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The Administrative Appeals Tribunal has found that amounts contributed by a taxpayer company to an employee welfare fund were not deductible outgoings for income tax purposes. The Tribunal also found that assessments made by the Commissioner in 2012 were valid for the 1998 and 1999 income years, but not for the 2002 income year.

The taxpayer was one of a group of companies which carried on an automotive repair and spare parts business. In 1998 and 1999 the taxpayer made payments which it said were deductible outgoings for income tax purposes. It claimed the payments were made to the trustee of an “Employee Welfare Fund” established offshore. The fund was said to have been established so that “benefits” could be provided for the “welfare” of the fund’s beneficiaries – specified individuals who were employees of either the taxpayer itself, or one of the related companies. The fund was set up in the context of mass-marketed offshore schemes that were being promoted at the time.

The amounts paid to the employee welfare fund soon found their way back to the taxpayer.

The Commissioner said the deductions were not allowable. He also said that tax losses that were claimed in later years were not available to the taxpayer. In 2012 the Commissioner made assessments, not only for 1998 and 1999 but also for 2002, that had the effect of disallowing the deduction claims and the claims for carry-forward tax losses. He also imposed administrative penalties. The taxpayer’s objections against the assessments of tax and penalties were disallowed. The taxpayer applied to the Tribunal for review of the objection decisions.

On the evidence, the Tribunal found that the payments made in June 1998 and June 1999 were not deductible. They were made not for the purpose of gaining or producing the taxpayer’s assessable income but for the purpose of generating tax deductions. In those circumstances it was not necessary to consider Part IVA of the Income Tax Assessment Act 1936.

The Tribunal found that the Commissioner’s original notices, issued in 1999 for the 1998 year and in 2000 for the 1999 year, were not notices of assessment under the law that applied at the time. It followed that the notices issued in 2012 in respect of those income years were not notices of amended assessment but original assessments. That meant that time limits relating to the amendment of assessments had no relevance to the 1998 and 1999 years. Those years fell squarely within s 171A of the ITAA 1936, which was enacted in 2005 to limit the time period within which the Commissioner may make assessments for what the heading to the section describes as “nil liability returns” for the 2003-04 year of income or earlier.

However, the time limit for the Commissioner to amend the taxpayer’s assessment for the 2002 year was set by the table in s 170(1) of the ITAA 1936. The 2012 assessment was out of time, and the taxpayer’s objection should be allowed to that extent.

The Tribunal also affirmed the administrative penalties imposed by the Commissioner in respect of the 1998 and 1999 years.

Re RepairCo and FCT [2014] AATA 414 (S E Frost DP, 25 June 2014).

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