GURU 4U v FC of T

Members:
G Lazanas SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2014] AATA 740

Decision date: 14 October 2014

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G Lazanas (Senior Member):

INTRODUCTION

1. Guru 4U, a company, is in dispute with the Commissioner of Taxation (Commissioner) with respect to whether it was carrying on an enterprise in the tax periods between 1 October 2010 and 30 June 2012 (the Relevant Period). Guru 4U (the Company) contends that its main business activity was "lifestyle counselling and advisory services".

2. The Commissioner formed the view that the Company was not carrying on an enterprise during the Relevant Period and decided that the Company was not entitled to claim input tax credits (ITCs) for GST purposes, on the acquisitions made. The Commissioner also cancelled the GST registration of the Company with effect from 30 June 2012.

3. The Commissioner formed the further view that the Company was still liable to pay GST in the Relevant Period even though he maintained it was not carrying on an enterprise. At the hearing, however, counsel for the Commissioner acknowledged that this was "his [the Commissioner's] pre-Naidoo position", a reference to a decision by this Tribunal handed down on 28 June 2013 in
Re Naidoo and Commissioner of Taxation [2013] AATA 443 (
Re Naidoo). Counsel for the Commissioner further acknowledged the correctness of the Tribunal's decision in
Re Naidoo and, consequently, it was the Commissioner's position in the present case that "if the Tribunal agrees there is no enterprise the correct position is zero GST remitted and zero input tax credits available".

4. I have concluded that the Company was not carrying on an enterprise in the Relevant Period. Specifically, I have found that the Company intended to start an enterprise but it had not yet done so in the Relevant Period. I have, therefore, decided that the Commissioner was required to cancel the GST registration of the Company.

5. I have also concluded that the Company was not liable to pay GST and also not entitled to claim ITCs during the Relevant Period and that this necessarily follows from the decision that the Company was not carrying on an enterprise at that time.

6. The consequence of applying the Tribunal's decision in
Re Naidoo is that the net amounts for the Company for each of the tax periods in the Relevant Period is nil.

7. In relation to the imposition of administrative penalties, the Commissioner determined that the behaviour of the Company involved recklessness and that penalties of 50% should be imposed under the Taxation Administration Act 1953 (TAA). I concur with that decision. However, I take a different view to the Commissioner in the objection decision as to the shortfall in respect of which the penalties are calculated (his assessment of penalty was also premised on "his pre-Naidoo position" which is now also abandoned by the Commissioner). Accordingly, a lower amount of penalties applies. Further, the Commissioner decided that there were no exceptional circumstances warranting remission of penalties. I agree with the Commissioner's decision that penalties should not be remitted.

THE ISSUES BEFORE THE TRIBUNAL

8. The dispute between the parties involved the following questions:

9. I propose to deal with the issues in the same order as the questions listed above. In addition, I separately reiterate the position with respect to the calculation of the net amount under the GST Act following
Re Naidoo. However, before doing so, I set out below some of the key legislative provisions followed by the relevant factual matrix and the evidence.

THE LEGISLATION

10. It is necessary to set out some "central provisions" of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). I should note at the outset that some of the legislative provisions have changed and it is sometimes

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necessary to make reference to these changes, as indicated below.

11. The "central provisions" (in their form during the Relevant Period) are as follows which, for simplicity, I have omitted the notes and examples:

7-1 GST and input tax credits

  • (1) GST is payable on *taxable supplies and *taxable importations.
  • (2) Entitlements to input tax credits arise on *creditable acquisitions and *creditable importations.

7-5 Net amounts

Amounts of GST and amounts of input tax credits are set off against each other to produce a *net amount for a tax period (which may be altered to take account of *adjustments).

7-10 Tax periods

Every entity that is *registered, or *required to be registered, has tax periods applying to it.

7-15 Payments and refunds

The *net amount for a tax period is the amount that the entity must pay to the Commonwealth, or the Commonwealth must refund to the entity, in respect of the period.

12. As will be noted, s 7-1 refers to "taxable supplies" and "creditable acquisitions", which are defined in s 9-5 and s 11-5, respectively. Most defined terms in the GST Act are identified by an asterisk at the start of the term: s 3(1) of the GST Act. As will also be noted, ss 7-5 and 7-15 invoke the concept of "net amount" which was defined during the Relevant Period in s 195-1 (being the Dictionary of the GST Act) to have the meaning given by ss 17-5, 126-5 and 162-105. For present purposes, only the meaning given by s 17-5 is relevant. Section 17-5 contains the definition of net amount in the GST Act, except where other provisions expressly modify it, such as s 126-5 which applies in respect of taxpayers who make gambling supplies.

13. Subsection 17-5(1) relevantly stated (during the Relevant Period) as follows:

17-5 Net amounts

  • (1) The net amount for a tax period applying to you is worked out using the following formula:

    GST - Input tax credits

where:

GST is the sum of all of the GST for which you are liable on the *taxable supplies that are attributable to the tax period.

input tax credits is the sum of all of the input tax credits to which you are entitled for the *creditable acquisitions and *creditable importations that are attributable to the tax period.

14. Section 3-10 of the GST Act provides that "[w]ithin a definition, the defined term is identified by bold italics ".

15. Section 9-5 of the GST Act sets out what are taxable supplies by stating that "[y]ou make a taxable supply if", among other criteria not presently relevant, "the supply is made in the course or furtherance of an *enterprise that you *carry on". Section 11-5 relevantly provides that "[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose" and "(c) you provide, or are liable to provide, *consideration for the supply".

