Case V81
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
In this reference the Commissioner has issued an amended assessment of income tax against the applicant. In doing so, he allowed some claims not previously allowed and disallowed certain other claims of the applicant in relation to the year of income ended 30 June 1985. Tax was assessed at $77,059.76 - an increase of $32,023.20: equal to 60% of the net increase in taxable income. Additional tax for incorrect return was levied at $16,336. The applicant objected to some aspects of the amended assessment by the Commissioner and, when his objection was disallowed, the applicant requested that his objection be referred on for independent review.
2. The adjustment sheet which accompanied the notice of amended assessment showed that adjustments had been made as follows:
$ $
Taxable Income returned 91,070
Less:
Interest 3,555
Sec. 75A deduction 1,073
Depreciation:
prior year 2,225
other 67 6,920
--------- ---------
Add:
Repairs - farm 36,932.95
- practice 163.93
Interest bank bill 14,161.48
Bank charges 2,000.00
Depreciation - private 1,187.00
Horse trainer fees 1,030.00
---------
55,475.36
* Service fees 3,820.00
---------
** 59,295.36
*** Borrowing costs 997.00
---------
60,292.36 60,292
--------
Income assessed $144,442
--------
*The disallowance was objected to but the ground of objection was abandoned at the hearing.
**The objection referred to $59,151.
***The disallowance of this item was not objected to.
ATC 559
3. When the matter came on for hearing, the statement required to be furnished to the Tribunal by the Commissioner in accordance with para. 37(1)(a) of the Administrative Appeals Tribunal Act 1975 stated:
``3. The Commissioner's reasons for disallowing the taxpayer's claims:
- (a) no part of an amount of $3,820 representing service fees in an allowable deduction under sub-section 51(1) or any other provision of the Act;
- (b) no part of an amount of $14,161.48 representing interest on bank bill is an allowable deduction in the year of income under sub-section 51(1) or any other provision of the Act;
- (c) no part of an amount of $2,000 representing bank charges in respect of bank bill is an allowable deduction in the year of income under sub-section 51(1) or any other provision of the Act;
- (d) no part of an amount of $1,030.30 representing horse training fees is an allowable deduction under sub-section 51(1) or any other provision of the Act;
- (e) no part of amounts totalling $37,096.88 and claimed as repairs is an allowable deduction under section 53, sub-section 51(1) or any other provision of the Act;
- (f) no parts of the following amounts claimed as depreciation are allowable deductions under section 54 of any other provision of the Act -
$ Dresser 345 Carpet 77 Bath tub 160 Blinds 2 Floor coverings 81 Table 132 Blinds 7 Three beds 107 Bed 53 Farm furniture 93 Tap fittings 50 Carpet 13 Washing machine/dryer 64 Toaster and kettle 3 ------ $1,187 ------- (g) the taxpayer incorrectly claimed deductions in respect of non-allowable expenditure and became liable to pay additional tax under sub-section 226(2) of the Act. The Commissioner remitted, under sub-section 226(3), 80% of the additional tax otherwise payable and in the circumstances of this particular case no further remission is warranted; (sic)''
4. The applicant is a successful medical practitioner. He is a surgeon. By the close of the year of income ended 30 June 1985 by the exercise of his professional skills he had derived assessable income on hospital service in the sum of $48,851 and from other professional practice a further $366,491 - a total of $415,342. Although the applicant had the talents and energy to achieve that financial position his endeavours were not limited to the practice of those professional skills. As the son of parents who had been farmers, for some years - the period was not established - he had been involved in primary production. He extensively engaged in forestry development on a property of some 300 hectares. It also had a carrying capacity of about 700 dry sheep equivalent and he ran sheep and cattle there. He gave that property such management attention as the property needed and his professional duties allowed. On average, he travelled the 44 kilometres from his practice to the property once per week. The nature of the property and its geographical setting was such that it was lush in summer, but so cold in winter as to diminish the usefulness of the property for running livestock in that period. Farming was not his only interest in livestock. With others, ranging from two to four in number, he also maintained a syndicate interest in one or two racehorses.
5. In late 1983 another property came on the market. It was significantly closer to his home and to the hospitals at which he rendered service. It comprised nearly 200 hectares. It was represented - correctly - by its auctioneers as having a carrying capacity of the order of 3,500 dry sheep equivalent. The applicant was aware that the property was one of considerable historical interest and that it had first been developed as a farm in the early 1800s. He was also conscious of the fact that the property was being widely promoted.
ATC 560
However, he was also aware that highway realignment was under contemplation which would have some impact on the property. Recognising those considerations he demonstrated his considerable commercial acumen. He took care to make sure that his interest in purchasing the property would not be widely known and, in particular, would not be known to the auctioneers. Further, he refrained from availing himself of any opportunity to have an on-site inspection of the property. He contented himself with an inspection from the perimeter roads. It was only on that limited basis that he observed the existence of the farm buildings, including the farm residence. He attended the auction and he was content that it was then made known that the property could be affected by highway realignment. I make no finding as to the role played by the applicant in bringing about that situation. It suffices to say that the applicant was the successful bidder at the auction and - so far as the evidence shows - he bought extremely well. His belief is that the disclosure of future road development at the auction caused many bidders to withdraw for want of adequate instructions.6. In consequence of the auction he became entitled in equity to a property comprising nearly 200 hectares at a price of $250,000. With the land came the structures erected on it. They included a residence, barn, stables, machinery shed, shearing shed and killing shed. Having obtained that equitable interest by contract, difficulties were then encountered by the vendor in making title to the property. Pending resolution of those difficulties, the applicant entered into possession as a lessee. It was only in October 1984 that settlement of the purchase was effected. Thereafter he was able to run the two properties in association with each other.
7. Having gained access to the property he learned with particularity of its condition. Prior to the applicant entering into possession the property had been let for some 13 years to a horse trainer. The applicant had known of the tenancy and that the tenant occupied the residence erected on the property. He discovered that the residence had been erected in the 1820s, with some extensions erected much later. Having regard to the age and observable condition of the exterior of the residence as seen before gaining access to the property, and having regard to what he then knew of its occupant, he had not expected the house to be in very presentable order. Inspection following purchase confirmed that expectation. Although all basic functions existed, the structure was in very poor condition. Its condition was such that at the time of the auction the auctioneers had represented that, although well-sited, any purchaser would probably want to demolish the existing structure and build anew. In particular, the brickwork and mortar were in poor condition. That was particularly so because of the effect of damp on the brickwork and mortar which had been used in about the 1820s. One distinguishing feature of the condition of the interior was that a substantial internal staircase leading to the upper floor had been removed and stored on the upper floor. Access to the upstairs section had been closed off.
``Repairs - Maintenance''
8. The applicant's evidence was that his commitments professionally were such that he needed some assistance by way of the services of a farm manager, as well as the services of casual labourers from time to time. I accept that that was so. He found a suitable manager in the person of a former farmer who had recently sold his farm and moved to reside in the city. The farmer accepted responsibility as a part-time farm manager. That sufficiently satisfied the needs of the applicant. The manager had no need for residential accommodation on the farm. The applicant's evidence was that none the less, after embarking on the repair, renovation and, as appropriate, extension of other farm buildings, he commenced the ``repair'' of the residence in order to bring it to a condition suitable for occupation by a farm manager.
