applicant was first asked whether he sent the fax in question on 18 October 2004, he said, "I must take your word for it". He was then referred to page 3 of annexure A to Exhibit R3 and the note at the foot of that page reading as follows:


"… …
… Client voluntarily said that there were errors on the AS and that the refund should not issue as for example the purchase of land had not been proceeded with and that due to a recent break in at the business premises all records used to prepare the AS had been stolen. A fax was received on 18/10/04 indicating that the AS need [sic] to be revised but the client had no records on which to base the revised figures.

…"

He was asked whether that note assisted him in remembering the date of the fax. He said at first that he did not know whether the fax was sent before or after the telephone call, but eventually, and after being pressed, agreed that the fax was sent in point of time after the telephone call.

47. The Applicant was next referred to T8 p18 and the note made by the Respondent on 22 October 2004 reading as follows:


"22/10/2004 22/10/2004.
  Called & visited client at business premises.
  I asked the client why he said to CVC [Compliance Verification Centre] that the business had ceased trading on 15/10/04 & the client stated that he was trying to trade out of his problems and was trying to secure loans from private sources.
  Client said that all business records were taken during the break-in, the client kept the records in a combined filing cabinet/safe.
  Client said that he would have to review his last BAS since he lost the records.
  I asked the client how he recorded his sales and he said that the sales were recorded in an invoice book and the old books were kept in the filing cabinet/safe which was stolen.
  I asked the client to provide a list of his supplier [sic] and to contact his suppliers to get copies of the TI [tax invoices] for his purchases. Client said that this was not possible as he had "hundreds" of suppliers and could not remember them all.
  Client said that reps were coming in all the time and offering "specials".
 

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Asked the client to secure bank statements for the business, loan account & private account from the start of the business.
  Client said "where is all that leading to?" I told the client that the business has constantly loss [sic] money and never shown a profit, the total loss in the 3 years of operation being about $ 2.3 million.
  Client said that it was his money to do what he wanted with and that he really wanted to make a go of the business.
  I concurred with the client [sic] opinion with the proviso that the expenses had to be substantiated. Client said that he sold 2 taxis in the last 4 years and got bank loans of over $ 1 million for the business and now owed nearly $ 2 million and was selling 2 homes, 1 is on the market with Ray White W'gong (Karen …) the other is being ready [sic] to be put on the market.
  I asked the client how he paid for his purchases & he said that he either paid in cash or by cheques.
  I asked the client if he could go back through the bank statements and cheque butts to extract the list of suppliers and the client agreed that he would check the old cheque books, gesturing toward a shelf were [sic] they are kept (lucky there were not in the safe).
  I asked the client if 2 weeks, say 5/11/04, would be enough for him to gather the required documents and he said that he would have them long before and would drop them to me at the office, I asked the client to contact me when he had the documents and that I would collect them.
  While I was going out a removal truck from 5 Stars relocations came & blocked the exit, the driver & his offsider came out & opened the back of the truck as if to load or unload and went to the store. They then came back out within minutes, closed the back doors of the truck & drove away.
  I did not sight any employee in the store during the visit."

The Applicant denied that he ever told the Compliance Verification Centre (CVC) that the business had ceased trading.

48. The Applicant was referred to the note at the bottom of page 2 of annexure A to Exhibit R3 reading "client advised that the business was a furniture retail store that closed 15/10/04 as business was in a loss situation. Cline tuis [sic] awaiting receivers to be appointed". He said that "this is all news to me. I never said it".

49. The Applicant referred to clause 71 of Exhibit A1 and said that the word "eventually" was the relevant word in this particular context.

50. Again referred to T8 p18, the Applicant agreed that to say that he failed to obtain the documents necessary to substantiate the Original BAS was "pretty accurate".

51. The Applicant said that he did send a record of some payments. When it was put to him that he had not sent bank statements, he said "I don't know whether I did or I didn't. I know I got some". He went on to say that he did send two pages of payments going back to August 2003 but agreed that eight only of those payments occurred in the Relevant Period. But, as to bank statements (and referred to in annexure B to Exhibit R4), he said that to obtain bank statements was too expensive.

52. Ms Morgan asked the Applicant to look at some pages which reflected the eight payments (totalling approximately $12,000). He said that this was what he had sent but that to obtain bank statements would have involved him in cost. The schedule relating to the list of cheques was admitted into evidence together with certain other documents as Exhibit R2; Mr Lewis contended that Exhibit R2 should have been included in the T documents.

53. In answer to a number of other questions, the Applicant admitted that he did not have physical evidence of all of the claimed purchases in the Relevant Period. Referred to clauses 95 and 96 of Exhibit A1 (and annexures A and B to Exhibit A1), he agreed that what he had done was identify the items of stock in the warehouse at May 2005 when a fire took place. He agreed that he did not undertake a similar exercise for the Respondent in relation to the Relevant Period.

