The AAT has affirmed default assessments and penalties issued by the Commissioner, finding that the taxpayer could not use “threatened” losses from proceedings that had ended over a decade ago to reduce his taxable income to nil.
The taxpayer, a barrister, was a member of a partnership, which, through a nominee company, purchased a farm in 1986 for the claimed purpose of carrying on a primary production business. The purchase was funded by loans from Macquarie Bank. A related company borrowed additional funds from Sandhurst Trustees Ltd in order to pay off the Macquarie Bank debt. The partners and borrowers were subsequently involved in proceedings with both lenders, which were settled in the early 1990s. Under the terms of both settlements, the assignors agreed not to pursue their rights against the taxpayer.
The taxpayer failed to lodge tax returns for the 2005, 2006 and 2008 income years and the Commissioner issued default assessments (including penalties), totalling nearly $1m. The taxpayer argued that his taxable income was nil for each income year in question, arguing that the Commissioner failed to apply losses carried forward from previous income years, including interest from the Macquarie Bank and Sandhurst loans.
The AAT found that the taxpayer failed to discharge his burden of proving the default assessments were excessive, agreeing with the Commissioner that the taxpayer’s case was “one of assertion, not evidence”.
Irrespective of the deficiencies of evidence, the Tribunal said the “critical flaw” in the taxpayer’s case lay in the fact that he did not incur the interest expenses, he claimed as deductions, for the relevant income years.
- This was because the Macquarie Bank and Sandhurst proceedings had been settled over a decade earlier and, following execution of the settlement deeds, the taxpayer had ceased to be “definitively committed” nor “completely subjected” to relevant outgoings of interest.
- Further, in relation to the Sandhurst loans, the Tribunal agreed with the Commissioner that the taxpayer was merely a guarantor and was not liable to pay interest on the loans. The Tribunal said the related company, and not the taxpayer, incurred the interest expenses.
(Re Sandbach and FCT [2015] AATA 1024, AAT, File Nos 2013/6121 to 2013/6123, Alpins DP, 24 December 2015.)
[FJM Note: I’m not sure that subsequently settling so that a liability does not remain payable, affects whether the taxpayer was ‘definitely committed’ to the liability in the year in which the alleged tax losses were incurred.]
[LTN 1, 5/1/16]