9. The total amount said to have been expended on the ``repairs'', and claimed by the applicant as a deduction, was $37,096.88. The amount in dispute under the classification ``repairs and maintenance'' was made up as follows:
$
Replacement taps 163.93*
Shearing gear 402.40**
Builder 5,818.90***
Painting farmhouse 200.00
Painter 400.00
Knobs and knockers 476.82
Painter
*Claimed in the practice profit and loss statement but installed in the farm residence.
**Unrelated to the residence.
***These items were to some extent vouched at the hearing by presentation of documents originating with the supplier.
10. I accept the applicant's evidence that $402.40 was expended to replace components of the shearing equipment which came to be lost to him. I would allow the deduction claimed. As to the item ``replacement taps $163.93'' claimed as an expense in the practice account, I find that the taps were installed in the farmhouse. Accordingly, that claim forms part of the $36,694 related to the residence.
11. At the hearing the applicant gave evidence. On the issues of what was done and at what cost, he was not strongly challenged. His evidence was that all of the foregoing expenses related to the farmhouse ($36,694) had actually been incurred, and been incurred during the year of income. I accept that. He gave evidence that he had paid the accounts as claimed and I accept that. His evidence was that no claim had been made in relation to works which did not in the opinion of the applicant constitute ``repairs''. I accept that. The applicant's evidence was that, in particular, the builder had been requested to present separate accounts for works of ``repair'' and for other works but that, on the first relevant occasion, he had not done so and had presented an account for $12,331.32 which embraced both new works (``alterations'') and ``repairs''. The copy of that account as presented in evidence was subsequently annotated by the builder at the request of the applicant to distinguish between ``alterations'' and ``repairs''. It recorded that only $5,818.90 represented ``repairs''. Although the builder by that annotation referred to repairs ``of outbuildings'', it is not disputed before me that the ``repairs'' related to work done on the house.
12. As matters developed the original farm manager was to serve in that capacity until late 1986. By that time the applicant had found himself to be quite capable of carrying out the necessary management duties. However, his evidence was that as at the date of hearing he was still seeking the services of a farm manager and that the repaired residence was being maintained to be offered to any future appointee as on-site accommodation. One consequence of all of those matters is that, to the date of hearing, the only persons to have occupied the residence since its purchase and ``repair'' were the applicant and his wife and children.
13. The applicant frequently travelled the 20 kilometres from his practice to the farm. Although travelling time between the farm and the hospitals was only of the order of 15 minutes, he rarely attended at the farm when ``on call'' for hospital duty. Subject to that, his visits were quite frequent and on occasions he stayed overnight in the residence: sometimes staying there for as many as three or four successive nights. The children rarely visited the farm except during school holidays. When on vacation they would sometimes stay at the farm with their mother, possibly remaining there as many as five or six nights in succession. When there they would work at farm chores.
Depreciation
14. That it was possible for the family of the applicant or any family to be reasonably accommodated at the premises required that the premises should be furnished. The depreciation schedule indicated that the following items were installed in the newly renovated residence and that depreciation was claimed in respect of them. The claim was:
15. On the face of it, no claim has been made for such furniture and appliances as a stove; a refrigerator; dining chairs; easy chairs; radio and other seemingly ``necessary'' entertainment appliances. However, the evidence satisfies me that many items of furniture which were selected reflected an expectation that the premises would be more extensively used by the family than by strangers. The amount claimed for depreciation in relation to the foregoing items amounted to $1,187: a claim wholly disallowed by the Commissioner. I accept that the capital expenditure was incurred.
The costs of finance
16. When the applicant had to settle the purchase of the property he was able to do so by borrowing $80,000 from the Commonwealth Development Bank and by financing the balance through ``commercial bills''. In consequence, $80,000 (the Development Bank loan) was credited to his ``business account'' on 1 October 1984. Settlement of the purchase was effected on 1 October 1984 when (inter alia) his bankers advanced $256,223.75 to his solicitors: a transaction which converted his credit balance to a debit balance of $166,592.76. Two days later, by reason of the commercial bills, a further $187,098.54 was deposited to the same account and the account was restored to credit. Upon his acceptance of those two bills of exchange, he became liable for payment in two sums of $100,000 each, payable 180 days hence.
17. On 1 April 1985, those two bills fell due for payment. On that date, presumably in accordance with collateral arrangements made before the bills were drawn and accepted, the bankers debited the business account of the applicant with $200,000: the face value of the bills. In doing so, they placed the account in overdraft in the sum of $192,909.32.
18. On 16 April 1985, in consequence of the applicant having accepted two more bills of exchange drawn upon him for a face value of $100,000 each payable 180 days hence, there was credited to the business account of the applicant $183,838.52.
19. It follows that the cost to the applicant of having had available for his own use the initial sum of $187,098.54 for some six months was $12,901.46. On any view that expense was incurred during the year of income ended 30 June 1985. In his return of income, in accordance with the advice of his accountants, the applicant claimed the entirety of that expense attributing $10,822.01 as ``interest - Westpac'' and $2,079.45 as ``being fees''. The claim was allowed.
20. Similarly, in the following six months the cost to the applicant of having available to him the second sum of $183,838.52 was $16,161.48. The applicant claimed to deduct the entirety of that expense as an expense
ATC 563
incurred during the year of income ended 30 June 1985. He did so by adopting his accountant's analysis of the expense as ``bank fees (approx.) $2,000'' and ``interest Westpac $14,161.48''. The evidence presented to me was more precise and I accept it. It showed that the bills were purchased at a discount of $14,305.60 for $185,694.40. However, the bank immediately took its acceptance fee $1,495.89 and stamp duty $360. As a result, the sum credited to the account was only $183,838.51. The Commissioner disallowed those claims on the basis that the expense had not been ``incurred'' within the year of income. It was acknowledged for the Commissioner that, all other things being equal, the expense would have been allowable as a deduction in the following year on the basis that it was a loss or outgoing ``incurred'' in the following year of income.Horse trainer's fees
21. During the year of income ended 30 June 1985 the applicant continued to pursue his interest in racing horses. He was a member of two syndicates. The syndicates incurred expenses in having the horses trained and in some measure those expenses were offset by winnings. The applicant suffered a net loss for the year of $1,030.30 and sought to claim an income tax deduction in that amount. The claim was disallowed.
22. In his evidence he spoke of his ambition to race horses, not only successfully, but also profitably. He gave evidence indicating that the quality of the horses in which he, with others, had been interested was such that the prospect of such profit was not unreasonable. He had looked forward to the time when the second property could be used in the course of a horse racing business: it had already been equipped with two stables, one with four stalls and one suited to a stallion alone. To the date of hearing he had not used his own property to that purpose because his farm manager had need for those stables.
23. As he said in the course of his evidence, he was ``looking for a ruling that the losses should be allowed; or a guarantee that future wins would not be assessable''.
Service fees
24. In the profit and loss account relating to the professional practice the applicant claimed a deduction against practice fees of $366,491 for ``Management Service Fees $210,000''. The Commissioner allowed the claim except for a sum of $3,820 said to represent the amount paid by the applicant for out-of-hours meals served to him in his home. Although the disallowance was objected to, before me the claim to a deduction was abandoned.
Borrowing costs
25. The Commissioner disallowed $997 under this description. The disallowance was not objected to and no evidence was presented as to the basis for the claim or the reason for its disallowance.
