Employee Investment Co Pty Ltd and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2007/1401)
Judgment date: 20 May 2009
Date published: 23 October 2009
Decision outcome: Partially unfavourable

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether amounts deposited into a taxpayer's bank account represented consideration for taxable supplies. Whether a penalty for recklessly failing to declare the taxable supply was correctly applied.

Overview of facts:
• In each of its BASs for the quarterly tax periods 1 July 2001 to 31 December 2003 ('the relevant tax periods') the Applicant declared nil activity. • The Respondent issued Notices of Assessment of Net Amount on the basis that amounts deposited to the Applicant's bank account were consideration received for making taxable supplies. The Respondent assessed a shortfall for each quarter, with the total shortfall amounting to $341,040. • Additionally, the Respondent issued a Notice of Assessment of penalty of 50% of the shortfall amounts for each of the relevant tax periods, for recklessness as to the operation of a taxation law, pursuant to item 2 of s 284-90(1) of the Taxation Administration Act 1953. The base penalty amount of 50% was increased by 20%. (This 20% increase in penalty was abandoned by the Respondent in the course of the hearing before the Tribunal.) • The Applicant objected to the GST assessments and the penalty assessment. • The Respondent allowed the objection in part for the quarter ending 31 December 2003 by reducing the tax shortfall by $228,573, but disallowed the remainder. The penalty percentage rate was not reduced but the total penalty payable was reduced from $204,624 to $67,470.20 as a consequence of the reduction in net amount. • The Applicant applied to the Tribunal for a review of the objection decision. • The Applicant contended that a significant proportion of amounts received were not consideration for taxable supplies and were not subject to GST (being loans, damages paid arising from litigation, rent received from commercial premises, reimbursements made to the Applicant and consideration arising from the refinancing of a mortgage). The Applicant also claimed that, in any event, it was entitled to input tax credits (ITCs) which would offset any GST payable on supplies. • The Respondent contended that the Applicant had not discharged its onus to establish that the GST assessments were excessive and that by failing to declare any amounts in its BASs, the Applicant had approached its tax obligations in a reckless manner. | • In each of its BASs for the quarterly tax periods 1 July 2001 to 31 December 2003 ('the relevant tax periods') the Applicant declared nil activity. • The Respondent issued Notices of Assessment of Net Amount on the basis that amounts deposited to the Applicant's bank account were consideration received for making taxable supplies. The Respondent assessed a shortfall for each quarter, with the total shortfall amounting to $341,040. • Additionally, the Respondent issued a Notice of Assessment of penalty of 50% of the shortfall amounts for each of the relevant tax periods, for recklessness as to the operation of a taxation law, pursuant to item 2 of s 284-90(1) of the Taxation Administration Act 1953. The base penalty amount of 50% was increased by 20%. (This 20% increase in penalty was abandoned by the Respondent in the course of the hearing before the Tribunal.) • The Applicant objected to the GST assessments and the penalty assessment. • The Respondent allowed the objection in part for the quarter ending 31 December 2003 by reducing the tax shortfall by $228,573, but disallowed the remainder. The penalty percentage rate was not reduced but the total penalty payable was reduced from $204,624 to $67,470.20 as a consequence of the reduction in net amount. • The Applicant applied to the Tribunal for a review of the objection decision. • The Applicant contended that a significant proportion of amounts received were not consideration for taxable supplies and were not subject to GST (being loans, damages paid arising from litigation, rent received from commercial premises, reimbursements made to the Applicant and consideration arising from the refinancing of a mortgage). The Applicant also claimed that, in any event, it was entitled to input tax credits (ITCs) which would offset any GST payable on supplies. • The Respondent contended that the Applicant had not discharged its onus to establish that the