Vakiloroaya and Commissioner of Taxation (Taxation) [2017] AATA 95
(31 January 2017)
Division:
TAXATION & COMMERCIAL DIVISION
File Number:
2015/6422
Re:
Vahid Vakiloroaya
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal:
Ms G Lazanas, Senior Member
Date:
31 January 2017
Place:
Sydney
The Tribunal decides that the objection decision of the Respondent in relation to the
assessment for the year ended 30 June 2014 is set aside and the matter is remitted to the
Respondent to issue an assessment in accordance with the Tribunal’s reasons.
The Tribunal affirms the objection decision with respect to administrative penalty.
..........................[sgd].................................
Ms G Lazanas, Senior Member
© Commonwealth of Australia 2017
PAGE 2 OF 25
CATCHWORDS
TAXATION AND REVENUE – income tax – deductions – employee – work-related motor
vehicle expenses – self-education expenses – other work-related expenses – objection
decision relating to income tax set aside and matter remitted to Commissioner –
administrative penalty – whether failure to take reasonable care – question of remission –
objection decision relating to administrative penalty affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 8-1, 28-25, 32-5, 32-10, 32-35, 32-65, 900-15,
900-30, 900-105, 900-110, 900-115, 900-195
Taxation Administration Act 1953 (Cth) s 14ZZK, Sch 1 ss 284-75, 284-90, 298-20
CASES
Case P25 (1982) 82 ATC 107
Commissioner of Taxation v Finn (1961) 106 CLR 60
Commissioner of Taxation v Payne (2001) 202 CLR 93
Federal Commissioner of Taxation v Cooper (1991) 29 FCR 177
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1
John Holland Group Pty Ltd v Federal Commissioner of Taxation (2015) 232 FCR 59
Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation
(1958) 100 CLR 478
Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949)
78 CLR 47
Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337
REASONS FOR DECISION
Ms G Lazanas, Senior Member
31 January 2017
INTRODUCTION
1.
Dr Vahid Vakiloroaya, a mechanical engineer with a PhD qualification, is in dispute with
the Commissioner of Taxation with respect to an amended assessment issued to him,
PAGE 3 OF 25
following an audit of his income tax return for the year ended 30 June 2014 (the relevant
year). The dispute is about deductions claimed by Dr Vakiloroaya in respect of workrelated motor vehicle expenses, self-education expenses and other work-related
expenses. The Commissioner disallowed these deductions and also issued Dr
Vakiloroaya with an assessment of administrative penalty at the rate of 25 per cent of the
tax shortfall for failure to take reasonable care with respect to compliance with taxation
laws.
2.
Dr Vakiloroaya objected to the amended assessment and to the assessment of penalty.
The Commissioner allowed the objection in relation to income tax in part by allowing a few
of the deductions. Prior to and at the hearing, both the Commissioner and Dr Vakiloroaya
made further concessions narrowing the issues for determination by the Tribunal.
3.
The question for the Tribunal is whether the Commissioner’s objection decisions are
correct. As the Commissioner conceded that some further deductions should be allowed
on the basis of further information provided, and as I have decided to allow a few
deductions claimed for other work-related expenses, Dr Vakiloroaya has succeeded in
showing that the amended assessment issued to him with respect to the year ended 30
June 2014 was excessive for the purposes of s 14ZZK of the Taxation Administration Act
1953 (TAA). However, I have decided not to allow the vast majority of the deductions, for
the reasons set out below. I also agree with the Commissioner’s decisions regarding
penalties.
THE FACTUAL BACKGROUND AND EVIDENCE
4.
The following findings of fact are based on the T-Documents, the evidence of Dr
Vakiloroaya, including his oral evidence at the hearing and the documents that he filed
with the Tribunal on 15 April 20161, 20 May 20162 and 28 June 20163, as well as
documents provided by him to the Commissioner on 25 August 2015 which were tendered
1
Exhibit A1.
Exhibit A2.
3
Exhibit A3.
2
PAGE 4 OF 25
at the hearing4. Dr Vakiloroaya also tendered a copy of his tax return for the subsequent
income year ended 30 June 20155.
5.
Dr Vakiloroaya was employed as a Heating, Ventilation and Air Conditioning Mechanical
Engineer by Hi-Air Australia Pty Ltd (Hi-Air) between 16 September 2013 and 22 January
2015. Aside from some minor interest income, Dr Vakiloroaya’s income for the year ended
30 June 2014 was from his employment with Hi-Air.
6.
On 7 August 2014, Dr Vakiloroaya lodged his income tax return for the relevant year
claiming total deductions of approximately $60,000. The Commissioner issued a Notice of
Assessment to Dr Vakiloroaya on 15 August 2014. Relevantly, the following expenses
were claimed by Dr Vakiloroaya in his income tax return:
Label
D1
7.
Description
Work-related motor vehicle expenses using the
expense-per-kilometre method
Amount $
3,250
D4
Work-related self-education expenses
48,287
D5
Other work-related expenses
6,787
On 31 October 2014, the Commissioner advised Dr Vakiloroaya that he had been
selected for audit and requested Dr Vakiloroaya to substantiate the abovementioned
expenses.
8.
On 16 December 2014, Dr Vakiloroaya responded through his accountant and tax agent,
Mr Hany Mina of Logic Accountants and Tax Professionals Pty Ltd, by providing various
documents which he contended supported the deductions claimed. These comprised of
copies of tax invoices and receipts for payment but no separate explanation was provided
with respect to the documents.
4
5
Exhibit A4.
Exhibit A5.
PAGE 5 OF 25
9.
