The importance of tax records: Taxpayer faces $2 million penalty after “inconsistencies” and “contradictions” in case

A recent case in the Administrative Appeals Tribunal has again shown the importance of having proper records and evidence when the Australian Tax Office comes calling.

The taxpayer in question was audited and adjustments were made by the ATO. The taxpayer took the matter to the Tribunal but could not prove his case.

Read more: “Mice ate my tax records” just doesn’t cut it!

The AAT disallowed the taxpayer’s appeal against GST and default income tax assessments, although it set aside an administrative penalty for one of the years in question.

In 2008, the ATO audited the tax affairs of the taxpayer’s family and the companies they controlled. The family business in question was a business of property development and construction. The Tribunal said the audit “did not end well” for the taxpayer. As a result of the audit, the Commissioner was not satisfied that all of the taxpayer’s income had been disclosed nor that he had been carrying on an enterprise for GST purposes, which had the effect of calling into question the input tax credits he had claimed on his GST returns.

In 2012, the Commissioner made assessments of GST net amounts so as to claw back the input tax credits the taxpayer had claimed, plus default income tax assessments of the taxpayer’s taxable income for each of the income years 2003 to 2008 inclusive. The Commissioner had earlier made amended assessments for the income years 2007, 2009 and 2011.

The taxpayer faced tax and penalties of almost $2 million.

The taxpayer objected against the various assessments of tax and penalty. All of the objections relating to primary tax were disallowed, with the exception of one of the objections dealing with the 2007 income year, which was allowed in full. The objections relating to administrative penalty were disallowed, with the exception of the 2011 year, which was allowed in part.

The taxpayer then applied to the Tribunal for review of the Commissioner’s objection decisions.

The taxpayer was represented in the proceedings by his sister who, on his behalf, provided 55 lever-arch folders of documents to the Tribunal. Deputy President Frost of the AAT said it seemed that the taxpayer’s sister considered that those folders would shed light on her brother’s activities during the relevant period, including how he generated his income, what expenses he incurred in relation to those income-generating activities, what supplies he made for GST purposes and to whom, and what acquisitions he made and from whom, so as not only to attack the various assessments as wrong, but also to establish how they could be made right. The Tribunal, however, did not find the documents to be as helpful as hoped by the taxpayer.

The taxpayer himself did not provide a written statement to the Tribunal to explain his activities during the relevant periods or the sources of his income, and he did not give oral evidence either.

His sister provided a document that she described as her “witness statement”. It ran to 188 numbered paragraphs over 16 pages. The Tribunal said that, “aside from complaining, without any justification, that the Commissioner had taken ‘unlawful’ and ‘harsh and oppressive’ action during and after the audit, and had made ‘false and misleading statements to the taxpayer and the Tribunal’ by failing to produce documents to the Tribunal that [the taxpayer’s sister] says are in the Commissioner’s possession, the statement explained only in vague terms what her brother’s activities were during the relevant period”.

The Tribunal considered the statement did not tell much at all. At one point, the statement said that the one GST entity was reporting GST on both a cash and an accruals basis, which the Tribunal noted was an impossibility.

The Tribunal was told the taxpayer’s activities during the relevant periods included architectural design and drafting services, managing the residential investment properties that he owned, managing the residential investment properties owned by other family members or family companies, office-based administration and management of projects, and on-site management of construction projects.

The Tribunal said the fruits of the taxpayer’s labour were “non-existent”. It noted that “not one of the GST returns he lodged for the period June 2001 to March 2007 disclosed a single supply that he had made – whether taxable, GST-free or input taxed”.

During the same period, the Tribunal said the taxpayer claimed a total of $54,389 in input tax credits, meaning almost $600,000 worth of acquisitions, “without a single supply having been reported during that entire 6-year period”.

The Tribunal also found that money coming into the taxpayer’s accounts (from funds apparently provided by the family group and from borrowings) invited “the inference, that at least some (and perhaps most) of the money coming into the … accounts was ordinary income in his hands, provided to him to enable him to meet his day-to-day living expenses”. The Tribunal said it drew that inference, and found accordingly.

With one exception regarding the administrative penalty for GST shortfall for the 2011 year (which the Tribunal set aside), the Tribunal decided in each case to affirm the Commissioner’s objection decisions relating to the income tax assessments for the 2003 to 2008 income years.

The Tribunal said the taxpayer’s case was “full of inconsistencies, contradictions, inadequate explanations and unsupported and implausible assertions”.

Overall, not a pleasant outcome for the taxpayer, but the case graphically illustrates the need to have good records and to be able to properly explain one’s tax affairs.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.