This is a case that has piqued interest from a lot of people.
In multiple proceedings handed down in August, the Federal Court held that nearly all deductions amounting to several million dollars claimed by three entities controlled by one individual should not be allowed.
This is a case referred to as Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation. It also involved a business called the Anglo American Charitable and Cultural Trust (the AA Trust).
What’s the story?
The case came about because the Tax Commissioner issued amended assessments of income tax and penalty assessments in relation to the above-mentioned companies. These were in relation to tax deduction claims for management fees and interest said to be incurred in respect to purported loans.
The question arose as to whether the alleged management fees were actually incurred.
In addition, there were queries around whether purported loans were actually made, whether the proceeds of the loans were used in producing assessable income or whether the interest claimed was in relation to the alleged loans.
The case concluded with the court upholding that the value of “management fees” and interest were “no more than ex post facto constructions designed to be fiscally convenient for tax purposes”.
Basically, the claims were not valid.
In one of the cases, as shared by Senior Content Analyst Heidi Macguire from Wolters Kluwer Tax and Accounting, “The lead appeal in this decision was in relation to Melbourne Corp which, over the 2001 to 2014 income years, claimed deductions in respect of management and consulting fees as well as interest expenses in relation to arrangements with various Australian entities.
The Commissioner disallowed the deductions and imposed penalties at the rate of 75% for intentional disregard, increased by 20% for the years after 2001.
The assessments resulted in Melbourne Corp’s taxable income increasing from $168,018 to $2,431,071, with penalties of $589,225 and shortfall interest charge of $175,746 imposed.”
A caution for all business owners
There are many ways to minimise tax as a business or individual but if your accountant goes beyond what is legal, there will always be the risk of a response and investigation from the ATO, and subsequent legal action.
In terms of writing off management fees or loan expenses, it is important to have documented evidence of everything. At the very least, the ATO needs to see the flow of money between bank accounts as a way of proving tax-related claims.
The term ‘wilful blindness’ was mentioned many times during the Melbourne Corporation cast. In his findings, Justice Logan stated that the taxpayer’s directors conduct (and his evidence) was not dishonest, but he was mistaken to the point of wilful blindness to the obvious in fixing and then causing the amounts to be claimed.
Justice Logan stated that the accountant in question, “Appears additionally to have convinced himself, seemingly based on a mistaken understanding of the proposition, that it is not for the Commissioner to dictate to a taxpayer how to run a taxpayer’s business or one controlled by a taxpayer.”
For penalty purposes, this behaviour was classed as ‘reckless’ rather than ‘intentional disregard’. However, as Heidi McClure wrote in the conclusion of her lengthy article about the trial:
“An act of will, no matter how genuine, does not overcome lack of documentation, contradictory evidence, unreliable ledger entries or transactions devoid of any plausible explanation.
Second, making ex post facto (after the fact) constructs or “closing adjustments” after the end of an income in order to achieve a fiscally convenient outcome does not serve to minimise tax but rather leads to a finding of sham.”
Long story short… tax returns require an honest approach based on documentation and evidence. If you’re a business owner, this means keeping your receipts and records of all interest, loan and other transactions. If you make a claim that the ATO notices as outside of standard benchmarks, you must be able to prove it is genuine.
Crest Lawyers provides legal advice for individuals and business owners on the Gold Coast.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.