Decision impact statement
The Employed Accountant and Commissioner of Taxation
Venue: Administrative Appeals Tribunal
Venue Reference No: 2009/2599-2603
Judge Name: Deputy President Frost
Judgment date: 6 November 2012
Appeals on foot: No.
Decsion Outcome: Adverse
Impacted Advice
Relevant Rulings/Determinations:- Nil
- Nil
Subject References:
Burden of proof
Misappropriated funds
Interest deductions in connection with rental properties
Deductions in relation to a loan to employer
Penalties for intentional disregard
Précis
Outlines the ATO's response to this case which primarily concerned whether reasonably regular deposits made into the taxpayer's bank account constituted assessable income of the taxpayer.
Brief summary of facts
During the income years under review, the taxpayer (an accountant) undertook a regular practice of altering clients' cheques which were drawn in favour of the ATO so that they could be deposited into his own bank account.
The taxpayer also altered the client's BAS (without their knowledge) to show a lower liability, and paid the lower amount to the ATO. The taxpayer claimed that he undertook this practice on the instruction of his employer, who asked him to hand over the net difference in cash. There was no evidence to show that the amounts were paid to his employer.
The Commissioner assessed the taxpayer on the basis that the amounts retained were assessable income to him. In doing so, the Commissioner relied on statements from the taxpayer that the amounts were derived in the course of his bookkeeping business.
During the hearing it became clear that the amounts were not derived from performing bookkeeping services but were instead obtained from the practice of altering clients' cheques.
The taxpayer submitted before the Tribunal that on the basis that he was collecting these amounts on behalf of his employer, he was not beneficially entitled to the amounts, and therefore he had derived no assessable income.
During the relevant years the taxpayer owned rental properties. He purchased a property in 2002 and borrowed the entire purchase price. He sold that property in 2004 and used the proceeds towards the purchase of a second property. Both properties have been income producing.
The taxpayer claimed interest deductions in relation to loans used to finance the purchase of rental properties.
The Commissioner imposed penalties of 75% on the resulting shortfall on the basis that there was intentional disregard.
Issues decided by the court/Tribunal
1. The misappropriated amounts deposited in the taxpayer's bank account did not constitute assessable income of the taxpayer because the taxpayer was not beneficially entitled to those amounts.
2. The taxpayer was entitled to a deduction for interest payments in respect of loans used to purchase rental properties.
3. The penalties imposed and not remitted were appropriate in the circumstances.
ATO view of Decision
The Tribunal's decision will have no impact on other cases.
Administrative Treatment
Implications for ATO precedential documents (Public Rulings & Determinations etc)
Nil
Implications for Law Administration Practice Statements
Nil
Court citation:
[2012] AATA 770
2012 ATC 1-049
(2012) 91 ATR 217
Legislative References:
Income Tax Assessment Act 1997
8-1
25-35
32-45
Taxation Administration Act 1953
14ZZK
284-75
284-90
298-20
Case References:
A Taxpayer v Commissioner of Inland Revenue
[1997] NZCA 135
(1997) 18 NZTC 13,350
Countess of Bective v Federal Commissioner of Taxation
(1932) 47 CLR 417
Danmark Pty Ltd v Federal Commissioner of Taxation
(1944) 7 ATD 333
Federal Commissioner of Taxation v Dalco
[1990] HCA 3
(1990) 168 CLR 614
(1990) 20 ATR 1370
90 ATC 4088
George v Federal Commissioner of Taxation
[1952] HCA 21
(1952) 86 CLR 183
Zobory v Commissioner of Taxation
(1995) 64 FCR 86
30 ATR 412
95 ATC 4251