16. The term "creditable purpose" is defined (to the extent presently relevant) in s 11-15 as follows:

11-15 Meaning of creditable purpose

  • (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
  • …

17. The amount of the ITC that is allowable in respect of a creditable acquisition is given by s 11-25 as follows (again, for simplicity without the note):

11-25 How much are the input tax credits for creditable acquisitions?

The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.

18.

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The other important definition which is key to the present case is that of "enterprise" which is contained in s 9-20. The relevant paragraph for present purposes states as follows:

9-20 Enterprises

  • (1) An enterprise is an activity, or series of activities, done:
    • (a) in the form of a *business; or
    • …

19. The word "business" is defined in s 195-1 of the GST Act as including "any profession, trade, employment, vocation or calling, but does not include occupation as an employee."

20. It is curious that the expression "carry on", although asterisked where it appears in s 9-5 of the GST Act (see [15] above), is not defined in s 195-1 of the GST Act, however, "carrying on" is defined in s 195-1. Having regard to the similarity in the expressions, and the fact that in each case the expressions are used in relation to the concept of enterprise, "carry on" is considered to have relevantly the same meaning as "carrying on". Section 195-1 states that " carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise". Notably, it is the expression "carrying on" that is also referred to in ss 23-5 and 23-10 of the GST Act which relevantly provide "[y]ou are required to be registered under this Act if: (a) you are *carrying on an *enterprise; …" and "[y]ou may be *registered under this Act if you are carrying on an *enterprise…", respectively.

21. Other relevant provisions of the GST Act and the TAA are set out below.

THE FACTUAL BACKGROUND

22. The findings of fact are based upon the following:

The Company and its BASS

23. The Company was incorporated on 25 November 2010 as a company limited by guarantee. The name of the Company was initially "Guru 4U Limited" but this was later changed to "Guru 4 U" on 10 April 2012. Throughout the Relevant Period, except on the date of incorporation, the Company's director was Mr Govinda Watts, the son of Mr Gambhir Watts. Mr Gambhir Watts and his wife were directors of the Company on 25 November 2010 (that is, its date of incorporation only). Ms Moshka Watts, the daughter of Mr Gambhir Watts became a director of the Company from 30 March 2012.

24. The Company had eight shareholders at the time of its incorporation. These included Mr Gambhir Watts, Mr Govinda Watts, BMGW Pty Ltd, the Australia India Foundation and BMG Holdings Pty Ltd as trustee for the Watts Family Trust. As will be seen below, the Company's only "disclosed" transactions were with some of these related entities. I use the word "disclosed" as they were the only transactions about which the Company revealed details to the Commissioner. The Company claimed to have undertaken other transactions as well but there were fewer details in relation to those transactions. Specifically, it emerged that the Company had a cash collection box for the voluntary payment of money but the Company did not know what amounts had been paid by each of the customers for the Company's services. Additionally, Mr Gambhir Watts said that he did not want to reveal the names of the customers as he would compromise their privacy.[2] Transcript p. 28

25. Mr Gambhir Watts was at all relevant times the Company's public officer, tax agent and authorised representative in its interactions with the Commissioner. He said that he also provided the services which were supplied by the Company to its customers, even though he was not remunerated for his work. The Company has never had any employees.

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Instead, Mr Gambhir Watts said he was "managing everything for the company".[3] Transcript p. 17

26. The Company's registered office and principal place of business were the same premises that were leased by BMG Group Australia Pty Ltd (BMG Group), another related entity. Mr Gambhir Watts claimed that that entity provided administration services including staff and office space to Guru 4U.

27. The Company registered for GST from 1 December 2010 and accounted for GST on a non-cash basis (that is, it had adopted the accruals basis of accounting). It submitted its Business Activity Statements (BASs) on a quarterly basis.

28. The Company lodged BASs showing the following information with respect to the Relevant Period:

Quarter GST ITCs
1 October 2010 to 31 December 2010 Nil $6,228
1 January 2011 to 31 March 2011 Nil $1,250
1 April 2011 to 30 June 2011 $500 $750
1 July 2011 to 30 September 2011 $500 $850
1 October 2011 to 31 December 2011 $450 $750
1 January 2012 to 31 March 2012 $200 $750
1 April 2012 to 30 June 2012 Nil $750

29. It is noted that the Company's net amounts for each of the quarterly tax periods was less than zero, that is, a negative net amount, based on the fact of the GST refundable exceeding the GST payable. The Commissioner was, therefore, required to pay those respective net amounts (expressed as positive amounts) as GST refunds to the Company. The total of the net amounts paid by the Commissioner to the Company for the quarterly tax periods in the Relevant Period was $9,678.

The Company's Constitution

30. The Company lodged a Constitution with the Australian Securities and Investments Commission (ASIC) at or about the time of its incorporation in November 2010. Relevantly, the Constitution stated as follows:

31. The Company's Constitution is, of course, only part of the story. I separately set out below, when dealing with the evidence of Mr Gambhir Watts, his aspirations for the Company as well as his description of the activities undertaken by the Company in the Relevant Period.

ASSESSMENTS OF NET AMOUNTS AND PENALTIES

32. It is necessary to briefly set out the background of the Commissioner's GST audit of the Company and the details of the assessments which ensued.