On 3 February 2015, the Commissioner notified Dr Vakiloroaya that all his
abovementioned claims were disallowed apart from an amount of $854 relating to “other
work-related expenses”.
10.
On 11 February 2015, the Commissioner issued Dr Vakiloroaya with a Notice of Amended
Assessment for the relevant year as well as a Notice of Assessment of Shortfall Penalty,
the latter calculated, as mentioned above, at the rate of 25 per cent of the tax shortfall.
11.
On 13 May 2015, Dr Vakiloroaya, with the assistance of Mr Mina, objected to the
amended assessment and to the imposition of penalty. It is important to set out some
relevant statements that were made in the objection as they inform the taxpayer’s case.
12.
With respect to Dr Vakiloroaya’s claim for “work-related travel expenses” in the sum of
$3,250, Mr Mina stated on behalf of Dr Vakiloroaya that because of his employed position
as a mechanical engineer:
…he is required to carry confidential and sensitive document[s] relating to projects
at work regularly, at 4 days a week for 36 weeks in 2014 financial year with a total
of 5184kms travelled, [he] claimed the max 5000kms for the Set rate per Kilometre
(sic) Car expenses method.
13.
Regarding his claim for “work-related self-education expenses”, Dr Vakiloroaya stated in
his objection that his thesis in his PhD studies at university related to efficient air
conditioning systems and that he “was required to construct a test chamber to test his
findings from his new invention derived from his research and development”. He also
asserted in his objection that he spent considerable monies to protect his intellectual
property and to submit applications for provisional patents for his invention. The amount
claimed for these “work-related self-education expenses” was $48,287. Separately, Dr
Vakiloroaya provided a breakdown of the “other work-related expenses” and a brief
explanation of the expenses totaling $6,787, which are discussed below.
14.
Dr Vakiloroaya also provided the Commissioner, together with his objection, copies of
numerous documents including invoices and receipts and, importantly, three signed letters
from the Operations Manager at Hi-Air, as follows:
PAGE 6 OF 25
(a) the first letter dated 2 December 2014 confirmed that “Mr Vakiloroaya uses his
vehicle to drive to and from his home … to our office … on a daily basis”;6
(b) the second letter dated 23 January 2015 confirmed that “Hi Air Australia Pty Ltd
did not pay for any car expenses for Mr Vakiloroaya during his employment”;7 and
(c) the third letter dated 13 February 2015 confirmed that Mr Vakiloroaya used his
vehicle to drive to and from his home and his workplace on a daily basis (in
precisely the same terms as the first letter referred to above) with the following
additional statement: “Vahid carried confidential information with him”.8
15.
On 3 September 2015, the Commissioner issued his Notice of Objection Decision to Dr
Vakiloroaya. The Commissioner decided to allow Dr Vakiloroaya’s objection in part by
allowing a deduction for $976 in respect of “work-related self-education expenses”,
namely, expenses incurred for certain university courses and books.
16.
On 11 September 2015, the Commissioner issued an amended assessment to give effect
to the objection decision.
17.
On 18 January 2016, Dr Vakiloroaya filed an Application for Review with the
Administrative Appeals Tribunal in respect of the Commissioner’s objection decision.
18.
Dr Vakiloroaya’s evidence was that between finishing his PhD university studies and
starting with the commercialisation of his inventions, he worked with Hi-Air, a company
that operated in the field of air-conditioning systems. He said and I accept that the firm
acted as a project designer as well as provided consulting services to clients and that he
was employed as a senior engineer.
19.
Dr Vakiloroaya said that he has dedicated his academic and professional career to
developing air conditioning systems and advances in that field. In relation to his invention
for a more efficient air conditioning system, Dr Vakiloroaya’s oral evidence was, as
follows:
6
T10 P-116.
T10 P-85.
8
T10 P-86.
7
PAGE 7 OF 25
… that invention has nothing to do with my industrial job in Hi Air Australia … and
has nothing to do with my PhD.…The industry is my own and I was the owner of
that time and then I licence it to another company… in September 2013 I
established a company named Green HVAC Solution Pty Ltd… the reason was I
wanted to go and file my invention, make a provisional patent. Why? Because the
provisional patent give you one year so that you can make the prototype, test if it
works, then you’re looking for the investor or you start commercialization and
selling the product in the market …
… the investor wants to look at the patent…They’re business people. They can’t
understand scientifically how it works. So, you have to make the smart prototype
… I made that prototype and I purchase some equipment, which is in the claim,
for experimentation and I’ve been monitoring and collecting the data to give
evidence to anybody who would like to be investor … And then when the prototype
was working, I was talking to somebody… interested to commercialise it. Name is
Mr. Steven Heaton … He established a company called Independent Products Pty
Ltd based in Melbourne, which the shareholder was me, himself and his wife… So,
according to the agreement we got, I get 10 per cent of the company as a
shareholder … $12,000 monthly income plus five to 10 per cent royalty… So, now,
three years – about three years, or two years and a half, has passed. We sell
some system but for free, not for money, so I haven’t got any royalty yet. The
company now just substantially is going to be invested probably next week by
Goldman and Sachs… Then according to the agreement I got with Steven, he
must reimburse me what I pay for the patent, what I paid for prototype and what I
paid for instrumentations to make experimentation. All of this was after I paid for
everything and it was in the next year for tax … which I assume should be
considered as my income for the tax year, which I paid the tax for...9
20.
