Case U60
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
In February 1985 the Commissioner assessed the applicant company as liable to pay income tax for the year of income ended 30 June 1983 [sic] amounting to $150,312. The applicant did not dispute the assessment. The Commissioner also determined that the company should pay additional tax of $1,013 for an "incorrect return". The company objected and its objection now falls to be determined.
2. The applicant is a public company, incorporated for over 30 years. It carries on business from a number of factories in different States and maintains its quite complicated accounts in relation to 12 distinct operations. For the year of income ended 30 June 1983 sales in its major manufacturing division were approximately $10,000,000. The depreciation claims give some indication of the complexity of its affairs. It maintained depreciation schedules in relation to eight distinct operations, details of which appeared on many sheets in depreciation schedules to the return. Among other things they record a wide range of "additions" for depreciation purposes, large in number and in aggregate amount.
3. In presenting its appropriately voluminous income tax return to 30 June 1983, it included one document signed by its public officer certifying:
"Schedule 35 - Repairs and Maintenance
Expenditure totalling $153,889 was incurred in respect of normal replacements and maintenance and does not include expenditure of a capital nature.
(sgd. Public Officer)"
It also presented a schedule identifying its claims for investment allowance amounting to $4,673.
4. A field audit, conducted by staff of the Commissioner and carried out prior to the issue of an assessment of taxable income on 13 February 1985, resulted in some adjustments to the income returned. Additional tax was claimed because the Commissioner alleged that claims for "repairs" and "investment allowance" were overstated. It was said that the claim for "Repairs and Maintenance" ($153,889) exceeded the amount properly allowable by $6,482 which, after allowing for depreciation ($919) and investment allowance ($816), resulted in a net overclaim of $4,747; and that investment allowance was not allowable on four other items and was overclaimed by $1,170.
5. The Commissioner calculated the tax that would have been avoided had the return not been adjusted (as it was prior to assessment) at $2,199.59. He remitted portion of the 200% additional tax provided for by sec. 226 thereby reducing additional tax to $1,013, applying a penalty interest factor of 20% p.a. to "tax avoided" (as he calculated it) for 112 days and a 40% culpability factor. The applicant decided not to argue about the adjustments to claimed "repairs" (six items the largest adjustment being $1,248); or about four "investment allowance" items (the largest being $529), but it did protest against the imposition of additional tax alleging that the Commissioner had no authority to impose any such liability. As an alternative it seeks a review of the Commissioner's exercise of his discretion as to remission. It was expressly conceded that the Tribunal did have power to vary the remission allowed if it was thought to be appropriate.
6. Adjustments in relation to the "repairs" were as follows:
Claim Deprcn Inv. Allce Overclaim
$ $ $ $
Air-hoist 1,012 118 182 712
Control cabinet 1,324 221 238 865
Heating controls 1,000 150 180
7. The taxpayer has chosen not to contest the action of the Commissioner in categorising those "repairs" as matters on capital account. In consequence it is common ground that all are depreciable. I merely observe that it is quite feasible that upon examination more closely of the evidence a number of those claims may have well been categorised as "repairs". The revenue significance of misclassification is twofold; first, to the detriment of the revenue the whole cost was claimed in a single year of income whereas the Commissioner claims it should have been spread over several years; and, secondly, to the detriment of the applicant there was no "once-only" claim for investment allowance.
8. There can be no similar suggestion in relation to the other "investment allowance" claims. One claim, said to relate to "pallet truck" (singular), related to two trucks and the allowance was claimed at the rate of 18%. $198 was claimed when only $50 was allowable. That was because nothing was allowable on one truck which cost less than $500; and only 7.2% was allowable in relation to the other. Investment allowance of $493 was also claimed on computer equipment when the item was not "new". It was purchased upon termination of a lease at residual value. The final claim was not allowable because it was conceded to relate only to consulting fees and the like in relation to the design of a production line. $529 had been claimed and was disallowed.
9. The first issue for determination calls for the application of sec. 226(2) which is said to have rendered the applicant liable to "additional tax". Section 226(2) provided:
"(2) Any taxpayer who -
- (a) omits from his return any assessable income;
- (b) includes in his return as a deduction for, or as a rebate in respect of, expenditure incurred by him an amount in excess of the expenditure actually incurred by him;
- ...
shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of $2, whichever is the greater."
10. At the outset, it is appropriate to observe that para. (b) relates to "expenditure" rather than, for example, to "losses and outgoings" such as are the subject of sec. 51. As Smith J. said in
Cyprus Mines Corporation v. F.C. of T. 78 ATC 4468 at p. 4486:
"The word `expenditure' in that context has no technical meaning. The Shorter Oxford Dictionary defines it to mean: `laying out (of money etc.), amount expended'."
That led his Honour to express the view that:
"unless the taxpayer includes as a deduction expenditure which he has not incurred or overstates the amount claimed as a deduction, then the section does not operate to permit the respondent to impose additional tax."
(I note that in using the term "permit", his Honour was summarising the effect of the section. Section 226(2) imposes the penalty, although the imposition will be ineffective unless the Commissioner issues an assessment in appropriate terms; and subsec. (3) empowers the Commissioner to remit the penalty so directed by Parliament.)
11. I take the view that just as in relation to para. (2)(a) the omission of assessable income must relate to assessable income derived in the year to which the item relates, so too in para. (b) the "expenditure" must relate to the year of income in which the deduction is claimed; and relate to the item as described by the applicant by terms such as are appropriate to identify the subject matter (e.g. "Depreciation: Air-hoist") of the deduction.