Penalties
26. The Commissioner by one of his officers, a chartered accountant, conducted a field audit into the affairs of the applicant for the years of income ended 30 June 1980 to 1984 inclusive. Some of the matters which attracted critical scrutiny were claims to deduct ``service fees'' paid in relation to the provision of ``after-hours meals'' for the applicant; and ``repairs'' to farm buildings on the original property effected shortly after its acquisition. The carrying out of that field audit involved discussions with the applicant and his tax agent. Following discussions in August 1985, the Commissioner's investigator documented his proposed amendments. That was during the month of September 1985. No documentation relating to the proposed amendments, or as to the amended assessments (and adjustment sheets) which later issued, was presented in evidence. However, I am satisfied that, before the income tax return of the applicant for the year of income ended 30 June 1985 was signed and filed, the applicant was aware of some challenges to earlier returns. I am not persuaded by what I have heard in evidence that the basis for any adjustments proposed was precisely made known to him. Further, I am not satisfied that in November 1985 he was aware of what was in prospect in relation to the imposition of additional tax in relation to any amended assessments for the years of income ended 30 June 1980 to 1984.
27. I find that it was in November 1985 that the applicant, after conferring with his accountant, determined to present his 1985 return in the manner he did, but that it was only later that the ``audit'' of earlier years resulted in any amended assessments. I find that on 19
ATC 564
May 1986 the 1985 income tax return of the applicant was assessed as returned and that on 23 May 1986 - four days later - amended assessments issued in relation to the years of income ended 30 June 1980 to 1984 inclusive. The amended assessments which so issued were challenged by objection and those issues were resolved on unknown terms when reduced amended assessments issued on 10 November 1986.28. It was only subsequently, on 6 February 1987, that the amended assessment which is before me issued. It assessed taxable income at $144,442 and the tax thereon (including Medicare Levy) at $77,793.08: an increase over the figures previously assessed of $32,023.20. In addition, additional tax was assessed at $16,336.
29. The evidence satisfies me that the investigating officer, in reporting to his superiors and making recommendations as to penalties, had said:
``The return was prepared after notification of proposed adjustments to earlier years and therefore some of the errors perpetuated could be held to be blatant attempts by the taxpayer to beat the system. The penalty guidelines provide for additional penalty to be imposed where there is a prior history of tax evasion or avoidance. (Note 7 IT 2012). However, in this case as adjustments to earlier years had not been finalised at the time of preparing the return it is proposed to give the taxpayer the benefit of doubt and only apply the recommended standard penalty.
It is submitted that penalty be remitted to 40% of the tax avoided plus the per annum component.''
30. I accept that penalties were imposed in accordance with that recommendation, but whether because of it or not is a matter as to which I make no finding. I find that the amount of additional tax assessed was made up as follows:
$32,023.20 at 20% per annum from 19 June
1986 to 6 January 1987 - the date of calculation
- 201 days $3,526.93
$32,023.20 by 40% (culpability factor) $12,809.28
----------
TOTAL $16,336.21
----------
31. When the Commissioner came to submit these proceedings to the Tribunal the statement required to be furnished by the Commissioner to the Tribunal stated that by reason of ``incorrectly claimed deductions in respect of non-allowable expenditure'' the applicant ``became liable to pay additional tax under sub-section 226(2) of the Act'' and that the Commissioner had effected remissions under sec. 226(3) of the Act: the amount remitted being ``80% of the additional tax otherwise payable''. The references to sec. 226 are acknowledged to have been in error and also the reference to remissions of ``80%''.
Deductibility: Horse trainer's fees
32. The first observation to be made is that the applicant was not engaged at any time in horse training: whether in the way of business or not. In claiming the deduction sought he claims for his share of the net loss incurred in and about attempts to profit from horse racing. The claim is entirely without merit. The horse racing activities were the activities of syndicates. It is difficult to imagine how the applicant could have been in the business of horse racing independently of the syndicates in which he was involved. If the syndicates were in business they had obligations, as a group of persons in receipt of income jointly, to file income tax returns. It is not suggested that they did so. But whether the activities of any syndicate or those of the applicant as a member of one or more syndicates constitutes carrying on of a business, the Act requires that assessable income be brought to account in the first instance and deductions then claimed in order to determine taxable income (sec. 48).
33. Whether any such activities as those engaged in constituted the carrying on of a
ATC 565
business depends more upon an objective assessment than subjective considerations as to purpose or motive even though:``... it is certainly relevant to ascertain if the operations of the taxpayer have a commercial purpose, i.e. pursuit of profit or gain rather than pleasure or recreation.''
(Fisher J. in
Ferguson v. F.C. of T. 79 ATC 4261 at p. 4270.)
34. However, whatever the intentions of the applicant may now be for future years, and whatever may have been his state of mind as at November 1985, I am not persuaded that his intention and purpose at any material time during the year of income ended 30 June 1985 was to derive assessable income from his racing activities or that the nature and extent of what was undertaken and done constituted the carrying on of any business activity. Accordingly, the claim to a deduction fails.
35. Further, in relation to his requirement that either his losses be allowed as deductions or his future winnings declared not to constitute assessable income, I would merely observe that neither the Commissioner nor the Tribunal is vested with either the capacity or the authority to predict the future. The taxable income of the applicant for the year of income ended 30 June 1986, and each year following, will have to be determined according to the relevant law in force in relation to those years and in the light of the evidence presented at the appropriate time.
Deductibility: The costs of finance
36. There is no issue as to whether the costs of enjoying the commercial bill facilities and having the use of the money provided by that technique is deductible. The only question is whether the second set of expenses claimed were ``incurred'' during the year of income ended 30 June 1985 rather than at a later date. The accountant to the applicant viewed the commercial bill facilities as providing a ``loan'' in relation to which the ``interest'' and other charges were prepaid. He was wrong. That he was wrong is quite understandable. He was not, and did not claim to be, expert in the law of banking or in the law relating to bills of exchange. One can understand the view which he took that the applicant was ``borrowing'' $200,000 at a particular cost - known precisely in aggregate, if not in all its elements, in advance.
