Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation

1. Subject to exceptions, for example for losses or outgoings of a private or domestic nature, s 8-1(1) of the Income Tax Assessment Act 1997 (Cth) ('ITAA 1997') sets out the basic rule for income tax deductions for losses or outgoings, in these terms:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

1. Some principles for the application of this provision are well established:

(a) A loss or outgoing is taken to be incurred in gaining or producing assessable income if it is incidental and relevant to the activities from which the assessable income is produced. In respect of outgoings incurred in a business context, that question is answered by reference to whether the occasion of the outgoing is found in whatever is productive of assessable income or expected to produce assessable income.[2] > > (b) It is not for the Commissioner, or the Tribunal on review, to say how much a taxpayer should expend in operating a business. These are commercial decisions for the taxpayer. The question is whether there is the necessary connection to the production of assessable income.[3] > > (c) However, if the outgoing is disproportionate to the assessable income, it may be necessary to consider whether the outgoing was incurred in part for some other purpose in which case apportionment may be required.[4] > > (d) It is not essential for deductibility of a business outgoing that the amount is incurred in the same year in which the relevant assessable income to which it is said to relate is derived. However, temporal considerations are part of the factual matrix against which the character of the outgoing is to be determined.[5]

1. It is common ground that the lands at the centre of this dispute were the applicant's trading stock.
2. Section 70-35 of the ITAA 1997 requires comparison of the value of an entity's trading stock on hand at the beginning of the relevant income year with the value of trading stock on hand at the end of the year.
3. The entity's assessable income includes any excess of the closing value over the opening value for the year. If the opening value exceeds the closing value, the excess is deductible.

1. A shortfall in returned tax attracts a base penalty of 50% where the shortfall results from recklessness by the taxpayer or the taxpayer's agent as to the operation of a taxation law: Taxation Administration Act 1953 (Cth), Schedule 1, s 284-90(1), item 2.
2. 'Recklessness' has been described in these terms:

Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.[6]

3. Thus, a shortfall may result from recklessness as to the operation of a taxation law where the taxpayer or the taxpayer's tax agent is grossly indifferent as to whether a return is correct and a reasonable person in the position of the taxpayer or the agent would see there was a real risk the return would not be correct.
4. The Commissioner may wholly or partly remit a base penalty.[7] Case authority establishes the discretion to remit is broad. Essentially, the question the Tribunal must answer is whether it is appropriate in all the circumstances to remit the penalty wholly or partly.
5. The Tribunal does not have the benefit of evidence of the considerations or circumstances leading to the claiming of the relevant deductions. That makes it difficult to determine the degree of recklessness involved.
6. However, in Commissioner of Taxation v Complete Success Solutions Pty Ltd ATF Complete Success Solutions Trust,[8] the Full Federal Court stated:

The Tribunal stated that it had no evidentiary basis "to consider whether remission to any extent would be appropriate in the circumstances": at T [180]. It emphasised that "there is no evidence that [CSS] through [its director] or its tax agents engaged at all with the statutory requirements for GST-free supplies of bullion". The power in s 298‑20 of Sch 1 to the Taxation Administration Act 1953 (Cth) to remit a penalty is constrained only by the purposes and object for which the power is conferred: Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50; (2013) 212 FCR 483 at 521 [193] (Greenwood J). In determining whether to remit a penalty, the Tribunal is not confined only to considering the circumstances surrounding the failure on the part of the taxpayer or its agent to exercise reasonable care or to not act recklessly in making the statement to the Commissioner that might explain the conduct the subject of the penalty. It is also relevant to consider what circumstances, on the evidence, ought to be taken into account in determining, as a matter of discretion, that, notwithstanding the imposition of a penalty on the taxpayer on the basis of a failure to take reasonable care or acting recklessly in making the statement, the penalty ought nevertheless be reduced either in whole or in part: Sanctuary Lakes at 524 [209] (Greenwood J).[9]

1. Those remarks indicate that, notwithstanding the absence of evidence concerning the basis on which Beta Leigh decided to claim the deductions, we should consider what other circumstances, on the evidence, ought to be taken into account to determine whether it is appropriate that the penalty be wholly or partly remitted.

1. In determining whether the applicant has discharged the burden of proof it bears in respect of these issues, we apply the following principles:

(a) Facts may be found based on oral evidence alone. There is no barrier to a fact being found on the uncorroborated evidence of an applicant. There is no requirement that direct evidence by oral testimony or affidavit may only be accepted if corroborated. > > (b) However, self-serving statements should be closely scrutinised. > > (c) Where a taxpayer has received funds or incurred costs that are not clearly or fully explained in contemporaneous records, the taxpayer may face a challenge in satisfying the burden of proof without corroborating evidence. > > (d) However, even in such cases, oral or written evidence of the taxpayer is not to be regarded as prima facie unacceptable. While it will often be prudent to put forward corroborating evidence, taxpayers are not obliged to call all material witnesses or produce all material documents. > > (e) The standard of proof is the balance of probabilities. An applicant that succeeds 'in weighing down [the] scales ever so slightly' in the applicant's favour will discharge the burden of proof it bears.[10]

2. We are also mindful of the observations of Logan J in Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation_[11]_ noting that informality can and often does attend the formation of legal relations in small business. As his Honour noted:

Even more this is so where the relevant corporate actors are or are represented by the same individual acting in different capacities or by individuals who are close family members or business associates. Sometimes the only documentary manifestation of that legal relationship may be a transaction recorded in a ledger or perhaps just an annually prepared profit and loss account and accompanying annotations. There may then, in a taxation appeal, be related oral evidence of the individual(s) concerned that the transaction was as so recorded informality. . .

