Tax 101 doesn’t get much more basic than the need for keeping proper and adequate records to substantiate tax claims.
Without good records, SMEs (or any taxpayer for that matter) face an uphill battle to convince the Tax Office or the AAT or a court that their tax claims should be allowed.
This was graphically illustrated in a recent decision of the Administrative Appeals Tribunal (AAT).
The AAT affirmed amended assessments and penalties imposed on a taxpayer that were based on the Commissioner’s assessment of numerous unexplained deposits to several of the taxpayer’s bank accounts.
The taxpayer had a number of business interests including a sewing business, a chicken business, and a shop from which he sold phones and movies, a pawn shop, as well as a building business. The Tribunal said evidence showed none of his ventures generated anything more than “modest financial returns”.
However, the taxpayer claimed that he and a friend travelled to Vietnam in 2006, where he discovered a system for winning at baccarat that meant he could win 95% of the time. He claimed he and his friend won more than $US4 million at casinos in Vietnam and Cambodia in late 2006 to early 2007. The taxpayer also said he won “a lot of money” at a casino in Sydney during the 2007 financial year.
The AAT said that over the space of four days in August 2010, the Commissioner issued to the taxpayer two notices of amended assessment of income tax (one for each of the 2007 and 2008 income years). He was also issued two notices of assessment of shortfall penalty, also relating to those years, which required him to pay almost $1.15 million in income tax and penalties. He was given three and a half weeks to pay.
The Tribunal said the amended assessments were based on numerous unexplained deposits that were made to several of the taxpayer’s bank accounts, and followed an extensive audit of the taxpayer’s income tax affairs, during which the taxpayer claimed that the deposits were from “windfall gambling gains”.
The Tax Commissioner accepted that the taxpayer was a regular gambler, but did not consider that fact to be “relevant to the determination of [the taxpayer’s] assessable income”. Following disallowance of the taxpayer’s objections, he sought a review by the AAT. The Tribunal said the main issue was whether the taxpayer could demonstrate the deposits were attributable to his gambling activities, meaning they would not form part of his assessable income.
Lack of records defeats the taxpayer
Based on the evidence, the AAT found that the taxpayer gambled at a Sydney casino on a total of 228 days during the 2008 financial year, “and that he gambled very significant amounts of money in doing so”. The Tribunal said another document provided by the casino disclosed that, according to the casino, the taxpayer suffered overall losses on his gambling activity for the calendar years 2005, 2006 and 2007 of $25,657, $43,733 and $168,791, respectively.
On the other hand, in the calendar year 2008 (up to November, when that particular recording system was superseded), the taxpayer won a net $464,156 from the casino. However, the Tribunal noted that the casino’s records, while very extensive, were not comprehensive so far as the periods under review were concerned, although they did “paint a picture of significant gambling activity by the taxpayer”.
The Tribunal said the taxpayer argued that all of the unexplained deposits were attributable to his gambling winnings. However, it said that proposition was “accompanied by an almost total lack of records kept by the taxpayer as to the frequency or the magnitude of his gambling activity”.
This proposition, the AAT said, was also not supported by the records obtained from the casino. The AAT said those records showed that the taxpayer’s rate of success was “nowhere near the level that he claims it to be, or the level it would need to be if the assessments were to be undermined”.
Deputy President Frost of the AAT also said: “The taxpayer’s proposition is also underpinned by the inherently improbable notion that he and his friend discovered a system for winning at baccarat up to 95% of the time. He claims that their system is based on mathematical science, but it seems to me that one needs more than mathematical science to turn the sow’s ear of complete randomness into the silk purse of virtual certainty.”
The Tribunal concluded that, on the material before it, it was far from satisfied the tax assessments were excessive, although subject to one qualification relating to “winner’s cheque amounts” received by the taxpayer during the 2008 financial year.
The result however, was that the Tribunal affirmed the assessments in question, including as to the penalties imposed.
The taxpayer undoubtedly gambled large sums of money, but his inability to offer sufficient records in support of his claims meant he did not win his case.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.