33. By letter dated 18 July 2012, the Commissioner advised the Company that it was subject to an audit of its BAS for the quarter ending 30 June 2012. The purpose of the audit was to substantiate the ITCs reported and to verify the authenticity of the enterprise. The Commissioner asked the Company to provide copies of records and documents which were used to prepare the BAS for the quarter ended 30 June 2012 and also to complete and return a "Business profile questionnaire" which was enclosed with his letter.

34. On 8 August 2012, Mr Gambhir Watts sent to the Commissioner the completed questionnaire, a detailed transaction listing, tax invoices, an outline of a business plan, the Company's Constitution and the ASIC certificate relating to the Company's change of name.

35. The relevant extracts of the completed questionnaire which had been completed by Mr Gambhir Watts are set out below (his answers are in bold for ease of reference):

36. The detailed transaction listing for the quarter ended 30 June 2012 was a one page

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report titled "GST [Detail - Accrual]" for the Company and it showed GST-free sales to the Australia India Foundation with a sale value of $15,000 and no GST collected, as well as acquisitions from BMG Group for $8,250 with GST of $750 having been charged on that acquisition.'[6] T13–91 That is to say, the Company reported nil GST payable and $750 GST refundable in its BAS for the quarter ended 30 June 2012.

37. The tax invoices provided to the Commissioner were as follows:

38. The "Outline of Business Plan" was a one page document which relevantly stated as follows:

39. On 9 August 2012, the Commissioner further requested from the Company bank statements or other documents as proof of payment for creditable acquisitions and asked for these by the close of business the following day. Mr Gambhir Watts wrote to the Commissioner on the same day (9 August 2012) advising that there are no bank statements and that the Company reports on an accruals basis. The Commissioner responded on the same day explaining that the bank statements were requested to assist in the determination of the enterprise issue. The Commissioner stated "[y]ou are requested to provide evidence of which acquisitions have actually been paid by Guru 4 U Pty Ltd to date, i.e since the lodgement of the first activity statement commencing October 2010". The audit was, in other words, expanded to the

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entirety of the Company's tax periods (1 October 2010 to 30 June 2012).

40. Later that same day (9 August 2012), Mr Gambhir Watts replied stating that he "will organise by 20 August 2012". Nothing further in the way of documentation was provided by the Company to the Commissioner prior to the issue of the assessments. At the hearing, Mr Gambhir Watts explained that the Company opened a bank account in June 2013, that is to say, after the Relevant Period.[8] Exhibit A3

41. On 24 August 2012, the Commissioner issued an audit finalisation letter. Relevantly, the Commissioner stated that:

All tax credits for the tax periods 1 October 2010 - 30 June 2012 have been disallowed because you have not provided sufficient evidence to support the amounts reported on your original activity statements.

…

Your GST registration has been cancelled from 30 June 2012. This decision was made on the basis of our determination that you are not carrying on an enterprise for tax purposes and further we determine that you have never carried on an enterprise.

…

An administrative penalty of $5,664.00 has been applied.

42. On 28 August 2012, the Commissioner issued a "Notice of Amended Assessments" for the tax periods 1 October 2010 to 30 June 2012. Accompanying that notice was a Schedule which included the following table and explanation:

Column A Column B Column C Column D
Tax period Previously assessed net amount Amended assessed net amount Difference (Col C - Col B)
1 Oct 2010 - 31 Dec 2010 $6,228.Cr $0 $6,228 Dr
1 Jan 2011 - 31 Mar 2011 $1,250 Cr $0 $1,250 Dr
1 Apr 2011 - 30 Jun 2011 $250 Cr $500 Dr $750 Dr
1 Jul 2011 - 30 Sep 2011 $350 Cr $500 Dr $850 Dr
1 Oct 2011 - 31 Dec 2011 $300 Cr $450 Dr $750 Dr
1 Jan 2012 - 31 Mar 2012 $550 Cr $200 Dr $750 Dr
1 Apr 2012 - 30 Jun 2012 $750 Cr $0 $750 Dr
Total amount applied to your running balance account is: $11,328 Dr

Explanation

We have made changes to the goods and services tax.

Your previously assessed net amount for the tax period is in column B.

Your amended assessed net amount for the tax period is in column C. This is the amount that we have determined to be your net amount for the tax period.

The difference between your previously assessed net amount and amended assessed net amount for that tax period is in column D.[9] T24–137

43. On 28 August 2012, the Commissioner also issued a "Notice of assessments and liability to pay penalty" for the amount of $5,664. It is noted that the administrative penalty of 50% was calculated by reference to the total of the "difference" of $11,328.

44.

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In summary, the Commissioner decided as follows:

45. On 9 September 2012, the Company objected to the cancellation of the GST registration and to the assessments of the net amount and the assessment of penalty. Broadly, the Company contended that the Commissioner's decision "had been recklessly taken" "probably due to lack of understanding of the basic accounting principles and the commercial reality". The Company emphasised that it reports GST on an accruals basis and that "it is not mandatory that payments should be made in cash only or through a bank account". The Company referred to "the validity of making and receiving payments by book entries" and pointed to one of the Commissioner's own determinations (GSTD 2004/4 - more about this will be said below). In relation to the Commissioner's apparent concerns with respect to Guru 4U sharing the same premises with related entities, Guru 4U stated that it is "not … a crime anywhere in the world to 'share business address with numerous related entities'" and that "does not indicate 'lack of business enterprise'".