GST assessments were excessive and that by failing to declare any amounts in its BASs, the Applicant had approached its tax obligations in a reckless manner. | Issues decided by the tribunal | Deposits that the Applicant contended were loans | • The Tribunal accepted that deposits totalling $29,500 were amounts loaned to the Applicant by Ms Turberville (a director and shareholder of the Applicant) and were not subject to GST. The Tribunal accepted Ms Turberville's evidence that she deposited amounts of $500 into the Applicant's account every fortnight from her salary by way of an interest free loan that was repayable on demand. A backdated document evidencing the loan was considered unreliable, but Commonwealth Bank (CBA) statements verified the source of the payments as being from Ms Turberville. The form regularity of the fortnightly payments as well as the CBA bank statements constituted independent confirmatory evidence. The evidence satisfied the Tribunal that, on the balance of probabilities, the Applicant had established that the amounts were deposited by Ms Turberville as loans to the Applicant. • The Tribunal accepted that deposits totalling $60,000 were amounts loaned to the Applicant by Mrs Fitton, interest free and payable on demand and were not subject to GST. The Tribunal accepted Mrs Fitton's evidence, supported by confirmation in the CBA bank statements that the drawer of the cheques deposited was 'JM Fitton'. An acknowledgement of the loan, prepared by Mrs Fitton and signed by both Mr and Mrs Fitton, was also produced. • In relation to deposits totalling $227,230.56: - Deposits in the amount of $38,491 were held to represent consideration received for taxable supplies and were subject to GST. There was no supporting documentation, such as a loan agreement, or receipt or acknowledgement issued by the Applicant, to show that the amounts were in fact loans to the Applicant. - The Tribunal found that a deposit in the amount of $188,739.56 made on 26 November 2003 represented a deposit by way of loan made by Mr Fitton and therefore did not represent a taxable supply. Mr Marotta from the National Australia Bank (NAB) gave evidence that the money came from Mr Fitton's own funds. The timing of the deposit suggested that it was connected with the repayment of a debt owed to the NAB. • The Tribunal was satisfied that an amount of $186,242.60 was a loan made to the Applicant in order to repay amounts outstanding to the NAB and did not represent consideration for a taxable supply. Letters confirmed the existence of an ongoing facility which was related to two deposits (of $1,514,303.36 and $186,242.60 on 26 November 2003) made from the CBA and its subsidiary as part of a refinancing arrangement with the NAB (the deposit of $1,514,303.36 having been accepted by the Respondent as being made for this purpose). The Applicant's CBA account for that date also recorded establishment fees and other costs being debited to the Applicant's account, as well as a payment to the NAB of $1,932,982.65. | • The Tribunal accepted that deposits totalling $29,500 were amounts loaned to the Applicant by Ms Turberville (a director and shareholder of the Applicant) and were not subject to GST. The Tribunal accepted Ms Turberville's evidence that she deposited amounts of $500 into the Applicant's account every fortnight from her salary by way of an interest free loan that was repayable on demand. A backdated document evidencing the loan was considered unreliable, but Commonwealth Bank (CBA) statements verified the source of the payments as being from Ms Turberville. The form regularity of the fortnightly payments as well as the CBA bank statements constituted independent confirmatory evidence. The evidence satisfied the Tribunal that, on the balance of probabilities, the Applicant had established that the amounts were deposited by Ms Turberville as loans to the Applicant. • The Tribunal accepted that deposits totalling $60,000 were amounts loaned to the Applicant by Mrs Fitton, interest free and payable on demand and were not subject to GST. The Tribunal accepted Mrs Fitton's evidence, supported by confirmation in the CBA bank statements that the drawer of the cheques deposited was 'JM Fitton'. An acknowledgement of the loan, prepared by Mrs Fitton and signed by both Mr and Mrs Fitton, was also produced. • In relation to deposits totalling $227,230.56: - Deposits in the amount of $38,491 were held to represent consideration