54. Again referred to Exhibit R1 and in relation to the year prior to the Relevant Period, it was pointed out to the Applicant once again that there were sales of $100,000 against (non-capital) purchases of $1 million. He was asked whether the stock annexures referred to in the preceding clause showing stock valued at

ATC 2345

approximately $1.3 million as at May 2005 included acquisitions in the Relevant Period less sales and he answered that it did. It was put to him that the annexures had no real value in relation to the Relevant Period because they included periods before the Relevant Period and were compiled approximately 8 months after it ended. And when asked why he obliged the Respondent to do all of the work of reconstruction for the Amended BAS, he answered simply "personal issues".

55. A brief re-examination followed in that Mr Lewis asked a number of questions (some of them distinctly leading). The Applicant repeated that he understood that the Respondent was going to help him with an Amended BAS but had no idea what help the Respondent would give. He did not send any further correspondence and did not remember when the penalty was imposed. He was asked whether he withdrew money from the bank and answered that he didn't know but thought that withdrawals would have been made for personal use and to fund purchases of stock. He also could not remember what property was sold but did say that there were borrowings against real property. He said moreover that he was pressured to sell the properties at Cordeaux Heights and Figtree referred to in clauses 27 and 28 of Exhibit A1 because money was owed on them.

56. The Applicant said also that he thought that the taxi licenses were sold for $300,000 and that payment was made in cash, and by which he meant bank notes.

Part C - The evidence of Mrs Gail Sgardelis

57. Exhibit A2 was accepted on the basis that it was subject to much the same criticism as Exhibit A1 but also on the basis that Mrs Sgardelis was not required for cross-examination.

58. As was the case with Exhibit A1, Ms Morgan noted certain objections to Exhibit A2 and which in the result were not again referred to.

Part D - The evidence of Peter Cassidy

59. In broad terms the evidence in chief of Mr Cassidy is contained in Exhibit R3, which (without annexures) reads as follows:

  • "1. I am employed as a Compliance Verification Centre (CVC) officer in the Goods and Services ("GST") business line at the Australian Taxation Office ("ATO") at Adelaide. I had the conduct of a CVC review being conducted on behalf of the Respondent in relation to the tax affairs of the Applicant in respect of the Business Activity Statement ("BAS") quarter from 1 July 2004 to 30 September 2004.
  • 2. On 18 October 2004, I downloaded the case from the ATO computer application Automated Work Allocation (AWA). This system is used by GST for allocating case work. Attached to the AWA system is a document template called a Compliance Verification Case Report (CVC Report). This document is used to record details of the CVC review, in particular, questions asked and responses provided. Annexed hereto and marked with the letter "A" is the Compliance Verification Case Report.
  • 3. On the same date, I had a telephone conversation with the Applicant. I do not recall the exact conversation, however the CVC report has an entry under the heading "Nature of Business" stating "Client advised that the business was a furniture retail store that closed Friday 15/10/04 as business was in a loss situation. Client is awaiting receivers to be appointed." Further in the report, under an entry titled "Confirm Turnover range of Business', it was noted "N/A NOT TRADING". I would have made those entries after speaking to Mr Sgardelis.
  • 4. During that conversation on 18 October 2004, a voluntary disclosure was offered to the Applicant. Although I do not recall the conversation, the CVC report has an entry under the heading "Outcome of Voluntary Disclosure". I would have made that entry after speaking to Mr Sgardelis. It states: "Client voluntarily said that there were errors on the AS [activity statement] and that the refund should not issue as for example the purchase of land had not been proceeded with and that due to a recent break in at the business premises all records used to prepare the AS had been stolen. A fax was received on the 18/10/04 indicating that the AS need to be revised but the client had no records on which to base the revised figures."

  • ATC 2346

    5. On 18 October 2004, I received a facsimile from Mr Sgardelis advising that the BAS statement needs to be revised due to the break in of its premises on 11 October 2004. The facsimile also stated that the Applicant has no records and the BAS statement was sent on 9 October 2004. The facsimile is produced in the Section 37 Documents at T6-16."

60. T8 p18 has been quoted in full in clause 47 above. (Similarly, a note at the bottom of page 3 of annexure A to Exhibit R3 has been included in clause 46 above).

61. The following additional notes are taken from annexure A to Exhibit R3:

62. It is not necessary for me to deal in detail with the cross-examination of Mr Cassidy. Insofar as it could be taken to be an attack on his credibility, it did not succeed because the Tribunal is satisfied that his evidence was truthful. It may be noted that there were some aspects which he did not recollect but where notes were relied upon and which had been made contemporaneously.