Dr Vakiloroaya confirmed in cross-examination that the expenses for instrumentation
equipment which he claimed as “self-education expenses” were for physical products that
he purchased in August and September 2013 (before he commenced working at Hi-Air) to
make the prototype10. The items purchased included a hybrid air-conditioner, temperature
sensors and pressure transmitters.11 Dr Vakiloroaya also clarified that he applied for two
provisional patents to procure intellectual property protection for his invention and to allow
him a period of one year to find an investor. He said that after one year, “you have to pay
again to go to the second stage…”, but that the company, Independent Products Pty Ltd,
which was licensed by him to use the patent in April 2014, paid those additional costs.
21.
The agreement between Dr Vakiloroaya and “Independent Products, Steven Heaton ABN
XXX…” signed and dated 7 April 2014 provided that the latter “will own and have
exclusive rights over the patents and technology from the date of signing this agreement”.
9
Transcript P-14.
Transcript P-21, line 40.
11
Transcript P-22.
10
PAGE 8 OF 25
Furthermore, Dr Vakiloroaya was to receive payments for the sale of units of the product,
10% of the equity in an entity to be established to commercialise the technology and
$12,000 per month for ongoing research and development of Products.12 Another
document that was in evidence was an “Assignment Deed” between Dr Vakiloroaya and
HVPS Holdings (Pty) Ltd. This agreement was unsigned but appeared to have been
negotiated after the abovementioned agreement as the year 2015 was on the execution
page although the rest of the date was incomplete. Pursuant to this later agreement, Dr
Vakiloroaya was to assign his rights for $1 to HVPS Holdings (Pty) Ltd. It was not clear
what the precise arrangement and relationship of the parties was and whether Dr
Vakiloroaya received any of the payments as agreed (except some reimbursement of
costs).
22.
Dr Vakiloroaya explained that everything he was doing in the engineering field to advance
his learning and to invent new technology was a form of “self-education”. He put it this
way at the hearing:
Self-education for me means something that is not currently available in the
technology, in the engineering field. I make it. I create it. I produce it. So do to
that I have the things, and I cannot go to this book and read about it because this
is not available. I’m creating it. So I call myself as a creator. So then to create
something I have to study, like self-study, think continuously, try a new road. So if
it is not called self-education, what can it be called then? I’m not going to
university to get that knowledge. I’m not talking to any industry people to get that
knowledge because they don’t have that knowledge. That’s why it can be a
patent. Otherwise if it’s already in the public, it can’t be a patent.13
23.
I found Dr Vakiloroaya to be an honest witness. Accordingly, I find that he gave an
accurate and comprehensive description of the circumstances surrounding his invention,
what the expenses were for, and his reasons for claiming deductions in his tax return for
the relevant year. Dr Vakiloroaya was forthright in his oral evidence and helpful in
clarifying matters for the Tribunal, even when his clarifications did not necessarily advance
his case. However, as will become evident from my analysis below of the deductions that
Dr Vakiloroaya claimed, his perception of his entitlements in the way of allowable
deductions, is at odds with the relevant principles regarding deductions under the income
tax laws. For example, he adopted an extremely broad view of “self-education”, to the
point where he justified to himself and possibly to Mr Mina that, as he was an inventor, he
12
13
Exhibit A1.
.Transcript P-47.
PAGE 9 OF 25
was entitled to claim all kinds of deductions for his innovations, including for the purchase
of experimentation equipment. Furthermore, some of his other claims for deductions, for
example, in relation to his so called “work-related motor vehicle expenses” and “other
work-related expenses”, showed he had adopted a completely, unprincipled approach.
THE ISSUES BEFORE THE TRIBUNAL
24.
The only substantive tax issues which remained for resolution are whether Dr Vakiloroaya
is entitled to deductions in his tax return for the relevant year for:
25.
(a)
motor vehicle expenses in the amount of $3,250;
(b)
self-education expenses in the amount of $47,311; and
(c)
other work-related expenses in the amount of $5,653.
In addition, there is the issue of whether the administrative penalty imposed on Dr
Vakiloroaya for failure to take reasonable care was correct. If so, should the penalty be
remitted?
LEGISLATIVE FRAMEWORK AND PRINCIPLES
26.
The key taxation provisions relevant to this case are the general deductibility provisions as
well as the specific legislative provisions regarding motor vehicle expenses, entertainment
expenses and, in addition, the substantiation provisions for expense claims.
27.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) relevantly provides as
follows:
8-1 General deductions
(1)
(2)
You can deduct from your assessable income any loss or outgoing to the
extent that:
(a)
it is incurred in gaining or producing your assessable income; or
(b)
it is necessarily incurred in carrying on a *business for the purpose of
gaining or producing your assessable income.
However, you cannot deduct a loss or outgoing under this section to the
extent that:
…
(b)
it is a loss or outgoing of a private or domestic nature; or
PAGE 10 OF 25
… [original emphasis]
28.
The issues in this case turn on s 8-1(1)(a) and whether a particular “loss or outgoing” was
“incurred in gaining or producing ... assessable income”. Paragraph (b) of s 8-1(1) does
not apply as Dr Vakiloroaya was an employee and Dr Vakiloroaya did not, at any stage,
assert that he was carrying on a business in the relevant year or provide sufficient
information in relation to his activities to establish that he was carrying on a business at
any time. It is settled that the reference to “assessable income” in s 8-1(1)(a) is not
confined to that of the income year in question, but extends to that of other years or that
which the outgoing would be expected to produce: Fletcher v Federal Commissioner of
Taxation (1991) 173 CLR 1 at 16.
29.