37. But a dealing in a bill of exchange in the manner followed in these circumstances quite definitely did not constitute a loan: and that was quite deliberately so, at least on the part of the bank. What happened was that the bank prepared a form of bill of exchange to be ``drawn'' upon the applicant. So long as the bank retained it in that condition, and whether the bank had signed it or not, it was nothing more than an ineffective piece of paper. As such it had no value. The bank presented it to the applicant and he ``accepted'' it. That is to say, in accordance with the requirements of the Bills of Exchange Act 1909 (Cth), he undertook to honour the bill on presentation for payment in accordance with its terms. He undertook that, on a nominated future date, he would pay the face value of the bill to the holder who presented it to him for payment. So long as the applicant retained the bill on his own account it remained a worthless piece of paper. But it would come to have some value in the marketplace if anyone could be found who was prepared to take it and give value for it. Such a person was found in or through the bank. The bank was able to provide for the purchase by the bank or by one of its other customers of the applicant's promise to pay in future. The price to be paid to the applicant for his promise was a sum of money payable immediately. In the case of the original bills of October 1984 that sum (less bank charges) amounted to $187,098.54. In the case of the bills of April 1985 that sum was $185,694.40 which, after deduction for bank fees ($1,495.89) and stamp duty ($360), resulted in funds available immediately of $183,838.51. In the period to elapse between acceptance by the applicant and the maturity date of the bill, the amount to be paid by the applicant on maturity would not change but the value of the bill might have changed. That being so it was always possible that the applicant might have redeemed his bill prior to its maturity at less cost to himself than $200,000. Had he done so the period during which his negotiation of his bill had resulted in the availability of money to him and the cost to him of having procured the use of that money for that period would have changed. As it happened none of those things occurred. Instead, no doubt pursuant to authorities it held, the bank ensured the honouring by the
ATC 566
applicant of the bills at maturity by effecting a debit for the face value of the bills to the bank account of the applicant with the bank. Thereby the bank, after exhausting any available credits in that account, lent to the applicant on overdraft a sum sufficient to equal the face value of the bills.37. [sic] As I indicated earlier, the question to be determined is whether the ``loss or outgoing'' which was undoubtedly incurred in relation to the second bills of exchange was ``incurred'' when the bills were accepted - that is, when the applicant assumed obligations under the bills - or when the bills were honoured at maturity, that is upon the applicant satisfying his obligations under the bills. In the circumstances of the case, clearly the ``loss or outgoing'' was not paid at point of acceptance. At acceptance the applicant assumed an obligation which, with practical certainty, would result in future expenditure. Although ``incurred''... ``does not mean only defrayed, discharged or borne but rather includes encountered, run into or fallen upon... (It) does not include a loss or expenditure which is no more than impending, threatened or expected'' (
New Zealand Flax Investments Ltd. v. F.C. of T. (1938) 61 C.L.R. 179 at p. 207 per Dixon J.): a comment approved of by Barwick C.J. in
Nilsen Development Laboratories Pty. Ltd. v. F.C. of T. 81 ATC 4031 at p. 4035; (1981) 144 C.L.R. 616 at p. 624 when, having cited the passage just quoted with approval, his Honour said:
``... and I would for myself add `no matter how certain it is in the year of income that that loss or expenditure will occur in the future'.''
In my view, the claim to a deduction in relation to the discount factor of $14,305.60 has not been made out. It was premature. On the other hand, the outgoings in relation to bank fees ($1,495.89) and stamp duty ($360) were immediately incurred. To that extent the claim will be allowed.
Deductibility: Depreciation
38. Section 54 provides:
``(1) Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.
(2) In this section, `plant' includes -
- (a)...
- (b) fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits,... other than -
- (i) structural improvements used for domestic or residential purposes except where the improvements are provided for the accommodation of employees, tenants or share farmers engaged in or in connexion with those pursuits or operations,...; or
- (ii)...
- (c) plumbing fixtures and fittings, including wall and floor tiling, in premises acquired after 30 June 1938, or installed in premises after that date, by a person carrying on a business for the purpose of producing assessable income, where those fixtures and fittings are provided principally for the use, for personal purposes, of persons employed by him in that business or for the care of children of those persons.''
39. I am satisfied that all of the items in relation to which depreciation is claimed constitute ``plant'' within the meaning of the section. However, the evidence satisfies me that the plant was not used by persons employed by the applicant or by the dependants or children of such persons. In this regard I find that such work as the wife and children of the applicant did in the way of farm chores did not constitute them as employees of the applicant, let alone as persons occupying the residence as employees of the applicant. It follows that, if the extended definitions of ``plant'' set forth in sec. 54(2)(b) and (c) are to be relied on, it must be because the plant was ``provided for'' (sec. 54(2)(b)), or ``provided principally for the use, for personal purposes, of'' (sec. 54(2)(c)) such persons: if the claim is to be allowed. In my view, the use of the term ``provided'' in those subsections does not speak of motive or intention at the time decisions were taken to provide such facilities, or of a state of mind
ATC 567
subsisting at the time when the plant was acquired or installed. Rather, the term bespeaks states of affairs as existing from time to time. Upon the evidence, clearly from the time of the installation of the ``plant'' in question it was, to the extent to which it was used at all, used only by the applicant and his immediate family for their domestic purposes. Furthermore, it was not at any time available to be used by any other persons, being employees or their dependants, for their purposes.40. That being so, the question falls to be determined by reference to sec. 54(1) itself. I am satisfied that all the ``plant'' was depreciable; and that it was owned by the taxpayer. It follows then that, if it was ``used by him during that year for the purpose of producing assessable income, (or was) installed ready for use for that purpose...'' the deduction shall be allowed. The deduction is not to be denied because of the nature of the articles because:
``Section 54 does not exclude articles of a private or domestic nature; it requires only that the articles (if owned by the taxpayer) should be used for the stated purpose.''
(
F.C. of T. v. Faichney 72 ATC 4245.)
However, sec. 61 provides:
``Where the use of any property by the taxpayer has been only partly for the purpose of producing assessable income, only such part of the deduction otherwise allowable under section 54 or section 59 in respect of that property as in the opinion of the Commissioner is proper shall be an allowable deduction.''
41. Clearly the scheme of the Act contemplates that plant may be used only partly for the purpose of producing assessable income. Other purposes may include the production of exempt income and use of the property for private or domestic purposes. Recognising that, I am of opinion that, just as the barrister in his bed pondering the problems of the morrow is not entitled to depreciation in relation to that item of ``plant'', neither is the farmer lazing in his bath in the farmhouse and there shedding the soil ingrained by his labours entitled to have depreciation allowed for his bath tub. That being so, in my view, none of the items of potentially depreciable plant constituted items ``used... for the purpose of producing assessable income (or)... installed ready for use for that purpose...''.
Repairs and maintenance
42. Having accepted that the applicant is entitled to a deduction of $402 in relation to the shearing gear, it is only necessary to now consider the ``repair'' of the farm residence.
43. Just as a farm residence provided for the use of employees may be depreciable, so too the cost of repairing and maintaining such a structure may be allowable as a deduction pursuant to sec. 51(1), which provides:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
or pursuant to sec. 53(1) which states:
``Expenditure incurred by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied or used by him for the purpose of producing assessable income, or in carrying on a business for that purpose, shall be an allowable deduction.''
44. In claiming the deductions he seeks the applicant faces two problems in relation to both sec. 51(1) and 53(1): first, he must establish that the losses and outgoings incurred were incurred ``in the course of'' his income-producing activities; secondly, he must persuade that the expenses incurred were not of ``capital or a capital, private or domestic nature''.
45. I am satisfied that all of the work done to the residence and claimed under this item on any fair use of language did constitute ``repairs'' even though they were most extensive. I am also satisfied that the amounts claimed to have been expended were expended. However, that is far from being sufficient to enable the applicant to succeed with his claim.
ATC 568
46. As to the former question, I am not persuaded that the premises were in fact used ``in the course of'' income-producing activity such as is required by either section. They were used to provide residential accommodation for the applicant and his family. That that was so is not altered by the circumstance that it may have been intended when the works were commenced that they would be used by a farm manager and his family and thereby used for income-producing purposes. Further, the mere circumstance that the particular residence happened to be sited on the farm did not alter its character as a private residence (cf.
Handley v. F.C. of T. 81 ATC 4165; (1981) 148 C.L.R. 182; and
F.C. of T. v. Forsyth 81 ATC 4157; (1981) 148 C.L.R. 203).
