Australian Pasture Seeds Pty Ltd and Commissioner of Taxation

[2008] AATA 520

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 520

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/2892

TAXATION APPEALS DIVISION		)
Re		AUSTRALIAN PASTURE SEEDS PTY LTD

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr S E Frost, Member

Date23 June 2008

PlacePort Kembla

Decision Subject to the minor arithmetic adjustment in paragraph 26 of these reasons, the objection decision is affirmed.

..................[sgd].........................

Mr S E Frost      
  Member

CATCHWORDS

TAXATION - goods and services tax - input tax credits - attribution of input tax credits - administrative penalty - uniform administrative penalty provisions - false or misleading statement - shortfall amount - intentional disregard of a taxation law - burden of proof - objection decision affirmed.

Taxation Administration Act 1953 - Part IVC, section 14ZZK, Schedule 1 Part 4-25 Division 284, section 298-20

A New Tax System (Goods and Services Tax) Act 1999 - Division 29

Nozzi Pty Ltd v Commissioner of Taxation [2003] FCA 356; (2003) 52 ATR 521

Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345; (2007) 66 ATR 1

BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164; (2001) 46 ATR 347

Re Kowadlo and Commissioner of Taxation [2004] AATA 786

Practice Statement Law Administration PSLA 2006/2

REASONS FOR DECISION

23 June 2008 Mr S E Frost, Member

Introduction

1.      The Applicant, Australian Pasture Seeds Pty Ltd (APS), is a company whose sole business is the export sale of agricultural seeds and products. It has no goods and services tax (GST) liability on its export sales, but it is entitled to input tax credits for the GST included in the price of the goods and services it buys.

2.      APS lodges Business Activity Statements (BAS) monthly, and accounts for GST on a cash basis. When it lodged its BAS for June 2003, it included a claim for input tax credits on purchases that it expected to make but for which it had not yet paid. Because APS accounts for GST on a cash basis, it was wrong to do so. It has since corrected the error, but the Commissioner has assessed a penalty against APS on the basis that it intentionally disregarded the law. When its objection against the penalty was disallowed, APS applied to the Administrative Appeals Tribunal (the Tribunal), under Part IVC of the Taxation Administration Act 1953 (the Administration Act), for review of the objection decision.

The law relating to penalties

3. The uniform administrative penalty provisions are found in Part 4-25 of Schedule 1 to the Administration Act. The main provisions relevant to this case are in Division 284 (under which penalties are imposed for false or misleading statements that lead to a “shortfall amount”) and section 298-20 (under which penalties can be remitted).

4.      A “shortfall amount” arises when, among other things, an amount that the Commissioner owes a taxpayer for an accounting period, worked out on the basis of a false or misleading statement made by the taxpayer, is more than it would be if the statement were not false or misleading: item 2 of the table in subsection 284-80(1). In that circumstance the taxpayer is liable to a penalty under subsection 284-75(1), calculated by reference to a “base penalty amount”, but which can be increased or reduced according to specific criteria set out in sections 284-220 and 284-225. None of these specific criteria apply in this case.

5.      The “base penalty amount” (set by section 284-90) depends on the level of culpability involved in making the false or misleading statement. If the shortfall amount, or part of it, resulted from intentional disregard of a taxation law by the taxpayer or its agent, the base penalty amount is 75% of the shortfall. If it resulted from recklessness by the taxpayer or its agent as to the operation of a taxation law then the base penalty amount is 50% of the shortfall. In the case of a failure to take reasonable care, the base penalty amount is 25%.

6. Subsection 298-20(1) provides the Commissioner (and on review, the Tribunal) with a discretion to remit all or part of a penalty. The Administration Act provides no specific guidance on how the discretion is to be exercised.

The law relating to the time at which GST is payable and input tax credits are available

7. The GST law does not concern itself, as a general rule, with the timing of supplies and acquisitions. It does not contain any “time of supply” or “time of acquisition” rule. It is concerned instead with the “attribution” of the GST payable on taxable supplies, and the “attribution” of input tax credits that are available on creditable acquisitions. The rules on attribution are set out in Division 29 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).

