Small business benchmarks catch out florist

The AAT has dismissed a taxpayer’s appeal against income tax and GST assessments issued following an ATO audit of her florist business.

Background

The taxpayer conducted a GST-registered florist business and lodged Business Activity Statements (BASs) for the monthly tax periods from 1 July 2007 to 30 June 2008. In her 2008 tax return, she reported “Cost of sales” for the business of $259,982 and “Total business income” of $313,971.

The ATO selected the taxpayer for audit because she had reported cost of goods sold (COGS) representing 83% of her reported business income, and this was outside the COGS industry benchmark percentage range of between 44% and 54%. The ATO requested that the taxpayer provide evidence that she was correctly recording and reporting her business income. In response, her tax agent forwarded certain documentation to the ATO, eg EFTPOS statements, a spreadsheet summary of cash register rolls, cash register roll receipts, bank account statements and several bank deposit slips. The documentation generally covered the period from April to July 2008.

Following the audit, the ATO advised the taxpayer that in its opinion, she had not keep adequate records, and, as a result, issued default amended assessments (including penalties) totalling just over $130,000 based on the COGS small business industry benchmarks. She objected, and her objection was partially allowed on the penalty issue (by reducing the administrative penalty for the income tax and GST shortfalls from 75% to 50%, and by partially remitting the GIC). However, it was disallowed regarding the income tax and GST assessments.

Decision

The AAT said there was no evidence before it to support the taxpayer’s contentions. Based on the evidence before it, the AAT considered that the taxpayer had failed to prove positively, on the balance of probabilities, that the relevant assessments were excessive. The AAT said the evidence before it did not prove how the taxpayer calculated the gross income of the florist business for the year ended 30 June 2008 and, in particular, the cash component. The AAT said the taxpayer’s problems in this regard appeared to arise as a result of the following:

• a defective cash register;

• missing till (cash register) tapes for June 2008;

• the fact that no reconciliations had ever been produced;

• that the spreadsheet summary of till (cash register) rolls for April and May 2008 was unreliable in that:

- days were missing from the summary and other evidence before the AAT indicated that the taxpayer did, in fact, trade on the those days; and

- there was a difference between the total sales recorded in the spreadsheet summary and the reported G1 “Total sales” amount in the BASs for the florist business for April and May 2008.

The AAT considered that in the circumstances, it was open to the Commissioner to exercise his discretion and apply the COGS small industry benchmark range.

Penalty issue

Based on the evidence before it, the AAT considered that in the circumstances of the taxpayer’s case, it was appropriate for the Commissioner to apply a base penalty amount of 50% on the income tax and GST shortfall amounts on the basis that those shortfall amounts were caused by her “recklessness” and that no part of those penalties should be remitted.

More particularly, the AAT considered “that a reasonable person in [the taxpayer’s] position would have foreseen that there was a real … risk that by not reconciling the Z-tapes (ie cash register tapes) with the BASs and bank accounts with the Florist Business for the relevant period and, instead, by relying solely on the deposited cash in bank to identify the sales of the Florist Business for the relevant period, her income tax returns and BASs may well be incorrect. Further, a reasonable person in [the taxpayer’s] shoes would have foreseen the risks of operating a business with a faulty cash register, which is unlikely to record all sales and/or damage the Z-tapes such that the true sales for a particular day may be unascertainable”.

Re Carter and FCT [2013] AATA 141, www.austlii.edu.au/au/cases/cth/AATA/2013/141.html.

Appeal update

The taxpayer has sought an extension of time to lodge an appeal against the decision.