Part E - The evidence of Pierre Flahaut

63. As with Mr Cassidy, the evidence in chief of Mr Flahaut consisted in large part of Exhibit R4 which (without annexures) reads as follows:

  • "1. I am employed as a field officer in the Goods and Services ('GST") business line at the Australian Taxation Office ('ATO') at Wollongong. In the period 21 October 2004 to 8 July 2005 I had the conduct of a field review being conducted on behalf of the Respondent in relation to the tax affairs of the Applicant in respect of the Business Activity Statement ('BAS') quarter from 1 July 2004 to 30 September 2004.
  • 2. My duties as a Field Officer with GST include verification of information contained in BAS. This involves conducting research, profiling taxpayers and businesses, examining tax invoices and other taxation documents relating to GST transactions, conducting interviews with taxpayers and conducting third party checks.
  • 3. My practice in relation to any contact I have with a taxpayer or a third party is to take hand written notes either during the contact or shortly after. I then make an entry into the Respondent's Activity Log (which is a database maintained by the respondent). I then discard my hand written notes. However, in some circumstances, I will not take any hand written notes but will record the contact with the taxpayer or third party directly into the Respondent's Activity Log on my return to the office.

  • ATC 2347

    4. On 22 October 2004, I conducted an interview with Mr John Sgardelis, the appointed contact for the Applicant. During that interview, I had a conversation with Mr Sgardelis. I cannot recall that conversation word for word, nor did I take notes during the conversation. The results of my conversation with Mr Sgardelis were entered into the Respondent's Activity Log on the same date. The Respondent's Activity Log contains a record of telephone conversations between the Applicant and the Respondent once a field audit has commenced. Annexed hereto and marked with the letter 'A' is a copy of that record.
  • 5. After returning to the office on 22 October 2004 I received a phone call from Mr Sgardelis. He said words to the effect of: 'The finance company want over $500 to supply me copies of the statements. I cannot afford the expense but am happy for you to obtain them.' Annexed hereto and marked with the letter 'B' is a copy of the record from the Respondent's Activity Log.
  • 6. On 25 October 2004, I visited Mr Sgardelis and he gave me the bank account numbers: Australian National Credit Union (City Coast Credit Union) accounts: Personal …, Business …. Annexed hereto and marked with the letter 'C' is a copy of the record from the Respondent's Activity Log.
  • 7. On 8 December 2004, I spoke to 'Kay' at Australian National Credit Union. She said words to the effect of: 'We do not backcharge the client when the request for the document comes from the ATO. The client would be charged if he made the request himself'. Annexed hereto and marked with the letter 'D' is a copy of the record of that conversation from the Respondent's Activity Log.
  • 8. On 16 December 2004 I received a telephone call from 'Kay' from Australian National Credit Union. She said words to the effect of: 'The cost of obtaining the bank statements is $5 per statement for the last 12 months and $10 per statement prior to 1 July 2003.' Annexed hereto and marked with the letter 'E' is a record of that conversation from the Respondent's Activity Log.
  • 9. On 17 December 2004 I rang Mr Sgardelis and said words to the effect of: 'The cost of obtaining copies of the bank statements is $5 per statement for the last 12 months and $10 per statement prior to 1 July 2003. Do you have any at home or with your tax agent?' Mr Sgardelis said words to the effect of: 'I do not have any bank statements at home or with my tax agent.' I said words to the effect of: 'To minimise the cost, I will request the bank statements for the last 13 months.' Mr Sgardelis said: 'Yes'. I said words to the effect of: 'Have you compiled a list of your supplies [sic]?' Mr Sgardelis said words to the effect of: 'I have not done so yet but will go through the 3 cheque book butts and do it.' Annexed hereto and marked with the letter 'F' is a record of the conversation from the Respondent's Activity Log.
  • 10. On 25 January 2005, I conducted an interview with Mr John Sgardelis. Also present was Brendan Hulley, another officer of the Respondent. I do not recollect the exact conversation, however I used questions based on a list of topics that I had prepared earlier and during the interview, wrote notes of Mr Sgardelis's answers. After the interview, I returned to my office and typed up the notes from the interview. During the interview I gave Mr Sgardelis a 'summary of personal living expenses' form and asked him to fill it in. He said that he would have it back to me within a week. Annexed hereto and marked with the letter 'G' is a copy of that record.
  • 11. On 8 April 2005, I inspected the properties at 38 Nebo Drive Figtree and 30 Taminga Crescent Cordeaux Heights. I visited the Applicant and spoke to Mr Sgardelis. I do not recall the exact conversation, however a record of the conversation was kept in the Respondent's Activity Log. I asked Mr Sgardelis about the personal expenses sheet and he said that had not filled them in as they were misplaced. He asked me to fax him another 'summary of personal expenses' sheet and gave me his fax number. Annexed hereto and marked with the letter 'H' is a record of that conversation.