12. Having said that, it is reasonable to conclude that a person becomes liable to the
ATC 391
additional tax if he claims a deduction of $20,000 for "rent of premises" when he has only expended $10,000 on such an account in relation to that year; and that he cannot point to "rent" paid in relation to other years or to moneys expended on matters unrelated to "rent" in seeking to avoid the additional tax.13. However, if he claims a deduction for $20,000 for "rent", having expended $20,000 on "rent", he is not liable to additional tax even though the liability to "rent" was not incurred in circumstances or under conditions which would make it allowable as a deduction. That is the point made by the Full Bench of the Federal Court of Australia in
F.C. of T. v. Rabinov & Anor 83 ATC 4437.
14. In determining this reference I find that there was no claim to any deduction for an amount "in excess of the expenditure actually incurred" by the taxpayer. The Commissioner did not even suggest the contrary. The Commissioner's complaint is that:
- (a) in relation to "repairs and maintenance" - as that phrase was used by the applicant - so far as is relevant nothing was expended in circumstances entitling the taxpayer to any deduction for "repairs" - as that phrase is used by the Parliament in sec. 63 of the Act and by the courts in contradistinction to "capital" or "capital repairs" or "initial repairs" and, it seems, as the public officer intended to use the term in his certificate; and
- (b) in relation to the investment allowance, nothing was expended (so far as is relevant) entitling the taxpayer to a deduction.
15. The Commissioner points to the observation of their Honours in Rabinov when they said of (inter alia) para. (a) and (b) (at p. 4439):
"Although it was not suggested to the Court that these situations should be read ejusdem generis, it is possible to discern a common characteristic, viz. that facts are withheld from or falsely stated to the Commissioner. It is the failure to make a full and true disclosure of relevant information that attracts a liability to additional tax, not a failure properly to characterise an amount which has been disclosed."
16. The Commissioner relies on the first proposition in the latter sentence as justifying the imposition of additional tax, just as it would justify issue of an amended assessment pursuant to sec. 170 of the Act. But that proposition appears to be contrary to the proposition immediately following. The apparent contradiction can be resolved by considering the passage in the joint judgment of their Honours which gave rise to the comment.
17. Their Honours were commenting on a submission for the Commissioner made in the course of argument. Their Honours record that counsel for the Commissioner "later sought to qualify this submission but as he did not resile from it, it is necessary to express a view on it". The submission so commented on was (at p. 4439):
"... that section 226(2) operates so that if a taxpayer claims as a deduction an amount which is held not to be an allowable deduction under the Act he is liable to additional tax under sec. 226(2) even though the amount is expenditure actually incurred by the taxpayer. The proposition was that if a taxpayer claims as a deduction an amount which is not properly characterised, in part or in whole, as a deduction, a liability to additional tax arises under sec. 226(2)."
18. Their Honours then went on to explain the submission by way of example (at p. 4439):
"By way of illustration, if each of these taxpayers had actually expended the sum of $25,000 in a gift to the Ezroh (Relief) Trust Fund, claimed the sum as an allowable deduction, being a gift within sec. 78(1) of the Act and, as it happened, the fund did not qualify under that subsection, nevertheless a liability to additional tax arose. By way of further illustration, if a taxpayer actually incurred expenditure in overseas travel and claimed that expenditure as a deduction, if it were later held by Court or Board of Review to be non-deductible as a loss or outgoing within sec. 51, sec. 226(2) authorised the imposition of additional tax."
Their Honours then made the comments relied on in the course of rejecting the submissions so made.
19. In my view consideration of those passages makes clear what the Court saw as the distinction between failure to make "a full and true disclosure" and a failure in "characterisation". It becomes clear that the
ATC 392
"common characteristic, viz. that facts are withheld from or falsely stated to the Commissioner" is in "withholding" (in the case of assessable income) and having "falsely stated" (in the case of expenditure) the quantum of income received or expenditure incurred. In face of that I am satisfied that the error in relation to "repairs and maintenance" is an error in characterisation - not a false statement as to expenditure incurred.20. On the subject of "repairs" one further matter should be mentioned. The public officer provided a certificate as directed by the Commissioner. In doing so he purported to assess expenditure of the company by reference to matters of law. If he was in error in his classification as, for the purposes of these proceedings, it is conceded he was, that has no relevance to any issue arising under sec. 226(2). If the public officer is to be held accountable for the erroneous characterisation by reason of his certificate, that could have been a matter for a prosecution if it had been thought that a prosecution could successfully lie.
21. As to the claims for "investment allowance", I am satisfied that once again there has been no overstatement of "expenditure incurred". The only issue which might have arisen between the Commissioner and the taxpayer was whether the "expenditure incurred" gave rise to an entitlement to a deduction.
22. Should I be wrong in the foregoing, the question arises as to the quantum of additional tax as to which I now proceed to the exercise of my discretion. I have expressed my views in a recent decision (published 4 February 1987, No. 3189 [reported as Case U36,
87 ATC 266]) in relation to different circumstances. In this instance I observe that the issue as to "repairs" is commonly a difficult one and that by its action in seeking a sec. 51 deduction as an alternative to depreciation, the applicant denied itself the advantage of a claim to investment allowance. I also observe that I find less justification for criticism of the applicant with reference to "repairs" than I do in relation to the items of "investment allowance" where no similar difficulties are said to arise. I also observe that sec. 226(2) does not expressly require that allowances for depreciation and investment allowance be made and brought to account - a circumstance which would lift the sec. 226(2) additional tax to $5,443.
23. In all the circumstances I think it would be sufficient if the "culpability factor" were reduced by about half in the case of the "repair" items, but not at all in relation to "investment allowance".
24. Accordingly, although I have determined to vary the determination of the Commissioner under review by discharging the assessment of additional tax, as an alternative I would vary the decision under review by reducing additional tax to $600.
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