It is also well settled that incurred “in” gaining or producing means incurred “in the course
of” gaining or producing assessable income. In Ronpibon Tin NL & Tong Kah Compound
NL v Federal Commissioner of Taxation (1949) 78 CLR 47 (Ronpibon), the High Court
explained at 57:
it is both sufficient and necessary that the occasion of the loss or outgoing should
be found in whatever is productive of the assessable income or, if none be
produced, would be expected to produce assessable income.
30.
In Commissioner of Taxation v Payne (2001) 202 CLR 93 (Payne) at [11], the High Court
rephrased the issue in s 8-1(1)(a) of the ITAA 1997 as involving the following question: “is
the occasion of the outgoing found in whatever is productive of actual or expected
income?”
31.
With respect to outgoings incurred by a person travelling between their home and work, it
is common ground that although that travel can be described as a “prerequisite” to earning
income, on its own without more, that travel does not have the requisite connection with
the earning of income. That is, the occasion for the expenditure is not found in the
activities of the taxpayer that are productive of his or her income. See Lunney v Federal
Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (1958) 100 CLR
478. The situation would be different if, for example, an employee is required to travel as
part of their employment: John Holland Group Pty Ltd v Federal Commissioner of
Taxation (2015) 232 FCR 59.
PAGE 11 OF 25
32.
Additionally, with respect to work-related motor vehicle expenses, s 28-25 of the ITAA
1997 relevantly provided as follows in relation to the 2014 income year for claims made
using the “cents per kilometre” method:
(1) To calculate your deduction using the “cents per kilometre” method, you
multiply:

the number of *business kilometres the *car travelled in the income year;
by:

a number of cents based on the car’s engine capacity.
The number of cents can be found in the regulations.
(2) But you can use this formula for the first 5,000 *business kilometres only. If the
*car travelled more than 5,000 business kilometres, you must discard the
kilometres in excess of 5,000.
Example: If the car travelled 5,085 business kilometres, you could claim for 5,000, and would lose the
extra 85.
(3) Business kilometres are kilometres the *car travelled in the course of:
(a)
producing your assessable income; or
(b)
your *travel between workplaces.
You calculate the number of business kilometres by making a reasonable
estimate.
…[original emphasis]
33.
Work-related expenses such as self-education expenses are general deductions and
deductible under s 8-1 of the ITAA 1997 where the principles governing their deductibility
are satisfied. The principles regarding the deductibility of work-related self-education
expenses are relatively straightforward. That is, expenses are deductible where the
expenses have the necessary connection with the income earning activities of the
taxpayer. For example, expenses on work-related courses or overseas study tours for
taxpayers keeping up to date and/or resulting in or likely to result in an increase in a
taxpayer’s income from his or her current employment are ordinarily deductible. Similarly,
expenses which may lead to promotion are also deductible.
34.
In Commissioner of Taxation v Finn (1961) 106 CLR 60 (Finn), the taxpayer, a senior
design architect in the public works department of the State of Western Australia who
went overseas to further his knowledge of architectural developments, was allowed to
claim certain costs of travelling abroad as self-education expenses. The Commissioner
accepted in that case that all the taxpayer’s activities abroad were devoted to architecture
and its study and that Mr Finn made voluminous notes and kept photos but contested the
PAGE 12 OF 25
issue of Mr Finn’s deductibility of expenses on the basis of whether they were incurred in
gaining or producing assessable income.
35.
The following statement of Dixon CJ at 68, with whom Kitto and Windeyer JJ each agreed,
summarises the conclusions on the evidence in Finn and the requisite nexus of the
learning outcomes to the taxpayer’s income producing activities:
From the facts that have been stated above three or four conclusions may be
drawn which perhaps may be considered to govern the question whether the
expenditure was incurred in gaining or producing the assessable income. In the
first place it seems indisputable that the increased knowledge the taxpayer sought
and obtained of his subject and the closer and more realistic acquaintance he
secured of modern developments in design and construction made his
advancement in the service more certain, and that in respect of promotion to a
higher grade these things might prove decisive. This was put clearly by the
Principal Architect, though in a letter written ex post facto, "I understand from you
that the Commissioner now desires to know whether the experience obtained and
the large amount of data collected will result in an increase in your income. To me,
it is obvious that this must increase your professional efficiency, and hence your
value to this Department, and must materially assist your future advancement to a
higher position in the Department with consequent increase in income." In the
second place, so far as motive or purpose is material, advancement in grade and
salary formed a real and substantial element in the combination of motives which
led to his going abroad. In the third place it is apparent that the heads of his
Department, and indeed the Government itself, treated the use which he made of
his long service and other leave to study architecture, increase his professional
knowledge and study modern trends, as a matter not only of distinct advantage to
his work for the State but of real importance in at least one project in hand. In the
fourth place it was all done while he was in the employment of the Government,
earning his salary and acting in accordance with the conditions of his service. He
was in fact complying with the desires, and so far as going to South America was
concerned, with the actual request of the Government. His journey abroad and
what he did while in Europe, as well as in South America in the following year of
income, was therefore in a correct sense incidental to his employment and most
relevant to it.
36.
Windeyer J in Finn at 70 sets out the relevant principles regarding deductibility of
expenses with respect to maintaining or increasing knowledge in a field of expertise:
a taxpayer who gains income by the exercise of his skill in some profession or
calling and who incurs expenses in maintaining or increasing his learning,
knowledge, experience and ability in that profession or calling necessarily incurs
those expenses in carrying on his profession or calling. Whether he be paid fees
by different persons seeking his skilled services from time to time, or be paid a
regular salary by one person employing him to exercise his skill, matters not in my
opinion. Moreover, it would surely be wrong to assume that the Crown is so
indifferent to the professional attainments of those whom it employs that their
rights and prospects in its service are not affected by the true measure of those
attainments. That was not so in this case. Outgoings incurred for the genuine
PAGE 13 OF 25
purpose of acquiring or maintaining knowledge and skill in a vocation do not
become an outgoing "of a private nature" simply because the taxpayer got
pleasure and satisfaction in increasing his knowledge and attainments.
