SONNTAG v FC of T

Members:
G Ettinger SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 3

Decision date: 3 January 2008

G Ettinger (Senior Member)

1. Mr Lionel Sonntag was involved as a director, or employee with approximately 46 companies over a period between 1985 and 2003. He worked as a developer, arranging finance for consumers, and worked with other products. He described his role as actively involved in the work of the various companies, particularly at the design stage, where he was in touch with architects, and with obtaining development applications, and the other necessary documentation for development.

2. However by 2002 there were difficulties with cash flow, and by March 2003, 11 of the companies were under administration or in liquidation. Mr Sonntag's income tax returns for the years 2002 and 2003 were selected by the Commissioner for Taxation (the Commissioner), for audit.

3. Unfortunately Mr Sonntag did not pay sufficient attention to the necessary regulatory mechanisms, the paper work, as his representative, Mr Crane described it.

4. Mr Sonntag went through what he described as a period of great stress where he suffered depression for which he was treated. He did not report being fully recovered at the time of the hearing.

5. I found the Applicant was able to discharge the onus pursuant to section 14ZZK of the Taxation Administration Act 1953 (the Act), to show that the assessment in regard to the 2002 tax return was, in part, excessive. I understood that in relation to the 2003 year, only the penalties were in issue. I was satisfied that Mr Sonntag suffered depression for which he was being treated, and that this created a special circumstance which I could take into account when considering whether I might exercise the discretion for the penalties for the years 2002 and 2003 to be reduced. I was satisfied that Mr Sonntag failed to take reasonable care, and relied excessively on staff or agents for preparation of his financial statements and tax returns. I do not consider this is a case of recklessness or intentional disregard of the law. I am satisfied that the penalties for both years should be assessed at 25% of the tax shortfall amount. I remit the matter for calculation to the Commissioner.

6. My reasons follow.

Issues before the Tribunal

7. The decisions I must make are:

Background

8. Mr Sonntag told me that he was principally involved in property development, and that his group of companies from 2001 to the appointment of administrators in February or March 2003, was the Foresyte Group. The Group undertook financing of individuals in their investments, in relation to mortgages, motor vehicles and debt reduction. Mr Sonntag said that he personally principally looked after developments, sought properties for development, Council approvals, organised finance, and carried out liaison with designers and architects. He said that he had managers, a bookkeeper and financial controller and company secretary to perform administrative duties. He described "mountains of paperwork."

9. Mr Sonntag described cash flow problems, and occasionally in peak times as he described them, money to pay salaries was transferred from one account to another. He said that the problems occurred due to the increase in the cost of construction of up to

ATC 2003

30%, and that this, and his obligations to investors was what caused him to seek administration for his companies in 2003. He said that at that time, the administrators took more than 100 boxes of files, including his personal files, which caused difficulties for him in accessing records and completing his 2002 and 2003 tax returns.

10. By way of background, I note that the Commissioner produced a list of 46 companies for which Mr Sonntag had been appointed as a director in a period dating from 1985 to 2003. By 2002, approximately 11 were under administration or in liquidation. His records were not well kept.

11. The companies most relevant to this matter and related to Mr Sonntag's application to this Tribunal in relation to his 2002 and 2003 income tax returns were:

Whether the Applicant's income tax assessment for the year ended 30 June 2002 is excessive as he claims

12. Pursuant to section 14ZZK of the Act, on an application for review of a reviewable objection decision, the Applicant has the burden of proving that the assessment is excessive. There is well established case law which supports this, such as the cases of
McCormack v Federal Commissioner of Taxation 79 ATC 4111; (1979) 143 CLR 284 and
Federal Commissioner of Taxation v Dalco 90 ATC 4088; (1990) 168 CLR 614. In the latter, the High Court held that to discharge the onus of proof, the taxpayer had to do more than show that the income attributed was not his, rather, the taxpayer has to show that the actual taxable income is less than the amount assessed. Brennan J stated:

"… The amounts assessed represent the Commissioner's bona fide judgment as to the amount of the taxpayer's taxable income and the power to make the assessment was validly exercised. The assessments being valid, the burden was on the taxpayer to prove that the amounts assessed were excessive."

