CASE 1/2002

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2002] AATA 291

Decision date: 26 April 2002

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BH Pascoe (Senior Member)

These are applications to review decisions of the respondent to disallow objections to amended assessments of income tax for the years ended 30 June 1992 to 1995 inclusive. The amended assessments had been issued following an audit by the respondent to include profits on sale of motor vehicles as assessable income of the second applicant and to disallow spouse rebates claimed by the first applicant.

2. By consent, applications of both applicants were heard together. Pursuant to s. 14ZZE of the Taxation Administration Act 1953, the applicants had requested that the hearing be in private. At the hearing, the second applicant, Mrs A was represented by her husband, Mr A, who, as the first applicant, was unrepresented. The respondent was represented by Mr M. Corboy, of counsel. Evidence was given by Mrs and Mr A.

3. Mrs A had a history of physical medical problems. She said that she had psychological problems also for many years suffering from anxiety and depression for which she commenced psychiatric treatment from approximately April 1995. She outlined many of the stresses in her life. She was the second wife of Mr A who in turn was her second husband. She said that there had been considerable stress in relation to custody and other dispute with her husband's former wife. She had considerable difficulty in coping when her husband's son left his mother to live with them, then was forcibly taken back by his mother only to run away seeking to live with them again. She had a further problem with her own daughter who became involved with an older man of whom she disapproved, leading to major disputes. She said her son suffered from attention deficit disorder. Mrs A said that she was assaulted at a shopping centre by the husband of Mr A's former wife but no police action followed.

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4. Mrs A said that the result of the medical and personal stresses in her life was the development of paranoia which, in turn, led to a habit of changing her motor vehicles frequently and regularly. She said that she moved house five times between 1991 and 1995. While she acknowledged that she had bought and sold motor vehicles at frequent intervals over the period from July 1991 to March 1994, she maintained that each had been for her personal use or family use and that she had never owned more than one car at a time. She acknowledged that, from March 1994 her pattern of buying and selling cars was primarily dictated by profit motives and that profits from the transactions were properly assessable income for income tax purposes. Mrs A said that, from that time, she was bored with little or no social life, enjoyed the opportunities to meet people when buying, arranging repairs and cleaning and selling. She said that she was influenced by certain people she met who encouraged her to buy more cars and to use false names. She said that she refused to use false names or to buy more than one car at a time as she did not want to get herself into trouble.

5. Apart from one car purchased from a motor car dealer, Mrs A purchased all of her cars from an auction house. She said that Mr A always accompanied her so that he could drive any car purchased and, as she was of small stature and sometimes had difficulty being noticed by the auctioneer, to bid on her behalf. She acknowledged that some cars had been recorded as being purchased by her husband but, in the majority of cases, this was an error by the auction house. Purchases were paid for in cash. Apart from three cars purchased during the relevant period, Mrs A said that all decisions to buy and sell cars were made by her. She said that she purchased at auction because there was a greater variety of cars available. She acknowledged that there was no opportunity to test drive a car at auction and most were in a dirty condition. She said she concentrated on older cars and it is noted that, of the cars sold between July 1991 and June 1994, the purchase prices ranged from $1650 to $4000 with the majority of cars having a purchase price of between $2000 and $3000. All of the cars purchased were sold privately with the majority sold through newspaper advertisements. Mrs A said that she generally sold the car to the first buyer who offered a reasonable price, advertised the car at a price below the estimated marked value and was not concerned about making any specific profit. She maintained that, until March 1994 she did not contemplate a possible sale price when purchasing a car.

6. Mrs A said that it was not until February 1995, when the police indicated an interest in her car selling activity and the respondent commenced an audit, that she and her husband turned their minds to the number and frequency of car sales and the details of the various cars. She had not kept records of the transactions and said that she started to correlate the details from information supplied by the respondent, the police, vehicle licence records, credit car records, some receipts and from memory. She sought information from parts suppliers and trade people who had done work on her cars and, with her husband, prepared statements from the best of her knowledge to provide to the taxation auditors. Mrs A said that she was very concerned that there appeared to be a campaign to show that her husband, who was then a senior officer with the respondent, was involved in a business of car trading. She was adamant at that time that all car transactions were initiated by her alone and that all cars were hers and none were his. While she now says that three cars purchased during the year ended 30 June 1994 were purchased by and for use of her husband, she maintained that this difference was the result of having the pressure of having her husband excluded from involvement with her activities and on subsequent reflection after the stress of criminal charges had ceased. However, she said that, in each case, the decision to sell had been hers. Mrs A acknowledged that she had been convicted on eight out of nine charges of fraud resulting from her arranging for odometers to be wound back but stressed that these charges referred to cars sold after March 1994.

