The AAT has confirmed that a taxpayer, an automotive repair company, was not entitled a deductions for a contribution paid to an off-shore “employee welfare fund” in the 1998 income year nor to a deduction for the resultant carried forward loss and another contribution in the 1999 income year. However, the AAT found that while the Commissioner could issue assessments for these income years in 2012, an assessment to deny a deduction for resulting carried forward losses that was issued for the 2002 income year was out of time.
The taxpayer and a number of related companies carried on an automotive repair and spare parts business. In 1998, the taxpayer claimed deductions of $400,000 for contributions made to an “employee welfare fund”. Its beneficiaries were the 2 employee-operators of the business and a spouse. In 1999, the taxpayer claimed deductions for further contributions of $25,000 and carried forward losses resulting from the original contribution in 1998. In 2012, the Commissioner issued amended assessments to deny the original and later contributions and the resultant carried forward losses (including for the 2002 income year), together with issuing Pt IVA determinations. The fund had been established in June 1998 as an offshore discretionary trust fund.
In dismissing the taxpayer’s application, the AAT found that the contributions were not deductible as they were not made for the purpose of gaining or producing the taxpayer’s assessable income but rather they were made for the purpose of generating tax deductions. In doing so, the AAT dismissed the taxpayer’s argument that as it conducted a “business of providing personnel to other entities in the group”, the contributions were deductible. The AAT also found major problems in the way the fund was set up and operated, including that the idea for the fund originated not with the business itself, but with its accountant and at no stage had the taxpayer identified any need to provide for the retention of its employees and that only one payment of $22,780 had ever been made out of the fund in 15 years.
The AAT then found that the notices of assessment for the 1998 and 1999 years were not out of time as they came within relevant items in s 171A of the ITAA 1936 (the time period to make assessments for “nil liability returns” for the 2003-04 or earlier years). However, the AAT found the Commissioner did not have the power to issue an assessment for the 2002 year because this assessment came within s 170(1), Item 4 which only allows a 4-year time limit for issuing assessments.
Finally, the AAT found that it had been appropriate for the Commissioner to impose 75% penalty tax for “intentional disregard” of the law and that there were no grounds for remission of the penalty.
(AAT Case [2014] AATA 414, Re RepairCo and FCT, AAT, Frost DP, Ref Nos 2012/4885-4887, 25 June 2014.)
[LTN 121, 26/6/14]