13. In the case of
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63, the High Court stated as follows:

"In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.

….

ATC 2004

… the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right…"

14. The Commissioner submitted that on the evidence, Mr Sonntag had not discharged this onus in relation to the 2002 tax year, which was the one in dispute at the Tribunal.

15. Mr Crane indicated that due to the administration of the Foresyte Group and the subsequent impounding of documents by the administrator it was impossible to obtain evidence of payroll records to provide further evidence of employment details for Mr Sonntag. He conceded that there was confusion as to which company was registered as a payer, which company had submitted Tax File Number declarations, which company paid withholding tax, and which company made payments to employees.

16. I am mindful that pursuant to section 12-35 of the Act, an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). There are general exemptions pursuant to section 12-1 of the Act; I am satisfied that none of those applied to the Applicant.

17. I noted that both parties agreed that the following facts applied:

18. The Applicant submitted that he reported his 30 June 2002 salary and wages of $135,736 from 21 Sportz and tax withheld of $40,683 on the basis of the payment summary created by his support staff. He submitted that he discovered the form when given a box from the Administrator, and had relied on it. Mr Crane submitted that Mr Sonntag was under stress, and would not necessarily have queried, even if he had noticed, that the payment summary was in the name of 21 Sportz. There were, at that time, quite a number of companies in the group, and therefore the Applicant would not have easily recognised who was or was not registered as a payer he submitted.

19. The Commissioner submitted that the Applicant made false or misleading statements in claiming PAYG Withholding credits of $40,683 in his 2002 income tax return which were never paid to the Commissioner by his employer. The Commissioner submitted that as a director of 21 Sportz, the Applicant was aware of the fact that he was not entitled to the PAYG withholding credits claimed, and that as a result, PAYG withholding credits were claimed which were more than they would have been had the statement not been false or misleading, giving rise to a tax shortfall amount of $20,951.74 in the year ended 30 June 2002.

20. A tax shortfall penalty of $15,713.80 was imposed in respect of the 2002 income year at 75% of the tax shortfall amount for intentional disregard. A Notice of Assessment of Penalty for having a tax shortfall amount issued on 29 June 2005. (T11-23).

21. 

ATC 2005

By letter dated 27 July 2005, the Applicant objected to the Notices of Amended Assessment and Assessment of Penalties (T12-24). In his objection, the Applicant claimed that he had not received the net wages represented by the payments summaries, as his employer had not been able to afford to make the salary payments. The Applicant claimed that his net salary for the 2002 income year should be $58,921, calculated as follows:
Amount received from employer per bank statements 90,766
Reduced by loan repayments as identified (Eloncia) (16,000)
Reduced by salary reversals (18,500)
  56,266
Increased by other deposits not specifically explicable therefore included as income 2,655
Net Salary 58,921

22. The Applicant claimed that he did not make false and misleading statements in his tax returns. "The cancellation of a credit for PAYG (W) is most unusual, and to have lodged the income tax returns on the basis that the amended assessments have been issued would be potentially misleading and deceptive." (T12-24).

23. On 7 December 2005, the Respondent disallowed the objection (T15-80). On 2 February 2006, the Applicant applied for a review of the decision at the Tribunal (T1-1).

24. The Respondent submitted that the basis for the Applicant declaring his income had changed from the time of his first objection, to his Statement of Facts and Contentions, and eventually at the Tribunal hearing. I have noted those submissions, and Mr Crane' reply, but consider that the more important focus for me is to ensure that the I make the correct or preferable decision based on the law, and all the facts before me.

25. At the hearing before me, the Applicant claimed that the actual net wages amount he received in respect of the 2002 year was $35,962.68 paid by I-Finance, as indicated in the document, Exhibit A1.

26. He also agreed for the year ended 30 June 2002, $90,767.38 was credited to his CTB fund account. I noted that the deposits for the 2002 year were designated as follows in Exhibit A1:


"Sale of Equipment $24,984
Loan Eloncia Pty Ltd $16,000
Wages $35,962.68
Other $10,327.37
Credit $1.17
Reversal of debit $3,92.16
Total $90,767.38"

27. Mr Crane accepted on behalf of Mr Sonntag that the $10,327.37 shown as "other" could not be substantiated, although the "netbank" deposits would suggest, he submitted, that this was other than salary, and more likely to be a transfer of funds between entities.