46. The Company subsequently provided some further information in support of its objection at the request of the Commissioner. Significantly, by letter dated 8 November 2012, Mr Gambhir Watts wrote to the Commissioner as follows:

Carrying on an enterprise - general

  • 1. Sales have exceeded purchases in every period since 01 July 2011. Capital purchases made on credit in December 2010 and still not paid. Other purchases have been primarily for administration services and use of resources from BMG Group Australia who provide premises and all administration services and resources. Payments for these services were met from the income generated.
  • 2. Profit is already being reported since 1 July 2011. Business plan is attached.
  • 3. From the commencement date …
    • a. There have been various individual clients paid in cash. Names etc cannot be provided for privacy reasons. GURU 4U reported GST collected in the relevant periods; it is not required to maintain ABN etc of the customers/clients.
    • b. As stated above, supplies have been made to general public. BMG Group Australia makes external acquisitions for most of its services, including rental premises and other resources. GURU 4U paid for using these services from BMG.
  • 4. GURU 4U has YouTube Channel and 1300 number… Relevant documents are attached.
  • 5. GURU 4U is not a member of any professional organisation. Its key person Gambhir Watts is [a] member of several professional organisations; his CV is attached.
  • 6. Detailed transaction listing for the periods from 1 October 2010 to 31 March 2012 is attached.

Payments made for acquisitions - set off - GSTD 2004/4

We will submit this information by 15 November 2012. Please let me know if you need any information.[10] T29–153

47. Accompanying that letter were also the various documents indicated in the letter. I will provide more details about the documents relating to the YouTube channel and the 1300

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telephone number below, when discussing the Company's promotional efforts, as explained by Mr Gambhir Watts in his evidence.

48. On 11 November 2012, Mr Gambhir Watts followed up by sending to the Commissioner by email a document titled "Aged Payables [Summary]" and a "GURU 4 U promotional flyer".

49. The Aged Payables [Summary] in respect of the Company showed that it owed $66,860 to Advent Enterprises Pty Ltd and $16,500 to BMG Group.[11] T30–168 Both amounts were more than 90 days overdue. It emerged at the hearing that Advent Enterprises Pty Ltd was another related entity of the Company and that it had been deregistered with ASIC in March 2012.[12] Transcript p. 40 Guru 4U had apparently purchased all the office equipment from Advent Enterprises Pty Ltd, but not paid for it because that entity was deregistered.

50. The GURU 4 U promotional flyer was an A4 page sheet of paper which had a photo of Mr Gambhir Watts in the top left hand corner and a title of "GURU 4 U". It then stated the following:

Lifestyle education and a simpler and more natural way of living life in general

Health, well-being and food inspired by the ancient Vedic system of India relevant for modern times

Nonviolence in action at every point with every issue with inspiration from Mahatma Gandhi, Martin Luther King, Nelson Mandela and Dai Saku Ikeda

Contact for registration: Gambhir Watts[13] T30–169

51. At the bottom of the page were the contact details for the Company.

52. On 24 December 2012, Mr Gambhir Watts submitted further information to the Commissioner, namely, a "General Ledger [Detail]" report giving more information about the transactions that the Company claimed to have undertaken in the period 1 December 2010 to 24 December 2012.[14] T31–170 to 173 While it was difficult to discern the precise nature of the transactions that were listed in that report, the one thing that was clear was that the names of all of the entities listed on the report were related entities of the Company.

53. On 11 February 2013, the Commissioner disallowed the objection in its entirety and issued the Company with an objection decision.

54. On 26 March 2013, the Company applied to the Tribunal for a review of the objection decision.

THE EVIDENCE OF MR GAMBHIR WATTS

55. Mr Gambhir Watts was the only person to give evidence at the hearing. No witness statements or other evidence was filed by the Company before the hearing. Mr Gambhir Watts also represented the Company at the hearing. He said he was fully aware of the Company's activities and was also responsible for its set up. He said that he was the Company's key person. He explained that Guru 4U was established to primarily provide advice on different aspects of life and business and that he had extensive personal experience in social issues and in giving taxation advisory services.

56. As to the social issues, he explained that he personally had been promoting peace and harmony in the community for over 25 years and also been recognised for his contributions by being awarded a Medal of the Order of Australia in 2013. In addition, he had been involved in cultural organisations on a pro bono basis and promoted multiculturalism and a culture of nonviolence, including by publishing magazines on these topics, one of which he produced for viewing at the hearing.[15] Exhibit A15 He had also organised events and conferences to develop a culture of nonviolence and to raise awareness, the most recent one having involved the attendance of the granddaughter of Mahatma Gandhi. As to business matters, Mr Watts said he had been practising as a taxation adviser for over 40 years including through his company, Taxation Guru Pty Ltd, being another service provider to Guru 4U.

57. Mr Watts described Guru 4U as being his family's business because he envisaged that his son, Mr Govinda Watts, who was interested in personal training and fitness would join it once he had obtained his qualifications and provide services through that entity. Mr Govinda Watts, as noted above, was the director of the Company throughout the Relevant Period but there was no evidence of him having any active involvement in the

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Company's affairs in the Relevant Period. Mr Gambhir Watts said that when his wife retired from her current job as a scientist, she would also join him, his son and daughter at Guru 4U. He said "[t]he whole family could be involved. Four can go in this business. They could not be getting into business advisory for taxation, but they can get into this business."[16] Transcript p. 47 He noted that there are no licensing requirements for the advice work by Guru 4U and that that work would be easier for him as he got older, as well as more suited to his lifestyle of engaging with the community. Mr Watts explained that when he stopped working at his taxation practice, he would concentrate on the activities of Guru 4U. He put it this way: "I'm preparing the company [Guru 4U]; it will be expanded - the business will be substantially expanded if I stop my taxation consultancy".[17] Transcript p. 104

