TRNKA v FC of T

Members:
JL Redfern SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2012] AATA 492

Decision date: 30 July 2012

---

Ms J L Redfern (Senior Member)

BACKGROUND

1. Mr Matthew Trnka claimed input tax credits under the Goods and Services legislation for the period 1 July 2002 to 31 December 2002 in the sum of $ 30,360 in respect of a thoroughbred horse racing and breeding business said to have been carried on by him in the period. After an audit commenced on 13 February 2003 the Commissioner disallowed the input tax credits claimed and issued assessments for the net amounts owing of $10,007 for the quarter ended 30 September 2002 and $20,353 for the quarter ended 31 December 2002. In addition, a penalty of $27,324, representing 75% of the assessments with an increase of 20% on the base penalty for obstruction, was imposed.

2. Mr Trnka objected to the penalty but the Commissioner disallowed the objection in full and on 23 October 2008 Mr Trnka applied for a review of the penalty decision. There was confusion about the basis for the application and whether Mr Trnka also sought a review of the assessments. It was common ground that Mr Trnka had not made a formal objection to the assessments, through an oversight and/or confusion, and as such there was no jurisdiction to review the assessments. On 4 February 2011 Mr Trnka objected to the assessments for tax made in respect of the quarters ending 30 September and 31 December 2002. The Commissioner disallowed this objection on 15 February 2011 and Mr Trnka applied for review of the tax assessment decision on 9 March 2011.

3. Given the penalty is based on the tax assessments, the parties agreed that both reviews should be heard concurrently, with evidence in one proceeding being evidence in the other.

ISSUES FOR DETERMINATION

4. Mr Trnka contended that the input tax credits claimed by him should not have been disallowed. He was carrying on a thoroughbred horse racing and breeding enterprise at the relevant time and made acquisitions of goods and services in respect of the business, for which consideration was provided. He made payments for expenses of $10,007 and $353 for the upkeep of horses during the relevant period. In addition, he purchased twelve horses from a company associated with him, Glass Slipper Racing Pty Limited (GSR), in the sum of $220,000, the consideration being the discharge of a "book debt" owed by GSR to Mr Trnka. He further contended that $23,000 was paid to GSR on account of the GST but it was common ground that this amount was not remitted to the Commissioner by GSR for GST. Mr Trnka contended that the claim for $20,000 for an input tax credit was legitimate.

5. The Applicant submitted that the documents that would have substantiated his claim were destroyed in a fire in 2006 but were available to the Commissioner, or his delegate, at the time of an audit undertaken in respect of his claims. Even though there are few documents to support his claim for input tax credits, those claims are nevertheless substantiated by the evidence of Mr Trnka and Ms Wade and the documents that were still available. This being the case, the assessments were excessive and the penalty was improperly imposed. He further contended that, even if the tax assessment decision was correct, the penalty was excessive and/or should be remitted.

6. The Commissioner contended that the input tax credits were disallowed because there was no documentary evidence to substantiate the claims. In particular, there was no evidence Mr Trnka was carrying on an enterprise at the relevant time; there was no evidence he had acquired any goods or services that would attract an input tax credit and there was no evidence he had paid any consideration for the claimed acquisitions. The onus was on Mr Trnka to establish that the assessments were excessive and the only evidence was the evidence from Mr Trnka and Ms Wade that was inconsistent in any event.

7. The Commissioner contended that a penalty was properly imposed in the circumstances but conceded the appropriate penalty should be 50% of the shortfall amount on the Business Activity Statements as the conduct of Mr Trnka was reckless rather than acting in intentional disregard of the tax law, which attracts a penalty of 75%. The Commissioner also conceded that the additional penalty of 20% for obstruction should no longer be pressed. He opposed any remission of penalty and denied that the tax assessments or penalties, other than as now conceded, are excessive.

8. The issues for determination are therefore:

• (a) Are the assessments for the quarters ending 30 September 2002 and 31 December 2002, or either of them, excessive?
• (b) Having regard to the answer to (a), was the assessment relating to penalty excessive, namely:
  • (i) Should a penalty be imposed, and, if so, how should the penalty be calculated? And
  • (ii) Should the penalty, or any part, be remitted?

LEGISLATIVE FRAMEWORK

9. The relevant legislation is A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) and the Taxation Administration Act 1953 (Cth) (the TAA).

10. In 1999 the GST Act introduced a broad based indirect tax on the consumption of most goods and services in Australia, known as the 'Goods and Service Tax' (GST). This was achieved by imposing tax on supplies made by entities registered for GST but allowing those entities to offset the GST they are liable to pay on supplies they make against 'input tax credits' for the GST that was included in the price they paid for their business inputs.

11. Section 382-5 in Schedule 1 of the TAA provides that if a taxpayer makes a taxable supply, taxable importation, creditable acquisition or creditable importation the taxpayer must:

• (a) keep records that record and explain all transactions and other acts engaged in that are relevant to that supply, importation, acquisition, dealing or entitlement; and
• (b) retain those records for at least 5 years after the completion of the transactions or acts to which they relate.

12. An entity that is registered or required to be registered under the GST Act is required by s 31.5 to give to the Commissioner a GST return. The GST return is incorporated in the approved form of a 'Business Activity Statement'. The Business Activity Statement records the amount of GST for a tax period that an entity has self-assessed it is liable to pay as well as the amount of input tax credits to which the entity has self-assessed it is entitled to claim. Section 17.5 of the GST Act provides that the difference between the GST payable and the input tax credits claimed is the net amount.

13. Section 35.5 of the GST Act provides that if the net amount is less than zero, the entity is entitled to a refund. Section 33.3 of the GST Act provides that if the net amount for a tax period is greater than zero, the entity must pay the difference to the Commissioner.