37.
As some of the expenses claimed by Dr Vakiloroaya as deductions related to “awards
gala dinners”, it is necessary to have regard to the following statutory provisions in the
ITAA 1997 for expenses which involve some form of entertainment:
32-5 No deduction for entertainment expenses
To the extent that you incur a loss or outgoing in respect of providing
*entertainment, you cannot deduct it under section 8-1. However, there are
exceptions, which are set out in Subdivision 32-B.
(notes omitted)
32-10 – Meaning of entertainment
(1) Entertainment means:
(a)
entertainment by way of food, drink or *recreation; or
(b)
accommodation or travel to do with providing entertainment by way of
food, drink or *recreation.
(2) You are taken to provide entertainment even if business discussions or
transactions occur.
…
32-35 Seminar expenses
Item
Section 32-5 does not stop you
But the exception does not apply if
deducting a loss or outgoing for ... ...
2.1
2.1 providing food, drink,
accommodation or travel to an
individual (including yourself) that is
reasonably incidental to the individual
attending a *seminar that *goes for at
least 4 hours.
(a) the seminar is a *business meeting;
or
(b) the *seminar’s main purpose is to
promote or advertise a *business (or
prospective *business) or its goods or
services; or
(c) the *seminar’s main purpose is to
provide *entertainment at, or in
connection with, the seminar.
32-65 Seminars (seminar expenses table item 2.1)
(1) Seminar includes a conference, convention, lecture, meeting (including a
meeting for the presentation of awards), speech, "question and answer session",
training session or educational course.
PAGE 14 OF 25
(2) In working out whether a *seminar goes for at least 4 hours the following are
taken not to affect the seminar’s continuity, nor to form part of it:
(a)
any part of the seminar that occurs during a meal;
(b)
any break during the seminar for the purpose of a meal, rest or
*recreation.
…[original emphasis]
38.
Turning to the substantiation requirements, Division 900 of the of the ITAA 1997 sets out
the rules in respect of “work expenses” which are defined in s 900-30 to mean “a loss or
outgoing you incur in producing your salary or wages”. Section 900-15 relevantly provides:
900-15 Getting written evidence
(1) To deduct a *work expense:
(a) it must qualify as a deduction under some provision of this Act outside
this Division; and
(b) you need to substantiate it by getting written evidence.
Subdivision 900-E tells you about the evidence you need.
…
39.
Subdivision 900-E is directed towards the written evidence required for the purposes of
s 900-15. Section 900-105 explains that the legislation provides for a set of rules for
getting written evidence to substantiate deductions and that the rules that can be used
depend on the type of expense. Section 900-110 provides that there is no time limit for
getting written evidence of an expense (unless the expense is recorded by the taxpayer in
specified situations), “[b]ut until you get written evidence of it, you are not entitled to a
deduction for the expense”. Section 900-110(2) further provides that if:
…when you lodge your *income tax return for the income year you have good
reason to expect to get written evidence of the expense within a reasonable time,
you can deduct the expense without actually getting the evidence. But if you don’t
get the evidence within a reasonable time, your entitlement to the deduction
ceases...
40.
Section 900-115 sets out a number of rules in relation to written evidence from a supplier,
which covers any type of expense except the decline in value of a depreciating asset.
Section 900-115 relevantly provides, as follows:
900-115 Written evidence from supplier
…
(2)
You must get a document from the supplier of the goods or services the
expense is for. The document must set out:
PAGE 15 OF 25
(3)
(a)
the name or business name of the supplier; and
(b)
the amount of the expense, expressed in the currency in which it was
incurred; and
(c)
the nature of the goods or services; and
(d)
the day the expense was incurred; and
(e)
the day it is made out.
There are 2 exceptions to these requirements:
(a)
if the document does not show the day the expense was incurred, you
may use a bank statement or other reasonable, independent evidence
that shows when it was paid;
(b)
if the document the supplier gave you does not specify the nature of
the goods or services, you may write in the missing details yourself
before you lodge your *income tax return for the income year.
…
41.
Some other specific rules relevant to substantiation of expenses are discussed further
below.
IS DR VAKILOROAYA ENTITLED TO CLAIM DEDUCTIONS FOR WORK-RELATED
MOTOR VEHICLE EXPENSES?
42.
Dr Vakiloroaya claimed deductions for work-related motor vehicle expenses on a number
of different bases. In his objection, he claimed that he was required to carry confidential
documents relating to projects at work regularly. In subsequent documents filed with the
Tribunal, he also claimed that he used his car to transport items during client meetings
and site visits and to continue with his work duties from home.14 Furthermore, he claimed
to use his car for “traveling to and from university, to conduct his research and to
attending his PhD classes” (sic).15
43.
In support of Dr Vakiloroaya’s claim for motor vehicle expenses, he provided a copy of his
motor vehicle’s registration and three letters signed by the Operations Manager at Hi-Air
(see [14] above). As noted above at [12], he asserted in his objection but without providing
any explanation or records to support distances travelled, that he had travelled 5,184 kms,
ostensibly as “business kilometres” under the terms of s 28-25(3) and, therefore, had
14
15
Exhibit A1, page 11.