58. Counsel for the Commissioner cross-examined Mr Gambhir Watts about the asserted charitable purposes of the Company and the fact that clauses 5 and 6 of the Company's Constitution (extracted at [30] above) preclude the Company from making distributions to members or paying fees to its directors. Mr Watts explained that, as "there is no restriction [in the Constitution] on paying for the services", it was proposed that he and his family would earn income by Guru 4U paying them for the services that it subcontracted them to provide.[18] Transcript p. 47

59. Mr Watts further explained that, in April 2011, the Company had applied to the Commissioner for endorsement as a tax concession charity, namely, a "health promotion charity"[19] Exhibit A12 ; but that it had been refused because the Commissioner had said it was a business.[20] Transcript p. 37 However, as there was no separate evidence before the Tribunal of the Commissioner's reasons for refusing endorsement of the Company as a tax concession charity, I do not accept that the Commissioner had made a decision that the Company was carrying on a business.

60. Mr Gambhir Watts was also cross-examined by the Commissioner's counsel about the Company's business plan, extracted at [38] above. Mr Watts explained that that document had not been prepared at the start because he didn't need to show anybody else, especially as there was no external financing.[21] Transcript p. 34 He acknowledged that the business plan was written up after the Commissioner had asked him for it, during the course of the GST audit.[22] Transcript p. 35 It is noted, however, that the Company's business plan was substantially based on the Company's Constitution that was lodged with ASIC in 2010, well before the Commissioner's audit.

61. As to the activities of Guru 4U, Mr Gambhir Watts said that the Company was advising people and companies on how to tackle social issues and personal problems as well as cultural matters. He said that the customers of Guru 4U are some of his customers from his taxation practice and others that know him from his social networks. According to Mr Watts, Guru 4U had one major customer in the Relevant Period, known as the Australia India Foundation, a related entity, although initially it had external directors. Mr Watts said that the services provided to the Australia India Foundation were advice as to building the relationship between India and Australia and about "increasing cultural understanding".[23] Transcript p. 19 Mr Gambhir Watts did not elaborate further. The tax invoice for the services to the Australia India Foundation is referred to at [37(b)] above. This was in fact the only tax invoice before the Tribunal referencing services that Mr Watts claimed to have been provided by Guru 4U. No other documentation was provided in support of the advice given to the Australia India Foundation or to any other customer.

62. As noted above, Mr Gambhir Watts said that other customers of Guru 4U contributed money on a voluntary basis into a cash collection box after receiving lifestyle advice and/or management services from Guru 4U. Mr Watts also stated that Guru 4U had reported GST on the collection box monies to the Commissioner on the basis that it had made taxable supplies. For example, according to the "GST [Detail - Accrual]" report for the quarter ended 31 March 2012, $2,200 had been paid into the cash collection box and the Company reported $200 GST payable.[24] T29–161 Subsection 9-15(2) of the GST Act relevantly provides that "[i]t does not matter whether the payment… was voluntary" in the meaning of "consideration" in s 9-15 of the GST Act. It

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follows that if the other requirements of s 9-5 of the GST Act are satisfied, in particular, if the supply was made by the Company in the course or furtherance of an enterprise that it was carrying on, the Company was correct to have reported GST on these voluntary payments. For the reasons explained below, however, I am of the view that the Company was not carrying on an enterprise in the Relevant Period.

63. Mr Gambhir Watts said that, as the Company had no employees, the Company had subcontracted BMG Group, another related entity, to provide it with administration services. BMG Group charged Guru 4U an administration fee inclusive of GST for using its office premises, staff and equipment including telephone facilities. The administration fee was based on an estimate of costs that Mr Watts considered appropriate for BMG Group to charge Guru 4U, having regard to his business experience. Mr Watts said that he provided the advisory services, on behalf of Guru 4U, to the Australia India Foundation and its other customers but that he was not paid for his time. To the extent that Mr Watts did things for Guru 4U, it was unclear, in what capacity he was doing so. He was neither an employee nor a director of the Company in the Relevant Period. Mr Watts also stated that he was so busy with his commitments he would only be able to put his "full concentration" on Guru 4U after he retired from his taxation practice.

64. Finally, it is necessary to record the promotional efforts of Guru 4U. Mr Gambhir Watts described the following methods as the means by which Guru 4U was advertised:

65. As is evident from the above list, some of the promotion was undertaken after the Relevant Period, especially those activities that entailed specific advertising costs. Mr Gambhir Watts also spoke about a special "1300" telephone number, but this too was apparently organised after the Relevant Period. Furthermore, he said he "was planning to go big through TV" but this never happened. He also said that he advertises his taxation business on radio stations and in magazines and that he planned to do the same kind of advertising for Guru 4U but this did not eventuate in the Relevant Period.[30] Transcript p. 46

66. I found Mr Gambhir Watts to be a frank witness and, accordingly, I accept much of what he said about Guru 4U especially in relation to its objectives and his vision for it being a family business. I also found his explanation as to the preparation of the business plan, based on the Company's Constitution, to be genuine. That is to say, he converted the business plan into written form to respond to the Commissioner's

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request during the GST audit but it was based on what had been earlier submitted to ASIC.

