CACHIA v FC of T (No 2)

Members:
R Hunt SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 819

Decision date: 25 August 2005

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R Hunt (Senior Member)

Summary

1. Mr Cachia, the applicant, applied to the Tribunal for review of the Commissioner's decision on his objection, denying him a deduction of $61,000 for the year ending 30 June 2002. The Tribunal has reviewed the objection decision and finds that it should be affirmed for the reasons set out below.

Issues

2. The issue before the Tribunal was whether, in respect of the year ended 30 June 2002, Mr Cachia was entitled to a deduction that was not taken into account by the Commissioner for calculation of his taxable income. There are two possibilities raised in Mr Cachia's grounds of objection and subsequent submissions. Firstly, tax losses for earlier income years may be claimed as a deduction under Division 36 of the Income Tax Assessment Act 1997 (the ITAA 1997). Section 36-10 explains how to calculate a tax loss and section 36-15 explains how tax losses may be utilised as deductions in later income years. Secondly, deductions may be claimed under section 4-15 of the ITAA 1997.

Evidence before the Tribunal

3. Before the Tribunal is a letter from Mr Cachia, dated 9 June 2004, in which he outlined his objection to the Commissioner's amended assessment made on 7 June 2004 for the year ended 30 June 2002. The notice of amended assessment set out that the Commissioner had adjusted the deductions claimed by Mr Cachia by minus $61,000.00 as a result of audit or

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ATC 2298

investigation. The adjustment was described as an adjustment to deductions for ``Loss prior year''.

4. Mr Cachia stated in his objection letter that he relied on ``carry forward losses'' and his ``basic contention'' was ``that a taxpayer may utilise at his discretion as a deduction an amount from accumulated losses-carried- forward from previous years''. He added that there appeared to be no tax law to the contrary and that the tax office had not explained any inconsistency in the law or identified the basis at law for its decision. Mr Cachia's position before the Tribunal at a hearing on 22 August 2005 was that he was not claiming tax losses but a deduction for unclaimed deductions. Mr Cachia also disputed the general interest charge in his objection letter and at the Tribunal hearing.

Legislation

5. As to income tax deductions, section 8-1 of the ITAA 1997 provides, in part:

``(1) 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.''

6. Section 4-15 of the ITAA 1997 provides that taxable income equals assessable income less deductions. Section 36-10 provides that, if your deductions for an income year exceed your total assessable income, you have a tax loss for that income year. Section 36-15 explains how to deduct tax losses. Under subsections 36-15 (1) and (2), tax losses may be deducted in a later year if assessable income for the year exceeds total deductions other than the tax losses. Then the taxpayer may deduct the tax loss from that excess.

Analysis and findings

7. As can be seen from the above setting out of the legislation, the tax laws provide how to calculate a tax loss for an income year and also how to deduct tax losses so as to calculate taxable income. There is also a general deduction provision as well as other specialised deduction provisions of various kinds in the Act. Section 8-1 is the main section dealing with deductions. Section 4-15 deals with how to work out taxable income by first calculating assessable income for the year and then adding up deductions for that year so as to produce a taxpayer's taxable income. Section 36-15 allows prior year losses to be utilised in a later year.

9. Mr Cachia initially claimed that he had a deduction for the year ended 30 June 2002 by way of prior year tax losses by reference to what he described as ``unclaimed deductions''. From the documents and submissions before the Tribunal, it is obvious that Mr Cachia never claimed any prior year losses over the period covered, that is, since 1994. Income tax returns going back to 1994 are before the Tribunal and show no such losses. Each year, Mr Cachia's assessable income exceeded his claimed deductions so that no loss was ever generated. This means that Mr Cachia can not point to any prior year tax losses which might be converted to a deduction. Mr Cachia has not shown the Tribunal any evidence of tax losses and abandoned this claim at the hearing.

10. Mr Cachia argued that he had unclaimed deductions for previous years. Mr Cachia has referred to ``unclaimed deductions'' in some of the returns before the Tribunal. However, the justification for and quantification of any unclaimed deductions is not clear, let alone proved, as required under section 14ZZK of the Taxation Administration Act 1953 (the Administration Act). For example, Mr Cachia did claim a deduction of $49,393 as ``other rental deductions'' in his 2001 income tax return (at T16-86) but then attempted to carry this amount forward as part of an ``unclaimed deduction'' totalling $120,334 in the same income year (T16, 104 and 106).

11. Even if Mr Cachia did fail to claim legitimate deductions in previous returns, they are not available to him in the 2002 year. Section 4-15 indicates that to calculate taxable income for a particular year, the taxpayer must take away any deductions ``for the income year''. The legislation does not allow a taxpayer to take away a previous year's deductions from an income year except for ``prior year losses''. Mr Cachia may have confused the term ``prior year losses'' with amounts he thinks he should have treated as deductions for a previous year. If this is correct, he should claim those deductions for the correct year.

12. Both parties referred to Case W52,
89 ATC 486 in support of their contentions. Mr Cachia thought the law was so difficult that a

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beneficial interpretation should be taken in his favour. However, the s 14ZZK of the Administration Act emphatically requires the taxpayer to show that an assessment is excessive or incorrect or should have been made differently. Mr Cachia has not discharged this onus in my view. Further, in that case, which concerned losses and allowable deduction provisions under the former tax laws, the Income Tax Assessment Act 1936 (the 1936 Act), Deputy President CJ Bannon QC noted that subsections 80(2) and (2C) did not permit the taxpayer to elect years in which to offset previous losses but envisaged an order of application of losses. In my opinion, the reasoning in Case W52 does not assist Mr Cachia to establish any entitlement to a deduction even on a beneficial interpretation.

13. The Deputy President in Case W52 also noted that the effect of section 166 of the 1936 Act was to impose a obligation on the Commissioner to allow deductions that come to his knowledge and which have not been claimed in income tax returns lodged. Mr Cachia has not substantiated any unclaimed deductions before the Tribunal that might be taken into account for the 2002 year. On balance, I am not persuaded that the Commissioner's assessment is in any way defective. As Mr Cachia has not discharged his onus of proving that the 2002 assessment was excessive or incorrect or that it should have been made differently, the Tribunal must decide that the objection decision should be affirmed.

14. Mr Cachia also disputed the general interest charge levied against him saying that he had disclosed all relevant material to the Commissioner in his taxation returns. The Tribunal has no jurisdiction to review the general interest charge imposed by the Commissioner as it is not part of the Commissioner's taxation assessment. The Tribunal is empowered to review the decision on Mr Cachia's objection to the Commissioner's assessment of tax only. See section 14ZZ of the Administration Act. While common sense would dictate that no interest charge should be levied where no debt exists, Mr Cachia must establish this independently of this review.

Decision

27. The Tribunal affirms the objection decision made by a delegate of the respondent on 30 July 2004 in respect of the year ended 30 June 2002.