received for taxable supplies and were subject to GST. There was no supporting documentation, such as a loan agreement, or receipt or acknowledgement issued by the Applicant, to show that the amounts were in fact loans to the Applicant. - The Tribunal found that a deposit in the amount of $188,739.56 made on 26 November 2003 represented a deposit by way of loan made by Mr Fitton and therefore did not represent a taxable supply. Mr Marotta from the National Australia Bank (NAB) gave evidence that the money came from Mr Fitton's own funds. The timing of the deposit suggested that it was connected with the repayment of a debt owed to the NAB. • The Tribunal was satisfied that an amount of $186,242.60 was a loan made to the Applicant in order to repay amounts outstanding to the NAB and did not represent consideration for a taxable supply. Letters confirmed the existence of an ongoing facility which was related to two deposits (of $1,514,303.36 and $186,242.60 on 26 November 2003) made from the CBA and its subsidiary as part of a refinancing arrangement with the NAB (the deposit of $1,514,303.36 having been accepted by the Respondent as being made for this purpose). The Applicant's CBA account for that date also recorded establishment fees and other costs being debited to the Applicant's account, as well as a payment to the NAB of $1,932,982.65. | - Deposits in the amount of $38,491 were held to represent consideration received for taxable supplies and were subject to GST. There was no supporting documentation, such as a loan agreement, or receipt or acknowledgement issued by the Applicant, to show that the amounts were in fact loans to the Applicant. - The Tribunal found that a deposit in the amount of $188,739.56 made on 26 November 2003 represented a deposit by way of loan made by Mr Fitton and therefore did not represent a taxable supply. Mr Marotta from the National Australia Bank (NAB) gave evidence that the money came from Mr Fitton's own funds. The timing of the deposit suggested that it was connected with the repayment of a debt owed to the NAB. | Deposits that the Applicant contended were damages | The Tribunal held that the Applicant did not discharge its onus of proof; it did not produce any documentation which substantiated the deposits as arising from damages paid from the settlement of a NSW Supreme Court action as asserted by the Applicant. However, in relation to a deposit of $50,000 made into the Applicant's account on 11 September 2002, the Tribunal found that it was not consideration for a taxable supply, as it represented either a loan from Mr Fitton or payment of damages awarded to the Applicant. This was supported by evidence of a bank cheque dated 9 September 2002 payable to Mr Fitton and an accompanying email from Mr Fitton requesting that the cheque be paid to the Applicant. | Legal expenses that the applicant contended were incurred by it and therefore gave rise to an entitlement to input tax credits | The Tribunal was unable to accept that the cost of litigation undertaken in the Supreme Court of NSW was incurred by Mr Fitton on behalf of the Applicant and that he was acting as the undisclosed agent for the Applicant in those proceedings. | Deposits that the Applicant contended were reimbursements for costs | The Applicant did not discharge its onus of proof - noting that it did not produce sufficient evidence, such as receipts or claim forms - to substantiate that these amounts represented reimbursement of costs met by the Applicant on behalf of companies which marketed the Applicant's services. | Deposits that the Applicant contended were rental payments | The Applicant conceded that the payment of commercial rent totalling $54,318.82 amounted to consideration for an undeclared taxable supply. | The Applicant's concession regarding the value of consideration for taxable supplies | The Applicant accepted at the hearing that an amount of $632,245.13 was received as consideration for taxable supplies and that gave rise to a GST liability of $57,476.83. | Assessment of Penalty | • The Tribunal determined that the Applicant was reckless in declaring nil activity in its BASs during the relevant tax periods. • The Tribunal decided that no part of the 50% penalty should be remitted. | • The Tribunal determined that the Applicant was reckless in declaring nil activity in its BASs during the relevant tax periods. • The Tribunal decided that no part of the 50% penalty should be remitted.