47. As to the latter question, I adopt the words of Windeyer J. in the High Court of Australia in
W. Thomas & Co Pty. Limited v. F.C. of T. (1965) 14 A.T.D. 78 at p. 87 when his Honour said:
``The works in question can all be fairly described as repairs to the building. They were done to make good a deterioration that had occurred by ordinary wear and tear or by the operation of natural causes during the passage of time... The words `repair' and `improvement' may for some purposes connote contrasting concepts; but obviously repairing a thing improves the condition it was in immediately before repair. It may sometimes be convenient for some purposes to contrast a `repair' with a `replacement' or a `renewal'. But repairs to a whole are often made by the replacement of worn-out parts by new parts. Repair involves a restoration of a thing to a condition it formerly had without changing its character. But in the case of a thing considered from the point of view of its use as distinct from its appearance, it is restoration of efficiency in function rather than exact repetition of form or material that is significant. Whether or not work done upon a thing is aptly described as a repair of that thing is thus a question of fact and degree.''
The circumstance that the applicant dramatically altered the appearance of the premises by restoring the verandah to its original condition and by replacing the staircase which had been disconnected does not persuade me otherwise.
``But the answer to that question does not of itself decide whether the expenditure on the work is properly to be considered as an outgoing upon capital account or upon revenue account. And that is what must be decided when the question is whether that expenditure is an allowable deduction in the ascertainment of taxable income.
Expenditure upon repairs is properly attributed to revenue account when the repairs are for the maintenance of an income-producing capital asset. Maintenance involves the periodic repair of defects that are the result of normal wear and tear in operation. It is an expense of a revenue nature when it is to repair defects arising from the operations of the person who incurs it. But if when a thing is bought for use as a capital asset in the buyer's business it is not in good order and suitable for use in the way intended, the cost of putting it in order suitable for use is part of the cost of its acquisition, not a cost of its maintenance. The decision of the Court of Sessions in
Law Shipping Co. Ltd. v. Inland Revenue Commissioners ((1924) S.C. 74; 12 T.C. 621), is commonly cited as authority for that proposition. The principle is obvious without the need for any supporting authority.''
In my view, his Honour's comments are wholly apposite in the circumstances of this case. I say no more upon this aspect of these matters. The claim to the deduction fails.
Deductibility: Service fees
48. It is conceded that the disallowance of the claim to the extent of $3,820 is correct.
Deductibility: Borrowing costs
49. The disallowance of the claim was not contested by the objection or before me.
Additional tax generally
50. Upon the hearing, counsel for the applicant raised a threshold question touching the matter of additional tax. The submission was founded in the factual circumstance that, when the Commissioner forwarded the formal documents to the Tribunal for review in accordance with the request previously made by the applicant, the Commissioner was obliged; pursuant to sec. 37(1)(a) of the Administrative Appeals Tribunal Act 1975 to state ``the
ATC 569
Commissioner's reasons for disallowing the taxpayer's claim''. One of the claims of the applicant had been that the assessment of additional tax should be set aside, or alternatively, reduced. Before that point in time all that had happened was that, according to the Commissioner's contention, the applicant had become liable to pay additional tax for incorrect return; that the Commissioner had exercised his discretion to remit in part the additional tax for which the applicant had become liable; and that the Commissioner had thereupon fixed upon $16,336 as the amount of additional tax to be levied.51. The Commissioner did not point to any statutory warrant for levying the additional tax he assessed. It was only when the Commissioner forwarded the formal documents to the Tribunal and the Commissioner formulated his reasons for disallowing the taxpayer's claims and incorporated a statement of those reasons in the formal documents that anyone referred to any statutory authority as to the imposition of additional tax.
52. In that statement of reasons, the Commissioner said:
``The taxpayer incorrectly claimed deductions in respect of non-allowable expenditure and became liable to pay additional tax under sub-section 226(2) of the Act. The Commissioner remitted, under sub-section 226(3), 80% of the additional tax otherwise payable and in the circumstances of this particular case no further remission is warranted.''
53. The statements so made were inaccurate. Section 226 of the Income Tax Assessment Act 1936 had been repealed before additional tax was imposed. Further, it was not accurate to say that ``80% of the additional tax otherwise payable'' had been remitted. It was therefore argued that the imposition of additional tax failed. In my view the argument has no merit. It is not suggested that the statement which first came into existence with the formal documents misled the taxpayer and it cannot be suggested that the statement then erroneously made rendered ineffective the exercise by the Commissioner of his power to remit portion of the additional tax for which the applicant had become liable by force of the Act at the time the assessment was raised. In the circumstances, there was not even the possibility of detriment to the taxpayer such as might have been in
F.C. of T. v. Reynolds 81 ATC 4131 if the objection had been drawn in terms responsive only to the incorrect adjustment sheet.
54. In approaching the question of imposition of additional tax it is appropriate to first recognise that the pivotal provisions of the Income Tax Assessment Act 1936 (``the Act'') are as follows:
``166. From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon.''
``208(1) Income tax when it becomes due and payable shall be a debt due to the Commonwealth, and payable to the Commissioner in the manner and at the place prescribed.''
Each of those sections is supported by related provisions.
55. In addition, fundamental to the Commissioner's discharge of those responsibilities, is sec. 161(1) which, in its material terms, provides:
``Every person shall... furnish to the Commissioner... a return signed by him setting forth a full and complete statement of the total income... derived by him during the year of income, and of any deductions claimed by him...''
That too is supported by other provisions.
56. By Act No. 123 of 1983 the Commonwealth amended the Act, repealing earlier provisions as to additional tax and introducing new provisions in the way of ``Part VII Penalty Tax''. I think it is clear that the far greater particularity and extent of the new provisions by comparison with the repealed provisions is such that the new provisions were designed to cast heavier burdens upon taxpayers and, in particular, to overcome a perceived ``mischief'': the circumstance that some taxpayers who had paid less than ``the tax properly payable'' had been found by the decisions of the Federal Court in
F.C. of T. v. Rabinov & Anor (83 ATC 4437) and
F.C. of T. v. Sahhar (85 ATC 4072) to have no liability to penalty tax.
ATC 570
57. Section 223 is one of several sections enacted in the new Part and is one of two sections directly relevant to the determination of the issues in this reference. Section 223 provides for the definition of circumstances in which:
``... the taxpayer is liable to pay, by way of penalty, additional tax...''
(sec. 223(1))
58. Liability to additional tax is a function of the difference between ``the tax properly payable by the taxpayer'' and a lesser figure. It is clear then that the correct assessment of ``the tax properly payable'' depends upon the correct carrying out of the process of assessment by the Commissioner. That work is done by his officers. The assessment so raised may levy ``the tax properly payable'' or some other amount in tax. If the amount of tax levied is incorrect by reason of an over-assessment of taxable income the assessment is open to challenge, first by objection to the Commissioner and then, if the objection is not fully allowed, by either independent review before this Tribunal or on appeal to the Federal Court of Australia.
59. If the assessment is inadequate the error may be attributable to error on the part of the Commissioner's officer. It may be by reason of an error in his calculations (e.g. reducing taxable income on disallowing a deduction claimed rather than increasing it). It may have been occasioned by an error in law (e.g. failing to know the full scope and extent of relevant principles of law). It may have been occasioned by failing to detect as excessive a claim made by the taxpayer (e.g. failing to ascertain that a deduction properly allowable at $1,000 was either deliberately or inadvertently claimed at $1,500); or failing to ascertain all relevant facts such that, had they been known, would have indicated that a receipt referred to was assessable or that a deduction claimed would not have been allowable. In the latter instances, it may be that the claim was sufficiently and fairly described to have indicated to a reasonably competent assessor that as a matter of law the receipt was assessable or that the claim would not have been allowable. In that event, the error is probably to be characterised as an error of law on the part of the assessor. On the other hand, if insufficient information was before the assessor to indicate that, then the under-assessment is probably attributable to a mistake of fact.
