Penalty for unsubstantiated work-related deduction claims

The AAT has affirmed the Commissioner's decision to refuse a taxpayer's claim for tax deductions for work-related expenses for the relevant year. In doing so, the AAT also affirmed the imposition of a penalty of 50% of the shortfall amount for "recklessness".

Background

The taxpayer was a car salesman and his tax return for the 2011–2012 tax year was lodged by his tax agent. In that return, the taxpayer claimed deductions for work-related car expenses, work-related clothing and laundry expenses, and other work-related expenses (including phone expenses and a car dealer's licence expense), totalling some $34,300. After an audit of the return, the Commissioner determined that the taxpayer had made unsubstantiated claims in relation to his work as a car salesman for most of the deductions claimed, and imposed a penalty of around $6,100, being 50% of the tax shortfall.

Before the AAT, the taxpayer did not refute the tax shortfall amount, but argued that his conduct should not have resulted in such a severe penalty. It was submitted that he had paid most of the penalty, and with $1,400 outstanding was unable to pay the remainder. The Commissioner argued that the penalty was properly assessed and that the taxpayer should have been familiar with the substantiation requirements. (In this regard, the Commissioner provided copies of the taxpayer's previous tax returns for the five years prior to the relevant tax year, noting that similar claims had been made in those years.)

Decision

The AAT noted that it was not in dispute that the taxpayer bore the onus of proof in the matter. It was also not in dispute that the taxpayer claimed deductions against his income that were not substantiated. However, the AAT was of the view that the taxpayer's conduct was more serious than mere failure to take reasonable care.

The AAT said that the taxpayer's evidence "was given in an unconvincing manner relying, in the main, on the input of his tax agent and his own inability to recollect details of aspects of his claimed deductions". Among other things, the AAT noted that the taxpayer did not maintain a log book or retain invoices or receipts. In relation to the work-related clothing expense claim, the AAT noted that the taxpayer described his work uniform as "merely whatever clothing he happened to be wearing on a particular day", and that there was no requirement of his employer to wear specified clothing or shoes.

In regard to phone expenses, the AAT noted that the taxpayer had agreed that one of his phones was used by his wife and that some of the phone bills recorded included non-work related international calls. The AAT was also not satisfied with the evidence led concerning the car dealer's licence expense. In this regard, the AAT said the taxpayer was "uncertain of the cost of the licence, whether it was taken for one or three years or whether he or his employer had paid the licence fee".

In conclusion, the AAT was satisfied that the 50% penalty was appropriate and that there was no basis for remission. It was also of the view that the penalty was not "harsh or unjust" in the circumstances.

Re Perry and FCT [2013] AATA 671, www.austlii.edu.au/au/cases/cth/AATA/2013/671.html.