3. That is not to say there is any special or lesser standard of proof for a small business. Where informality is present, 'much can depend on the credibility one affords the accounts given by participants and, where they exist, representations in business records created under their supervision or with their approval'.[12]
4. The Tribunal can only make findings of fact based on the evidence put before it and, where necessary, its relevance explained. Mere assertions will not suffice, and nor, as occurred in this case, are critiques of the Commissioner's responses as 'uncommercial' or the like a basis on which, without more, the Tribunal can make relevant factual findings.
5. Further, the process of finding facts needs to consider the evidence led through the lens of what was, or could be expected to be, capable of being led.[13] As already noted, that does not mean an applicant is obliged to produce every relevant document or potential witness. However, where relevant evidence that could be expected is not produced, that is a relevant factor for the Tribunal to consider.
6. In that regard, the applicant as a company is required by the law governing corporations to keep written financial records which correctly record and explain its transactions, financial position and performance, and would enable true and fair financial statements to be prepared and audited.[14] Financial records include invoices, documents of prime entry; and working papers and other documents needed to explain how its financial statements are compiled.[15] Books of prime entry include cash books and journals, and ledgers such as job costing and general ledgers. Additionally, taxation laws require businesses to keep records that record and explain transactions relevant to their income tax liabilities.[16]
7. None of this is intended to convey that, without production of records of the kind outlined, a taxpayer cannot discharge its burden of proof. The principles outlined above make it clear that is not the case. However, the records required to be kept and that might have been expected to be produced, relative to those produced to the Tribunal, are part of the mix of considerations to be taken into account in assessing the evidence before the Tribunal.

1. At the hearing of this matter, after opening statements, admission of evidence and cross examination, the parties conferred and agreed that closing submissions should be provided in writing. The Tribunal made directions for the provision of written closing statements which were provided by both parties.
2. However, after an extensive examination of the applicant's written closing submissions, witness statements and documentary evidence, we were unable to identify with certainty the evidence that the applicant maintained would support its position in respect of the various issues in dispute. We therefore decided that, exceptionally, we would give the applicant a further opportunity to explain how its evidence was said to support its assertions regarding the appropriate outcomes in respect of the issues in dispute. We convened a directions hearing at which a timetable for provision of further submissions for that purpose was agreed. This was reduced to writing in formal directions in these terms:
   1. On or before 31 January 2024, the Applicant is to provide to the Tribunal and copy to the Respondent a schedule identifying, in relation to each of the issues in dispute, all evidence in support of its case and any submissions regarding why the identified evidence is said to support the Applicant's case. [Emphasis added.]
   2. On or before 14 February 2024, the Respondent is to provide the Tribunal and copy to the Applicant any submissions in response or advise the Tribunal in writing, copied to the Applicant, if the Respondent does not wish to provide submissions in response.
3. These directions were forwarded to the parties under cover of an email stating:

Dear Parties > > Please find attached a copy of a Direction in this matter. In relation to the schedule addressing the evidence referred to in the attached directions, the Tribunal would be grateful if the following were to be listed separately for each of the issues in dispute:

• - The tab, page and paragraph number where the evidence is located in the hearing book or transcript
• - The evidence (e.g. witness statement, transcript reference or documentary evidence) on which the applicant relies to prove the facts the applicant submits the Tribunal should find in relation to each issue.
• - Why the applicant submits the findings should be made, that is, why this evidence positively proves the applicant's case.

As discussed at the directions hearing, the schedule should only address the evidence before the Tribunal. It is exceptional for further evidence to be filed after the close of a hearing and would require leave of the Tribunal.

1. At the request of the applicant, the time for compliance with the first direction was extended to 5 February 2024 and a corresponding extension was made for the respondent to file any reply by 19 February 2024.
2. It was our expectation that the schedule filed in accordance with these directions would, as discussed at the directions hearing and confirmed in the covering email, direct attention to relevant primary sources of evidence, such as paragraphs in the applicant's witness statements, oral evidence recorded in the transcript and the documentary evidence such as financial records. That would have facilitated the Tribunal examining the identified evidence and determining whether, in each case, it supported factual findings the applicant says should be made.
3. While there are some references to, for example, financial records, the entries in the schedule provided by the applicant are limited in number and commonly refer to ATO documents, e.g., audit reports and reasons for decision, rather than to the applicant's own statements and records.

1. On 2 February 2024, over four months after the hearing of the evidence, the applicant applied to re-open its case and file further evidence. The evidence sought to be filed related to Issue 2 and, the applicant said, comprised invoices issued by the partnership to the applicant for property maintenance and repair services, as follows:

(a) 2015 income year - 8 invoices totalling the claimed deduction of $416,818; and > > (b) 2016 income year - 17 invoices totalling the claimed deduction of $680,000.

2. The applicant's representatives advised that these invoices matched summaries already in evidence and detailed the work including the properties on which the work was said to have been carried out.
3. We accept, and the Commissioner did not deny, that such invoices would be relevant to Issue 2. In their letter dated 2 February 2024, the applicant's representatives stated:

The reasons for the evidence not being provided earlier in response to the Tribunal's various directions requiring all evidence to be relied upon to be filed is partly because the summarised information had been supplied to the AAT and the respondent. In the earlier stages we were talking about systems and procedures and how the inter entity relationship worked not the specifics of individual invoices. We did provide the Transaction listings for these accounts which show the invoices and add up to the disallowed deductions.