  • ATC 2348

    12. On my return to the office on 8 April 2005, I faxed another source of funds for personal living expenses to Mr Sgardelis. Annexed hereto and marked with the letter 'I' is the record from the Respondent's Activity Log."

64. Annexure B to Exhibit R4 reads as follows:


"22/10/2004 Client rang saying that the finance company want over $ 500 to supply him with copies of the statements & that he cannot afford the expense but he is happy for us to obtain them."

65. Annexure D to Exhibit R4 reads as follows:


"8/12/2004 I spoke to Kay at the credit union and they do not backcharge the client when the request for document come [sic] from the ATO, the client would be charged if he made the request himself."

66. Annexure E to Exhibit R4 reads as follows:


"16/12/2004 Kay … from Nat. Credit Union rang & told me that as this client is on a monthly statement their [sic] would be a $ 5.00 charge/statement for the last 12 months & a $10 charge/statement for period prior to 1 July 2003. Told Kay to hold on until I made some further enquiries and get back to her. Her phone No is … & her fax is …"

67. Mr Flahaut visited the Applicant together with Mr Brendan Hulley whose witness statement is Exhibit R5. Mr Flahaut's notes of that visit appear at annexure G of Exhibit R4 and read as follows:

"Interview conducted 25 January 2005 @ 0900 at 101a Auburn St, Wollongong.


Present were: Mr John Sgardelis, client.
  Brendan Hulley, ATO
  Pierre Flahaut, ATO

Proceeded to do RKAT and advised the client of the shortcomings of his record keeping method.

Asked client about July/Sept 2004 BAS

  • Q What was the $ 825,700 capital acquisition?
  • A Client stated that this should be non capital acquisition. (stock currently on the floor)
  •   The client had previously advised CVC that this amount was largely made up of a property purchase that did not proceed.
  • Q You reported a total of $ 948,800 acquisitions, the calculated amount from the bank statements is $ 38,907 why the discrepancy?
  • A The client claimed that the difference was paid in cash
  •   When asked were [sic] the cash come [sic] from the client said that it was kept in a. location the whereabouts he would not disclose.
  •   When asked how he came into such a large amount of cash the client said that it came from savings, as he worked very hard at two jobs, inclusive of shiftwork at the steel work [sic] and driving cabs and from the sales of 2 cabs 2 to 3 years ago for about $ 220,000 each and could not remember to whom he sold them but to ask Nick … from Wollongong cabs.(…, Wollongong …
  •   This would bring the issue of sales of capital asset (GST or going concern) and of capital gain.
  • Q What are the other capital acquisitions in the other BAS?
  • A The client said that the building at 101 Auburn St was in a state of disrepair when he purchased it and that about $ 300,000 was spent in refurbishing.
  • Q What are the $ 721,395 non capital acquisitions in the March 04 BAS?
  • A The client said that it was the acquisition of 101 Auburn St (Capital Acq)
  •   RP data shows the settlement date as 05/06/03 for $ 625.000
  • Q How did you arrive at the G1, G10 & G 11 figures?

  • ATC 2349

    A from the total of the sales in the receipt book and the total of the tax invoices received.
  • Q You lodged a tax return for 2003/4 for the business & the partners. On what were the returns based since you claimed that all your records were stolen on 1l/10/04?
  • A The ITR was done by the TAG and the documents returned to me before the break-in.
  •   Partnership ITR was lodged on 23/10/04; JS ITR was lodged on 26/10/04 and GS ITR was lodged on 28/10/04
  • Q Did you include the amounts of money withdrawn at the casinos in your income? ($ 89,500 in the financial year)
  • A The income was accounted for at the end of the year when doing the ITR with the TAG.
  •   Mr Sgardalis [sic] did not seem to understand that takings from the business for personal purpose was to be accounted for as income.
  • Q Do you, or your wife, have any other income than from the business and the rents?
  • A Not for the last 2 to 3 years.
  • Q Viewed list of properties. Is there any other properties [sic]?
  • A No. 38 Nebo Drive, Figtree and 30 Taminga Crescent, Cordeaux Heights are on the market. The proceed [sic] would go towards repaying some of the loans.
  • Q How do you receive the rents?
  • A by direct credit from Illawarra properties

Mr Sgardelis was told that the business was in constant loss totalling $ 2,323,344 since the start of the business in October 2000 and that the value of the sales amounted to 15.3% of the total expenditures.

Mr Sgardelis agreed that the business was losing money and that he had nearly $ 2,000,000 in loans ($ 800,000 for City Coast credit, Union; $ 650,000 from Challenger & $ 430,000 from Aust. Wholesale lending)

Mr Sgardelis was told that due to the result of the bank statements analysis for the last 15 months we would have to secure the rest of the bank statements since October 2000 and was informed again of the $ 10 fee / bank statement. Mr Sgardelis said that if it was needed to obtain them.