60. That analysis accords with the principles laid down in sec. 170 as to the amendment of assessments. In particular, it is reflected in sec. 170(3) which provides:
``Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact;...''
61. clearly then, accuracy of assessments depends heavily on two factors: the sufficiency and accuracy of disclosure by the taxpayer; and the skill and diligence of the assessor responsible for effecting the assessment. Clearly too, in the absence of challenge to the return or other investigation by the assessor, a correct assessment depends upon the accuracy of disclosure of all the facts which need to be known by an assessor in order to effect a correct assessment of ``the tax properly payable''.
62. So far as sec. 223 of the Act is concerned, the extent of that disclosure need not be great. A taxpayer who only acknowledged a taxable income of $50,000 without providing any details of assessable income or deductions claimed would fall short of effecting full disclosure and might breach many provisions of the Act. But he would not be exposed to liability to additional tax under sec. 223 of the Act if his taxable income did not exceed $50,000. The same situation would arise if taxable income was accurately acknowledged at $60,000 following disclosure of unspecified assessable income of $100,000 and unidentified deductions of $40,000. The same result would also follow if assessable income had been understated, provided allowable deductions had been understated by the same amount. Nor would it matter if, for example, a deduction claimed was inaccurately described, provided that it was allowable; nor if a deduction under one heading was overclaimed, provided that the aggregate of allowable deductions was not overclaimed.
63. Errors in assessment which are induced or which, but for the alertness of an assessor might have been induced, by representations on the part of a taxpayer fall into three principal categories:
ATC 571
- Quantum of the claim: When, either deliberately or inadvertently, an amount of assessable income is understated or the amount of an allowable deduction is overstated.
- The description of the claim: When, for example, an item of expense is correctly stated as to quantum, but it is inaccurately or incompletely described - e.g. the costs of a fortnight's holiday for a taxpayer and his spouse described as ``Travelling and Conference Expenses'': and
- Characterisation of the claim: For example, where profit on the sale of land, which was acquired for the purpose of profit-making by sale, is described in the return as ``capital gain''.
In any particular case two or more factors may co-exist.
64. The obligation to pay additional tax does not arise whenever there is (or might have been) an under-assessment of tax. It is conditioned upon there having been a situation:
``223(1). Where -
- (a) a taxpayer -
- (i) makes a statement to a taxation officer... that is false or misleading in a material particular; or
- (ii) omits from a statement made to a taxation officer... any matter or thing without which the statement is misleading in a material particular; and
- (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be,
the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.''
65. Section 227 obliges the Commissioner to make an assessment of the additional tax. It provides that:
``(1) The Commissioner shall make an assessment of the additional tax payable by a person under a provision of this Part,''
but it goes on to provide
``(3) The Commissioner may, in the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under a provision of this Part,...''
66. It can be observed at the outset that the concepts of additional tax being as much as equal to double the tax which was or might have been avoided; and the obligation to exercise a discretion as to whether to remit additional tax in part or even wholly as existed under the repealed provisions have been preserved. That being so, I think it appropriate to say at this point that I find nothing in the amendments which would suggest that the obligations of the Commissioner in considering remissions should be any less than they were under earlier legislation (cf. my reasons for decision in Case U36,
87 ATC 266). However, whether there is any scope for the impostion of additional tax is the question which must first be addressed.
67. In that regard I observe that I have found that the applicant did suffer all of the expenses claimed. It follows that, at least to the extent to which the expense suffered was accurately described, the applicant would not have been liable to additional tax under the repealed provisions (cf. Rabinov - ante). However, the Commissioner contends that the scope of sec. 223(1) is such that it should be found that the applicant has made statements which are either ``false or misleading in a material particular'' and that, in addition or in the alternative, the applicant has omitted from statements made to a taxation officer matters or things without which the statements actually made are ``misleading in a material particular''. In that regard in imposing additional tax the Commissioner points to what was stated or omitted from statements made in relation to five different and distinct subject areas: ``repairs''; depreciation; horse trainer's fees; costs of finance; service fees; and borrowing costs.
68. In my view, the provisions of para. (b) of sec. 223(1) require that regard must be had to each statement as a separate statement, in order to determine ``the tax that would have been payable by the taxpayer if (the tax) were assessed on the basis that the statement were not false or misleading...'' (emphasis added). Given that there were three distinct statements, it might have been that, had the excess been calculated in each case, it might have stood at
ATC 572
$10,000, $20,000 and $30,000 respectively but that, pursuant to sec. 227, the appropriate course in considering remissions might have been to not remit at all; to remit partially; and to remit wholly. I also observe that it follows from the view so expressed that three such representations may result in greater liability than a single representation relating to $60,000 in that aggregation may result in the average rate of tax being lower than the rate appropriate to each statement if considered separately.69. I am satisfied, even without calling in aid subsec. (8) of sec. 223 of the Act, that an income tax return, such as was presented by the applicant through his tax agent to the Commissioner, constitutes ``a statement to a taxation officer'' and ``a statement made to a taxation officer'' within the meaning of sec. 223(1)(a) of the Act.
70. I next observe that the section does not require that the statement should have misled the Commissioner. It is sufficient that the statement be false, whether or not it deceives; or misleading whether or not it misleads. Nor does a statement escape being false or misleading because of a view honestly held by the maker of the statement that it is not so. (
Reliance Finance Corporation Pty. Limited v. F.C. of T. 87 ATC 4146).
71. Next, I am of the view that the penalties in relation to each statement must only be a function of such underpayment of tax as was occasioned by the statement or, but for the correct assessment of tax properly payable, might have been so occasioned. An omission of bank interest of $10 may only result in additional tax equal to double the tax on the difference between the tax properly payable and the tax on a taxable income of $10 less. That omission of $10 may not be coupled with an under-assessment of taxable income by $10,000 occasioned by another factor so as to justify additional tax equal to double the tax on the further $10,010 of taxable income. If there is to be such a level of additional tax it must be because there has been some other false or misleading statement or omission in relation to the further item of $10,000.
72. Further, it is not every understatement of taxable income which justifies the imposition of additional tax. It is only if there is either a statement that is false or misleading in a material particular or an omission which is misleading in a material particular.
73. In considering the application of those provisions to claims for deductions under sec. 51 of the Act, it needs to be borne in mind that the presentation of any claim for a deduction in any manner commonly used for presenting such a claim involves assertions that:
- (1) the amount claimed was paid (or otherwise suffered) so as to constitute a ``loss or outgoing'';
- (2) the amount so claimed was incurred in the amount specified in Australian currency, or was suffered in some other currency or in some other way so as to be fairly measured in Australian currency in the sum specified;
- (3) the loss claimed as a deduction was incurred during the year of income;
- (4) it was incurred in gaining or producing the assessable income of the applicant; or was necessarily incurred in carrying on a business for the purpose of gaining or producing such an income;
- (5) it was not a loss or outgoing of capital or of a capital, private or domestic nature; and
- (6) it was not a loss or outgoing incurred in relation to the gaining or production of exempt income.