Issues decided:
Deposits that the Applicant contended were loans • The Tribunal accepted that deposits totalling $29,500 were amounts loaned to the Applicant by Ms Turberville (a director and shareholder of the Applicant) and were not subject to GST. The Tribunal accepted Ms Turberville's evidence that she deposited amounts of $500 into the Applicant's account every fortnight from her salary by way of an interest free loan that was repayable on demand. A backdated document evidencing the loan was considered unreliable, but Commonwealth Bank (CBA) statements verified the source of the payments as being from Ms Turberville. The form regularity of the fortnightly payments as well as the CBA bank statements constituted independent confirmatory evidence. The evidence satisfied the Tribunal that, on the balance of probabilities, the Applicant had established that the amounts were deposited by Ms Turberville as loans to the Applicant. • The Tribunal accepted that deposits totalling $60,000 were amounts loaned to the Applicant by Mrs Fitton, interest free and payable on demand and were not subject to GST. The Tribunal accepted Mrs Fitton's evidence, supported by confirmation in the CBA bank statements that the drawer of the cheques deposited was 'JM Fitton'. An acknowledgement of the loan, prepared by Mrs Fitton and signed by both Mr and Mrs Fitton, was also produced. • In relation to deposits totalling $227,230.56: - Deposits in the amount of $38,491 were held to represent consideration received for taxable supplies and were subject to GST. There was no supporting documentation, such as a loan agreement, or receipt or acknowledgement issued by the Applicant, to show that the amounts were in fact loans to the Applicant. - The Tribunal found that a deposit in the amount of $188,739.56 made on 26 November 2003 represented a deposit by way of loan made by Mr Fitton and therefore did not represent a taxable supply. Mr Marotta from the National Australia Bank (NAB) gave evidence that the money came from Mr Fitton's own funds. The timing of the deposit suggested that it was connected with the repayment of a debt owed to the NAB. • The Tribunal was satisfied that an amount of $186,242.60 was a loan made to the Applicant in order to repay amounts outstanding to the NAB and did not represent consideration for a taxable supply. Letters confirmed the existence of an ongoing facility which was related to two deposits (of $1,514,303.36 and $186,242.60 on 26 November 2003) made from the CBA and its subsidiary as part of a refinancing arrangement with the NAB (the deposit of $1,514,303.36 having been accepted by the Respondent as being made for this purpose). The Applicant's CBA account for that date also recorded establishment fees and other costs being debited to the Applicant's account, as well as a payment to the NAB of $1,932,982.65. • The Tribunal accepted that deposits totalling $29,500 were amounts loaned to the Applicant by Ms Turberville (a director and shareholder of the Applicant) and were not subject to GST. The Tribunal accepted Ms Turberville's evidence that she deposited amounts of $500 into the Applicant's account every fortnight from her salary by way of an interest free loan that was repayable on demand. A backdated document evidencing the loan was considered unreliable, but Commonwealth Bank (CBA) statements verified the source of the payments as being from Ms Turberville. The form regularity of the fortnightly payments as well as the CBA bank statements constituted independent confirmatory evidence. The evidence satisfied the Tribunal that, on the balance of probabilities, the Applicant had established that the amounts were deposited by Ms Turberville as loans to the Applicant. • The Tribunal accepted that deposits totalling $60,000 were amounts loaned to the Applicant by Mrs Fitton, interest free and payable on demand and were not subject to GST. The Tribunal accepted Mrs Fitton's evidence, supported by confirmation in the CBA bank statements that the drawer of the cheques deposited was 'JM Fitton'. An acknowledgement of the loan, prepared by Mrs Fitton and signed by both Mr and Mrs Fitton, was also produced. • In relation to deposits totalling $227,230.56: - Deposits in the amount of $38,491 were held to represent consideration received for taxable supplies and were subject to GST. There was no supporting documentation, such as a loan agreement, or receipt or acknowledgement issued by the Applicant, to show that the amounts were in fact loans to the Applicant. - The Tribunal found that a deposit in the amount of $188,739.56 made on 26 November 2003 represented a deposit by way of loan made by Mr Fitton and therefore did not represent a taxable supply. Mr Marotta from the National