Mr Sgardelis said that he was trying to make a go of the business and had some prospects, he also said that Aust. Wholesale lending had wanted to foreclose on the business for defaulting on the loan repayment and that he had to cash in some of his superannuation ($ 25,000 - tax) to avoid the foreclosing. (he showed us the paperwork)

Mr Sgardelis said that business was very slow & took as an example his last sale [sic] of the 24/01 & 18/01 with nothing in between.

Mr Sgardelis was given a 'summary of personal living expenses' and asked to fill it in, he said that he should have it back to us within the week"

68. In respect of Mr Flahaut's evidence, cross-examination indicated one error. The reference in annexure G to Auburn Street and its settlement date as 5 June 2003 was incorrect and should have been recorded as 5 June 2004. Clause 37 of Exhibit A1 indicates that it was purchased in March 2004 for $625,000.

69. I am satisfied that Mr Flahaut was a truthful witness and that his notes were made in such manner that they can be treated as correct.

Part F - The evidence of Mr Brendan Hulley

70. Mr Hulley's witness statement (Exhibit R5) constituted his evidence in chief and it is reproduced in full as amended in respect of clause 3(iii) (in accordance with his evidence) as follows:

  • "1. I am employed as a field officer in the Goods and Services ('GST') business line at the Australian Taxation Office ('ATO') at Wollongong. I had involvement in a review being conducted on behalf of the Respondent in relation to the tax affairs of the Applicant in respect of the Business Activity Statement ('BAS') quarter from 1 July 2004 to 30 September 2004.
  • 2. On 25 January 2005, I accompanied Pierre Leon Flauhaut, another taxation officer of the Respondent, to an interview with Mr John Sgardelis. I do not recollect the exact conversation, however Pierre had prepared a list of questions which he asked Mr Sgardelis. I took notes during the interview. After the interview, I gave my notes to Pierre.

  • ATC 2350

    3. I recall the following details from the interview. These details remain in my mind because I thought them interesting or odd.
    • (i) Mr Sgardalis said words to the effect of: 'I started up the business in the last year or so. I used to operate taxis. I spent a lot of money fixing up the warehouse before it was ready to be used as a furniture warehouse.'
    • (ii) Pierre asked Mr Sgardelis: 'What about moneys being taken out of the business account at casinos?' The client stated 'What I do with my money is my business.' I said: 'There is a difference between business dollars and after tax personal dollars'.
    • (iii) I asked Mr Sgardelis: 'Why was there a difference between the payments going out of the bank account and the BAS you used to claim'. Mr Sgardelis said: 'I keep money in a safe 'somewhere' money to pay for stock'. Either I or Pierre said: 'Would you keep $800,000 in a safe?' Mr Sgardelis said: 'I have.'
    • (iv) Either Pierre or I said: 'Could we have the documentation in support of the BAS?' Mr Sgardelis said: 'Someone broke in and took the documents.'
    • (v) Mr Sgardelis said: 'The business is not making any money at the moment'. He also said:' I think the geographical position of the business may not be the best for furniture.'
    • (vi) I viewed the display furniture. I recall the furniture had been marked down significantly. The showroom/warehouse did not appear to have many people in it. It was a Tuesday morning at around 9 am. No customers were there at any time during the interview.
    • (vii) I viewed the warehouse and noticed that there were a lot of furniture boxes stored in the back

  • …"

71. Mr Hulley's role in relation to this matter was comparatively minor. His cross-examination was brief and his evidence can be accepted.

Part G - Analysis of the evidence of the Applicant

72. Exhibit A1 is a very long document. A consideration of clauses 59 to 64 indicates that the Applicant did not make any mention of the fact that his fax dated 18 October 2004 was sent after he had received a call from Mr Cassidy and in which he had admitted that the Original BAS required amendment because it was not correct. In particular and in relation to so detailed a document the fact that those clauses of Exhibit A1 do not refer to the call from Mr Cassidy on 18 October 2004 is surprising in the extreme.

73. The business was on his evidence conducted in a fashion that was in many respects decidedly unorthodox. According to his evidence, furniture sold by retail was always sold for cash or through EFTPOS (which included for this purpose, credit cards). (In many retail furniture businesses transactions on credit, including through hire purchase agreements, are standard, but this was not so in respect of the business of the Applicants.) Purchases were made according to the Applicant from numerous suppliers and generally for cash; it is for this reason, according to the Applicant, that substantial sums in cash were held in the safe. As to why there was no cash in the safe at the time of the break-in was not explained.