28. Mr Sonntag conceded in his closing submissions made on his behalf by Mr Crane, that salary reversals ($18,500), were no longer a valid point of contention, and hence a contra claim was retracted. Mr Crane indicated this flowed from the settlement of the 2003 income year where salary reversals were agreed not to apply. I noted however that there was no explanation of this in Exhibit A1.

29. In his written closing submissions (paragraph 26), Mr Sonntag submitted as follows:

"In the alternative, should the tribunal find that the Applicants' notice of amended assessment for the year ended 30th of June 2002 was excessive, the applicant submits that the Applicants taxable income for the year ended 30th of June 2002 should be the total credits to his bank account during the 2002 income year reduced by $3,492.16 (not a deposit but a reversal of a debit) together with $24,984 (representing sale of equipment) and $16,000 (inter entity bank transfers, being "at will" loans) leaving a figure of $46,290.05."

30. As to whether Mr Sonntag was paid by 21 Sportz or I-Finance; I noted that the latter was registered on 2 March 2001 and deregistered on 23 July 2006. The Applicant was a director of I-Finance from 20 February 2003 to 3 September 2003. I-Finance was not registered with the Commissioner as a PAYG Withholder. The company did not lodge any

ATC 2006

Payment Summaries or PAYG Payment Summary statements with the Commissioner for the 2002 or 2003 years. However the Applicant did lodge a Tax File Number declaration for I-Finance for the year ended 30 June 2002, the company from which he received payment of salary and wages for that year. The chart at Exhibit A1 indicated that Mr Sonntag was paid what was designated as wages of $35,962.68 by I-Finance for the 2002 income year.

31. Another item which impacted on Mr Sonntag's income was what was shown on Exhibit A1, as a sale of equipment to the value of $24,984. Exhibit A2 purported to evidence the sale of office equipment between Mr Sonntag and I-Finance, designated as I-Finance Pty Ltd, a non-existent company. The so-called agreement was dated 19 January 2001, and signed by Mr Sonntag, and someone called Scott who signed for the purchaser. Mr Sonntag could not recall his other name. The so-called agreement also referred to a schedule "A" which was either never prepared, or mislaid, and in any case not available. The so-called agreement was also signed in January 2001 before the formation on 2 March 2001 of the only company in the Group with a similar name, that is I-Finance (Australia) Pty Ltd. Mr Crane submitted that there was confusion over the name of the company, but that this fact would not invalidate the "sale of equipment" agreement. The difference in name was just an oversight he submitted. He also said that the Applicant maintained the address was the operating address, and the fact that it was different from the address listed at ASIC did not prove a falsehood. He submitted that many businesses changed addresses of operation without altering the ASIC register. Neither did not remembering the first name as Scott prove there was not a real person who was the signatory. He submitted that had the Applicant wanted to fabricate the agreement, then he would logically have attached the supporting schedule. The fact of no schedule was understandable he said, given that all documents were with the Administrator and the schedule became detached at some time, either before or after the appointment of the administrator. Also the very size of the payments would suggest that they were inconsistent with that of salary and wages.

32. It goes without saying that the Respondent did not agree with the argument regarding the validity of the document purporting to evidence the sale of office equipment, and neither do I. The so-called agreement did not name the purchaser correctly, pre-dated the formation of I-Finance (Australia) Pty Ltd, and did not attach the schedule "A" to which it referred. I could not accept that this was a valid agreement for the sale of equipment, and cannot be used to substantiate the money received as being other than income.

33. As to the so-called loan between Mr Sonntag and Eloncia Pty Ltd (Eloncia); the Applicant rejected the claim by the Respondent that no evidence was produced in respect of the $16,000 transfer by Eloncia, classified as being a loan account (Exhibit A1). He submitted that the evidence was that Eloncia was the trustee of a family trust, there was evidence of transactions from the bank account, and the Respondent knew of Eloncia as the trustee of the family trust, submitting tax returns. Mr Crane submitted that the bank transfers were all identifiable by date (except for $3,000). The transfer of funds between entities would not have any other identification. He submitted that transactions between entities constitute loans "at will", and do not represent formal agreements, as is typical of small business in connection with cash-flow requirements. I was unable to accept the amount as a loan due to the lack of documentation, and the inconsistencies between the dates which were drawn to my attention by Ms Su. I preferred the submission of the Respondent in regard to the $16,000.