4. The letter also referred to difficulties in accessing the invoices, although there is no detailed account of the effect of such difficulties, nor is it suggested that any attempt was made to access the invoices before the hearing of the review.
5. We decided to refuse the application to re-open the evidence. In reaching that conclusion, aside from the factors favouring the re-opening of the evidence indicated above, we took into account the statutory objectives of the Tribunal which include the provision of a mechanism for review that is, amongst other things, 'fair, just, economical, informal and quick'.[17]
6. In that regard, we note this application has been on foot since October 2019. The applicant was represented by tax agents who, we assume, considered themselves competent to advise and represent the applicant in the proceedings. Numerous accommodations were provided by the Tribunal to the applicant to enable it to put its case forward. Numerous directions were given before the hearing requiring the applicant to file the evidence upon which it would rely in the proceeding.
7. As it happens, the applicant has not been disadvantaged by this decision as we have decided Issue 2, to which the further evidence is said to relate, in favour of the applicant for the reasons indicated below.

Observations regarding the applicant's evidence

1. In addition to documentary evidence, Mr and Mrs Uhrhane provided witness statements and were cross-examined by the Commissioner's representative. Witness statements were also provided by the applicant's external accountants, Mr Mark Pollock and Mr Kevin Hoiberg. The Commissioner's representative chose not to cross-examine Mr Pollock or Mr Hoiberg.
2. Financial records might be regarded as of fundamental importance to discharging an applicant's burden of proof in a case of this kind. Mrs Uhrhane gave oral evidence that she maintains an MYOB general ledger for the applicant and for the partnership, DNU, which are supported by job costing ledgers, and has receipts and invoices for all transactions. In his witness statement, Mr Hoiberg confirmed Beta Leigh and DNU keep MYOB ledgers.[18]
3. As will appear from the discussion of the evidence below, the applicant produced and directed attention to some, but not all, of the financial records it might be expected to hold and produce to assist its case, and which indeed Mrs Uhrhane gave sworn evidence that it had retained. That is so notwithstanding numerous requests by the ATO during the audit and objection process and numerous directions by this Tribunal requiring the applicant to produce all evidence upon which it would seek to rely.
4. Apart from the submissions filed by the applicant's representatives in relation to the application to re-open the evidence, which relates only to Issue 2, it is unclear why further records that could have been expected to assist the applicant's case were not produced notwithstanding the multiple opportunities provided over a number of years. We address this further below in relation to the individual issues in dispute.

Issue 1: Has the applicant proved it is entitled to a deduction for cost of sales in the amount of $56,000 in respect of Lots 1 and 3 on SP267071 in the 2015 income year?

1. The applicant did not address this issue directly in the schedule it produced in response to the directions issued after the hearing. Accordingly, the Tribunal has not been directed to evidence said to prove the applicant is entitled to this deduction.[19] On that basis alone, it could be said that the applicant has not discharged the burden of proof on this issue.
2. Nevertheless, we make the following observations.
3. Beta Leigh seeks to claim the tax deduction for cost of sales of $56,000 in respect of the sale of Lot 1 and Lot 3 on SP267071. In its objection, it asserted:

The ATO have claimed my arithmetic calculation that the taxpayer has overstated the allocation of land disposed in the 2015 income tax year. The ATO approached on a pro-rata allocation of costs which ignores that mathematically if the cost of sales of land disposed in 2015 is overstated then the cost of sales of land disposed in prior years is understated. Therefore, the impact of the adjustment suggested by the ATO will be to increase any carry forward losses as at 1 July 2015 [2014]. Therefore, arithmetically the impact upon loss of revenue is neutral. > > If the ATO wishes to decrease cost of sales in 2015, then it should increase the cost of goods sold in 2014. The ATO response to audit Appendix 1 indicates that the only item held by the taxpayer in 2016 was for Millennium Circuit. All other properties were sold and disposed of and the cost of land would have been eliminated. Therefore, the claim between ATO and taxpayer is just one of timing and alternative methods of accounting.

4. Beta Leigh must prove it is entitled to the deduction of $56,000 it seeks to claim as the cost of sales for Lots 1 and 3 on SP267071. The argument it puts forward quoted above does not do that. It merely suggests that even if the amount of $56,000 is incorrect, in that it is overstated, it does not matter because the excess should be ascribed to cost of sales in the previous year.
5. What is not found in the evidence are details of the cost of land for each of the 28 lots on SP 133900 and then each of the 5 lots on CTS SP 267071 and how those costs were apportioned to each lot. Working papers showing those calculations were not provided either to the Commissioner during the audit or to the Tribunal.
6. Absent this information, the Tribunal has no way of knowing whether $56,000, or any other amount, is the correct cost of sales of Lots 1 and 3 on SP267071 and Beta Leigh has not provided any substantiation of those costs. For those reasons, we are not satisfied Beta Leigh is entitled to the deduction claimed. To the extent that the applicant maintains the shortfall in the 2015 would be offset by carried forward losses, the discussion below relating to Issue 5 refers.

Issue 2: Has the applicant proved it is entitled to deductions in the amounts of $416,818 and $680,000 in the 2015 and 2016 income years respectively, for 'property maintenance services' paid to the partnership?

1. At paragraph 17 of Mr Hoiberg's witness statement, he says:

Because the partnership is the builder, certain expenses are incurred in the name of the partnership that relate to the assets of Beta Leigh. Because the partnership will accumulate the costs in the ledger and then will invoice Beta Leigh when the company has the cashflow to pay for it, expenses in one year may not be reimbursed in that year but could be in the following year.