Australia Bank (NAB) gave evidence that the money came from Mr Fitton's own funds. The timing of the deposit suggested that it was connected with the repayment of a debt owed to the NAB. • The Tribunal was satisfied that an amount of $186,242.60 was a loan made to the Applicant in order to repay amounts outstanding to the NAB and did not represent consideration for a taxable supply. Letters confirmed the existence of an ongoing facility which was related to two deposits (of $1,514,303.36 and $186,242.60 on 26 November 2003) made from the CBA and its subsidiary as part of a refinancing arrangement with the NAB (the deposit of $1,514,303.36 having been accepted by the Respondent as being made for this purpose). The Applicant's CBA account for that date also recorded establishment fees and other costs being debited to the Applicant's account, as well as a payment to the NAB of $1,932,982.65. - Deposits in the amount of $38,491 were held to represent consideration received for taxable supplies and were subject to GST. There was no supporting documentation, such as a loan agreement, or receipt or acknowledgement issued by the Applicant, to show that the amounts were in fact loans to the Applicant. - The Tribunal found that a deposit in the amount of $188,739.56 made on 26 November 2003 represented a deposit by way of loan made by Mr Fitton and therefore did not represent a taxable supply. Mr Marotta from the National Australia Bank (NAB) gave evidence that the money came from Mr Fitton's own funds. The timing of the deposit suggested that it was connected with the repayment of a debt owed to the NAB. Deposits that the Applicant contended were damages The Tribunal held that the Applicant did not discharge its onus of proof; it did not produce any documentation which substantiated the deposits as arising from damages paid from the settlement of a NSW Supreme Court action as asserted by the Applicant. However, in relation to a deposit of $50,000 made into the Applicant's account on 11 September 2002, the Tribunal found that it was not consideration for a taxable supply, as it represented either a loan from Mr Fitton or payment of damages awarded to the Applicant. This was supported by evidence of a bank cheque dated 9 September 2002 payable to Mr Fitton and an accompanying email from Mr Fitton requesting that the cheque be paid to the Applicant. Legal expenses that the applicant contended were incurred by it and therefore gave rise to an entitlement to input tax credits The Tribunal was unable to accept that the cost of litigation undertaken in the Supreme Court of NSW was incurred by Mr Fitton on behalf of the Applicant and that he was acting as the undisclosed agent for the Applicant in those proceedings. Deposits that the Applicant contended were reimbursements for costs The Applicant did not discharge its onus of proof - noting that it did not produce sufficient evidence, such as receipts or claim forms - to substantiate that these amounts represented reimbursement of costs met by the Applicant on behalf of companies which marketed the Applicant's services. Deposits that the Applicant contended were rental payments The Applicant conceded that the payment of commercial rent totalling $54,318.82 amounted to consideration for an undeclared taxable supply. The Applicant's concession regarding the value of consideration for taxable supplies The Applicant accepted at the hearing that an amount of $632,245.13 was received as consideration for taxable supplies and that gave rise to a GST liability of $57,476.83. Assessment of Penalty • The Tribunal determined that the Applicant was reckless in declaring nil activity in its BASs during the relevant tax periods. • The Tribunal decided that no part of the 50% penalty should be remitted. • The Tribunal determined that the Applicant was reckless in declaring nil activity in its BASs during the relevant tax periods. • The Tribunal decided that no part of the 50% penalty should be remitted.

ATO view of decision:
This Tax Office accepts that the various decisions were open on the basis of the evidence accepted by the Tribunal. The decision does not have any implications for other cases. | Implications on current Public Rulings and Determinations and Law Administration Practice Statements | None

Administrative treatment:

Legislative references: Taxation Administration Act 1953 284-85 284-90 284-220
Case references: BRK (Bris) Pty Ltd v Commissioner of Taxation 2001 ATC 4111 [2001] FCA 164 46 ATR 347
Subject references: Taxation Administration Act whether applicant received consideration for taxable supplies whether input tax credits should be allowed penalty whether the applicant acted recklessly in preparing its business activity statements