7. Mrs A said that she had always purchased old cheap cars which were not so susceptible to damage and did not make her easily recognised. She said that her first husband was a motor vehicle panel repairer so that she had some knowledge of what could be done to improve the appearance of a car. She said that she was incapable of repairing cars herself. She said that she was conscious of appearance and would not drive a dirty car or one showing signs of rust so always arranged for cars purchased to be

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cleaned and have panel work repaired. She would obtain necessary parts from wreckers, often from newspaper advertisements from ``back yard wreckers''. She said that organising the cleaning and repairs ``gave me something to do''. She maintained that there was no conscious consideration of a sale of a car at the time of purchase prior to March 1994 and the regular turnover of cars was a result of her psychological condition and a distraction from her stress and loneliness. She accepted that her husband was normally home and present when prospective purchasers came to inspect a car advertised for sale but insisted that neither lied to prospective purchasers about the history of the car or reasons for selling and the decision to accept an offer was always hers.

8. In a statement filed with the Tribunal, Mrs A set out details of the 9 cars sold in the year ended 30 June 1992, the 12 cars sold in the year ended 30 June 1993 and the 19 cars sold in the year ended 30 June 1994. In each case she attributed a reason for buying and selling. The reasons for selling included:

• • station wagon for use in moving house only
• • short term use to tow caravan for son's accommodation and another, later, to tow caravan back
• • car had major mechanical problems
• • larger car to visit son some distance away
• • larger car for specific holiday purpose
• • car too large
• • car too small
• • car damaged in accident
• • second car for husband's short term use
• • an old station wagon to transport pavers for short period
• • purchased manual car by mistake and could drive automatic car only
• • did not like colour
• • car steering too stiff with shoulder problems
• • to cheer herself up
• • to have different car to avoid recognition

Mr A maintained that all cars were purchased for personal use and, prior to March 1994, the regularity of changing vehicles and short term ownership was the result primarily of her psychological problems. She said that she had not realised how many cars she had purchased and sold until after the audit commenced.

9. Mr A said that he was aware that his wife had purchased and sold a number of cars in the relevant years but was not conscious of the number of cars involved until after the audit commenced and was surprised by the volume of sales. Neither his wife nor he had kept records. He said that, during the relevant period, he was distracted by family law matters relating to his former wife, problems with his children, the assault on his wife, difficulties with her children, threatening mail, his wife's medical and psychological condition plus significant work-related stress. While he was adamant that, prior to March 1994, his wife's activities in buying and selling cars was not a business and had no profit motive, he said that, prior to 1995, he had not addressed his mind to those activities. He acknowledged that he had prepared the bulk of submissions and details submitted to the respondent relating to the car transactions on behalf of his wife and had prepared on her behalf the statement filed for the purposes of the hearing. Mr A accepted that he had been present at each auction attended by his wife, had bid on her behalf and was generally present when prospective buyers called at their home. He often accompanied buyers on test drives and passed on details of price offers to his wife. He said that attending auctions and accompanying his wife on searches for parts, etc encroached on his leisure and created problems of fitting in her demands with his work responsibility but he had accepted it as part of his lifestyle.

10. The respondent provided 29 statements from persons who had purchased cars from Mrs A. Mr A did not seek to have any called for cross-examination as all related to sales after March 1994 where profits were conceded as assessable. However, Mr A, while not disputing that he had been present when the buyer arrived, did dispute any active involvement with negotiations, saying that he simply passed on the view of his wife on any offer price, and disputed any attempt had been made to mislead prospective purchasers in any way. While accepting that he had been personally convicted on 9 counts of fraud for involvement in odometer changes, he argued that the practice was rife in the used car sale industry, was merely a cosmetic change and not intended to deceive and buyers were regularly advised not

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to rely on odometer readings in old cars. He said that it was rare for a buyer to be concerned at odometer readings, basing their decision more on the general condition of the car.

11. Mr A maintained that three cars purchased during the year ended 30 June 1994 were his purchases. These were a Mitsubishi Colt, a Holden station wagon and a Ford Fairlane. He acknowledged that the Holden was purchased in his wife's name but had based his statement on the fact that it was his decision rather than hers to buy each of the three cars. He said that the Colt was purchased to assist in moving house as it was manual drive with a tow bar to be used with a borrowed trailer and was cheaper and more flexible than hiring a van for the short term use. He did not dispute that the records showed that it was purchased on Tuesday, 4 January 1994 and advertised for sale on Sydney, 9 January 1994 which would have required a decision to advertise possibly by Friday, 7 January or, at the latest Saturday, 8 January. He said he decided to buy the station wagon which was dirty, cockroach infested and damaged solely for the purpose of transporting used pavers for paving at his house. He said that, after transporting the pavers, his wife arranged to have the vehicle cleaned, repaired and sold. It was advertised for sale 17 days after purchase. Mr A said that he purchased the Fairlane as he ``fell in love with it'' at the auction and wanted a good car to use. His wife strongly disagreed with the purchase as it was too large for her and she advertised it for sale three days after purchase.