8. The general rule for a taxpayer that accounts for GST on a cash basis is that input tax credits are attributable to the tax period in which the acquisitions are paid for: subsection 29-10(2) of the GST Act.

The background to the lodgement of the June 2003 BAS

9.      The Managing Director of APS, Anthony Gilmore, is evidently the directing mind of the company. He made a written statement in this matter and gave oral evidence to the Tribunal. He explained that the business undertakes only about ten sales transactions a year, all of them exports. The turnover of the business is less than $500,000, with a profit that is “not great”. For most of the transactions, he said, the GST that the company has to pay to its suppliers, and which is ultimately refunded by the Australian Taxation Office (ATO), is greater than the profit.

10.     Mr Gilmore expressed some frustration about the way the GST operates for a business that only makes export sales and accounts for GST on a cash basis. It was this frustration that caused the June 2003 BAS to be submitted as it was.

11.     He said in his written statement:

Generally the Company trades on a gross margin of less than 10% so the payment of GST involves a loss of funds until the refund is received, which on a Cash Basis [of] accounting can be up to 50 days after making payment and is on average at least 20 days after payment. This is an interest free loan to Government. …

…

In June 2003 the Company had 2 sales orders in progress. I wrongly lodged the GST return for June 2003 based on the contracts, agreements and orders in an attempt to match the outflow of funds to pay for the gst (sic) portion of the seed cost with the receipt of the gst (sic) refund of this same amount.

12.     These two excerpts from Mr Gilmore’s statement explain both the mechanics of, and the motivation for, the lodgement of the incorrect BAS. The company had arranged to supply a significant quantity of seed to an export customer, and to meet that order it needed to buy the corresponding quantity of seed from one or more local suppliers. Those purchases by APS would be on a GST inclusive basis. The GST included would be creditable to APS, but not until the price (including the GST) had been paid to the suppliers. APS tried to “short-circuit” the system by claiming the credits before it was entitled to them. The motivation was cash flow.

13.     Mr Gilmore was not able to provide a satisfactory explanation of the way in which he calculated the input tax credit amount in the June 2003 BAS. The best I can conclude is that the credit claim was based on an estimate of the price that APS would be required to pay to purchase the quantity of seed that it needed. On the basis of that estimate, APS included an amount of $40,919 as an input tax credit in the June 2003 BAS. The company’s records show that, on a cash basis, the amount of input tax credits to which it was entitled for the month of June 2003 was $2,005, and not the $40,919 that it claimed. The “shortfall amount” is $38,914.

14.     Mr Gilmore knew that the effect of claiming that amount was to accelerate APS’s input tax credit entitlements. To compensate, the company started claiming less than its full entitlement in subsequent months. It seems that over the next nine months or so, by declining to claim input tax credits to which it was entitled during those months, APS effectively repaid about $20,000 of the overpaid amount. But the position was not finally corrected until January 2006, when APS paid a little over $8,000 to the Commissioner to reconcile its GST position.

The burden of proof

15. Under section 14ZZK of the Administration Act, the burden of proof is on the taxpayer to show that the shortfall amount did not result from intentional disregard of the GST law: cf. Nozzi Pty Ltd v Commissioner of Taxation [2003] FCA 356; (2003) 52 ATR 521; Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345; (2007) 66 ATR 1.

The level of culpability

16.     Mr Gilmore claimed on behalf of APS that the level of penalty was “unfair and unjust”. He admitted that the input tax credit claims were made early, but, he said, it was not for the purpose of gaining an advantage but rather to align the receipt of the refund with the time that the company had to pay the GST to its suppliers. He said that it was never the company's intention “to take what is not ours”. It was not an attempt to defraud. He described it as “the company asking early for our own money back”.

17.     For the Commissioner it is said, in the Commissioner’s outline of submissions dated 2 May 2008, that:

…intentional disregard occurs where a taxpayer knew what his or her obligations were and chose to disregard them...

18. “Intentional disregard” (item 1 of the table in subsection 284-90(1) of the Administration Act) is to be contrasted with the somewhat less culpable behaviour described as “recklessness” in item 2 of that table. Cooper J said in BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347; [2001] FCA 164 at [77]:

… Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.