14. Section 9.40 of the GST Act provides that GST is payable on any taxable supply that is made. Section 9.5 defines a 'taxable supply' as a supply for consideration where the supply is made in the course or furtherance of an enterprise and where the supplier is registered or required to be registered. Section 9.15(1) provides that consideration includes:

• (a) any payment, or any act or forbearance, in connection with a supply of anything; and
• (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything

15. Section 11.20 of the GST Act provides that an entity is entitled to input tax credits for its creditable acquisitions. Section 11.5 defines a creditable acquisition. There is a 'creditable acquisition' when: a person or entity acquires anything solely or partly for a creditable purpose; the supply is a taxable supply; there has been consideration for supply; or the person or entity is liable to provide consideration and the person or entity is registered or required to be registered, for GST. Section 11.15 defines a creditable purpose and provides that a person or entity acquires a thing for a 'creditable purpose' to the extent it is acquired in carrying out an enterprise.

16. Section 9.20 defines an 'enterprise' and provides:

• (1) An enterprise is an activity, or series of activities, done:
  • (a) in the form of a business; or
  • (b) in the form of an adventure or concern in the nature of trade; or
  • (c) on a regular or continuous business activity statement, in the form of a lease, licence or other grant of an interest in property; …

  …

• (2) However, enterprise does not include an activity, or series of activities, done:

  …

  • (b) as a private recreational pursuit or hobby; or
  • (c) by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain;

    …

17. Section 29.10(3) of the GST Act provides that input tax credits will not be attributable to a tax period unless the taxpayer holds a tax invoice for the acquisition by the end of the tax period. Section 29.10(2) provides that if an entity accounts on a cash basis, input tax credits will only be attributable insofar as consideration has been paid for the acquisition. Section 29.70 sets out the requirements for a 'tax invoice' but provides that the Commissioner has discretion to treat particular documents as a tax invoice where the document does not comply with the section. A tax invoice must be issued by a supplier, set out the ABN of the supplier, the price for the supply, the amount of the GST and must be in the approved form.

18. Part IVC of the TAA deals with taxation objections, reviews and appeals. Where a taxation objection is lodged with the Commissioner within the required time, the Commissioner must make an objection decision: s 14ZY. If a person is dissatisfied with the Commissioner's objection decision and the decision is a reviewable objection decision, the person may apply to the Tribunal for review: s 14ZZ(a)(i). The assessment, determination, notice or decision against which a taxation objection may be, or has been, made is a "taxation decision": s 14ZQ. Part IVC Division 4 modifies various provisions of the Administrative Appeals Act 1975 (the AAT Act) in relation to the review of reviewable objection decisions. Of particular relevance is s 14ZZK(b), which provides:

(b) the applicant has the burden of proving that:

• (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or
• (ii) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or
• (iii) in any other case - the taxation decision concerned should not have been made or should have been made differently.

19. Division 284 in Schedule 1 of the TAA deals with liability for administrative penalties. Division 298 deals with the machinery provisions for the imposition and remission of penalties.

20. A taxpayer is liable for an administrative penalty under s 284-75 in Schedule 1 of the TAA if the taxpayer, or their agent, makes a false or misleading statement and the statement results in a "shortfall amount". Relevantly, there is a shortfall amount under item 1 of s 284-80(1) in Schedule 1 if:

a tax-related liability… worked out on the basis of the statement is less than it would be if the statement were not false or misleading

21. s 284-90(1) in Schedule 1 provides for a base penalty depending on the basis on which the tax shortfall resulted. If the shortfall, or part of it, resulted from a failure by the taxpayer to take "reasonable care", the penalty is 25% of the shortfall amount. If the shortfall resulted from "recklessness" the penalty is 50% of the shortfall amount and if the shortfall resulted from "intentional disregard" the penalty is 75% of the shortfall amount. Under s 284-220(1) the base penalty may be increased by 20% if the taxpayer took steps to prevent or obstruct the Commissioner from finding out about the shortfall.

22. The Commissioner may remit penalties under s 298-20(1) in Schedule 1 of the TAA and has issued guidelines as set out in Practice Statement Law Administration (PS LA) 2006/2 as to when this discretion may be exercised. PS LA 2006/2 provides at [137].

A major objective of the penalty regime is to promote consistent treatment in respect of the rates of penalty imposed. The objective would be compromised if the penalties imposed at the specific rates were remitted without just cause, arbitrarily or as a matter of course.

23. According to PS LA 2006/2 a penalty should be remitted where there would be "unintended or unjust results" but notes such cases would be "exceptional".

THE HEARING

24. This matter has had a protracted history.

25. Mr Trnka sustained a serious head injury in November 2003 after an assault. He was represented in both applications for review by his mother, Ms Dawn Wade. She was also nominated as his agent for the purposes of communications with the Australian Taxation Office. Ms Wade submitted that Mr Trnka was unable to represent himself because of memory problems and the impact of the injuries he sustained in the assault. The Tribunal was provided with a report from Dr Ikau Kevau, Senior Consultant Orthopaedics and Trauma Surgeon, Port Moresby General Hospital, dated 16 March 2011. According to Dr Kevau, Mr Trnka "has major long term problems" following the assault, including memory issues and "post-traumatic amnesia". Mr Trnka gave evidence but did not take an active role in directions hearings or submissions. There were significant delays, not only in the conduct of the proceedings, but in respect of the objections made on behalf of Mr Trnka.

26. There were two applications for review before the Tribunal - the first relating to the imposition of a penalty on assessments made in November 2003 following an audit by the Commissioner and the second relating to the actual assessments. The assessments and penalty were issued in respect of input tax credits claimed and subsequently disallowed by the Commissioner as a result of the audit.

27. The first application was filed by Ms Wade on behalf of Mr Trnka on 23 October 2008 in respect of an objection decision made by the Commissioner on 19 January 2005. This decision was confined to the penalty imposed by the Commissioner.

28. The matter was listed for hearing on 21 and 22 February 2011 before me but an adjournment was sought by both parties on the basis that a formal objection decision had not yet been made on the actual assessments issued in November 2003. It was common ground that these assessments were also in dispute but the Tribunal would have no jurisdiction to deal with the matter unless and until a formal objection, and objection decision, was made in respect of the assessments. This was an issue that had been first been raised by the Tribunal in 2009 so it is difficult to understand why this matter took such a long time to identify and resolve. However, in the interests of resolving all relevant matters in dispute, I adjourned the hearing and made directions about the preparation and hearing of all disputes.