12. Mr A accepted that he had made the claim of the three cars being purchased by him only in the statement filed in December 2001. He acknowledged that in all statements, including a statement of facts and contentions filed in December 2000 and all statements provided to the respondent in 1995, it had been said that all cars in question were owned by his wife. He said that this had been the result of efforts to insist that he had no part in buying and selling cars and the need to explain why several cars had his name as purchaser. He acknowledged also that, in the criminal proceedings, he had stated in evidence that the Fairlane was not his car. He said, however, with the stress of those proceedings behind him, he had been able to reflect on the history of the cars from a different perspective and was now clear that, in three instances, he had made the decision to buy for his own reasons but, in all other instances, his wife had made the decisions. He did state, nevertheless, that his wife had made the decisions to sell these three cars and had handled the sales.

13. Mr A said that he had claimed a spouse rebate in good faith in each of the years in dispute. He maintained that he had not considered any possibility prior to 1995 that his wife's activities in buying and selling cars was anything other than a personal and non- assessable activity. He said that, by the time he lodged his return for the year ended 30 June 1995, he had become aware of the probability that her activities in that year amounted to profit making and had made a conscious effort to calculate her income for that year so as to claim a partial rebate only. He stressed that the return for the year ended 30 June 1995 was lodged prior to the amended assessments in relation to his wife being issued by the respondent.

14. Both Mrs and Mr A disputed some of the calculations of the respondent in arriving at the alleged assessable income. Disagreement on some sale prices of cars related to those where there was no record of the sale price and the respondent calculated a figure by reference to stamp duty paid. As stamp duty is calculated in increments of $100 or part thereof, the respondent had shown the highest figure. For example, in the case of a sale of a Sigma sedan in August 1991, the stamp duty was applicable to a sale price of between $3901 and $4000. The respondent based the calculation of profit on a sale price of $4000. The applicants argued that the sale was more likely to have been $3950. In each case of dispute on the sale price, the figure nominated by the applicants was $50 lower than that used by the respondent. There were six cars where this difference arose. The other area of dispute was in relation to expenses incurred in cleaning and repairs allowed in the respondent's calculation. The respondent had allowed a standard amount of $150 per car unless additional expenses had been substantiated by documentary evidence. Mrs and Mr A maintained that expenses based on specific recollections should be allowed. In addition, it was said that more documentary evidence had been available for the later years whilst little had been available for earlier years and the respondent should have been prepared to accept this by extrapolating the average

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expenses in the latter years for use in the earlier years.

15. It was noted that, in the year ended 30 June 1992, the longest period of ownership of a car before sale was 80 days and the shortest being 18 days. Nine cars were sold in that year. In the year ended 30 June 1993 the longest period was 85 days and the shortest 8 days. One vehicle which was owned for 59 days was shown as having been advertised for sale on the day after it was purchased. In that year 12 cars were sold. Prior to March 1994, 1 vehicle sold had been owned for 115 days which Mrs A said had been her favourite car and only sold after a serious accident. Other than that, the longest period was 85 days and the shortest 10 days. Against 1 car owned for 30 days was advertised 1 day after purchase and another owned for 16 days was advertised 5 days after purchase.

16. It was submitted for the respondent that the acquisition and sale of 56 cars over a 4 year period and the generally short period of ownership was beyond that which could reasonably be explained as having been acquired for private purposes. It was noted that every vehicle was sold at a profit. It was said that the vehicles were dealt with in a systematic manner involving bidding at auctions, organising, detailing and repair, advertising and arranging sales. The respondent submitted that the regular purchase of cars in poor condition was not consistent with her claims of being concerned with appearance and cleanliness. Her explanations were said to have been implausible and inconsistent with the evidence of her knowledge of the market value of cars and the costs and methods of improving their appearance. While it was said that there may have been some psychological reasons for the behaviour of Mrs A, it was submitted that the essential character of repetitive, continuous and systematic conduct was such that the profits made represented income under ordinary concepts. It was argued that there was an underlying intention to make a profit on each vehicle, which stamped her activities with a commercial character irrespective of any subjective motives. Mr Corboy submitted that the respondent had been generous in a standard allowance of $150 without evidence plus stamp duty for expenses and plus other specific expenses where substantiated. It was said to be inappropriate to allow further deductions based on memory of Mrs A, which had been shown to be inconsistent over the some seven years since the audit commenced. In relation to Mr A it was submitted that, if the Tribunal found against Mrs A, the claims for spouse allowance could not stand, leaving only the question of additional tax for the incorrect claims. It was said that Mr A participated in all purchases and sales and should have been well aware of the volume and frequency of transactions. As a senior officer of many years service with the respondent, he would have been well aware of the need for attention to detail, the submission of correct income tax returns and the likelihood of his wife's activities giving rise to taxable profits. This, it was said, properly justified additional tax equal to 75 per cent of the tax shortfall resulting from his claims for spouse allowance.