19.     But this is not a case where, from the taxpayer’s perspective, there was a “real, as opposed to a fanciful, risk” that the BAS was wrong, or one where the taxpayer was “grossly indifferent as to whether or not the material [was] true and correct”. Instead it was absolutely certain that the BAS was incorrect. Nor is it accurate to say that the taxpayer was “grossly indifferent” as to the correctness of the BAS; it knew the BAS was incorrect, and lodged it anyway.

20. I infer from the fact that previous returns lodged by APS seem to have dealt with input tax credits in the way required by Division 29 of the GST Act that Mr Gilmore, the directing mind of the company, was aware of the company's obligations. I find that Mr Gilmore knew at the time of lodgement that the June 2003 BAS was wrong. Indeed, that finding is supported by Mr Gilmore’s own acknowledgement to that effect as demonstrated by the understatement of input tax credits in the returns lodged in subsequent months for the specific purpose of absorbing the over claimed amount.

21.     I also find that there was no reliable basis to support the amount of $40,919 that was included as a credit in the June 2003 return. At the time that the BAS was lodged the company had not received any invoices from its suppliers; in fact it is not clear that it had even identified who the suppliers would be. The fact that even after two and a half years of adjustments the taxpayer still had to make an $8,000 reconciliation payment to the Commissioner to correct the position suggests that there was little science involved in the calculation of the original input tax credit claim.

22.     It has previously been noted in this Tribunal that the penalty regime is to penalise non-compliance with the requirements of the legislation, and that loss of revenue is not the issue: see for example Re Kowadlo and Commissioner of Taxation [2004] AATA 786.

23. It should also be noted that the definition of “shortfall amount” in section 284-80 makes reference to a taxpayer’s tax-related liability “for an accounting period”. It is not sufficient that a taxpayer pays the right amount of tax; he or she must also pay it at the right time. The “right time” is to be discovered in the provisions of Division 29 of the GST Act, the purpose of which is to tell taxpayers when they must pay their GST, and when they can claim their credits. And so it is clear that in APS's case, there would still have been a shortfall amount in June 2003 even if the quantum claimed had eventually been shown to be correct.

24.     Mr Gilmore – and by extension the company itself, APS – knew what its obligation was. The obligation was to include in its BAS for June 2003 the amount of input tax credits which were attributable to that month. That amount was $2,005, but instead it claimed $40,919. The Commissioner, on the basis of that statement, paid $40,919 to APS when it was entitled to only $2,005. The overpaid amount is a “shortfall amount” which resulted from intentional disregard of a taxation law by APS. The base penalty amount, accordingly, is 75% of the shortfall.

Remission

25. As noted above, the Administration Act provides no guidance on how the discretion in section 298-20 in Schedule 1 is to be exercised. The Commissioner has, however, published a practice statement, Practice Statement Law Administration PSLA 2006/2, in which guidance is provided to his officers as to how the power to remit might be exercised.

26.     The only comment in the practice statement that might be relevant to this case is found in paragraph 142 where it is stated:

Where an entity has been more culpable and has behaved recklessly or with intentional disregard it is difficult to envisage a situation where the Commissioner would exercise the discretion to remit. It would be exceptional if the discretion was exercised when an entity had behaved recklessly or with intentional disregard.

27.     I agree that it would be an “exceptional” case in which a finding of intentional disregard might be accompanied by a favourable exercise of the discretion in section 298-20. I do not consider that this particular case has any exceptional factors that would warrant remission.

Conclusion

28.     While I have concluded that the appropriate level of penalty is 75% of the shortfall amount, the Commissioner has conceded that the shortfall amount for the month of June 2003 is $38,914 rather than $39,095 as originally thought. Subject to that minor arithmetic adjustment, the objection decision is affirmed.

I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member

Signed: ....................[sgd].................................................
  Associate

Date of Hearing  5 May 2008
Date of Decision  23 June 2008
Appearance for the Applicant   Mr Tony Gilmore
Solicitor for the Respondent     Mr Damien Ong