Applicant’s outline of submission paragraph (i) 1 c.
PAGE 16 OF 25
claimed motor vehicle expenses based on the maximum 5,000 kms allowed, in
accordance with s 28-25(2) of the ITAA 1997.
44.
I have decided that Dr Vakiloroaya is not entitled to claim a deduction of $3,250 for motor
vehicle expenses pursuant to s 8-1 as he did not prove that his travel by car was workrelated and not private in nature: Lunney v Federal Commissioner of Taxation; Hayley v
Federal Commissioner of Taxation (1958) 100 CLR 478. I was not satisfied that Dr
Vakiloroaya travelled any “business kilometres’ within the meaning of s 28-25 of the ITAA
1997.
45.
I have specifically taken into account the fact that Hi-Air’s Operations Manager did not
reference any requirement for Dr Vakiloroaya to attend any work-related client meetings
or site visits, despite three letters having been produced by Hi-Air’s Operations Manager
about Dr Vakiloroaya travelling to work with his car. Nor was there any suggestion that HiAir required Dr Vakiloroaya to have a car available to perform his employment duties or
any statement to the effect that he was required to continue to perform any work duties,
after work hours, at home.
46.
Furthermore, in my view the statement by Hi-Air’s Operations Manager that “Vahid carried
confidential information with him” was a vague statement which did not support Dr
Vakiloroaya’s claim that he used his motor vehicle for carrying confidential information for
Hi-Air. Indeed, Dr Vakiloroaya clarified in his oral evidence that he carried with him
sensitive information relating to the patents and other trade secret information which
belonged to him and which had nothing to do with Hi-Air or the university where he was
studying. Even if Dr Vakiloroaya was carrying confidential information relating to his
employer between home and work, he would not be entitled to claim a deduction for his
motor vehicle expenses on that basis alone.
47.
Dr Vakiloroaya also said at the hearing “during that time I was living in Newtown and
Newtown was close to UTS. So I don’t need to get the car”16. This contradicted his earlier
claim (see [43] above) that he travelled by car from work to university. He further
explained at the hearing that he sometimes used his car to transport tools or parts of his
prototype so that he could talk to engineers and get advice and purchase other parts from
16
Transcript P-44.
PAGE 17 OF 25
shops.17 Dr Vakiloroaya stated at the hearing that the prototype had nothing to do with his
employment at Hi-Air or his university studies.
IS DR VAKILOROAYA ENTITLED TO CLAIM DEDUCTIONS FOR SELF-EDUCATION
EXPENSES?
48.
The Commissioner had already allowed Dr Vakiloroaya some deductions for course
related expenses including for some costs to do with his PhD university studies which he
completed at about the end of January 2014. Dr Vakiloroaya claimed a further $47,311 in
“self-education expenses” comprised of the following:
(a) Two invoices: $9,940 and $25,000 for amounts paid to Arike Gostaran Farayand
Co Ltd (AGF) for various “control and measuring instruments”;
(b) Two invoices: $5,489 each for amounts paid to BaxterIP Patent Attorneys for
preparing and filing provisional patent applications and related filing fees; and
(c) Various expenses for attending awards function in connection with his invention.
49.
Dr Vakiloraoaya explained that the expenditure was necessary for him to create and test
an air conditioning device, in respect of which his idea had originated in 2008, and that he
needed to do this by a process of “trial and error to make a prototype”. As noted above, he
also stated that he needed to protect his intellectual property which is why he engaged
patent attorneys to file applications for provisional patents. Accordingly, I find that the bulk
of the self-education expenses were incurred in constructing a test chamber and related
applications for provisional patents to protect his intellectual property.
50.
In relation to the balance of his deduction for “self-education” expenses (claimed to be
$1,423), Mr Mina stated the position in Dr Vakiloroaya’s objection, as follows:
Part of the PhD program in UTS, industrial assessments are conducted to judge
the value of the invention in the form of awards. Mr Vakiloroaya was required to
pay a fee to attend the function.
17
Transcript P-45.
PAGE 18 OF 25
51.
That explanation was not advanced at the hearing with reference to any supporting
documents to substantiate the incurrence of the expenses. Accordingly, Dr Valikoroaya
failed to discharge the burden of proving what he was claiming the deductions for.
52.
As to the bulk of the self-education expenses, I disagree with Dr Vakiloroaya’s submission
that they were for “self-education” expenses in respect of which deductions can be
claimed pursuant to s 8-1 of the ITAA 1997. Those expenses had nothing to do with his
employment at Hi-Air, nor was he required to invent and or patent any invention as part of
his university course, contrary to this suggestion in his objection. They were expenses that
were incurred by Dr Vakiloroaya in relation to his own invention, in his own time, which if
successful, he hoped to commercialise in the future. More importantly, I agree with the
Commissioner’s submission that Dr Valikoroaya did not prove the requisite connection
between the “self-education” expenses and any income producing activity. At best, as the
Commissioner’s counsel submitted, Dr Vakiloroaya incurred the expenditure on
experimentation equipment with AGF well before he was engaged in any income
producing activity. That is, “[t]hat expenditure was incurred in getting work, rather than
doing it”, applying the principle that some expenditure may be incurred at a point too soon
to qualify as a working expense, as explained by Hill J in Federal Commissioner of
Taxation v Cooper (1991) 29 FCR 177 at 198.
53.