17. Mr A was critical of the conduct of the audit and comments made by the auditor. He submitted that, prior to March 1994, the activities of his wife in relation to motor vehicles did not amount to the carrying on of any business activity, nor were undertaken for a purpose of making a profit. He believed that all of the cars purchased prior to that date were for her personal use, the transactions were not systematic or business like and the short periods of ownership and subsequent sales were a product of her psychological condition and impulsive nature. He accepted that, at times, she may have been foolish but, notwithstanding urging from people she knew at auctions, she had refused to use false names or purchase and own more than one vehicle at a time for personal use. Mr A submitted that the use of a car for, on occasions, more than two months could not be considered a business and that there were reasons given for short term ownership. He said that, with the time that had elapsed, memories were fallible but there had been no attempt to mislead. Mrs A had accepted readily after sufficient information had been obtained by September 1995 that her position changed in March 1994 to motives of profit. He argued that, in earlier periods and if profit was a motive, she could have purchased more cars whereas the purchases and sales had frequently resulted from a ``kneejerk'' reaction to the stresses in her life. Mr A maintained that the acceptance of higher expenses in later years for which evidence had been available should have produced a higher average expense being accepted in earlier years particularly when Mrs

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A had a specific memory of work being carried out on a particular car although documentary evidence was not available. Attached to the statement of Mrs A filed with the Tribunal was a summary for each of the years ended 30 June 1992 to 1994 inclusive of her view of the calculation of profit on each vehicle sold. Although some of the figures in this summary differed from figures provided previously to the respondent, it was said that Mrs A now relied on these calculations prepared in December 2001.

18. Mrs A had conceded by September 1995 that her activities in buying and selling cars were undertaken with a purpose of generating profit from March 1994. The question remains as to whether the same motives were present in relation to cars sold from July 1991 to that date. Mr A sought to show by presentation of a graph which plotted the periods of ownership of all cars owned during the relevant period that there was a change from March 1994 to a greater regularity of very short term ownership from that of earlier periods. However, it is difficult to select a somewhat arbitrary point at which it can be said that the motives and activities of Mrs A changed. It was said that March 1994 coincided with a move to a smaller unit giving Mrs A less to do and a greater involvement with other people at auctions. However, they moved from the unit in a relatively short time thereafter to a larger house and little or no evidence was provided to show how the influence of others commenced in March 1994. It is accepted that after that date the longest period of ownership of a car appeared to be 27 days. Nevertheless, there were many cars owned for much shorter periods in the earlier years, and I find great difficulty in attributing March 1994 as the commencement of profit making activity which was not present prior to that date.

19. While much of the submissions made at the hearing were concerned with whether the profits were derived from the carrying on of a business of buying and selling cars, it is not necessary to find that a business was carried on to make the profits assessable as the entering into a transaction with the intention or purpose of profit making will make the resulting profit assessable. Here there were some of the indicia of business present in the frequency of transactions beyond what can be readily explicable as purchases for private purposes, the regular profit derived from the transactions, the way in which the applicant embarked on the transactions and the apparent degree of specialised knowledge involved in the transactions. Mrs A's evidence showed that she had a good knowledge of the market value of cars, was aware of and appeared to use a well- known publication used within the used car industry and which sets out values of the various makes and models of used cars, was knowledgeable of what could be done at moderate cost to repair and improve the appearance of a car and choice of car rarely appeared to be driven by her own particular needs. I accept that rarely did Mrs A own more than one car at a time and, mostly, during the ownership she used the car for personal travel. However it is the dominant purpose of acquisition which will determine the question of whether the profit on sale is assessable income. It is relevant that, with one apparent exception, all cars within the relevant period were purchased at auction. Mrs A accepted that this method of purchase gave no opportunity to test drive a car and it is difficult to accept that a private person would consistently purchase a car for personal and family use in this manner, particularly a car of the type regularly purchased. While the applicants regarded a period of ownership of a car of some two to three months, as happened in relation to four or five cars during the period, as a not unreasonable period within which a person may change over a car, it is doubtful that this would be seen as normal private behaviour particularly as many cars were held for much shorter periods. There was a systematic pattern of purchasing a car at auction and selling that car by private sale within a relatively short period. It may well be that Mrs A had other subjective motives for changing motor vehicles but given the discernible trading pattern it is difficult to arrive at any other conclusion than that the objective tests, looking at the frequency and regularity of transactions, the method of buying and selling, the degree of knowledge of the used car industry and the regular profit on each car sold, lead to the conclusion that the cars over the relevant period were acquired for the purpose of sale at a profit with the private purpose as a secondary and relatively minor purpose. I am left in no doubt that, whatever the purpose expressed in evidence may have been, the decision to buy a particular car was primarily driven by considerations of the ability and intention to resell at a profit. It is well