29. Mr Trnka objected to the assessments and on 15 February 2011 the Commissioner disallowed this objection. Mr Trnka filed an application for review of this decision on 9 March 2011.

30. Both applications were listed for hearing on 12 December 2011 but did not conclude on that day. Ms Wade requested leave to file further evidence and to issue summonses to obtain access to documents from suppliers and other parties that may be able to substantiate Mr Trnka's case.

31. The resumed hearing was listed for 21 February 2012 during which directions were made about written submissions. Ms Wade sought an extension of time to file submissions, which was granted until 26 March 2012. On 15 March 2012, Ms Wade requested a further extension until 10 May 2012 because of ill health. The Commissioner objected and Ms Wade was advised to provide evidence in support of her application. A directions hearing was held on 29 March 2012. No evidence was provided and Ms Wade was given an extension for a shorter period, with resulting extensions to the directions for the Commissioner.

BACKGROUND FACTS

32. Ms Wade began breeding thoroughbred horses as a hobby in about 1994 and later incorporated a company, known as GSR Pty Limited (GSR), which she asserted operated a business enterprise from about 2000. Ms Wade was a director of GSR from 9 November 2001 until 20 December 2002. She was made bankrupt in January 2003 and Mr Trnka was the sole director of GSR from 20 December 2002 to 20 July 2003. He also held two of its three issued shares.

33. GSR lodged Business Activity Statements for the periods between 1 July 2000 and 30 September 2001 claiming input tax credits. On or about 26 October 2001, the Commissioner finalised an audit in relation to those claims. The Commissioner concluded that GSR was not entitled to claim certain refunds totalling $16,591.00 on the grounds that the activities undertaken by it were not an enterprise in the form of a business for the purposes of s 9-20(1)(a) of the GST Act. Notices of Assessment were issued to GSR as a result of the audit. GSR objected to the assessments but on 25 February 2002 the Commissioner disallowed the objection. On 25 September 2003 the Supreme Court of New South Wales ordered that GSR be wound up on application from the Commissioner. On 31 July 2005 GSR was deregistered by ASIC pursuant to s 601AB of the Corporations Act 2001 (Cth).

34. Ms Wade said she was given advice that the finding by the Commissioner that GSR was not an enterprise affected claims made by Mr Trnka for input tax credits so she made an application to reinstate GSR pursuant to s 601A(h) of the Corporations Act 2001. On 28 September 2009, Brereton J dismissed her application.

35. One of the issues is whether GSR made a taxable supply to Mr Trnka. To establish a taxable supply by GSR, the Tribunal must be satisfied GSR carried on an enterprise. The Commissioner submitted, and I accept, that any previous findings by the ATO in this regard in respect of GSR are not determinative of whether Mr Trnka is entitled to claim certain input tax credits and it is therefore unnecessary for GSR to be reinstated to decide this question. This Tribunal can decide this question on the evidence before it, regardless of the previous finding. This history has been included for completeness and to explain the delay and why Ms Wade made her application to the Supreme Court.

36. On 1 July 2000, Mr Trnka registered for the purposes of GST but no Business Activity Statements were lodged by Mr Trnka until 13 December 2002, when Ms Wade lodged a business activity statement for the period 1 July 2002 to 30 September 2002 on his behalf. Mr Trnka claimed an input tax credit in the amount of $10,007.00. It is common ground that the amount claimed was said to be for "expenses incurred for the agistment and upkeep of horses" said to be owned by Mr Trnka.

37. On 13 January 2003, Ms Wade lodged on behalf of Mr Trnka a business activity statement for the period 1 October 2002 to 31 December 2002 which claimed input tax credits totalling $20,353.00. The $20,353.00 input tax credit had two components. The first amount was for $353.00, which was said to relate to the maintenance of horses owned by Mr Trnka. The second amount was $20,000.00, which was said to relate to the purchase of twelve horses from GSR.

38. On or about 13 February 2003, the Australian Taxation Office (ATO) commenced an audit in relation to Business Activity Statements lodged by Mr Trnka for the period 1 July 2002 to 30 September 2002 and 1 October 2002 to 31 December 2002, which together claimed input tax credits totalling $30,360.00. On 25 July 2003, the ATO issued a notice to Mr Trnka requesting "original source documents" that formed the basis for the input tax credits made by Mr Trnka in the period 1 July 2002 to 31 December 2002. The notice requested these documents to be produced by 22 August 2003. It is not in dispute that the documents were not produced but there is dispute about the circumstances of and reasons for the non-production. Ms Wade and the ATO officer who conducted the audit gave evidence about this.

39. The audit was finalised on or about 16 October 2003. The Commissioner concluded that Mr Trnka was not entitled to claim the input tax credits and issued revised assessments in November 2003. In addition, the Commissioner found that Mr Trnka was liable to pay an administrative penalty in accordance with s 284-75(1) in Schedule 1 of the TAA. In calculating the penalty, the Commissioner found that the shortfall amount resulted from an "intentional disregard" of a taxation law by Mr Trnka and was increased by a further 20% pursuant to s 284-220(1) for obstruction. The notice of the penalty was issued on 18 December 2003 in the sum of $27,324.

THE EVIDENCE

40. In addition to documentary evidence about the audit, correspondence between Ms Wade and the ATO and supplementary documents provided by Ms Wade both before and after the hearing had commenced, the Tribunal was provided with statements from Ms Wade and Mr Trnka and reports from, Mr Terry Smith, a psychologist, assessing Ms Wade's psychological condition. Oral evidence was given by Mr Trnka, Ms Wade and Mr Smith.

41. Mr Trnka filed a brief statement dated 20 November 2008. He stated that he cancelled his GST registration in 2001 as he understood all horses had been leased to GSR. He was unaware until 2003 that Ms Wade had transferred the thoroughbred enterprise into his name and "reactivated" his GST registration. There were no other details in his statement about his entitlement to claim the input tax credits which were the subject of the dispute.