34. Having heard the evidence and the submissions of the parties, I am satisfied that Mr Sonntag's record keeping was extremely poor. As a company director he had many responsibilities, including for his staff, and the work they carried out for him. His lack of vigilance has clearly caused him many problems, including those associated with his 2002 and 2003 tax returns which are the subject of these proceedings.

35. I am satisfied from the evidence that the purported sale of equipment to the value of $24,984 cannot be held to be an actual sale. I

ATC 2007

accept the argument of the Respondent in regard to what the Applicant called the $16,000 Eloncia loan, and am thus unable to consider this a valid deduction. There was no acceptable explanation given for the amount of $10,327.37 designated as "other" in Exhibit A1, and the payment of $35,962.68 from I-Finance as wages is accordingly only a part of the income Mr Sonntag received in the 2002 year. It was agreed by the parties, and I accept from the evidence before me, in particular from Exhibit A1, that the amount credited to Mr Sonntag's CTB account for the year 2002 was $90,767.38. That must accordingly be his taxable income for that year.

36. I am accordingly satisfied that the Notice of Amended Assessment for 2002 is excessive, and that it should be varied to find that Mr Sonntag's taxable income for the year 2002, is $90,767.38.

Whether tax shortfall penalties imposed should be remitted in full or in part

37. The Commissioner imposed tax shortfall penalties of 75% pursuant to sections 284-75(1) and 284-90(1) of Schedule 1 to the Act on Mr Sonntag for the years 2002 and 2003 for intentional disregard.

38. Having heard the evidence and considered the legislation, the submissions and the case law, I have to decide whether the penalties should be remitted in full or in part pursuant to section 298-20 of Schedule 1 to the Act. Taxation Rulings TR94/5 and TR94/7 have been developed to discuss the discretion to remit tax shortfall penalties. I have noted that the discretion may only be exercised in exceptional circumstances where the application of a particular rate of penalty would provide an unreasonable or unjust result.

39. Mr Crane submitted that the Applicant gave credible evidence about his financial problems which was not challenged, and that none of the bases for imposition of the penalty due to intentional disregard of the law applied to him. He submitted that the application of penalty based on intentional disregard of the law would provide an unreasonable and unjust result.

40. Ms Su, on the other hand, submitted that the Applicant or his agent had made false or misleading statements in regard to PAYG withholding credits in relation to his 2002 and 2003 tax year. She emphasised Mr Sonntag was a director and "guiding mind" of Foresyte, 21 Sportz and I-Finance during the relevant periods, and had not discharged his burden of proof under section 14ZZK of the Act to show that the assessments for 2002 and 2003 were excessive. She submitted that the taxation shortfall arose due to an intentional disregard of a taxation law, (penalty 75%), and in the alternative, should be no less than 50% of the tax shortfall amount for recklessness.

41. I found there were extenuating circumstances in relation to Mr Sonntag's health, and I am satisfied that in submitting inaccurate figures, he unwisely relied on staff and agents. I accept that he was suffering under the pressure of 11 of his companies being in liquidation or under administration, and did not take reasonable care to ensure his tax returns were in order. Accordingly I am satisfied that the penalty should be remitted to 25% of the shortfall amount for both the 2002 and 2003 years.

Decision

42. The Tribunal varies the decision under review in relation to Mr Sonntag's 2002 income tax return as follows. Mr Sonntag's taxable income for the year 2002, is $90,767.38.

43. The only outstanding issue relating to the 2003 income tax return, (the deduction for the cost of the liquidation), is settled by agreement of the parties.

44. The penalties for the 2002 and 2003 years are 25% of the shortfall amount in each case. The matter is remitted to the Commissioner of Taxation for calculation of the monetary value of the penalty.

 

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