74. The records maintained by the Applicant even before the break-in were by any standards hardly adequate. Sales were recorded in an invoice book where the Applicant retained a carbon copy. In respect of purchases, receipts were sometimes but not always obtained, more particularly having regard to the fact that according to his evidence many if not most purchases were made for cash and in order to obtain discounts.

75. Exhibit R2 indicates that the business was, even before the Relevant Period, incurring significant losses on a continuous basis. In the period prior to the Relevant Period, expenditure invariably exceeded sales. However, the Original BAS reflected an even bigger deficiency such that if it had been processed without question an amount of approximately

ATC 2351

$80,000 would have been paid to the Applicants.

76. On 9 October 2004, the Original BAS was sent to the Respondent. The fact that it was sent so soon after the end of the Relevant Period and so long before the due date may have been motivated by a desire for the payment claimed to be due although the Applicant denied that this was so.

77. On 11 October 2004, two days after the Applicant sent in the Original BAS, the break-in occurred. The fact that the loss in these circumstances amounted to less than $500 is odd. The thieves took virtually nothing other than a cabinet which apparently contained a safe and the safe did not contain any cash. It will be remembered that the Applicant said that a substantial cash amounts were retained in order to fund purchases of stock. The Applicant said that as a result of the break-in, all of the relevant records were lost.

78. On 18 October 2004, the Applicant received a call from Mr Cassidy which made it clear that the Original BAS was the subject of scrutiny. Indeed, Mr Cassidy's evidence makes it clear that a tax audit (having regard to the definition of that term contained in s 995-1 of the Income Tax Assessment Act 1997 ("the ITAA") had commenced. The Applicant told Mr Cassidy that the Original BAS was incorrect and should not be implemented. The Applicant then sent the fax dated 18 October 2004 to the Respondent in which he repeated that the Original BAS contained errors and that therefore it need not be processed.

79. The Applicant's evidence was that he is a business man of experience. The manner in which he conducted his affairs thereafter does not accord with that statement. It might be thought that in these circumstances he would have gone to considerable lengths to reconstruct the vouchers and evidence that had been stolen. He did nothing of the kind; on the contrary, his conduct was such that the Respondent was obliged on occasions after the issue of statutory notices, to go to the trouble of obtaining all of the documentation which enabled him to issue the Amended BAS. The Applicant's evidence that he expected the Respondent to help him do so is not supported by the evidence before the Tribunal.

80. The evidence before the Tribunal considered as a whole, does not enable the Tribunal to form any view as to how the Applicants were able to finance the business and as to how this was possible on the evidence before the Tribunal remains a mystery. The business itself ran consistently at a loss and a loss which was by no means insignificant. Expenditure of a substantial nature was made in cash. Stock was purchased from "hundreds of suppliers"; some money becoming available, on the evidence, through property sales or borrowings against property but as to when those transactions took place was entirely unclear, especially in the light of the fact that the evidence in this context was contradictory.

81. The sale of the taxi licenses is a good example of the confused nature of the evidence. The Applicant said that the taxi licenses were sold at some time in the past for cash. Mr Flahaut in his investigations ascertained that taxi licenses were sold and for an aggregate amount in excess of the amount specified by the Applicant. It is significant that no such sales were reflected in any prior BAS statements.

82. On the balance of probabilities, the Original BAS was incorrect; documentation in support of its content was, again on the balance of probabilities, not available. The telephone call from Mr Cassidy on 18 October 2004 caused the Applicant to realise that the claim by the Applicants in the Original BAS was not supportable and for this reason he informed Mr Cassidy that it should not be proceeded with, and also to send a fax on that same date to the Respondent to the same effect. On the evidence before the Tribunal, the Amended BAS was correct. The Applicant in his evidence consistently maintained that the only error in the Original BAS was the transposition of two items. At the same time he said that because of his inability to furnish the necessary documentation he could not and did not dispute the Amended BAS. The fallacy in this line of reasoning is demonstrated by the failure of and indeed refusal by the Applicant to procure the necessary documentation. It is possible that he might, had he made the necessary efforts to do so, have found it difficult to obtain all of the documents needed, but this would not have been so for many of them. The Applicant simply did nothing at all. As to bank statements

ATC 2352

and as noted previously, the Applicant complained that the cost of obtaining them precluded him from doing so.

83. The Applicant was not an impressive witness. Too many questions were answered with "I don't remember" or similar words. His lack of credibility arises also from the fact that on occasions he found it necessary to alter his answers. His demeanour at times verged on the belligerent.

84. In submissions, Mr Lewis complained that Exhibit R2 should have formed part of the section 37 documents. Even if this is so, it is not possible to discern any prejudice to the Applicants.