42. Mr Trnka also attended the hearing and gave oral evidence. He said he had provided funding for the family horse breeding business in the 1990s, which was originally a hobby. It later became a business when GSR was established. He left Australia "some time ago" to live and work in Papua New Guinea. Mr Trnka said that he spent "over $100,000" on agistment for the horses owned by him. He could not recall exactly how much money was spent and had no documents in his possession to substantiate this claim. He said the documents were destroyed in a fire. He could not explain why documents were not produced at the time of the audit in 2003. He left these matters to his mother as she was running the day to day business of GSR at this time as he was not in Australia. Mr Trnka also said he gave money to GSR but could not recall whether this was a loan or an investment. Mr Trnka said he was unable to recall the details of the transactions because of his memory problems resulting from his head injury in 2003.

43. Ms Wade provided a number of statements to the Tribunal, the most detailed being a statement dated 10 October 2008, which was filed at the time of the first application for review, a statement dated 13 November 2009 and a statement dated 17 January 2011. Ms Wade also gave evidence at the hearing. There was correspondence between Ms Wade and the ATO between June 2004 and September 2004 which was relevant in so far as Ms Wade sets out details of the basis for the claim for the input tax credits and refers to documents and records that are said to substantiate Mr Trnka claims.

44. In a facsimile to the ATO dated 9 June 2004, Ms Wade stated that she had just received the notice of October 2003 to Mr Trnka in relation to the audit and disputed the results. She stated as follows:

When Jan Lackey and some other field officers attended 26 Beachcomber Parade, North Avoca, to do the physical audit, my bookkeeper explained to her that the program we had installed in the computer specially for the purposes of the GST, was unable to be retrieved on that day of the visit. Jan Lackey agreed that she would revisit and complete the audit. I supplied her with a number of invoices, and explained to her that I would be moving within a couple of weeks.

45. By letter dated 22 June 2004 to Mr Trnka c/- Ms Wade, the ATO requested further information. Ms Wade responded by letter dated 15 July 2004, including the following:

Matthew Trnka was registered for GST. He was carrying on an enterprise. He purchased the horses from Golden Slipper Racing for $230,000. He nominated myself, Dawn Wade, to act on his behalf to lodge his BAS. A tax invoice was issued from Glass Slipper Racing prior to the company being liquidated. It was advised that Matthew Trnka was a former director of GSR. I did not advise Jan Lackey that I had provided to the Commissioner documentation of evidence that the transaction took place between Golden Slipper Racing and Matthew Trnka. I did not advise that [sic] Jan Lackey that Matthew Trnka did not provide any consideration for the acquisition of the horses. Golden Slipper Racing, in fact, owed Matthew several hundred thousand dollars in loans. Part of these loans were converted into the acquisition of the horses. I deny that I have refused to provide any further information necessary to confirm Matthew Trnka's entitlement to the input of the tax credit. I deny that on Matthew Trnka's behalf I failed to reply to a formal statutory request for the provision of the original documentation relating to the transaction. I never received a formal statutory request from the ATO.

…

I provided Jan Lackey with a number of account statements from Redbank North for horse ajistment [sic] and advised her that on her return I would have all the statements from Redbank North available which had been paid over the past year.

…

I believe the ATO field officer made a finding without proper investigation. They neglected to take note of my advice to them by telephone and in person I was moving and I advise them of my forwarding address. They failed to return and inspect the documents that I had available for them and they continued to send correspondence to my former address which I only began to receive in April or May of 2004 notwithstanding that the BAS were arriving at my forwarding address as above.

46. On 11 August 2004, the ATO requested documentation in relation to the alleged acquisition of horses by Mr Trnka from GSR and any loan documentation between GSR and Mr Trnka. The letter was re-sent on 31 August 2004 at Ms Wade's request. Ms Wade responded to this letter on 22 September 2004 and stated that the books and records relating to GSR were given to her accountant, Mr Richard Hill, in mid-2001. She also stated that Mr Hill would not release the records because of unpaid fees.

47. When Ms Wade lodged an application for review on behalf of Mr Trnka in October 2008, she filed a statement dated 10 October 2008. In her statement, Ms Wade referred to her earlier dispute with the ATO about the entitlement of GSR to claim input tax credits. She also stated that documents relating to GSR were with her accountant, Mr Richard Hill and noted she had been unable to retrieve information for Mr Trnka from her new computer system but would "get a computer expert to try and retrieve the MYOB program and will endeavour to locate all the original invoices".

48. According to this statement, Ms Wade moved back to Sydney in about May or June 2003 and thereafter began to suffer depression and anxiety. She did not refer to any further attempts to obtain the documents or to a fire that Ms Wade later stated destroyed these records in 2006.

49. In her statement of 13 November 2009, Ms Wade attached a letter from Mr Richard Hill dated 20 October 2004 stating that he had been contacted by the ATO in relation to a GST claim and would be pleased to provide assistance "once our account is settled". Ms Wade also stated that a fire destroyed her house, including her business documents relating to GSR on 17 August 2006. She produced a computer printout said to be an incident report from emergency services. The report noted "House well alight" and the address of the fire was recorded as "65 Progress Street, Tahmoor", which was said to be Ms Wade's address at the time.

50. Ms Wade gave oral evidence that she lodged a Business Activity Statement for Mr Trnka on 13 December 2002 claiming an input tax credit of $10,007. This related to payments of "over $100,000" which Miss Ms Wade said were paid by Mr Trnka for expenses for the horses owned by him. The invoices and check butts evidencing these payments were with her bookkeeper, Richard Gillard. She also said that documents had been scanned into the computer but the computer crashed at the time the ATO auditor came to her home to review the documents. Ms Wade said she invited the ATO officers to attend the offices of Mr Richard Gillard to inspect the files. This was disputed by Ms Jan Lackey, the ATO officer who conducted the audit. Ms Wade said that she could no longer locate any invoices and source documents because she had lost all her documents in the fire. Other documents were with Richard Gillard or Richard Hill. Ms Wade said she would seek to obtain evidence from Redbank North about the payment of the expenses by Mr Trnka. She also said she would obtain any bank statements and records from her former accountant if they were available. Ms Wade was given leave to apply for summonses in relation to further documents and summonses were issued to Richard Hill and the ATO.

