The recent Administrative Appeals Tribunal (AAT) decision of Holman v FCT highlights once again the importance of documentation and maintaining objective factual evidence to discharge the statutory burden of proof when disputing an assessment.
In this instance, the AAT held that a taxpayer (Mr H) and his wife (Mrs H) were not conducting a business in partnership, with the consequence that Mr H could not deduct partnership losses in his individual income tax return.
In determining that Mr and Mrs H did not carry on business in partnership, the AAT directed significant attention to the Commissioner’s views in Taxation Ruling TR 94/8 on the indicia of a partnership, noting in particular that:
the intention of the parties to form a partnership was unclear because the ABN and GST registrations of the business were under Mrs H’s name as a sole trader;
the Business Activity Statements were lodged under the name of Mrs H solely;
the business did not register for a tax fie number or lodge a partnership tax return;
there was no partnership agreement to document the relationship between the parties;
it was not clear on the evidence what capital, if any, Mr H had contributed to the business; and
in relation to the business bank account, Mrs H was listed as the “owner” and Mr H as an authorised “user”.
The factors above led the AAT to conclude at [73]:
If the Business was being conducted as a partnership one would expect that the BAS, ABN, ITR, and business name registration would be in the partners’ joint names. Here, only Mrs H is registered on these business records. The BAS for the Business were lodged by Mr H’s wife. The Business Names Extract identifies that Mrs H is the sole trader of the Business.
The AAT pointed to the judgment of Hill J in Re Imperial Bottleshops Pty Ltd and William John King Egerton v FCT (1991) 22 ATR 148 of the difficulties a taxpayer has without substantiating records:
A taxpayer who does not keep records of his deductible outgoings faces a very difficult task. If he goes into the witness box and swears that he has incurred the outgoings he is making a self-serving statement. That does not necessarily mean that he is not to be believed. Such a statement, like statements of purpose, or object or state of mind must, however, be "tested most closely, and received with the greatest caution": … It would, of necessity, be a rare case indeed where a taxpayer, claiming to have expended a very large sum of money on trading stock and other business expenses, would succeed in satisfying the burden of proving that the assessment is excessive. Some other corroborative evidence would normally be required which makes it more probable than not that his sworn testimony is to be believed. ....
The result of Holman suggests three things:
Always document a commercial relationship or arrangement, even if between related parties.
Even though the existence of a partnership is a question of fact and degree based on the conduct of the parties a partnership agreement may have aided in objectively demonstrating the commercial arrangement and intentions of Mr H and Mrs H.That spouses, or domestic partners, may assist each other in the running of their businesses does not, of itself, mean that they are a partnership for taxation purposes. (The AAT accepted that Mr H contributed to the business, but not as a partner).
Seek specialist advice before engaging in the objection or appeals process. Mr H was self-represented in this matter and may not have appreciated the burden of proof threshold that must be overcome when litigating against the Australian Taxation Office (ATO).
If you require further information about documenting a commercial arrangement or managing an ATO dispute, please contact.
Edward Hennebry
Associate
T +61 3 9611 0113
E: ehennebry@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@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
