The Administrative Appeals Tribunal (Tribunal) has determined, in opposition to the Commissioner of Federal Taxation (Commissioner), that a luxury car dealer was entitled to decreasing Luxury Car Tax (LCT) and Goods and Services Tax (GST) input credits on the acquisition of a luxury vehicle. Comments contained in the Tribunal’s decision include a cautionary warning for the Commissioner in a number of aspects, including to take care in concluding that a taxpayer has been dishonest.

In the case, Skourmallas v FC of T 2019 [2019] AATA 5535, the taxpayer, Mr Skourmallas, operated a small-scale luxury car business under a motor vehicle dealer’s licence. During the period he purchased and sold eight luxury cars and claimed adjustments in the business’ Business Activity Statements (BAS) for LCT and GST on those cars. The vehicles were held between 12 and 420 days and had kilometres travelled between 0 and 4,969.

Interestingly, three of the eight vehicles purchased by Mr Skourmallas were then sold back to the company he purchased them from, in one case at a loss. Further, of the eight vehicles purchased and sold as part of the business, Mr Skourmallas only made a profit on two. However, a profit would arise in relation to other vehicles if Mr Skourmallas was entitled to decreasing adjustments made in the business’ BAS.

Upon reviewing the tax affairs of Mr Skourmallas, the Commissioner determined that the taxpayer was not a motor vehicle dealer or, in the alternative, one particular car was acquired for personal rather than business purposes and therefore he was not eligible for the LCT or GST adjustments.

It appears that the key arguments from the Commissioner included:

Mr Skourmallas was not a “credible witness” as he was unable to substantiate statements with evidence and was aggressive in responses.
In relation to an Audi R8 held, the insurance on the vehicle covered only private and extreme limited use, the car had personalised plates and was sold on carsales.com.au via a private rather than dealer account.
Mr Skourmallas did not operate his business as expected. For example, he did not have a showroom, car yard or other such indicia of a conventional motor vehicle dealership

The AAT held in favour of Mr Skourmallas, setting aside the Commissioner’s decisions.

The Tribunal was satisfied that the taxpayer was a motor vehicle trader and all vehicles had been acquired for that. Importantly the AAT cautioned the Commissioner on a number of approaches taken in this matter, notably:

Whilst self-serving statements should be given careful scrutiny, facts may be found on the basis of oral evidence alone. The Tribunal noting at paragraph 7(a):

[t]here is no requirement that direct evidence by oral testimony or affidavit may only be accepted if corroborated.

Referring to the decision in Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, Senior Member R J Olding addressed the issue of burden of proof and the requirements of this, quoting at paragraph 7(d):

…[where] the taxpayer succeeds in ‘weighing down [the] scales ever so slightly in his favour then he has discharged the burden he carries’.

The Commissioner’s assertions that the taxpayer was not credible was not accepted. Allegations of this nature due to Mr Skourmallas interrupting the interviewer’s questions or being aggressive in his response did not go to his credibility. Senior Member RJ Olding noted at paragraph 13 that:

Mr Skourmallas would not be the first witness to respond emotionally to questions that directly asserted that he fabricated a document or, in one series of questions, baldly stated: ‘Mr Skourmallas, you’re lying? . . . I’m telling you that you’re lying’. An animated or argumentative response may not be helpful but in that context does not necessarily indicate absence of truthfulness.

Whilst there was some personal use of one car, Senior Member R J Olding noted that even if there were some private use of the vehicle this does not mean that the vehicle was acquired for private purposes. It is for this reason that change of purpose provisions are contained in the legislation both for LCT and GST.
Commenting on the Commissioner’s approach to the business being one clouded by traditional concepts of a car business, such as a showroom, it was noted at paragraph 58:

It would be a mistake to give significant weight to the absence of features of traditional businesses, such as showrooms and premises for storage, that are not necessary or appropriate for an entirely different business model or stage in the development of an alleged business.

Senior Member R J Olding in concluding obligations at paragraph 114, sent a clear message to the Commissioner in relation to the difference between the submissions made on behalf of the Commissioner and his own reaction to the evidence of Mr Skourmallas. Senior Member RJ Olding noted that this difference underlines the care needed to be taken by the Commissioner and his officers in concluding that a taxpayer is dishonest.

Whilst the Commissioner may appeal the decision, comments from the Tribunal are a significant win for taxpayers.

Firstly, the decision serves as a reminder that patience with and impartiality towards taxpayers is required by the Commissioner and his officers during review and audit processes. Whilst these requirements are outlined in the Taxpayer’s Charter as a right of taxpayers, Senior Member R J Olding’s comments serve as a timely reminder to ATO officers of their necessity.

Secondly, comments regarding substantiation and the validity of affidavits alone as evidence, provide hope to taxpayers who may find themselves in situations where they are unable to support positions. The retention of sufficient evidence to support positions taken is required under the tax legislation. Therefore thorough documentation and the retention of such information is always best practice and highly encouraged. However, the flexibility noted by Senior Member R J Olding acknowledges that such documentation is not always readily available and, in such cases, sworn affidavits made by taxpayers as to the facts should not necessarily be dismissed due to lack of substantiation.

Finally, the Tribunal’s comments regarding a car showroom acknowledges the changes seen in modern business landscape. The comments serve as a reminder that business models have changed and will continue to change and so too should the perspectives of the tax office on this. With technology advancing to allow businesses to connect with their customer base via new models, such comments should provide a level of comfort to taxpayers who operate their business in the absence of the traditional bricks and mortar office.

If you would like further information in relation to an audit or review processes, GST, LCT or other tax matters, please contact our specialist team:

Laura Spencer
Senior Associate
T +61 3 9611 0110
lspencer@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105
E: dsmedley@sladen.com.au