51. At the resumed hearing, Ms Wade advised she had not issued a summons to Redbank North as she had made enquiries and was advised that the person she had been dealing with was no longer there. She approached the bank and was advised they did not maintain bank statements after 6 years. She therefore did not apply for the issue of a summons to the bank. A summons was issued to Mr Richard Hill and he responded by letter dated 20 February 2012 that he did not possess any documents for GSR and Matthew Trnka. Ms Wade also issued a summons to the ATO. She said she had sent a compact disc with all the relevant invoices and evidence of payment to the ATO in response to the letter of 31 August 2004. She no longer had a copy of the compact disc as it was destroyed in the fire but said she kept a photocopy of the cover, which was produced. It is relevant to note that Ms Wade did not refer to the compact disc in any of her previous statements or correspondence. She was cross examined about this issue and said she may have sent it after December 2004 but was "pretty sure" she had sent it. Counsel for the Commissioner advised a search had been undertaken but no compact disc had been located. It was disputed by the Commissioner that the disc had been sent or in fact existed.

52. The second Business Activity Statement was said to have been prepared by Ms Wade's secretary, presumably on instructions from Ms Wade. It comprised a claim for an input tax credit of $20,000 and $353 for upkeep of horses. Ms Wade's account of the claim for an input tax credit of $20,000 related to a series of transactions that she stated took place from 2000. In her letter of 22 September 2004 to the ATO Ms Wade stated that GSR leased most of the horses that had previously been owned by the family, including Mr Trnka, in the 1990s. From 2000 GSR was paying the upkeep and costs but after the ruling by the ATO that GSR was not carrying on an enterprise, it could not claim input tax credits. According to the letter, Mr Trnka had been given an option to purchase horses from GSR and he exercised this option and "took back" the horses in lieu of approximately $230,000 owed to him by GSR. According to her statement of 10 October 2008, it was proposed that Mr Trnka would operate the thoroughbred horse breeding and racing business as an enterprise and take over the upkeep expenses. However, in the Applicant's Statement of Facts Issues and Contentions, it is contended that GSR exercised an option to buy the horses and on sold them to Mr Trnka. This is consistent with Ms Wade's statement of 13 November 2009, in which she stated that she exercised an option on 1 October 2002 on behalf of GSR to purchase the thoroughbred horses leased to GSR and on the same day raised an invoice to sell the horses to Mr Trnka for $220,000, cancelling out part of the loans owed by GSR to Mr Trnka.

53. Ms Wade's oral evidence was inconsistent with these statements. When cross examined about this, Ms Wade said this inconsistency may be caused by her dyslexia and the fact she finds it difficult to communicate in writing. Her account was as follows.

54. GSR was granted an option to purchase thoroughbred horses by her, Mr Trnka, other members of the family and a business associate, Mr Dallas Tindell. Ms Wade prepared the option but no longer had a copy. She exercised the option for GSR but did not have any documents recording this. Those horses had progeny and the progeny were owned by GSR. It was the 12 progeny, and not the original horses that had been leased to GSR, that were sold to Mr Trnka on 1 October 2002 for $220,000. Ms Wade had a copy of the sales invoice to Mr Trnka dated 1 October 2002 and this was produced to the ATO and the Tribunal. The other horses were taken over from GSR by Mr Trnka for nothing as they were worth nothing - no one would buy them because of the drought. The input tax credit claims for the period 1 July to 30 September 2002 related to these horses. The consideration for the purchase of the progeny was repayment of loans from Mr Trnka to GSR but there was no documentary evidence about this loan. There would have been a loan agreement and minutes of meetings of GSR recording the loans but these documents were destroyed in the house fire. Mr Richard Hill may also have had copies of these records but they could not now be located.

55. Ms Wade was cross examined on the inconsistency between her oral evidence and her statement of 13 November 2009 and she conceded that the sale of horse to Mr Trnka for $220,000 had nothing to do with the exercise of the option as the progeny were owned by GSR in any event.

56. Ms Wade produced bank statements from the Commonwealth Bank for GSR for the period 20 December 2001 to 17 April 2003. These statements showed that GSR had an opening balance of $139,245 and a closing balance of $3,589. There were various deposits and withdrawals but there was no evidence about what these withdrawals and deposits related to or who made the deposits. Ms Wade said Mr Trnka had made a number of the deposits into the account of GSR, which evidenced his loans. She also said he made deposits for GST and had paid $23,000 to GSR for GST on the sale of the progeny but agreed this money was not remitted to the ATO.

57. The only documents produced by Ms Wade and/or Mr Trnka relating to the disputed claim for input tax credits were a sales invoice dated 1 October 2002 from GSR to Matthew Trnka in the sum of $220,000 for 12 horses, an invoice from Redbank North to Matthew Trnka for expenses in respect of 6 of the horses in the sum of $3,887.40 and the bank statements for GSR. There was no evidence that this invoice had been paid by Mr Trnka. Ms Wade produced additional copies of invoices to Mr Trnka from Redbank North for agistment of horses but the invoices were outside the period claimed and there was no evidence they had been paid. There was also evidence that GSR sold property in the relevant period.

58. Ms Jan Lackey filed a statement dated 9 February 2012 and was questioned on her statement by Ms Wade. She stated that she was the compliance officer responsible for the review of the Business Activity Statements lodged by Mr Trnka in the period 1 July 2002 to 31 December 2002. Her review commenced in February 2003 and she prepared an 'Activity Log' recording a summary of activity undertaken on the review. The Activity Log was completed by Ms Lackey either at the time or shortly after each activity was completed. The log records an interview with Ms Wade on 17 February 2003 about Mr Trnka's claim for input tax credits. During the interview, Ms Wade stated that Mr Trnka had invested money into GSR and took horses from GSR as a form of repayment. During the interview, Ms Lackey asked Ms Wade to "put together all tax invoices for the enterprise" and provide proof of a loan owed by GSR to Mr Trnka. Ms Lackey denied that Ms Wade suggested she should contact an accountant in this conversation and noted that her Activity Log did not refer to such a conversation. A further appointment was arranged to discuss the matter for 25 February 2003. Ms Wade subsequently called to alter this appointment and did not arrange a new appointment. All subsequent discussions were apparently over the telephone.

