Decision Impact Statement
Mold, Stephen and Commissioner of Taxation
 AATA 823
2011 ATC 10-220
83 ATR 233
Venue: Administrative Appeals Tribunal
Venue Reference No: 2008/1691, 2009/0559-60
Judge Name: Senior Member Frank O'Loughlin
Judgment date: 18 November 2011
Appeals on foot: No.
Decision Outcome: Partially Adverse
Administrative Treatment (Implication on current Public Rulings and Determinations)
MT 2008/3 (now replaced by MT 2011/D3 for voluntary disclosures after 4 July 2010)MT 2011/D3
Claim for input tax credits
Substitute substantiation evidence when original invoices lost
Penalty - Reduction for voluntary disclosure
Outlines the ATO response to this case about the use of substantiation evidence and the imposition and reduction of penalties where a taxpayer has made voluntary disclosure after the commencement of an audit
Brief Summary of Facts
In partnership with his wife, the applicant conducted a cabinet making business. The dispute concerned the period from 1 April 2003 to 31 December 2005, in relation to the goods and services tax ("GST") liabilities ("the GST period in dispute") and the years ended 30 June 2003 and 2004, for the income tax liabilities ("the IT period in dispute"). The Applicant's input tax credit ("ITC") claims during the GST period in dispute included ITCs of $35,000 in relation to the acquisition of a factory in the December 2005 quarter BAS.
The ATO contacted the applicant on 12 January 2006 and offered the opportunity to make a voluntary disclosure of any problems with the December 2005 quarter BAS. On 17 January 2006, the applicant made a request to amend his BAS, as payments had come through which should have been attributed to the period ended 31 December 2005. On 23 January 2006, the applicant advised the Commissioner that the BAS amounts should also be changed to reflect the fact that the factory sale had not happened.
Following the audit of the partnership business and the applicant's income tax affairs, the Commissioner assessed GST shortfalls associated with what the Commissioner contended were over claimed ITCs, GST shortfall penalties, income tax shortfalls associated with what the Commissioner contended were claims for deductions for business expenses which were not allowable, and income tax shortfall penalties.
GST Issues The Commissioner disallowed ITCs claimed by the Applicant resulting in a shortfall of $63,060. The Commissioner also imposed penalties of 50% in relation to the ITC claim related to the factory and 25% in relation to the other ITC claims.
IT Issues The Commissioner disallowed deductions claimed by the Applicant resulting in an income tax shortfall of $753 for the year ended 30 June 2003. The Commissioner also disallowed deductions in the 2004 year which resulted in the reduction of carried forward losses to $12,002 for that income year. The Commissioner also imposed penalties of 25% for lack of reasonable care in relation to claiming deductions for business expenses to which he was not entitled.
Reduction of penalty Pursuant to section 284-225 of Schedule 1 to the Taxation Administration Act 1953 the Commissioner granted a 20% reduction of the penalties relating to the factory sale on account of the applicant's voluntary disclosure.
Issues decided by the Tribunal
For the GST periods in dispute SM O'Loughlin varied the assessments issued by the Commissioner to allow input tax credits corresponding to 72.87% of GST on sales revenue. This was based on evidence that the Applicant held invoices in previous periods. SM O'Loughlin upheld the income tax assessments and also upheld the penalties that had been imposed subject to one variation. The decision that the assessments should be varied was based on the following:
- It was clear that the applicant was not entitled to all of the ITCs claimed because at least some acquisitions were for a non-creditable purpose (para 29);
- While the tax invoices the applicant held for the relevant tax periods were lost while attempting to provide them to the Commissioner by post, documentation, including tax invoices held for earlier periods, indicated that the applicant did hold tax invoices when the relevant BAS were lodged to support at least some of the ITCs claimed (paras 13; 30);
- Use of an industry range was not an appropriate surrogate in these circumstances as the applicant's serious illness had undoubted impact on his business activities and capabilities - an allowance of more than the industry average was appropriate (para 31);
- Given that conclusion, a method of determining an appropriate amount of ITCs based on proportion of cost of goods sold to sales revenue in an earlier period was inappropriate,
- Having regard to the fact that the same business expenditures were in question, it was appropriate for consistency between the income tax deduction allowed and ITCs (paras 32-34).
In relation to the Applicant's voluntary disclosure regarding the factory sale SM O'Loughlin found that the facts warranted an 80% rather than 20% reduction of the penalty that had been imposed pursuant to subsection 284-225(1). 'An 80% reduction in penalty was allowed because it was appropriate, on balance, for the applicant to be treated as having made a disclosure before being informed that a tax audit was to be conducted (in accordance with Miscellaneous Taxation Ruling MT 2008/3). It is noted that MT 2008/3 has been withdrawn and replaced with MT 2011/D3.
The findings of fact included that the Applicant (1) held invoices at the relevant time corresponding to ITCs greater than those that had been allowed and (2) had attempted to provide these invoices to the ATO however they were lost in transit; and (3) the applicant had suffered serious illness that had had undoubted impact on his business activities and capabilities.
ATO view of Decision
The ATO accepts that this decision was open to the Tribunal due to the particular facts and circumstances of this case and the evidence presented during the hearing.
The ATO does not accept as a general principle that there will always be consistency between deductions and input tax credits due to the different laws applying to the different taxes. The relevant Acts for income tax and GST have a number of different criteria for the allowance of deductions and input tax credits, and each case needs to be looked at individually to determine the allowance of relevant amounts.
The ATO also accepts that the penalty decision was open to the Tribunal on the particular facts and circumstances of the case, and the evidence presented. However, the ATO notes that, in relation to penalty, the Tribunal considered the case marginal and that the voluntary disclosure decision was made "on balance".
Implications for ATO precedential documents (Public Rulings & Determinations etc) / Implications for Law Administration Practice Statements
We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer.
| Date Issued:
||16 February 2012
| Due Date:
||12 April 2012
| Contact officer:
| Email address:
||08 9268 5171
||08 9268 5250
||45 Francis Street, Northbridge Western Australia 6003
A New Tax System (Goods and Services Tax) Act 1999
Taxation Administration Act 1953