85. Mr Lewis contended at some length, and on more than one occasion, that the Applicants made a voluntary disclosure and, moreover, before the audit commenced, thus entitling them to a statutory discount. He said that the telephone call from Mr Cassidy on 18 October 2004 constituted an announcement that a tax audit was about to commence and that the fax of 18 October 2004 was thus dispatched before the commencement of the tax audit. The term "tax audit" is defined in s 995-1 in the ITAA as follows:

"…

'tax audit' means an examination by the Commissioner of an entity's financial affairs for the purposes of a taxation law.

…"

86. The evidence of Mr Cassidy makes it clear that the tax audit had commenced. Nor did the Applicants make any disclosure other than a general statement that the Original BAS was incorrect and that the claim for a payment was not being pressed. That statement and the fax dated 18 October 2004 did not on any basis constitute a disclosure of anything other than the fact that the Original BAS was incorrect. It must be remembered in this context that the Applicant repeatedly insisted in evidence that the figures in the Original BAS were correct save only that two relevant amounts were erroneously transposed. In the light of the manner in which events proceeded after 18 October 2004 the statement by the Applicant that the figures in the Original BAS were correct overall and that the only error was one of transposition, must in the light of his failure to contest the Amended BAS be untruthful.

87. The evidence of Mrs Sgardelis who was not involved in the business during the Relevant Period and whose role was always limited, regarded in this light cannot be accorded any significant weight. The fact that stock lists were prepared in May 2005 in consequence of the fire that occurred in that month does not furnish any meaningful assistance. The T documents indicate that in respect of the fire, there are ongoing forensic investigations.

88. As to the expenditure of a capital nature, the Applicant could not furnish the names of any builders. He said that there were various tradesmen of various types but he could not name any of them.

Part H - The penalty

89. The Respondent imposed an administrative penalty under Division 284 of Schedule 1 of Taxation Administration Act 1953 ("TAA"). Subsection 284-75(1) of Schedule 1 of the TAA provides that a taxpayer is liable to an administrative penalty if the taxpayer or its agent makes a statement to the Commissioner which is false or misleading in a material particular and there is a shortfall amount as a result of the statement.

90. The Respondent contends that the Applicants made false or misleading statements in the Original BAS for the Relevant Period in three respects:

91. As a result of the false or misleading statement, there was a tax shortfall in an amount of $83,422 (T25 p43).

92. Even if the Applicants' objection had challenged the Amended BAS (and it did not) the Applicants could not discharge the onus of establishing that during the Relevant Period it spent $948,800 on capital and non-capital acquisitions. More specifically:

93. The Respondent contended, and the Tribunal agrees, that the Original BAS contained false and misleading statements in that:

94. The amount of the administrative penalty is calculated as a percentage of the shortfall amount determined by the level of culpability on the part of the taxpayer and/or its tax agent. Subsection 284-90(1) of Schedule 1 to the TAA provides for:

95. The Respondent contended that the Applicant acted in a reckless manner in submitting, on behalf of the Applicants, the BAS for the Relevant Period and that the tax shortfall penalty was correctly imposed at 50 percent of the tax shortfall amount.

96. Taxation Ruling TR 94/4 relates to tax shortfall penalties and the concepts of reasonable care, recklessness and intentional disregard and provides, relevantly:

  • "…

  • 7. Recklessness is gross carelessness. A taxpayer will have behaved recklessly if the taxpayer's conduct clearly shows disregard of, or indifference to, consequences that are foreseeable by a reasonable person as being a likely result of the taxpayer's actions. It is not necessary for a finding of recklessness that the taxpayer should have been acting dishonestly, nor that the taxpayer intended to bring about the consequences that his or her actions caused.

  • …

  • 15. The word "recklessness" is not a term of legal art that has a special meaning, but rather has a well established ordinary meaning which the courts have generally had no difficulty applying. Literally, the word "reckless" means "without reck", "reck" being an old English word meaning "heed", "concern" or "care" (R v. Bates [1952] 2 All ER 842). The courts, however, have long recognised that the ordinary meaning of recklessness involves something more than mere inadvertence or carelessness (for example, see Derry v. Peek (1889) 14 AXpp. Cas. 337; 5 T.L.R. 625).
  • 16. Briefly stated, recklessness is gross carelessness - the doing of something which in fact involves a risk, whether the doer realises it or not, and the risk being such having regard to all the circumstances, that the taking of that risk would be described as "reckless" (Shawinigan Ltd v. Vokins & Co. Ltd [1961] 3 All ER 396). In other words, recklessness involves the running of what a reasonable person would regard as an unjustifiable risk (Reed (Albert E) & Co Ltd v. London and Rochester Trading Co. Ltd [1954] 2 Lloyds Rep 463).