59. On 20 February 2003, Ms Lackey received a facsimile from Ms Wade stating "I am happy for you to inspect all the horses and to hand up to you all the cheque books and bank statements, which are mainly with the bookkeeper in Sydney". She also referred to 'Richard Gillard' but noted he would "require a substantial amount of money up front, prior to completing the necessary bookkeeping". Ms Lackey said she telephoned Ms Wade after receiving this facsimile on 21 February 2003. She had a conversation with Ms Wade to arrange an appointment with her. Ms Lackey said that at no time during this conversation did Ms Wade refer to Mr Gillard or invite her to obtain documents from him. She said she did not recall any conversation about the computer not working, nor was this recorded in her Activity Log. Ms Lackey caused a notice to be issued to Mr Trnka seeking certain documentation on 25 July 2003. She telephoned Ms Wade to discuss the notice on 29 July 2003. Ms Lackey's file note records that Ms Wade returned her call and said she was "going to repay all the money and does not want to proceed". Neither Ms Lackey nor Ms Wade was questioned about this record so it was unclear what this statement was about.

60. Mr Terry Smith, a clinical psychologist, prepared a report dated 31 August 2010. Mr Smith also gave evidence. He reported that he had interviewed Ms Wade on three occasions in January 2011 but given the report was dated 2010, it was apparent there was a typographical error and either the date of the report was 31 August 2011 or the date of the review was January 2010. These errors were not of any significance to the substance of the report or Mr Smith's opinion.

61. Based on information told to him by Ms Wade, Mr Smith formed the view that Ms Wade had a diagnosis of adjustment disorder from December 2002 to February 2003. This was the period in which Ms Wade lodged Business Activity Statements for Mr Trnka. Mr Smith said that the stressors Ms Wade was experiencing at that time may have caused her to lack judgment but would not have caused her to make a false or misleading statement. This was "critical judgement" and that would not be impaired by an adjustment disorder.

ARE THE ASSESSMENTS EXCESSIVE?

62. If it can be established that Mr Trnka was entitled to claim the input tax credits for the period 1 July to 31 December 2002, the assessments issued in November 2003 as a result of the audit finalised in October 2003 would be excessive.

63. In order to establish the entitlement, Mr Trnka must establish that he made a creditable acquisition in respect of an enterprise carried on by him in the period 1 July to 31 December 2002. Mr Trnka cannot claim input tax credits in respect of a creditable acquisition unless he holds a tax invoice in respect of the acquisition, although there is discretion to treat a particular document as a tax invoice even though it does not comply with the legislation. For there to be a creditable acquisition, Mr Trnka must establish he made an acquisition of goods or services and that there was consideration provided for the supply. Mr Trnka must also establish the acquisition was a taxable supply.

64. It is well established that Mr Trnka bears the onus of establishing that the assessments were excessive (s 14ZZK(b)(i) of the TAA;
McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1978) 143 CLR 284 ). The Commissioner does not need to show a that the assessments issued to Mr Trnka can be sustained or supported by evidence (
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 ) and he is entitled to rely on any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment (
Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 624). These principles apply equally to a GST assessment (
Hua-Aus v Commissioner of Taxation [2010] FCA 341; (2010) 184 FCR 430 at 436).

65. There are two types of claims made by Mr Trnka for input tax credits. Mr Trnka claims expenses incurred for agistment and for the upkeep of the horses said to be owned by him. He claims $10,007 for the period 1 July to 30 September 2002, and which Ms Wade contended related to the horses transferred to Mr Trnka for "nothing", and $353 for the period 1 October to 31 December 2002, which Ms Wade contended related to the upkeep of the horses sold to Mr Trnka on 1 October 2002.

66. Mr Trnka has not produced a tax invoice for these claims. The only invoice produced was an invoice from Redbank North dated 4 December 2002 in the sum of $3,887.40. This is said to relate to the input tax credit of $353 but it does not comply with s 29.70 of the GST Act as the invoice does not contain the amount of GST payable in respect of the supply. Even if this invoice could be treated as tax invoice under s 29.70(1B), there is no evidence that the invoice has been paid by Mr Trnka.

67. No tax invoice (or any other documentary evidence) was produced in respect of the claim for $10,007. Moreover there is no documentary evidence that payments have been made in respect of this claim. The only evidence before the Tribunal is the oral evidence of Ms Wade and Mr Trnka that over $100,000 was paid for agistment and upkeep of horses. The ATO conducted an audit of the Business Activity Statements lodged on behalf of Mr Trnka which commenced in February 2003. The officer who conducted the review, Ms Jan Lackey, contacted both Mr Trnka and Ms Wade during the period from February to July 2003. She recorded her activities in respect of the review, including a summary of her conversations with Ms Wade and Mr Trnka, in her Activity Log. There was evidence this document was contemporaneous as it was completed at the time of the activity or shortly thereafter. The Activity Log shows that Ms Lackey made numerous enquiries about documents to substantiate the claims for input tax credits made by Mr Trnka. Ms Lackey also gave evidence that she raised the issue of substantiation with Ms Wade during an interview with her at her premises on 17 February 2003. She said that Ms Wade did not raise with her that she should inspect documents at the offices of her accountant nor does she recall any issue raised about difficulty in retrieving documents from Ms Wade's computer system.

68. Ms Lackey attempted to contact Ms Wade on numerous occasions during the review and when she was unable to obtain access to documents she sent a formal notice to Ms Wade on 25 July 2003 requiring production of documents to substantiate the claim for input tax credits. Ms Wade denies receiving the notice but the Activity Log of Ms Lackey records that she telephoned Ms Wade on 29 July 2003 to discuss the notice.