2. In practical terms, the above statement appears to reflect that the expenses incurred are accumulated in expense accounts in the ledger for DNU.[20] Expenses are invoiced by DNU to the company and cash is transferred as and when available. Those amounts are income to DNU and credited to an account styled 'Repairs & Maintenance' in its ledger, thereby reducing its overall expenses. The corresponding expense is debited to an account styled 'Property Maintenance' (6-1060) in the ledger for the company.[21]
3. The evidence before the Tribunal is that amounts totalling $416,818.16 for the 2015 year and $680,000 for the 2016 year were transferred from Beta Leigh to DNU as payment for 'property maintenance expenses' incurred by the partnership. The Tribunal has been able to trace six of the eight transfers during the 2015 year as between general ledger account 6-1060 for Beta Leigh,[22] and the job cost ledger for DNU.[23] It has been unable to trace a recorded transfer on 30 September 2014 of $150,000 and a negative amount recorded as occurring on 1 October 2014 in the amount of $9,090.91.
4. For the 2016 year, a copy of general ledger account 6-1060 for the company was provided and shows the individual amounts transferred from the company to the partnership in the total amount of $680,000.[24] However, a copy of the job cost ledger for DNU for the 2016 year was not provided and so the Tribunal has been unable to trace the transfers from the company to the partnership in the 2016 income year.
5. There is some inconsistency in the stated accounting policy as between Beta Leigh and DNU regarding property maintenance expenses. If, as Mr Hoiberg says, DNU incurs expenses for the company for which it then seeks reimbursement as and when Beta Leigh has funds, those would be expenses of Beta Leigh. That is, they would be expenses incurred by another party (DNU) on Beta Leigh's behalf. On that premise, it would be for DNU to claim reimbursement from Beta Leigh on whatever terms the parties agree.
6. If, on the other hand, the expenses are incurred by the partnership in carrying out its business and a verbal arrangement it has with the company to conduct property maintenance and building works for Beta Leigh, the partnership would have been, in effect, rendering progress claims to the company for those services.
7. The company directly incurs at least some property maintenance expenses itself. It was not explained in the evidence why a small amount of the property maintenance expenses is incurred by the company directly and the bulk is incurred by the partnership.
8. Although it is not entirely consistent, based on the evidence provided, the Tribunal accepts the expenses were incurred by the partnership as part of the cost of providing services to Beta Leigh. There is no direct evidence to suggest the amounts were incurred by DNU as agent for Beta Leigh and the Commissioner did not suggest this was the case. The amounts paid by Beta Leigh were, on this premise, for services provided by the partnership, not reimbursement of amounts incurred by the partnership on behalf of Beta Leigh.
9. If the Tribunal's understanding of the evidence provided by the taxpayer is correct, the payments from the company to the partnership are akin to progress claims, albeit not necessarily made in a timely fashion, and the way the partnership accounts for expenses and claims tax deductions for those expenses is a matter for the partnership. It is sufficient to observe that the uncontested evidence is that the payments to the partnership by Beta Leigh were treated as income of the partnership, which is consistent with our conclusion that they were in return for services rendered by the partnership to Beta Leigh. The Tribunal sees no impediment in principle to the company being entitled to deductions for the progress claims it pays to the partnership.
10. In particular, that some payments were made in the income year following the year in which the amounts were incurred in the partnership is not fatal to the applicant's position provided, as we accept, the amounts paid to the partnership were incurred by Beta Leigh in the course of Beta Leigh's business. There is no reason to conclude, and the Commissioner did not specifically allege, that the payments were of a different character. Specifically, the Commissioner did not allege sham or that the general anti-avoidance provision in Part IVA of the Income Tax Assessment Act 1936 (Cth) should apply.
11. Given the close relationship between the company and the partnership, the Tribunal expected to be able to trace the payments in the records of Beta Leigh to the corresponding receipts in the records of the partnership. The Tribunal has been unable to trace these progress claims for the whole of the 2015 and 2016 financial years because the job cost ledger for the partnership for 2015 produced is incomplete and for the 2016 year was not included in the evidence. Additionally, we understand the applicant produced to the ATO some but not all of the invoices rendered to the partnership for which it claimed reimbursement from Beta Leigh.
12. However, both the directors and the external accountants gave evidence that all expenses incurred in the partnership were recorded in ledger accounts for the relevant development and charged on to Beta Leigh by way of the invoiced amounts that total the deductions claimed. Further, it was not put to any of the witnesses that the MYOB account transaction reports of Beta Leigh, identifying the payments to the partnership in the 2015 and 2016 income years, were falsified. Having regard to the observations of Logan J extracted above, although the evidence is not ideal, it is sufficient to satisfy us that the payments were for expenses incurred in carrying on Beta Leigh's business. That is the evidence of the directors, confirmed by their accountants, and generally reflected in the applicant's financial records in the transaction reports.
13. Accordingly, we accept the applicant is entitled to these deductions. In so concluding, we observe that we regard this as a borderline matter in which the evidence is far from ideal but, on balance, sufficient to tip the scales 'ever so slightly' in favour of the applicant.