67. I was not persuaded, however, that Guru 4U was engaged in the activities that Mr Gambhir Watts considered it to be undertaking during the Relevant Period. Specifically, I was not convinced that it was Guru 4U that was providing any of the services that were said to have been provided to the Australia India Foundation or to the other customers, if indeed the services had been provided at all. The limited evidence suggests that it was Mr Watts that had performed any counselling services in his own right, especially as he was not remunerated by Guru 4U. Based on my findings, the family of Mr Gambhir Watts had not yet become involved in Guru 4U and Mr Gambhir Watts himself said he was not able to give his full attention to Guru 4U. The grand plan was, after all, for Guru 4U to occupy the children of Mr Gambhir Watts when they were ready, as well as his wife and Mr Gambhir Watts when the latter retired from their respective jobs. Also, they were all going to be remunerated by Guru 4U paying them for the services they provided to Guru 4U, rather than as directors or shareholders, consistent with the limitations in the Company's Constitution. I find that the Company was a corporate vehicle set up by Mr Gambhir Watts for his family to conduct activities in the future but that it had not yet started to do so.

68. The critical issue of what Guru 4U was doing, if anything, in the Relevant Period, was not established. There was very little information before the Tribunal other than Mr Gambhir Watts' oral evidence and the documents that he produced. He said that he performed the advisory services on behalf of Guru 4U for its customers and that BMG Group provided administration services, including staff, but there was no real evidence of what was actually done, especially insofar as providing the services alleged to have been supplied by Guru 4U to the Australia India Foundation and to other customers. Moreover, all the explanations given by Mr Gambhir Watts were vague and lacked specificity. For example, in relation to the services said to have been provided to the Australia India Foundation, Mr Gambhir Watts did not produce any contract, report or notes of meetings or discussions or a list of the activities undertaken even though Guru 4U had charged $15,000 for the services that it claimed to have provided to the Australia India Foundation. Rather, Mr Watts relied on accounting entries and accounting reports that he had prepared, but these are hardly influential when the description of the activities themselves was lacking. Accordingly, I was not satisfied that any services were in fact supplied by Guru 4U in the Relevant Period.

69. I was also not satisfied that Guru 4U had made the acquisitions that it claimed to have made from BMG Group or from any other related entities in the Relevant Period. The mere assertion that administration services were provided by BMG Group (and other related entities) to Guru 4U is not persuasive, in the present circumstances. There is no evidence that Guru 4U occupied the premises of BMG Group or used any staff or facilities of BMG Group. Guru 4U relied on accounting entries and one tax invoice to support its contentions but, as they were all prepared by Mr Gambhir Watts, who was related to all of the entities and who was also the tax agent of all the entities, I am not prepared to give those documents any evidentiary weight, in the absence of independent evidence.

WAS THE COMPANY CARRYING ON AN ENTERPRISE?

70. The GST Act defines enterprise broadly, as set out in [18] above. Furthermore, while s 195-1 extends the definition of enterprise due to the definition of "carrying on" as including "doing anything in the course of the commencement", there is still an important distinction to be made between commencement and preparation for commencement, which is key in the present case. As Dowsett J said in
Russell v Federal Commissioner of Taxation [2011] FCAFC 10; (2011) 190 FCR 449 at 465, [71], "[c]ommencement of the enterprise is not necessarily the same thing as taking a step in preparation for such commencement."

71. The intention of a taxpayer is clearly a relevant consideration in determining whether a particular activity constitutes the carrying on of an enterprise: Russell at [72] (Dowsett J). That said, "[a]n intention to carry on a business will not determine that a business is in fact carried

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on":
Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376 at 385 (Hill J). See also Russell at 468, [87] (Gordon J).

72. It is plain from the above findings that the Company intends to carry on an enterprise in the future when the family members are ready. It is also the case that some initial steps have been taken in the Relevant Period by Mr Gambhir Watts to prepare the Company for the commencement of activities, but they are very preliminary.

73. I have concluded that the promotional activities undertaken in the Relevant Period, including the uploading of a video on a YouTube channel about the Company's plans and the establishment of a website, did not demonstrate that these steps were done "in the course of the commencement … of the enterprise", which is the expanded meaning of enterprise by virtue of the definition of "carrying on" in s 195-1 of the GST Act. They were merely preparatory steps to advertise and showcase Guru 4U, and the enterprise had not commenced by June 2012. In Mr Gambhir Watts' own words, the YouTube video was an "introduction" and the websites (including the one later developed in 2013) contained only basic information, because "activities haven't started as yet".[31] Transcript p. 63 I find that they were undertaken prior to Guru 4U commencing any enterprise. The persons who were to be involved in providing the services for Guru 4U had not yet even come on board.

74. A secondary issue in the present case is that the enterprise has to be carried on by an entity, namely, the taxpayer (s 9-5(b) and s 11-15(1)). It is not sufficient, in the circumstances, to point to steps being taken and to assume that they were necessarily being undertaken by the entity. As the Company had no employees and there was no evidence that the children of Mr Gambhir Watts had done anything in the Relevant Period (even though his son was the director for the entire time and his daughter became a director in March 2012), it was hard to see how the Company itself did anything. Mr Watts was, as he put it, "preparing the Company"[32] Transcript p. 104 . Accordingly, I was also not convinced that it was the Company that was involved in undertaking any of the activities but this, as noted above, is a secondary issue.

WAS THE COMMISSIONER CORRECT IN CANCELLING THE GST REGISTRATION OF THE COMPANY?