69. Ms Wade gives a different account of the meetings and discussions with Ms Lackey. There are inconsistencies between her various accounts about the existence and location of the tax invoices and other documents to substantiate the claims for import tax credits. In June 2004, Ms Wade stated the documents were in her computer but she could not retrieve the documents during the audit inspection. She also said that Ms Lackey agreed to revisit her to complete the audit. In her letter dated 22 September 2004, Ms Wade said the documents were with her accountant Mr Richard Hill and he would not release the documents because of unpaid fees. In her statement of October 2008 Ms Wade did not refer to the documents being with Mr Hill but referred to the difficulty in retrieving the documents from her computer. She stated she would retain a computer expert to assist in retrieval. In her statement of September 2009, Ms Wade stated that the documents had been was destroyed in a fire in 2006 but this fire was not referred to in her earlier statement of 2008. When Ms Wade gave evidence in December 2011, she referred to the problem with her computer and also said that she invited Ms Lackey to attend the offices of Mr Richard Gillard to inspect the documents.

70. It was not until the resumed hearing in February 2012 that Ms Wade referred to a compact disc which she said was sent to the ATO in late 2004 and contained data which would have substantiated Mr Trnka claims. The compact the disc has not been located and notwithstanding that the issue of substantiation has been in dispute since the commencement of the proceedings in the Tribunal, this was the first time the matter was raised by Ms Wade.

71. Notwithstanding the claims and counter claims about the existence of documents to substantiate the input tax credits for these alleged agistment and upkeep expenses, no tax invoices have been produced. As observed by Dr P Dermott RFD, Senior Member in
Huynh & Nguyen and Commissioner of Taxation [2008] AATA 305; (2008) ATC 10-020 at [32], "The tax invoice is the cornerstone of the GST regime. A tax invoice is a document that substantiates a creditable acquisition".

72. The only invoice produced was an invoice which is said to relate to the input tax credit of $353. There was no reference to the GST payable in this invoice but even if this invoice could be treated as a tax invoice under s 29.70 (1B) of the GST Act, there is no evidence that it has been paid. There is no tax invoice in relation to the previous expenses claimed, nor is there any documentary evidence available, merely an assertion that documentary evidence would have been available if the audit officer had properly investigated the case. It is not the role of the ATO to investigate and obtain documents to substantiate a claim, it is the responsibility of the taxpayer to maintain these records and make them available for inspection. This is clear from s 70(1) of the TAA. Regardless of the evidence from Ms Wade that expenses were paid by Mr Trnka and there were records that support this, the fact remains that there is no tax invoice to substantiate the claim for an input tax credit of $10,007. Nor are there any documents that could be treated as a tax invoice. Section 29.10(3) of the GST Act provides that input tax credits will not be attributable to a tax period unless the taxpayer holds a tax invoice for the acquisition. While there is discretion to treat a particular document as a tax invoice, there were no documents produced or apparently available on which to make an assessment about the appropriateness of exercising the discretion. Moreover, there is no evidence, apart from a vague assertion by Ms Wade and Mr Trnka that he paid expenses of over $100,000. As such, I find there is insufficient evidence to satisfy me that Mr Trnka had an entitlement to claim the input tax credits for $10,007 and $353.

73. The second claim by Mr Trnka relates to the claim for $20,000 which was said to be the GST for the acquisition of 12 horses from GSR by Mr Trnka on 1 October 2002. The sales invoice identifies the 12 horses purchased with a purchase price of $200,000 and GST of $20,000. The Commissioner disputes the entitlement for two reasons. First, the Commissioner contended that this is not a creditable acquisition because Mr Trnka has not established that he provided consideration for the purchase. Secondly, the Commissioner disputes that there was a taxable supply as there is no evidence GSR was carrying on an enterprise.

74. Ms Wade contended that the consideration for the purchase was the repayment of part of a loan from Mr Trnka to GSR. She also contended that, notwithstanding the previous finding of the ATO, GSR was carrying on an enterprise.

75. The only evidence of a sale to Mr Trnka is the sales invoice of 1 October 2002, which was produced by Ms Wade to the ATO in 2003 after she was notified an audit had commenced. There are no other documents to substantiate that there was a sale or that any consideration was paid. Other than the sales invoice, there are no company records to substantiate the alleged sale, no documents recording the alleged loan, no records that GST was paid to GSR and no evidence from third parties, such as Richard Hill or Richard Gillard, about these matters. The lack of documents is significant as the ATO commenced its audit soon after the alleged sale. Ms Lackey requested documents to support the sale and consideration for the sale but none were provided and have not been provided to this Tribunal.

76. Ms Wade has always maintained that records were in her computer system and could not be retrieved at the time of the inspection. She also said records were with Richard Hill and/or Richard Gillard. It was not until the second day of the hearing, which had been adjourned to allow Ms Wade the opportunity to obtain or summons any further relevant information, that she said a compact disc with all the documentation had been provided to the ATO in late 2004. This information was very relevant to the review given records and substantiation of the claim for input tax credits by Mr Trnka had been an ongoing issue since the proceedings were commenced. Yet this was not mentioned in any statements by Ms Wade or the Applicant's Statement of Facts and Contentions. I find this evidence to be implausible.

77. Ms Wade also gave evidence that documents had been destroyed in a fire. I accept there was a fire but I am not satisfied that there were records destroyed that would have substantiated Mr Trnka's entitlement to claim input tax credits. Mr Trnka and Ms Wade, as his agent, were given ample opportunity to produce these documents from February 2003, not only by the ATO but by this Tribunal.

78. Mr Trnka could not recall any details about this sale and, while I accept his memory has been affected by his assault in 2003, it is clear from his statement of 10 November 2008 he did not know about any transactions and was not consulted by Ms Wade.

79. Ms Wade's evidence about the alleged sale was not convincing. Her written statements referred to a lease of horses to GSR by the family, an option to purchase and an 'on sale' of horses to Mr Trnka. There was no reference to a sale of the progeny of the GSR horses in any correspondence with the ATO or in her statements. The first time this was raised was in Ms Wade's oral evidence on the second day of the hearing. This was clearly inconsistent with her prior written statements.

