iscover Director fails to prove shortfall penalty assessment was excessive
BusinessThe Administrative Review Tribunal has tossed a taxpayer’s shortfall penalty objection after it determined that intercompany loans constituted dividends for the purposes of Div 7A.
Shane Traynor, director of a group of companies including KTM Property Trust (KTM) and Songain Property Trust (Songain), was found to have made unaccounted-for loans in taxation returns between 2016 and 2020, with the Administrative Tribunal rejecting his objection against a shortfall penalty of 25 per cent, on the basis that it was excessive.
Tribunal General Member Mersina Stratos determined that, following an audit by the Commissioner of Taxation into the companies’ income tax returns between 2017 and 2020, intercompany loans between them were allegedly made without written loan agreements.
For this reason, in its audit, the Commissioner determined that these loans were dividends for the purpose of Division 7A “as the loans were not repaid, nor converted into complying loan agreements by the lodgment day for those income years in which the loans occurred".
“Unpaid loans to Mr Traynor from [one of the companies] were to be treated as deemed unfranked dividends for financial years 2017 to 2020,” the Tribunal found.
“Despite the large amount of money being transferred across the various loan facilities of the Group for the years the subject of these proceedings, only general information regarding those transfers was provided, with no demonstration of the business purposes for such transfers,” it added.
“The Tribunal is unable to accept the proposition that no profits have flowed from [one of the entities] or other members of the group to Mr Traynor,” the Tribunal said.
The Tribunal also found that bank statements concerning the loans “contained transactions with descriptive titles indicating payments for electrical services, a rugby tour of New Zealand, water bills, health insurance, carpets, energy bills, insurance, lawyers, ATO liabilities, land tax, council fees, travel and amounts forwarded to other entities”.
“The issue arises for the Applicants in the lack of proper record keeping in a situation where funds are intermingled, which can lead to unfavourable taxation treatment when the records that are presented are deficient in the ways described above,” the Tribunal ruled.
The assessed shortfall amounts across the relevant income years were $1,958,191.54 with a 25 per cent shortfall penalty of $489,940.60, $2,505,343 with a 25 per cent shortfall penalty of $626,335.75, and $131,523, with a 25 per cent shortfall penalty of $32,881.00.
Thus, on the basis that the applicants failed to discharge their onus of demonstrating that the assessments were incorrect, it ruled that they were liable for administrative penalties of 25 per cent for both a lack of reasonable care and not having a reasonably arguable position in fulfilling their taxation obligations across the relevant income years, and General Member Stratos dismissed Traynor’s objection application.
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