Counsel for the Commissioner also correctly highlighted that if Dr Vakiloroaya was to
contend that he was carrying on a business (which, as previously noted, he did not
advance at any stage), it would be necessary to consider paragraph (b) of s 8-1(1) of the
ITAA 1997. In that regard, counsel referred me to a similar case, Case P25 (1982) 82
ATC 107, where the Board of Review decided that an electrical engineer who was
developing a device was not carrying on a business, but “engaged in seeking to develop
an idea which, if it could be perfected, would enable a business to be commenced” (at
109, [11]). However, it is strictly unnecessary to make any conclusion on this issue in the
present case.
54.
I also agree with the Commissioner’s submission that the cost of making applications for
provisional patents cannot be described as expenditure incurred “in maintaining or
increasing his learning, knowledge and experience and ability in [his] profession or calling”
applying the views of Windeyer J in Finn (at 70). Additionally, I am in full agreement with
the Commissioner’s submission that even if any of the expenses incurred satisfied s 8-
PAGE 19 OF 25
1(1), they are nonetheless not deductible because s 8-1(2)(a) of the ITAA 1997 relevantly
provides that:
(2) However, you cannot deduct a loss or outgoing under this section to the extent
that:
(a)
55.
it is a loss or outgoing of capital, or of a capital nature;
In Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun
Newspapers) at 359, Dixon J explained the distinction between expenditure on revenue
account as opposed to capital account, as follows:
The distinction between expenditure and outgoings on revenue account and on
capital account corresponds with the distinction between the business entity,
structure, or organization set up or established for the earning of profit and the
process by which such an organization operates to obtain regular returns by
means of regular outlay, the difference between the outlay and returns
representing profit or loss.
56.
His Honour later explained (at 363), the factors to be considered, in the following terms:
There are, I think, three matters to be considered, (a) the character of the
advantage sought, and in this its lasting qualities may play a part, (b) the manner
in which it is to be used, relied upon or enjoyed, and in this and under the former
head recurrence may play its part, and (c) the means adopted to obtain it; that is,
by providing a periodical reward or outlay to cover its use or enjoyment for periods
commensurate with the payment or by making a final provision or payment so as
to secure future use or enjoyment.
57.
In accordance with the analysis set out by Dixon J in Sun Newspapers, I conclude that the
steps taken by Dr Vakiloroaya for experimentation and development of his invention and
for the subsequent patent applications were directed at enduring assets. This is because
Dr Vakiloroaya sought to exploit his inventions by way of commercialisation of assets
which he saw as having an enduring quality and, additionally, his expenditure with respect
to the equipment and the provisional applications had a finality about it, once the
experimentation was completed and the patents were established. That is, Dr
Vakiloroaya’s expenses were directed at establishing the architecture, or to use Dr
Vakiloroaya’s own terminology, “the prototype”, which he could then exploit by
commercialisation. Accordingly, the expenses were of a capital nature.
58.
Finally, Dr Vakiloroaya pointed me to the fact of his 2015 income tax return showing that
he had included in his assessable income some amounts received for reimbursement of
expenses. It was not clear to me why it necessarily followed that if any such
PAGE 20 OF 25
reimbursement of any expenses was properly treated as assessable income (this issue
was not before the Tribunal), the expenses that he incurred and that were reimbursed,
were therefore deductible. Dr Vakiloroaya failed to demonstrate the basis for this
proposition.
IS DR VAKILOROAYA ENTITLED TO CLAIM DEDUCTIONS FOR OTHER WORKRELATED EXPENSES?
59.
There were several other work-related expenses claimed by Dr Vakiloroaya which were
still in dispute at the hearing, as set out below. I also set out below my decision and
reasons with respect to each of these claims.
60.
As will become clear, virtually all the deductions claimed for these expenses were not
substantiated by Dr Vakiloroaya in any way. Where the substantiation provisions in
Division 900 of the ITAA 1997 (see [38] – [40] above) are not satisfied, the Commissioner
may, pursuant to s 900-195 of the ITAA 1997, allow a deduction if the nature and quality
of the evidence satisfies him that the taxpayer incurred the expense and a deduction is
allowable. However, the Commissioner was not satisfied and nor am I, based solely on
the unsupported statements of Dr Vakiloroaya and, therefore, the unsubstantiated claims
must necessarily fail.
(a)
Mobile Phone Charges: $1,123 - Dr Vakiloraoaya claimed to have paid a monthly
amount of $39.64 in phone bills and also purchased prepaid cards at the cost of
$60 per card per month totalling $1,404 in mobile phone charges for the relevant
year. He claimed a deduction on the basis that he used his phone for work-related
purposes, as to 80 per cent of the time. As Dr Vakiloroaya provided no evidence to
substantiate that he incurred the abovementioned amounts, the deduction claimed
is disallowed.
(b)
Internet Expenses: $360 - Dr Vakiloroaya claimed to use the internet at home for
work-related purposes, as well as studying, and claimed 50% of the expenses
which totalled $719.88 in the relevant year ($59.99 per month). As Dr Vakiloroaya
provided no evidence to substantiate that he incurred this amount, this deduction is
disallowed.
PAGE 21 OF 25
(c)
Membership Fees: $120 - Mr Vakiloroaya claimed to have paid a membership fee
of $120 for the American Institute of Refrigeration Air Conditioning and Heating but
there was no evidence of payment. Accordingly, this deduction is disallowed.
(d)
Engineering Report: $149 - Dr Vakiloroaya submitted some work for assessment
and approval of his patent. As Dr Vakiloroaya provided no evidence to substantiate
that he incurred this amount, or how it related to any income producing activity, this
deduction is disallowed.