80. Having regard to the paucity of evidence on this issue, I am not satisfied that there was an acquisition and that Mr Trnka paid any consideration for the alleged sale. As such, I am not satisfied on the evidence before me that Mr Trnka had an entitlement to claim the input tax credits for $20,000.

81. Having made this finding, I do not need to consider the issue of whether GSR was carrying on "an enterprise" but note, for completeness, that I am not satisfied on the evidence that either GSR or Mr Trnka carried on an enterprise at the relevant time. As submitted by the Commissioner, Sackville J summarised the factors to be considered when assessing whether an entity is carrying on an enterprise for the purposes of s 9.20 of the GST Act in
Woods v Deputy Commissioners of Taxation [1999] FCA 1589; (1999) 99 ATC 5306. Those factors are: whether the activities were undertaken as a commercial enterprise with the purpose of making a profit; whether the activities were engaged in on a continuous and repetitive basis; whether the activities were carried on in a businesslike manner; whether ordinary commercial principles were applied to the conduct of the undertaking; and whether the scale and volume of the undertaking was substantial, especially where the question is whether the taxpayer was conducting a business or was engaging in a hobby or recreational activity.

82. There is evidence from Ms Wade, with some documents to support this, that GSR was operating a thoroughbred breeding activity that was more than a hobby or a recreational activity. Other than making an assertion about this, neither Mr Trnka nor Ms Wade addressed this issue in any detail in their evidence. As such, there was insufficient evidence about this matter or about the activity being undertaken by Mr Trnka, who was living and working in Papua New Guinea at the relevant time, for me to be satisfied that either was carrying on an enterprise. However, for the reasons set out above, this was not determinative of the issues in dispute.

PENALTY

83. Ms Wade was responsible for lodging the Business Activity Statements on behalf of Mr Trnka and she was his agent. This was not in dispute. As such, Mr Trnka is liable for any administrative penalty under s 284-25 of the TAA in respect of any false or misleading statements made by Ms Wade in the Business Activity Statements.

84. In lodging claims for input tax credits to which Mr Trnka was not entitled and/or could not substantiate, I am satisfied that Ms Wade made false and misleading statements for the purposes of s 284-75 of the TAA, for which Mr Trnka is liable. There is a shortfall amount, being the net amount set out in the assessments issued in November 2003.

85. Having determined that an administrative penalty is payable, it is relevant to consider the appropriate base penalty to be applied under s 284-90 of the TAA in the circumstances of the case.

86. It was conceded that the original penalty based on intentional disregard is not appropriate. In my view and based on the evidence before me, this concession was properly made. The Commissioner contended that the shortfall resulted from recklessness. According to the submissions of the Commissioner, to claim an input tax credit without having tax invoices or records to substantiate the claims "demonstrates a degree of indifference or risk-taking that no reasonable person would assume", consistent with the principles established in
Hart v Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203.

87. Ms Wade maintained that the assessments were excessive and made no submissions during or after the hearing about whether the penalty should be imposed or remitted. However, there were previous submissions made about these matters by counsel for Mr Trnka during interlocutory proceedings. There was also evidence from Ms Wade about her depression and dyslexia and evidence from Mr Smith about Ms Wade's diagnosis of an adjustment disorder. The key submission previously made was that there were records to substantiate the claims but the ATO had not taken the necessary steps to obtain or inspect these records and they could no longer be located or produced given the fire in 2006, the time that had elapsed and the liquidation of GSR. It was also submitted that Ms Wade's depression and dyslexia had made it difficult for her to properly manage the affairs of GSR and Mr Trnka and this should be taken into account in assessing penalty and remission.

88. I accept Ms Wade has had stress and depression in the past and this may have affected her ability to manage the affairs of GSR and/or Mr Trnka. There was no independent evidence about her dyslexia, but I am prepared to accept her evidence that she has difficulty with written communications. It was clear from her evidence and presentation during the proceedings that she had difficulty organising her submissions and documents. I also accept that the passage of time and liquidation of GSR would have the effect of prejudicing the ability of Mr Trnka, and Ms Wade on his behalf, to obtain records. However, for the reasons previously expressed, I am not satisfied such records exist. I am also of the view that Ms Wade was given ample opportunity to produce these records and failed to do so. I accept the evidence of Ms Lackey about her efforts to obtain records to substantiate Mr Trnka's claims within months of the Business Activity Statements being lodged. Those records should have been available and I am not satisfied that Ms Lackey was asked, or indeed had any obligation, to obtain these documents from third parties.

89. I therefore accept the submissions of the Commissioner that the conduct in lodging the Business Activity Statements with claims for input tax credits that could not be substantiated was reckless and a base penalty of 50% is appropriate. I also accept the Commissioner's concession that a 20% increase in the penalty should not be imposed. There is no evidence of deliberate action on the part of Ms Wade or Mr Trnka to obstruct ATO officers and in my view this concession was properly made.

90. On the other hand, there are no exceptional circumstances or injustice in the present case that warrants remission of the penalty.

91. Ms Wade relied on the diagnosis of Mr Smith, which he conceded was based on the history given to him by Ms Wade. Even if this diagnosis is accepted, it does not excuse the false and misleading information in the Business Activity Statements. First, Mr Smith opined that Ms Wade was experiencing sufficient symptoms to diagnose adjustment disorder by the beginning of February 2003. Ms Wade had already lodged or authorised the lodging of the relevant Business Activity Statements by this stage. Secondly, Mr Smith said that adjustment disorder does not affect critical judgment and would not cause a person affected to make a false or misleading statement.

92. Ms Wade also submitted that the conduct of Ms Lackey in failing to inspect documents was to blame. I reject this submission for the reasons previously outlined.

93. Based on the evidence and having regard to these matters, I am not satisfied that the penalty assessment is excessive.

CONCLUSION

94. In summary, Mr Trnka has not discharged his onus to establish that the assessments and penalty imposed is excessive, other than as already conceded by the Commissioner that a base penalty of 75% and 20% increase is excessive. I therefore affirm the decision of the Commissioner on the assessments but vary the penalty assessment to reduce the base penalty to 50%, rather than the 75% imposed, and find that the 20% increase to the base penalty amount should not be imposed.