74. In short, the making of a claim constitutes a representation that as a matter of law the claimant is entitled to the deduction he seeks. If he is not so entitled then a situation will arise in which ``the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if (he) were assessed on the basis that'' the assertions he had made were accurate. But if that alone is enough to satisfy the requirements of the section, then the effect of the section is to require a taxpayer to warrant in all respects the accuracy of his return. That would cast an extraordinarily high measure of responsibility on all citizens. If the view was taken that a ``statement'' in that context included assertions as to tax entitlement or obligation consequent on things done, citizens would be liable to penalties for not correctly knowing the law when even judges of the High Court of Australia might disagree as to what the law is. Further, such a view of the law would run
ATC 573
counter to the terms of sec. 170(3) of the Act previously mentioned which - with emphasis added - provides that:``(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact;...''
75. However, on the other hand, it would render sec. 223 of the Act almost entirely without effect if too narrow a view was taken of the scope of the term ``statement''. If a deduction is claimed in a return for ``interest $2,000'', there is nothing false or misleading about the fact that that is the claim being made. Such a narrow and unreasonable construction is not to be supported. It would not reflect the common sense which is said to characterise the common law.
76. Rather it is to be recognised that the statements to which the section refers relate to the actions of the taxpayer in providing information usually either in the course of submitting himself to tax or in response to queries raised by the Commissioner in the course of the assessment process. Whether the information be provided in voluntary compliance with a legal obligation to submit a return of income, or in response to particular queries raised by the officers of the Commissioner, the process of disclosure by the taxpayer requires a submission to the Commissioner by the taxpayer of information as to things done so that they may be evaluated by the Commissioner as to their significance for tax purposes and thereby enable him to effect a correct assessment of ``tax properly payable''. That process operates on the basis that the taxpayer has an obligation to disclose to the Commissioner the facts, meaning only the material facts but all of the material facts, relevant to his assessment. It follows in my view that the essential objective of the section is to provide for the penalisation of those who mislead, or endeavour to mislead, the Commissioner and his officers, by either act or omission, if, not being detected, such action or omission would result in the tax payable by the taxpayer being less than the tax properly payable.
77. But there is no scope for the application of penalty tax unless either the ``... statement... is false or misleading in a material particular'' or the taxpayer ``omits from a statement... any matter or thing without which the statement is misleading in a material particular''. It will not matter if a statement which is not so misleading is presented and that statement is then made the basis of an unsound claim to a deduction or of an unjustifiable assertion that the moneys received did not constitute assessable income.
78. Before proceeding to a consideration in detail of the particular penalties imposed it is appropriate to observe that, but for remissions, the penalty for each mis-statement would automatically be 200% of the amount by which ``the tax properly payable... exceeds the tax that would have been payable... if it were assessed on the basis that the statement were not false or misleading''. Allowing for a tax rate of 60c in each dollar the penalties might have been, and the penalties which were actually imposed, were as follows:
Sec. 223(1) Penalty
Item Item penalty assessed
$ $ $
Service fees 3,820 4,584 1,035
Horse-training 1,030 1,236 279
Commercial bills 16,161 19,394 4,379
Repairs & depreciation 38,284 45,940 10,373
Borrowing expenses 997 1,196 270
------- ------- -------
$60,292 $72,350 $16,336
------- ------- -------
79. However, regard needs to be had to the circumstance that increased tax levied by the assessment was not $36,175.20 (60% of $60,292); that was because the Commissioner, at the same time, allowed further deductions of $6,920. As a result, the tax increase was limited to $32,023.20 (60% of $53,372: $60,292 less $6,920). Further, I find that in
ATC 574
calculating the amount of additional tax to be levied, the Commissioner calculated by reference to the net increase in tax. The result was calculated as follows: Net increase in tax $32,023.20
----------
Additional tax on $32,023
(a) for 201 days at 20% p.a. 3,526.91
(b) at 40% 12,809.20
.(11)
----------
$16,336.00
----------
80. In following that method, in so far as a compensation factor was calculated, it was appropriate that regard should be had to the period of actual loss of funds to the revenue. On the other hand, as to any culpability factor, whether any such temporal loss was occasioned to the revenue is of less significance.
Penalty: Horse trainer's fees
81. The applicant presented with his income tax return a balance sheet supported by two profit and loss statements: one relating to his professional practice and the other to primary production. The balance sheet recorded sheep, cattle and horses on hand at $12,763, $8,060 and $800 respectively; and identified fixed assets as including plant and equipment (farm) $42,119 and two freehold properties. The profit and loss statement relating to primary production recorded gross profit from both sheep and cattle; wool proceeds; hay and fodder proceeds; and sundry income, to give a total assessable income from that class of activity of $21,355. Against that expenses of $154,269 were claimed under 37 distinct heads. One such item of expense appeared as ``horse trainer's fees $1,030''. The representation so made in claiming the deduction was, to say the least, not made clearly. I have found that the amount claimed was a net amount which represented the net loss to the applicant from horse racing activities conducted by a syndicate. By omitting reference to the syndicate; to its alleged assessable income and its expenses, the statement was misleading. But, if the statement had had no effect on the calculation of tax properly payable, no liability to additional tax would have arisen. 200% of nothing is still nothing.
82. However, those were not the only respects in which the statement was misleading. In presenting the claim as he did, he represented that the expenses were incurred as costs of primary production activities. It was not so. The expenses in relation to horses did not arise out of the conduct of primary production activities but out of horse racing activities. Again, that error would have been of no significance if the incorrect reference had had no effect on tax properly payable. However, it was not so in relation to ``horse training''. The ``horse training'' activities had no tax significance. Receipts were not assessable income and the expenses were not allowable deductions. If the income tax return had disclosed that there was a syndicate; that it had derived assessable income from racing one or more horses, that it had incurred expenses in doing so; and had resulted in a claim that the loss from syndicate activities incurred by the applicant was properly allowable as a deduction, in my view there would have been no false or misleading statement involved. But it was misleading to attribute the amount claimed as an expense incurred in primary production dealing with cattle, sheep and crops on two parcels of real estate; and in my view deliberately so.
Penalty: Depreciation
83. I next turn to consider the depreciation issues. The statements that the nominated items had been purchased at the prices recorded were correct. Those statements were not false or misleading in any way. Nor was there anything false or misleading about the fact that the ``plant'' was situate on farm property. But there was a significant omission which was misleading in a material particular. The applicant failed to disclose that the only use to which the plant had been put was for use by and for the accommodation of the applicant and his family. On the other hand, there would not have been anything misleading if he had reported the acquisition of the plant and truthfully stated that it had all been installed ready for the manager; and that, pending his appointment, it had been used occasionally by the applicant and his family.
Penalty: Repairs
84. I next address the question of ``repairs'' and observe that it is not necessary that the applicant should have advanced any assertions as to whether the amounts claimed were allowable by force of sec. 51 or 53 of the Act.
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Further, I have found that the expenditure claimed was incurred and that the description ``repairs and maintenance'' was accurate in so far as I have found that what was carried out did constitute ``repairs'' (cf. para. 44). The difficulty in relation to this aspect of the matter is whether it was an obligation of the applicant to disclose so much additional information as would invite the Commissioner's attention to the possibility of disallowing the claimed repairs by reason of a rule of law which treats expenses of repair incurred so soon after acquisition of an asset as capital expenses. I think it was. I have not reached that conclusion without difficulty and I am conscious of the problems advisers will face in dealing with such matters. However, I am satisfied that the view I have expressed is a necessary consequence of the overall view of the provisions which I have formed. The moral would seem to be:``If in doubt, disclose: or risk penalties.''