Issue 3: Has the applicant proved its taxable income for 2016 calculated under the trading stock provisions was not understated:

*** - in respect of Lots 2, 4 and 5 on SP267071 - by $364,000; and

• - in respect of Lot 15 on SP133900 - by $340,000?**

1. The trading statement for Beta Leigh for the 2016 year shows sales of commercial property of $693,053 and of vacant land of $550,000,[25] being total sales of $1,243,053.[26] The net profit shown in the financial statements for 2016 is $150,119.[27] Total sales shown in the 2016 company tax return as 'Other gross income' are $1,909,948, and total profit of $150,121. [28]
2. Beta Leigh sold Lot 15 on SP133900 for $950,000 by contract dated 10 April 2015 which settled on 7 December 2015.[29] It also sold Lots 2, 4 and 5 on SP267071 for $1,050,108 during the 2016 year. That amounts to gross sales of $2,000,108.
3. The financial statements for 2016 also show construction costs of $753,923 and zero cost of land sold under the hearing 'Cost of Goods Sold'. This is despite sales of vacant land of $550,000 for that year as shown above. For Lot 15, the objection asserts the cost of the land sold of $400,000 was deducted from the sale proceeds of $950,000 and the net amount of $550,000 was returned as sales.[30] Neither Mr Pollock in his witness statement, nor any other witness, offered an explanation as to this method of presentation but this decision does not turn on the lack of such an explanation. The Commissioner says the cost of land sold is overstated.
4. Mr Pollock stated:

The ATO have highlighted that the 2016 return did not include a provision for cost of land even though provision has been made for the adjustment. The ATO have attempted to claim by arithmetic calculation that adjustments should have been made for cost of land. These have been previously claimed. The ATO have claimed that the taxpayer has overstated the allocation of land disposed in the 2016 income tax year. The ATO approached on a pro rata allocation of costs which ignores that mathematically if the cost of sales of land disposed in 2016 is overstated then the cost of sales of land disposed in prior years is understated. Therefore, the impact of the adjustment suggested by the ATO will be to increase carry forward losses as at 1 July 2015. Therefore, arithmetically the impact upon loss of revenue is neutral.

5. Mr Hoiberg's witness statement said that he conducted a review of the applicant's affairs and found that for the period 2011 to 2016, land sales were recorded but the cost of sales did not include an allocation for the value of the land sold. In preparing the 2017 financial accounts, Mr Hoiberg said he created a journal entry to reflect the remaining land at that time.
6. Mr Hoiberg went on to state:

Regarding the calculation of the cost of goods [land] sold, I agreed with the ATO that the claim made in 2015 & 2016 was incorrect and increased costs thus reducing the profit because a proper accounting of the reduction in land values by the properties sold was not carried out in the correct period.

7. Accordingly, as Mr Hoiberg has stated, the profit for the 2016 year was understated because of the overstating of the cost of land sold. Mr and Mrs Uhrhane made similar concessions in their witness statements.
8. Unless offset by carried forward losses, it follows that the taxable income of the applicant is understated through the overstatement of cost of land sold in this income year. The applicant therefore has not proved its taxable income for the 2016 income year is not understated as a consequence of the trading stock calculations. So far as proving the 2016 taxable income is not understated, it is not to the point that there may be corresponding understatements of cost of land sold in other years, unless that results in carried forward losses able to be offset in the 2016 income year. The question of carried forward losses is addressed further below.
9. Accordingly, we conclude that the applicant has not discharged the burden of proving its taxable income for 2016 is not understated due to errors in its trading stock calculations.

Issue 4: Has the applicant proved it is entitled to a deduction for 'management fees' of $350,000 paid to the partnership in the 2016 income year?

1. According to the records provided by Beta Leigh, it paid management fees of $350,000 to DNU for the first time in the 2016 year. The financial statements for the 2017 year show a similar amount was paid in that year.
2. The Tribunal can identify from the records in evidence that this amount was paid in two tranches in the 2016 income year: a cash payment of $300,000 and the balance by journal entry. The amounts so recorded as expenses of Beta Leigh are recorded as income items of DNU for the same year. It is not in dispute the amount was paid in the 2016 year. Since there is no suggestion the applicant committed to payment of the amount in any earlier year, we accept Beta Leigh incurred the amount in the 2016 income year.
3. The remaining question is whether the applicant has proved these outgoings were incurred in gaining or producing Beta Leigh's assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
4. In Appendix 3D to her witness statement, Mrs Uhrhane says:[31]

The partnership of Dennis and Nina Uhrhane provides expertise and knowledge to the taxpayer Beta Leigh. The taxpayer Dennis Uhrhane and Nina Uhrhane do receive a minimal wage from the taxpayer Beta Leigh, but this wage does not recognise the expertise of the partnership of Dennis and Nina Uhrhane. Market value for a builder of the experience and knowledge of Dennis and Nina Uhrhane is $100 per hour. Assuming a 40-hour week, this is $4,000 per week or over a 45-week year this equates to $180,000 per annum. If the partnership of Dennis and Nina Uhrhane did not provide the expertise and experience to the taxpayer Beta Leigh, then the taxpayer Beta Leigh would have sourced this service at a much higher rate and expense that is presently Incurred. > > Hours claimed in this is as per partnership estimates and based at commercial dry hire rates. Therefore, cost to partnership was $360,000.