75. As the Company was not carrying on an enterprise in the Relevant Period, the Commissioner was correct in cancelling its GST registration. This is because the GST Act requires that the Commissioner must do so if he is satisfied that the taxpayer was not carrying on an enterprise and he believes on reasonable grounds that the taxpayer is not likely to carry on an enterprise for at least 12 months (s 25-55(2) of the GST Act).

76. The date of effect of cancellation of GST registration is provided for in s 25-60 of the GST Act. As noted above, the Commissioner cancelled the GST registration of the Company with effect from 30 June 2012 (the last day of the Relevant Period). Whether or not that was the correct date of effect was not the subject of the Commissioner's objection decision for review by the Tribunal nor were any submissions made about it at the hearing. It is, therefore, not a matter that I must separately address because I have decided that the Commissioner was correct in cancelling the GST registration of the Company.

WAS THE COMPANY ENTITLED TO CLAIM INPUT TAX CREDITS?

77. The Company was not entitled to claim ITCs as it did not make creditable acquisitions during the Relevant Period. This follows from s 11-5 which states that "[y]ou make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose". The meaning of "creditable purpose" in s 11-15(1) of the GST Act is "[y]ou acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise". As I have determined that Guru 4U was not carrying on an enterprise at any stage during the Relevant Period, it follows that it did not have a creditable purpose in making the acquisitions and, therefore, did not make creditable acquisitions in the Relevant Period.

78. The Commissioner made further submissions as to why the Company was not entitled to claim ITCs, including because the Company did not provide consideration for the

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purported supplies. While this submission does not have to be addressed given my conclusion above, I have decided to do so to clarify some issues raised by the parties.

79. The Commissioner submitted that Guru 4U could not rely on the Commissioner's Goods and Services Tax Determination, GSTD 2004/4, in support of its position that it could claim ITCs, notwithstanding that it had not paid consideration, because there was no evidence of any set-off of liabilities. Broadly, in GSTD 2004/4, the Commissioner accepts that a taxpayer can provide or receive consideration without transferring money by the taxpayer setting off mutual liabilities in accordance with the doctrine of set-off. I agree with the Commissioner's submissions that set-off can only apply where parties have mutual liabilities of amounts presently payable between them and they have a binding agreement to use the set-off method. In the present case, Guru 4U did not produce evidence as to whether the related entities owed it any money nor that there was any agreement to use the set-off method to pay the consideration. Accordingly, Guru 4U failed to discharge its onus that the doctrine of set-off applies.

80. However, as Guru 4U was a non-cash basis taxpayer, it would have been entitled to claim ITCs (if it was carrying on an enterprise and had made acquisitions) without needing to rely on the doctrine of set-off. That is to say, if the Company satisfied the requirements of s 11-5 of the GST Act in relation to creditable acquisitions, it would have been entitled to claim ITCs as soon as it received a tax invoice from any suppliers. This is because s 11-5 relevantly provides that "[y]ou make a creditable acquisition if: … (c) you provide, or are liable to provide, *consideration for the supply" (emphasis added). In other words, it is sufficient for a taxpayer to be liable to provide consideration, as an alternative to actually providing consideration (whether by set-off of liabilities or otherwise). Moreover, the taxpayer's entitlement to claim the ITC arises (assuming the requirements are satisfied) even though the invoice remains unpaid: s 29-10(1)(b) of the GST Act.

HOW HAS THE COMMISSIONER ASSESSED THE NET AMOUNT?

81. The Commissioner assessed the Company to a positive net amount for each tax period, even though the Commissioner contended that the taxpayer was not carrying on an enterprise. The Commissioner accepts following
Re Naidoo that his position was flawed and that he could not require the taxpayer to repay the entirety of the GST refunds paid to the Company (totalling $9,678) while at the same time requiring the taxpayer to pay the incorrectly reported GST amounts (totalling $1,650) because the Company was not carrying on an enterprise.

82. For the reasons that I set out in
Re Naidoo, summarised below, the Commissioner's Notices of assessment issued to the Company were incorrect. As I have decided that the Commissioner is right about the Company not carrying on an enterprise during the Relevant Period, the Company's net amount can only be zero for each of the tax periods in the Relevant Period. That is now described as the Commissioner's "post-Naidoo position".

83. My reasons in
Re Naidoo are summarised for the parties in this case, as follows:

84. Accordingly, I have decided that the net amount of the Company for each of the tax periods from 1 October 2010 to 30 June 2012 is zero. As none of the BASs lodged by the Company involved any positive net amounts having been paid to the Commissioner, it is unnecessary to canvass other issues which were discussed in
Re Naidoo to do with whether the Commissioner was required to repay any overpaid GST to the Company.

WAS THE COMPANY LIABLE TO PENALTIES BASED ON RECKLESSNESS? IF SO, SHOULD ALL OR PART OF IT BE REMITTED?

85. The penalty imposed on the Company was in respect of the tax periods lodged from 1 October 2010 to 30 June 2012 and, therefore, related to statements made after 4 June 2010. In the circumstances, the new penalty provisions in the TAA with a date of effect of 4 June 2010 apply.

86. Section 284-75(1) in Schedule 1 to the TAA is in the following terms (note omitted):

284-75 Liability to penalty

  • (1) You are liable to an administrative penalty if:
    • (a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law; and
    • (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

87. "Shortfall amount" is defined in s 284-80(1) in the following way (note omitted):

284-80 Shortfall amounts

  • (1) You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been. 
Shortfall amounts

88. The Company is liable to an administrative penalty under s 284-75(1) since the two paragraphs of that subsection are satisfied. The Company made false and misleading statements in a material particular because it claimed ITCs in its BASs which I have found it was not entitled to.

