Taxpayer (and tax agent) slammed on record keeping

Taxpayer (and tax agent) slammed on record keeping

The AAT has upheld the application of a 50% penalty to a taxpayer (who claimed to rely entirely on his tax agent) for ‘recklessness’ in claiming deductions that couldn’t be substantiated. Facts In the 2011/12 tax year, in a tax return lodged by his tax agent, the taxpayer made the following claims for tax deductions in relation to his work as a car salesman:

• work-related car expenses of $23,065;
• work-related clothing and laundry expenses of $645; and
• other work-related expenses, including phone expenses and a car dealer’s licence expense, of $10,605.

Following a tax audit, these were reduced to nil, $150 and nil, respectively, and the Commissioner also imposed a penalty of $6,092, being 50% of the tax shortfall (on the basis that the taxpayer had acted recklessly in making false or misleading statements which led to the tax shortfall). The taxpayer challenged the amount of the penalty imposed by the Commissioner (though no dispute was raised in relation to the calculation of the tax shortfall amount of $12,184). Reasons for Decision In the course of the trial, it was established that:

• the taxpayer had not maintained a log book in relation to his claim for car expenses;
• the car dealer’s licence expense was not incurred in the relevant financial year, as the liability to renew did not arise until the following year;
• laundry expense records were not maintained (in any event, the taxpayer described his ‘work uniform’ as “merely whatever clothing he happened to be wearing on a particular day”, and there was no requirement from his employer to wear specified clothing or shoes); and
• phone records indicated that the taxpayer had two mobile phones, one which was used by his wife, that the account included home internet charges and that non-work related international calls were included.

However, the taxpayer claimed that his conduct was unintentional and the penalty was unfairly imposed on him, and, in particular, the penalty was “more severe than would be imposed in a court if he had been convicted of criminal conduct”. In giving evidence about his claims, the taxpayer maintained that, on all the deductions in his tax return, he relied on his tax agent. Editor: On this point, the AAT stated, since the taxpayer did not maintain a log book or retain invoices or receipts, it was “unclear how his tax agent was able to assess the expenses claimed on (his) behalf.” The AAT accepted the meaning attributed to the concept of “recklessness” advanced by the ATO, and was satisfied that the taxpayer was grossly negligent in claiming the deductions included in his tax return: “There was a real risk that the material in his tax return would be incorrect, and a reasonable person in his position would be aware that there was a real risk and that the legislation would not operate correctly”. It was satisfied that his conduct was more serious than mere failure to take reasonable care and that the 50% penalty was the appropriate level of penalty in his circumstances.

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