5. The amount charged by DNU and paid by Beta Leigh for the 2016 year was $350,000. If, as Mrs Uhrhane says, the cost to the partnership was $360,000, no explanation was offered as to why only $350,000 was charged.
6. The payments are not explained by contemporaneous records. There is no evidence that any specific thought process was undertaken prior to the payment dates to determine the amount to be charged to Beta Leigh by the partnership. If there was such a thought process, no contemporaneous evidence, such as minutes, file notes or other working papers, were created or provided. The calculations set out above were undertaken well after the event in an attempt to show the amounts charged were not unreasonable based on commercially applicable rates. The extent to which Mr and Mrs Uhrhane were engaged in activities other than for Beta Leigh, which may impact upon an assessment of the reasonableness and therefore purpose of the amounts claimed, was not the subject of evidence before the Tribunal.
7. Beta Leigh paid the management fees at a time when DNU had been incurring substantial losses for the 2014 and 2015 years. It may be the management fees were a convenient way of shifting profit, which would have otherwise been taxable, to DNU to absorb accumulated losses.
8. Whatever the reason for charging the 'management fees' for the 2016 year, the difficulty for the applicant is that there is no evidence relating the payments to any particular activities carried out by Mr and Mrs Uhrhane. It is not even clear in what income years the activities for which the payments were said to be paid were carried out. In its written closing submissions, the applicant stated that the management fee claimed in 2016 'reflects multiple years of work'.
9. We accept the fact that the payments do not relate to work carried out in the 2016 income year is not fatal to the applicant's case. Contemporaneity in that sense is not a prerequisite to deductibility if the necessary connection to gaining assessable income is proved. But nor are temporal considerations irrelevant. As indicated earlier, they are part of the factual context against which an outgoing must be tested to ascertain if it is of the necessary character.
10. As also indicated earlier, it is not for the Commissioner or the Tribunal on review to substitute its own judgement for a taxpayer's business judgement regarding the incurring of an outgoing. However, that does not mean a company is necessarily entitled to a substantial deduction for any amount paid to its sole shareholders and directors 'multiple years' after the activity for which it is said to relate by branding the payments as 'management fees', which on the applicant's own evidence these payments clearly are not, without any evidence of how the amount was determined at the time the payment was made.
11. The amounts claimed are not insubstantial. The applicant seeks a total deduction of $350,000. In those circumstances, even making full allowance for the informality attending small business affairs, it is to be expected that some contemporaneous record would be created and maintained, as required by corporations and taxation laws, to record the purpose of the payments. We do not say the amounts were necessarily 'plucked out the air' to suit the desired tax outcome, but the difficulty is that there is no evidence at all of how the amounts were calculated at the time they were paid nor, at any level of detail, the services for which they were paid. Without such evidence, we are unable to be satisfied these payments are of the necessary character and were not paid at least in part for another purpose. It follows that the applicant has not proved it is entitled to the deduction.

Issue 5: Has the applicant proved it is entitled to deductions, for losses in the 2013 income year totalling $841,003, carried for to the 2015 and 2016 income years?

1. Beta Leigh seeks to claim a deduction for tax losses brought forward from the 2013 year of $841,003.[32] The evidence includes a copy of MYOB account 5-1020 (Construction) for Beta Leigh for the year ended 30 June 2013.[33] It shows total construction costs for that year of $1,299,749.02, of which $1,297,863.64 was paid to DNU.
2. The MYOB ledger account proves that the company processed entries that year totalling that amount through its ledger account 5-1020. There is no supporting documentation, such as copies of tax invoices, showing the composition of those amounts and how they refer to the properties owned by the company at the time.
3. Another document described as 'Movement in WIP and land held for resale' for Beta Leigh for the years 2011 to 2019 inclusive is included in the applicant's submissions.[34] This document shows income from sales of property for all years other than 2014 which is shown as zero, and the associated cost of sales and gross profit.
4. The Tribunal has traced the amount of sales, cost of sales and gross profit for the 2015 and 2016 years from this document to the financial statements for those years and they agree. However, the amounts shown as movements in land held for resale and freehold land at cost are unchanged in 2015 and 2016 which accords with another line on the document, entitled movement from previous year, showing nothing in each of those years. This is despite there being significant sales in each of the 2015 and 2016 years. It is not clear how there can be no movement in land held for resale and/or freehold land at cost in years when sales of such properties clearly occurred.
5. In another document filed by the applicant, entitled Statement of Facts, Issues and Contentions in respect of Cost of Goods Sold, the applicant states:

The taxpayer does not disagree that the amounts as claimed were in the correct [incorrect?] year but rather states that the losses arising are correct whether arithmetically accumulated over a period or whether a "catch-up" adjustment is made.

6. That statement is not to the point. In discharging its onus of proof for the amounts it seeks to claim a tax deduction for carry forward losses, Beta Leigh must prove the amount of the losses it claims to be entitled to carry forward. That means showing on a year-by-year basis the amounts expended on construction costs. Beta Leigh did not supply supporting evidence either to the Commissioner or to the Tribunal.
7. The statement goes on to say:

In the original taxation return submitted for the years 2012 to 2016, closing stock, opening stock and land held for resale never altered and the balance remain constant, regardless of the extent of property sold.

8. Following that is a table showing the sales, opening stock and closing stock followed by another statement which says:

This is illogical and obviously an error which results in an overstatement of the land retained after sales, an understatement in cost, and an overstatement in profit. The taxpayer made an entry to correct the books in 2017 ("catch-up adjustment") by increasing costs decreasing stock held and thus creating a loss to correctly reflect the asset position of the taxpayer. An analysis of the reworked income tax returns is attached as Appendix A.