89. There are two exceptions in ss 284-75(5) and (6). Pursuant to s 284-75(5), a taxpayer is not liable to an administrative penalty if the taxpayer and their agent took reasonable care in connection with the making of the statement. Section 284-75(6) applies where the taxpayer, relevantly, engages a registered tax agent, gives the tax agent all relevant taxation information, the tax agent makes the statement and the false or misleading nature of the statement did not result from recklessness by the agent as to the operation of a taxation law.

90. Mr Gambhir Watts made no separate submissions that either of these exceptions apply. In any event, I have decided that the Company cannot avail itself of either of these exceptions because it did not take reasonable care and because the false or misleading statement, namely, the claims of ITCs, resulted from recklessness, as discussed below. I note that although the Company retained Mr Watts, a tax agent, he was not independent. Moreover, the evidence indicates that Mr Watts produced all of the Company's documents.

91. Working out the amount of penalty starts with s 284-85(1) which provides as follows:

284-85 Amount of penalty

  • (1) Work out the *base penalty amount under section 284-90. If the base penalty amount is not increased under section 284-220 or reduced under section 284-225, this is the amount of the penalty.

92. The base penalty was neither increased nor reduced in this case. The Commissioner formed the view that Guru 4U was liable to pay penalty at the base penalty amount of 50% of the shortfall amount on the basis that there had been recklessness as to the operation of the tax laws: s 284-90(1) Item 2. The Company's position was that the imposition had been calculated erroneously, that the shortfall did not result from its recklessness but rather from the recklessness of the Commissioner in its application of legal and accounting principles.

93.

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The key issue is whether the Company discharged the onus of proving that the assessment of penalty on the basis of recklessness as to the operation of the taxation laws was excessive. In
Hart v Commissioner of Taxation (2003) 131 FCR 203; [2003] FCAFC 105 (Hart), the majority of the Full Federal Court at [43] referred to the concept of recklessness being established "if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person". The majority of the Full Federal Court in Hart also approved the observations of Cooper J in
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347; [2001] FCA 164 (BRK) at [77] as follows:

… Recklessness in this context means to include in a tax statement material upon which the ITAA 1936 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 ITAA 1936 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.

94. In this case, it is the behaviour of the Company and that of the tax agent who was involved in the lodgement of the BASs that matters. As noted above, Mr Gambhir Watts was the controlling mind of the Company as well as its tax agent at all relevant times and responsible for the lodgement of the Company's BASs. The factors that I consider to be relevant to the question of penalty were, as follows:

95. Having regard to those factors, the Company failed to discharge the onus that it bore pursuant to s 14ZZK of the TAA of establishing that the assessment by the Commissioner of a 50% administrative penalty was excessive. Accordingly, I find that the administrative penalty of 50% for recklessness is the correct or preferable one.

96. However, I disagree with the Commissioner's view in the notice of assessment that the penalties should be calculated in respect of "Difference" amount referred to in paragraph [42] above. The provisions of the TAA require the 50% penalties to be calculated in respect of the shortfall amount, that is, taking into account the ITCs claimed less the GST liability. In this case the shortfall amount equals the total of the amounts that were overpaid by the Commissioner to the Company as GST refunds. It follows, that the penalties are $4,839 (50% of $9,678) not $5,664 (50% of $11,328), as the Commissioner assessed.

97. This calculation of penalties is based on 50% of the negative net amounts for the tax periods as that is the tax shortfall, namely, the tax-related liability that is due and payable by the Company to the Commissioner: s 250-10(2), Item 12 - "excess refund of GST" and Item 90, "administrative overpayment made by Commissioner" and s 255-5(1) of Schedule 1 to the TAA. The Commissioner acknowledged at the hearing that if the Tribunal held that the Company was not carrying on an enterprise, penalty of $4,839 was the right calculation of penalties following
Re Naidoo.

98. The final issue to be considered is whether all or part of the penalty should be remitted. Taking into account all of the circumstances of the case, in particular the fact that a reasonable person in the position of Mr Gambhir Watts would have known that there were foreseeable risks as to a tax shortfall where the Company's BASs included claims for ITCs to which it was not entitled, I am not satisfied that the penalty should be remitted in whole or part. There is nothing inappropriate about the imposition of penalties in this situation. No reason was offered in the objection lodged by the Company as to why the penalty should be remitted and I find that there is none.

CONCLUSIONS

99. For the reasons set out above, the Tribunal decides that:

Footnotes

[1] Exhibit A1
[2] Transcript p. 28
[3] Transcript p. 17
[4] T13–97 to 98
[5] T13–87 to 90
[6] T13–91
[7] T13–94
[8] Exhibit A3
[9] T24–137
[10] T29–153
[11] T30–168
[12] Transcript p. 40
[13] T30–169
[14] T31–170 to 173
[15] Exhibit A15
[16] Transcript p. 47
[17] Transcript p. 104
[18] Transcript p. 47
[19] Exhibit A12
[20] Transcript p. 37
[21] Transcript p. 34
[22] Transcript p. 35
[23] Transcript p. 19
[24] T29–161
[25] T30–169, Exhibit A5, Transcript p. 44
[26] Transcript p. 63
[27] Exhibit A4
[28] Exhibit A13
[29] Transcript p. 18
[30] Transcript p. 46
[31] Transcript p. 63
[32] Transcript p. 104

 

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