(e)
Engineers Australia “Conferences” and Registration Fees: $1,170 - Dr Vakiloroaya
attended various functions and events which he described in his objection as
“conferences”, including an Engineers Australia industry award presentation for the
Research and Development category ($290), an Engineers Australia industry
award presentation for the Environment and Heritage category ($440), and an
Engineers Australia industry award presentation for the Small Business Ventures
category ($440). Dr Vailoloaya explained that he incurred fees for registering
himself as a nominee for the awards. The invoices for these expenses showed
payment having been made on 16 April 2013; that is, they were not incurred in the
relevant year and, on that basis alone, are not deductible in the 2014 income year.
(f)
Awards Entry Fee and Tickets: $1,120 – Dr Vakiloroaya claimed deductions for
costs described as “one entry fee for the 2013/2014 Consensus GreenTech
Awards” ($550) and three tickets for the ARBS Exhibitions Ltd 2014 Industry
Awards Gala Dinner ($570). I was satisfied on the basis of the evidence provided
by Dr Vakiloroaya that these deductions should be allowed. In particular, I note
that the invoice for the latter was issued to his employer but that Dr Vakiloroaya
demonstrated through his bank records that he had personally paid for the tickets.
I accept that the attendances at these functions were related to Dr Vakiloroaya’s
employment. I am also satisfied on the evidence of Dr Vakiloroaya about the
informative nature of these events for participants in the engineering industry and
their extended duration (between 5 and 6 hours, with food being served for
approximately 45 minutes) that his deductions should not be excluded on the basis
of involving the provision of non-deductible entertainment as contemplated in s 325 of the ITAA 1997 or, if “entertainment” as defined in s 32-10 was provided, that
the exception in s 32-35 applies as the food and drink was reasonably incidental to
the attendances at these events.
PAGE 22 OF 25
(g)
Depreciation of Equipment: $797 – Dr Vakiloroaya claimed a deduction for
depreciation of a laptop and for a home desktop computer that were purchased
during the relevant year. I was not satisfied that he used this equipment for workrelated purposes to any extent as he did not provide any reliable evidence that he
worked from home or that it was a requirement of his employment that he work
from home. Accordingly, this deduction is disallowed.
61.
I note that by the time of the hearing, Dr Vakiloroaya had abandoned his claims for
deductions in respect of purchases of tubes, ink and stationery as he volunteered that he
had lost the receipts. It was unnecessary, therefore, to deal with those claims.
Additionally, it was also unnecessary to deal with various other receipts for payments
which were amongst the T-Documents, in circumstances where Dr Vakiloroaya had never
made claims for deductions for those expenses in his income tax return.
IS DR VAKILOROAYA LIABLE TO AN ADMINISTRATIVE PENALTY? IF SO, SHOULD
IT BE REMITTED?
62.
Dr Vakiloroaya was assessed for an administrative penalty at the rate of 25 per cent of the
shortfall amount for making a false and misleading statement in his income tax return for
the relevant year and for failure to take reasonable care in relation to compliance with
taxation laws: s 284-75(1) and table item 3 in s 284-90(1) in Schedule 1 to the TAA.
63.
Dr Vakiloroaya objected to the penalty on the basis that he had not failed to take
reasonable care. He argued that he was compliant and that he specifically sought advice
from his accountant and tax agent, who also lodged his income tax return for the relevant
year. He further sought remission of any penalty on the basis that his case would provide
clarification for the deductibility of self-education expenses, particularly with respect to
provisional patents.
64.
I was not satisfied that the Commissioner’s decision with respect to the imposition of
penalty was incorrect and should have been made differently, as Dr Vaklioroaya did not
discharge his burden of proving this: s 14ZZK(b)(ii) of the TAA. My conclusion is based on
the fact that Dr Vakiloroaya is a very knowledgeable and highly credentialed professional
and academic who claimed significant deductions (in the order of $60,000), particularly in
contrast to his assessable income in his tax return for the relevant year. His submission
that no penalties should have been imposed or, in the alternative, the penalties should
PAGE 23 OF 25
have been remitted in full because his case would provide an opportunity for clarification
of the taxation law is slightly disingenuous. Dr Vakiloroaya could have sought a second
tax opinion or applied for a private binding ruling to ascertain the Commissioner’s views
before making his claims for deductions for “self-education” expenses. Also, as already
noted above, some deductions claimed by Dr Vakiloroaya for work-related expenses were
not substantiated in any way.
65.
In practical terms, Dr Vakiloroaya was seeking to be subsidised, through his taxation
affairs, for his private expenditure, including for his travel to work by car and his
experimentation with inventions. In the circumstances, there is no basis for the Tribunal to
exercise its discretion pursuant to s 298-20(1) in Schedule 1 to the TAA to remit any part
of the penalty.
CONCLUSION
66.
For the reasons set out above, I have decided that the Commissioner’s objection decision
in relation to the amended assessment for the years ended 30 June 2014 is set aside and
the matter is remitted to the Commissioner to issue an assessment in accordance with the
Tribunal’s reasons. I affirm the objection decision relating to the assessment of
administrative penalty.
I certify that the preceding 66
(sixty -six) paragraphs are a
true copy of the reasons for
the decision herein of Ms G
Lazanas, Senior Member
............................[sgd]...................................
Associate
Dated: 31 January 2017
PAGE 24 OF 25
Date of hearing:
28 September 2016
Date final submissions received:
1 November 2016
Advocate for the Applicant:
Counsel for the Respondent:
Mr H Mina, Logic
Professionals Pty Ltd
Mr M Cosgrove
Solicitors for the Respondent:
ATO Review and Dispute Resolution Group
Accountants
and
Tax
PAGE 25 OF 25