The sole trader taxpayer carried on a business selling second-hand cars. Following an audit, the Commissioner found that the taxpayer had understated both GST sales in his BAS returns and his net business income in his tax returns.
Although the taxpayer accepted that sales had been understated, he argued that the Commissioner’s methodology for calculating his liability was wrong. The taxpayer argued that:
- he could not have earned the income which the Commissioner had assessed him on, having regard to the size of his car yard and the number of vehicles involved
- the Commissioner’s calculations ignored periods he was injured or overseas and could not earn any income during those periods.
These arguments were not accepted by the Administrative Appeals Tribunal (AAT). The analysis of the taxpayer’s bank accounts and the deposits into those accounts were preferred as the logical starting points in determining the understatements, and the taxpayer failed to discharge the burden of proving the amended assessments were excessive.
Commissioner’s discretion to disregard the operation of Division 7A (Section 109RB of the ITAA 1936). Building Company Owner and Commissioner of Taxation – Ref: [2012] AATA 755
The taxpayer was a director and shareholder of a building company (‘BCo’), and he withdrew money from BCo’s bank accounts and deposited the money into his personal bank accounts on several occasions in 2005, 2006 and 2007.
The amount of $261,950 – the total withdrawn by the taxpayer from BCo in the 2005 year – was assessed by the Commissioner as a dividend under section 109C of the ITAA 1936. There was no written loan agreement between the taxpayer and the company for that year. In the absence of a loan agreement and given the facts put before the AAT, the payments in 2005 could not be characterised as loans.
For the 2006 and 2007 years, the taxpayer had an undated written agreement, which was not properly documented in accordance with the requirements of section 109N. The amounts of $102,189 for the 2006 year and $317,729 for 2007 were treated as dividends and assessable under section 109D. The primary issue before the AAT was whether the Commissioner should have exercised his discretion under section 109RB to disregard the deemed dividend.
Notwithstanding the very basic nature of the undated loan agreement, it was the lack of reference to a term in the loan agreement that meant it failed to comply with the requirements of a Division 7A loan agreement as set out in section 109N. The tribunal was satisfied that the deficiencies in the taxpayer’s accountant’s command of English, combined with the inability to draw an inference other than that the mistake made in drafting the loan agreement was an honest one, meant that the discretion in 109RB could be exercised as the deemed dividend arose from an “honest mistake or inadvertent omission”.
An overall assessment of the factors, including the early repayment of the loan, was taken into account, as required under section 109RB(3) by the AAT. It was decided that it was appropriate, in the circumstances, to exercise the discretion. As a result, the amounts treated as dividends were disregarded.
The tribunal affirmed the Commissioner’s objection decision with respect to the income year ended 30 June 2005, but the penalty was reduced from 50 per cent to 25 per cent.