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recognised that a business activity can and often does commence with one isolated transaction. There was no evidence of the member and frequency of car sales by Mrs A prior to July 1991 but I am not persuaded that the activity of buying and selling cars for a profit did commence any later than that date.

20. Both Mrs and Mr A argued that three cars during the period were purchased and used by him. Given that several other cars were purchased in his name and one of the three was not and given the evidence that the decision to sell all cars was made by Mrs A and the very short period of ownership of all three, I am not disposed to consider any of these three vehicles as not falling within the same category of being within the activity conducted by Mrs A. There was conflict in evidence of who made the decision to buy and the circumstances surrounding the ownership recorded. However, the evidence was clear that Mrs A was the one who made the decision to sell and arranged the advertisement for sale.

21. Having reached the conclusion that the profit derived from the sale of each of the cars during the relevant period was assessable income, the question of the calculation of the profits and the allowances of expenses incurred on each car is difficult. The applicants argued for a higher expense on certain cars than allowed by the respondent. Little other than recollections of Mrs A was offered in evidence to support such deductions. On the other hand, the respondent had allowed an expense of $150 on each car with additional amounts where substantiated by documentary evidence. The additional expenses sought by the applicants amounted to $400 in 1992, $745 in 1993 and $1538 in 1994. The bulk of these expenses were said to be body repairs but some related to tyres and mechanical repairs. Whilst I am sympathetic to the view that some or all of these expenses could well be allowable, there was no evidence that at least $150 was spent on each vehicle and that such additional costs were in addition to that $150. Other claimed adjustments to the calculation of the profits consisted of a reduction in sale price of $50 for six cars and additional stamp duty costs of between $6 and $8 on each car. The differences in sale prices arose where there was no record of the actual sale price. The respondent calculated the sale price from the amount of stamp duty paid and, as stamp duty is based on increments of $100 or part thereof, used the upper rounded $100 figure. For example, a sale price calculated by the respondent of $4000 was said by the applicants to have been $3950. There was no evidence other than an assumption by the applicants. In all of the circumstances, I am of the view that Mrs A has not discharged the onus of proof that the assessments are excessive.

22. In relation to the applications by Mr A there was no dispute that, if the Tribunal affirmed the decisions of the respondent including profits from sale of cars in the assessable income of Mrs A, his claims for spouse rebates could not succeed as her net separate income would preclude such rebates. Consequently, the only issue remaining in relation to Mr A is the quantum of additional tax levied by the respondent. The additional tax was assessed at the rate of 75 per cent of the tax shortfall. This level of additional tax is that set by s.226J of the Act and applies where a tax shortfall was caused by ``the intentional disregard by the taxpayer'' of the Act or Regulations. There appears little doubt that this high level of additional tax was imposed as a result of Mr A's position as a senior officer employed by the respondent's. However, notwithstanding an expectation that, in his position, he would have had a greater knowledge of the requirements of the Act and responsibilities of the taxpayer than an ordinary citizen, I accept his evidence that there was no intentional disregard of the Act. I accept his evidence of significant personal problems and work-related stresses during the relevant period. While I accept that he was aware of the purchases and sales of cars by his wife and should have been aware that the volume and frequency of such transactions could lead to a view that the profits were assessable, I place his actions in claiming the spouse rebate no higher than a lack of reasonable care. This level of culpability attracts additional tax under s. 226G of the Act at a rate of 25 per cent of tax shortfall. Consequently, I find that the circumstances justify additional tax under s. 226G and would allow his objections to the extent of reducing additional tax from 75 per cent to 25 per cent of the tax shortfall in each of the years ended 30 June 1992 to 1995 inclusive.