In a recent AAT judgment Huang and FCT [2024] AATA 397, Deputy President Boyle said that the penalty of some $1.4m imposed by the ATO on Mr Huang (sole director of Austin Computers, the corporate trustee for his family trust Rong Family Trust (RFT)), was “excessive or otherwise incorrect and that the assessment should have been that no penalty was applicable”.
As a result of an audit of RFT’s GST and income tax compliance between July 2013 to December 2017, the Commissioner determined that RFT incorrectly claimed GST credits and failed to report the correct amount of business income in its tax returns and BAS. The ATO compared RFT’s computer retailing business with the small business benchmarks for the applicable industry and concluded that RFT had derived significantly more taxable income than it had disclosed in its tax returns. The ATO also included in RFT’s assessable income various unexplained deposits in bank accounts associated with RFT. Consequently, Mr Huang had failed to declare the correct trust distribution amounts for the 2014 and 2015 income years and the ATO therefore issued amended assessments for those years amounting to a $2.872m tax payable.
Additionally, the Commissioner issued an assessment that applied a 50% shortfall penalty due to Mr Huang’s “reckless disregard” of the Tax Administration Act. The ATO’s basis for imposing the penalty was that it considered Mr Huang had recklessly failed to keep accounting records, resulting in false or misleading income tax returns, and that his accountant, Stephen Hollyock, failed to reconcile and verify financial reports, MYOB system and income tax returns. The AAT held that the incorrect tax returns for 2014 and 2015 arose prior to the claimed reckless act of failing to keep copies of the relevant records and as such the tax shortfall was not caused by the taxpayer’s alleged recklessness. Deputy President Boyle found that he had “difficulty” with the Commissioner’s reasoning for the application of the shortfall penalty, stating that the “failure to keep the relevant records…. did not cause the statements to be false or misleading” and that he was “satisfied that the applicant has … discharged the burden of proof” thereby ruling that Mr Huang’s objection to the $1.4m penalties should be allowed.
However, on the matter of the amended assessments issued by the ATO being excessive, the AAT concluded that the taxpayer was unable to produce evidence to refute the ATO’s conclusion that RFT’s income was higher than as reported (as required by s 14ZZK(b)(i) of the TAA). This was largely because he was unable to produce the source records containing data as to RFT’s cost of goods to sales ratios or historical profit figures which would have verified the figures apparently used by RFT, nor was he able to explain the unreported deposits into the RFT bank accounts. The AAT did not find the taxpayer’s explanations “particularly convincing” and accordingly, the $2.872m tax payable on the amended assessments remained.
This case is a timely reminder for taxpayers, and their advisers, that they often face challenging hurdles in satisfying the burden of proof when their evidence and submissions are not well thought through or have inconsistencies. It is imperative that in order to challenge an assessment, you have to have evidence that can support your claim that the ATO’s view incorrect. It is also important to consider and weigh up the chances of challenging a position with a specialist advisor prior to disputing an assessment based on the relevant facts and circumstances of the case.
If you would like to discuss the above matters, please contact Mimi Ngo.