Tribunal finds applicant unable to substantiate input tax credits for horse racing enterprise

Yesterday the Tribunal handed down its decision in Trnka and Commissioner of Taxation [2012] AATA 492.  The Tribunal dismissed the application and found that the applicant could not substantiate input tax credits claimed in respect of a horse racing and breeding enterprise the applicant had claimed was carried on.  At the hearing the Commissioner accepted that the penalties should be reduced from 75% (intentional disregard) to 50% (reckless) and that an additional penalty of 20% for obstruction should not be imposed.

This case is yet another example of the hurdles faced by taxpayers in challenging assessments.  The Tribunal found that the following principles applied in the income tax context apply equally to a GST assessment:

  • The taxpayer bears the onus of establishing that the assessments were excessive: McCormack v Federal Commissioner of Taxation (1978) 143 CLR 248;
  • The Commissioner does not need to show that the assessments issued can be sustained or supported by evidence: Gauci v FCT (1975) 135 CLR 81
  • The Commissioner is entitled to rely on any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment: FC of T v Dalco (1990) 168 CLR 614 at 624.

The applicant was unable to produce documentary evidence to substantiate the claims for input tax credits, in particular tax invoices.  In this context the Tribunal referred to the following statement of the Tribunal in Huynh & Nguyen and Commissioner of Taxation [2008] AATA 305 at [32]:

“The tax invoice is the cornerstone of the GST regime.  A tax invoice is a document that substantiates a creditable acquisition”

Given its finding on the input tax credits, the Tribunal did not consider it necessary to deter me whether the applicant was carrying on an enterprise.  However, the Tribunal adopted the following factors listed in Sackville J in Woods v Deputy Commissioners of Taxation [1999] FCA 1589 as those to be considered when assessing whether an entity is carrying on an enterprise:

  • whether the activities were carried on as a commercial enterprise with the purpose of making a profit;
  • whether the activities were engaged in on a continuous and repetitive basis;
  • whether the activities were carried on in a businesslike manner;
  • whether ordinary commercial principles were applied to the conduct of the undertaking
  • whether the scale and volume of the undertaking was substantial, especially where the question is whether the taxpayer was conducting a business or was engaged in a hobby or recreational activity

In the context of penalties, the Tribunal found that the taxpayer was reckless.  The Tribunal accepted the Commissioner’s contention that the claiming of input tax credits without having tax invoices or records to substantiate the claims “demonstrates a degree of indifference or risk-taking that no reasonable person would assume”, consistent with the principle established in Hart v Commissioner of Taxation [2003] FCAFC 105.

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