  • ATC 2354

    17. A person would be acting recklessly if:
    • (a) the person did an act which created a risk of a particular consequence occurring (e.g. a tax shortfall);
    • (b) a reasonable person who, having regard to the particular circumstances of the person, knew or ought to have known the facts and circumstances surrounding the act would have or ought to have been able to foresee the probable consequences of the act;
    • (c) the risk would have been foreseen by a reasonable person as being great, having regard to the likelihood that the consequences would occur, and the likely extent of those consequences (e.g. the size of the tax shortfall); or
    • (d) when the person did the act, he or she either was indifferent to the possibility of there being any such risk, or recognised that there was such risk involved and had, nonetheless, gone on to do it. That is, the person's conduct clearly shows disregard of, or indifference to, consequences foreseeable by a reasonable person.
  • 18. It should be noted that a finding of dishonesty is not necessary to a finding of recklessness (R v. Grunwald & Ors (1963) 1 Q.B. 935; R v. Bates (supra)). Rather, it is sufficient that the person's behaviour displayed a high degree of carelessness and indifference to the consequences.

  • …"

97. In
Hart v Commissioner of Taxation 2003 ATC 4665; (2003) 131 FCR 203 at [43]-[44] (per Hill and Hely JJ) the Full Court by a majority held that recklessness in the context of administrative penalties "means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J)". Their Honours adopted the statement of Cooper J in
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111; (2001) 46 ATR 347 at [77], 364:

"…

Recklessness in this context means to include in a tax statement material upon which the [Act] or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the [Act] and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.

…"

98. The Respondent in its written submissions noted (clause 22), that it relied upon the following matters to establish recklessness by the Applicants:

  • "(a) the BAS submitted on behalf of the Applicants by the Applicant was inaccurate in that the Applicants claimed:
    • • by claiming $35,675 for sales instead of $43,435;
    • • by claiming $948,800 for purchases rather than $38,907; and
    • • in claiming a net amount of GST of $83,011.00: T25-43;
  • (b) the inaccuracies in the BAS lead to an $83,422 shortfall;
  • (c) on 18 October 2004 the Applicant when contacted by the Australian Taxation Office about the Applicant's BAS, said to Mr Cassidy, an officer of the ATO, that there were errors in his BAS and that the refund should not issue. The explanation given at that point as recorded in the contemporaneous note was that the purchase of property did not occur and that the supporting documents had been lost in a break-in at the premises: Affidavit of Peter Cassidy sworn 19 December 2006 at para 4 and annexure A page 3 ( Ex R3 );
  • (d) on 18 October 2004 the Applicant notified the Respondent by facsimile that the Applicants' BAS needed to be revised because he had no records due to a break-in at his business premises (on 11 October 2004): T6-16; in his statement the Applicant states that was because he couldn't "substantiate amounts claimed therein": paras 65-66 of A1 ;

  • ATC 2355

    (e) the bank records obtained by the Respondent to verify the contents of the BAS (as the Applicants' records had been stolen on 11 October 2004) disclosed discrepancies between the amounts shown in the bank accounts and BAS lodged for sales and purchases by the Applicant; and
  • (f) the Applicants had no alternative records to support the figures claimed in the BAS despite the significant amount claimed.

  • …"

99. In this case, the Respondent imposed a penalty of 50 percent. He increased the penalty by 20 percent pursuant to subsection 284-220 of Schedule 1 to the TAA. However, the Respondent subsequently decided not to press for the additional penalty of 20 percent.

100. The Tribunal considers that a penalty of 50 percent is appropriate and if anything, generous. A penalty of 75 percent might well, in all the circumstances, have been justified; similarly, an additional penalty of 20 percent as referred to in the preceding clause, and had it been pressed, might well have been justified.

101. The Tribunal does not accept that subsection 284-225 of Schedule 1 to the TAA can apply to reduce the base penalty amount as contended by the Applicant (and see clause 85). The Applicants did not make any disclosure before the audit commenced. Nor did they make any disclosure which assisted the Respondent after the audit commenced.

102. It is not necessary to deal in detail with the claim by the Applicants that the penalty should be remitted. The Tribunal refers to the Practice Statement Law Administration 2006/2 (PSLA 2006/2) at paras 138 to 158 and in particular, paragraph 142, which provides:

"…

Where an entity has … behaved recklessly … it is difficult to envisage a situation where the Commissioner would exercise the discretion to remit. It would be exceptional if the discretion was exercised when an entity had behaved recklessly.

…"

103. The Applicants have not in any event provided any evidence of any kind in support of their claim that the penalty should be remitted in whole or in part; on the contrary the evidence as a whole establishes that there is no basis upon which the Tribunal can or should do so.

Part I - Conclusion

104. The penalty imposed is appropriate and in the view of the Tribunal should not be remitted. Accordingly, the decision under review is affirmed.

 

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