9. Appendix A and Appendix 1 appear to be the same document.
10. Beta Leigh is seeking to claim tax losses brought forward from 2013 year of $841,000. Its evidence in support of that claim is a ledger account, which shows total construction costs for that year of $1,299,749.02 of which DNU received $1,297,863.64. Not only is there no supporting documentation for the asserted total construction costs of $1,299,749.02, there is also no explanation of how and why $841,000 of that amount generates a carry forward tax loss.
11. To claim carry forward tax losses from 2013, the Commissioner's auditors suggested Beta Leigh lodge amended returns for the 2011, 2012 and 2013 years, which it did. The Commissioner could not accept those amended returns as objections against the assessments because the company had reported nil taxable income in those years. The applicant provided copies of those amended returns, which show the following:

1. The claimed carried forward loss of $1,007,233 is $166,230 from 2012 plus $841,003 from 2013 even though the reported tax loss is $846,212. The Tribunal assumes this is a typographical error. However, $841,003 is the amount Beta Leigh seeks to carry forward as a tax loss. The applicant's submissions do not explain why the amount so claimed is not $1,007,233 as shown in the amended return for 2013. Nor is there any substantiation of the claimed carried forward tax loss.
2. The Tribunal assumes financial statements were prepared from MYOB general ledgers and the information in the income tax returns came from the ledgers. Mrs Uhrhane said she has supporting documentation for all of the transactions in the MYOB ledgers. Beta Leigh did not provide that information to support the claim made for tax losses from the 2013 year.
3. Again, the applicant seeks to claim a very substantial deduction without significant substantiation. Although the applicant seeks to carry forward losses from 2013, it has not put into evidence its 2014 return. Even putting aside the issues raised above, given the recurring error in the prior year calculations of cost of sales, the adjustment resulting in a substantial error in 2016 and the applicant's apparent lack of regard for maintaining proper records explaining other significant amounts, such as the substantial so-called 'management fees' claimed for the 2016 and 2017 income years, the Tribunal is not persuaded it should accept, without more, the applicant's calculation of the asserted carried forward loss.
4. Accordingly, Beta Leigh has not proved it is entitled to the tax losses of $841,003 it says are available from 2013.

Issue 6: Has the applicant proved the assessments of administrative penalties for the alleged shortfalls in the 2015 and 2016 income years are excessive and what the base assessment amounts should be?

1. The Commissioner assessed administrative penalties for these years at 50% of the alleged shortfalls. For the following reasons we are not persuaded, on the evidence, that the shortfalls did not result from recklessness. However, in view of our conclusion in respect of Issue 2, the base penalty assessments should be proportionately reduced to 50% of the reduced shortfalls after allowing deductions for the 'property maintenance expenses'.
2. The remaining shortfalls result from the claiming of $350,000 in so-called 'management fees', and the incorrect trading stock/cost of sales calculations.
3. No evidence was provided regarding how the decision to claim $350,000 in 'management fees' was arrived at. There is, for example, no file note or other evidence indicating the basis on which these significant amounts were said to be deductible. As already noted, there is no evidence of how the amounts claimed were calculated at the time they were incurred or when the tax returns were prepared; the specific services to which they were said to relate; or even the year or years in which the services to which the payments are said to relate were rendered.
4. The basis on which the payments are now said to be of a commercial nature, as set out above, was not recorded at the time the amounts were paid or even when the returns were prepared and lodged. Those calculations were not produced and, so far as the evidence indicates were not undertaken, until the ATO queried the deductions.
5. In those circumstances, without any evidential foundation, we are unable to say whether the accountants who prepared the returns explicitly turned their minds to, or were indifferent to, whether there was a proper basis for claiming these substantial deductions for 'management fees'. It follows that, to the extent the shortfall results from the 'management fees' issue, we are not persuaded the shortfall did not result from recklessness.
6. In respect of the trading stock issue, the 2016 return was clearly incorrect in the deductions claimed. Mr Hoiberg conceded as much. It is difficult to see how a reasoned decision to file the return with that clear error could have been made. In any case, there is, again, no evidence regarding how the decision to file the return with that error was made. Nor is there any evidence of a file note, directors' minutes or other document recording the reasoning supporting the making of the accounting adjustment to correct the previous error and the basis of a conclusion that the return as lodged was appropriate.
7. Again, on the evidence before the Tribunal, we are unable to conclude the accountants who prepared the return were not indifferent to whether the return was accurate. It follows that, to the extent the penalty assessment relates to the trading stock/cost of sales issue, the applicant has not proved the assessment of the base penalty amount, calculated at 50% for recklessness, was excessive.

Issue 7: Has the applicant proved full or partial remission of the penalties is appropriate?

1. In approaching this issue, we asked ourselves whether, in the circumstances of this case, it is appropriate for the reduced base penalty, calculated at 50% of the remaining shortfall, to be wholly or partly remitted.[36]
2. We have, in considering that question, taken into account the Commissioner's guidance on the exercise of the discretion to remit penalties contained in Law Administration Practice Statement PSLA 2012/5. That document recognises that in some cases where a taxpayer relies on a tax agent to prepare a return the tax agent's conduct may exhibit a higher degree of culpability than the taxpayer which may warrant some remission of penalty. As the Commissioner notes:

17J. Sometimes an agent's behaviour is more culpable than the entity's. This can result in an unjust result. > > 17K. For example, an unjust result may also occur in certain situations where the entity has made a genuine attempt to comply (they have taken reasonable care), but because of the actions of their tax agent the entity is liable to a penalty and safe harbour does not apply (for example, because the agent was reckless in their application of the law). > > 17L. As an entity is responsible for the actions of their agent, except where safe harbour applies, it would be unusual for full remission to be given unless the taxpayer took reasonable care. > > 17M. An entity does not give up responsibility simply by appointing a tax agent. They are still required to ask questions or make reasonable enquiries, commensurate to their knowledge and experience, with the tax agent about the reporting that is occurring. Additionally, they are liable for the penalty outcomes of actions of their agent unless safe harbour applies. > > 17N. Where the entity failed to take reasonable care, some remission may still be appropriate. However, in the absence of exceptional circumstances, remission (if any) on this basis should not be below the level of behaviour exhibited by the entity unless other circumstances apply. > > Example 14 > > Donald changed accountants on the recommendation of a friend, as the friend had received a large refund. Donald used the agent and received a significantly higher than usual refund. A subsequent audit identified significant shortfall amounts as a result of exaggerated deduction claims related to private expenditure. Interest deduction claims included 50% of the mortgage loan interest for the family home in which his family lived and from which Donald occasionally worked, 40% of his family's private phone bill (and Donald had a work phone), some travel to work, some family grocery expenses and numerous other private expenses. The behaviour was assessed as intentional disregard of the law. > > Donald said this was his tax agent's fault, stating he provided his agent the information he had requested. Donald did say that he did not question the agent. He just signed the document. > > While the ATO did not expect Donald to ask sophisticated questions about the tax law, it would be expected for him to review the documents and to ask questions about some items - he knew he could not claim his mortgage interest and had not in the past, but had not noticed it was included in the return. He did not ask if his previous agent was wrong and why. In not making appropriate enquiries with the tax agent, and not checking, and in choosing to be 'un-curious' of their accuracy, Donald failed to take reasonable care and has been reckless. Remission of penalty was not considered appropriate. > > This compares to Mo, who went to the same agent. Mo checked the return and noticed the large claim for interest. He told his agent he only used one room to work from home, not half the property, and that amount was reduced. Although we later found that Mo was not entitled to claim the deductions for the interest and a few other items, in this case Mo has made appropriate enquiries by asking questions about some other items and been given explanations by the agent as to why he could claim the travel expenses to work. > > Safe harbour did not apply because of the agent's behaviour but Mo, while he could have confirmed certain more extreme information, made an attempt to understand and question the situation. Significant remission is appropriate in this situation.

3. Having observed Mr and Mrs Uhrhane giving evidence and being cross-examined, we have no reason to believe their evidence was other than truthful. Further, it was not put to either of them that their evidence was in any particular respect untruthful. We accept that Mr and Mrs Unhrhane did their best to provide honest evidence.
4. It is apparent from their evidence that Mrs Uhrhane maintained comprehensive accounting records for the business. It is also implicit that the applicant relied upon their accountants to prepare their tax returns. There is no evidence to suggest they had any reason to doubt the treatment of the 'management fees' presented by the accountants would not be acceptable. On the other hand, as a developer of long experience, it would be surprising for Mr Uhrhane not to have at least queried the trading stock treatment when a cursory examination of the return and financial statements would have revealed the disclosed trading stock value could not be correct.
5. In the circumstances, we consider a penalty of 50% of the remaining shortfall to be unduly harsh and inappropriate. On the other hand, in our view full remission would be inappropriate in the circumstances we have outlined and having regard to the object of the penalty regime to encourage compliance and consistency in penalty decisions. Doing our best to take into account the factors outlined above, we consider that remission of the penalty to 25% of the remaining shortfall is appropriate in the circumstances.

(a) the assessments of primary tax should be reduced to allow deductions for the claimed 'property maintenance expenses' but otherwise affirmed; > > (b) the assessments of administrative penalties should be proportionately reduced to reflect the adjustment in (a) and remitted by 50% (that is, to 25% of the reduced shortfall).

2. Accordingly, the objection decisions under review must be set aside. Rather than risk miscalculation, we will remit the matters to the Commissioner for re-assessment in accordance with these reasons.

1. I certify that the preceding 116 (one hundred and sixteen) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding and Member P Ranson

..................................[SGD].................................

[1] Taxation Administration Act 1953 (Cth) s 14ZZK.

[2] Ronpibon Tin NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47.

[3] Ronpibon Tin NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47.

[4] Fletcher and Others v Federal Commissioner of Taxation [1991] HCA 42.

[5] Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation (1995) 31 ATR 253.

[6] BRK (Bris) Pty Ltd v. Federal Commissioner of Taxation [2001] FCA 164.

[7] Taxation Administration Act 1953 (Cth), Schedule 1, s 298-20.

[8] [2023] FCAFC 19.

[9] [2023] FCAFC 19, [54].

[10] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation [1991] FCA 276; (1991) 22 ATR 148, 155; and FCT v Cassaniti [2018] FCAFC 212.

[11] [2022] FCA 971, [54].

[12] Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972, [47].

[13] GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32, [94].

[14] Corporations Act 2001 (Cth), s 286.

[15] Corporations Act 2001 (Cth), s 9 Dictionary.

[16] Income Tax Assessment Act 1936 (Cth), s 262A.

[17] Administrative Appeals Tribunal Act 1975 (Cth), s 2A.

[18] Witness statement of Mr Kevin Hoiberg dated 9 August 2023, paragraph 17.

[19] Whether the applicant's taxable income for this year is in any case reduced by carried forward losses is discussed in relation to issue 5 below.

[29] Tab 31, page 216. The statement of Mrs Uhrhane dated 9 May 2018 (Tab 24, page 150) states that settlement occurred on 2 December 2015. Either way, this decision does not turn on which is the correct date.

[32] The Commissioner's Amended Statement of Facts Issues and Contentions was confusing in that it put forward alternative contentions in respect of the carried forward loss issue. The first contended the applicant had not discharged the burden of proving the applicant was entitled to carried forward losses at all. The second posited the possibility of allowing $800,000 relating to an historical adjustment 'if we are partially allowing carry forward losses of $800,000'. However, correspondence between the parties and the respondent's closing submissions made clear this concession was conditional upon proof of the calculation of the relevant construction costs leading to the claimed losses, which was not provided. The applicant's written closing submissions indicate it was aware the respondent had not accepted the $800,000 amount could be carried forward.