Tax law report - June 2013

The Commissioner of Taxation has a two-year period to amend a taxpayer’s tax return where that taxpayer is an individual or a qualifying small business taxpayer. Four-year time limits apply to taxpayers with more complex tax affairs, including those who are beneficiaries of trusts.

In Yazbek v FCT 2013 ATC 20-371, the taxpayer was a beneficiary of the trust (Trust) as a result of the definition of the ‘eligible class’ in the trust deed. The taxpayer lodged his 2005 tax return in April 2006 and the original assessment was issued on 18 April 2006. The Trust did not distribute income to the taxpayer and his tax return did not disclose any trust distributions.

On 12 April 2010, the Commissioner issued an amended assessment to the taxpayer that included additional income of $2.1 million. This additional income was not from the Trust.

The taxpayer claimed as part of his objection that the two-year time limit applied and that the Commissioner was out of time to raise the amended assessment. The Federal Court confirmed the AAT decision that taxpayers who are mere objects of discretionary trusts (persons who may benefit from the trust) are ‘beneficiaries’ and the four-year time limit applies.

This decision expands the taxpayer population subject to the four-year time limit, as it applies, for example, to mum and dad beneficiaries who have received distributions from a trust, as well as to nieces and nephews who have not received a distribution. This is a double-edged sword, as it also allows mere objects of discretionary trusts to request amendments to tax returns within the four-year time limit.

Industry benchmarks

In Carter v FCT [2103] AATA 141, the taxpayer carried on a florist business and failed to show that income tax and GST assessments issued to her on the basis of cost of goods sold (COGS) small business industry benchmarks were excessive.

The audit of the taxpayer was undertaken because her percentage of COGS was outside the acceptable benchmark range, and default assessments were issued for both income tax and GST in order for sales to be assessed according to industry benchmarks. The assessments gave rise to shortfalls of GST and income tax and a 75 per cent penalty was applied for intentional disregard of the law. (This was reduced to 50 per cent for recklessness at the objection determination stage.)

Taxpayers bear the burden of proving, on the balance of probabilities, that assessments are excessive. In this case, arguments raised by the taxpayer – that prices were reduced as a result of competition, that most sales were EFTPOS and that the cash register did not work properly – did not discharge that burden of proof.

The Tribunal held that the taxpayer’s evidence did not prove how the gross business income of the florist business, particularly the cash component of the business income, was calculated. Further, the Tribunal upheld the 50 per cent penalty imposed by the Commissioner.

Clearly, more than just general statements about competition or other business-specific issues are required to discharge the burden of proof. Although business-specific issues will be relevant, taxpayers must be able to demonstrate how their assessable income is calculated. There is no substitute for keeping records that fully explain the income of a business.

This is one of a number of cases where the use of benchmarks by the Commissioner in determining a taxpayer’s income has been accepted by the Tribunal.