In a decision handed down on Mon 5.9.2016, the AAT held that a taxpayer was not entitled to a deduction claim in relation to a “service charge” and it also affirmed an administrative penalty imposed for failure to lodge a tax return on time.

The issue before the AAT was whether the taxpayer was entitled to claim a deduction under s8-1(1)(b) of the ITAA 1997 for a service charge said to have been paid to a related company in the year ended 30 June 2012. The service charge was said to comprise, among other things, workers’ compensation expenses, client entertainment expenses, and certain payments made to third party subcontractors. At the hearing, the Commissioner said he was satisfied as to the deductibility of the subcontractor expenses. The other issue was whether the taxpayer was liable to pay an administrative penalty under s284-75(3) of Sch 1 to the TAA at the rate of 75% for failing to lodge its income tax return on time. The taxpayer contended that it did comply with the Commissioner’s demand to lodge its return by a specific date.

The AAT found there was insufficient evidence to show that it incurred a service charge in carrying on its business. It also agreed with the Commissioner that FCT v Phillips [1978] FCA 28 was not of any direct relevance or assistance to the taxpayer’s case. It also said the taxpayer’s reliance on Taxation Ruling TR 2006/2 was “misplaced”. The AAT also found the subject tax return was not lodged on time and that there was no justification to remit any of the penalty.

Accordingly, the Commissioner’s objection decision with respect to income tax was set aside and remitted to the Commissioner for determination in accordance with the concession that the Commissioner had already made.

The objection decision with respect to the penalty was also affirmed except that the amount of penalty is to be recalculated.

(Re PBKQ and FCT [2016] AATA 681, AAT, File No: 2015/0806, Lazanas SM, 5 September 2016.)

[LTN 171, 5/9/16]