That does not seem to be unreasonable since the correct assessment of tax properly payable does require that the assessor should know of all the facts necessary to effect the correct assessment.
Penalty: The costs of finance
85. In so far as the applicant claimed an excessive deduction for the costs incurred in relation to the second bill of exchange: the second ``commercial bill'', his presentation of the claim can be characterised as misleading in two respects. The first is that the expense was described as ``interest'', a term not the most appropriate to describe the expense incurred by reason of resort to financing by bills of exchange. However, whatever criticisms of terminology may be appropriate, they have no significance in relation to sec. 223 because the choice of terminology would not have occasioned a situation in which ``the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading...''.
86. The second incorrect representation is more significant. It was a representation that the expense so claimed was incurred during the year of income ended 30 June 1985. I have held that that representation was incorrect as to the discount factor ($14,305.60). I hold that, by representing that that expense was borne in the year of income ended 30 June 1985, the applicant was making a statement which was false or misleading in a material particular. Had the error not been identified by an assessor, a situation would have arisen in which the tax properly payable would have exceeded that payable had the return been assessed as presented. But that would have occasioned no permanent detriment to the revenue. In this instance the evidence satisfied me that although the $14,305.60 claim was not allowable in the 1985 year, it would have been allowable in the following year. On the other hand, the bank's fees ($1,495.89) and stamp duty ($360) were incurred and are allowable. Further, as to penalty, any error in description of those expenses would not have led to an underpayment of tax. Accordingly, to that extent additional tax should be set aside.
Penalty: Service fees
87. The failure to disclose the circumstances which caused the element of expense not to be allowable was misleading, and seriously so.
Penalty: Borrowing costs
88. I have no information as to the circumstances represented to the Commissioner beyond the fact that a claim was made; it was disallowed; and the disallowance was not objected to.
Penalties: Conclusions
89. I have already said the Act requires that the question of remissions be considered whenever there is a liability to additional tax; and that liability to additional tax is to be determined appropriately having regard to each statement which gives rise to any liability for additional tax.
90. In this instance the Commissioner had adopted an ``en globo'' approach. In my view, in doing so, he fell into error in that he failed to distinguish between the gravity of the several mis-statements. Each erroneous statement contributed to a loss of revenue or potential loss of revenue to the Commonwealth. In the case of commercial bill expenses, the loss was to only be for a limited period: something of the order of 201 days as calculated by the Commissioner. As to that, I accept that the error was induced by a quite understandable misunderstanding as to the law - something very relevant to the assessment of penalty (
Trautwein v. F.C. of T. (1935-1936) 56 C.L.R. 196 at p. 209).
ATC 576
I think in that regard the error is far less culpable than in the other cases. On the other hand, I find the manner of misrepresentation as to horse trainer's fees and service fees to be more deserving of criticism than any of the mis-statements as to ``repairs'' or depreciation. That is so despite the far greater size of the ``repairs'' issue. Use of an approach to assessment based on percentages of tax avoided automatically takes factors as to quantum into account. As to the matter of ``borrowing expenses'' no information has been advanced which would indicate whether or not the imposition was unreasonable.91. Generally, in considering the matter of penalties, I am conscious that these penalties were imposed relatively soon after the introduction of the new legislation; and that this decision will be, as I understand it, the first occasion upon which the Commissioner's exercise of discretion under the new legislation has been the subject of any independent review. On the other hand, I also take into account the circumstance that, as early as 11 March 1985, the Commissioner had published to the world his ruling: Taxation Ruling IT 2141 ``False or Misleading Statement'' - in which he had expressed his concept of what constitutes a false or misleading statement; and that on 31 October 1985 - shortly prior to lodgment of the return in question - he had issued his ruling as to remissions pursuant to sec. 223: Taxation Ruling IT 2206. In that regard, I also accept that the community was on notice that the Commissioner had previously issued rulings laying down norms for his staff in the exercise of discretion as to remission of additional tax. It is not to be expected that taxpayers as a whole should be directly aware of such announcements and directions by the Commissioner. But professional tax advisers should have been aware of such matters.
92. In carrying out a review of the manner in which the Commissioner discharged his responsibility so as to effect remissions of additional tax for incorrect returns, I apply the principles expressed in Case U36, 87 ATC 266 which have been applied in many cases since. Applying those principles I find no scope for the application of a culpability factor in relation to the claims touching the ``commercial bills'' - now reduced from $16,161 disallowed to $14,305 disallowed. In my view, it is sufficient that the revenue should be compensated for what it lost, namely the use of funds for a period of 201 days taken into account by the Commissioner. I think that, despite its commercial severity, the rate proposed by sec. 207 in relation to unpaid tax in the period in question (namely 20% per annum) is appropriate. By that means the same result for the Commonwealth will have been achieved as if the tax had been correctly assessed originally and had remained overdue and unpaid for 201 days.
93. As to the matters of depreciation and repairs: in my judgment the matters are much more culpable, without being so blameworthy as the deliberate concealment of derivation of assessable income: something which, even when reflected in a prolonged and habitual pattern of conduct, does not often attract any higher culpability factor than the 40% of tax avoided which was imposed in this instance. In all the circumstances, I think that a culpability factor of 25% of tax avoided, in addition to a compensatory rate of 20% per annum of tax avoided is fair and reasonable. In addition, a reduction must be effected in consequence of reducing taxable income by $402.
94. As to horse trainer's fees ($1,030) and service fees ($3,820) I consider culpability to be greater than in relation to any other item. Accordingly, I would not disturb the penalty imposed by the Commissioner. As to borrowing expenses ($997), no basis at all has been advanced for altering penalty.
95. For all of the foregoing reasons I have concluded that additional tax should first be calculated as follows:
- (a) There will be no reduction in relation to:
Service fees $1,305 Horse training fees 279 Borrowing expenses 270 - (b) The penalty of $4,378 in relation to the commercial bill items (adjusted to $14,305) calculated as a function of tax avoided being $32,023 will be reduced to its proportion of that figure and limited to 20% per annum for the 201 days calculated by the Commissioner:
14,305/60,292 x $32,023 x 20/100 x 201/365 = $837
- a reduction of $3,541.
- (c) The penalty of $10,372 in relation to the repairs and depreciation items (adjusted by
ATC 577
$402 to $37,882) calculated as a function of tax avoided being $32,023 will be reduced similarly but only so as to reduce the culpability factor to 25%. The penalty shall therefore be:37,882/60,292 x $32,023 x 20/100 x 201/365 = $2,216 PLUS 37,882/60,292 x $32,023 x 25/100 = $5,030 ------- $77,322 -------
- a reduction of $3,127.
96. The calculations so made give a mathematical precision to what should be essentially an exercise of judgment. The calculations are most helpful in that task but they do not determine the character of that judgment. That being so I will direct that, instead of strictly following the calculations and reducing additional tax from $16,336 to $9,667, it shall be reduced to $9,600.
97. The result will be that I will direct that the determination of the Commissioner upon the objection under review shall be varied and that:
- (a) taxable income shall be reduced from $144,442 to $142,184; and
- (b) additional tax shall be reduced from $16,336 to $9,600.
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